CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K (“Annual Report”) include forward-looking statements, which reflect our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Annual Report and are subject to a number of risks, uncertainties and assumptions described under the sections entitled “Business,” “Risk Factors” andFactors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements”Statements and Supplementary Data” and elsewhere in this Annual Report.
Forward-looking statements include, but are not limited to, statements with respect to the nature of our strategy and capabilities, the vertical and regional expansion of our market and business opportunities, and the expansion of our product offeringofferings in the future. Statements that include words like “believe,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “could,” “potentially” or similar expressions are forward-looking statements and reflect future predictions that may not be correct, even though we believe they are reasonable. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or are beyond our control. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward lookingforward-looking statements. Consequently, readers should not place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made.
The forward-looking statements reflect our current expectations and are based on information currently available to us and on assumptions we believe to be reasonable. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause our actual results, activities, performance or achievements to be materially different from that expressed or implied by such forward-looking statements.
Factors to consider when evaluating these forward-looking statements include, but are not limited to:
•We could be impacted by disruptions in supply.
•We currently rely on one distributor for sales of our relianceproducts in China.
•A material portion of our business is in China, which may be an unpredictable market and is currently suffering trade tensions with the U.S.
•We must continue to attract, retain and develop key personnel.
•Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
•We must maintain an effective system of internal control over financial reporting to keep stockholder confidence.
•Our industry is highly competitive.
•Our business is highly dependent on automotive sales and production volumes.
•Our North American market is currently designed for the public’s use of car dealerships to purchase automobiles which may dramatically change.
•Our revenue could be impacted by growing use of ride-sharing or other alternate forms of car ownership.
•We must be effective in developing new lines of business and new products to maintain growth.
•Any disruptions in our relationships with independent installers and new car dealerships could harm our sales.
•Our strategy related to acquisitions and investments could be unsuccessful or consume significant resources.
•We must maintain and grow our network of sales, distribution channels and customer base to be successful.
•We are exposed to a single distributorwide 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 China;
political, regulatory, economic, and other risks arising from the multi-national natureordinary course of our business, including our extensive businessproduct liability and warranty claims.
•We must comply with a broad and complicated regime of domestic and international trade compliance, anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory regimes.
•We may seek to incur substantial indebtedness in China;the future.
the highly competitive nature of our industry;
our current reliance•Our growth may be dependent on a limited number of suppliers;
our ability to successfully introduce new products and services;
our ability to achieve benefits from our business initiatives, including identifying and completing suitable acquisitions and investments;
fluctuating revenue and operating results;
volatility in currency exchange rates;
the potential exit of current key personnel or possibility of failure to attract future qualified personnel;
significant demands related to our rapid growth;
risks related to possible future indebtedness or the availability of future financing;capital and funding.
risks related•Our Common Stock could decline or be downgraded at any time.
•Our stock price has been, and may continue to internal control over financial reporting;be, volatile.
our status as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012;
risks related to our intellectual property;
general global and economic business conditions•We may issue additional equity securities that may affect demandthe priority of our Common Stock.
•We do not currently pay dividends on our Common Stock.
•Shares eligible for future sale may depress our products;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.
Although we have attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. The forward-looking information contained herein is made as of the date of this Annual Report and, other than as required by law, we do not assume any obligation to update any forward-looking information, whether as a result of new information, future events or results or otherwise.
You should also read the matters described in “Risk Factors” and the other cautionary statements made in this Annual Report as being applicable to all related forward-looking statements wherever they appear in this Annual Report. The forward-looking statements in this Annual Report may not prove to be accurate and therefore
you are encouraged not to place undue reliance on forward-looking statements. You should read this Annual Report completely.
EXPLANATORY NOTE
This Annual Report also includes estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.
We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights referred to in this report are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, trade names and copyrights. Please see “Business -Intellectual Property and Brand Protection” for more information.
Other trademarks and trade names in this Annual Report are the property of their respective owners.
Unless the context indicates otherwise, all references in this Annual Report to “XPEL,” the “Company,” “we,” “us,” and “our” refer to XPEL, Inc. and allits subsidiaries.
SUMMARY OF RISK FACTORS
The following is a summary of its wholly-ownedthe most significant risks and majority-owned subsidiaries.
uncertainties that we believe could adversely affect our business, financial condition or results of operations. In addition to the following summary, you
should consider the other information set forth in the “Risk Factors” section and the other information contained in this Annual Report.
Operational Risks
•A material disruption in supply from any of our suppliers could impact our business.
•We currently rely on one distributor for our products in China.
•A material portion of our business is in China, which may be an unpredictable market and is currently suffering trade tensions with the U.S.
•We must continue to attract, retain and develop key personnel.
•Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
•During the fourth fiscal quarter, we identified and fully remediated a material weakness in our internal controls related to user access controls to our financial system.
Risks Related to Our Business and Industry
•Our industry is highly competitive.
•Our business is highly dependent on automotive sales and production volumes.
•Our market fluctuates rapidly, which could cause our results to fall short of expectations.
•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.
Strategic Risks
•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.
Legal, Regulatory and Compliance Risks
•We are subject to claims and litigation in the ordinary course of our business, including product liability and warranty claims.
•We must comply with a broad and complicated regime of domestic and international trade compliance, anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory regimes.
Liquidity Risks
•We may seek to incur substantial indebtedness in the future.
•Our growth may be dependent on the availability of capital and funding.
Risks Relating to Common Stock
•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 preferred stock with greater rights than 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 us difficult.
•Our directors and officers have substantial control over us.
•Our bylaws may limit investors’ ability to obtain a favorable judicial forum for disputes.
General Risk Factors
•The COVID-19 pandemic could materially adversely affect our business.
•Our business faces unpredictable global economic and business conditions.
•The price and availability of key components used to manufacture our products may fluctuate significantly.
Part I
Item 1. Business
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 with XPEL FUSION PLUS. Today, we have approximately 230 employees and serve over 2,400 direct customers and several thousand indirect customers around the world.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 rock impingementrocks 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 debris infringement.
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 launched
•We introduced the next generation of our highly successful ULTIMATE line, ULTIMATE PLUS andPLUS.
•We acquired Apogee Corporation which allowed usled to launchformation of XPEL Asia based in Taiwan. In
•2019 we introduced
•We were approved for the listing of our new ceramic coating product, XPEL FUSION PLUS,stock on Nasdaq trading under the symbol “XPEL”.
•2020
•We acquired Protex Centre, a wholesale-focused paint protection installation business based in Montreal, Canada.
•We expanded our presence in France with the acquisition of certain assets of France Auto Racing.
•We expanded our architectural window film presence with the acquisition of Houston based Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and interior applicationsindustrial settings.
•2021
•We expanded our presence into numerous automotive dealerships throughout the United States with the acquisition of PermaPlate Film, LLC, a wholesale-focused automotive window film installation and distribution business based in Salt Lake City, Utah.
•We acquired five businesses in the United States and Canada from two sellers as a continuation of our acquisition strategy. These acquisitions allowed us to continue to increase our penetration into mid-range dealerships in the US and solidify our presence in Western Canada.
•We acquired invisiFRAME, Ltd, a designer and manufacturer of paint protection film patterns for bicycles, thus further expanding our ULTIMATE line of products and opened our XPEL Germany office.non-automotive offerings.
Products and Services
Surface and Paint Protection Film Rolls: Our primary products are paint and surface protection films. Most of the products sold are destined for automotive application which principally protect painted surfaces from rock chips, damage from bug acids and other road debris. Some of the products sold are used for non-automotive applications, such as industrial protection, screen protection or architectural protection. We sell a variety of product lines each with their own unique characteristics, warranty and intended use, including:use.
Automotive Surface and Paint Protection
XPEL ULTIMATE PLUS: ULTIMATE PLUS is theour flagship clear, thermoplastic polyurethane, or TPU, based product which is a self-healing, stain-resistant film with unmatchedexceptional clarity and durability.
XPEL ULTIMATE FUSION: ULTIMATE FUSION is our newest paint protection film product providing the same benefits as ULTIMATE PLUS carriesbut also contains a 10-year warranty in most marketshydrophobic top-coat which creates a naturally slick surface to repel water and is by far our top seller.road grime
XPEL STEALTH: STEALTH is a satin-finished paint protection film, made with the same construction as ULTIMATE PLUS. STEALTH is designed to protect surfaces that already have a matte finish or to give otherwise glossy surfaces a matte finish.
TRACWRAP: TRACWRAP is a temporary TPU-based paint protection film, for both do it yourself, or DIY, and professional applications, that is designed to be used for a short period of time, including during road trips, vehicle transport or vehicles pending a full installation of our other products likesuch as XPEL ULTIMATE PLUS.
LUX PLUS: LUX PLUS is our flagship clear, TPU-based paint protection film for the Chinese market. Designed and formulated specifically for the demands of China, with excellent self-healing and stain-resistance, it is offered for sale exclusively in that market.
XPEL RX: RX Protection Film provides protection for a variety of surfaces including screens and other electronics and contains silver ions which inhibit the growth of microbes on the film’s surface. This product was launched pursuant to our acquisition of E-Shields LLC in 2018.
XPEL ARMOR: ARMOR is a thick PVC-based protection film that looks and performs like a spray-on bedliner. It is designed to resist abrasions and punctures from the most aggressive terrain.terrains.
OTHER FILMS: We sell a variety of other specialty films in smaller quantities for select customers or in certain markets, including: LUX-M, ZEUS, PROTEX, MPD and ASP in the Chinese Market, F8000 Film in Mexico and F9300 Film in Canada and Europe.
Most of our Surface and Paint Protection films are applied wet and can be installed in bulk or pre-cut using our Design Access Program, or DAP, software. While we sell some pre-cut and Do-It-Yourself products made from these rolls directly to consumers, the vast majority of the products are professionally installed.
Surface and Paint Protection film sales represented 74.9%68.6% of our consolidated revenue for the year ended December 31, 2019.2021.
Automotive Window Film Rolls: We sell several lines of automotive window films, primarily under the XPEL PRIME brand name, which exhibit a range of performance characteristics and appearances, including:
XPEL PRIME XR PLUS: PRIME XR PLUS offers 98% infrared heat rejection thanks todeveloped with multi-layer nano-particulenano-particle technology. This is our most expensive flagship product with our best specifications and characteristics. It is available in a variety of visible light transmission, or VLT, levels.
XPEL RRIMEPRIME XR: PRIME XR utilizes a nano-ceramic construction, blocking 88% of infrared heat and willdoes not interfere with radio, cellular or Bluetooth signals like a metallized film.
XPEL PRIME CS: PRIME CS blocks solar heat radiation to keep vehicles at comfortable temperatures and blocks 99% of harmful UV rays. Available in both a black and neutral charcoal color, PRIME CS is designed to remain the same over the years and never fades or turns purple.
OTHER FILMS: We also sell a variety of other automotive window films both under the PRIME brand and on a private-label basis, including: PRIME X-SERIES and PRIME AP in China, PRIME HP, PRIME GL, PRIME SD and more. Generally, these products are lower cost and are sold only in certain markets.
Automotive window film sales represented 8.8%13.6% of our consolidated revenue for the year ended December 31, 2019.
Architectural Window Film Rolls: In 2018, we began offering anWe sell architectural glass solutionsolutions for commercial and residential buildings under the VISION brand name, representing our first product set with a fully non-automotive use. Architectural window films come in several broad categories, including:
SOLAR: Solar films are designed to provide solar energy rejection. We offer a variety of films with varying colors, VLTs and price points.
SAFETY & SECURITY: Safety and Security films are clear, thick polyethylene terephithalate,terephthalate, or PET, films to secure glass in the event of a breakage. We offer a variety of thicknesses and offer films with varying adhesive characteristics for different types of installations.
OTHER: In addition to the main categories of SOLAR and SAFETY & SECURITY films, we also offer anti-graffiti, exterior applied and decorative films.
Architectural window film sales represented less than 1%2.0% of our consolidated revenue for the year ended December 31, 2019.2021.
Design Access Program: A key component of our product offering is our Design Access Program software. DAP is a proprietary software and database consisting of over 80,000 vehicle applications used by the Company and its customers to cut automotive protection film into vehicle panel shapes for both paint protection film and window film products.
We commit significant resources to keep the pattern database updated with a goal toward having a pattern for every panel of every vehicle. When new vehicle models are introduced to the market, we strive to create the pattern as soon as possible. Our patterns and software increase installer efficiency and reduce waste.
Our DAP customers pay a monthly access fee to access our proprietary database. Monthly DAP subscriptions represented 2.5%1.7% of our consolidated revenue for the year ended December 31, 2019.2021.
Installation Services: We offer installation services of our various products directly to retail and wholesale customers through our nine company-ownedCompany-owned installation facilities in their respective markets.markets and through our on-site services to automobile dealerships. Our installation services are primarily automotive film installation but have grown to include architectural film installation in certain markets. Installation services (including product and labor revenue) represented 6.1%11.1% of our consolidated revenue for the year ended December 31, 2019.2021.
Miscellaneous Products, Tools and Pre-Cut:Pre-Cut Films: We sell a variety of other miscellaneous product sets which include:
PRE-CUT FILM PRODUCTS: While most of our surface protection films, automotive window films and architectural window films are sold as rolls, we also offer to pre-cut them into vehicle specific shapes (if applicable) or cut them into smaller pieces or shapes to aide in the installation or to increase affordability or efficiency for our customers who cannot justify purchasing an entire roll of a given product.customers.
