10-Q 1 xpel-20220930.htm 10-Q xpel-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2022

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from         to
Commission file number 001-38858
XPEL, INC.
(Exact name of registrant as specified in its charter)
xpel-20220930_g1.jpg
Nevada
20-1117381
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3251 I-35
San Antonio
Texas
78219
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code: (210) 678-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.001 per shareXPELThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
        
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ☐    No  
The registrant had 27,616,064 shares of common stock outstanding as of November 9, 2022.




TABLE OF CONTENTS
Page




Part I. Financial Information

Item 1. Financial Statements

XPEL, INC.
Condensed Consolidated Balance Sheets
(In thousands except share and per share data)
(Unaudited)
(Audited)
September 30, 2022December 31, 2021
Assets
Current
Cash and cash equivalents
$10,245 $9,644 
Accounts receivable, net17,944 13,159 
Inventory, net69,388 51,936 
Prepaid expenses and other current assets7,065 3,672 
Income tax receivable 617 
Total current assets
104,642 79,028 
Property and equipment, net
12,658 9,898 
Right-of-use lease assets15,194 12,910 
Intangible assets, net29,426 32,733 
Other non-current assets921 791 
Goodwill25,417 25,655 
Total assets$188,258 $161,015 
Liabilities
Current
Current portion of notes payable140375
Current portion lease liabilities3,1552,978
Accounts payable and accrued liabilities28,04832,915
Income tax payable472  
Total current liabilities31,81536,268
Deferred tax liability, net2,5022,748
Other long-term liabilities8992,631
Borrowings on line of credit26,00025,000
Non-current portion of lease liabilities12,089 9,830
Non-current portion of notes payable 76 
Total liabilities73,305 76,553 
Commitments and Contingencies (Note 11)
Stockholders’ equity
Preferred stock, $0.001 par value; authorized 10,000,000; none issued and outstanding
  
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,616,064 issued and outstanding
28 28 
Additional paid-in-capital10,869 10,581 
Accumulated other comprehensive loss(3,411)(590)
Retained earnings107,467 74,443 
Total stockholders’ equity114,953 84,462 
Total liabilities and stockholders’ equity$188,258 $161,015 
See notes to condensed consolidated financial statements.
1

XPEL, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In thousands except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Revenue
Product revenue
$72,616 $56,996 $197,753 $160,595 
Service revenue17,142 11,533 47,759 28,536 
Total revenue
89,758 68,529 245,512 189,131 
Cost of Sales
Cost of product sales47,225 39,701 129,646 111,839 
Cost of service6,767 4,374 19,400 9,303 
Total cost of sales53,992 44,075 149,046 121,142 
Gross Margin35,766 24,454 96,466 67,989 
Operating Expenses
Sales and marketing6,297 4,904 18,515 12,978 
General and administrative12,162 9,183 34,859 23,423 
Total operating expenses
18,459 14,087 53,374 36,401 
Operating Income17,307 10,367 43,092 31,588 
Interest expense391 46 933 143 
Foreign currency exchange loss372 149 833 122 
Income before income taxes16,544 10,172 41,326 31,323 
Income tax expense3,226 1,841 8,302 5,959 
Net income$13,318 $8,331 $33,024 $25,364 
Earnings per share
Basic$0.48 $0.30 $1.20 $0.92 
Diluted$0.48 $0.30 $1.20 $0.92 
Weighted Average Number of Common Shares
Basic27,616 27,613 27,614 27,613 
Diluted27,620 27,613 27,615 27,613 
See notes to condensed consolidated financial statements.
2

XPEL, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Other comprehensive income
Net income
$13,318 $8,331 $33,024 $25,364 
Foreign currency translation(1,551)(433)(2,821)(416)
Total comprehensive income$11,767 $7,898 $30,203 $24,948 
See notes to condensed consolidated financial statements.
3

XPEL, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In thousands)

