UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 20192023
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-38858
XPEL, INC.
(Exact name of registrant as specified in its charter)
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Nevada | 20-1117381 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| |
618 W. Sunset Road711 Broadway St., Suite 320 | San Antonio | Texas | 7821678215 | |
(Address of Principal Executive Offices) | | | (Zip Code) | |
Registrant's telephone number, including area code: (210)678-3700
Securities registered pursuant to Section 12(b) of the Act:
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| | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | XPEL | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐x No Nox☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☐☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☒☐ | Smaller reporting company | ☒☐ |
Emerging growth company | ☒☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had 27,612,59727,628,953 shares of common stock outstanding as of August 21, 2019.November 8, 2023.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
XPEL, INC.
Condensed Consolidated Balance Sheets
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| | | | | | | |
| (Unaudited) | | (Audited) |
| June 30, 2019 | | December 31, 2018 |
Assets | | | |
Current | | | |
Cash and cash equivalents | $ | 5,473,964 |
| | $ | 3,971,226 |
|
Accounts receivable, net | 7,549,789 |
| | 5,554,313 |
|
Inventory, net | 15,304,778 |
| | 10,799,611 |
|
Prepaid expenses and other current assets | 1,312,016 |
| | 706,718 |
|
Total current assets | 29,640,547 |
| | 21,031,868 |
|
Property and equipment, net | 3,711,031 |
| | 3,384,206 |
|
Right-of-Use lease assets | 4,016,516 |
| | — |
|
Intangible assets, net | 3,595,785 |
| | 3,804,026 |
|
Other assets | 35,999 |
| | — |
|
Goodwill | 2,349,501 |
| | 2,322,788 |
|
Total assets | $ | 43,349,379 |
| | $ | 30,542,888 |
|
Liabilities | | | |
Current | | | |
Current portion of notes payable | $ | 670,516 |
| | $ | 853,150 |
|
Current portion lease liabilities | 976,339 |
| | — |
|
Accounts payable and accrued liabilities | 11,255,718 |
| | 6,292,093 |
|
Income tax payable | 565,350 |
| | 1,337,599 |
|
Total current liabilities | 13,467,923 |
| | 8,482,842 |
|
Deferred tax liability, net | 549,257 |
| | 478,864 |
|
Non-current portion of lease liabilities | 3,137,297 |
| | — |
|
Non-current portion of notes payable | 502,080 |
| | 968,237 |
|
Total liabilities | 17,656,557 |
| | 9,929,943 |
|
Stockholders’ equity | | | |
Preferred stock, $0.001 par value; authorized 10,000,000; none issued and outstanding | — |
| | — |
|
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,612,597 and 27,612,597 issued and outstanding, respectively | 27,613 |
| | 27,613 |
|
Additional paid-in-capital | 11,348,163 |
| | 11,348,163 |
|
Accumulated other comprehensive loss | (976,292 | ) | | (1,190,055 | ) |
Retained earnings | 15,481,857 |
| | 10,617,253 |
|
| 25,881,341 |
| | 20,802,974 |
|
Non-controlling interest | (188,519 | ) | | (190,029 | ) |
Total stockholders’ equity | 25,692,822 |
| | 20,612,945 |
|
Total liabilities and stockholders’ equity | $ | 43,349,379 |
| | $ | 30,542,888 |
|
(In thousands except share and per share data) | | | | | | | | | | | |
| (Unaudited) | | (Audited) |
| September 30, 2023 | | December 31, 2022 |
Assets | | | |
Current | | | |
Cash and cash equivalents | $ | 10,374 | | | $ | 8,056 | |
Accounts receivable, net | 24,115 | | | 14,726 | |
Inventories | 92,458 | | | 80,575 | |
Prepaid expenses and other current assets | 11,091 | | | 3,464 |
| | | |
Total current assets | 138,038 | | | 106,821 | |
Property and equipment, net | 15,690 | | | 14,203 | |
Right-of-use lease assets | 14,014 | | | 15,309 | |
Intangible assets, net | 29,461 | | | 29,294 | |
Other non-current assets | 971 | | | 972 | |
Goodwill | 28,602 | | | 26,763 | |
Total assets | $ | 226,776 | | | $ | 193,362 | |
Liabilities | | | |
Current | | | |
Current portion of notes payable | $ | — | | | $ | 77 | |
Current portion of lease liabilities | 3,650 | | 3,885 |
Accounts payable and accrued liabilities | 42,059 | | 22,970 |
Income tax payable | 836 | | 470 |
Total current liabilities | 46,545 | | 27,402 |
Deferred tax liability, net | 1,205 | | | 2,049 |
Other long-term liabilities | 950 | | | 1,070 |
Borrowings on line of credit | — | | | 26,000 |
Non-current portion of lease liabilities | 11,523 | | | 12,119 |
| | | |
Total liabilities | 60,223 | | | 68,640 | |
Commitments and Contingencies (Note 11) | | | |
Stockholders’ equity | | | |
Preferred stock, $0.001 par value; authorized 10,000,000; none issued and outstanding | — | | | — | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,628,953 and 27,616,064 issued and outstanding, respectively | 28 | | | 28 | |
Additional paid-in-capital | 12,050 | | | 11,073 | |
Accumulated other comprehensive loss | (2,179) | | | (2,203) | |
Retained earnings | 156,654 | | | 115,824 | |
Total stockholders’ equity | 166,553 | | | 124,722 | |
Total liabilities and stockholders’ equity | $ | 226,776 | | | $ | 193,362 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands except per share data)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2023 | | 2022 | | 2023 | | 2022 |
Revenue | | | | | | | | Revenue | | | | | | | |
Product revenue | $ | 25,425,489 |
| | $ | 24,988,880 |
| | $ | 46,480,212 |
| | $ | 47,083,121 |
| Product revenue | $ | 81,125 | | | $ | 72,616 | | | $ | 229,339 | | | $ | 197,753 | |
Service revenue | 4,668,665 |
| | 3,802,011 |
| | 8,339,388 |
| | 6,829,289 |
| Service revenue | 21,552 | | | 17,142 | | | 61,416 | | | 47,759 | |
Total revenue | 30,094,154 |
| | 28,790,891 |
| | 54,819,600 |
| | 53,912,410 |
| Total revenue | 102,677 | | | 89,758 | | | 290,755 | | | 245,512 | |
| | | | | | | | |
Cost of Sales | | | | | | | | Cost of Sales | |
Cost of product sales | 18,551,030 |
| | 19,560,320 |
| | 34,239,063 |
| | 36,410,156 |
| Cost of product sales | 51,876 | | | 47,225 | | | 143,613 | | | 129,646 | |
Cost of service | 917,111 |
| | 665,731 |
| | 1,804,444 |
| | 1,332,270 |
| Cost of service | 9,272 | | | 6,767 | | | 25,660 | | | 19,400 | |
Total cost of sales | 19,468,141 |
| | 20,226,051 |
| | 36,043,507 |
| | 37,742,426 |
| Total cost of sales | 61,148 | | | 53,992 | | | 169,273 | | | 149,046 | |
Gross Margin | 10,626,013 |
| | 8,564,840 |
| | 18,776,093 |
| | 16,169,984 |
| Gross Margin | 41,529 | | | 35,766 | | | 121,482 | | | 96,466 | |
| | | | | | | | |
Operating Expenses | | | | | | | | Operating Expenses | |
Sales and marketing | 2,064,836 |
| | 1,479,510 |
| | 3,663,942 |
| | 3,036,608 |
| Sales and marketing | 7,730 | | | 6,297 | | | 22,554 | | | 18,515 | |
General and administrative | 4,589,906 |
| | 3,620,542 |
| | 8,667,857 |
| | 6,895,140 |
| General and administrative | 16,170 | | | 12,162 | | | 46,180 | | | 34,859 | |
Total operating expenses | 6,654,742 |
| | 5,100,052 |
| | 12,331,799 |
| | 9,931,748 |
| Total operating expenses | 23,900 | | | 18,459 | | | 68,734 | | | 53,374 | |
| | | | | | | | |
Operating Income | 3,971,271 |
| | 3,464,788 |
| | 6,444,294 |
| | 6,238,236 |
| Operating Income | 17,629 | | | 17,307 | | | 52,748 | | | 43,092 | |
| | | | | | | | |
Interest expense | 29,074 |
| | 47,130 |
| | 57,780 |
| | 104,084 |
| Interest expense | 85 | | | 391 | | | 946 | | | 933 | |
Foreign currency exchange loss (gain) | (3,518 | ) | | 56,505 |
| | 14,908 |
| | 23,124 |
| |
Foreign currency exchange loss | | Foreign currency exchange loss | 398 | | | 372 | | | 419 | | | 833 | |
| | | | | | | | | | | | | | | |
Income before income taxes | 3,945,715 |
| | 3,361,153 |
| | 6,371,606 |
| | 6,111,028 |
| Income before income taxes | 17,146 | | | 16,544 | | | 51,383 | | | 41,326 | |
Income tax expense | 938,405 |
| | 808,011 |
| | 1,504,293 |
| | 1,469,073 |
| Income tax expense | 3,490 | | | 3,226 | | | 10,553 | | | 8,302 | |
Net income | 3,007,310 |
| | 2,553,142 |
| | 4,867,313 |
| | 4,641,955 |
| Net income | $ | 13,656 | | | $ | 13,318 | | | $ | 40,830 | | | $ | 33,024 | |
Income (loss) attributed to non-controlling interest | 1,293 |
| | (1,968 | ) | | 2,709 |
| | (10,513 | ) | |
Net income attributable to stockholders of the Company | $ | 3,006,017 |
| | $ | 2,555,110 |
| | $ | 4,864,604 |
| | $ | 4,652,468 |
| |
| | | | | | | | | | | | | | | |
Earnings per share attributable stockholders of the Company | | | | | | | | |
Basic and diluted | $ | 0.11 |
| | $ | 0.09 |
| | $ | 0.18 |
| | $ | 0.17 |
| |
Earnings per share | | Earnings per share | |
Basic | | Basic | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
Diluted | | Diluted | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
Weighted Average Number of Common Shares | | | | | | | | Weighted Average Number of Common Shares | | | | | | | |
Basic and diluted | 27,612,597 |
| | 27,612,597 |
| | 27,612,597 |
| | 27,612,597 |
| |
Basic | | Basic | 27,623 | | | 27,616 | | | 27,620 | | | 27,614 | |
Diluted | | Diluted | 27,644 | | | 27,620 | | | 27,634 | | | 27,615 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2023 | | 2022 | | 2023 | | 2022 |
Other comprehensive income | | | | | | | | Other comprehensive income | | | | | | | |
Net income | $ | 3,007,310 |
| | $ | 2,553,142 |
| | $ | 4,867,313 |
| | $ | 4,641,955 |
| Net income | $ | 13,656 | | | $ | 13,318 | | | $ | 40,830 | | | $ | 33,024 | |
Foreign currency translation | 133,306 |
| | (296,769 | ) | | 212,564 |
| | (426,716 | ) | Foreign currency translation | (731) | | | (1,551) | | | 24 | | | (2,821) | |
Total comprehensive income | 3,140,616 |
| | 2,256,373 |
| | 5,079,877 |
| | 4,215,239 |
| Total comprehensive income | $ | 12,926 | | | $ | 11,767 | | | $ | 40,854 | | | $ | 30,203 | |
Total comprehensive income attributable to: | | | | | | | | |
Stockholders of the Company | 3,145,330 |
| | 2,274,921 |
| | 5,078,367 |
| | 4,248,062 |
| |
Non-controlling interest | (4,714 | ) | | (18,548 | ) | | 1,510 |
| | (32,823 | ) | |
Total comprehensive income | $ | 3,140,616 |
| | $ | 2,256,373 |
| | $ | 5,079,877 |
| | $ | 4,215,239 |
| |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Three Months Ended September 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | | | |
Balance as of June 30, 2022 | 27,613 | | | $ | 28 | | | $ | 10,760 | | | $ | 94,149 | | | $ | (1,860) | | | $ | 103,077 | |
Net income | — | | | — | | | — | | | 13,318 | | | — | | | 13,318 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (1,551) | | | (1,551) | |
Stock-based compensation | 3 | | | — | | | 109 | | | — | | | — | | | 109 | |
Balance as of September 30, 2022 | 27,616 | | | 28 | | | 10,869 | | | 107,467 | | | (3,411) | | | 114,953 | |
| | | | | | | | | | | |
Balance as of June 30, 2023 | 27,620 | | | 28 | | | 11,730 | | | 142,998 | | | (1,448) | | | 153,308 | |
Net income | — | | | — | | | — | | | 13,656 | | | — | | | 13,656 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (731) | | | (731) | |
Stock-based compensation | 9 | | | — | | | 320 | | | — | | | — | | | 320 | |
Balance as of September 30, 2023 | 27,629 | | | $ | 28 | | | $ | 12,050 | | | $ | 156,654 | | | $ | (2,179) | | | $ | 166,553 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Three Months Ended June 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Equity attributable to Stockholders of the Company | | Non-Controlling Interest | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | | |
Balance as of March 31, 2018 | 27,612,597 |
| | $ | 27,613 |
| | $ | 11,348,163 |
| | $ | 4,002,077 |
| | $ | (720,900 | ) | | $ | 14,656,953 |
| | $ | (202,701 | ) | | $ | 14,454,252 |
|
Net income | — |
| | — |
| | — |
| | 2,555,110 |
| | — |
| | 2,555,110 |
| | (1,968 | ) | | 2,553,142 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (280,189 | ) | | (280,189 | ) | | (16,580 | ) | | (296,769 | ) |
Balance as of June 30, 2018 | 27,612,597 |
| | 27,613 |
| | 11,348,163 |
| | 6,557,187 |
| | (1,001,089 | ) | | 16,931,874 |
| | (221,249 | ) | | 16,710,625 |
|
| | | | | | | | | | | | | | | |
Balance as of March 31, 2019 | 27,612,597 |
| | 27,613 |
| | 11,348,163 |
| | 12,475,840 |
| | (1,115,605 | ) | | 22,736,011 |
| | (183,805 | ) | | 22,552,206 |
|
Net income | — |
| | — |
| | — |
| | 3,006,017 |
| | — |
| | 3,006,017 |
| | 1,293 |
| | 3,007,310 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 139,313 |
| | 139,313 |
| | (6,007 | ) | | 133,306 |
|
Balance as of June 30, 2019 | 27,612,597 |
| | $ | 27,613 |
| | $ | 11,348,163 |
| | $ | 15,481,857 |
| | $ | (976,292 | ) | | $ | 25,881,341 |
| | $ | (188,519 | ) | | $ | 25,692,822 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Six Months Ended June 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Equity attributable to Stockholders of the Company | | Non-Controlling Interest | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | | |
Balance as of December 31, 2017 | 27,612,597 |
| | $ | 27,613 |
| | $ | 11,348,163 |
| | $ | 1,904,719 |
| | $ | (596,683 | ) | | $ | 12,683,812 |
| | $ | (188,426 | ) | | $ | 12,495,386 |
|
Net income | — |
| | — |
| | — |
| | 4,652,468 |
| | — |
| | 4,652,468 |
| | (10,513 | ) | | 4,641,955 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (404,406 | ) | | (404,406 | ) | | (22,310 | ) | | (426,716 | ) |
Balance as of June 30, 2018 | 27,612,597 |
| | 27,613 |
| | 11,348,163 |
| | 6,557,187 |
| | (1,001,089 | ) | | 16,931,874 |
| | (221,249 | ) | | 16,710,625 |
|
| | | | | | | | | | | | | | | |
Balance as of December 31, 2018 | 27,612,597 |
| | 27,613 |
| | 11,348,163 |
| | 10,617,253 |
| | (1,190,055 | ) | | 20,802,974 |
| | (190,029 | ) | | 20,612,945 |
|
Net income | — |
| | — |
| | — |
| | 4,864,604 |
| | — |
| | 4,864,604 |
| | 2,709 |
| | 4,867,313 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 213,763 |
| | 213,763 |
| | (1,199 | ) | | 212,564 |
|
Balance as of June 30, 2019 | 27,612,597 |
| | $ | 27,613 |
| | $ | 11,348,163 |
| | $ | 15,481,857 |
| | $ | (976,292 | ) | | $ | 25,881,341 |
| | $ | (188,519 | ) | | $ | 25,692,822 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' Equity - Nine Months Ended September 30 |
| Common Stock | | Additional Paid-in-Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | | | |
Balance as of December 31, 2021 | 27,613 | | | $ | 28 | | | $ | 10,581 | | | $ | 74,443 | | | $ | (590) | | | $ | 84,462 | |
Net income | — | | | — | | | — | | | 33,024 | | | — | | | 33,024 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (2,821) | | | (2,821) | |
Stock-based compensation | 3 | | | — | | | 288 | | | — | | | — | | | 288 | |
Balance as of September 30, 2022 | 27,616 | | | 28 | | | 10,869 | | | 107,467 | | | (3,411) | | | 114,953 | |
| | | | | | | | | | | |
Balance as of December 31, 2022 | 27,616 | | | 28 | | | 11,073 | | | 115,824 | | | (2,203) | | | 124,722 | |
Net income | — | | | — | | | — | | | 40,830 | | | — | | | 40,830 | |
Foreign currency translation | — | | | — | | | — | | | — | | | 24 | | | 24 | |
Stock-based compensation | 13 | | | — | | | 977 | | | — | | | — | | | 977 | |
Balance as of September 30, 2023 | 27,629 | | | $ | 28 | | | $ | 12,050 | | | $ | 156,654 | | | $ | (2,179) | | | $ | 166,553 | |
See notes to condensed consolidated financial statements.