XPEL FUSION PLUS CERAMIC COATING: XPEL FUSION PLUS is a hydrophobic, self-cleaning coating that can be applied to paint and paint protection film, wheels and calipers, plastic and trim, upholstery and glass. XPEL FUSION PLUS provides additional protection to a vehicle’s painted surfacethese surfaces to enhance its glosstheir appearance and protect it from minor scratches.
TOOLS AND ACCESSORIES: We sell a variety of tools and accessories which are used in the installation of our products, including squeegees and microfiber towels, application fluids, plotter cutters, knives and more. Generally, these are offered as a service to our customers to provide one-stop shopping.
MERCHANDISE AND APPAREL: We sell a variety of XPEL-branded merchandise and apparel which helps represent and build our brand.
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. For example, beginning in 2020, the Company has entered into a multi-year partnership with Team Penske to serve as the official protective film partner of Team Penske and act as primary sponsor for two or more IndyCar races per year.
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 centers aroundon our belief that the closer the Company is to its end customers, the greater its ability to drive increased product sales. During 2021, we acquired several businesses serving multiple markets in the United States, Canada, and the United Kingdom, in furtherance of this objective.
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 new product line will expose the Company to several new addressable markets.opportunities.
Sales and Distribution
We sell and distribute our products through independent installers, new car dealerships, third-party distributors, Company-owned installation centers, Protex Canada’s franchisees, and on-line.online.
Independent Installers/New Car Dealerships
We primarily operate by selling a complete turn-key solution directly to independent installers and new car dealerships, which includes XPEL protection films, installation training, access to our proprietary DAP software, marketing support and lead generation. For the year ended December 31, 2019,2021, approximately 54% of the Company’s consolidated revenue was through this channel.
While we are principally a product company, we alsoWe offer a suite of services to complement our products for our customers, includingdealers and strive to create value for being an XPEL dealer. We provide access to our proprietary DAP software.software which, in turn, provides access to pattern libraries that enable cutting our films into specific shapes to aid in their installation. We believe that this software greatly enhances installation efficiency and reduces film waste – a highly valuable feature to our customers, as their highest cost tends to be labor. Increasingly, DAP is used to manage operations for our dealers, including job management, scheduling and inventory tracking. We also provide marketing and lead generation for our customers by featuring them in our dealer locator on our website. To be considered an “authorized dealer”Authorized Dealer (and thereby have end customers referred to them), independent installers must complete our four-day, hands-on training classemploy certified installers and meet other requirements. Trainees are certified upon completion. Additionally, XPEL works closely with independent installersrequirements including purchase minimums and more.
We expanded our service offerings to new car dealerships with our 2021 acquisitions of PermaPlate LLC and TintNet, Inc. New car dealerships generally have three options to support local eventsinstall protective films and other appearance products once sold to their customers:
•through an “in-house” program whereby the dealerships hire installers on their payroll to install the product once sold;
•out-sourcing the installation to an aftermarket installer; and,
•utilizing a labor service model whereby third-party labor performs the installation on dealership premises.
Our PermaPlate and TintNet acquisitions added this third party labor option to our portfolio of services offered to new car dealerships in their area.addition to increasing our exposure to more mid-range automobile dealerships.
XPEL also offers 24/7 customer service for independent installers and new car dealerships where we provide installation, software and training support via our website and telephone technical support services.
Finally, our customers in the independent installer/new car dealership channel tend to be smaller in nature, and consequently frequently experience “just-in-time” inventory needs. The Company maintains inventory in several locations globally to meet these needs.
Distributors
In various parts of the world, XPEL operates primarily through third partythird-party distributors under written agreements with the Company to develop a market or a region under our supervision and direction. These distributors may sell to other distributors or customers who ultimately install the product on an end customer’s vehicle. Due to the nature of this channel, product margins are generally less than other channels. For the year ended December 31, 2019,2021, approximately 34%28% of the Company’s consolidated revenue was through this channel.
WeIn China, we operate through a sole distributor under a distribution agreement, Shanghai Xing Ting Trading Co., Ltd., which we refer to as the China Distributor, in China under a distribution agreement.Distributor. Approximately 23.5%18% of our consolidated revenue for the year ended December 31, 2019,2021, was derived from sales to the China Distributor.
Through our distribution agreement with the China Distributor entered into on May 31, 2018, the China Distributor has rights to promote, market, distribute, sell and install our products in China. Additionally, we have granted the non-exclusive right to the China Distributor to use our software in connection with customers’ purchases of our products. The China Distributor places orders with us on a prepaid basis at a price set by us, which we may change with 30 days’ notice. Certain of our products have minimum purchase requirements that increase annually.
We have also granted the China Distributor a non-exclusive license to use our brands to promote sales of our products to end-users. The distribution agreement applies to separate product categories, distinguished by their exclusive or non-exclusive relationship with the China Distributor, each for a term of five years, each of which will automatically renew for up to three additional five yearfive-year periods unless otherwise terminated by either party with 60 days’ notice.
We consider our relations with the China Distributor to be good, but the loss of our relationship could result in the delay of the distribution and a decrease in marketing of our products in China. For more information, see Part I, Item 1A—Risk Factors—We rely on one distributor of our products and services in China. The loss of this relationship, or a material disruption in sales by this distributor, could severely harm our business”business” and “A significant percentage of our revenue is generated from our business in China, a market that is associated with certain risks.”
Company-Owned Installation Centers
XPEL operates nine company-owned11 Company-owned installation centers: sixseven in the United States, twothree in Canada and one in the United Kingdom. These locations serve wholesale and retail customers in their respective markets. This channel represented approximately 6%5% of the Company’s consolidated revenue for the year ended December 31, 2019.2021.
Some of our Company-owned installation centers are located in geographic areas where we also serve customers in our independent installer/dealership channel, which could be perceived to generate channel conflict. However, we believe these channels have a synergistic relationship with our Company-owned centers supporting independent installers and dealerships by supplementingallowing us to implement local marketing, making inventory needs,available locally for fast delivery, offering overflow installation capacity and assisting with overflow work and providing additional customer service and employee training.training needs. We believe this channel strategy benefits our goal of generating the most product revenue possible.
Franchisee ChannelAutomobile Original Equipment Manufacturers (“OEMs”)
XPEL’s acquisition of Protex Canada in 2017 added its franchisee network to our distribution portfolio. Franchisees are authorized to sell our automotiveXPEL sells products, including paint protection film, and window film. A franchisee must pay a franchise fee to be assigned an exclusive area in which to offer sale andprovides services, including the installation of protective films. As the franchisor, Protex Canada provides brand, training and other support to franchisees. Franchisees pay a royalty to Protex Canada based on percent of revenues. Franchisees, as part of their franchise agreement,
are required to purchase paint protection film and window films from XPEL. The revenue from thispre-delivery inspection to various OEMs. These services are provided in-plant at the OEMs’ facilities or in one of our facilities. This channel which consists of franchise fee and royalty revenue represented approximately 1%3% of the Company’s consolidated revenue for the year ended December 31, 2019.2021.
Online and Catalog Sales
XPEL offers certain products such as paint protection kits, car wash products, after-care products and installation tools via its website. Revenues from this channel are negligible but we believe that by offering these products on our website, we increase brand awareness. The revenue from this channel represented approximately 2%1% of the Company’s consolidated revenue for the year ended December 31, 2019.2021.
Competition
The Company principally competes with other manufacturers and distributors of automotive protective film products. While the Company considers itself a product company competing with other product companies, the Company believes its suite of services which accompany the Company’s product offerings including its software, marketing and lead generation to its customers and customer service provide for substantial differentiation from its competitors. Within the market for surface and paint protection film, our principal competitors include Eastman Chemical Company (under the LLumar and Suntek brands) and several other smaller companies. For more information, see Part I, Item 1A—Risk Factors—The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company.
Suppliers
The Company’s products are sourced from a number of suppliers or manufactured by various third-party contract manufacturers. The Company has opted to pursue an asset-light manufacturing model whereby third-party suppliers and manufacturers are used to supply the Company with the majority of its products. The Company’s film products (including paint protection film and surface protection, automotive window films and architectural window filmsfilms) are sourcedproduced using various roll-to-roll manufacturing processes performed entirely by third parties. The Company internalizes many conversion operations including quality assurance, inspection, rewinding, boxing and packaging for many of its products at its facilities around the world.
The Company’s product lines continue to grow and include both film and non-film products. The products fall into three categories:
•Products where we own or license the intellectual property (“IP”) – the Company owns or licenses the underlying IP for product construction or for one or more components of the product and could seek to have the products made at a variety of manufacturing locations.
•Products that are made for us on an exclusive basis – the Company does not own all the underlying IP, but has products made by a third party solely for the Company on an exclusive basis.
•Products that we source from five suppliers. suppliers on a non-exclusive basis – the Company does not own the underlying IP but sources products on commercial terms from a third party.
Tthe Company either owns or licenses the relevant IP or has alternative substitutes to continue to operate for the material portion of products sold.
Approximately 80%75% of the Company’s inventory purchases in the year ended December 31, 20192021 were sourced from one of these suppliers, entrotech which we referinc. (“entrotech”), pursuant to as the primary supplier.
Through ouran Amended and Restated Supply Agreement thatwith entrotech (the “entrotech Agreement”). Under the entrotech Agreement, we entered into with our primary supplier in March 2017, we havehad exclusive rights to commercialize, market, distribute and sell itsentrotech’s automotive aftermarket products through March 21, 2020,2022, at which time the term could automatically renewsrenew for successive two year periods thereafter unless terminated at the option of either party with two months’ notice. During suchOn January 20, 2022, we gave notice to entrotech that the Company would not extend the term we have agreed to use commercially reasonable efforts to purchase a minimum of $5,000,000 of products quarterly from this primary supplier, with a yearly minimum purchasing requirement of $20,000,000. Under the terms of the Supplyentrotech Agreement in its current form. Accordingly, the primary supplier has retained all of the rights to its technology and products relating to protective films subject to the Company’s exclusive right to commercialize, market, distribute and sell products manufactured by the primary supplier to the automotive aftermarket including to new car dealerships. Since no notice of termination has been given by either us or the primary supplier, the Supplyentrotech Agreement will automatically renewterminate on March 21, 2020 for an additional two-year term.2022. The Company intends to enter into a new supply agreement with entrotech; however, we cannot assure you that we will be successful in negotiating a new agreement. We expect to purchase product from entrotech on a purchase order basis in the interim.
The primary supplier manufactures our products according to mutually agreed-upon specifications, quality assurance programs and other standards that are mutually established. We consider our relations with the primary supplier to be good, but the loss of our relationship with the primaryentrotech, or any other supplier, could result in the delay of the manufacture and delivery of some of our automotive film products. For more information, see Part I, Item 1A—Risk Factors—A material disruption from our primary suppliersuppliers, or our inability to obtain a sufficient supply of product from alternate suppliers, could cause us to be unable to meet customer demands or increase our costs.
Film Conversion Process
The Company receives its surface and paint protection, automotive window film and architectural window film in a variety of roll forms, including short and master roll format. For some of the Company’s products,
the Company engages in a variety of converting activities in its facilities in San Antonio, Texas and in other locations. Depending on the product and the format in which it was received, conversion activities may include: inspection, slitting, rewinding or boxing. Additionally, for some of the Company’s products, including pre-cut film products, the Company performs further conversion which includes cutting film into specific shapes using computer aided cutting equipment.
Government Regulation and Legislation
The manufacturing, packaging, storage, distribution, advertising and labeling of our products and our business operations all must comply with extensive federal, state and foreign laws and regulations and consumer protection laws. Governmental regulations also affect taxes and levies, capital markets, healthcare costs, energy usage, international trade, immigration and other labor issues, all of which may have a direct or indirect negative effect on our business and our customers’ and suppliers’ businesses. We are also required to comply with certain federal, state and local laws and regulations and industry self-regulatory codes concerning privacy and datedata security. These laws and regulations require us to provide customers with our policies on sharing information with third parties, and advance notice of any changes to these policies. Related laws may govern the manner in which we store or transfer sensitive information, or impose obligations on us in the event of a security breach or inadvertent disclosure of such information. International jurisdictions impose different, and sometimes more stringent, consumer and privacy protections.
Our products are subject to export controls, including the U.S. Department of Commerce’s Export Administration Regulations and economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Asset Controls, and similar laws that apply in other jurisdictions in which we distribute or sell our products. Export control and economic sanctions laws include prohibitions on the sale or supply of certain products and services to certain embargoed or sanctioned countries, regions, governments, persons and entities. In addition, various countries regulate the import of certain products, through import permitting and licensing requirements, as well as customs, duties and
similar charges, and have enacted laws that could limit our ability to distribute our products. The exportation, reexportation,re-exportation, and importation of our products, including by our partners,distributors, must comply with these laws or else we may be adversely affected, through reputational harm, government investigations, penalties, and a denial or curtailment of our ability to export our products. Complying with export control and sanctions laws for a particular sale may be time consuming and may result in the delay or loss of sales opportunities. If we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us. Changes in export, sanctions or import laws, may delay the introduction and sale of our product in international markets, or, in some cases, prevent the export or import of our products to certain countries, regions, governments, persons or entities altogether, which could adversely affect our business, financial condition and operating results.
We are also subject to various domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, as well as other similar anti-bribery and anti-kickback laws and regulations. These laws and regulations generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our exposure for violating these laws would increase to the extent our international presence expands and as we increase sales and operations in foreign jurisdictions.
