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What changed in XPEL, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of XPEL, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+176 added−204 removedSource: 10-K (2024-02-28) vs 10-K (2023-02-28)

Top changes in XPEL, Inc.'s 2023 10-K

176 paragraphs added · 204 removed · 149 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeSome of the products sold are used for non-automotive applications, such as industrial protection, screen protection or architectural protection. We sell a variety of product lines each with their own unique characteristics, warranty and intended use.
Biggest changeMost installers of paint protection film prefer to use software and a pattern databases to aid in the installation. The benefits of using software for installation include increased installation efficiency and reduction of waste. Some of the products sold are used for non-automotive applications, such as industrial protection, screen protection or architectural protection.
Related laws may govern the manner in which we store or transfer sensitive information, or impose obligations on us in the event of a security breach or inadvertent disclosure of such information. International jurisdictions impose different, and sometimes more stringent, consumer and privacy protections. Our products are subject to export controls, including the U.S.
Related laws may govern the manner in which we store or transfer sensitive information or impose obligations on us in the event of a security breach or inadvertent disclosure of such information. 8 International jurisdictions impose different, and sometimes more stringent, consumer and privacy protections. Our products are subject to export controls, including the U.S.
We also provide marketing and lead generation for our customers by featuring them in our dealer locator on our website. To be considered an Authorized Dealer (and thereby have end customers referred to them), independent installers must employ certified installers and meet other requirements including purchase minimums and more. 9 Our products are primarily utilized for new cars.
We also provide marketing and lead generation for our customers by featuring them in our dealer locator on our website. To be considered an Authorized Dealer (and thereby have end customers referred to them), independent installers must employ certified installers and meet other requirements including purchase minimums and more. Our products are primarily utilized for new cars.
Within the market for surface and paint protection film, our principal competitors include Eastman Chemical Company (under the LLumar and Suntek brands) and several other smaller companies. For more information, see Risk Factors— The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company.
Within the market for surface and paint 7 protection film, our principal competitors include Eastman Chemical Company (under the LLumar and Suntek brands) and several other smaller companies. For more information, see Risk Factors— The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company.
Changes in export, sanctions or import laws, may delay the introduction and sale of our product in international markets, or, in some cases, prevent the export or import of our products to certain countries, regions, 12 governments, persons or entities altogether, which could adversely affect our business, financial condition and operating results.
Changes in export, sanctions or import laws, may delay the introduction and sale of our product in international markets, or, in some cases, prevent the export or import of our products to certain countries, regions, governments, persons or entities altogether, which could adversely affect our business, financial condition and operating results.
The products fall into three categories: 11 • Products where we own or license the intellectual property or, “IP” – the Company owns or licenses the underlying IP for product construction or for one or more components of the product and could seek to have the products made at a variety of manufacturing locations.
The products fall into three categories: • Products where we own or license the intellectual property or, “IP” – the Company owns or licenses the underlying IP for product construction or for one or more components of the product and could seek to have the products made at a variety of manufacturing locations.
In addition to earning a base salary, eligible employees are compensated for their contributions to the Company’s goals with short-term cash incentives. Through its global pay philosophy, principles and consistent implementation, the Company is committed to providing fair and equitable pay for employees.
In addition to earning a base salary, eligible employees are compensated for their contributions to the Company’s short and long-term goals with cash and equity incentives. Through its global pay philosophy, principles and consistent implementation, the Company is committed to providing fair and equitable pay for employees.
Revenues from this channel are negligible but we believe that by offering these products on our website, we increase brand awareness. The revenue from this channel represented less than 1% of the Company’s consolidated revenue for the year ended December 31, 2022. Competition The Company principally competes with other manufacturers and distributors of automotive protective film products.
Revenues from this channel are negligible, but we believe that by offering these products on our website, we increase brand awareness. The revenue from this channel represented less than 1.0% of the Company’s consolidated revenue for the year ended December 31, 2023. Competition The Company principally competes with other manufacturers and distributors of automotive protective film products.
Our DAP customers pay a monthly access fee to access our proprietary database. Monthly DAP subscriptions represented less than 2% of our consolidated revenue for the year ended December 31, 2022.
Our DAP customers pay a monthly access fee to access our proprietary database. Monthly DAP subscriptions represented less than 2% of our consolidated revenue for the year ended December 31, 2023.
In China, we operate through a sole distributor under a distribution agreement, Shanghai Xing Ting Trading Co., Ltd., which we refer to as the China Distributor. Approximately 10% of our consolidated revenue for the year ended December 31, 2022, was derived from sales to the China Distributor.
In China, we operate through a sole distributor under a distribution agreement, Shanghai Xing Ting Trading Co., Ltd., which we refer to as the China Distributor. Approximately 10.5% of our consolidated revenue for the year ended December 31, 2023, was derived from sales to the China Distributor.
Our street address is 711 Broadway, Suite 320, San Antonio, Texas 78219 and our phone number is (210) 678-3700. The address of our website is www.xpel.com.
Our street address is 711 Broadway, Suite 320, San Antonio, Texas 78215 and our phone number is (210) 678-3700. The address of our website is www.xpel.com.
Independent Installers/New Car Dealerships We primarily operate by selling a complete turn-key solution directly to independent installers and new car dealerships, which includes XPEL protection films, installation training, access to our proprietary DAP software, marketing support and lead generation. For the year ended December 31, 2022, approximately 65% of the Company’s consolidated revenue was through this channel.
Independent Installers/New Car Dealerships We primarily operate by selling a complete turn-key solution directly to independent installers and new car dealerships, which includes XPEL protection films, installation training, access to our proprietary DAP software, marketing support and lead generation. For the year ended December 31, 2023, approximately 63.2% of the Company’s consolidated revenue was through this channel.
This channel represented approximately 3% of the Company’s consolidated revenue for the year ended December 31, 2022. Online and Catalog Sales XPEL offers certain products such as paint protection kits, car wash products, after-care products and installation tools via its website.
This channel represented approximately 4.1% of the Company’s consolidated revenue for the year ended December 31, 2023. Online and Catalog Sales XPEL offers certain products such as paint protection kits, car wash products, after-care products and installation tools via its website.