Stockholders' Equity - Three Months Ended September 30
Common StockAdditional Paid-in-CapitalRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 202127,613 $28 $10,412 $59,909 $83 $70,432 
Net income— — — 8,331 — 8,331 
Foreign currency translation— — — — (433)(433)
Stock-based compensation— — 77 — — 77 
Balance as of September 30, 202127,613 28 10,489 68,240 (350)78,407 
Balance as of June 30, 202227,613 28 10,760 94,149 (1,860)103,077 
Net income— — — 13,318 — 13,318 
Foreign currency translation— — — — (1,551)(1,551)
Stock-based compensation3 — 109 — — 109 
Balance as of September 30, 202227,616 $28 $10,869 $107,467 $(3,411)$114,953 
Stockholders' Equity - Nine Months Ended September 30
Common StockAdditional Paid-in-CapitalRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total Stockholders’ Equity
SharesAmount
Balance as of December 31, 202027,613 $28 $10,412 $42,876 $66 $53,382 
Net income— — — 25,364 — 25,364 
Other comprehensive (loss) income— — — — (416)(416)
Stock-based compensation— — 77 — — 77 
Balance as of September 30, 202127,613 28 10,489 68,240 (350)78,407 
Balance as of December 31, 202127,613 28 10,581 74,443 (590)84,462 
Net income— — — 33,024 — 33,024 
Foreign currency translation— — — — (2,821)(2,821)
Stock-based compensation3 — 288 — — 288 
Balance as of September 30, 202227,616 $28 $10,869 $107,467 $(3,411)$114,953 
See notes to condensed consolidated financial statements.
4

XPEL, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

Nine Months Ended September 30,
20222021
Cash flows from operating activities
Net income
$33,024 $25,364 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
2,486 1,258 
Amortization of intangible assets3,248 1,420 
Gain on sale of property and equipment, net(10)(14)
Stock-based compensation317 77 
Bad debt expense350 237 
Deferred income tax7 418 
Accretion on notes payable6 24 
Changes in assets and liabilities:
Accounts receivable(5,899)(2,801)
Inventory, net(18,423)(16,397)
Prepaid expenses and other assets(3,982)(2,245)
Income tax receivable and payable1,077 (1,006)
Accounts payable and accrued liabilities(2,505)13,839 
Net cash provided by operating activities9,696 20,174 
Cash flows used in investing activities
Purchase of property, plant and equipment
(5,534)(5,082)
Proceeds from sale of property and equipment66 48 
Acquisition of a businesses, net of cash acquired(2,993)(29,992)
Development of intangible assets(1,368)(666)
Net cash used in investing activities(9,829)(35,692)
Cash flows from financing activities
Net borrowings on revolving credit agreement1,000  
Repayments on term loan (5,064)
Restricted stock withholding taxes paid in lieu of issued shares(30) 
Repayments of notes payable(304)(529)
Net cash used in provided by (used in) financing activities666 (5,593)
Net change in cash and cash equivalents533 (21,111)
Foreign exchange impact on cash and cash equivalents68 (100)
Increase (decrease) in cash and cash equivalents during the period601 (21,211)
Cash and cash equivalents at beginning of period9,644 29,027 
Cash and cash equivalents at end of period$10,245 $7,816 
Supplemental schedule of non-cash activities
Non-cash lease financing$5,209 $7,322 
Issuance of vested restricted units$222 $ 
Supplemental cash flow information
Cash paid for income taxes$7,305 $6,670 
Cash paid for interest$900 $117 
See notes to condensed consolidated financial statements.
5

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.    INTERIM FINANCIAL INFORMATION
The accompanying (a) condensed consolidated balance sheet as of December 31, 2021, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022 and 2021 have been prepared by XPEL, Inc. (“XPEL” or the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period due to variability in customer purchasing patterns and seasonal, operating and other factors.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K as filed with the SEC on February 28, 2022 (the "Annual Report"). These condensed consolidated financial statements also should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section appearing in this Report.

2.    SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company is based in San Antonio, Texas and sells, distributes, and installs protective films and coatings, including automotive paint protection film, surface protection film, automotive and architectural window films and ceramic coatings. The Company was incorporated in the state of Nevada, U.S.A. in October 2003.
Basis of Presentation - The condensed consolidated financial statements are prepared in conformity with United States Generally Accepted Accounting Principles ("U.S. GAAP") and include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.
The functional currency for the Company is the United States dollar. The assets and liabilities of each of its foreign subsidiaries are translated into U.S dollars using the exchange rate at the end of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the period. Gains and losses from translations are recognized in foreign currency translation included in accumulated other comprehensive income in the accompanying consolidated balance sheets. Foreign currency exchange gains and losses are presented as foreign currency exchange loss in the accompanying condensed consolidated statements of income. The ownership percentages and functional currencies of the entities included in these condensed consolidated financial statements are as follows:
6