XPEL, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| | | Six Months Ended June 30, | | Nine Months Ended September 30, 2023 |
| 2019 | | 2018 | | 2023 | | 2022 |
Cash flows from operating activities | | | | Cash flows from operating activities | | | |
Net income | $ | 4,867,313 |
| | $ | 4,641,955 |
| Net income | $ | 40,830 | | | $ | 33,024 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation of property, plant and equipment | 421,088 |
| | 338,867 |
| Depreciation of property, plant and equipment | 3,229 | | | 2,486 | |
Amortization of intangible assets | 371,372 |
| | 312,169 |
| Amortization of intangible assets | 3,660 | | | 3,248 | |
Impairments | 66,364 |
| | — |
| |
Loss on sale of property and equipment | 24,605 |
| | 35,986 |
| |
Gain on sale of property and equipment, net | | Gain on sale of property and equipment, net | (11) | | | (10) | |
Stock-based compensation | | Stock-based compensation | 1,144 | | | 317 | |
Bad debt expense | 123,753 |
| | 122,777 |
| Bad debt expense | 216 | | | 350 | |
Deferred income tax | 58,405 |
| | (45,891 | ) | |
Deferred income taxes | | Deferred income taxes | (844) | | | 7 | |
Accretion on notes payable | 36,843 |
| | 37,393 |
| Accretion on notes payable | — | | | 6 | |
| | | | |
Changes in current assets and liabilities: | | | | |
Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | (2,063,400 | ) | | (1,868,399 | ) | Accounts receivable | (9,483) | | | (5,899) | |
Inventory, net | (4,427,940 | ) | | (1,059,537 | ) | Inventory, net | (11,583) | | | (18,423) | |
Prepaid expenses and other current assets | (603,016 | ) | | (208,854 | ) | |
Other assets | 26,194 |
| | — |
| |
Prepaid expenses and other assets | | Prepaid expenses and other assets | (7,288) | | | (3,982) | |
Income tax receivable and payable | | Income tax receivable and payable | 320 | | | 1,077 | |
Accounts payable and accrued liabilities | 4,975,948 |
| | (155,093 | ) | Accounts payable and accrued liabilities | 18,311 | | | (2,505) | |
Income tax payable | (799,700 | ) | | (531,975 | ) | |
Net cash provided by operating activities | 3,077,829 |
| | 1,619,398 |
| Net cash provided by operating activities | 38,501 | | | 9,696 | |
Cash flows used in investing activities | | | | Cash flows used in investing activities | |
Purchase of property, plant and equipment | (764,125 | ) | | (555,592 | ) | Purchase of property, plant and equipment | (4,741) | | | (5,534) | |
Proceeds from sale of property and equipment | 11,386 |
| | — |
| Proceeds from sale of property and equipment | 20 | | | 66 | |
Acquisition of subsidiaries, net of cash acquired and notes payable | — |
| | (155,093 | ) | |
Business acquisitions, net of cash acquired | | Business acquisitions, net of cash acquired | (4,697) | | | (2,993) | |
Development of intangible assets | (138,097 | ) | | (95,507 | ) | Development of intangible assets | (798) | | | (1,368) | |
Net cash used in investing activities | (890,836 | ) | | (806,192 | ) | Net cash used in investing activities | (10,216) | | | (9,829) | |
Cash flows from financing activities | | | | Cash flows from financing activities | | | |
Net repayments on revolving credit agreement | — |
| | (2,000,000 | ) | |
Repayment of bank loan payable | — |
| | (292,032 | ) | |
Net (repayments of) borrowings on revolving credit agreement | | Net (repayments of) borrowings on revolving credit agreement | (26,000) | | | 1,000 | |
Restricted stock withholding taxes paid in lieu of issued shares | | Restricted stock withholding taxes paid in lieu of issued shares | (167) | | | (30) | |
Repayments of notes payable | (714,668 | ) | | (280,905 | ) | Repayments of notes payable | (77) | | | (304) | |
Net cash used in financing activities | (714,668 | ) | | (2,572,937 | ) | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (26,244) | | | 666 | |
Net change in cash and cash equivalents | 1,472,325 |
| | (1,759,731 | ) | Net change in cash and cash equivalents | 2,041 | | | 533 | |
Foreign exchange impact on cash and cash equivalents | 30,413 |
| | (211,963 | ) | Foreign exchange impact on cash and cash equivalents | 277 | | | 68 | |
Increase (decrease) in cash and cash equivalents during the period | 1,502,738 |
| | (1,971,694 | ) | |
Increase in cash and cash equivalents during the period | | Increase in cash and cash equivalents during the period | 2,318 | | | 601 | |
Cash and cash equivalents at beginning of period | 3,971,226 |
| | 3,498,904 |
| Cash and cash equivalents at beginning of period | 8,056 | | | 9,644 | |
Cash and cash equivalents at end of period | $ | 5,473,964 |
| | $ | 1,527,210 |
| Cash and cash equivalents at end of period | $ | 10,374 | | | $ | 10,245 | |
| | | | | | | |
Supplemental schedule of non-cash activities | | | | Supplemental schedule of non-cash activities | |
Notes payable issued for acquisitions | $ | — |
| | $ | 396,982 |
| |
Forgiveness of debt for acquired entities | $ | — |
| | $ | 32,155 |
| |
Non-cash lease financing | | Non-cash lease financing | $ | 1,847 | | | $ | 5,209 | |
Issuance of common stock for vested restricted stock units | | Issuance of common stock for vested restricted stock units | $ | 874 | | | $ | 222 | |
| | | | |
Supplemental cash flow information | | | | Supplemental cash flow information | |
Cash paid for income taxes | $ | 2,058,925 |
| | $ | 1,789,087 |
| Cash paid for income taxes | $ | 11,144 | | | $ | 7,305 | |
Cash paid for interest | $ | 10,997 |
| | $ | 61,946 |
| Cash paid for interest | $ | 1,000 | | | $ | 900 | |
See notes to condensed consolidated financial statements.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
1. INTERIM FINANCIAL INFORMATION
The accompanying (a) condensed consolidated balance sheet as of December 31, 2018,2022, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and sixnine months ended JuneSeptember 30, 20192023 and 2022 have been prepared by XPEL, Inc. (“XPEL” or the Company“Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (“SEC”). Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period due to variability in customer purchasing patterns and seasonal, operating and other factors.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Amendment No. 2 toAnnual Report on Form 10-K as filed with the Form 10 filedSEC on May 30, 2019.February 28, 2023 (the "Annual Report"). These condensed consolidated financial statements also should be read in conjunction with Management’sthe Management's Discussion and Analysis of Financial Condition and Results of Operations section appearing in this report.
Certain immaterial amounts in the prior year consolidated financial statements have been reclassified in order to conform to the presentation adopted in the current year. None of these changes in presentation affect previously reported results of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company is based in San Antonio, Texas and sells, distributes, and installs after-market automotive products,protective films and coatings, including automotive paint protection film, headlightsurface protection film, automotive and architectural window films and other related products.
ceramic coatings. The Company was incorporated in the state of Nevada, U.S.A. in October 2003 and its registered office is 618 W. Sunset Road, San Antonio, Texas, 78216.2003.
Basis of Presentation - The condensed consolidated financial statements are prepared in conformity with GAAPUnited States Generally Accepted Accounting Principles ("U.S. GAAP") and include the accounts of the Company and its wholly owned or majority ownedwholly-owned subsidiaries. The ownership interest of non-controlling participants in subsidiaries that are not wholly-owned is included as a separate component of stockholders’ equity. The non-controlling participants’ share of the net income (loss) is included as “Income (loss) attributable to noncontrolling interest” on the Condensed Consolidated Statements of Income and Comprehensive Income. Intercompany accounts and transactions have been eliminated.
The functional currency for the Company is the United States ("U.S.") dollar. The assets and liabilities of each of its wholly-owned foreign subsidiaries are translated into U.S dollars using the exchange rate at the end of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the period. Gains and losses from translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss)loss in the accompanying consolidated balance sheets. Foreign currency exchange gains and losses are recorded in other expense, net in the accompanying condensed consolidated statements of income. The ownership percentages and functional currencies of the entities included in these condensed consolidated financial statements are as follows:
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
|
| | | | | |
Subsidiaries | | Functional Currency | | % Owned by XPEL, Inc. |
XPEL, Ltd. | | UK Pound Sterling | | 85 | % |
Armourfend CAD, LLC | | US Dollar | | 100 | % |
XPEL Canada Corp. | | Canadian Dollar | | 100 | % |
XPEL B.V. | | Euro | | 100 | % |
XPEL de Mexico S. de R.L. de C.V. | | Peso | | 100 | % |
XPEL Acquisition Corp. | | Canadian Dollar | | 100 | % |
Protex Canada, Inc. | | Canadian Dollar | | 100 | % |
Apogee Corp. | | New Taiwan Dollar | | 100 | % |
Segment Reporting - Management has concluded that our chief operating decision makerXPEL's Chief Operating Decision Maker (“CODM”) is our chief executive officer.the Company's Chief Executive Officer. The Company’s CODM reviews the entire organization’s consolidated results as a whole on a monthly basis to evaluate performance and make resource allocation decisions. Management views the Company’s operations and manages its business as one operating segment.
Use of Estimates - The preparation of these condensed consolidated financial statements in conformity towith U.S. GAAP requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and underlying assumptions are reviewed on an ongoing basis. Actual outcomes may differ from these estimates under different assumptions and conditions.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accounts Receivable - Accounts receivable are shown net of an allowance for expected credit losses and doubtful accounts of $196,255$0.2 million and $133,696$0.2 million as of JuneSeptember 30, 20192023 and December 31, 2018,2022, respectively. The Company evaluates the adequacy of its allowances by analyzing the aging of receivables, customer financial condition, historical collection experience, the value of any collateral and other economic and industry factors. Actual collections may differ from historical experience, and if economic, business or customer conditions deteriorate significantly, adjustments to these reserves may be required. When the Company becomes aware of factors that indicate a change in a specific customer’s ability to meet its financial obligations, the Company records a specific reserve for credit losses. The Company had no significant accounts receivable concentration as of September 30, 2023 or December 31, 2022.
Provisions and Warranties - We provide a warranty on ourthe Company's products. Liability under the warranty policy is based on a review of historical warranty claims. Adjustments are made to the accruals asbased on actual claims data experience warrant. Ourdata. The Company's liability for warranties as of JuneSeptember 30, 20192023 and December 31, 20182022 was $66,642 $70,250,$0.4 million and $0.2 million, respectively. The following tables present a summary of the Company's accrued warranty liabilities for the nine months ended September 30, 2023 and the twelve months ended December 31, 2022 (dollars in thousands):
| | | | | |
| 2023 |
Warranty liability, January 1 | $ | 234 | |
Warranties assumed in period | 446 | |
Payments | (306) | |
Warranty liability, September 30 | $ | 374 | |
| | | | | |
| 2022 |
Warranty liability, January 1 | $ | 75 | |
Warranties assumed in period | 624 | |
Payments | (465) | |
Warranty liability, December 31 | $ | 234 | |
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases” (“the new lease standard” or “ASC 842”), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new lease standard requirements were effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company adopted this standard effective January 1, 2019. In adopting this standard, the Company elected the package of practical expedients afforded thereby. This election allowed the Company, among other things, to carry forward prior lease classifications. Pursuant to the adoption of this standard, ROU assets and operating lease liabilities (current and long-term portions) as of June 30, 2019 were $4,016,516 and $4,113,636, respectively. Refer to Note 13 for additional information related to the adoption of this standard.