These locations serve wholesale and retail customers in their respective markets. The Company also provides on-site installation services to automobile dealerships throughout 10 the United States and Canada through its dealership services business. This channel represented approximately 15% of the Company’s consolidated revenue for the year ended December 31, 2022.
These locations serve wholesale and retail customers in their respective markets. The Company also provides on-site installation services to automobile dealerships throughout the United States and Canada through its dealership services business. This channel represented approximately 14.0% of the Company’s consolidated revenue for the year ended December 31, 2023.
We offer a variety of films with varying colors, VLTs and price points. SAFETY & SECURITY: Safety and Security films are clear, thick polyethylene terephthalate, or PET, films to secure glass in the event of a breakage. We offer a variety of thicknesses and offer films with varying adhesive characteristics for different types of installations.
We offer a variety of films with varying colors, visual light transmissions and price points. 4 SAFETY & SECURITY: Safety and Security films are clear, thick polyethylene terephthalate, or PET, films to secure glass in the event of a breakage. We offer a variety of thicknesses and offer films with varying adhesive characteristics for different types of installations.
These distributors may sell to other distributors or customers who ultimately install the product on an end customer’s vehicle. Due to the nature of this channel, product margins are generally less than other channels. For the year ended December 31, 2022, approximately 17% of the Company’s consolidated revenue was through this channel.
These distributors may sell to other distributors or customers who ultimately install the product on an end customer’s vehicle. Due to the nature of this channel, product margins are generally less than other 6 channels. For the year ended December 31, 2023, approximately 18.1% of the Company’s consolidated revenue was through this channel.
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. Sales and Distribution We sell and distribute our products through independent installers, new car dealerships, third-party distributors, Company-owned installation centers, Automobile Original Equipment Manufacturers, Protex Canada’s franchisees, and online.
We believe there are multiple uses for protective films and we continue to explore those adjacent market opportunities. Sales and Distribution We sell and distribute our products through independent installers, new car dealerships, third-party distributors, Company-owned installation centers, Automobile Original Equipment Manufacturers, Protex Canada’s franchisees, and online.
The loss of this relationship, or a material disruption in sales by this distributor, could severely harm our business” and “A significant percentage of our revenue is generated from our business in China, a market that is associated with certain risks.” Company-Owned Installation Centers/Dealership Services XPEL operates 13 Company-owned installation centers: seven in the United States, three in Canada and one in the United Kingdom.
The loss of this relationship, or a material disruption in sales by this distributor, could severely harm our business” and “A significant percentage of our revenue is generated from our business in China, a market that is associated with certain risks.” Company-Owned Installation Centers/Dealership Services XPEL operates 24 Company-owned installation centers: ten in the United States, ten in Canada and one each in the United Kingdom, Australia, Mexico, and Taiwan.
The launch of the ULTIMATE product catapulted XPEL into several years of strong revenue growth. 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.
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.
In the future, we intend to continue to seek intellectual property protection for our products and enforce our rights against those who infringe on these valuable assets. Human Capital Resources On December 31, 2022, the Company employed approximately 818 people (full-time equivalents), with approximately 567 employed in the United States and 251 employed internationally.
In the future, we intend to continue to seek intellectual property protection for our products and enforce our rights against those who infringe on these valuable assets. Human Capital Resources On December 31, 2023, the Company employed approximately 1,054 people (full-time equivalents), with approximately 710 employed in the United States and 344 employed internationally.
Our global expansion strategy includes establishing a local presence where possible, allowing us to better control the delivery of our products and services. We also add locally based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate.
Strategic Overview XPEL continues to pursue 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 also add locally based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate.
OTHER: In addition to the main categories of SOLAR and SAFETY & SECURITY films, we also offer anti-graffiti, exterior applied and decorative films. Architectural window film sales represented approximately 2% of our consolidated revenue for the year ended December 31, 2022. DAP : A key component of our product offering is our DAP platform.
OTHER: In addition to the main categories of SOLAR and SAFETY & SECURITY films, we also offer anti-graffiti, exterior applied and decorative films. Architectural window film sales represented approximately 2.3% of our consolidated revenue for the year ended December 31, 2023.
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 ULTIMATE technology allows the protective film to better absorb the impacts from rocks and other road debris, thereby fully protecting the 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 the Company into several years of strong revenue growth.
Installation and Dealership Services : We offer installation services of our various products directly to retail and wholesale customers through our Company-owned installation facilities in their respective markets and through our dealership services business which provides on-site services to automobile dealerships. Our installation services are primarily automotive film installation but have grown to include architectural film installation in certain markets.
Installation, Dealership and OEM Services : We offer installation services of our various products directly to retail and wholesale customers through our Company-owned installation facilities in their respective markets, through our dealership services business which provides on-site services to automobile dealerships and to Original Equipment Manufacturers (“OEMs”).
The Company recycles plastic cores, film waste, corrugated boxes and other material related to our conversion operations. We utilize third party software to monitor our progress on this objective.
The Company recycles plastic cores, film waste, corrugated boxes and other material related to our conversion operations. We utilize third-party software to monitor our progress on this objective. 9 Intellectual Property and Brand Protection We own intellectual property rights, including numerous patents, copyrights and trademarks, that support key aspects of our brand and products.
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. During 2022, we acquired the paint protection film business of our Australian distributor in furtherance of this objective. We also continue to drive expansion of our non-automotive product portfolio.
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. During 5 2023, we completed four acquisitions in furtherance of this objective.
Our exposure for violating these laws would increase to the extent our international presence expands and as we increase sales and operations in foreign jurisdictions. Proposed or new legislation and regulations could also significantly affect our business.
Our exposure for violating these laws would increase to the extent our international presence expands and as we increase sales and operations in foreign jurisdictions. In the ordinary course of business, we collect and utilize information supplied by our customers, which may include personal information and other data.
Surface and Paint Protection film sales represented approximately 62% of our consolidated revenue for the year ended December 31, 2022.
We sell a variety of product lines each with their own unique characteristics, warranty and intended use. Surface and Paint Protection film sales represented approximately 58.0% of our consolidated revenue for the year ended December 31, 2023.
Installation services (including product and labor revenue) represented approximately 16% of our consolidated revenue for the year ended December 31, 2022.