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
SubsidiariesFunctional Currency% Owned by XPEL, Inc.
XPEL, Ltd.UK Pound Sterling100 %
XPEL Canada Corp.Canadian Dollar100 %
XPEL B.V.Euro100 %
XPEL Germany GmbHEuro100 %
XPEL de Mexico S. de R.L. de C.V.Peso100 %
XPEL Acquisition Corp.Canadian Dollar100 %
Protex Canada, Inc.Canadian Dollar100 %
Apogee Corp.New Taiwan Dollar100 %
XPEL SlovakiaEuro100 %
XPEL FranceEuro100 %
XPEL SpainEuro100 %
PermaPlate Film, LLCUS Dollar100 %
1 One Armor, Inc.US Dollar100 %
TintNet, Inc.US Dollar100 %
XPEL AustraliaAustralian Dollar100 %
invisiFRAME, Ltd.UK Pound Sterling100 %
Segment Reporting - Management has concluded that XPEL's chief operating decision maker (“CODM”) is the Company's chief executive officer. The Company’s CODM reviews the entire organization’s consolidated results as a whole on a monthly basis to evaluate performance and make resource allocation decisions. Management views the Company’s operations and manages its business as one operating segment.
Use of Estimates - The preparation of these condensed consolidated financial statements in conformity to U.S. GAAP requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and underlying assumptions are reviewed on an ongoing basis. Actual outcomes may differ from these estimates under different assumptions and conditions.
Accounts Receivable - Accounts receivable are shown net of an allowance for doubtful accounts of $0.4 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively. The Company evaluates the adequacy of its allowances by analyzing the aging of receivables, customer financial condition, historical collection experience, the value of any collateral and other economic and industry factors. Actual collections may differ from historical experience, and if economic, business or customer conditions deteriorate significantly, adjustments to these reserves may be required. When the Company becomes aware of factors that indicate a change in a specific customer’s ability to meet its financial obligations, the Company records a specific reserve for credit losses. The Company had no significant accounts receivable concentration as of September 30, 2022 or December 31, 2021.
Provisions and Warranties - We provide a warranty on the Company's products. Liability under the warranty policy is based on a review of historical warranty claims. Adjustments are made to the accruals based on actual claims data. The Company's liability for warranties as of September 30, 2022 and December 31, 2021 was $0.2 million and $0.1 million, respectively. The following tables present a summary of the Company's accrued warranty liabilities for the nine months ended September 30, 2022 and the twelve months ended December 31, 2021 (in thousands):
7

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2022
Warranty liability, January 1$75 
Warranties assumed in period$412 
Payments$(257)
Warranty liability, September 30$230 
2021
Warranty liability, January 1$52 
Warranties assumed in period$398 
Payments$(375)
Warranty liability, December 31$75 
Recent Accounting Pronouncements Issued and Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2023 and is required to be applied prospectively. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.

3.    REVENUE
Revenue recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods and services to a customer, in an amount that reflects the consideration that it expects to receive in exchange for those goods or services. This is achieved through applying the following five-step model:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company generates substantially all of its revenue from contracts with customers, whether formal or implied. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes, with the exception of taxes assessed during the procurement process of select inventories. Shipping and handling costs are included in cost of sales.
Revenues from product and services sales are recognized when control of the goods is transferred to the customer which occurs at a point in time, typically upon shipment to the customer or completion of the service. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
8

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Based upon the nature of the products the Company sells, its customers have limited rights of return, and these rights are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales at the time of the sale.
Warranty obligations associated with the sale of the Company's products are assurance-type warranties that are a guarantee of the product’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. Warranty expense is included in cost of sales.
We apply a practical expedient to expense direct costs of obtaining a contract when incurred because the amortization period would have been one year or less.
Under its contracts with customers, the Company stands ready to deliver product upon receipt of a customer's purchase order. Accordingly, the Company has no performance obligations under its contracts until its customers submit a purchase order. The Company does not enter into commitments to provide goods or services that have terms greater than one year. In limited cases, the Company requires payment in advance of shipping product. Typically, product is shipped within a few days after prepayment is received. These prepayments are recorded as contract liabilities on the condensed consolidated balance sheet and are included in accounts payable and accrued liabilities (Note 9). As the performance obligation is part of a contract that has an original expected duration of less than one year, the Company has applied the practical expedient under ASC 606 to omit disclosures regarding remaining performance obligations.
When the Company transfers goods or provides services to a customer, payment is due, subject to normal terms, and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to 30 days, depending on the type of customer and relationship. At contract inception, the Company expects that the period of time between the transfer of goods to the customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient under ASC 606 to not adjust for the effects of a significant financing component. As such, these amounts are recorded as receivables and not contract assets.
The following table summarizes transactions within contract liabilities for the three and nine months ended September 30, 2022 (in thousands):
Balance, December 31, 2021$818 
Revenue recognized related to payments included in the December 31, 2021 balance$(556)
Payments received for which performance obligations have not been satisfied$181 
Effect of foreign currency translation$(2)
Balance, March 31, 2022$441 
Revenue recognized related to payments included in the March 31, 2022 balance$(387)
Payments received for which performance obligations have not been satisfied$1,012 
Effect of foreign currency translation$(8)
Balance, June 30, 2022$1,058 
Revenue recognized related to payments included in the June 30, 2022 balance$(1,006)
Payments received for which performance obligations have not been satisfied$599 
Effect of foreign currency translation$(9)
Balance, September 30, 2022$642 