Proposed or new legislation and regulations could also significantly affect our business. For example, the European General Data Protection Regulation, (“GDPR”)or “GDPR”, took effect in May 2018 and applies to all of our products and services used by people in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union that are different from those previously in place in the European Union. In addition, the GDPR requires submission of breach notifications to our designated European privacy regulator and includes significant penalties for non-compliance with the notification obligation as well as other requirements of the regulation. The California Consumer Privacy Act, or AB 375, was also recently passed and createscreated new data privacy rights for users, effectivebeginning in 2020. Similarly, there are a number of legislative proposals in the European Union, the United
States, at both the federal and state level, as well as other jurisdictions that could impose new obligations in areas affecting our business. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
Environmental Matters
We are subject to a variety of federal, state, local and foreign environmental, health and safety laws and regulations governing, among other things, the generation, storage, handling, use and transportation of hazardous materials; the emission and discharge of hazardous materials into the environment; and the health and safety of our employees. We have incurred and expect to continue to incur costs to maintain or achieve compliance with environmental, health and safety laws and regulations. To date, these costs have not been material to the Company.
Intellectual Property and Brand Protection
We regard some of the featuresown intellectual property rights, including numerous patents, copyrights and trademarks, that support key aspects of our DAP software,brand and products. We believe these intellectual property rights, combined with our brandsbrand name and marketing message, and our documentation as proprietary and rely on copyright, patent, and trademark and service mark laws and trade secret protection, such as confidentiality procedures, contractual arrangements, non-disclosure agreements and other measures toreputation, provide us with a competitive advantage. We protect our proprietary information. Our intellectual property is an important and valuable asset that enables us to gain recognition for our products, services, and DAP software and enhance our competitive position and market value.
We have obtained United States copyright registrations for our DAP software applications and also have two patents in the United States related to our DAP software.
We also have trademarks registrationsrights in the United States and many international jurisdictions.
We aggressively pursue and defend our intellectual property rights to protect our distinctive brand and products. We have processes and procedures in place to identify and protect our intellectual property assets on a global basis. We utilize legal and brand protection resources to initiate claims and litigation to protect our intellectual property assets. In the future, we intend to continue to seek intellectual property protection for our products and enforce our rights against those who infringe on these valuable assets.
Human Capital Resources
On December 31, 2021, the Company employed approximately 709 people (full-time equivalents), with approximately 493 employed in the United States and 216 employed internationally. We believe that the ability to recruit, retain, develop, protect and fairly compensate our global workforce greatly contributes to the Company’s success.
In addition to a professional work environment that promotes innovation and rewards performance, the Company’s total compensation for employees includes a variety of components that support sustainable employment and the ability to build a strong financial future, including competitive market-based pay and comprehensive benefits. In addition to earning a base salary, eligible employees are compensated for their contributions to the Company’s goals with short-term cash incentives. Through its global pay philosophy, principles and consistent implementation, the Company is committed to providing fair and equitable pay for employees. Eligible full-time employees in the United States also have access to medical, dental and vision plans, savings plans and other countries.
XPEL®, XPEL & DESIGN®, XPEL ULTIMATE®, PELTI®, PROTEX®resources. Programs and TRACWRAP® are registered trademarksbenefits differ internationally for a variety of the Company.
XPEL™, XPEL FUSION™, XPEL ULTIMATE PLUS™, XPEL STEALTH™, XPEL RX™, XPEL ARMOR™, XPEL PRIME XR™, XPEL PRIME XR PLUS™, XPEL PRIME CS™, PRIME X-SERIES™, PRIME AP™, PRIME GL™, PRIME SD™, PROTEX (STYLIZED)™, ASP™, LUX™, LUX PLUS™, LUX-M™, ZEUS™, F8000 Film™, F9300 Film™reasons, such as local legal requirements, market practices and MPD™ are trademarks of the Company.negotiations with work councils, trade unions and other employee representative bodies.
Available Information
XPEL was incorporated in Nevada in 2003. Our street address is 618 W. Sunset Road, San Antonio, Texas 78216 and our phone number is (210) 678-3700. The address of our website is www.xpel.com. The inclusion of the Company’s website address in this annual reportAnnual Report does not include or incorporate by reference the information on or accessible through the Company’s website, and the information contained on or accessible through the website should not be considered as part of this annual report.Annual Report.
The Company will make its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports (and amendments to those reports) filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, available on the Company’s website as soon as reasonably practicable after the Company electronically files or furnishes such materials with the Securities and Exchange Commission (“SEC”). Interested persons can view such materials without charge under the “Investor Relations” section and then by clicking “Corporate Filings / Financial Results” on the Company’s web site. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information about SEC registrants, including XPEL.
XPEL, Inc. is an “emerging growth company” and a “smaller reporting company” within the meaning of Rule 12b-2 under the Securities Exchange Act.
Item 1A. Risk Factors
This Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this Annual Report. See “Cautionary Notice Regarding Forward-Looking Statements.”
Operational Risks Related to Our Business and Industry
The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company.
We face significant competition from a number of companies, many of whom have greater financial, marketing and technical resources than us, as well as regional and local companies and lower-cost manufacturers of automotive and other products. Such competition may result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products.
Additionally, as we introduce new products and as our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition. Our principal competitors have significantly greater resources than us. This may allow our competitors to respond more effectively than we can to new or emerging technologies and changes in market requirements. Our competitors may also develop products, features, or services that are similar to ours or that achieve greater market acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against us.
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:
•the usefulness, ease of use, performance, and reliability of our products compared to our competitors;
the timing and market acceptance of products, including developments and enhancements to our products or our competitors’ products;
•customer service and support efforts;
•marketing and selling efforts;
•our financial condition and results of operations;
•acquisitions or consolidation within our industry, which may result in more formidable competitors;
•our ability to attract, retain, and motivate talented employees;
•our ability to cost-effectively manage and grow our operations;
our ability to meet the demands of local markets in high-growth emerging markets, including some in which we have limited experience; and
•our reputation and brand strength relative to that of our competitors.
If we are unable to differentiate or successfully adapt our products, services and solutions from competitors, or if we decide to cut prices or to incur additional costs to remain competitive, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
A material disruption from the primary supplierour suppliers, or our inability to obtain a sufficient supply of product from alternate suppliers, could cause us to be unable to meet customer demands or increase our costs.
Pursuant to an Amended and Restated Supply Agreement dated as of March 21, 2017, between us and our primary supplier, which we refer to as the Supply Agreement, we have engaged the primary supplier to act as the primary sourceIf any of our automotive paint protection film products. During the year ended December 31, 2019, approximately 80%sources of our annual inventory purchases were purchased from the primary supplier.
Any failure by the primary supplier to perform its obligations under the Supply Agreement, including a failure to provide sufficient supply of our products to satisfy customer demand, could have a material adverse effect on our revenue, operating results and operating cash flows.
Additionally, if our relationship with the primary supplier were to terminatedeteriorate or if operations at its manufacturing facility were to be disrupted as a result of disagreements with one or more of our suppliers, COVID-19, significant equipment failures, natural disasters, earthquakes, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other reasons, we may be unable to fill customer orders or otherwise meet customer demand for our products, andproducts. Any such disruption or failure by us to obtain a sufficient supply of our products to
satisfy customer demand could increase our costs and reduce our sales, anyeither of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our suppliers have been subject to various supply chain disruptions. While these supply chain disruptions have not yet slowed the delivery of products, any such disruption could cause us to not be able to meet demand due to a lack of inventory and/or cause a significant increase in costs of raw materials and shipping costs. Our ability to produce and timely deliver our products may be materially impacted in the future if these supply chain disruptions continue or worsen. In addition, because of rising costs, we may be forced to increase the price of our products to our customers, or we may have to reduce our gross margins on the products that we sell.
Pursuant to the entrotech agreement between us and entrotech, we had engaged entrotech as a primary supplier for our automotive paint protection film products. During the year ended December 31, 2021, approximately 75% of our annual inventory purchases were purchased from entrotech.
On January 20, 2022, we gave notice to entrotech that the Company would not extend the term of the entrotech Agreement in its current form. Accordingly, the entrotech Agreement will terminate on March 21, 2022. The Company intends to enter into a new supply agreement with entrotech; however, we cannot assure you that we will be successful in entering into a new agreement. If we are unable to reach a new agreement with entrotech, we will not have a long-term supply agreement with entrotech, and entrotech could stop manufacturing products for us at any time. If entrotech unilaterally ceased supplying us, our operations would likely be impacted if the Company’s alternate suppliers were unable to meet demand.
We rely on one distributor of our products and services in China. The loss of this relationship, or a material disruption in sales by this distributor, could severely harm our business.
The Company distributes all of its products in China through one distributor, with sales to such distributor representing 23.5%approximately 18% of our consolidated revenue for the year ended December 31, 2019.2021. The China Distributor places orders with us on a prepaid basis at a price set by us, which we may change with 30 days’ notice. The China Distributor then generates orders, sells and distributes our products to its end customers in China.
Any failure by the China Distributor to perform its obligations, including a failure to procure sufficient orders of our products to satisfy customer demand or a failure to adequately market our products, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Because of our dependence on the China Distributor, any loss of our relationship or any adverse change in the financial health of such distributor that would affect its ability to distribute our products may have a material adverse effect on our business, financial condition, results of operations and cash flows.
A significant percentage of our revenue is generated from our business in China, a market that is associated with certain risks.
Our businessMaintaining a strong position in Chinathe Chinese market is operated through a single distributor.key component of our global growth strategy. During the year ended December 31, 2019,2021, approximately 23.5%18% of our consolidated revenue was generated in China, more than any other country outside of the U.S. in which we operate, and we expect such portion will increase with the expansion ofto continue to expand our business in China. However, there are risks generally associated with doing business in China, including:
Significant political and economic uncertainties
Historically, the Chinese government has exerted substantial influence over the business activities of private companies. Under its current leadership, the Chinese government has been pursuing economic
reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice. Furthermore, the Chinese government continues to exercise significant control over the Chinese economy through regulation and state ownership. Changes in China’s laws, regulations or policies, including those affecting taxation, currency, imports, or the nationalization of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Furthermore, government actions in the future could have a significant
effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
Impact from the “Coronavirus”
China has experienced an outbreak of the coronavirus that is affecting the entire country. If the virus continues to spread, or China is unable to effectively control the outbreak of the coronavirus, our sales could be materially adversely affected. In addition, as the coronavirus has spread to other regions of the world, our sales to non-China regions could also be materially adversely affected.
Trade policy
The currentIn 2018, the U.S. government took the stance that China was engaged in unfair trade practices, and instituted a series of tariffs and other trade barriers on China in response. Though the U.S. and China administrations have recently reached a phase one agreement in January 2020, tension persists between the two countries. Although the current U.S. administration has continued to enforce the phase one agreement, the future of U.S. and Chinese trade relations is uncertain. If the current agreement after several months of negotiations. If such agreement wereis abandoned, changed or violated by either party, we could be forced to increase the sales price of our products, reduce margins, or otherwise suffer from trade restrictions or changes in policy levied by the U.S. or Chinese government thatgovernments, any of which may have a material adverse effect on our business.
Limited recourse in China
While the Chinese government has enacted a legal regime surrounding corporate governance and trade, its experience inhistory of implementing such laws and regulations is limited. It is unclear how successful any attempt to enforce commercial claims or resolve commercial disputes will be. The resolution of any such dispute may be subject to the exercise of considerable discretion by the Chinese government and its agencies and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.
Additionally, any rights we may have to specific performance, or to seek an injunction under China law in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
Uncertain interpretation of law
There are substantial uncertainties regarding the interpretation and application of the laws and regulations in the greater China area, including, but not limited to, the laws and regulations governing our business. China’s laws and regulations are frequently subject to change due to rapid economic and social development and many of them were newly enacted within the last ten years. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
The Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business permits and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to our Company by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new Chinese laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found to be in violation of any current or future Chinese laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and
management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
General global economicThe loss of one or more of our key personnel, or our failure to attract and business conditions affect demand forretain other highly qualified personnel in the future, could harm our products.business.
We competecurrently depend on the continued services and performance of our executive officers, Ryan L. Pape, our President and Chief Executive Officer, Barry R. Wood, our Senior Vice President and Chief Financial Officer and Mathieu Moreau, our Senior Vice President, Sales and Product, none of whom has an employment agreement. Loss of key personnel, including members of management as well as key product development, marketing, and sales personnel, could disrupt our operations and have an adverse effect on our business. As we continue to grow, we cannot guarantee that we will continue to attract the personnel we need to maintain our competitive position. As we grow, the incentives to attract, retain, and motivate employees may not be as effective as in various geographic regionsthe past. If we do not succeed in attracting, hiring, and markets around the world. We expect to experience fluctuations in revenueintegrating effective personnel, or retaining and results of operations due to economic and business cycles. Important factors formotivating existing personnel, our business and the businessescould be adversely affected.
The preparation of our customers includefinancial statements will involve the overall strengthuse of the economyestimates, judgments and assumptions, and our customers’ confidencefinancial statements may be materially affected if such estimates, judgments and assumptions prove to be inaccurate.
Financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP” or “GAAP”) require the economy, unemployment rates, availabilityuse of consumer financingestimates, judgments and interest rates. Our productsassumptions that affect the reported amounts. Different estimates, judgments and services are discretionary purchases for most consumers. Consumers are generally more willing to make discretionary purchases on products and services such as ours during periods of favorable general economic conditions. While we attempt to minimize our exposure to economic or market fluctuations by offering a balanced mix of end markets and geographic regions, any of the above factors, individually or in the aggregate, or a significant or sustained downturn in a specific end market or geographic regionassumptions reasonably could reduce demand for our products and services, which couldbe used that would have a material adverse effect on the consolidated financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but are not limited to, determining the fair value of our assets and the timing and amount of cash flows from our assets. These estimates, judgments and assumptions are inherently uncertain and, if they prove to be wrong, we face the risk that charges to income will be required. Any such charges could significantly harm our business, financial condition, results of operations and the price of our securities. Estimates and assumptions are made on an ongoing basis for the following: revenue recognition, capitalization of software development costs, impairment of long-lived assets, inventory reserves, allowances for doubtful accounts, fair value for business combinations, and impairment of goodwill.
In the ordinary course of business, we continually evaluate our internal controls and make improvements as deemed necessary. During the fourth fiscal quarter, we identified and fully remediated a material weakness in our internal controls related to user access controls to our financial system as part of this process. We may identify further significant deficiencies and material weaknesses in our internal control over financial reporting for future fiscal years. The failure to remediate significant deficiencies and material weaknesses or to implement and maintain effective internal control over financial reporting in the future could adversely affect the accuracy and timeliness of our financial reporting and could result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. We continually evaluate our internal controls and make changes and improvements as necessary. During the fourth fiscal quarter, management identified a material weakness in our internal controls related to user access controls to our financial system. This material weakness was fully remediated as of December 31, 2021. There were no errors or misstatements in our financial statements resulting from this identified material weakness. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. Any failure to maintain or implement new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses or significant deficiencies and could result in material misstatements in our financial statements. Furthermore, any failure in the effectiveness of our system of internal control over financial reporting could have a material adverse impact on our ability to report our financial results in an accurate and timely manner and, as a result, our investors, regulators, customers and other business partners may lose confidence in our business or our financial reports, and our access to capital markets may be adversely affected. Any of the foregoing effects could have a material adverse effect on the Company’s business, financial condition and operating cash flows.
Risks Related to Our Business and Industry
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.
Automotive sales and production are cyclical and depend on, among other things, general economic conditions, consumer spending, vehicle demand and preferences (which can be affected by a number of factors, including fuel costs, employment levels and the availability of consumer financing). As the volume of automotive production and the mix of vehicles produced fluctuate, the demand for our products may also fluctuate. Prolonged or material contraction in automotive sales and production volumes, or significant changes in the mix of vehicles produced, could cause our customers to reduce purchasepurchases of our products and services, which could adversely affect our business, results of operations and financial condition.
Automobile manufacturers continue to experience a global semiconductor shortage which has affected production of vehicles and, in turn, the inventory of vehicles at new car dealerships. To the extent that this shortage persists, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Fluctuations 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.
The price and availability of key components used to manufacture our products may fluctuate significantly. Any fluctuations in the cost and availability of any of our products and/or any interruptions in the delivery of our products could harm 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.
The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company.
We face significant competition from a number of companies, many of whom have greater financial, marketing and technical resources than us, as well as regional and local companies and lower-cost manufacturers of automotive and other products. Such competition may result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products.
Additionally, as we introduce new products and as our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition. Our principal competitors have significantly greater resources than we do. This may allow our competitors to respond more effectively than we can to new or emerging technologies and changes in market
requirements. Our competitors may also develop products, features, or services that are similar to ours or that achieve greater market acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against us.
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:
•the usefulness, ease of use, performance, and reliability of our products compared to our competitors;
•the timing and market acceptance of products, including developments and enhancements to our products or our competitors’ products;
•customer service and support efforts;
•marketing and selling efforts;
•our financial condition and results of operations;
•acquisitions or consolidation within our industry, which may result in more formidable competitors;
•our ability to attract, retain, and motivate talented employees;
•our ability to cost-effectively manage and grow our operations;
•our ability to meet the demands of local markets in high-growth emerging markets, including some in which we have limited experience; and
•our reputation and brand strength relative to that of our competitors.
If we are unable to differentiate or successfully adapt our products, services and solutions from competitors, or if we decide to cut prices or to incur additional costs to remain competitive, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Harm to our reputation or the reputation of one or more of our products could have an adverse effect on our business.
We believe that maintaining and developing the reputation of our products is critical to our success and that the importance of brand recognition for our products increases as competitors offer products similar to our products. We devote significant time and incur substantial marketing and promotional expenditures to create and maintain brand loyalty as well as increase brand awareness of our products. Adverse publicity about us or our brands, including product safety or quality or similar concerns, whether real or perceived, could harm our image or that of our brands and result in an adverse effect on our business, as well as require resources to rebuild our reputation.
Our revenue and operating results may fluctuate, which may make our results difficult to predict and could cause our results to fall short of expectations.
As a result of the rapidly changing nature of the markets in which we compete, our quarterly and annual revenue and operating results may fluctuate from period to period. These fluctuations may be caused by a number of factors, many of which are beyond our control. For example, changes in industry or third-party specifications may alter our development timelines and consequently our ability to deliver and monetize new or updated products and services. Other factors that may cause fluctuations in our revenue and operating results include:
•any failure to maintain strong customer relationships;
•any failure of significant customers, including distributors, to renew their agreements with us;
•variations in the demand for our services and products and the use cycles of our services and products by our customers;
•changes in our pricing policies or those of our competitors; and
•general economic, industry and market conditions and those conditions specific to our business.
For these reasons and because the market for our services and products is relatively new and rapidly changing, it is difficult to predict our future financial results.
If the model of selling vehicles through dealerships in North America changes dramatically, our revenue could be impacted.
Generally, most vehicles in North America are sold through franchised new car dealerships. These dealerships have a strong profit motive and are historically very good at selling accessories and other products. Going forward, if the dealership model were to change in the form of fewer franchised dealerships, or the possibility of manufacturer owned distribution, the prospects in this channel may diminish. Manufacturer-owned sales of new cars might become harder to penetrate or more streamlined with fewer opportunities to sell accessories. This would make us more reliant on our independent installer, retail-oriented channel, which would require more internal efforts and financial resources to create consumer awareness.
If ride-sharing or alternate forms of vehicle ownership gain in popularity, our revenue could be impacted.
If ride-sharing or alternate forms of vehicle ownership including rental, ride-sharing, or peer-to-peer car sharing gain in popularity, consumers may own fewer vehicles per household, which would reduce our revenue. More vehicles entering a ride-sharing or car-sharing fleet could have an uncertain impact on our revenue as consumers could be less interested in accessorizing vehicles they own that are in the ride-sharing fleet.
Technology could render the need for some of our products obsolete.
We derive the majority of our revenue from surface and paint protection films, with the majority of products applied on painted surfaces of vehicles. If automotive paint technology were to improve substantially, such that newer paint did not chip, scratch or was generally not as susceptible to damage, our revenue could be impacted.
Similarly, our automotive and architectural window films could be impacted by changes or enhancements from automotive manufacturers or window manufacturers that would reduce the need for our products.
Strategic Risks
If changes to our existing products or introduction of new products or services do not meet our customers’ expectations or fail to generate revenue, we could lose our customers or fail to generate any revenue from such products or services and our business may be harmed.
We may introduce significant changes to our existing products or develop and introduce new and unproven products or services, including using products with which we have little or no prior development or operating experience. The trend of the automotive industry towards autonomous vehicles and car- and ride-sharing services may result in a rapid increase of new and untested products in the aftermarket automotive industry. If new or enhanced products fail to attract or retain customers or to generate sufficient revenue, operating margin, or other value to justify certain investments, our business may be
adversely affected. If we are not successful with new approaches to monetization, we may not be able to maintain or grow our revenue as anticipated or recover any associated development costs.
We depend on our relationships with independent installers and new car dealerships and their ability to sell and service our products. Any disruption in these relationships could harm our sales.
The largest portion of our products are distributed through independent installers and new car dealerships. We do not have direct control over the management or the business of these independent installers and new car dealerships, except indirectly through terms as negotiated with us. Should the terms of doing business with them change, our business may be disrupted, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
Because some of our independent installer and new car dealership customers also may offer our competitors’ products, our competitors may incent such customers to favor their products. We do not have long-term contracts with a majority of these independent installers and new car dealerships, and these customers are not obligated to purchase specified amounts of our products but instead buy from us on a purchase order basis. Consequently, the independent installers and new car dealerships may terminate their relationships with us or materially reduce their purchases of our products with little or no notice. If we were to lose any significant independent installers or new car dealerships, for any reason, including if an independent installer and new car dealership acquired or were acquired by a competitor such that they became a direct competitor, then we would need to obtain one or more new independent installers or new car dealerships to cover the particular location or product line, which may not be possible on favorable terms or at all.
We may not be able to identify, finance and complete suitable acquisitions and investments, and any completed acquisitions and investments could be unsuccessful or consume significant resources.
Our business strategy is expected to continue to include acquiring businesses and making investments that complement our existing business. We expect to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen our industry position or enhance our existing set of product and service offerings. We may not be able to identify suitable acquisition candidates, obtain financing or have sufficient cash necessary for acquisitions or successfully complete acquisitions in the future. Acquisitions and investments may involve significant cash expenditures, debt issuance, equity issuance, operating losses and expenses. Acquisitions involve numerous other risks, including:
•diversion of management time and attention from daily operations;
•difficulties integrating acquired businesses, technologies and personnel into our business;
•difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
•inability to obtain required regulatory approvals;
•potential loss of key employees, key contractual relationships or key customers of acquired companies or of ours;
•assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and
•dilution of interests of holders of our common stock through the issuance of equity securities or equity-linked securities.
If we are unable to maintain our network of sales and distribution channels, it could adversely affect our net sales, profitability and the implementation of our growth strategy.
Our ability to continue to grow our business depends on our ability to maintain effective sales and distribution channels in each of the markets in which we operate. We make use of a variety of distribution channels, including independent installers, new car dealerships, distributors and franchisees. We believe that this network of distribution channels enables us to efficiently reach consumers at a variety of points of sale. If we are not able to maintain our sales and distribution channels, we could experience a decline in sales, as well as reduced market share, as consumers may decide to purchase competing products that are more easily obtainable. The failure to deliver our products in accordance with our delivery schedules could harm our relationships with independent installers and new car dealerships, distributors and franchisees, which could adversely affect our net sales, profitability and the implementation of our growth strategy.
We depend on our relationships with independent installers and new car dealerships and their ability to sell and service our products. Any disruption in these relationships could harm our sales.
The largest portion of our products are distributed through independent installers and new car dealerships. We do not have direct control over the management or the business of these independent installers and new car dealerships, except indirectly through terms as negotiated with us. Should the terms of doing business with them change, our business may be disrupted, which could have an adverse effect on our business, financial condition and results of operations.
Because some of our independent installer and new car dealership customers also may offer our competitors’ products, our competitors may incent the independent installers and new car dealerships to favor their products. We do not have long-term contracts with a majority of the independent installers and new car dealerships, and the independent installers and new car dealerships are not obligated to purchase specified amounts of our products. In fact, all of the independent installers and new car dealerships buy from us on a purchase order basis. Consequently, with little or no notice, the independent installers and new car dealerships may terminate their relationships with us or materially reduce their purchases of our products. If we were to lose any significant independent installers or new car dealerships, for among other reasons that the independent installers and new car dealerships acquired or were acquired by a competitor such that they became a direct competitor, then we would need to obtain one or more new independent installers or new car dealerships to cover the particular location or product line, which may not be possible on favorable terms or at all.
The Company may incur material losses and costs as a result of product liability and warranty claims.
The Company faces an inherent risk of exposure to product liability claims if the use of its products results, or is alleged to result, in personal injury and/or property damage. If the Company manufactures a defective product, it may experience material product liability losses. Whether or not its products are defective, the Company may incur significant costs to defend product liability claims. It also could incur significant costs in correcting any defects, lose sales and suffer damage to its reputation. Product liability insurance coverage may not be adequate for the liabilities and may not continue to be available on acceptable terms.
The Company is also subject to product warranty claims in the ordinary course of business. If the Company sells poor-quality products or uses defective materials, the Company may incur unforeseen costs in excess of what it has reserved in its financial statements. These costs could have a material adverse effect on the Company’s business, financial condition, operating cash flows and ability to make required debt payments.
We sell our products under limited warranties. We have established a liability reserve under these warranties based on a review of historical warranty claims. Our liability for warranties as of the year ended December 31, 2019 was $65,591. The warranty reserve may not be sufficient to cover the costs associated with future warranty claims. A significant increase in these costs could adversely affect the Company’s operating results for future periods in which these additional costs materialize. Warranty reserves may need to be adjusted from time to time in the future if actual warranty claim experience differs from estimates. Any of the foregoing matters could have a material adverse effect on the Company’s business, financial condition, operating cash flows and ability to make required debt payments.
Harm to our reputation or the reputation of one or more of our products could have an adverse effect on our business.
We believe that maintaining and developing the reputation of our products is critical to our success and that the importance of brand recognition for our products increases as competitors offer products similar to our products. We devote significant time and incur substantial marketing and promotional expenditures to create and maintain brand loyalty as well as increase brand awareness of our products. Adverse publicity about us or our brands, including product safety or quality or similar concerns, whether real or perceived,
could harm our image or that of our brands and result in an adverse effect on our business, as well as require resources to rebuild our reputation.
We may not be able to identify, finance and complete suitable acquisitions and investments, and any completed acquisitions and investments could be unsuccessful or consume significant resources.