Installation services (including product and labor revenue) represented approximately 18% of our consolidated revenue for the year ended December 31, 2023. Miscellaneous Products, Tools and Pre-Cut Films: We sell a variety of other miscellaneous product sets including pre-cut film products, tools and accessories and merchandise and apparel.
Products and Services Surface and Paint Protection Film Rolls : Our primary products are paint and surface protection films. Most of the products sold are for automotive application which principally protect painted surfaces from rock chips, damage from bug acids and other road debris.
Products and Services Surface and Paint Protection Film Rolls : Our primary products are paint and surface protection films. Most of the products sold are for automotive applications. Paint protection film, our flagship product, is a self-adhesive, clear film designed to be applied to painted surfaces of automobiles and other surfaces.
In 2018, we expanded our product offerings to include architectural window film (both commercial and residential) and security film protection for commercial and residential uses, and in 2019 we further expanded our product line to include automotive ceramic coatings. XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles.
The majority of our revenue is derived from our automotive products and services while the remainder of our revenue is derived from non-automotive products including architectural window film, marine and flat surface protection films. The Company began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles.
Automotive Window Film Rolls: We sell several lines of automotive window films, primarily under the XPEL PRIME brand name, which exhibit a range of performance characteristics and appearances, including: XPEL PRIME XR PLUS: PRIME XR PLUS offers 98% infrared heat rejection developed with multi-layer nano-particle technology. This is our most expensive flagship product with our best specifications and characteristics.
Automotive Window Film Rolls: We sell several lines of automotive window films, primarily under the XPEL PRIME brand name, which exhibit a range of performance characteristics and appearances. Automotive window film sales represented approximately 14.8% of our consolidated revenue for the year ended December 31, 2023.
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Item 1. Business Company Overview Founded in 1997 and incorporated in Nevada in 2003, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including automotive surface and paint protection, headlight protection, and automotive window films, as well as a provider of complementary proprietary software.
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Item 1. Business Company Overview We are a supplier of automotive paint protection film, automotive window film, ceramic coatings, architectural window film products, and related tools and equipment to support the installation of these products. We also function as a service provider offering installation of these products through multiple channels.
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Consistent with this philosophy, 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. 5 • 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.
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Historically, one of the top complaints from new car buyers has been damage to paint from rock chips and road debris. Paint protection film solves for this issue by protecting the painted surface from such damage. The installation of paint protection film requires training and practice to become proficient.
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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.
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Ceramic coating: We sell a hydrophobic, self-cleaning coating that can be applied to a variety of surface types for automobiles, aircraft and marine applications. Ceramic coating sales represented less than 2% of our consolidated revenue for the year ended December 31, 2023. Software : A key component of our product offering is our Design Access Platform (“DAP”).
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Automotive Surface and Paint Protection XPEL ULTIMATE PLUS : ULTIMATE PLUS is our flagship clear, thermoplastic polyurethane, or TPU, based product which is a self-healing, stain-resistant film with exceptional clarity and durability. 6 XPEL ULTIMATE FUSION : ULTIMATE FUSION is our newest paint protection film product providing the same benefits as ULTIMATE PLUS but also contains a hydrophobic top-coat which creates a naturally slick surface to repel water and road grime XPEL STEALTH: STEALTH is a satin-finished paint protection film, made with the same construction as ULTIMATE PLUS.
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We believe our channel strategy uniquely positions us to be wherever the demand takes us and is a key part of our ability to drive sustained growth. We also continue to drive expansion of our non-automotive product portfolio. Our architectural window film segment continues to gain traction.
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STEALTH is designed to protect surfaces that already have a matte finish or to give otherwise glossy surfaces a matte finish.
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We are also subject to and comply with increasingly complex privacy and data protection laws and regulations in the United States and other jurisdictions. This includes the EU’s General Data Protection Regulation (“GDPR”) and the California Privacy Rights Act ("CPRA"), which enforce rules relating to the protection of processing and movement of personal data.
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TRACWRAP: TRACWRAP is a temporary TPU-based paint protection film, for both do-it-yourself, or DIY, and professional applications, that is designed to be used for a short period of time, including during road trips, vehicle transport or vehicles pending a full installation of our other products such as XPEL ULTIMATE PLUS.
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The interpretation and enforcement of such regulations are continuously evolving and there may be uncertainty with respect to how to comply with them. Noncompliance with GDPR, the CPRA and other data protection laws could result in damage to our reputation and payment of monetary penalties.
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LUX PLUS: LUX PLUS is our flagship clear, TPU-based paint protection film for the Chinese market. Designed and formulated specifically for the demands of China, with excellent self-healing and stain-resistance, it is offered for sale exclusively in that market.
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XPEL RX: RX Protection Film provides protection for a variety of surfaces including screens and other electronics and contains silver ions which inhibit the growth of microbes on the film’s surface. XPEL ARMOR: ARMOR is a thick PVC-based protection film that looks and performs like a spray-on bedliner. It is designed to resist abrasions and punctures from aggressive terrains.
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OTHER FILMS: We sell a variety of other specialty films in smaller quantities for select customers or in certain markets, including: LUX-M, MPD and ARES in the Chinese Market and F Series Film in various international markets.
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Most of our Surface and Paint Protection films are applied wet and can be installed in bulk or pre-cut using our pattern database accessible by DAP, our SAAS platform. While we sell some pre-cut and Do-It-Yourself products made from these rolls directly to consumers, the vast majority of the products are professionally installed.
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It is available in a variety of visible light transmission, or VLT, levels. XPEL PRIME XR: PRIME XR utilizes a nano-ceramic construction, blocking 88% of infrared heat and does not interfere with radio, cellular or Bluetooth signals like a metallized film.
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XPEL PRIME CS: PRIME CS blocks solar heat radiation to keep vehicles at comfortable temperatures and blocks 99% of harmful UV rays. Available in both a black and neutral charcoal color, PRIME CS is designed to remain the same over the years and never fades or turns purple.
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OTHER FILMS: We also sell a variety of other automotive window films both under the PRIME brand and on a private-label basis, including: PRIME X-SERIES and PRIME AP in China, PRIME HP, PRIME GL, PRIME SD and more.