9

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below sets forth the disaggregation of revenue by product category for the periods indicated below (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Product Revenue
Paint protection film$54,230 $43,221 $146,465 $124,250 
Window film15,391 11,401 42,711 29,645 
Other2,995 2,374 8,577 6,700 
Total
72,616 56,996 197,753 160,595 
Service Revenue
Software$1,351 $1,125 $3,804 $3,158 
Cutbank credits4,352 3,362 11,459 9,384 
Installation labor11,067 6,784 31,371 15,257 
Training and other372 262 1,125 737 
Total17,142 11,533 47,759 28,536 
Total$89,758 $68,529 $245,512 $189,131 
Because many of the Company's international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents the Company's estimate of sales by geographic regions based on the Company's understanding of ultimate product destination based on customer interactions, customer locations and other factors (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
United States$51,522 $37,363 $142,275 $97,263 
China11,009 10,571 27,772 33,902 
Canada11,046 8,715 29,773 22,538 
Continental Europe6,065 4,747 18,671 14,286 
United Kingdom2,482 1,987 7,505 5,906 
Middle East/Africa3,322 2,090 8,025 6,466 
Asia Pacific2,540 1,973 6,549 5,621 
Latin America1,468 945 4,033 2,891 
Other304 138 909 258 
Total$89,758 $68,529 $245,512 $189,131 
XPEL's largest customer accounted for 12.3% and 15.4% of the Company's net sales during the three months ended September 30, 2022 and 2021, respectively and 11.3% and 17.9% of the Company's net sales during the nine months ended September 30, 2022 and 2021, respectively.

10

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4.    PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (in thousands):
September 30, 2022December 31, 2021
Furniture and fixtures
$2,573 $2,147 
Computer equipment3,044 2,201 
Vehicles811 822 
Equipment4,371 3,572 
Leasehold improvements6,787 5,138 
Plotters2,809 2,132 
Construction in Progress515 117 
Total property and equipment20,910 16,129 
Less: accumulated depreciation8,252 6,231 
Property and equipment, net$12,658 $9,898 
Depreciation expense for the three months ended September 30, 2022 and 2021 was $0.9 million and $0.5 million, respectively. For the nine months ended September 30, 2022 and 2021, depreciation expense was $2.5 million and $1.3 million, respectively.

5.    INTANGIBLE ASSETS, NET
Intangible assets consists of the following (in thousands):
September 30, 2022December 31, 2021
Trademarks
$636 $500 
Software
4,642 3,431 
Trade names1,372 2,579 
Contractual and customer relationships
31,127 31,326 
Non-compete
437 459 
Other
487 693 
Total cost
38,701 38,988 
Less: Accumulated amortization9,275 6,255 
Intangible assets, net$29,426 $32,733 
Amortization expense for the three months ended September 30, 2022 and 2021 was $1.1 million and $0.7 million, respectively. For the nine months ended September 30, 2022 and 2021, amortization expense was $3.2 million and $1.4 million, respectively. Certain of these intangible assets have been adjusted for business acquisition open period adjustments. Refer to Footnote 13 for discussion of these updates.
11

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6.    GOODWILL
The following table summarizes goodwill transactions for the nine months ended September 30, 2022 and 2021 (in thousands):
Balance at December 31, 2020$4,472 
Additions21,284 
Foreign Exchange(101)
Balance at December 31, 2021$25,655 
Balance at December 31, 2021$25,655 
Open period adjustments for 2021 acquisitions772 
Foreign Exchange(1,010)
Balance at September 30, 2022$25,417 
The Company completed seven acquisitions during the twelve months ended December 31, 2021. Purchase price accounting for all these acquisitions have been completed. Refer to Footnote 13 for discussion related to open period adjustments.