Our business strategy is expected to include acquiring businesses and making investments that complement our existing business. We expect to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen our industry position or enhance our existing set of product and service offerings. We may not be able to identify suitable acquisition candidates, obtain financing or have sufficient cash necessary for acquisitions or successfully complete acquisitions in the future. Acquisitions and investments may involve significant cash expenditures, debt issuance, equity issuance, operating losses and expenses. Acquisitions involve numerous other risks, including:
•diversion of management time and attention from daily operations;
•difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties in obtaining and verifying the financial statements and other business information of acquired businesses;
•inability to obtain required regulatory approvals;
potential loss of key employees, key contractual relationships or key customers of acquired companies or of ours;
•assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and
dilution of interests of holders of our common stock through the issuance of equity securities or equity-linked securities.
Our revenue and operating results may fluctuate, which may make our results difficult to predict and could cause our results to fall short of expectations.
As a result of the rapidly changing nature of the markets in which we compete, our quarterly and annual revenue and operating results may fluctuate from period to period. These fluctuations may be caused by a number of factors, many of which are beyond our control. For example, changes in industry or third-party specifications may alter our development timelines and consequently our ability to deliver and monetize new or updated products and services. Other factors that may cause fluctuations in our revenue and operation results include but are not limited to:
•any failure to maintain strong customer relationships;
•any failure of significant customers, including distributors, to renew their agreements with us;
variations in the demand for our services and products and the use cycles of our services and products by our customers;
•changes in our pricing policies or those of our competitors; and
•general economic, industry and market conditions and those conditions specific to our business.
For these reasons and because the market for our services and products is relatively new and rapidly changing, it is difficult to predict our future financial results.
If we are unable to retain and acquire new customers, our financial performance may be materially and adversely affected.
Our financial performance and operations are dependent on retaining our current customers and acquiring new customers. A number of factors could negatively affect our customer retention or acquisition.
For example, potential customers may request products or services that we currently do not provide and may be unwilling to wait until we can develop or source such additional features.products or services.
Other factors that affect our ability to retain or acquire new customers include customers’ increasing use of competing products or services, our failure to develop and introduce new and improved products or new products or services not achieving a high level of market acceptance, changes in customer preference or customer sentiment about the quality or usefulness of our products and services, including customer service, consolidation or vertical integration of our customers, adverse changes in our products mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees, and technical or other problems preventing us from delivering our products in a rapid and reliable manner.
If we are unable to retain and acquire new customers, our financial performance may be materially and adversely affected.
We are exposed to political, regulatory, economic and other risks that arise from operating a multinational business.
Sales outside of the U.S. for the year ended December 31, 20192021 accounted for approximately 53%48% of our consolidated revenue. Accordingly, our business is subject to the political, regulatory, economic and other risks that are inherent in operating in numerous countries. These risks include:
•changes in general economic and political conditions in countries where we operate, particularly in emerging markets;
•relatively more severe economic conditions in some international markets than in the U.S.;
•the difficulty of enforcing agreements and collecting receivables through non-U.S. legal systems;
•the difficulty of communicating and monitoring standards and directives across our global facilities;
•the imposition of trade protection measures and import or export licensing requirements, restrictions, tariffs or exchange controls;
•the possibility of terrorist action affecting us or our operations;
•the threat of nationalization and expropriation;
•difficulty in staffing and managing widespread operations in non-U.S. labor markets;
•changes in tax treaties, laws or rulings that could have a material adverse impact on our effective tax rate;
•limitations on repatriation of earnings;
•the difficulty of protecting intellectual property in non-U.S. countries; and
•changes in and required compliance with a variety of non-U.S. laws and regulations.
Our success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.
Volatility in currency exchange rates could have a material adverse effect on our financial condition, results of operations and cash flows.
Our financial statements reflect translation of items denominated in non-U.S. currencies to U.S. dollars. Therefore, if the U.S. dollar strengthens in relation to the principal non-U.S. currencies from which we derive revenue as compared to a prior period, our U.S. dollar-reported revenue and income will effectively be decreased to the extent of the change in currency valuations and vice-versa. Fluctuations in foreign currency exchange rates, most notably the strengthening of the U.S. dollar against other various foreign currencies in markets where we operate, could continue to have a material adverse effect on our reported revenue in
future periods. In addition, currency variations could have a material adverse effect on margins on sales of our products in countries outside of the U.S.
The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
We currently depend on the continued services and performance of our executive officers, Ryan L. Pape, our President and Chief Executive Officer, and Barry R. Wood, our Senior Vice President and Chief Financial Officer, neither of whom has an employment agreement. Loss of key personnel, including members of management as well as key product development, marketing, and sales personnel, could disrupt our operations and have an adverse effect on our business. As we continue to grow, we cannot guarantee that we will continue to attract the personnel we need to maintain our competitive position. As we grow, the incentives to attract, retain, and motivate employees may not be as effective as in the past. If we do not succeed in attracting, hiring, and integrating effective personnel, or retaining and motivating existing personnel, our business could be adversely affected.
If we fail to manage our growth effectively, our business, financial condition and results of operations may suffer.
We have experienced rapid growth over the last fiveseveral years and we believe we will continue to grow at a rapid pace. This growth has put significant demands on our processes, systems and personnel. We have made and we expect to make further investments in additional personnel, systems and internal control processes to help manage our growth. In addition, we have sought to, and may continue to seek to grow through strategic acquisitions. Our growth strategy may place significant demands on our management and our operational and financial infrastructure. Our ability to manage our growth effectively and to integrate new technologies and acquisitions into our existing business will require us to continue to expand our operational, financial and management information systems and to continue to retain, attract, train, motivate and manage key employees. Growth could strain our ability to develop and improve our operational, financial and management controls, enhance our reporting systems and procedures, recruit, train and retain highly skilled personnel, maintain our quality standards;standards and maintain our customer satisfaction.
Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows or if we are unable to successfully manage and support our rapid growth and the challenges and difficulties associated with managing a larger, more complex business, this could cause a material adverse effect on our business, financial position, and results of operations and cash flows, and the market value of our shares could also decline.
WeLegal, Regulatory and Compliance Risks
The Company may seekincur material losses and costs as a result of product liability and warranty claims.
The Company faces an inherent risk of exposure to product liability claims if the use of its products results, or is alleged to result, in personal injury and/or property damage. If the Company manufactures a defective product, it may experience material product liability losses. Whether or not its products are
defective, the Company may incur substantial indebtednesssignificant costs to defend product liability claims. It also could incur significant costs in correcting any defects, lose sales and suffer damage to its reputation. Product liability insurance coverage may not be adequate for the liabilities and may not continue to be available on acceptable terms.
The Company is also subject to product warranty claims in the future.
Our business strategyordinary course of business. If the Company sells poor-quality products or uses defective materials, the Company may include incurring indebtednessincur unforeseen costs in the future. If this occurs, our degreeexcess of leveragewhat it has reserved in its financial statements. These costs could have important consequences for the holders of our Common Stock, including increasing our vulnerability to general economic and industry conditions; requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged. Any of the above consequences could result in a material adverse effect on ourthe Company’s business, financial condition, operating cash flows and results of operations.
We cannotsell our products under limited warranties. We have established a liability reserve under these warranties based on a review of historical warranty claims. Our liability reserve for warranties as of the year ended December 31, 2021 was $75,329. The warranty reserve may not be certain thatsufficient to cover the costs associated with future warranty claims. A significant increase in these costs could adversely affect the Company’s operating results for future periods in which these additional financing willcosts materialize. Warranty reserves may need to be available on reasonable terms when required, or at all.
Fromadjusted from time to time we may need additional financing. Our ability to obtain additional financing,in the future if and when required, will depend on investor demand, our operating performance, the conditionactual warranty claim experience differs from estimates. Any of the capital markets, and other factors. To the extent we draw on credit facilities, if any, to fund certain obligations, we may need to raise additional funds and we cannot assure investors that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Common Stock, and existing stockholders may experience dilution.
The preparation of our financial statements will involve the use of estimates, judgments and assumptions, and our financial statements may be materially affected if such estimates, judgments and assumptions prove to be inaccurate.
Financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonablyforegoing matters could be used that would have a material adverse effect on the consolidated financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but are not limited to, determining the fair value of our assets and the timing and amount of cash flows from our assets. These estimates, judgments and assumptions are inherently uncertain and, if they prove to be wrong, we face the risk that charges to income will be required. Any such charges could significantly harm ourCompany’s business, financial condition, results of operationsoperating cash flows and the price of our securities. Estimates and assumptions are made on an ongoing basis for the following: revenue recognition, capitalization of software development costs, impairment of long-lived assets, inventory reserves, allowances for doubtful accounts, revenue recognition, fair value for business combinations, and impairment of goodwill.
If we failability to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would likely negatively affect our business and the market price of our Common Stock.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and prevent fraud. Any failure to implementmake required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing conducted by us, or any testing conducted by our independent registered public accounting firm may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which is likely to negatively affect our business and the market price of our Common Stock.
We will be required to disclose changes made in our internal controls and procedures on a quarterly basis and our management will be required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
We are an “emerging growth company,” and we cannot be certain if the reduced SEC reporting requirements applicable to emerging growth companies will make our Common Stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue is $1.07 billion, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities and (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We intend to take advantage of exemptions from various reporting requirements that are applicable to most other public companies, whether or not they are classified as “emerging growth companies,” including, an exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
If some investors find our Common Stock less attractive because we intend to rely on certain of these exemptions and benefits under the JOBS Act, there may be a less active, liquid or orderly trading market for our Common Stock and the market price and trading volume of our Common Stock may be more volatile and decline significantly.payments.
Violations of the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the U.S. could have a material adverse effect on us.
The Foreign Corrupt Practices Act, or FCPA, and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC, increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that are recognized as having governmental and commercial corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or third-party intermediaries. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may require self-disclosure to governmental agencies and result in criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.
Our failure to satisfy international trade compliance regulations, and changes in U.S. government sanctions, could have a material adverse effect on us.
Our global operations require importing and exporting goods and technology across international borders on a regular basis. Our policy mandates strict compliance with U.S. and non-U.S. trade laws applicable to our products. Nonetheless, our policies and procedures may not always protect us from actions that would violate U.S. or non-U.S. laws. Any improper actions could subject us to civil or criminal penalties, including material monetary fines, or other adverse actions including denial of import or export privileges, and could damage our reputation and business prospects.
Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international relations, could adversely affect our financial performance.
As a result of changes to U.S. administrative policy, among other possible changes, there may be (i) changes to existing trade agreements; (ii) greater restrictions on free trade generally; and (iii) significant increases in tariffs on goods imported into the United States. The United States, Mexico and Canada signed the United States-Mexico-Canada Agreement ("USMCA"U.S.MCA"), the successor agreement to the North American Free Trade Agreement ("NAFTA"). It is expected that the USMCA will becomeThe U.S.MCA became effective by Januaryon July 1, 2021.2020. On January 15, 2020, the United States signed the "Phase 1" trade agreement with China. It remains unclear what the U.S. administration or foreign governments, including China, will or will not do with respect to tariffs, the USMCAU.S.MCA or other international trade agreements and policies. A trade war, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently manufacture and sell products or any resulting negative sentiments towards the United States could adversely affect our business, financial condition, operating results and cash flows.
Changes in the United Kingdom's economic and other relationships with the European Union could adversely affect us.
On January 31, 2020, the United Kingdom formally withdrew from the European Union. Pursuant to the Withdrawal Agreement Bill, the United Kingdom will remainremained in the European Union's free market and customs union until December 31, 2020. After sometimes bitter negotiations, the two sides agreed to a new trade deal on December 24, 2020. The new deal contains new rules for how the United Kingdom and European Union will live, work and trade together. On January 1, 2021, the United Kingdom will withdrawformally withdrew from the free market and customs union, and trade between the European Union and the United Kingdom will be subject to border controls. During the transition, the parties will negotiate a free trade agreement to manage future trade in goods and services. However, it is possible that an agreement will not be reached within the transition period, and there remains significant uncertainty about the terms of the future trade relationship between the European Union and the United Kingdom.Union.
We have significant operations in both the European Union and the United Kingdom. In the year ended December 31, 2019,2021, our European Union (excluding the United Kingdom) and United Kingdom sales totaled $7,419,524$19,605,415 and $3,784,535,$7,714,395, respectively. Expressed as a percentage of total consolidated revenue for the year ended December 31, 2019,2021, these figures represented 5.7%7.6% and 2.9%3.0%, respectively. Our supply chain and thatIf modifications to existing terms of our customers are highly integrated across the European Union andagreement between the United Kingdom and we are highly dependent on the free flow of goods in those regions. The ongoing uncertainty and imposition of border controls on trade between the European Union andwere to occur, the United Kingdomchanges could negatively impact our competitive position, supplier and customer relationships and financial performance. The ultimate effects of the United Kingdom's withdrawal from the European Union on us will depend on the specific terms of any agreement the European Union and the United Kingdom reach to provide future access to each other’s respective markets.
Intellectual property challenges may hinder our ability to develop and market our products, and we may incur significant costs in our efforts to successfully avoid, manage, defend and litigate intellectual property matters.
Proprietary technologies, customer relationships, trademarks, trade names and brand names are important to our business. Intellectual property protection, however, may not preclude competitors from developing products similar to ours or from challenging our names or products. Further, as we expand on a multi-national level and in some jurisdictions where the protection of intellectual property rights is less robust, the risk of competitors duplicating our proprietary technologies increases. We may need to spend significant resources monitoring our intellectual property rights, and we may or may not be able to detect infringement by third parties. Assertions by or against us relating to intellectual property rights, and any inability to protect these rights, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may face design limitations or liability associated with the use of products for which patent ownership or other intellectual property rights are claimed.