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
Recent Accounting Pronouncements Issued and Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial“Financial Instruments — Measurement of Credit Losses on Financial Instruments,Instruments”, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 isWe adopted this pronouncement effective for the Company beginning January 1, 2020 and is required2023 without material impact to be applied prospectively. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from the Tax Cuts and Jobs Act (Tax Reform Act) that are stranded in accumulated other comprehensive income. This standard also requires certain disclosures about stranded tax effects. ASU No. 2018-02, however, does not change the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations. ASU No. 2018-02 will be effective for the Company’s fiscal year 2020, with the option for early adoption at any time prior to the effective date. It must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company is currently assessing the impact this new accounting guidance will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” in order to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. This is an amendment to ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is still assessing this guidance and the impact it will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement, to amend the disclosure requirements related to fair value measurements. These amendments include, but are not limited to, additional disclosures related to the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The standard has an effective date for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The Company is still assessing this guidance and the impact it will have on its consolidated financial statements.
3. REVENUE
Revenue recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods and services to a customer, in an amount that reflects the consideration that it expects to receive in exchange for those goods or services. This is achieved through applying the following five-step model:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company generates substantially all of its revenue from contracts with customers, whether formal or implied. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes, with the exception of taxes assessed during the procurement process of select inventories. Shipping and handling costs are included in cost of sales.
Revenues from product and services sales are recognized when control of the goods and services is transferred to the customer, which occurs at a point in time, typically upon shipment to the customer or completion of the service. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
Based upon the nature of the products the Company sells, its customers have limited rights of return, whichand these rights are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales asat the products are sold.time of the sale.
Warranty obligations associated with the sale of ourthe Company's products are assurance-type warranties that are a guarantee of the product’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. Warranty expense is included in cost of sales.
We apply a practical expedient to expense direct costs of obtaining a contract when incurred because the amortization period would have been one year or less.
Under its contracts with customers, the Company stands ready to deliver product upon receipt of a customer's purchase order. Accordingly, the Company has no performance obligations under its contracts until its customers submit a purchase order. The Company does not enter into commitments to provide goods or services that have terms greater than one year. In limited cases, the Company does requirerequires payment in advance of shipping product. Typically, product is shipped within a few days after prepayment is received. These prepayments are recorded as contract liabilities on the condensed consolidated balance sheet and are included in accounts payable and accrued liabilities (Note 9). As the performance obligation is part of a contract that has an original expected duration of less than one year, the Company has applied the practical expedient under ASC 606 to omit disclosures regarding remaining performance obligations.
When the Company transfers goods or provides services to a customer, payment is due, - subject to normal terms, - and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to 30 days, depending on the type of customer and relationship. At contract inception, the Company expects that the period of time between the transfer of goods to the customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient under ASC 606 to not adjust for the effects of a significant financing component. As such, these amounts are recorded as receivables and not contract assets.
The following table summarizes transactions within contract liabilities for the sixthree and nine months ended JuneSeptember 30, 2019:2023 (dollars in thousands):
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
| | | | | |
Balance, December 31, 2022 | $ | 261 | |
Revenue recognized related to payments included in the December 31, 2022 balance | (206) | |
Payments received for which performance obligations have not been satisfied | 2,791 | |
Effect of foreign currency translation | 1 | |
Balance, March 31, 2023 | 2,847 | |
Revenue recognized related to payments included in the March 31, 2023 balance | (2,771) | |
Payments received for which performance obligations have not been satisfied | 3,955 | |
Effect of foreign currency translation | (4) | |
Balance, June 30, 2023 | 4,027 | |
Revenue recognized related to payments included in the June 30, 2023 balance | (3,973) | |
Payments received for which performance obligations have not been satisfied | 5,575 | |
Effect of foreign currency translation | (4) | |
Balance, September 30, 2023 | $ | 5,625 | |
|
| | | |
Balance at December 31, 2018 | $ | 136,213 |
|
Revenue recognized related to payments included in the December 31, 2018 balance | (38,405 | ) |
Payments received for which performance obligations have not been satisfied | 217,195 |
|
Balance at March 31, 2019 | $ | 315,003 |
|
Revenue recognized related to payments included in the March 31, 2019 balance | (77,265 | ) |
Payments received for which performance obligations have not been satisfied | 1,493,645 |
|
Balance at June 30, 2019 | $ | 1,731,383 |
|
The table below sets forth the disaggregation of revenue by product category for the periods indicated below:below (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Product Revenue | | | | | | | |
Paint protection film | $ | 21,166,420 |
| | $ | 21,922,607 |
| | $ | 39,622,775 |
| | $ | 42,138,754 |
|
Window film | 3,171,155 |
| | 2,364,958 |
| | 5,004,071 |
| | 3,536,815 |
|
Other | 1,087,914 |
| | 701,315 |
| | 1,853,366 |
| | 1,407,552 |
|
Total | 25,425,489 |
| | 24,988,880 |
| | 46,480,212 |
| | 47,083,121 |
|
| | | | | | | |
Service Revenue | | | | | | | |
Software | $ | 775,745 |
| | $ | 627,283 |
| | $ | 1,519,513 |
| | $ | 1,233,086 |
|
Cutbank credits | 2,064,962 |
| | 1,725,240 |
| | 3,530,096 |
| | 2,942,402 |
|
Installation labor | 1,647,954 |
| | 1,334,035 |
| | 2,946,343 |
| | 2,440,003 |
|
Training | 180,004 |
| | 115,453 |
| | 343,436 |
| | 213,798 |
|
Total | 4,668,665 |
| | 3,802,011 |
| | 8,339,388 |
| | 6,829,289 |
|
| | | | | | | |
Total | $ | 30,094,154 |
| | $ | 28,790,891 |
| | $ | 54,819,600 |
| | $ | 53,912,410 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| 2023 | | 2022 | | 2023 | | 2022 | | | | | | |
Product Revenue | | | | | | | | | | | | | |
Paint protection film | $ | 58,977 | | | $ | 54,230 | | | $ | 165,016 | | | $ | 146,465 | | | | | | | |
Window film | 18,762 | | | 15,391 | | | 54,055 | | | 42,711 | | | | | | | |
Other | 3,386 | | | 2,995 | | | 10,268 | | | 8,577 | | | | | | | |
Total | $ | 81,125 | | | $ | 72,616 | | | $ | 229,339 | | | $ | 197,753 | | | | | | | |
| | | | | | | | | | | | | |
Service Revenue | | | | | | | | | | | | | |
Software | $ | 1,652 | | | $ | 1,351 | | | $ | 4,656 | | | $ | 3,804 | | | | | | | |
Cutbank credits | 4,524 | | | 4,352 | | | 13,253 | | | 11,459 | | | | | | | |
Installation labor | 14,852 | | | 11,067 | | | 41,781 | | | 31,371 | | | | | | | |
Training and other | 524 | | | 372 | | | 1,726 | | | 1,125 | | | | | | | |
Total | $ | 21,552 | | | $ | 17,142 | | | $ | 61,416 | | | $ | 47,759 | | | | | | | |
| | | | | | | | | | | | | |
Total | $ | 102,677 | | | $ | 89,758 | | | $ | 290,755 | | | $ | 245,512 | | | | | | | |
Because many of ourthe Company's international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents ourthe Company's estimate of sales by geographic regions based on ourthe Company's understanding of ultimate product destination based on customer interactions, customer locations and other factors:factors (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
United States | $ | 16,497,347 |
| | $ | 10,606,298 |
| | $ | 29,007,097 |
| | $ | 19,813,712 |
|
China | 3,127,723 |
| | 9,429,142 |
| | 7,646,920 |
| | 17,254,006 |
|
Canada | 5,217,535 |
| | 4,416,576 |
| | 8,315,899 |
| | 8,252,301 |
|
Continental Europe | 1,974,328 |
| | 1,725,472 |
| | 3,396,060 |
| | 3,003,471 |
|
United Kingdom | 926,925 |
| | 811,689 |
| | 1,810,283 |
| | 1,435,633 |
|
Asia Pacific | 1,059,560 |
| | 704,375 |
| | 1,931,518 |
| | 1,218,314 |
|
Latin America | 512,680 |
| | 426,784 |
| | 998,809 |
| | 1,231,238 |
|
Middle East/Africa | 720,347 |
| | 660,460 |
| | 1,603,479 |
| | 1,586,003 |
|
Other | 57,709 |
| | 10,095 |
| | 109,535 |
| | 117,732 |
|
Total | $ | 30,094,154 |
| | $ | 28,790,891 |
| | $ | 54,819,600 |
| | $ | 53,912,410 |
|
9
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| 2023 | | 2022 | | 2023 | | 2022 | | | | | | |
United States | $ | 59,002 | | | $ | 51,522 | | | $ | 169,228 | | | $ | 142,275 | | | | | | | |
Canada | 11,471 | | | 11,046 | | | 31,914 | | | 29,773 | | | | | | | |
China | 10,242 | | | 11,009 | | | 24,992 | | | 27,772 | | | | | | | |
Continental Europe | 8,705 | | | 6,065 | | | 26,354 | | | 18,671 | | | | | | | |
Middle East/Africa | 3,909 | | | 3,322 | | | 11,514 | | | 8,025 | | | | | | | |
United Kingdom | 3,499 | | | 2,482 | | | 10,220 | | | 7,505 | | | | | | | |
Asia Pacific | 3,233 | | | 2,540 | | | 9,192 | | | 6,549 | | | | | | | |
Latin America | 2,325 | | | 1,468 | | | 6,617 | | | 4,033 | | | | | | | |
Other | 291 | | | 304 | | | 724 | | | 909 | | | | | | | |
Total | $ | 102,677 | | | $ | 89,758 | | | $ | 290,755 | | | $ | 245,512 | | | | | | | |
OurXPEL's largest customer accounted for 10.4%10.0% and 32.8%12.3% of ourthe Company's net sales during the the three months ended JuneSeptember 30, 20192023 and 2018, respectively. Our largest customer accounted for 13.9%2022, respectively and 31.6%8.6% and 11.3% of ourthe Company's net sales during the the sixnine months ended JuneSeptember 30, 20192023 and 2018,2022, respectively. As of June 30, 2019 and December 31, 2018, there was no significant accounts receivable concentration.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:following (dollars in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Furniture and fixtures | $ | 1,055,029 |
| | $ | 956,467 |
|
Computer equipment | 1,039,090 |
| | 939,979 |
|
Vehicles | 754,459 |
| | 730,765 |
|
Equipment | 1,413,053 |
| | 1,079,503 |
|
Leasehold improvements | 1,162,772 |
| | 941,627 |
|
Plotters | 654,154 |
| | 544,080 |
|
Construction in Progress | 484,686 |
| | 646,576 |
|
Total property and equipment | 6,563,243 |
| | 5,838,997 |
|
Less accumulated depreciation | 2,852,212 |
| | 2,454,791 |
|
Property and equipment, net | $ | 3,711,031 |
| | $ | 3,384,206 |
|
| | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Furniture and fixtures | $ | 3,189 | | | | | $ | 2,667 | | | |
Computer equipment | 4,392 | | | | | 3,455 | | | |
Vehicles | 903 | | | | | 838 | | | |
Equipment | 5,279 | | | | | 4,728 | | | |
Leasehold improvements | 10,276 | | | | | 7,081 | | | |
Plotters | 3,750 | | | | | 2,980 | | | |
Construction in Progress | 351 | | | | | 1,745 | | | |
Total property and equipment | 28,140 | | | | | 23,494 | | | |
Less: accumulated depreciation | 12,450 | | | | | 9,291 | | | |
Property and equipment, net | $ | 15,690 | | | | | $ | 14,203 | | | |
Depreciation expense for the three months ended JuneSeptember 30, 20192023 and 20182022 was $220,270$1.2 million and $179,549,$0.9 million, respectively. Depreciation expense forFor the sixnine months ended JuneSeptember 30, 20192023 and 20182022, depreciation expense was $421,088$3.2 million and $338,867,$2.5 million, respectively.
5. INTANGIBLE ASSETS, NET
Intangible assets consists of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Trademarks | $ | 289,734 |
| | $ | 289,734 |
|
Software | 1,773,708 |
| | 1,635,731 |
|
Trade name | 464,374 |
| | 457,766 |
|
Contractual and customer relationships | 2,986,345 |
| | 2,947,264 |
|
Non-compete | 267,375 |
| | 261,914 |
|
Other | 150,139 |
| | 150,267 |
|
Total cost | 5,931,675 |
| | 5,742,676 |
|
Less: Accumulated amortization | 2,335,890 |
| | 1,938,650 |
|
Intangible assets, net | $ | 3,595,785 |
| | $ | 3,804,026 |
|
Amortization expense for the three months ended June 30, 2019 and 2018 was $186,824 and $175,532, respectively. Amortization expense for the six months ended June 30, 2019 and 2018 was $371,372 and $312,169, respectively.During the the six months ended June 30, 2019, the Company sold a franchise territory to a new franchisee in Quebec. In connection with this arrangement, the Company closed its Quebec City installation location and recorded an impairment against all previously recognized intangible assets for that location. The Company recorded an impairment loss of $30,480 related to the intangible assets other than goodwill associated with this closed location. This impairment loss is reflected in general and administrative expense on the condensed consolidated statement of income.
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
5. INTANGIBLE ASSETS, NET
Intangible assets consist of the following (dollars in thousands):
| | | | | | | | | | | | | |
| | | September 30, 2023 | | December 31, 2022 |
Trademarks | | | $ | 823 | | | $ | 686 | |
Software | | | 5,472 | | | 4,822 | |
Trade names | | | 1,609 | | | 1,451 | |
Contractual and customer relationships | | | 34,724 | | | 31,871 | |
Non-compete | | | 439 | | | 440 | |
Other | | | 498 | | | 497 | |
Total cost | | | 43,565 | | | 39,767 | |
Less: Accumulated amortization | | | 14,104 | | | 10,473 | |
Intangible assets, net | | | $ | 29,461 | | | $ | 29,294 | |
Amortization expense for the three months ended September 30, 2023 and 2022 was $1.3 million and $1.1 million, respectively. For the nine months ended September 30, 2023 and 2022, amortization expense was $3.7 million and $3.2 million, respectively.