7.    INVENTORIES
The components of inventory are summarized as follows (in thousands):
September 30, 2022December 31, 2021
Raw materials$11,986 $2,699 
Work in process3,835 180 
Finished goods53,567 49,057 
$69,388 $51,936 

8.    DEBT
REVOLVING FACILITIES
The Company has a $75.0 million revolving line of credit with a financial institution. The facility is utilized to fund the Company's working capital needs and other strategic initiatives, and is secured by a security interest in substantially all of the Company's current and future assets. Borrowings under the credit agreement bear interest at the Wall Street Journal U.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the Loan Agreement governing the facility) is equal to or less than 2.00 to 1.00 or the Wall Street Journal U.S. Prime rate less 0.25% if the Company's EBITDA ratio is greater than 2.00 to 1.00. The facility also includes a fee of 0.25% of the unused capacity on the facility. The interest rate for this credit facility as of September 30, 2022 and December 31, 2021 was 5.50% and 2.50%, respectively. The Company paid interest charges on borrowings under this facility of $0.4 million and $0.9 million during the three and nine months ended September 30, 2022, respectively, and had a balance of $26.0 million and $25.0 million as of September 30, 2022 and December 31, 2021, respectively. This facility matures on July 5, 2024.
12

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Loan Agreement governing the facility contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The Loan Agreement contains two financial covenants:
(1) Senior Funded Debt (as defined in the Loan Agreement) divided by EBITDA (as defined in the Loan Agreement) at or below 3.50 : 1.00 when tested at the end of each fiscal quarter on a rolling four-quarter basis, and
(2) A minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of 1.25 : 1.00 at the end of each fiscal quarter when measured on a rolling four-quarter basis.
The Company also has a CAD $4.5 million revolving credit facility through a financial institution in Canada, and is maintained by XPEL Canada Corp., a wholly-owned subsidiary of XPEL. This Canadian facility is utilized to fund the Company's working capital needs in Canada. This facility bears interest at HSBC Canada Bank’s prime rate plus 0.25% per annum and is guaranteed by the parent company. As of September 30, 2022 and December 31, 2021, no balance was outstanding on this line of credit.
As of September 30, 2022 and December 31, 2021, the Company was in compliance with all debt covenants.
NOTES PAYABLE
As part of its acquisition strategy, the Company may use a combination of cash and unsecured non-interest bearing promissory notes payable to fund its business acquisitions. The Company discounts the promissory note to fair value using market interest rates at the time of the acquisition.
Notes payable are summarized as follows (in thousands):
Weighted Average Interest Rate
MaturesSeptember 30, 2022December 31, 2021
Face value of acquisition notes payable2.61%2023152 458 
Unamortized discount(12)(7)
Current portion(140)(375)
Total long-term debt$ $76 

9.    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table presents significant accounts payable and accrued liability balances as of the periods ending (in thousands):
September 30, 2022December 31, 2021
Trade payables$22,436 $25,175 
Payroll liabilities2,864 3,385 
Contract liabilities642 818 
Acquisition holdback payments 2,007 
Other liabilities2,106 1,530 
$28,048 $32,915 

13

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10.    FAIR VALUE MEASUREMENTS
ASC 820 prioritizes the inputs to valuation techniques used to measure fair value into the following hierarchy:
Level 1 – Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than the quoted prices in active markets that are observable either directly or indirectly, including: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.
Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, our line of credit, and short-term borrowings approximate fair value because of the near-term maturities of these financial instruments. The carrying value of the Company’s notes payable approximates fair value due to the relatively short-term nature and interest rates of the notes. The carrying value of the Company's long-term debt approximates fair value due to the interest rates being market rates.
The estimated fair value of debt is based on market quotes for instruments with similar terms and remaining maturities.
The Company has certain contingent liabilities related to completed acquisitions. The payment of these liabilities is contingent on attainment of certain revenue performance metrics in future years. The fair value of these liabilities was determined using a Monte Carlo simulation method based on the probability and timing of certain future payments related to these metrics. These liabilities are accounted for as Level 3 liabilities within the fair value hierarchy.
Liabilities measured at fair value on a recurring basis as of the dates noted below are as follows (in thousands):
September 30, 2022December 31, 2021
Level 3:
     Contingent Liabilities$858 $2,665 
We assessed the fair value of these contingent consideration liabilities as of September 30, 2022. This assessment resulted in a reduction in the fair value of the liability of $0.2 million and $0.5 million for the three and nine months ended September 30, 2022, respectively. This reduction is reflected in general and administrative expenses in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2022. The remaining decrease in our contingent liabilities is attributable to foreign currency fluctuations and, for the nine-month period, the prior-quarter finalization of a different 2021 acquisition. Refer to Footnote 13 for discussion of valuation updates.