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Generally, these products are lower cost and are sold only in certain markets. 7 Automotive window film sales represented approximately 15% of our consolidated revenue for the year ended December 31, 2022.
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Miscellaneous Products, Tools and Pre-Cut Films: We sell a variety of other miscellaneous product sets which include: PRE-CUT FILM PRODUCTS: While most of our surface protection films, automotive window films and architectural window films are sold as rolls, we also offer to pre-cut them into vehicle specific shapes (if applicable) or cut them into smaller pieces or shapes to aide in the installation or to increase affordability or efficiency for our customers.
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XPEL FUSION PLUS CERAMIC COATING: XPEL FUSION PLUS is a hydrophobic, self-cleaning coating that can be applied to paint and paint protection film, wheels and calipers, plastic and trim, upholstery and glass.
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XPEL FUSION PLUS provides additional protection to these surfaces to enhance their appearance and protect from minor scratches. 8 TOOLS AND ACCESSORIES: We sell a variety of tools and accessories which are used in the installation of our products, including squeegees and microfiber towels, application fluids, plotter cutters, knives and more.
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Generally, these are offered as a service to our customers to provide one-stop shopping. MERCHANDISE AND APPAREL: We sell a variety of XPEL-branded merchandise and apparel which helps represent and build our brand. Strategic Overview XPEL continues to pursue several key strategic initiatives to drive continued growth.
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Through our distribution agreement with the China Distributor entered into on May 31, 2018, the China Distributor has rights to promote, market, distribute, sell and install our products in China. Additionally, we have granted the non-exclusive right to the China Distributor to use our software in connection with customers’ purchases of our products.
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The China Distributor places orders with us on a prepaid basis at a price set by us, which we may change with 30 days’ notice. Certain of our products have minimum purchase requirements that increase annually. We have also granted the China Distributor a non-exclusive license to use our brands to promote sales of our products to end-users.
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The distribution agreement applies to separate product categories, distinguished by their exclusive or non-exclusive relationship with the China Distributor, each for a term of five years, each of which will automatically renew for up to three additional five-year periods unless otherwise terminated by either party with 60 days’ notice.
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For example, the European General Data Protection Regulation, or “GDPR”, took effect in May 2018 and applies to all of our products and services used by people in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union that are different from those previously in place in the European Union.
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In addition, the GDPR requires submission of breach notifications to our designated European privacy regulator and includes significant penalties for non-compliance with the notification obligation as well as other requirements of the regulation. The California Consumer Privacy Act, or AB 375, or CCPA, created new data privacy rights for users, beginning in 2020.
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Similarly, there are a number of legislative proposals in the European Union, the United States, at both the federal and state level, as well as other jurisdictions that could impose new obligations in areas affecting our business.
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In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
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The following represents a summary of our recycling results and impact to the environment in 2022: 13 Intellectual Property and Brand Protection We own intellectual property rights, including numerous patents, copyrights and trademarks, that support key aspects of our brand and products.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeTo the extent that this shortage persists, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. 18 Fluctuations in the cost and availability of raw materials, equipment, labor and transportation could cause manufacturing delays, increase our costs and/or impact our ability to meet customer demand.
Biggest changeA public health crisis could impact our business A public health crisis, including a pandemic, similar in nature to the coronavirus disease, could impact all geographic regions where we sell or produce products, creating business disruptions that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The failure or inadequacy of our IT systems, the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information, or the unauthorized access to, disruption of, or interference with our products and services that rely on IT systems, could impair our ability to secure and maintain intellectual property rights; result in a product manufacturing interruption or failure, or in the interruption or failure of products or services that rely on IT systems; damage our operations, customer relationships, or reputation; and cause us to lose trade secrets or other competitive advantages.
The failure or inadequacy of our IT systems, the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information, or the unauthorized 22 access to, disruption of, or interference with our products and services that rely on IT systems, could impair our ability to secure and maintain intellectual property rights; result in a product manufacturing interruption or failure, or in the interruption or failure of products or services that rely on IT systems; damage our operations, customer relationships, or reputation; and cause us to lose trade secrets or other competitive advantages.
If the Company sells poor-quality products or uses defective materials, the Company may incur unforeseen costs in excess of what it has reserved in its financial statements. These costs could have a material 24 adverse effect on the Company’s business, financial condition, operating cash flows and ability to make required debt payments. We sell our products under limited warranties.
If the Company sells poor-quality products or uses defective materials, the Company may incur unforeseen costs in excess of what it has reserved in its financial statements. These costs could have a material adverse effect on the Company’s business, financial condition, operating cash flows and ability to make required debt payments. We sell our products under limited warranties.
If the current agreement is abandoned, changed or violated by either party, we 15 could be forced to increase the sales price of our products, reduce margins, or otherwise suffer from trade restrictions or changes in policy levied by the U.S. or Chinese governments, any of which may have a material adverse effect on our business.
If the current agreement is abandoned, changed or violated by either party, we could be forced to increase the sales price of our products, reduce margins, or otherwise suffer from trade restrictions or changes in policy levied by the U.S. or Chinese governments, any of which may have a material adverse effect on our business.
We do not have direct control over the management or the business of these independent installers and new car dealerships, except indirectly through terms as negotiated with us. Should the 21 terms of doing business with them change, our business may be disrupted, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
We do not have direct control over the management or the business of these independent installers and new car dealerships, except indirectly through terms as negotiated with us. Should the terms of doing business with them change, our business may be disrupted, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
Any such charges could significantly harm our business, financial condition, results of operations and the price of our securities. Estimates and assumptions are made on an ongoing basis for the following: revenue recognition, capitalization of software development costs, impairment of long-lived assets, inventory reserves, allowances for doubtful accounts, fair value for business combinations, and impairment of goodwill.
Any such charges could significantly harm our business, 13 financial condition, results of operations and the price of our securities. Estimates and assumptions are made on an ongoing basis for the following: revenue recognition, capitalization of software development costs, impairment of long-lived assets, inventory reserves, allowances for doubtful accounts, fair value for business combinations, and impairment of goodwill.