6. GOODWILL
The following table summarizes goodwill transactions for the sixnine months ended JuneSeptember 30, 20192023 and 2018:2022 (dollars in thousands):
| | | | | |
| 2023 |
Balance at December 31, 2022 | $ | 26,763 | |
Additions and purchase price allocation adjustments | 1,875 | |
Foreign Exchange | (36) | |
Balance at September 30, 2023 | $ | 28,602 | |
| |
| 2022 |
Balance at December 31, 2021 | $ | 25,655 | |
Additions and purchase price allocation adjustments | 1,826 | |
Foreign Exchange | (718) | |
Balance at December 31, 2022 | $ | 26,763 | |
|
| | | |
Balance at December 31, 2017 | $ | 1,856,642 |
|
Additions | 161,737 |
|
Foreign Exchange | (62,576 | ) |
Balance at June 30, 2018 | $ | 1,955,803 |
|
| |
Balance at December 31, 2018 | $ | 2,322,788 |
|
Impairment | (35,884 | ) |
Foreign Exchange | 62,597 |
|
Balance at June 30, 2019 | $ | 2,349,501 |
|
The Company completed one acquisition in the nine months ended September 30, 2023. Refer to Note 13 for discussion of this acquisition.
During the the six months ended June 30, 2019, the Company sold a franchise territory
XPEL, Inc.
Notes to a new franchisee in Quebec. In connection with this arrangement, the Company closed its Quebec City installation location and recorded an impairment against all previously recognized intangible assets for that location. The Company recorded an impairment loss of $35,884 related to the Goodwill associated with this closed location. This impairment loss is reflected in general and administrative expense on the condensed consolidated statement of income.Condensed Consolidated Financial Statements
7. INVENTORIES
The components of inventory are summarized as follows:follows (dollars in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Raw materials | $ | 18,741 | | | $ | 10,416 | |
Work in process | 3,617 | | | 6,756 | |
Finished goods | 70,100 | | | 63,403 | |
| $ | 92,458 | | | $ | 80,575 | |
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Film and film based products | $ | 13,694,546 |
| | $ | 9,399,067 |
|
Other products | 1,355,668 |
| | 1,264,862 |
|
Packaging and supplies | 370,166 |
| | 320,738 |
|
Inventory Reserve | (115,602 | ) | | (185,056 | ) |
| $ | 15,304,778 |
| | $ | 10,799,611 |
|
8. DEBT
REVOLVING FACILITIES
The Company has entered into a $8,500,000 revolving linecredit facility providing for secured revolving loans and letters of credit in an aggregate amount of up to $125.0 million, which is subject to the terms of a credit agreement with The Bank of San Antonio to support its continuing working capital needs. The Bank of San Antonio has been granted a security interest in substantially all of the Company’s current and future assets. The line of credit has a variable interest rate of the Wall Street Journal prime rate plus 0.75% with a floor of 4.25% and matures on May 5, 2020. The interest rate at both June 30, 2019 and December 31, 2018 was 6.25%dated April 6, 2023 (the "Credit Agreement"). As of JuneSeptember 30, 2019 and December 31, 2018,2023, no balance was outstanding under this agreement. As of December 31, 2022, the Company had an outstanding balance of $26.0 million under a prior credit agreement which was subsequently repaid and terminated.
Borrowings under the Credit Agreement bear interest, at XPEL’s option, at a rate equal to either (a) Base Rate or (b) Adjusted Term SOFR. In addition to the applicable interest rate, the Credit Agreement includes a commitment fee ranging from 0.20% to 0.25% per annum for the unused portion of the aggregate commitment and an applicable margin ranging from 0.00% to 0.50% for Base Rate Loans and 1.00% to 1.50% for Adjusted Term SOFR Loans. At September 30, 2023, these rates were 8.5% and 6.3%, respectively. Both the margin applicable to the interest rate and the commitment fee are dependent on XPEL’s Consolidated Total Leverage Ratio. The Credit Agreement's maturity date is April 6, 2026. All capitalized terms in this line.description of the credit facility that are not otherwise defined in this report have the meaning assigned to them in the Credit Agreement.
Obligations under the Credit Agreement are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in all of XPEL’s material property and assets.
The credit agreement contains customaryterms of the Credit Agreement include certain affirmative and negative covenants including covenants relatingthat require, among other things, XPEL to complyingmaintain legal existence and remain in good standing, comply with applicable laws, delivery ofmaintain accounting records, deliver financial statements payment of taxes and maintaining insurance. The credit agreement also requires that XPEL must maintain debt service coverage (EBITDA divided by the current portion of long-term debt +interest) of 1.25:1 and debt to tangible net worth of 4.0:1certifications on a rolling four quartertimely basis, pay taxes as required by law, and maintain insurance coverage, as well as to forgo certain specified future activities that might otherwise encumber XPEL and certain customary covenants. The Credit Agreement provides for two financial covenants, as follows.
As of the last day of each fiscal quarter:
1.XPEL shall not allow its Consolidated Total Leverage Ratio to exceed 3.50 to 1.00, and
2.XPEL shall not allow its Consolidated Interest Coverage Ratio to be less than 3.00 to 1.00.
The Company also has a CAD $4.5 million (approximately $3.3 million as of September 30, 2023) revolving credit facility through a financial institution in Canada, as maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus 0.25% per annum
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
basis. The credit agreement also contains customary eventsand is guaranteed by the parent company. As of default including the failure to make paymentsSeptember 30, 2023 and December 31, 2022, no balance was outstanding on this line of principal and interests, the breach of any covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events.credit.
As of JuneSeptember 30, 20192023 and December 31, 2018,2022, the Company was in compliance with all debt covenants.
XPEL Canada, Corp., a wholly owned subsidiary of XPEL, Inc., has also entered into a CAD $4,500,000 revolving line of credit agreement with HSBC Bank Canada to support its continuing working capital needs. The line has a variable interest rate of the HSBC Canada Bank’s prime rate plus 0.25%. The interest rate as of both June 30, 2019 and December 31, 2018 was 5.75%. As of June 30, 2019 and December 31, 2018, no balance was outstanding on this line of credit. This facility is guaranteed by the parent company.
NOTES PAYABLE
As part of its acquisition strategy, the Company uses a combination of cash and unsecured non-interest bearing promissory notes payable to fund its business acquisitions. The Company discounts the promissory note to fair value using market interests rates at the time of the acquisition.
Notes payable are summarized as follows:
|
| | | | | | | | | | | |
| Weighted Average Interest Rate | | Matures | | June 30, 2019 | | December 31, 2018 |
Acquisition Notes Payable | 5.54% | | 2022 | | $ | 1,172,596 |
| | $ | 1,821,387 |
|
Total Debt | | | | | 1,172,596 |
| | 1,821,387 |
|
Current Portion | | | | | 670,516 |
| | 853,150 |
|
Total Long-term debt | | | | | $ | 502,080 |
| | $ | 968,237 |
|
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table presents significant accounts payable and accrued liability balances as of period end:the periods ending (dollars in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Trade payables | $ | 30,419 | | | $ | 16,689 | |
Payroll liabilities | 3,236 | | | 3,596 | |
Contract liabilities | 5,625 | | | 261 | |
Acquisition holdback payments | 394 | | | 191 | |
Other liabilities | 2,385 | | | 2,233 | |
| $ | 42,059 | | | $ | 22,970 | |
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Trade payables | $ | 8,004,168 |
| | $ | 3,905,187 |
|
Payroll liabilities | 647,914 |
| | 1,194,237 |
|
Contract liabilities | 1,731,383 |
| | 136,213 |
|
Other liabilities | 872,253 |
| | 1,056,456 |
|
| $ | 11,255,718 |
| | $ | 6,292,093 |
|
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
10. FAIR VALUE MEASUREMENTS
Financial instruments include cash and cash equivalents (level 1), accounts receivable, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximate fair value because of the near-term maturities of these financial instruments. The carrying value of the Company’s notes payable approximates fair value due to the relatively short-term nature and interest rates of the notes. For discussion of the fair value measurements related to goodwill refer to Note 6, Goodwill of the financial statements for periods ended June 30, 2019 and December 31, 2018.
The estimated fair value of debt is based on market quotes for instruments with similar terms and remaining maturities (Level 2 inputs and valuation techniques).
ASC 820 prioritizes the inputs to valuation techniques used to measure fair value into the following hierarchy:
Level 1 – Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than the quoted prices in active markets that are observable either directly or indirectly, including: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.
11. INCOME TAXES
On December 22, 2017,Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and short-term borrowings approximate fair value because of the U.S. government enacted comprehensive tax legislation commonly referred to asnear-term maturities of these financial instruments. The carrying value of the Tax Cuts and Jobs Act, or Tax Reform Act. The Tax Reform Act makes broad and complex changesCompany’s notes payable approximates fair value due to the U.S. tax code that impactedrelatively short-term nature and interest rates of the Company’s fiscal year ended December 31, 2018, including but not limitednotes. The carrying value of the Company's long-term debt approximates fair value due to reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, generally eliminating the U.S. federal income taxesinterest rates being market rates.
The estimated fair value of debt is based on dividends received from foreign subsidiariesmarket quotes for instruments with similar terms and joint ventures after December 31, 2017, and imposing a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries and joint ventures.remaining maturities.
The Company recorded income tax expense duringhas contingent liabilities related to future internal performance milestones. The fair value of these liabilities was determined using a Monte Carlo Simulation based on the probability and
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
timing of certain future payments under these arrangements. These liabilities are accounted for as Level 3 liabilities within the fair value hierarchy.
Liabilities measured at fair value on a recurring basis as of the dates noted below are as follows (dollars in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Level 3: | | | |
Contingent Liabilities | $ | 1,085 | | | $ | 955 | |
Increases in the fair value of level 3 contingent liabilities are reflected in general and administrative expenses in the Consolidated Statements of Income for the three and nine months ended JuneSeptember 30, 2019 and 2018 of $938,405 and $808,011, respectively. The Company recorded income tax expense during the six months ended June 30, 2019 and 2018 of $1,504,293 and $1,469,073, respectively.2023.
12.
11. COMMITMENTS AND CONTINGENCIES
(a)Contingencies
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Management also has determined that the likelihood of any litigation and claims having a material impact on our results of operations, cash flows or financial position is remote.
XPEL Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
(b)Supply Agreement
Through our Amended and Restated Supply Agreement that we entered into with our primary supplier in March 2017, we have exclusive rights to commercialize, market, distribute and sell its automotive aftermarket products through March 21, 2020, which term automatically renews for successive two year periods thereafter unless terminated at the option of either party with two months’ notice. During such term, we have agreed to use commercially reasonable efforts to purchase a minimum of $5,000,000 of products quarterly from this principal supplier, with a yearly minimum purchasing requirement of $20,000,000.
13. LEASES
We lease space under non-cancelable operating leases for office space, warehouse facilities, and installation locations. These leases do not have significant rent holidays, rent escalation provisions, leasehold improvement incentives, or other build-out clauses. Neither do these leases contain contingent rent provisions. We also lease vehicles and equipment to support our global operations. We have elected the practical expedient to combine lease and non-lease components. We have also elected to adopt the package of practical expedients that allow us not to reassess whether expired leases are or contain leases, not to reassess the lease classification of existing leases, and not to reassess initial direct costs for existing leases.
Some of our leases contain options to renew. The exercise of lease renewals is at our sole discretion; therefore, the renewals to extend the lease terms are not include in our ROU assets as it is not reasonably certain that they will be exercised. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
Balance sheet information related to operating leases is as follows:
|
| | | |
| June 30, 2019 |
Operating lease ROU assets | $ | 4,016,516 |
|
| |
Current portion of operating lease liabilities | 976,339 |
|
Noncurrent portion of operating lease liabilities | 3,137,297 |
|
Total operating lease liabilities | $ | 4,113,636 |
|
12. EARNINGS PER SHARE
We had operating lease expensescompute basic earnings per share by dividing net income by the weighted average number of $288,091common shares outstanding during the period. Diluted earnings per common share includes effect of granted incremental restricted stock units.
The following table reconciles basic and $590,334 fordiluted weighted average shares used in the three and six months ended June 30, 2019, respectively. Variable lease payments for the same periods were and $131,270 and $239,351, respectively. For the same periods, we also had short-term lease expensescomputation of $19,936, and $40,603, respectively, and we made cash payments of $280,352 and $574,926, respectively, on leases subject to the accounting treatment described aboveearnings per share (dollars in Note 2.thousands):
Weighted-average information associated with the measurement of our remaining operating lease obligations is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Numerator | 2023 | | 2022 | | 2023 | | 2022 |
Net income | $ | 13,656 | | | $ | 13,318 | | | $ | 40,830 | | | $ | 33,024 | |
Denominator | | | | | | | |
Weighted average basic shares | 27,623 | | | 27,616 | | | 27,620 | | | 27,614 | |
Dilutive effect of restricted stock units | 21 | | | 4 | | | 14 | | | 1 | |
Weighted average diluted shares | 27,644 | | | 27,620 | | | 27,634 | | | 27,615 | |
Earnings per share | | | | | | | |
Basic | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
Diluted | $ | 0.49 | | | $ | 0.48 | | | $ | 1.48 | | | $ | 1.20 | |
13. BUSINESS ACQUISITIONS
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2019 and 2018
(Unaudited)
The Company completed the following acquisition during the nine months ended September 30, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Acquisition Date | | Name and Location | | Purchase Price | Acquisition Type | | Acquisition Purpose |
May 1, 2023 | | Protective Solutions, Inc. Holliston, Massachusetts, United States | | $ | 5,502 | | Share Purchase | | Market Expansion |
The following table presents the purchase price allocation for this transaction (dollars in thousands).
| | | | | | | | | | | |
| | (Unaudited)
Protective Solutions, Inc. | |
Purchase Price | June 30, 2019 | | |
Weighted-average remaining lease term (in years) Cash | 6.26 |
$ | 5,502 | | * |
Weighted-average discount rate | 5.87 | % | |
Allocation | | | |
Cash | | $ | 411 | | |
Accounts receivable | | 206 | | |
Inventory | | 267 | | |
Prepaid and other assets | | 10 | | |
Fixed assets | | 14 | | |
Trade name | | 150 | | |
Customer relationships | | 2,900 | | |
Goodwill | | 1,875 | | |
Accounts payable and accrued liabilities | | (331) | | |
| | $ | 5,502 | | |
* Of this cash consideration, $0.4 million was held back for settlement six months after the acquisition date, pending the completion of certain contractual obligations. | | | |
Acquired intangible assets have a weighted average useful life of 9 years. These intangible assets will be amortized on a straight line basis over that period.