14

XPEL, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11.    COMMITMENTS AND CONTINGENCIES
In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Management also has determined that the likelihood of any litigation and claims having a material impact on our results of operations, cash flows or financial position is remote.

12.    EARNINGS PER SHARE
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes effect of granted incremental restricted stock units.
The following table reconciles basic and diluted weighted average shares used in the computation of earnings per share (in thousands except per share values):
Three Months Ended September 30,Nine Months Ended September 30,
Numerator2022202120222021
   Net income$13,318 $8,331 $33,024 $25,364 
Denominator
   Weighted average basic shares27,616 27,613 27,614 27,613 
   Dilutive effect of restricted stock units4  1  
   Weighted average diluted shares27,620 27,613 27,615 27,613 
Earnings per share
   Basic$0.48 $0.30 $1.20 $0.92 
   Diluted$0.48 $0.30 $1.20 $0.92 


13.    ACQUISITIONS OF BUSINESSES
During the three months ended September 30, 2022, we finalized the valuations of the purchase price and related purchase price allocations for our October 1, 2021 acquisitions of TintNet, Inc., 1 One Armor, 6873391 Canada Ltd. (operating as Shadow Shield), 1716808 Alberta Ltd. (operating as Shadow Tint), and North 1 Technologies. These final allocations resulted in an increase to goodwill of $0.9 million, an increase to other intangible assets of $0.5 million, and an increase to deferred tax liabilities of $0.2 million. During the nine months ended September 30, 2022 finalization of purchase price and purchase price accounting for acquisitions completed during the twelve months ended December 31, 2021 resulted in purchase price reductions of $0.9 million, an increase to goodwill of $0.8 million, a reduction to other intangible assets of $0.6 million and a decrease to deferred tax liabilities of $0.1 million and a reduction to contingent liabilities of $0.9 million. These changes were caused by updates made to certain valuation assumptions. Results for the twelve months ended December 31, 2021 would not have been materially changed had these final allocations been made in that period. The purchase price accounting for all 2021 acquisitions has been finalized.
15


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess the financial condition and results of operations of XPEL, Inc. (“XPEL” or the “Company”). Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Forward-Looking Statements” in this report and under “Business," "Risk Factors,” "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data" in the Annual Report which is available on the SEC’s website at www.sec.gov.
Forward-Looking Statements
 This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to the safe harbor created by those sections. In addition, the Company or others on the Company’s behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on the Company’s internet web site, or otherwise. All statements other than statements of historical facts included in this report or expressed by the Company orally from time to time that address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future are forward-looking statements, including, in particular, the statements about the Company’s plans, objectives, strategies, and prospects regarding, among other things, the Company’s financial condition, results of operations and business, and the outcome of contingencies, such as legal proceedings. The Company has identified some of these forward-looking statements in this report with words like “believe,” “can,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “outlook,” or “continue” or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to the Company’s condensed consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements are based on current expectations about future events affecting the Company and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to the Company. These uncertainties and factors are difficult to predict, and many of them are beyond the Company’s control. Factors to consider when evaluating these forward-looking statements include, but are not limited to:
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 U.S.
We must continue to attract, retain and develop key personnel.
We could be impacted by disruptions in supply.
Our accounting estimates and risk management processes rely on assumptions or models that may prove inaccurate.
We must maintain an effective system of internal control over financial reporting to keep stockholder confidence.
Our industry is highly competitive.
Our North American market is currently designed for the public’s use of car dealerships to purchase automobiles which may dramatically change.
16