Such issuances may 30 have a dilutive effect on our earnings per share, which could materially adversely affect the market price of our Common Stock. Anti-takeover provisions could make a third party acquisition of us difficult. Our bylaws eliminate the ability of stockholders to call special meetings or take action by written consent.
Such issuances may have a dilutive effect on our earnings per share, which could materially adversely affect the market price of our Common Stock. Anti-takeover provisions could make a third-party acquisition of us difficult. Our bylaws eliminate the ability of stockholders to call special meetings or take action by written consent.
We expect to analyze and evaluate the acquisition of strategic businesses or product lines with the potential to strengthen our industry position or enhance our existing set of product and service offerings. We may not be able to identify suitable acquisition candidates, obtain financing or have sufficient cash necessary for acquisitions or successfully complete acquisitions in the future.
We expect to analyze and evaluate the acquisition of 17 strategic businesses or product lines with the potential to strengthen our industry position or enhance our existing set of product and service offerings. We may not be able to identify suitable acquisition candidates, obtain financing or have sufficient cash necessary for acquisitions or successfully complete acquisitions in the future.
Intellectual property protection, however, may not preclude competitors from developing products similar to ours or from challenging our names or products. Further, as we expand on a multi-national level and in some jurisdictions where the protection of intellectual property rights is less robust, the risk of competitors duplicating our proprietary technologies increases.
Intellectual property protection, however, may not preclude competitors from developing products similar to ours or from challenging our names or products. Further, as we expand on a multi-national level and in some jurisdictions where the protection of intellectual property rights is less 21 robust, the risk of competitors duplicating our proprietary technologies increases.
These fluctuations may be caused by a number of factors, many of which are beyond our control. For example, changes in industry or third-party specifications may alter our development timelines and consequently our ability to deliver and monetize new or updated products and services.
These fluctuations may be caused by a number of factors, many of which are beyond our control. For example, changes in industry or third-party specifications may alter our development timelines and consequently our ability to deliver 15 and monetize new or updated products and services.
More vehicles entering a ride-sharing or car-sharing fleet could have an uncertain impact on our revenue as consumers could be less interested in accessorizing vehicles they own that are in the ride-sharing fleet. 20 Technology could render the need for some of our products obsolete.
More vehicles entering a ride-sharing or car-sharing fleet could have an uncertain impact on our revenue as consumers could be less interested in accessorizing vehicles they own that are in the ride-sharing fleet. Technology could render the need for some of our products obsolete.
If automotive paint technology were to improve substantially, such that newer paint did not chip, scratch and was generally not as susceptible to damage, or vehicles were manufactured in a way that no longer required painted surfaces, our revenue could be impacted.
If automotive paint technology were to improve substantially, such that newer paint did not chip, scratch and was generally not as susceptible to damage, or vehicles were manufactured in a way that no longer required painted surfaces, our revenue could be adversely impacted.
We may issue shares of preferred stock with greater rights than our Common Stock. Subject to the rules of The Nasdaq Stock Market, our articles of incorporation authorize our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of our Common Stock.
We may issue shares of preferred stock with greater rights than our Common Stock. Subject to the rules of The Nasdaq Stock Market, our articles of incorporation authorize our Board to issue one or more series of preferred stock and set the terms of the preferred stock without seeking any further approval from holders of our Common Stock.
Sales of shares of Common Stock under Rule 144 or another exemption under the Securities Act or pursuant to a registration statement could have a material adverse effect on the price of our Common Stock and could impair our ability to raise additional capital through the sale of equity securities.
Sales of shares of Common Stock under Rule 144 or another exemption under the Securities Act or pursuant to a registration statement could have a material adverse effect on 25 the price of our Common Stock and could impair our ability to raise additional capital through the sale of equity securities.
In addition, the Company may lack the experience to manage this transition effectively or may lack the appropriate personnel to successfully accomplish this transition. 17 The preparation of our financial statements involves the use of estimates, judgments and assumptions, and our financial statements may be materially affected if such estimates, judgments and assumptions prove to be inaccurate.
In addition, the Company may lack the experience to manage this transition effectively or may lack the appropriate personnel to successfully accomplish this transition. The preparation of our financial statements involves the use of estimates, judgments and assumptions, and our financial statements may be materially affected if such estimates, judgments and assumptions prove to be inaccurate.
This choice of forum provision may limit a stockholder’s ability to bring claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.
This choice of forum provision may limit a stockholder’s ability to bring claim in a judicial forum that it finds 26 favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.
Our success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these 23 and other factors will not have a material adverse effect on our international operations or on our business as a whole.
Our success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.
The resolution of any such dispute may be subject to the exercise of considerable discretion by the Chinese government and its agencies and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.
The resolution of any such dispute may be subject to the exercise of considerable discretion by the Chinese government and its 11 agencies and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.
The current administration instituted additional export controls in October 2022. Although the current U.S. administration has continued to enforce the phase one agreement, the future of U.S. and Chinese trade relations is uncertain.
The current administration instituted additional export controls in October 2022 and October 2023. Although the current U.S. administration has continued to enforce the phase one agreement, the future of U.S. and Chinese trade relations is uncertain.
It remains unclear what the 25 U.S. administration or foreign governments, including China, will or will not do with respect to tariffs, the U.S.MCA or other international trade agreements and policies.
It remains unclear what the U.S. administration or foreign governments, including China, will or will not do with respect to tariffs, the U.S.MCA or other international trade agreements and policies.
If any of our sources of supply were to deteriorate or operations were to be disrupted as a result of disagreements with one or more of our contract manufacturers or suppliers, COVID-19, significant equipment failures, natural disasters, earthquakes, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other reasons, we may be unable to fill customer orders or otherwise meet customer demand for our products.
If any of our sources of supply were to deteriorate or operations were to be disrupted as a result of disagreements with one or more of our contract manufacturers or suppliers, significant equipment failures, natural disasters, earthquakes, power outages, fires, explosions, terrorism, adverse weather conditions, labor disputes or other reasons, we may be unable to fill customer orders or otherwise meet customer demand for our products.
In addition, we have sought to, and may continue to seek to grow through strategic acquisitions. Our growth strategy may place significant demands on our management and our operational and financial infrastructure.