Goodwill from this acquisition is deductible for tax purposes. The goodwill represents the acquired employee knowledge of the various markets, distribution knowledge by the employees of the acquired business, as well as the expected synergies resulting from the acquisition.
Acquisition costs incurred related to this acquisition were immaterial and were included in selling, general and administrative expenses.
The acquired company was consolidated into the Company's financial statements on its acquisition date. Revenue of $1.0 million and $1.6 million from this acquisition has been consolidated into the Company's financial statements for the three and nine months ended September 30, 2023, respectively. Net income of $0.3 million and $0.3 million from this acquisition has been consolidated into the Company's financial statements for the three and nine months ended September 30, 2023, respectively.
The following table summarizesunaudited consolidated pro forma combined financial information presents the maturityCompany's results of our operating lease liabilitiesoperations, including the estimated expenses relating to the amortization of
XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
intangibles purchased, as if this acquisition had occurred on January 1, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 (unaudited) | | 2022 (unaudited) |
Revenue | | $ | 291,983 | | | $ | 248,899 | |
Net income | | $ | 40,863 | | | $ | 33,179 | |
The unaudited consolidated pro forma combined financial information does not purport to be indicative of the results which would have been obtained had the acquisition been completed as of June 30, 2019:the beginning of the earliest period presented or of results that may be obtained in the future. In addition, they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.
|
| | | |
2019 | $ | 508,333 |
|
2020 | 882,469 |
|
2021 | 778,166 |
|
2022 | 695,870 |
|
2023 | 600,482 |
|
Thereafter | 1,378,775 |
|
Total operating lease payments | 4,844,095 |
|
Less: interest | (730,459 | ) |
Total operating lease liabilities | $ | 4,113,636 |
|
During
14. SUBSEQUENT EVENTS
Acquisitions of businesses
On October 1, 2023, we completed the threeacquisition of a Canadian-based automotive film distribution and six months ended June 30, 2018, rent expense related to operating leasesinstallation business serving primarily automotive dealerships. On October 4, 2023, we completed the acquisition of a European-based automotive paint protection film installation company serving two OEMs. The total purchase price for these transactions was approximately $272,281 and $542,478, respectively. Future minimum lease payments, under non-cancelable operating leases$13.4 million. In connection with these acquisitions, we deposited $7.4 million into an escrow account as of December 31, 2018 were as follows:September 30, 2023. This deposit is included in prepaid expenses in our September 30, 2023 Condensed Consolidated Balance Sheet.
|
| | | |
2019 | $ | 869,492 |
|
2020 | 736,169 |
|
2021 | 667,551 |
|
2022 | 601,593 |
|
2023 | 528,427 |
|
Thereafter | 1,372,388 |
|
| $ | 4,775,620 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess the Company’s financial condition and results of operations.operations of XPEL, Inc. ("we", "our", "us", “XPEL” or the “Company”). Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Forward-Looking Statements” in this report and under “Item 1A. Risk Factors”“Business," "Risk Factors,” "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data" in our Amendment No. 2 to Form 10the Annual Report which was filed with the Securities and Exchange Commission (SEC) on May 30, 2019 and is available on the SEC’s website at www.sec.gov.
Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to the safe harbor created by those sections. In addition, the Company or others on the Company’s behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on the Company’s internet web site, or otherwise. All statements other than statements of historical facts included in this report or expressed by the Company orally from time to time that address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future are forward-looking statements, including, in particular, the statements about the Company’s plans, objectives, strategies, and
prospects regarding, among other things, the Company’s financial condition, results of operations and business, and the outcome of contingencies, such as legal proceedings. The Company has identified some of these forward-looking statements in this report with words like “believe,” “can,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “outlook,” or “continue” or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to the Company’s condensed consolidated financial statements and elsewhere in this report, including under the heading “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.”
Forward-looking statements are based on current expectations about future events affecting the Company and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to the Company. These uncertainties and factors are difficult to predict, and many of them are beyond the Company’s control. The followingFactors to consider when evaluating these forward-looking statements include, but are somenot limited to:
•Our business is highly dependent on automotive sales and production volumes.
•We currently rely on one distributor for sales of our products in China.
•A material portion of our business is in China, which may be an unpredictable market and is currently suffering trade tensions with the uncertaintiesU.S.
•We must continue to attract, retain and factors knowndevelop key personnel.
•We could be impacted by disruptions in supply.
•Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
•We must maintain an effective system of internal control over financial reporting to us thatkeep stockholder confidence.
•Our industry is highly competitive.
•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 causebe impacted by growing use of ride-sharing or other alternate forms of car ownership.
•We must be effective in developing new lines of business and new products to maintain growth.
•Any disruptions in our relationships with independent installers and new car dealerships could harm our sales.
•Our strategy related to acquisitions and investments could be unsuccessful or consume significant resources.
•We must maintain and grow our network of sales, distribution channels and customer base to be successful.
•We are exposed to a wide range of risks due to the Company’s actual results to differ materially from what the Company has anticipated in its forward-looking statements:
the highly competitivemultinational nature of our industry;business.
•We must continue to manage our current reliance on a limited number of suppliers;rapid growth effectively.
our ability•We are subject to successfully introduce new productsclaims and services;
our ability to achieve benefits from our business initiatives, including identifying and completing suitable acquisitions and investments;
fluctuating revenue and operating results;
our reliance on a single distributorlitigation 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.
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•Our growth may be dependent on the availability of future financing;capital and funding.
•Our Common Stock could decline or be downgraded at any time.
risks related•Our stock price has been, and may continue to internal control over financial reporting;be, volatile.
our lack of experience, and the requirements related to operating, as a U.S. publicly traded company;
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.
considerations related•Our bylaws may limit investors’ ability to listingobtain a favorable judicial forum for disputes.
•The COVID-19 pandemic could materially affect our common stock (“Common Stock”) listed on The NASDAQ Stock Market.business.
•Our business faces unpredictable global, economic and business conditions, including the risk of inflation in various markets.
We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed these factors in more detail in in our Amendment No. 2 to Form 10, as filed with the Securities and Exchange Commission on May 30, 2019.Annual Report. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholdersstockholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.
Company Overview
Founded in 1997 and incorporated in Nevada in 2003, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including automotive surface and paint protection, headlight protection, and automotive window films, as well as a provider of complementary proprietary software. In 2018, we expanded our product offerings to include architectural window film (both commercial and residential) and security film protection for commercial and residential uses. Today,uses, and in 2019 we employ approximately 185 employees and serve over 2,000 direct customers and several thousand indirect customers around the world.further expanded our product line to include automotive ceramic coatings.
XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles. In 2007, we began selling automobile protectiveautomotive surface and paint protection film products to complement our software business. In 2011, we introduced theour 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 impingement.
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 stems from 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. Consistent with this philosophy, we have executed on several strategic initiatives including:
2014 we
•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 as well as
•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.
•We acquired Apogee Corporation which led to formation of XPEL Asia based in Taiwan.
2019
•We were approved for the listing of our stock on Nasdaq trading under the symbol “XPEL”.
2020
•We acquired Protex Centre, a wholesale-focused paint protection installation business based in Montreal, Canada.
•We expanded our presence in France with the acquisition of certain assets of France Auto Racing.
•We expanded our architectural window film presence with the acquisition of Houston-based Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and industrial settings.
2021
•We expanded our presence into numerous automotive dealerships throughout the United States with the acquisition of PermaPlate Film, LLC, a wholesale-focused automotive window film installation and distribution business based in Salt Lake City, Utah.
•We acquired five businesses in the United States and Canada from two sellers as a continuation of our acquisition strategy. These acquisitions allowed us to continue to increase our penetration into mid-range dealerships in the US and solidify our presence in Western Canada.
•We acquired invisiFRAME, Ltd, a designer and manufacturer of paint protection film patterns for bicycles, thus further expanding our non-automotive offerings.
2022
•We expanded our presence in Australia with the purchase of the paint protection film business of our Australian distributor.
Strategic Overview
XPEL is currently pursuingcontinues to pursue 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 continuing toalso add locally basedlocally-based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate.
We seek to increase global brand awareness in strategically important areas, including seekingpursuing high visibility at premium events such as major car shows and high value placement in advertising media consumed by car enthusiasts, to help further expand the Company’s premium brand.
XPEL also continues to expand its delivery channels by acquiring select installation facilities in key markets and acquiring international partners to enhance itsour global reach. As we expand globally, we strive to tailor our distribution model to adapt to target markets. We believe this flexibility allows us to penetrate and grow market share more efficiently. Our acquisition strategy centers aroundon our belief that the closer the Company is to its end customers, the greater its ability to drive increased product sales. During 2022, we acquired the paint protection film business of our Australian distributor and in May 2023, we acquired a dealership-focused installation business in the greater Boston area 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 linesegment continues to gain traction. We believe there are multiple uses for protective films and we continue to explore those adjacent market opportunities.
Trends and Uncertainties
Macroeconomic uncertainties persist in 2018, giving us accessthe U.S. and other parts of the world as inflation, rising interest rates and the changes in value of the U.S. Dollar relative to other major currencies have recently affected the economic environment and consumer behaviors. Additionally, while we have not experienced any material supply chain disruptions directly, the automobile industry has experienced component shortages, increased lead times, cost fluctuations and logistic constraints. Some or all of these could continue throughout the remainder of 2023. This economic uncertainty could impact vehicle sales in the U.S. or other parts of the world, which could adversely affect our business, results of operations and financial condition. See Risk Factors - “We are highly dependent on the automotive industry. A prolonged or material contraction in the automotive sales and production volumes could adversely affect our business, results of operations and financial condition” included in Part I, Item 1A - Risk Factors, in the Annual Report.
On September 15, 2023, the United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) initiated a largestrike at certain U.S. facilities causing work stoppages to some vehicle production and parts distribution activities. UAW reached a tentative settlement with each targeted automaker that still needs to be ratified by its members. If UAW members fail to ratify the new marketcontract and representinga pro-longed strike or further work stoppages may continue which could have a material adverse impact on inventories at car dealerships which could, in turn, adversely affect our business, results of operations and financial condition. See Risk Factors - “We are highly dependent on the first non-automotive product lineautomotive industry. A prolonged or material contraction in XPEL’s history. the automotive sales and production volumes could adversely affect our business, results of operations and financial condition” included in Part I, Item 1A - Risk Factors, in the Annual Report.
While there is some overlap withRussia’s invasion of Ukraine has not had a material direct impact on our existing customers, we believebusiness, the nature and degree of the effects of that this new product line exposesconflict, as well as the Companyother effects of the current business environment over time remain uncertain. See Risk Factors- “We are exposed to several new addressable markets.political, regulatory, economic and other risks that arise from operating a multinational business” included in Part I, Item 1A - Risk Factors, in the Annual Report.
Key Business MetricsMetric - Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)(“EBITDA”).
EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We define EBITDA as net income (loss) plus (a) totalconsolidated depreciation and amortization, (b) interest expense, net, and (c) income tax expense.
The following table is a reconciliation of Net incomeIncome to EBITDA for the three and sixnine months ended JuneSeptember 30, 20192023 and 2018:2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | | | (Unaudited) | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | |
| 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change | |
Net Income | $ | 13,656 | | | $ | 13,318 | | | 2.5 | % | | $ | 40,830 | | | $ | 33,024 | | | 23.6 | % | |
Interest | 85 | | | 391 | | | (78.3) | % | | 946 | | | 933 | | | 1.4 | % | |
Taxes | 3,490 | | | 3,226 | | | 8.2 | % | | 10,553 | | | 8,302 | | | 27.1 | % | |
Depreciation | 1,199 | | | 890 | | | 34.7 | % | | 3,229 | | | 2,486 | | | 29.9 | % | |
Amortization | 1,288 | | | 1,117 | | | 15.3 | % | | 3,660 | | | 3,248 | | | 12.7 | % | |
EBITDA | $ | 19,718 | | | $ | 18,942 | | | 4.1 | % | | $ | 59,218 | | | $ | 47,993 | | | 23.4 | % | |
|
| | | | | | | | | | | | | | | |
| (Unaudited) | | (Unaudited) |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net Income | $ | 3,007,310 |
| | $ | 2,553,142 |
| | $ | 4,867,313 |
| | $ | 4,641,955 |
|
Interest | 29,074 |
| | 47,130 |
| | 57,780 |
| | 104,084 |
|
Taxes | 938,405 |
| | 808,011 |
| | 1,504,293 |
| | 1,469,073 |
|
Depreciation | 220,270 |
| | 179,549 |
| | 421,088 |
| | 338,867 |
|
Amortization | 186,824 |
| | 175,532 |
| | 371,372 |
| | 312,169 |
|
EBITDA | $ | 4,381,883 |
| | $ | 3,763,364 |
| | $ | 7,221,846 |
| | $ | 6,866,148 |
|
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, (loss), as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.
EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting theirits usefulness as a comparative measures.measure.