From time to time we are subject to claims or inquiries regarding alleged unauthorized use of a third party’s intellectual property and cannot be certain that the conduct of our business does not and will not
infringe the intellectual property rights of others. An adverse outcome in any intellectual property litigation could subject us to significant liabilities to third parties, require us to license technology or other intellectual property rights from others, require us to comply with injunctions to cease marketing or using certain products or brands, or require us to redesign, re-engineer, or re-brand certain products or packaging, any of which could affect our business, financial condition and operating results. Third-party intellectual property rights may also make it more difficult or expensive for us to meet market demand for particular product or design innovations. If we are required to seek licenses under patents or other intellectual property rights of others, we may not be able to acquire these licenses on acceptable terms, if at all. In addition, the cost of responding to an intellectual property infringement claim, in terms of legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could have a material adverse effect on our business, results of operations and financial condition.
If the model of selling vehicles through dealerships in North America changes dramatically, our revenue could be impacted.
Generally, most vehicles in North America are sold through franchised new car dealerships. These dealerships have a strong profit motive and are historically very good at selling accessories and other products. Going forward, if the dealership model were to change in the form of fewer franchised dealerships, or the possibility of manufacturer owned distribution, the prospects in this channel may diminish. Manufacturer-owned sales of new cars might become harder to penetrate or more streamlined with fewer opportunities to sell accessories. This would make us more reliant on our independent installer, retail-oriented channel, which requires more work to create consumer awareness.
If ride-sharing or alternate forms of vehicle ownership gain in popularity, our revenue could be impacted.
If ride-sharing or alternate forms of vehicle ownership including rental, ride-sharing, or peer-to-peer car sharing gain in popularity, consumers may own fewer vehicles per household, which would reduce our revenue. More vehicles entering a ride-sharing or car-sharing fleet could have an uncertain impact on our revenue as consumers are more or less interested in accessorizing vehicles they own that are in the ride-sharing fleet.
Environmental regulation, changing fuel-economy standards and/or a drive toward electric vehicles could impact our revenue.
Many manufacturers have announced plans to transition from internal-combustion engines into electric vehicle platforms over the coming years. There is no assurance that consumers will respond positively to this fundamental shift in the auto industry, should it occur. If the change results in vehicles that are more utilitarian or otherwise less interesting to a large portion of our customers who are automotive enthusiasts, our revenue could be impacted.
Technology could render the need for some of our products obsolete.
We derive the majority of our revenue from surface and paint protection films, with the majority of products applied on painted surfaces of vehicles. If automotive paint technology were to improve substantially, such that newer paint did not chip, scratch or was generally not as susceptible to damage, our revenue could be impacted.
Similarly, our automotive and architectural window films could be impacted by changes or enhancements from automotive manufacturers or window manufacturers that would reduce the need for our products.
Failure, inadequacy, or breach of our information technology systems, infrastructure, and business information or violations of data protection laws could result in material harm to our business and reputation.
A great deal of confidential information owned by us is stored in our information systems, networks, and facilities or those of third parties. This includes valuable trade secrets and intellectual property, corporate strategic plans, marketing plans, customer information, and personally identifiable information, such as employee information (collectively, “confidential information”). We also rely to a large extent on the efficient and uninterrupted operation of complex information technology systems, infrastructure, and hardware (together “IT systems”), some of which are within our control and some of which are within the control of third parties, to accumulate, process, store, and transmit large amounts of confidential information and other data. We are subject to a variety of continuously evolving and developing laws and regulations around the world related to privacy, data protection, and data security. Maintaining the confidentiality, integrity and availability of our IT systems and confidential information is vital to our business.
IT systems are vulnerable to system inadequacies, operating failures, service interruptions or failures, security breaches, malicious intrusions, or cyber-attacks from a variety of sources. Cyber-attacks are growing in their frequency, sophistication, and intensity, and are becoming increasingly difficult to detect, mitigate, or prevent. Cyber-attacks come in many forms, including the deployment of harmful malware, exploitation of vulnerabilities, denial-of-service attacks, the use of social engineering, and other means to compromise the confidentiality, integrity and availability of our IT systems, confidential information, and other data. Breaches resulting in the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information, or the unauthorized access to, disruption of, or interference with our products and services, can occur in a variety of ways, including but not limited to, negligent or wrongful conduct by employees or others with permitted access to our systems and information, or wrongful conduct by hackers, competitors, certain governments, or other current or former company personnel.
The failure or inadequacy of our IT systems, the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information, or the unauthorized access to, disruption of, or interference with our products and services that rely on IT systems, could impair our ability to secure and maintain intellectual property rights; result in a product manufacturing interruption or failure, or in the interruption or failure of products or services that rely on IT systems; damage our operations, customer relationships, or reputation; and cause us to lose trade secrets or other competitive advantages. Unauthorized disclosure of personally identifiable information could expose us to significant sanctions for violations of data privacy laws and regulations around the world and could damage public trust in our company. For example, the European Union adopted the GDPR in 2018. The GDPR requires companies to meet new requirements regarding the handling of personal data, including its use, protection and transfer and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet the GDPR requirements could result in penalties of up to 40% of annual worldwide revenue. The GDPR also confers a private right of action on certain individuals and
associations. In addition, the state of California’s California Consumer Privacy Act (“CCPA”) became effective in January 2020 and has similar requirements to GDPR.
To date, system inadequacies, operating failures, unauthorized access, service interruptions or failures, security breaches, malicious intrusions, cyber-attacks, and the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information have not had a material impact on our consolidated results of operations. We continue to implement measures in an effort to protect, detect, respond to, and minimize or prevent these risks and to enhance the resiliency of our IT systems; however, these measures may not be successful. If they are not successful, any of these events could result in material financial, legal, business, or reputational harm to our business.
Liquidity Risks
Our business strategy may include incurring more indebtedness in the future. We recently increased the amount of our revolving credit facility to $75.0 million, of which $25.0 million was outstanding as of December 31, 2021. Our degree of leverage could have important consequences for the holders of our Common Stock, including increasing our vulnerability to general economic and industry conditions; requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; restricting us from making strategic acquisitions or causing us to make non-strategic divestitures, limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged. Any of the above consequences could result in a material adverse effect on our business, financial condition and results of operations.
We cannot be certain that additional financing will be available on reasonable terms when required, or at all.
From time to time, we may need additional financing. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors. To the extent we draw on credit facilities, if any, to fund certain obligations, we may need to raise additional funds and we cannot assure investors that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Common Stock, and existing stockholders may experience dilution.
Risks Relating to Common Stock
If research analysts issue unfavorable commentary or downgrade our Common Stock, the price of our Common Stock and their trading volume could decline.
The trading market for our Common Stock may depend in part on the research and reports that research analysts publish about us and our business. If we do not maintain adequate research coverage, or if one or more analysts who covers us downgrades our Common Stock or publishes inaccurate or unfavorable research about our business, the price of our Common Stock could decline. If one or more of the research analysts ceases to cover us or fails to publish reports on us regularly, demand for our Common Stock could decrease, which could cause the price or trading volume to decline.
Our stock price has been, and may continue to be, volatile.
The trading price of our Common Stock has been and could continue to be subject to wide fluctuations in response to certain factors, including:
•U.S. and global economic conditions leading to general declines in market capitalizations, with such declines not associated with operating performance.
•Quarter-to-quarter variations in results of operations.
•Our announcements of new products.
•Our announcements of acquisitions or divestitures.
•Our announcements of significant new customers or contracts.
•Our competitors’ announcements of new products.
•Our product development.
•Changes in our management team.
•General conditions in our industry.
•Investor perceptions and expectations regarding our products, services, plans and strategic position and those of our competitors and clients.
In addition, the public stock markets experience extreme price and trading volume volatility, particularly in growth sectors of the market. This volatility has significantly affected the market prices of securities of many companies for reasons often unrelated to the operating performance of the specific companies. The broad market fluctuations may adversely affect the market price of our Common Stock.
We may issue additional equity securities, or engage in other transactions that could dilute our book value or affect the priority of our Common Stock, which may adversely affect the market price of our Common Stock.
Our articles of incorporation allow our Board to issue up to 100,000,000 shares of Common Stock. Our Board may determine from time to time that we need to raise additional capital by issuing Common Stock or other equity securities. Except as otherwise described in this Annual Report, we are not restricted from issuing additional securities, including securities that are convertible into or exchangeable for, or that represent the right to receive, shares of our Common Stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Common Stock, or both. Holders of our Common Stock are not entitled to pre-emptive rights or other protections against dilution. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, the then-current holders of our Common Stock. Additionally, if we raise additional capital by making offerings of debt or shares of preferred stock, upon our liquidation, holders of our debt securities and shares of preferred stock, and lenders with respect to other borrowings, may receive distributions of our available assets before the holders of our Common Stock.
We may issue shares of preferred stock with greater rights than our Common Stock.
Subject to the rules of The NASDAQNasdaq Stock Market, our articles of incorporation authorize our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of our Common Stock. Any preferred stock that is issued may rank ahead of our Common Stock in terms of dividends, priority and liquidation premiums and may have greater voting rights than our Common Stock.
We have not paid any cash dividends in the past and have no plans to issue cash dividends in the future, which could cause our Common Stock to have a lower value than that of similar companies which do pay cash dividends.
We have not paid any cash dividends on our Common Stock to date and do not anticipate any cash dividends being paid to holders of our Common Stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board.
While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion. As we have no plans to issue cash dividends in the future, our Common Stock could be less desirable to other investors and as a result, the value of our Common Stock may decline, or fail to reach the valuations of other similarly situated companies that pay cash dividends.
Shares eligible for future sale may depress our stock price.
As of March 16, 2020,February 28, 2022, we had 27,612,597 shares of Common Stock outstanding of which 11,088,2296,452,587 shares were held by affiliates. All of the shares of Common Stock held by affiliates are restricted or are control securities under Rule 144 promulgated under the Securities Act of 1933 as amended (the “Securities Act”). Sales of shares of Common Stock under Rule 144 or another exemption under the Securities Act or pursuant to a registration statement could have a material adverse effect on the price of our Common Stock and could impair our ability to raise additional capital through the sale of equity securities. Furthermore, all Common Stock beneficially owned by persons who are not our affiliates and have beneficially owned such shares for at least one year may be sold at any time by these existing stockholders in accordance with Rule 144 of the Securities Act. However, there can be no assurance that any of these existing stockholders will sell any or all of their Common Stock and there may be a lack of supply of, or demand for, our Common Stock on The NASDAQNasdaq Stock Market. In the case of a lack of supply of our Common Stock offered in the market, the trading price of our Common Stock may rise to an unsustainable level, particularly in instances where institutional investors may be discouraged from purchasing our Common Stock because they are unable to purchase a block of our Common Stock in the open market due to a potential unwillingness of our existing stockholders to sell the amount of Common Stock at the price offered by such investors and the greater influence individual investors have in setting the trading price. In the case of a lack of market demand for our Common Stock, the trading price of our Common Stock could decline significantly and rapidly after our listing.
Percentage of ownership in our Common Stock may be diluted in the future.
In the future, the percentage ownership in our Common Stock owned by our stockholders may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we expect to be granting to our directors, officers and employees. Such issuances may have a dilutive effect on our earnings per share, which could materially adversely affect the market price of our Common Stock.
Anti-takeover provisions could make a third party acquisition of us difficult.
Our bylaws eliminate the ability of stockholders to call special meetings or take action by written consent. These provisions in our bylaws could make it more difficult for a third party to acquire us without the approval of our board. In addition, the Nevada corporate statute also contains certain provisions that could make an acquisition by a third party more difficult.
Our directors and officers have substantial control over us.
Our directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately 40.2%23.4% of our outstanding Common Stock as of March 16, 2020.February 28,
2022. These stockholders have the ability to substantially control our operations and direct our policies including the outcome of matters submitted to our stockholders for approval, such as the election of directors and any acquisition or merger, consolidation or sale of all or substantially all of our assets.
Our bylaws provide that the state and federal courts located in Bexar County, Texas will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our bylaws provide that, with certain limited exceptions, unless we consent in writing to the selection of an alternative forum, the state and federal courts located in Bexar County, Texas will be the sole and exclusive forum for any stockholder (including any beneficial owner) to bring any (i) derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of, or a claim based on, breach of a fiduciary duty owed by any current or former director, officer, employee or stockholder to us or our stockholders, (iii) any
action asserting a claim against us or any current or former director, officer, employee or stockholder arising pursuant to any provision of Chapters 78 and 92 of the Nevada Revised Statutes or our articles of incorporation or bylaws or (iv) any action asserting a claim against us or any current or former director, officer, employee or stockholder (including any beneficial owner of stock) governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in our Common Stock is deemed to have notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operationsoperations. The choice of forum provision does not apply to any actions arising under the Securities Act or the Securities Exchange Act.
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 since its spread 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 instituting 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, 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. Any one of these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows.
General global economic and business conditions affect demand for our products.