In addition, we have sought to, and may continue to seek to grow through strategic acquisitions. Our growth strategy may place significant demands on our 19 management and our operational and financial infrastructure.
The Company distributes all of its products in China through one distributor, with sales to such distributor representing approximately 10.5% of our consolidated revenue for the year ended December 31, 2022. The China Distributor places orders with us on a prepaid basis at a price set by us, which we may change with 30 days’ notice.
The Company distributes all of its products in China through one distributor, with sales to such distributor representing approximately 10.5% of our consolidated revenue for the year ended December 31, 2023. The China Distributor places orders with us on a prepaid basis at a price set by us, which we may change with 30 days’ notice.
New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, the then-current holders of 29 our Common Stock.
New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, the then-current holders of our Common Stock.
Any such disruption or failure by us to obtain a sufficient supply of our products to satisfy customer demand could increase our costs and reduce our sales, either of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our contract manufacturers and suppliers have been subject to various supply chain disruptions.
Any such disruption or failure by us to obtain a sufficient supply of our products to satisfy customer demand could increase our costs and reduce our sales, either of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our contract manufacturers and suppliers could be subject to various supply chain disruptions.
The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Uncertain interpretation of law There are substantial uncertainties regarding the interpretation and application of the laws and regulations in the greater China area, including, but not limited to, the laws and regulations governing our business.
The occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations. Uncertain interpretation of law There are substantial uncertainties regarding the interpretation and application of the laws and regulations in the greater China area, including, but not limited to, the laws and regulations governing our business.
Item 1A. Risk Factors This Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result 14 of certain factors, including the risks we face as described below and elsewhere in this Annual Report.
Item 1A. Risk Factors 10 This Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this Annual Report.
During the year ended December 31, 2022, approximately 10.5% of our consolidated revenue was generated in China, more than any other country outside of the U.S. and Canada in which we operate, and we expect to continue to expand our business in China.
During the year ended December 31, 2023, approximately 10.5% of our consolidated revenue was generated in China, more than any other country outside of the U.S. and Canada in which we operate, and we expect to continue to expand our business in China.
A material disruption from our contract manufacturers or suppliers, or our inability to obtain a sufficient supply of product from alternate suppliers, could cause us to be unable to meet customer demands or increase our costs.
A material disruption from our contract manufacturers or suppliers, or our inability to obtain a sufficient supply of products from alternate suppliers, could cause us to be unable to meet customer demands or increase our costs.
Liquidity Risks 27 We may seek to incur substantially more indebtedness in the future.
Liquidity Risks We may seek to incur substantially more indebtedness in the future.
The GDPR also confers a private right of action on certain individuals and associations. In addition, the CCPA became effective in January 2020 and has similar requirements to the GDPR.
The GDPR also confers a private right of action on certain individuals and associations. In addition, the CPRA became effective in January 2020 and has similar requirements to the GDPR.
Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Common Stock, or both. Holders of our Common Stock are not entitled to pre-emptive rights or other protections against dilution.
Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Common Stock, or both. Holders of our Common Stock are not entitled to preemptive rights or other protections against dilution.
We have established a liability reserve under these warranties based on a review of historical warranty claims. Our liability reserve for warranties as of the year ended December 31, 2022 was $0.2 million. The warranty reserve may not be sufficient to cover the costs associated with future warranty claims.
We have established a liability reserve under these warranties based on a review of historical warranty claims. Our liability reserve for warranties as of the year ended December 31, 2023 was $0.4 million. The warranty reserve may not be sufficient to cover the costs associated with future warranty claims.
If we are unable to retain and acquire new customers, our financial performance may be materially and adversely affected. We are exposed to political, regulatory, economic and other risks that arise from operating a multinational business. Sales outside of the U.S. for the year ended December 31, 2022 accounted for approximately 41% of our consolidated revenue.
If we are unable to retain and acquire new customers, our financial performance may be materially and adversely affected. 18 We are exposed to political, regulatory, economic and other risks that arise from operating a multinational business. Sales outside of the U.S. for the year ended December 31, 2023 accounted for approximately 43% of our consolidated revenue.
Our asset-light model for manufacturing trades lower fixed costs for higher variable costs. If existing or new competitors have lower variable costs, our ability to effectively compete could be impacted. If we choose to transition away from our asset-light model approach, our capital requirements and capital allocation decisions may fundamentally change which may introduce additional operational, environmental and other risks.
If existing or new competitors have lower variable costs, our ability to effectively compete could be impacted. If we choose to transition away from our asset-light model approach, our capital requirements and capital allocation decisions may fundamentally change which may introduce additional operational, environmental and other risks.
Consumers are generally more willing to make discretionary purchases on products and services such as ours during periods of favorable general economic conditions.
Our products and services are discretionary purchases for most consumers. Consumers are generally more willing to make discretionary purchases on products and services such as ours during periods of favorable general economic conditions.
Expressed as a percentage of total consolidated revenue for the year ended December 31, 2022, these figures represented 7.6% and 3.2%, respectively. If modifications to existing terms of the existing trade agreement between the United Kingdom and the European Union were to occur, the changes could negatively impact our competitive position, supplier and customer relationships and financial performance.
Expressed as a percentage of total consolidated revenue for the year ended December 31, 2023, these figures represented 8.8% and 3.4%, respectively. If modifications to existing terms of the existing trade agreement between the United Kingdom and the European Union were to occur, the changes could negatively impact our competitive position, supplier and customer relationships and financial performance.
The trading price of our Common Stock has been and could continue to be subject to wide fluctuations in response to certain factors, including: • U.S. and global economic conditions leading to general declines in market capitalizations, with such declines not associated with operating performance. • Quarter-to-quarter variations in results of operations. • Our announcements of new products. • Our announcements of acquisitions or divestitures. • Our announcements of significant new customers or contracts. • Our competitors’ announcements of new products. • Our product development. • Changes in our management team. • General conditions in our industry. • Investor perceptions and expectations regarding our products, services, plans and strategic position and those of our competitors and clients.