Results of Operations
The following tables summarize the Company’s consolidated results of operations for the three and sixnine months ended JuneSeptember 30, 20192023 and 2018:2022 (dollars in thousands):
| | | Three Months Ended June 30, 2019 | | % of Total Revenue | | Three Months Ended June 30, 2018 | | % of Total Revenue | | $ Change | | % Change | | Three Months Ended September 30, 2023 | | % of Total Revenue | | Three Months Ended September 30, 2022 | | % of Total Revenue | | $ Change | | % Change |
Total revenue | $ | 30,094,154 |
| | 100.0 | % | | $ | 28,790,891 |
| | 100.0 | % | | $ | 1,303,263 |
| | 4.5 | % | Total revenue | $ | 102,677 | | | 100.0 | % | | $ | 89,758 | | | 100.0 | % | | $ | 12,919 | | | 14.4 | % |
Total cost of sales | 19,468,141 |
| | 64.7 | % | | 20,226,051 |
| | 70.3 | % | | (757,910 | ) | | (3.7 | )% | Total cost of sales | 61,148 | | | 59.6 | % | | 53,992 | | | 60.2 | % | | 7,156 | | | 13.3 | % |
Gross margin | 10,626,013 |
| | 35.3 | % | | 8,564,840 |
| | 29.7 | % | | 2,061,173 |
| | 24.1 | % | Gross margin | 41,529 | | | 40.4 | % | | 35,766 | | | 39.8 | % | | 5,763 | | | 16.1 | % |
Total operating expenses | 6,654,742 |
| | 22.1 | % | | 5,100,052 |
| | 17.7 | % | | 1,554,690 |
| | 30.5 | % | Total operating expenses | 23,900 | | | 23.3 | % | | 18,459 | | | 20.6 | % | | 5,441 | | | 29.5 | % |
Operating income | 3,971,271 |
| | 13.2 | % | | 3,464,788 |
| | 12.0 | % | | 506,483 |
| | 14.6 | % | Operating income | 17,629 | | | 17.2 | % | | 17,307 | | | 19.3 | % | | 322 | | | 1.9 | % |
Other expenses | 25,556 |
| | 0.1 | % | | 103,635 |
| | 0.4 | % | | (78,079 | ) | | (75.3 | )% | Other expenses | 483 | | | 0.5 | % | | 763 | | | 0.9 | % | | (280) | | | (36.7) | % |
Income tax | 938,405 |
| | 3.1 | % | | 808,011 |
| | 2.8 | % | | 130,394 |
| | 16.1 | % | Income tax | 3,490 | | | 3.4 | % | | 3,226 | | | 3.6 | % | | 264 | | | 8.2 | % |
Net income | $ | 3,007,310 |
| | 10.0 | % | | $ | 2,553,142 |
| | 8.9 | % | | $ | 454,168 |
| | 17.8 | % | Net income | $ | 13,656 | | | 13.3 | % | | $ | 13,318 | | | 14.8 | % | | $ | 338 | | | 2.5 | % |
| | | Six Months Ended June 30, 2019 | | % of Total Revenue | | Six Months Ended June 30, 2018 | | % of Total Revenue | | $ Change | | % Change | | Nine Months Ended September 30, 2023 | | % of Total Revenue | | Nine Months Ended September 30, 2022 | | % of Total Revenue | | $ Change | | % Change |
Total revenue | $ | 54,819,600 |
| | 100.0 | % | | $ | 53,912,410 |
| | 100.0 | % | | $ | 907,190 |
| | 1.7 | % | Total revenue | $ | 290,755 | | | 100.0 | % | | $ | 245,512 | | | 100.0 | % | | $ | 45,243 | | | 18.4 | % |
Total cost of sales | 36,043,507 |
| | 65.7 | % | | 37,742,426 |
| | 70.0 | % | | (1,698,919 | ) | | (4.5 | )% | Total cost of sales | 169,273 | | | 58.2 | % | | 149,046 | | | 60.7 | % | | 20,227 | | | 13.6 | % |
Gross margin | 18,776,093 |
| | 34.3 | % | | 16,169,984 |
| | 30.0 | % | | 2,606,109 |
| | 16.1 | % | Gross margin | 121,482 | | | 41.8 | % | | 96,466 | | | 39.3 | % | | 25,016 | | | 25.9 | % |
Total operating expenses | 12,331,799 |
| | 22.5 | % | | 9,931,748 |
| | 18.4 | % | | 2,400,051 |
| | 24.2 | % | Total operating expenses | 68,734 | | | 23.6 | % | | 53,374 | | | 21.7 | % | | 15,360 | | | 28.8 | % |
Operating income | 6,444,294 |
| | 11.8 | % | | 6,238,236 |
| | 11.6 | % | | 206,058 |
| | 3.3 | % | Operating income | 52,748 | | | 18.1 | % | | 43,092 | | | 17.6 | % | | 9,656 | | | 22.4 | % |
Other expenses | 72,688 |
| | 0.1 | % | | 127,208 |
| | 0.2 | % | | (54,520 | ) | | (42.9 | )% | Other expenses | 1,365 | | | 0.5 | % | | 1,766 | | | 0.7 | % | | (401) | | | (22.7) | % |
Income tax | 1,504,293 |
| | 2.7 | % | | 1,469,073 |
| | 2.7 | % | | 35,220 |
| | 2.4 | % | Income tax | 10,553 | | | 3.6 | % | | 8,302 | | | 3.4 | % | | 2,251 | | | 27.1 | % |
Net income | $ | 4,867,313 |
| | 8.9 | % | | $ | 4,641,955 |
| | 8.6 | % | | $ | 225,358 |
| | 4.9 | % | Net income | $ | 40,830 | | | 14.0 | % | | $ | 33,024 | | | 13.5 | % | | $ | 7,806 | | | 23.6 | % |
The following tables summarize consolidated revenue results for the three and sixnine months ended JuneSeptember 30, 20192023 and 2018:2022 (dollars in thousands):
| | | Three Months Ended June 30, | | % | | % of Total Revenue | | Three Months Ended September 30, | | % | | % of Total Revenue |
| 2019 | | 2018 | | Inc (Dec) | | 2019 | | 2018 | | 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product Revenue | | | | | | | | | | Product Revenue | | | | | | | | | |
Paint protection film | $ | 21,166,420 |
| | $ | 21,922,607 |
| | (3.4 | )% | | 70.3 | % | | 76.1 | % | Paint protection film | $ | 58,977 | | | $ | 54,230 | | | 8.8 | % | | 57.4 | % | | 60.4 | % |
Window film | 3,171,155 |
| | 2,364,958 |
| | 34.1 | % | | 10.5 | % | | 8.2 | % | Window film | 18,762 | | | 15,391 | | | 21.9 | % | | 18.3 | % | | 17.1 | % |
Other | 1,087,914 |
| | 701,315 |
| | 55.1 | % | | 3.6 | % | | 2.4 | % | Other | 3,386 | | | 2,995 | | | 13.1 | % | | 3.3 | % | | 3.4 | % |
Total | $ | 25,425,489 |
| | $ | 24,988,880 |
| | 1.7 | % | | 84.5 | % | | 86.8 | % | Total | $ | 81,125 | | | $ | 72,616 | | | 11.7 | % | | 79.0 | % | | 80.9 | % |
| | | | | | | | | | | | | | | | | | | |
Service Revenue | | | | | | | | | | Service Revenue | |
Software | $ | 775,745 |
| | $ | 627,283 |
| | 23.7 | % | | 2.6 | % | | 2.2 | % | Software | $ | 1,652 | | | $ | 1,351 | | | 22.3 | % | | 1.6 | % | | 1.5 | % |
Cutbank credits | 2,064,962 |
| | 1,725,240 |
| | 19.7 | % | | 6.9 | % | | 6.0 | % | Cutbank credits | 4,524 | | | 4,352 | | | 4.0 | % | | 4.4 | % | | 4.8 | % |
Installation labor | 1,647,954 |
| | 1,334,035 |
| | 23.5 | % | | 5.5 | % | | 4.6 | % | Installation labor | 14,852 | | | 11,067 | | | 34.2 | % | | 14.5 | % | | 12.3 | % |
Training | 180,004 |
| | 115,453 |
| | 55.9 | % | | 0.6 | % | | 0.4 | % | |
Training and other | | Training and other | 524 | | | 372 | | | 40.9 | % | | 0.5 | % | | 0.5 | % |
Total | $ | 4,668,665 |
| | $ | 3,802,011 |
| | 22.8 | % | | 15.5 | % | | 13.2 | % | Total | $ | 21,552 | | | $ | 17,142 | | | 25.7 | % | | 21.0 | % | | 19.1 | % |
| | | | | | | | | | | | | | | | | | | |
Total | $ | 30,094,154 |
| | $ | 28,790,891 |
| | 4.5 | % | | 100.0 | % | | 100.0 | % | Total | $ | 102,677 | | | $ | 89,758 | | | 14.4 | % | | 100.0 | % | | 100.0 | % |
| | | Six Months Ended June 30, | | % | | % of Total Revenue | | Nine Months Ended September 30, | | % | | % of Total Revenue |
| 2019 | | 2018 | | Inc (Dec) | | 2019 | | 2018 | | 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product Revenue | | | | | | | | | | Product Revenue | | | | | | | | | |
Paint protection film | $ | 39,622,775 |
| | $ | 42,138,754 |
| | (6.0 | )% | | 72.3 | % | | 78.2 | % | Paint protection film | $ | 165,016 | | | $ | 146,465 | | | 12.7 | % | | 56.8 | % | | 59.7 | % |
Window film | 5,004,071 |
| | 3,536,815 |
| | 41.5 | % | | 9.1 | % | | 6.6 | % | Window film | 54,055 | | | 42,711 | | | 26.6 | % | | 18.6 | % | | 17.4 | % |
Other | 1,853,366 |
| | 1,407,552 |
| | 31.7 | % | | 3.4 | % | | 2.5 | % | Other | 10,268 | | | 8,577 | | | 19.7 | % | | 3.5 | % | | 3.4 | % |
Total | $ | 46,480,212 |
| | $ | 47,083,121 |
| | (1.3 | )% | | 84.8 | % | | 87.3 | % | Total | $ | 229,339 | | | $ | 197,753 | | | 16.0 | % | | 78.9 | % | | 80.5 | % |
| | | | | | | | | | | | | | | | | | | |
Service Revenue | | | | | | | | | | Service Revenue | |
Software | $ | 1,519,513 |
| | $ | 1,233,086 |
| | 23.2 | % | | 2.8 | % | | 2.3 | % | Software | $ | 4,656 | | | $ | 3,804 | | | 22.4 | % | | 1.6 | % | | 1.5 | % |
Cutbank credits | 3,530,096 |
| | 2,942,402 |
| | 20.0 | % | | 6.4 | % | | 5.5 | % | Cutbank credits | 13,253 | | | 11,459 | | | 15.7 | % | | 4.6 | % | | 4.7 | % |
Installation labor | 2,946,343 |
| | 2,440,003 |
| | 20.8 | % | | 5.4 | % | | 4.5 | % | Installation labor | 41,781 | | | 31,371 | | | 33.2 | % | | 14.4 | % | | 12.8 | % |
Training | 343,436 |
| | 213,798 |
| | 60.6 | % | | 0.6 | % | | 0.4 | % | |
Training and other | | Training and other | 1,726 | | | 1,125 | | | 53.4 | % | | 0.5 | % | | 0.5 | % |
Total | $ | 8,339,388 |
| | $ | 6,829,289 |
| | 22.1 | % | | 15.2 | % | | 12.7 | % | Total | $ | 61,416 | | | $ | 47,759 | | | 28.6 | % | | 21.1 | % | | 19.5 | % |
| | | | | | | | | | | | | | | | | | | |
Total | $ | 54,819,600 |
| | $ | 53,912,410 |
| | 1.7 | % | | 100.0 | % | | 100.0 | % | Total | $ | 290,755 | | | $ | 245,512 | | | 18.4 | % | | 100.0 | % | | 100.0 | % |
Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following tables representsrepresent our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the three and sixnine months ended JuneSeptember 30, 20192023 and 2018:2022 (dollars in thousands):
| | | Three Months Ended June 30, | | % | | % of Total Revenue | | Three Months Ended September 30, | | % | | % of Total Revenue |
| 2019 | | 2018 | | Inc (Dec) | | 2019 | | 2018 | | 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
United States | $ | 16,497,347 |
| | $ | 10,606,298 |
| | 55.5 | % | | 54.8 | % | | 36.8 | % | United States | $ | 59,002 | | | $ | 51,522 | | | 14.5 | % | | 57.5 | % | | 57.4 | % |
Canada | | Canada | 11,471 | | | 11,046 | | | 3.8 | % | | 11.2 | % | | 12.3 | % |
China | 3,127,723 |
| | 9,429,142 |
| | (66.8 | )% | | 10.4 | % | | 32.8 | % | China | 10,242 | | | 11,009 | | | (7.0) | % | | 10.0 | % | | 12.3 | % |
Canada | 5,217,535 |
| | 4,416,576 |
| | 18.1 | % | | 17.3 | % | | 15.3 | % | |
Continental Europe | 1,974,328 |
| | 1,725,472 |
| | 14.4 | % | | 6.6 | % | | 6.0 | % | Continental Europe | 8,705 | | | 6,065 | | | 43.5 | % | | 8.5 | % | | 6.8 | % |
Middle East/Africa | | Middle East/Africa | 3,909 | | | 3,322 | | | 17.7 | % | | 3.8 | % | | 3.7 | % |
United Kingdom | 926,925 |
| | 811,689 |
| | 14.2 | % | | 3.1 | % | | 2.8 | % | United Kingdom | 3,499 | | | 2,482 | | | 41.0 | % | | 3.4 | % | | 2.8 | % |
Asia Pacific | 1,059,560 |
| | 704,375 |
| | 50.4 | % | | 3.5 | % | | 2.4 | % | Asia Pacific | 3,233 | | | 2,540 | | | 27.3 | % | | 3.1 | % | | 2.8 | % |
Latin America | 512,680 |
| | 426,784 |
| | 20.1 | % | | 1.7 | % | | 1.5 | % | Latin America | 2,325 | | | 1,468 | | | 58.4 | % | | 2.3 | % | | 1.6 | % |
Middle East/Africa | 720,347 |
| | 660,460 |
| | 9.1 | % | | 2.4 | % | | 2.3 | % | |
Other | 57,709 |
| | 10,095 |
| | 471.7 | % | | 0.2 | % | | 0.1 | % | Other | 291 | | | 304 | | | (4.3) | % | | 0.2 | % | | 0.3 | % |
Total | $ | 30,094,154 |
| | $ | 28,790,891 |
| | 4.5 | % | | 100.0 | % | | 100.0 | % | Total | $ | 102,677 | | | $ | 89,758 | | | 14.4 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | % | | % of Total Revenue |
| 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
United States | $ | 169,228 | | | $ | 142,275 | | | 18.9 | % | | 58.2 | % | | 58.0 | % |
Canada | 31,914 | | | 29,773 | | | 7.2 | % | | 11.0 | % | | 12.1 | % |
China | 24,992 | | | 27,772 | | | (10.0) | % | | 8.6 | % | | 11.3 | % |
Continental Europe | 26,354 | | | 18,671 | | | 41.1 | % | | 9.1 | % | | 7.6 | % |
Middle East/Africa | 11,514 | | | 8,025 | | | 43.5 | % | | 4.0 | % | | 3.3 | % |
United Kingdom | 10,220 | | | 7,505 | | | 36.2 | % | | 3.5 | % | | 3.1 | % |
Asia Pacific | 9,192 | | | 6,549 | | | 40.4 | % | | 3.2 | % | | 2.7 | % |
Latin America | 6,617 | | | 4,033 | | | 64.1 | % | | 2.3 | % | | 1.6 | % |
Other | 724 | | | 909 | | | (20.4) | % | | 0.2 | % | | 0.3 | % |
Total | $ | 290,755 | | | $ | 245,512 | | | 18.4 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | % | | % of Total Revenue |
| 2019 | | 2018 | | Inc (Dec) | | 2019 | | 2018 |
United States | $ | 29,007,097 |
| | $ | 19,813,712 |
| | 46.4 | % | | 52.9 | % | | 36.8 | % |
China | 7,646,920 |
| | 17,254,006 |
| | (55.7 | )% | | 13.9 | % | | 32.0 | % |
Canada | 8,315,899 |
| | 8,252,301 |
| | 0.8 | % | | 15.2 | % | | 15.3 | % |
Continental Europe | 3,396,060 |
| | 3,003,471 |
| | 13.1 | % | | 6.2 | % | | 5.6 | % |
United Kingdom | 1,810,283 |
| | 1,435,633 |
| | 26.1 | % | | 3.3 | % | | 2.7 | % |
Asia Pacific | 1,931,518 |
| | 1,218,314 |
| | 58.5 | % | | 3.5 | % | | 2.3 | % |
Latin America | 998,809 |
| | 1,231,238 |
| | (18.9 | )% | | 1.8 | % | | 2.3 | % |
Middle East/Africa | 1,603,479 |
| | 1,586,003 |
| | 1.1 | % | | 2.9 | % | | 2.9 | % |
Other | 109,535 |
| | 117,732 |
| | (7.0 | )% | | 0.3 | % | | 0.1 | % |
Total | $ | 54,819,600 |
| | $ | 53,912,410 |
| | 1.7 | % | | 100.0 | % | | 100.0 | % |
Product Revenue. Product revenue for the three months ended September 30, 2023 increased 1.7%11.7% over the three months ended JuneSeptember 30, 2018 and decreased 1.3% over the six months ended June 30, 2018.2022. Product revenue represented 84.5% and 84.8%79.0% of our total revenue forcompared to 80.9% in the three and six months ended JuneSeptember 30, 2019, respectively.2022. Revenue from our paint protection film product line decreased 3.4% and 6.0%, respectively, forincreased 8.8% over the three and six months ended JuneSeptember 30, 2019.2022. Paint protection film sales represented 70.3%57.4% and 76.1%60.4% of our total consolidated revenues for the three months ended JuneSeptember 30, 20192023 and 2018, respectively, and 72.3% and 78.2% of our2022, respectively. The total consolidated revenues for the six months ended June 30, 2019 and 2018, respectively. These decreasesincrease in paint protection film sales were primarily attributablewas due to decreasesincreased demand for our film products across multiple regions partially offset by a decrease in sales to China which were partially offset by increases in product sales in other geographic areas includingresulting from lingering impacts of the United States, continental Europe, United Kingdom and Asia Pacific. The decreases in sales to China were primarily due moderation of sales to China in the three and six months ended June 30, 2019 after rapid acceleration in the same periods of 2018, and increases in competition in this region. COVID-19 pandemic.
