xpel-20230630

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 June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38858

XPEL, INC.

(Exact name of registrant as specified in its charter)

Nevada

20-1117381

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

711 Broadway St., Suite 320

San Antonio

Texas

78215

(Address of Principal Executive Offices)

(Zip Code)

Registrant's telephone number, including area code: (210) 678-3700

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.001 per share	XPEL	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “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 27,622,944 shares of common stock outstanding as of August 9, 2023.

TABLE OF CONTENTS


			Page
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Income			2
Condensed Consolidated Statements of Comprehensive Income			3
Condensed Consolidated Statements of Changes in Equity			4
Condensed Consolidated Statements of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30

Part II - Other Information
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. Mine Safety Disclosures			32
Item 5. Other Information			32
Item 6. Exhibits			32
Signatures			33

Part I. Financial Information

Item 1. Financial Statements

XPEL, INC.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)


	(Unaudited)		(Audited)
	June 30, 2023		December 31, 2022
Assets
Current
Cash and cash equivalents	$	14,298	$	8,056
Accounts receivable, net	23,983		14,726
Inventories	82,714		80,575
Prepaid expenses and other current assets	4,660		3,464

Total current assets	125,655		106,821
Property and equipment, net	15,523		14,203
Right-of-use lease assets	15,161		15,309
Intangible assets, net	30,590		29,294
Other non-current assets	1,138		972
Goodwill	28,594		26,763
Total assets	$	216,661	$	193,362
Liabilities
Current
Current portion of notes payable	$	—	$	77
Current portion of lease liabilities	3,871		3,885
Accounts payable and accrued liabilities	31,194		22,970
Income tax payable	331		470
Total current liabilities	35,396		27,402
Deferred tax liability, net	1,481		2,049
Other long-term liabilities	1,176		1,070
Borrowings on line of credit	13,000		26,000
Non-current portion of lease liabilities	12,300		12,119

Total liabilities	$	63,353	$	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; 27,620,027 and 27,616,064 issued and outstanding and outstanding, respectively	28		28
Additional paid-in-capital	11,730		11,073
Accumulated other comprehensive loss	(1,448)		(2,203)
Retained earnings	142,998		115,824
Total stockholders’ equity	153,308		124,722
Total liabilities and stockholders’ equity	$	216,661	$	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,
	2023		2022		2023		2022
Revenue
Product revenue	$	80,906	$	67,040	$	148,214	$	125,137
Service revenue	21,331		16,850		39,864		30,617
Total revenue	102,237		83,890		188,078		155,754

Cost of Sales
Cost of product sales	49,557		44,227		91,737		82,421
Cost of service	8,686		6,680		16,388		12,633
Total cost of sales	58,243		50,907		108,125		95,054
Gross Margin	43,994		32,983		79,953		60,700

Operating Expenses
Sales and marketing	8,147		5,906		14,824		12,218
General and administrative	15,656		11,328		30,010		22,696
Total operating expenses	23,803		17,234		44,834		34,914

Operating Income	20,191		15,749		35,119		25,786

Interest expense	338		322		860		542
Foreign currency exchange loss	32		457		21		462

Income before income taxes	19,821		14,970		34,238		24,782
Income tax expense	4,080		3,068		7,064		5,076
Net income	$	15,741	$	11,902	$	27,174	$	19,706

Earnings per share
Basic	$	0.57	$	0.43	$	0.98	$	0.71
Diluted	$	0.57	$	0.43	$	0.98	$	0.71
Weighted Average Number of Common Shares
Basic	27,619		27,613		27,617		27,613
Diluted	27,631		27,613		27,629		27,613

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Other comprehensive income
Net income	$	15,741	$	11,902	$	27,174	$	19,706
Foreign currency translation	456		(1,175)		755		(1,270)
Total comprehensive income	$	16,197	$	10,727	$	27,929	$	18,436

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands)


Stockholders' Equity - Three Months Ended June 30
	Common Stock			Additional Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance as of March 31, 2022	27,613	$	28	$	10,652	$	82,247	$	(685)	$	92,242
Net income	—	—		—		11,902		—		11,902
Foreign currency translation	—	—		—		—		(1,175)		(1,175)
Stock-based compensation	—	—		108		—		—		108
Balance as of June 30, 2022	27,613	28		10,760		94,149		(1,860)		103,077

Balance as of March 31, 2023	27,616	28		11,376		127,257		(1,904)		136,757
Net income	—	—		—		15,741		—		15,741
Foreign currency translation	—	—		—		—		456		456
Stock-based compensation	4	—		354		—		—		354
Balance as of June 30, 2023	27,620	$	28	$	11,730	$	142,998	$	(1,448)	$	153,308


Stockholders' Equity - Six Months Ended June 30
	Common Stock			Additional Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance as of December 31, 2021	27,613	$	28	$	10,581	$	74,443	$	(590)	$	84,462
Net income	—	—		—		19,706		—		19,706
Foreign currency translation	—	—		—		—		(1,270)		(1,270)
Stock-based compensation	—	—		179		—		—		179
Balance as of June 30, 2022	27,613	28		10,760		94,149		(1,860)		103,077

Balance as of December 31, 2022	27,616	28		11,073		115,824		(2,203)		124,722
Net income	—	—		—		27,174		—		27,174
Foreign currency translation	—	—		—		—		755		755
Stock-based compensation	4	—		657		—		—		657
Balance as of June 30, 2023	27,620	$	28	$	11,730	$	142,998	$	(1,448)	$	153,308

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net income	$	27,174	$	19,706
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment	2,030		1,596
Amortization of intangible assets	2,372		2,131
Gain on sale of property and equipment, net	(10)		(11)
Stock-based compensation	657		179
Bad debt expense	156		251
Deferred income tax	(594)		16
Accretion on notes payable	—		5