The trading price of our Common Stock has been and could continue to be subject to wide fluctuations in response to certain factors, including: • U.S. and global economic conditions leading to general declines in market capitalizations, with such declines not associated with operating performance. • Quarter-to-quarter variations in results of operations. • Our announcements of new products. • Our announcements of acquisitions or divestitures. • Our announcements of significant new customers or contracts. • Our competitors’ announcements of new products. • Our product development. • Changes in our management team. • General conditions in our industry. • Investor perceptions and expectations regarding our products, services, plans and strategic position and those of our competitors and clients. 24 In addition, the public stock markets experience extreme price and trading volume volatility, particularly in growth sectors of the market.
If we are unable to differentiate or successfully adapt our products, services and solutions from competitors, or if we decide to cut prices or to incur additional costs to remain competitive, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. 19 Harm to our reputation or the reputation of one or more of our products could have an adverse effect on our business.
If we are unable to differentiate or successfully adapt our products, services and solutions from competitors, or if we decide to cut prices or to incur additional costs to remain competitive, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
While Russia’s invasion of Ukraine has not had a material direct impact on our business, and our related direct exposure is limited, the nature and degree of the effects of that conflict, as well as the other effects of the current business environment over time remain uncertain.
While Russia’s invasion of Ukraine and the Israel-Hamas conflict have not had a material direct impact on our business, and our related direct exposure is limited, the nature and degree of the effects of these conflicts, as well as the other effects of the current business environment over time remain uncertain.
We maintain an aggressive approach to defending our intellectual property. If we are unable to adequately protect our intellectual property or if our patterns become widely available without our permission, our revenue could be impacted.
If we are unable to adequately protect our intellectual property or if our patterns become widely available without our permission, our revenue could be impacted.
Our directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately 19.0% of our outstanding Common Stock as of February 28, 2023.
Our directors and executive officers, together with their affiliates and related persons, beneficially owned, in the aggregate, approximately 9.5% of our outstanding Common Stock as of February 28, 2024.
Changes in the United Kingdom's economic and other relationships with the European Union could adversely affect us. We have significant operations in both the European Union and the United Kingdom. In the year ended December 31, 2022, our European Union (excluding the United Kingdom) and United Kingdom sales totaled $24.7 million and $10.3 million, respectively.
Changes in the United Kingdom's economic and other relationships with the European Union could adversely affect us. We have significant operations in both the European Union and the United Kingdom. In the year ended December 31, 2023, our European Union and United Kingdom sales totaled $34.9 million and $13.4 million, respectively.
Our asset-light business model exposes us to product quality and variable cost risks We rely on the ability of contract manufacturers and suppliers to deliver adequate supplies of quality film. If contract manufacturers and suppliers are unable to deliver products that meet quality standards, we may lack recourse or the ability to make the quality improvements ourselves.
We rely on the ability of contract manufacturers and suppliers to deliver adequate supplies of quality film. If contract manufacturers and suppliers are unable to deliver products that meet quality standards, we may lack recourse or the ability to make the quality improvements ourselves. Our asset-light model for manufacturing trades lower fixed costs for higher variable costs.
As of February 28, 2023, we had 27,616,064 shares of Common Stock outstanding of which 5,257,982 shares were held by affiliates. All of the shares of Common Stock held by affiliates are restricted or control securities under Rule 144 promulgated under the Securities Act of 1933 as amended (the “Securities Act”).
As of February 28, 2024, we had 27,631,097 shares of Common Stock outstanding of which 2,616,697 shares were held by affiliates. All of the shares of Common Stock held by affiliates are restricted or controlled securities under Rule 144 promulgated under the Securities Act of 1933 as amended (the “Securities Act”).
If we are unable to successfully manage the production of quality film produced by our contract manufacturers on a timely basis, our ability to meet the demand of our customers may be severely impacted.
If we are unable to successfully manage the production of quality film produced by our contract manufacturers on a timely basis, our ability to meet the demand of our customers may be severely impacted. Our asset-light business model exposes us to product quality and variable cost risks.
In addition, the cost of responding to an intellectual property infringement claim, in terms of legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could have a material adverse effect on our business, results of operations and financial condition. 26 Failure, inadequacy, or breach of our information technology systems, infrastructure, and business information or violations of data protection laws could result in material harm to our business and reputation.
In addition, the cost of responding to an intellectual property infringement claim, in terms of legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could have a material adverse effect on our business, results of operations and financial condition.
In addition, the public stock markets experience extreme price and trading volume volatility, particularly in growth sectors of the market. This volatility has significantly affected the market prices of securities of many companies for reasons often unrelated to the operating performance of the specific companies. The broad market fluctuations may adversely affect the market price of our Common Stock.
This volatility has significantly affected the market prices of securities of many companies for reasons often unrelated to the operating performance of the specific companies. The broad market fluctuations may adversely affect the market price of our Common Stock.
The failure to deliver our products in accordance with our delivery schedules could harm our relationships with independent installers and new car dealerships, distributors and 22 franchisees, which could adversely affect our net sales, profitability and the implementation of our growth strategy.
The failure to deliver our products in accordance with our delivery schedules could harm our relationships with independent installers and new car dealerships, distributors and franchisees, which could adversely affect our net sales, profitability and the implementation of our growth strategy. If we are unable to retain and acquire new customers, our financial performance may be materially and adversely affected.
We believe that maintaining and developing the reputation of our products is critical to our success and that the importance of brand recognition for our products increases as competitors offer products similar to our products.
Harm to our reputation or the reputation of one or more of our products could have an adverse effect on our business. We believe that maintaining and developing the reputation of our products is critical to our success and that the importance of brand recognition for our products increases as competitors offer products similar to our products.
Upon a default under our credit facilities, the lenders could also foreclose against any collateral securing such obligations, which may be all or substantially all of our assets. If that occurred, we may not be able to continue to operate as a going concern.
Upon a default under our credit facilities, the lenders could also foreclose against any collateral securing such obligations, which may be all or substantially all of our assets.
Additionally, as we introduce new products and as our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition. Our principal competitors have significantly greater resources than we do. This may allow our competitors to respond more effectively than we can to new or emerging technologies and changes in market requirements.
Our principal competitors have significantly greater resources than we do. This may allow our competitors to respond more effectively than we can to new or emerging technologies and changes in market requirements.