Revenue from our window film product line grew 34.1% and 41.5%21.9% for the three and six months ended JuneSeptember 30, 2019.2023 compared to the three months ended September 30, 2022. Window film sales represented 10.5%18.3% and 8.2%17.1% of our total consolidated revenues for the three months ended JuneSeptember 30, 20192023 and 2018, respectively,2022, respectively. This increase was driven by increased demand resulting from increased channel focus and 9.1%increased product adoption in multiple regions. Architectural window film revenue increased 49.9% compared to the three months ended September 30, 2022, to $2.7 million, and 6.6%represented 14.4% of total window film revenue and 2.6% of total revenue for the three months ended September 30, 2023. This increase was driven by demand for our architectural window films as we continue to pursue this large addressable market.
Other product revenue for the three months ended September 30, 2023 increased 13.1% compared to the three months ended September 30, 2022 due mainly to continued demand for non-film related
products such as ceramic coating, plotters, chemicals, and other film installation tools and accessories. Our FUSION ceramic coating product revenue grew 34.6% compared to the three months ended September 30, 2022 to $1.5 million. This increase was driven primarily by increased channel focus and increased demand for our ceramic coating products.
Geographically, we saw revenue growth in most regions during the three months ended September 30, 2023. The U.S. region, our largest, grew 14.5%, over the three months ended September 30, 2022, due primarily to increasing attach rates. Outside the U.S., most regions saw strong growth due primarily to increased product awareness and attach rates.
Product revenue for the nine months ended September 30, 2023 increased 16.0% over the nine months ended September 30, 2022. Product revenue represented 78.9% of our consolidated revenue compared to 80.5% in the nine months ended September 30, 2022. Revenue from our paint protection film product line increased 12.7% over the nine months ended September 30, 2022. Paint protection film sales represented 56.8% and 59.7% of our consolidated revenues for the nine months ended September 30, 2023 and 2022, respectively. The increase in paint protection film sales was due to additional sales to both new and existing customers across multiple geographical markets.
Revenue from our window film grew 26.6% compared to the nine months ended September 30, 2022. Window film sales represented 18.6% and 17.4% of our total consolidated revenues for the sixnine months ended JuneSeptember 30, 20192023 and 2018,2022, respectively. This increase was duedriven by increased demand resulting from increased channel focus and increased product adoption in multiple regions. Architectural window film revenue increased 42.2% compared to continued strongthe nine months ended September 30, 2022 to $6.4 million and represented 11.9% of total window film revenue and 2.2% of total revenue. This increase was driven by increased demand for our architectural window films.
Other product revenue for the nine months ended September 30, 2023 increased 19.7% compared to the nine months ended September 30, 2022 due mainly to continued demand for non-film related products such as ceramic coating, plotters, chemicals, and other film products throughoutinstallation tools and accessories. Our FUSION ceramic coating product revenue grew 53.6% compared to the world.nine months ended September 30, 2022 to $4.5 million. This increase was driven primarily by increased channel focus and increased demand for our ceramic coating products.
Geographically, we saw revenue growth in most regions during the nine months ended September 30, 2023. The U.S. region, our largest region, grew 18.9% due primarily to increasing attach rates. Outside the U.S., most regions saw strong growth due primarily to increased product awareness and attach rates.
Service revenue. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue, which represents per-cut fees charged for 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, revenue from our dealership services business and revenue from training services provided to our customers.
Service revenue grew 22.8% and 22.1%25.7% over the servicethree months ended September 30, 2022. Within this category, software revenue forincreased 22.3% over the three and six months ended JuneSeptember 30, 2018, respectively. Service2022. This increase was due to an increase in total subscribers to our DAP software. Cutbank credit revenue represented 15.5% and 13.2% of our total consolidated revenueincreased 4.0% from the three months ended JuneSeptember 30, 2019 and 2018, respectively, and 15.2% and 12.7% of our total consolidated2022 due to associated product revenue fromgrowth. Installation labor revenue increased 34.2% over the sixthree months ended JuneSeptember 30, 20192022 due mainly to increased demand in our Company-owned installation facilities and 2018, respectively. Softwareacross our dealership service and OEM networks.
Service revenue for the nine months ended September 30, 2023 grew 28.6% over the nine months ended September 30, 2022. Within this category, software revenue grew 22.4% over the nine months ended September 30, 2022. This increase was due to an increase in total subscribers to our DAP
software. Cutbank credit revenue increased 23.7%15.7% over the nine months ended September 30, 2022 due to associated product revenue growth. Installation labor increased 33.2% over the nine months ended September 30, 2022 due mainly to increased demand in our Company-owned installation facilities and 23.2% fromacross our dealership service and OEM networks.
Total installation revenue (labor and product combined) increased 34.2% over the three and six months ended JuneSeptember 30, 2018. Software revenue2022. This represented 2.6%17.2% and 2.2%14.7% of our total consolidated revenue for the three months ended JuneSeptember 30, 20192023 and 2018, respectively,2022, respectively. This increase was primarily due to increased demand in our Company-owned installation centers and 2.8%across our dealership service and 2.3%OEM networks. Total installation revenue increased 33.2% over the nine months ended September 30, 2022. This represented 17.1% and 15.2% of our total consolidated revenue for the sixnine months ended JuneSeptember 30, 20192023 and 2018,2022, respectively. The increases were due mainly to increases in total subscribers resulting from increased demand
for our DAP software. Cutbank credit revenue grew 19.7% and 20.0% from the three and six months ended June 30, 2018, respectively. Cutbank sales represented 6.9% and 6.0% of our total consolidated revenue for the three months ended June 30, 2019 and 2018, respectively, and 6.4% and 5.5% of our total consolidated revenue for the six months ended June 30, 2019 and 2018, respectively. These increases were due mainly to our growth in product revenue in the United States. Software and cutbank credit revenue combined grew 20.8% and 20.9% for the three and six months ended June 30, 2019, due mainly to the increased demand for our products and services. Installation labor revenue increased 23.5% and 20.8% from the three and six months ended June 30, 2018, due mainly to increases in labor revenue related to our 2018 acquisitions. Training revenue increased 55.9% and 60.6% from the three and six months ended June 30, 2018, respectively,This increase was primarily due to increased demand for training from new and existing customers.
Total installation revenue (labor and product combined) atin our Company-owned installation centers for the three and six months ended June 30, 2019 increased 23.5%across our dealership service and 20.8%, respectively, over the three and six months ended June 30, 2018. This represented 6.5% and 5.5% of our total consolidated revenue for the three months ended June 30, 2019 and 2018, respectively, and 6.4% and 5.4% of our total consolidated revenue for the six months ended June 30, 2019 and 2018, respectively.OEM networks. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased 2.9% in11.3% over the three months ended JuneSeptember 30, 2019 versus the three months ended June 30, 2018 due mainly to strong sales growth in the United States, continental Europe, United Kingdom and Asia Pacific, partially offset by an overall decline in China’s product sales.2022. Adjusted product revenue forincreased 16.0% versus the sixnine months ended JuneSeptember 30, 20192022. For both the three and nine month periods, this growth was relatively flat compareddue to the six months ended June 30, 2018.sustained demand for our various product lines.
Cost of Sales
Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, personnel costs related to warehouse personnel, shipping costs, warranty costs and other related costs to provide products to our customers. Cost of service includes the labor costs associated with installation of product in our Company-ownedinstallation facilities, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers. Cost of product sales in
Product costs for the three and six months ended JuneSeptember 30, 2019 decreased 5.2% and 6.0%2023 increased 9.9% over the three and six months ended JuneSeptember 30, 2018, respectively2022. Cost of product sales represented 61.6%50.5% and 67.9%52.6% of total revenue in the three months ended JuneSeptember 30, 20192023 and 2018, respectively, and 62.5% and 67.5% of total revenue in the six months ended June 30, 2019 and 2018,2022, respectively. Cost of service revenue grew 37.8% and 35.4%37.0% during the three and six months ended JuneSeptember 30, 2019, respectively, due mainly2023. For both product and service, cost of sales increased commensurate with the related growth in revenue. Refer to the Gross Margin section below for discussion of this cost relative to revenue.
Product costs for the nine months ended September 30, 2023 increased installation labor costs associated10.8% over the nine months ended September 30, 2022. Cost of product sales represented 49.4% and 52.8% of total revenue in the nine months ended September 30, 2023 and 2022, respectively. Cost of service revenue grew 32.3% during the nine months ended September 30, 2023. For both product and service, cost of sales increased commensurate with increased installation sales.the related growth in revenue. Refer to the Gross Margin section below for discussion of this cost relative to revenue.
Gross Margin
Gross margin for the three and six months ended JuneSeptember 30, 20192023 grew approximately $2.1 million, or 24.1%, and $2.6$5.8 million, or 16.1%, fromcompared to the three and six months ended JuneSeptember 30, 2018, respectively.2022. For the three and six months ended JuneSeptember 30, 2019,2023, gross margin represented 35.3% and 34.3%40.4% of revenue respectively. compared to 39.8% for the three months ended September 30, 2022
Gross margin for the nine months ended September 30, 2023 grew approximately $25.0 million, or 25.9%, compared to the nine months ended September 30, 2022. For the nine months ended September 30, 2023, gross margin represented 41.8% of revenue compared to 39.3% for the nine months ended September 30, 2022.
The following tables summarizessummarize gross margin for productproducts and services for the three and sixnine months ended JuneSeptember 30, 20192023 and 2018:2022 (dollars in thousands):
| | | Three Months Ended June 30, | | % | | % of Category Revenue | | Three Months Ended September 30, | | % | | % of Category Revenue |
| 2019 | | 2018 | | Inc (Dec) | | 2019 | | 2018 | | 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product | $ | 6,874,459 |
| | $ | 5,428,560 |
| | 26.6 | % | | 27.0 | % | | 21.7 | % | Product | $ | 29,249 | | | $ | 25,391 | | | 15.2 | % | | 36.1 | % | | 35.0 | % |
Service | 3,751,554 |
| | 3,136,280 |
| | 19.6 | % | | 80.4 | % | | 82.5 | % | Service | 12,280 | | | 10,375 | | | 18.4 | % | | 57.0 | % | | 60.5 | % |
| | | | | | | | | | |
Total | $ | 10,626,013 |
| | $ | 8,564,840 |
| | 24.1 | % | | 35.3 | % | | 29.7 | % | Total | $ | 41,529 | | | $ | 35,766 | | | 16.1 | % | | 40.4 | % | | 39.8 | % |
| | | Six Months Ended June 30, | | % | | % of Category Revenue | | Nine Months Ended September 30, | | % | | % of Category Revenue |
| 2019 | | 2018 | | Inc (Dec) | | 2019 | | 2018 | | 2023 | | 2022 | | Inc (Dec) | | 2023 | | 2022 |
Product | $ | 12,241,149 |
| | $ | 10,672,965 |
| | 14.7 | % | | 26.3 | % | | 22.7 | % | Product | $ | 85,726 | | | $ | 68,107 | | | 25.9 | % | | 37.4 | % | | 34.4 | % |
Service | 6,534,944 |
| | 5,497,019 |
| | 18.9 | % | | 78.4 | % | | 80.5 | % | Service | 35,756 | | | 28,359 | | | 26.1 | % | | 58.2 | % | | 59.4 | % |
| | | | | | | | | | |
Total | $ | 18,776,093 |
| | $ | 16,169,984 |
| | 16.1 | % | | 34.3 | % | | 30.0 | % | Total | $ | 121,482 | | | $ | 96,466 | | | 25.9 | % | | 41.8 | % | | 39.3 | % |
Product gross margin for the three months ended JuneSeptember 30, 20192023 increased approximately $1.4$3.9 million, or 26.6%15.2%, over the three months ended JuneSeptember 30, 20182022 and represented 27.0%36.1% and 21.7%35.0% of total product revenue for the three months ended JuneSeptember 30, 20192023 and 2018,2022, respectively. This increase in margin was due primarily to decreases in product costs and improved operating leverage.