Our revenue could be impacted by growing use of ride-sharing or other alternate forms of car ownership.
We must be effective in developing new lines of business and new products to maintain growth.
Any disruptions in our relationships with independent installers and new car dealerships could harm our sales.
Our strategy related to acquisitions and investments could be unsuccessful or consume significant resources.
We must maintain and grow our network of sales, distribution channels and customer base to be successful.
We are exposed to a wide range of risks due to the multinational nature of our business.
We must continue to manage our rapid growth effectively.
We are subject to claims and litigation in the ordinary course of our business, including product liability and warranty claims.
We must comply with a broad and complicated regime of domestic and international trade compliance, anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory regimes.
We may seek to incur substantial indebtedness in the future.
Our growth may be dependent on the availability of capital and funding.
Our Common Stock could decline or be downgraded at any time.
Our stock price has been, and may continue to be, volatile.
We may issue additional equity securities that may affect the priority of our Common Stock.
We do not currently pay dividends on our Common Stock.
Shares eligible for future sale may depress our stock price.
Anti-takeover provisions could make a third party acquisition of our Company difficult.
Our directors and officers have substantial control over us.
Our bylaws may limit investors’ ability to obtain a favorable judicial forum for disputes.
The COVID-19 pandemic could materially affect our business.
Our business faces unpredictable global, economic and business conditions, including the risk of inflation in various markets.
We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf.  We have discussed these factors in more detail in in the Annual Report. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.
Company Overview
Founded in 1997 and incorporated in Nevada in 2003, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including automotive surface and paint protection, headlight protection, and automotive window films, as well as a provider of complementary proprietary software. In 2018, we expanded our product offerings to include architectural
17


window film (both commercial and residential) and security film protection for commercial and residential uses, and in 2019 we further expanded our product line to include automotive ceramic coatings.
XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles. In 2007, we began selling automotive surface and paint protection film products to complement our software business. In 2011, we introduced our ULTIMATE protective film product line which, at the time, was the industry’s first protective film with self-healing properties. The ULTIMATE technology allows the protective film to better absorb the impacts from rocks or other road debris, thereby fully protecting the painted surface of a vehicle. The film is described as “self-healing” due to its ability to return to its original state after damage from surface scratches. The launch of the ULTIMATE product catapulted XPEL into several years of strong revenue growth.
Our over-arching strategic philosophy centers around our view that being closer to the end customer in terms of our channel strategy affords us a better opportunity to efficiently introduce new products and deliver tremendous value which, in turn, drives more revenue growth for the Company. Since 2014, we have executed on several strategic initiatives including:
2014 - We began our international expansion by establishing an office in the United Kingdom.
2015 - We acquired Parasol Canada, a distributor of our products in Canada.
2016 - We opened our XPEL Netherlands office and established our European headquarters
2017
We continued our international expansion with the acquisition of Protex Canada Corp., or Protex Canada, a leading franchisor of automotive protective film franchises serving Canada, and
We opened our XPEL Mexico office.
2018
We launched our first product offering outside of the automotive industry, a window and security film protection for commercial and residential uses.
We introduced the next generation of our highly successful ULTIMATE line, ULTIMATE PLUS.
We acquired Apogee Corporation which led to formation of XPEL Asia based in Taiwan.
2019
We were approved for the listing of our stock on Nasdaq trading under the symbol “XPEL”.
2020
We acquired Protex Centre, a wholesale-focused paint protection installation business based in Montreal, Canada.
We expanded our presence in France with the acquisition of certain assets of France Auto Racing.
We expanded our architectural window film presence with the acquisition of Houston based Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and industrial settings.
2021
We expanded our presence into numerous automotive dealerships throughout the United States with the acquisition of PermaPlate Film, LLC, a wholesale-focused
18


automotive window film installation and distribution business based in Salt Lake City, Utah.
We acquired five businesses in the United States and Canada from two sellers as a continuation of our acquisition strategy. These acquisitions allowed us to continue to increase our penetration into mid-range dealerships in the US and solidify our presence in Western Canada.
We acquired invisiFRAME, Ltd, a designer and manufacturer of paint protection film patterns for bicycles, thus further expanding our non-automotive offerings.