Changes in assets and liabilities:
Accounts receivable	(9,021)		(6,604)
Inventory, net	(1,583)		(22,725)
Prepaid expenses and other assets	(975)		(1,039)
Income tax receivable and payable	(136)		96
Accounts payable and accrued liabilities	7,303		3,874
Net cash provided by (used in) operating activities	27,373		(2,525)
Cash flows used in investing activities
Purchase of property, plant and equipment	(3,306)		(4,025)
Proceeds from sale of property and equipment	24		53
Acquisition of a business, net of cash acquired	(4,457)		—
Development of intangible assets	(517)		(623)
Net cash used in investing activities	(8,256)		(4,595)
Cash flows from financing activities
Net (repayments of) borrowings on revolving credit agreement	(13,000)		7,000
Restricted stock withholding taxes paid in lieu of issued shares	(28)		—
Repayments of notes payable	(77)		(294)
Net cash (used in) provided by financing activities	(13,105)		6,706
Net change in cash and cash equivalents	6,012		(414)
Foreign exchange impact on cash and cash equivalents	230		91
Increase (decrease) in cash and cash equivalents during the period	6,242		(323)
Cash and cash equivalents at beginning of period	8,056		9,644
Cash and cash equivalents at end of period	$	14,298	$	9,321

Supplemental schedule of non-cash activities
Non-cash lease financing	$	1,810	$	2,534
Issuance of common stock for vested restricted stock units	$	134	$	—

Supplemental cash flow information
Cash paid for income taxes	$	7,810	$	4,677
Cash paid for interest	$	889	$	502

See notes to condensed consolidated financial statements.

XPEL, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. INTERIM FINANCIAL INFORMATION

The accompanying (a) condensed consolidated balance sheet as of December 31, 2022, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2023 and 2022 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, 2023 (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 ("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 loss in the accompanying consolidated balance sheets.

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 with 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 $0.2 million and $0.2 million as of June 30, 2023 and December 31, 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 June 30, 2023 or December 31, 2022.

Provisions and Warranties - We provide a warranty on the Company's products. Liability under the warranty policy is based on a review of historical warranty claims. Adjustments are made to the accruals based on actual claims data. The Company's liability for warranties as of June 30, 2023 and December 31, 2022 was $0.3 million and $0.2 million, respectively. The following tables present a summary of the Company's accrued warranty liabilities for the six months ended June 30, 2023 and the twelve months ended December 31, 2022 (dollars in thousands):


	2023
Warranty liability, January 1	$	234
Warranties assumed in period	226
Payments	(150)
Warranty liability, June 30	$	310


	2022
Warranty liability, January 1	$	75
Warranties assumed in period	624
Payments	(465)
Warranty liability, December 31	$	234

Recently Adopted Accounting Pronouncements

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. We adopted this pronouncement effective January 1, 2023 without material impact to our 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

XPEL, Inc.

Notes to Condensed Consolidated Financial Statements

(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, and these rights are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales at the time of the sale.

Warranty obligations associated with the sale of the Company's products are assurance-type warranties that are a guarantee of the product’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. Warranty expense is included in cost of sales.

We apply a practical expedient to expense direct costs of obtaining a contract when incurred because the amortization period would have been one year or less.

Under its contracts with customers, the Company stands ready to deliver product upon receipt of a customer's purchase order. Accordingly, the Company has no performance obligations under its contracts until its customers submit a purchase order. The Company does not enter into commitments to provide goods or services that have terms greater than one year. In limited cases, the Company requires payment in advance of shipping product. Typically, product is shipped within a few days after prepayment is received. These prepayments are recorded as contract liabilities on the condensed consolidated balance sheet and are included in accounts payable and accrued liabilities (Note 9). As the performance obligation is part of a contract that has an original expected duration of less than one year, the Company has applied the practical expedient under ASC 606 to omit disclosures regarding remaining performance obligations.

When the Company transfers goods or provides services to a customer, payment is due, subject to normal terms, and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to 30 days, depending on the type of customer and relationship. At contract inception, the Company expects that the period of time between the transfer of goods to the customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient under ASC 606 to not adjust for the effects of a significant financing component. As such, these amounts are recorded as receivables and not contract assets.

The following table summarizes transactions within contract liabilities for the three and six months ended June 30, 2023 (dollars in thousands):

XPEL, Inc.

Notes to Condensed Consolidated Financial Statements

(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

The table below sets forth the disaggregation of revenue by product category for the periods indicated below (dollars in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Product Revenue
Paint protection film	$	56,491	$	48,275	$	106,039	$	92,236
Window film	20,312		15,786		35,293		27,320
Other	4,103		2,979		6,882		5,581
Total	$	80,906	$	67,040	$	148,214	$	125,137

Service Revenue
Software	$	1,546	$	1,247	$	3,004	$	2,453
Cutbank credits	4,699		4,178		8,729		7,108
Installation labor	14,530		11,048		26,929		20,303
Training and other	556		377		1,202		753
Total	$	21,331	$	16,850	$	39,864	$	30,617

Total	$	102,237	$	83,890	$	188,078	$	155,754

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 (dollars in thousands):

XPEL, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
United States	$	59,149	$	49,166	$	110,226	$	90,753
China	8,103		7,904		14,750		16,763
Canada	11,851		10,877		20,443		18,727
Continental Europe	9,689		6,944		17,649		12,607
United Kingdom	3,630		2,595		6,721		5,022
Middle East/Africa	4,109		2,654		7,605		4,703
Asia Pacific	3,314		1,977		5,959		4,009
Latin America	2,119		1,359		4,292		2,565
Other	273

SEC Form 10-Q filed by XPEL Inc.