We compete in various geographic regions and markets around the world. We expect to experience fluctuations in revenue and results of operations due to economic and business cycles. Important factors for our business and the businesses of our customers include the overall strength of the economy and our customers’ confidence in the economy, unemployment rates, availability of consumer financing and interest rates. Our products and services are discretionary purchases for most consumers. Consumers are generally more willing to make discretionary purchases on products and services such as ours during periods of favorable general economic conditions. While we attempt to minimize our exposure to economic or market fluctuations by offering a balanced mix of end markets and geographic regions, any of the above factors, individually or in the aggregate, or a significant or sustained downturn in a specific end market or geographic region could reduce demand for our products and services, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal office is located in leased premises in San Antonio, Texas. Our operations are conducted in facilities throughout North America, Europe and Europe.Asia. These facilities house production,
distribution and operations, as well as installation services, sales and marketing.marketing, and administrative functions. A description of our principal facilities as of December 31, 20192021 is set forth in the chart below.
|
| | | | | | | | | | | | | | | | |
| Location | Leased or Owned | | Square Footage | | Facility Activity |
| Headquarters: | | | | | |
| San Antonio, Texas | Leased | | 16,651 | | Training/Admin functions |
| Other Properties: | | | | | |
| Austin, Texas | Leased | | 8,522 | | Sales/Installation |
Boise, IdahoBloomington, Illinois | Leased | | 4,98620,000 | | Sales/Installation |
| Boise, Idaho | Leased | | 4,986 | | Sales/Installation |
| Charlotte, North Carolina | Leased | | 13,950 | | Warehouse/Training |
| Dallas, Texas | Leased | | 4,875 | | Sales/Installation |
| Fullerton, California | Leased | | 14,121 | | Warehouse |
| Houston, Texas | Leased | | 7,780 | | Sales/Installation |
| Las Vegas, Nevada | Leased | | 6,864 | | Sales/Installation |
| San Antonio, Texas | Leased | | 48,770 | | Warehouse |
| San Antonio, Texas | Leased | | 8,882 | | Sales/Installation/Admin |
| San Antonio, Texas | Leased | | 115,825 | | Warehouse/Production |
| Scottsdale, Arizona | Leased | | 8,529 | | Admin Functions |
| Brossard , Quebec, Canada | Leased | | 4,658 | | Sales/Installation |
| Calgary, Alberta, Canada | Leased | | 5,680 | | Warehouse/Sales/Training |
Dallas, TexasCalgary, Alberta, Canada | Leased | | 1,6255,000 | | Sales/InstallationWarehouse |
Dallas, TexasCalgary, Alberta, Canada | Leased | | 1,1253,498 | | Sales/Installation |
| Calgary, Alberta, Canada | Leased | | 3,328 | | Admin functions |
| Laval, Quebec, Canada | Leased | | 6,342 | | Sales/Installation |
| Mississauga, Ontario, Canada | Leased | | 2,870 | | Warehouse/Sales |
| Terrebonne, Quebec, Canada | Leased | | 12,440 | | Warehouse/Sales/Training |
| Guadalajara, Jalisco, Mexico | Leased | | 6,83013,659 | | Warehouse/Sales/Training |
Houston, TexasBiggleswade, Bedfordshire, United Kingdom | Leased | | 7,78011,335 | | Sales/InstallationWarehouse/Install/Training |
Las Vegas, NevadaShrewsbury, Shropshire, United Kingdom | Leased | | 6,8643,500 | | Sales/InstallationSales |
Letchworth, United KingdomStuttgart, Germany | Leased | | 3,63257,015 | | Sales/Installation/TrainingInstallation |
San Antonio, Texas | Leased | | 48,770 | | Warehouse/production |
San Antonio, Texas | Leased | | 4,992 | | Sales/Installation |
Terrebonne, Quebec, Canada | Leased | | 12,440 | | Warehouse/Sales/Training |
| Tilburg, The Netherlands | Leased | | 21,52721,528 | | Warehouse/Sales/Training |
| Yilan City, Yilan County, Taiwan | Leased | | 4,3006,381 | | Warehouse/Sales |
Renningen, Baden-Württemberg, Germany | Leased | | 21,689 | | Sales/Installation |
Fullerton, California | Leased | | 14,121 | | Warehouse/production |
We believe that our facilities are suitable for their purpose and are sufficient to support our current business needs.
Item 3. Legal Proceedings
From time to time, we are made parties to actions filed or have been 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 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on The Nasdaq Stock Market LLC under the symbol XPEL.
Holders
As of March 16, 2020,February 28, 2022, there were 41 shareholders16 stockholders of record.
Dividend Policy
Holders of our Common Stock are entitled to receive such dividends as declared by our Board. No dividends have been paid with respect to our Common Stock and no dividends are anticipated to be paid in the foreseeable future. Any future decisions as to payment of dividends will be at the discretion of our Board, subject to applicable law.
Stock Performance
The information contained in the following graph shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.
The following data and graph show a comparison of the cumulative total stockholder return for XPEL’s common stock, the Russell 2000 Index and the S&P 500 Index from July 19, 2019 (the date our Common Stock began trading on the Nasdaq Stock Market) through December 31, 2021. The data assumes a hypothetical investment of $100 on July 19, 2019 in our common stock and each of the indices, and reinvestment of any dividends. The historical stock performance presented below is not intended to and may not be indicative of future stock performance.
We have chosen to use the Russell 2000 Index rather than an industry or line-business index because we do not believe our company is comparable to companies in a particular industry or line-of-business such as after-market automotive product companies and we have not used a peer group of companies because our major competitors are either much larger than we are and their competitive products constitute small lines of business for these companies or other competitors are private companies.
Purchases of Equity Securities
In the year ended December 31, 20192021 we did not repurchase any shares of our Common Stock.
Item 6. Selected Financial Data[Reserved]
Not applicable
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Set forth below is summary financial information for the years ended December 31, 20192021, 2020, and 2018.2019. 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, “Financial Statements and Supplementary Data” of this Annual Report to fully understand factors that may affect the comparability of the information presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % Change |
| 2021 | | %
of Total Revenue | | 2020 | | %
of Total Revenue | | 2019 | | %
of Total Revenue | | 2021 vs 2020 | 2020 vs 2019 |
| Total revenue | $ | 259,263,077 | | | 100.0 | % | | $ | 158,924,448 | | | 100.0 | % | | $ | 129,932,881 | | | 100.0 | % | | 63.1 | % | 22.3 | % |
| Total cost of sales | 166,586,090 | | | 64.3 | % | | 104,899,439 | | | 66.0 | % | | 86,426,622 | | | 66.5 | % | | 58.8 | % | 21.4 | % |
| Gross margin | 92,676,987 | | | 35.7 | % | | 54,025,009 | | | 34.0 | % | | 43,506,259 | | | 33.5 | % | | 71.5 | % | 24.2 | % |
| Total operating expenses | 52,561,368 | | | 20.3 | % | | 30,655,077 | | | 19.3 | % | | 26,418,912 | | | 20.3 | % | | 71.5 | % | 16.0 | % |
| Operating income | 40,115,619 | | | 15.5 | % | | 23,369,932 | | | 14.7 | % | | 17,087,347 | | | 13.2 | % | | 71.7 | % | 36.8 | % |
| Other expenses | 675,648 | | | 0.3 | % | | 565,573 | | | 0.4 | % | | 136,919 | | | 0.1 | % | | 19.5 | % | 313.1 | % |
| Income tax | 7,873,109 | | | 3.0 | % | | 4,522,668 | | | 2.8 | % | | 2,955,356 | | | 2.3 | % | | 74.1 | % | 53.0 | % |
| Net income | $ | 31,566,862 | | | 12.2 | % | | $ | 18,281,691 | | | 11.5 | % | | $ | 13,995,072 | | | 10.8 | % | | 72.7 | % | 30.6 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | %
of Total Revenue | | Year Ended December 31, 2018 | | %
of Total Revenue | | $
Change | | %
Change |
| Total revenue | $ | 129,932,881 |
| | 100.0 | % | | $ | 109,920,614 |
| | 100.0 | % | | $ | 20,012,267 |
| | 18.2 | % |
| Total cost of sales | 86,426,622 |
| | 66.5 | % | | 76,484,009 |
| | 69.6 | % | | 9,942,613 |
| | 13.0 | % |
| Gross margin | 43,506,259 |
| | 33.5 | % | | 33,436,605 |
| | 30.4 | % | | 10,069,654 |
| | 30.1 | % |
| Total operating expenses | 26,418,912 |
| | 20.3 | % | | 21,630,602 |
| | 19.7 | % | | 4,788,310 |
| | 22.1 | % |
| Operating income | 17,087,347 |
| | 13.2 | % | | 11,806,003 |
| | 10.7 | % | | 5,281,344 |
| | 44.7 | % |
| Other expenses | 136,919 |
| | 0.1 | % | | 324,698 |
| | 0.3 | % | | (187,779 | ) | | (57.8 | )% |
| Income tax | 2,955,356 |
| | 2.3 | % | | 2,760,073 |
| | 2.5 | % | | 195,283 |
| | 7.1 | % |
| Net income | $ | 13,995,072 |
| | 10.8 | % | | $ | 8,721,232 |
| | 7.9 | % | | $ | 5,273,840 |
| | 60.5 | % |
Full-Year 2019 comparedCompany Overview
The Company is a leading provider of protective films and coatings, including automotive paint protection film, surface protection film, automotive and commercial/residential window films, and ceramic coatings. With a global footprint, a network of trained installers and proprietary DAP software. The Company is dedicated to Full-Year 2018exceeding customer expectations by providing high-quality products, leading customer service, expert technical support and world-class training.
Consolidated revenue grew 18.2%Trends and Uncertainties
During 2021, we continued to $129.9 million.see strong recovery from the initial impacts of COVID-19. Revenue continued to increase markedly in all major geographic areas. Despite recent positive trends, the long-term effects of the pandemic on our financial results in future periods could still be significant and cannot be reasonably estimated due to the volatility, uncertainty and economic disruption caused by the pandemic. See the risk factor “The COVID-19 pandemic could materially adversely affect our financial condition and results of operations” included in Part I, Item 1A “Risk Factors” in this Annual Report for further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.
Gross margin grew 30.1%As we look ahead, we are unable to $43.5 million. Gross margin percentage improved 3.1%determine or predict the continuing impact that the COVID-19 pandemic will have on our customers, vendors and suppliers or our business, results of operations or financial condition. Despite the gradual reduction of restrictions related to 33.5%the COVID-19 pandemic and the apparent recovery of revenue.
Total operating expenses grew 22.1%our operations, significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic. Additionally, automotive sales and production are highly cyclical, and the cyclical nature of the industry could be, and has been, compounded by the pandemic. As demand for automotive products fluctuates or decreased, the demand for our products may also fluctuate or decrease. Automotive manufacturers have experienced a global semiconductor shortage which has affected production of vehicles and, in turn, available inventory at dealerships. As long as this shortage persists, it could have a material adverse effect on our business, financial condition and results of operations. Please refer to $26.4 millionrisk factor ‘We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and represented 20.3%production volumes could adversely affect our business, results of total consolidated revenue.
Income tax expense grew 7.1%operations and financial condition” in this Annual Report for additional consideration of the cyclical nature of the automotive industry. We will continue to $3.0 million. The effective income tax rate was 17.4%.
Net income grew 60.5%closely monitor updates regarding the continuing impact of COVID-19 and automotive sales and adjust our operations according to $14.0 millionguidelines form local, state and represented 10.8%federal officials. In light of total revenue. Earnings per share was $0.51 compared with $0.32the foregoing, we may take actions that alter our business operations or that we determine are in 2018.
the best interest of our employees, customers, suppliers and stockholders. Key Business Metric - Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).
EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We
define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.
The following table is a reconciliation of Net income to EBITDA for the years ended December 31,
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | % of Total Revenue | | 2020 | | % of Total Revenue | | 2019 | | % of Total Revenue |
| Net Income | $ | 31,566,862 | | | 12.2 | % | | $ | 18,281,691 | | | 11.5 | % | | $ | 13,995,072 | | | 10.8 | % |
| Interest | 302,674 | | | 0.1 | % | | 249,480 | | | 0.2 | % | | 96,646 | | | 0.1 | % |
| Taxes | 7,873,109 | | | 3.0 | % | | 4,522,668 | | | 2.8 | % | | 2,955,356 | | | 2.3 | % |
| Depreciation | 1,887,048 | | | 0.7 | % | | 1,274,095 | | | 0.8 | % | | 915,918 | | | 0.7 | % |
| Amortization | 2,500,620 | | | 1.0 | % | | 955,937 | | | 0.6 | % | | 781,105 | | | 0.5 | % |
| EBITDA | $ | 44,130,313 | | | 17.0 | % | | $ | 25,283,871 | | | 15.9 | % | | $ | 18,744,097 | | | 14.4 | % |
|
| | | | | | | | | | | | | |
| | 2019 | | % of Total Revenue | | 2018 | | % of Total Revenue |
| Net Income | $ | 13,995,072 |
| | 10.8 | % | | $ | 8,721,232 |
| | 7.9 | % |
| Interest | 96,646 |
| | 0.1 | % | | 168,389 |
| | 0.2 | % |
| Taxes | 2,955,356 |
| | 2.3 | % | | 2,760,073 |
| | 2.5 | % |
| Depreciation | 915,918 |
| | 0.7 | % | | 735,983 |
| | 0.7 | % |
| Amortization | 781,105 |
| | 0.5 | % | | 642,801 |
| | 0.6 | % |
| EBITDA | $ | 18,744,097 |
| | 14.4 | % | | $ | 13,028,478 |
| | 11.9 | % |
Use of Non-GAAP Financial Measures
EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.
EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting theirits usefulness as a comparative measures.measure.
Results of Operations
This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2021 and 2020 and year-over-year comparisons between those years. Discussions of the periods prior to the year ended December 31, 2020 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 and the discussion therein for the year ended December 31, 2020 compared to the year ended December 31, 2019 is incorporated by reference into this Annual Report.