Strategic Overview
XPEL is currently pursuing several key strategic initiatives to drive continued growth. Our global expansion strategy includes establishing a local presence where possible, allowing us to better control the delivery of our products and services. We will continue to add locally based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate.
We seek to increase global brand awareness in strategically important areas, including pursuing high visibility at premium events such as major car shows and high value placement in advertising media consumed by car enthusiasts, to help further expand the Company’s premium brand.
XPEL also continues to expand its delivery channels by acquiring select installation facilities in key markets and acquiring international partners to enhance our global reach. As we expand globally, we strive to tailor our distribution model to adapt to target markets. We believe this flexibility allows us to penetrate and grow market share more efficiently. Our acquisition strategy centers on our belief that the closer the Company is to its end customers, the greater its ability to drive increased product sales. In our last fiscal year, we acquired several businesses serving multiple markets in the United States, Canada, and the United Kingdom, in furtherance of this objective, and we have continued this trend with an October 2022 acquisition in Australia.
We continue to drive expansion of our non-automotive product portfolio. Our architectural window film segment continues to gain traction. We believe there are multiple uses for protective films and we continue to explore those adjacent market opportunities.
Trends and Uncertainties
Broad uncertainty remains as to the lingering global business impact of the COVID-19 pandemic. While our revenue has continued to increase in most of our major markets, market disruptions in future periods could have a material impact on our business. See the risk factor “The COVID-19 pandemic could materially adversely affect our financial condition and results of operations” included in Part I, Item 1A “Risk Factors” in the Annual Report for further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.
Automotive sales and production are highly cyclical, and the cyclical nature of the industry has been, and could continue to be, compounded by the on-going low inventories of new vehicles resulting primarily from the global semiconductor shortage. As long as the semiconductor shortage persists and leads to low dealership inventories, there could be a material adverse effect on our business, financial condition and results of operations. Refer to the risk factor ‘We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and production volumes could adversely affect our business, results of operations and financial condition” in the Annual Report for additional discussion of
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the cyclical nature of the automotive industry. We will continue to closely monitor updates regarding the continuing impact of the foregoing matters and adjust our operations accordingly.
Various geographies in which we operate, including the United States, are experiencing an increasing inflationary environment. We are actively monitoring the broader economic impact of inflation on the demand for our products and services. See risk factor "General global economic and business conditions affect demand for our products" included in Part I, Item 1A-Risk Factors, in the Annual Report on Form 10-K.
As more fully described in Part I, Item 1A-Risk Factors, in the Annual Report on Form 10-K, the entrotech agreement terminated on March 21, 2022. Effective October 1, 2022, the Company entered into a new three-year supply agreement with entrotech under commercially reasonable terms.

Key Business Metric - Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA").
EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.
The following table is a reconciliation of Net Income to EBITDA for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands):
(Unaudited)(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
20222021% Change 20222021% Change
Net Income$13,318 $8,331 59.9 %$33,024 $25,364 30.2 %
Interest391 46 750.0 %933 143 552.4 %
Taxes3,226 1,841 75.2 %8,302 5,959 39.3 %
Depreciation890 456 95.2 %2,486 1,258 97.6 %
Amortization1,117 735 52.0 %3,248 1,420 128.7 %
EBITDA$18,942 $11,409 66.0 %$47,993 $34,144 40.6 %

Use of Non-GAAP Financial Measures
EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP
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and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.
EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting their usefulness as comparative measures.

Results of Operations
The following tables summarize the Company’s consolidated results of operations for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands):
Three Months Ended September 30, 2022%
of Total Revenue
Three Months Ended September 30, 2021%
of Total Revenue
%
Change
Total revenue$89,758 100.0 %$68,529 100.0 %31.0 %
Total cost of sales53,992 60.2 %44,075 64.3 %22.5 %
Gross margin35,766 39.8 %24,454 35.7 %46.3 %
Total operating expenses18,459 20.6 %14,087 20.6 %31.0 %
Operating income17,307 19.3 %10,367 15.1 %66.9 %
Other expenses763 0.9 %195 0.3 %291.3 %
Income tax3,226 3.6 %1,841 2.7 %75.2 %
Net income$13,318 14.8 %$8,331 12.2 %59.9 %
Nine Months Ended September 30, 2022%
of Total Revenue
Nine Months Ended September 30, 2021%
of Total Revenue
%
Change
Total revenue$245,512 100.0 %$189,131 100.0 %29.8 %
Total cost of sales149,046 60.7 %121,142 64.1 %23.0 %
Gross margin96,466 39.3 %67,989 35.9 %41.9 %
Total operating expenses53,374 21.7 %36,401 19.2 %46.6 %
Operating income43,092 17.6 %31,588 16.7 %36.4 %
Other expenses1,766 0.7 %265 0.1 %566.4 %
Income tax8,302 3.4 %5,959 3.2 %39.3 %
Net income