Product gross margin for the sixnine months ended JuneSeptember 30, 20192023 increased approximately $1.6$17.6 million, or 14.7%25.9%, over the sixnine months ended JuneSeptember 30, 20182022 and represented 26.3%37.4% and 22.7%34.4% of total product revenue for the sixnine months ended JuneSeptember 30, 20192023 and 2018,2022, respectively. The increasesThis increase in margin was due primarily to decreases in product gross margin percentages were primarily due to the lower percentage of sales to lower margin distributors (primarily our China distributor) compared to sales to higher margin non-distributors.costs and improved operating leverage.
Service gross margin increased approximately $0.6$1.9 million, and $1.0 million, respectively, or 19.6% and 18.9%18.4%, respectively, over the three and six months ended JuneSeptember 30, 2018.2022. This represented 80.4%57.0% and 82.5%60.5% of total service revenue for the three months ended JuneSeptember 30, 20192023 and 2018, respectively, and 78.4% and 80.5% of total service revenue for the six months ended June 30, 2019 and 2018,2022, respectively. The decrease in service gross margin percentage for these periods versus the prior year periodsthree months ended September 30, 2022 was primarily due to a higher percentage of lower margin installation labor costsservice revenue mix relative to other higher margin service revenue components.components in the prior year period.
Service gross margin increased approximately $7.4 million, or 26.1%, over the nine months ended September 30, 2022. This represented 58.2% and 59.4% of total service revenue for the nine months ended September 30, 2023 and 2022, respectively. This was primarily due to a higher percentage of lower margin service revenue mix relative to other higher margin service revenue components in the prior year period.
Operating Expenses
Sales and marketing expenses for the three and six months ended JuneSeptember 30, 20192023 increased 39.6% and 20.7%, respectively,22.8% compared to the same periodsperiod in 2018.2022. This increase was due to increased personnel and marketing costs incurred to support the ongoing growth of the business. These expenses represented 6.9%7.5% and 5.1%7.0% of total consolidated revenue for the three months ended JuneSeptember 30, 20192023 and 2018, respectively,2022, respectively.
For the nine months ended September 30, 2023, sales and 6.7%marketing expenses increased 21.8% compared to the same period in 2022. This increase was due to increased personnel and 5.6%marketing costs incurred to support the ongoing growth of the business. These expenses represented 7.8% and 7.5% of total consolidated revenue for the sixnine months ended JuneSeptember 30, 20192023 and 2018,2022, respectively. The increase was primarily due to $0.5 million in costs related to our annual dealer conference which was held in the first quarter in 2018 and in the second quarter in 2019.
General and administrative expenses grew approximately $1.0$4.0 million, and $1.8 million, respectively, during the three and six months ended June 30, 2019, or 26.8% and 25.7%, respectively,33.0% over the three and six months ended JuneSeptember 30, 2018.2022. This increase in cost was due primarily to increases in personnel, occupancy costs and professional fees to support our ongoing growth. These costs represented 15.3% 15.7%
and 12.6%13.6% of total consolidated revenue for the three months ended JuneSeptember 30, 20192023 and 2018, respectively,2022, respectively.
General and 15.8%administrative expenses grew approximately $11.3 million, or 32.5% over the nine months ended September 30, 2022. This increase in cost was due primarily to increases in personnel, occupancy costs and 12.8%professional fees to support our ongoing growth. These costs represented 15.9% and 14.2% of total consolidated revenue for the sixnine months ended JuneSeptember 30, 20192023 and 2018,2022, respectively. The increase was due mainly to increases in personnel, occupancy costs, information technology costs and research and development costs to support the on-going growth of the business and increases in professional fees due mainly to the ancillary costs related to our U.S. regulatory filings.
Income Tax Expense
Income tax expense for the three months ended JuneSeptember 30, 20192023 increased $0.1$0.3 million from the three months ended JuneSeptember 30, 2018, primarily due to increased profitability2022. Our effective tax rate was 20.4% for the three months ended JuneSeptember 30, 2019. 2023 compared with 19.5% for the three months ended September 30, 2022.
Income tax expense for the sixnine months ended JuneSeptember 30, 20192023 increased $2.3 million from the same period in 2022, Our effective tax rate was comparable to20.5% for the prior year period.
Net Incomenine months ended September 30, 2023 compared with 20.1% for the nine months ended September 30, 2022.
Net income for the three and six months ended JuneSeptember 30, 20192023 increased by $0.5 million2.5% to $3.0 million and by $0.2 million to $4.9 million, respectively, from$13.7 million.
Net income for the three and sixnine months ended JuneSeptember 30, 2018, due mainly2023 increased 23.6% to increased revenue and improved gross margins in each period.$40.8 million.
Liquidity and Capital Resources
TheOur primary sourcesources of liquidity for our business isare available cash and cash equivalents, cash flows provided by operations.operations and borrowings under our credit facilities. As of September 30, 2023, we had cash and cash equivalents of $10.4 million. For the nine months ended September 30, 2023, cash provided by operations was $38.5 million. We currently have $128.3 million of credit available ($125.0 million under the Credit Agreement and CAD $4.5 ($3.3 million) under our Canadian credit facility) to us under our committed credit facilities. We expect available cash, internally generated funds, and borrowings from our committed credit facilities to continue to have cash requirementsbe sufficient to support working capital needs, capital expenditures (including acquisitions), and to pay
interest andour debt service debt, if applicable. We believe we have the ability and sufficient capacity to meet these cash requirements by using available cash and internally generated funds and borrowing under committed credit facilities.obligations. We are focused on continuing to generate positive operating cash to fund our operational and capital investment initiatives. We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this report.
Operating activities. Cash flows provided by operations totaled approximately $3.1for the nine months ended September 30, 2023 was $38.5 million compared to $9.7 million during the nine months ended September 30, 2022. Included in cash provided from operating activities for the nine months ended September 30, 2023 was a one-time payment of $7.4 million related to an acquisition that closed in October (see Note 14). Excluding that payment, cash provided from operations would have been $45.9 million for the six months ended June 30, 2019, compared to $1.6 million for the six months ended June 30, 2018.2023 period. The increase was driven primarily by increasesdue mainly to growth in net income and accounts payable and accrued liabilities partially offset by increaseschanges in other working capital items including reductions in inventory purchases and accounts receivable. The increaseincreases in accounts payable and accrued liabilities was primarily due to timing of billings and payments to our suppliers in the normal course of business. The increase in accounts receivable was due primarily to the timing of collections. The increase in inventory was primarily due to planned increased inventory levels to facilitate inter-company shipping of product via lower cost ocean shipment versus higher cost air shipment.payment cycle timing.
Investing activities. Cash flows used in investing activities totaled approximately $0.9$10.2 million during the sixnine months ended JuneSeptember 30, 20192023 compared to $0.8$9.8 million during the sixnine months ended JuneSeptember 30, 2018.2022. This increase was due primarily due to increases in capital expenditures to support the on-going needs of the business.higher acquisition-related payments made during 2023.
Financing activities. Cash flows used in financing activities during the sixnine months ended JuneSeptember 30, 20192023 totaled approximately $0.7$26.2 million compared to $2.6 million incash flows provided by financing activities during the same period in 2018.the prior year of $0.7 million. This decreasechange was due mainlyprimarily to repayments made on our revolvingcommitted credit agreement duringfacility in 2023 as compared to borrowings in the 2018 period.prior year.
Debt and contingent obligations as of JuneSeptember 30, 20192023 and December 31, 20182022 totaled approximately $1.2$1.1 million and $1.8$27.0 million, respectively.
Future liquidity and capital resource requirements
We expect to fund ongoing operating expenses, capital expenditures, acquisitions, interest payments, tax payments, credit facility maturities, future lease obligations, and payments for other long-term liabilities with cash flow from operations and borrowings under our credit facilities. In the short-term, we are contractually obligated to make lease payments and make payments on contingent liabilities related to certain completed acquisitions in the event they are earned. In the long-term, we are contractually obligated to make lease payments, payments for contingent liabilities, and repayments of borrowings on our line of credit. We believe that we have sufficient cash and cash equivalents, as well as borrowing capacity, to cover our estimated short-term and long-term funding needs.
Credit Facilities
Our credit facilities consist of a $8.5 million revolving line of credit agreement with The Bank of San Antonio andCompany has a revolving credit facility maintained by our Canadian subsidiary. The Bankproviding for secured revolving loans and letters of San Antonio facility is utilizedcredit in an aggregate amount of up to fund our working capital needs and is secured by a security interest in substantially all of our current and future assets. The line has a variable interest rate of the Wall Street Journal prime rate plus 0.75% with a floor of 4.25% and matures in May 2020. The interest rate at June 30, 2019 and December 31, 2018 was 6.25% and 6.25%, respectively.$125.0 million. As of JuneSeptember 30, 2019 and December 31, 2018,2023, no balance was outstanding under this agreement. Borrowings under this facility are subject to the terms of the Credit Agreement.
Borrowings under the Credit Agreement bear interest, at XPEL’s option, at a rate equal to either (a) Base Rate or (b) Adjusted Term SOFR. In addition to the applicable interest rate, the Credit Agreement includes a commitment fee ranging from 0.20% to 0.25% per annum for the unused portion of the aggregate commitment and an applicable margin ranging from 0.00% to 0.50% for Base Rate Loans and 1.00% to 1.50% for Adjusted Term SOFR Loans. At September 30, 2023, these rates were 8.5% and 6.3%, respectively. Both the margin applicable to the interest rate and the commitment fee are dependent on XPEL’s Consolidated Total Leverage Ratio. The Credit Agreement's maturity date is April 6, 2026. All capitalized terms in this line.description of the credit facility that are not otherwise defined in this report have the meaning assigned to them in the Credit Agreement.
Obligations under the Credit Agreement are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in all of XPEL’s material property and assets.
The credit agreement contains customaryterms of the Credit Agreement include certain affirmative and negative covenants including covenants relatingthat require, among other things, XPEL to complyingmaintain legal existence and remain in good standing, comply with applicable laws, delivery ofmaintain accounting records, deliver financial statements payment of taxes and maintaining insurance. The credit agreement also requires that XPEL must maintain debt service coverage (EBITDA divided by the current portion of long-term debt plus interest) of 1.25:1 and debt to tangible net worth of 4.0:1certifications on a rolling four quarter basis. The credit agreement also contains customary events of default including the failuretimely basis, pay taxes as required by law, and maintain insurance coverage, as well as to make payments of principal and interests, the breach of any covenants, the occurrence of a material adverse change,forgo certain specified future activities that might otherwise encumber XPEL and certain bankruptcy and insolvency events. customary covenants. The Credit Agreement provides for two financial covenants, as follows.
As of June 30, 2019, the last day of each fiscal quarter:
1.XPEL shall not allow its Consolidated Total Leverage Ratio to exceed 3.50 to 1.00, and
2.XPEL shall not allow its Consolidated Interest Coverage Ratio to be less than 3.00 to 1.00.
The Company wasalso has a CAD $4.5 million revolving credit facility through a financial institution in compliance with all covenants.
During 2018,Canada, as maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., entered into aXPEL. This Canadian Dollar (“CAD”) $4.5 million revolving credit facility through HSBC Bank Canada. This facility is utilized to fund ourthe Company's working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus .25%0.25% per annum and is guaranteed by the parent company. As of JuneSeptember 30, 20192023 and December 31, 2018,2022, no balance was outstanding on this facility.line of credit.
Contractual Obligations
There has been no material change to the Company’s contractual obligations as described in the Company’s Amendment No. 2 to Form 10 filed on May 30, 2019.
Critical Accounting Policies
There have been no material changes to the Company’s critical accounting policies and estimates from the information provided in the Company’s Amendment No. 2 to Form 10 filed on May 30, 2019.Annual Report.
Related Party Relationships
There are no family relationships between or among any of our directors or executive officers. There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.
Off-Balance Sheet Arrangements
As of June 30, 2019 and December 31, 2018, we did not have any relationships with unconsolidated organizations or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements. We do not engage in off-balance sheet financing arrangements. In addition, we do not engaged in trading activities involving non-exchange contracts.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have operations that expose us to currency risk in the British Pound Sterling, the Canadian Dollar, the Euro, the Mexican Peso, and the New Taiwanese Dollar, and the Australian Dollar. Amounts invested in our foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as accumulated other comprehensive income (loss),loss, a component of stockholders’ equity in our condensed consolidated balance sheets. We do not currently hedge our exposure to potential foreign currency translation adjustments.
If we borrowBorrowings under our revolving lines of credit we will beare subject to market risk resulting from changes in interest rates related to our floating rate bank credit facility. If we were to makefacilities. For such borrowings, a hypothetical 100200 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.
If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act)("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO)(“CEO”) and Chief Financial Officer (CFO)(“CFO”), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on such
evaluation, our CEO and CFO have each concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
From time to time, we are made parties to actions filed or have 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 1A. Risk Factors
In additionThere have been no material changes to the other information set forthrisk factors disclosed in this report, you should carefully considerPart I, Item IA of the factors discussed in “Item 1A Risk Factors” in our Amendment No. 2 to Form 10 filed with the SEC on May 30, 2019, which could materially affect our business, financial condition or future results. The risks described in our Amendment No 2 to Form 10 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the six months ended June 30, 2019, the Company did not issue any shares of its common stock or other equity securities of the Company that were not registered under the Securities Act of 1933, as amended.None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.On August 31, 2023, Richard Crumly, Director of the Company, adopted a 10b5-1 plan. This plan allows for Mr. Crumly's orderly disposition of 316,912 shares of the Company's Common Stock during the period from December 1, 2023 to December 31, 2024.
Item 6. Exhibits
The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:
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Exhibit No. | Description | Method of Filing |
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Exhibit No. | Description | Method of Filing |
31.1 | | Filed herewith |
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31.2 | | Filed herewith |
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32.1 |
| Furnished herewith |
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32.2 | | Furnished herewith |
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101 | The following materials from XPEL’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019,2021, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Consolidated Balance Sheets, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income, (iv) the unaudited Consolidated Statements of Equity, (v) the unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | XPEL, Inc. (Registrant) |
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| By: | /s/ Barry R. Wood | |
| | Barry R. Wood | |
| | Senior Vice President and Chief Financial Officer | |
August 21, 2019November 8, 2023 | | (Authorized Officer and Principal Financial and Accounting Officer) | |