The following tables summarize revenue results for the years ended December 31, 20192021, 2020 and 2018:2019:
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % | | % of Total Revenue |
| | 2019 | | 2018 | | Increase (Decrease) | | 2019 | | 2018 |
| Product Revenue | | | | | | | | | |
| Paint protection film | $ | 97,341,865 |
| | $ | 85,495,382 |
| | 13.9 | % | | 74.9 | % | | 77.8 | % |
| Window film | 11,384,437 |
| | 7,309,773 |
| | 55.7 | % | | 8.8 | % | | 6.7 | % |
| Other | 3,478,437 |
| | 2,721,195 |
| | 27.8 | % | | 2.7 | % | | 2.4 | % |
| Total | $ | 112,204,739 |
| | $ | 95,526,350 |
| | 17.5 | % | | 86.4 | % | | 86.9 | % |
| | | | | | | | | | |
| Service Revenue | | | | | | | | | |
| Software | $ | 3,263,391 |
| | $ | 2,566,960 |
| | 27.1 | % | | 2.5 | % | | 2.3 | % |
| Cutbank credits | 7,253,610 |
| | 6,197,250 |
| | 17.0 | % | | 5.6 | % | | 5.6 | % |
| Installation labor | 6,620,527 |
| | 5,211,633 |
| | 27.0 | % | | 5.1 | % | | 4.7 | % |
| Training | 590,614 |
| | 418,421 |
| | 41.2 | % | | 0.4 | % | | 0.5 | % |
| Total | $ | 17,728,142 |
| | $ | 14,394,264 |
| | 23.2 | % | | 13.6 | % | | 13.1 | % |
| | | | | | | | | | |
| Total | $ | 129,932,881 |
| | $ | 109,920,614 |
| | 18.2 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % Change | | % of Total Revenue |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | 2020 vs 2019 | | 2021 | | 2020 | | 2019 |
| Product Revenue | | | | | | | | | | | | | | |
| Paint protection film | $ | 169,879,447 | | | $ | 110,786,164 | | | $ | 97,341,865 | | | 53.3 | % | 13.8 | % | | 65.5 | % | | 69.7 | % | | 74.9 | % |
| Window film | 38,363,432 | | | 20,950,591 | | | 11,384,437 | | | 83.1 | % | 84.0 | % | | 14.8 | % | | 13.2 | % | | 8.8 | % |
| Other | 9,039,652 | | | 4,525,312 | | | 3,478,437 | | | 99.8 | % | 30.1 | % | | 3.5 | % | | 2.8 | % | | 2.7 | % |
| Total | $ | 217,282,531 | | | $ | 136,262,067 | | | $ | 112,204,739 | | | 59.5 | % | 21.4 | % | | 83.8 | % | | 85.7 | % | | 86.4 | % |
| | | | | | | | | | | | | | |
| Service Revenue | | | | | | | | | | | | | | |
| Software | $ | 4,373,083 | | | $ | 3,489,348 | | | $ | 3,263,391 | | | 25.3 | % | 6.9 | % | | 1.7 | % | | 2.2 | % | | 2.5 | % |
| Cutbank credits | 12,371,991 | | | 7,784,554 | | | 7,253,610 | | | 58.9 | % | 7.3 | % | | 4.8 | % | | 4.9 | % | | 5.6 | % |
| Installation labor | 24,252,774 | | | 10,925,525 | | | 6,620,527 | | | 122.0 | % | 65.0 | % | | 9.4 | % | | 6.9 | % | | 5.1 | % |
| Training | 982,698 | | | 462,954 | | | 590,614 | | | 112.3 | % | (21.6) | % | | 0.3 | % | | 0.3 | % | | 0.4 | % |
| Total | $ | 41,980,546 | | | $ | 22,662,381 | | | $ | 17,728,142 | | | 85.2 | % | 27.8 | % | | 16.2 | % | | 14.3 | % | | 13.6 | % |
| | | | | | | | | | | | | | |
| Total | $ | 259,263,077 | | | $ | 158,924,448 | | | $ | 129,932,881 | | | 63.1 | % | 22.3 | % | | 100.0 | % | | 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 table represents 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 years ended December 31, 20192021 and 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % | | % of Total Revenue |
| 2021 | | 2020 | | Increase | | 2021 | | 2020 |
| United States | $ | 133,456,859 | | | $ | 75,078,562 | | | 77.8 | % | | 51.5 | % | | 47.2 | % |
| China | 46,305,121 | | | 32,807,976 | | | 41.1 | % | | 17.9 | % | | 20.6 | % |
| Canada | 30,540,429 | | | 20,524,371 | | | 48.8 | % | | 11.8 | % | | 12.9 | % |
| Continental Europe | 19,605,415 | | | 12,772,441 | | | 53.5 | % | | 7.6 | % | | 8.0 | % |
| Middle East/Africa | 9,735,838 | | | 5,167,595 | | | 88.4 | % | | 3.8 | % | | 3.3 | % |
| United Kingdom | 7,714,395 | | | 4,716,531 | | | 63.6 | % | | 3.0 | % | | 3.0 | % |
| Asia Pacific | 7,706,344 | | | 5,262,733 | | | 46.4 | % | | 2.9 | % | | 3.3 | % |
| Latin America | 3,787,555 | | | 2,274,341 | | | 66.5 | % | | 1.4 | % | | 1.4 | % |
| Other | 411,121 | | | 319,898 | | | 28.5 | % | | 0.1 | % | | 0.3 | % |
| Total | $ | 259,263,077 | | | $ | 158,924,448 | | | 63.1 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % | | % of Total Revenue |
| | 2019 | | 2018 | | Increase (Decrease) | | 2019 | | 2018 |
| United States | $ | 60,452,238 |
| | $ | 46,077,624 |
| | 31.2 | % | | 46.5 | % | | 41.9 | % |
| China | 30,490,859 |
| | 32,279,335 |
| | (5.5 | )% | | 23.5 | % | | 29.4 | % |
| Canada | 17,912,548 |
| | 15,146,869 |
| | 18.3 | % | | 13.8 | % | | 13.8 | % |
| Continental Europe | 7,419,524 |
| | 5,734,925 |
| | 29.4 | % | | 5.7 | % | | 5.2 | % |
| United Kingdom | 3,784,535 |
| | 2,725,925 |
| | 38.8 | % | | 2.9 | % | | 2.5 | % |
| Asia Pacific | 4,370,156 |
| | 2,754,495 |
| | 58.7 | % | | 3.4 | % | | 2.5 | % |
| Latin America | 2,098,873 |
| | 1,799,180 |
| | 16.7 | % | | 1.6 | % | | 1.6 | % |
| Middle East/Africa | 3,149,235 |
| | 2,806,502 |
| | 12.2 | % | | 2.4 | % | | 2.6 | % |
| Other | 254,913 |
| | 595,759 |
| | (57.2 | )% | | 0.2 | % | | 0.5 | % |
| Total | $ | 129,932,881 |
| | $ | 109,920,614 |
| | 18.2 | % | | 100.0 | % | | 100.0 | % |
Product Revenue. Product revenue increased 17.5% for59.5% during the year ended December 31, 2019 . Product revenue2021 as compared to 2020 and represented 86.4%83.8% of our total revenue for the year ended December 31, 2019.consolidated annual 2021 revenue. Within this category, revenue from our paint protection film product line increased 13.9%53.3% as compared to 2020 and represented 65.5% of total revenue for the year ended December 31, 2019. Paint protection film sales represented 74.9% and 77.8% of our consolidated revenue for the years ended December 31, 2019 and 2018, respectively. Overall, this2021. This growth was due mainly to increases in the square footage of film product sold owing to increased demand for our products.film products across multiple regions. This increase in demand was driven by both an increase in the number of customers and an increase inincreased revenue tofrom our existing customers. Our paint protection film products experienced strong growth throughout the year in virtually all operating regions.
Revenue from our window film product line grew 55.7%83.1% in the year ended December 31, 2019. Window film sales2021 and represented 8.8% and 6.7%14.8% of our consolidated revenue forannual 2021 revenue. This increase was due mainly to increases in demand resulting from continuing channel focus and increased product adoption among our customer base.
Geographically, we experienced growth in all of our regions during the years ended December 31, 2019year. The US and 2018, respectively. ThisCanadian markets are our most mature markets. Our continued strong growth in these markets is being driven primarily by increased paint protection film attachment rates. Outside of these more mature markets, our continued strong growth was attributable todriven by increased demand for our window film products commensurate with increased window film adoption within our distribution channelsproduct awareness and an increase in new customers.
Geographically, growth was strong in most of the regions in which we operate except for China. The decline in China in 2019 was primarily due to the need to sell through inventory built up in the region during 2018. This sell through of the 2018 inventory build occurred primarily during the first half of 2019 after which growth in sales to China resumed.adoption.
Service revenue. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue, which represents per-cut fees chargedsold for pattern access or the usevalue of our DAP software,pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our company-ownedCompany-owned installation centers as well as from our newly acquired PermaPlate Films and TintNet businesses and revenue from training services provided to our customers. ServiceDuring 2021, service revenue grew 23.2%85.2% over the service revenue for the year ended December 31, 2018. Service revenue represented 13.6% and 13.1% of our total consolidated revenue from the years ended December 31, 2019 and 2018, respectively.2020.
Within the service revenue category, software revenue increased 27.1%25.3% from the year ended December 31, 2018. Software revenue represented 2.5% and 2.3% of our total consolidated revenue for the years ended December 31, 2019 and 2018, respectively.2020. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit revenue grew 17.0%58.9% from the year ended December 31, 2018. Cutbank sales represented 5.6% and 5.6% of our total consolidated revenue for the years ended December 31, 2019 and 2018, respectively.2020. This increase was due primarily to the aforementioned increases in demand for our products and services. Installation labor revenue increased 27.0%122.0% from the year ended December 31, 2018,2020, due mainly to the increasestrong demand in demand forour company-owned installation services.facilities and our newly acquired PermaPlate Films and TintNet businesses. Training revenue increased 41.2%112.3% from the year ended December 31, 2018.2020. This growthincrease was due primarily to continued strong interestheavily restricted training hours and classes in the Company’s training program coupled with increased training capacity added in 2019.year ended December 31, 2020 as a result of the COVID-19 pandemic.
Total installation revenue (labor and product combined) at our Company-owned installation centers for the year ended December 31, 20192021 increased 27.0%122.0% over the year ended December 31, 2018. This represented
6.1% and 5.6% of2020. Excluding the impact from our 2021 acquisitions, total consolidatedinstallation revenue for the years ended December 31, 2019 and 2018, respectively.grew 36.4%. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased by 17.4%59.4% from the year ended December 31, 20182020 due mainly to the same factors described previously.
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 Company-owned facilities, the labor cost associated with our new acquisitions, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers. Product costs in the year ended December 31, 20192021 increased 11.7%53.6% over the year ended December 31, 20182020 commensurate with the growth in product revenue. Cost of product sales represented 63.3% and 67.0% of total revenue in the years ended December 31, 2019 and 2018, respectively. Cost of service revenue grew 45.6%139.2% during the year ended December 31, 2019.2021. The increase was due primarily to increases inincreased labor installation costs commensurate with increased installation revenue in our company-owned facilities, increased labor cost associated with our 2021 acquisitions and increases in designincreased labor costs related to continued investmentsheadcount growth required in DAP.our production facility to meet increased demand.
Gross Margin
Gross margin for the year ended December 31, 2019 grew approximately $10.1 million, or 30.1%. For the years ended December 31, 2019 and 2018, gross margin represented 33.5% and 30.4% of revenue, respectively. The following table summarizes gross margin for product and services for the years ended December 31, 20192021, 2020 and 2018:2019:
| | | | Year Ended December 31, | | % | | % of Category Revenue | | Year Ended December 31, | | % Change | | % of Category Revenue |
| | 2019 | | 2018 | | Increase (Decrease) | | 2019 | | 2018 | | 2021 | | 2020 | | 2019 | | 2021 vs 2020 | 2020 vs 2019 | | 2021 | | 2020 | | 2019 |
| Product | $ | 29,896,483 |
| | $ | 21,869,961 |
| | 36.7 | % | | 26.6 | % | | 22.9 | % | Product | $ | 65,996,899 | | | $ | 37,759,788 | | | $ | 29,896,483 | | | 74.8 | % | 26.3 | % | | 30.4 | % | | 27.7 | % | | 26.6 | % |
| Service | 13,609,776 |
| | 11,566,644 |
| | 17.7 | % | | 76.8 | % | | 80.4 | % | Service | 26,680,088 | | | 16,265,221 | | | 13,609,776 | | | 64.0 | % | 19.5 | % | | 63.6 | % | | 71.8 | % | | 76.8 | % |
| Total | $ | 43,506,259 |
| | $ | 33,436,605 |
| | 30.1 | % | | 33.5 | % | | 30.4 | % | Total | $ | 92,676,987 | | | $ | 54,025,009 | | | $ | 43,506,259 | | | 71.5 | % | 24.2 | % | | 35.7 | % | | 34.0 | % | | 33.5 | % |
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. We identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.
Certain of the most critical estimates that require significant judgment are as follows:
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.
Item 7A. 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. 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, a component of stockholders’ equity in our consolidated balance sheets. We do not currently hedge our exposure to potential foreign currency translation adjustments.
hypothetical 100 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 8. Financial Statements and Supplementary Data
We have audited the accompanying consolidated balance sheets of XPEL, Inc. (the "Company") as of December 31, 2019 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for each of the two years thenin the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018,2020, and the results of their operations and their cash flows for each of the two years thenin the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