As we grow, the incentives to attract, retain, and motivate employees may not be as effective as in the past. If we do not succeed in attracting, hiring, and integrating effective personnel, or retaining and motivating existing personnel, our business could be adversely affected.
If 12 we do not succeed in attracting, hiring, and integrating effective personnel, or retaining and motivating existing personnel, our business could be adversely affected.
Our ability to produce and timely deliver our products may be materially impacted in the future if these supply chain disruptions continue or worsen. In addition, because of rising costs, we may be forced to increase the price of our products to our customers, or we may have to reduce our gross margins on the products that we sell.
In addition, because of rising costs, we may be forced to increase the price of our products to our customers, or we may have to reduce our gross margins on the products that we sell.
We cannot be certain that additional financing will be available on reasonable terms when required, or at all. From time to time, we may need additional financing. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors.
Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors.
While these supply chain disruptions have not yet slowed the delivery of products, any such disruption could cause us to not be able to meet demand due to a lack of inventory and/or cause a significant increase in costs of raw materials and shipping costs.
Such disruptions could cause us to not be able to meet demand due to a lack of inventory and/or cause a significant increase in costs of raw materials and shipping costs. Our ability to produce and timely deliver our products may be materially impacted in the future should supply chain disruptions develop or worsen.
The price and availability of key components used to manufacture our products may fluctuate significantly. Any fluctuations in the cost and availability of any of our products and/or any interruptions in the delivery of our products could harm our gross margins and our ability to meet customer demand.
Fluctuations in the cost and availability of raw materials, equipment, labor and transportation could cause manufacturing delays, increase our costs and/or impact our ability to meet customer demand. The price and availability of key components used to manufacture our products may fluctuate significantly.
The trading market for our Common Stock may depend in part on the research and reports that research analysts publish about us and our business.
Risks Relating to Common Stock If research analysts issue unfavorable commentary or downgrade our Common Stock, the price of our Common Stock and its trading volume could decline. The trading market for our Common Stock may depend in part on the research and reports that research analysts publish about us and our business.
Important factors for our business and the businesses of our customers include the overall strength of the economy and our customers’ confidence in the economy, unemployment rates, availability of consumer financing and interest rates. Our products and services are discretionary purchases for most consumers.
We expect to experience fluctuations in revenue and results of operations due to economic and business cycles. Important factors for our business and the businesses of our customers include the overall strength of the economy and our customers’ confidence in the economy, unemployment rates, availability of consumer financing and interest rates.
We face significant competition from a number of companies, many of whom have greater financial, marketing and technical resources than us, as well as regional and local companies and lower-cost manufacturers of automotive and other products. Such competition may result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products.
The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company. We face significant competition from a number of companies, many of whom have greater financial, marketing and technical resources than us, as well as regional and local companies and lower-cost manufacturers of automotive and other products.
We operate in many parts of the world that are recognized as having governmental and commercial corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or third-party intermediaries.
We operate in many parts of the world that are recognized as having governmental and commercial 20 corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices.
For example, potential customers may request products or services that we currently do not provide and may be unwilling to wait until we can develop or source such additional products or services.
Our financial performance and operations are dependent on retaining our current customers and acquiring new customers. A number of factors could negatively affect our customer retention or acquisition. For example, potential customers may request products or services that we currently do not provide and may be unwilling to wait until we can develop or source such additional products or services.
As interest rates increase, our debt service obligations on certain of our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. 28 Risks Relating to Common Stock If research analysts issue unfavorable commentary or downgrade our Common Stock, the price of our Common Stock and its trading volume could decline.
Borrowings under our credit facilities are at variable rates of interest and expose us to interest rate volatility. As interest rates increase, our debt service obligations on certain of our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.
A great deal of confidential information owned by us is stored in our information systems, networks, and facilities or those of third parties. This includes valuable trade secrets and intellectual property, corporate strategic plans, marketing plans, customer information, and personally identifiable information, such as employee information (collectively, “confidential information”).
This includes valuable trade secrets and intellectual property, corporate strategic plans, marketing plans, customer information, and personally identifiable information, such as employee information (collectively, “confidential information”).
We create patterns for our DAP platform through a combination of technology and skilled labor. If technology for pattern creation were improved or if paint protection film properties fundamentally changed, our proprietary patterns could become more widely available and our business could be negatively impacted.
If technology for pattern creation were improved or if paint protection film properties fundamentally changed, our proprietary patterns could become more widely available, and our business could be negatively impacted. 16 Similarly, our automotive and architectural window films could be impacted by changes or enhancements from automotive manufacturers or window manufacturers that would reduce the need for our products.
Loss of key personnel, including members of management as well as key product development, marketing, and sales personnel, could disrupt our operations and have an adverse effect on our business. As we continue to grow, we cannot guarantee that we will continue to attract the personnel we need to maintain our competitive position.
Wood, our Senior Vice President and Chief Financial Officer, none of whom has an employment agreement. Loss of key personnel, including members of management as well as key product development, marketing, and sales personnel, could disrupt our operations and have an adverse effect on our business.
If we are unable to successfully mitigate these cost increases, supply interruptions and/or labor shortages, our results of operations could be affected. The after-market automotive product supply business is highly competitive. Competition presents an ongoing threat to the success of our Company.
Any fluctuations in the cost and availability of any of our products and/or any interruptions in the delivery of our products could harm our gross margins and our ability to meet customer demand. If we are unable to successfully mitigate these cost increases, supply interruptions and/or labor shortages, our results of operations could be affected.
The choice of forum provision does not apply to any actions arising under the Securities Act or the Securities Exchange Act. General Risk Factors Pandemics have in the past and may in the future have a significant negative impact on our financial condition and operations.
The choice of forum provision does not apply to any actions arising under the Securities Act or the Securities Exchange Act. General Risk Factors General global economic and business conditions affect demand for our products. We compete in various geographic regions and markets around the world.
We currently depend on the continued services and performance of our executive officers, Ryan L. Pape, our President and Chief Executive Officer, Barry R. Wood, our Senior Vice President and Chief Financial Officer and Mathieu Moreau, our Senior Vice President, Sales and Product, none of whom has an employment agreement.
The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business. We currently depend on the continued services and performance of our executive officers, Ryan L. Pape, our President and Chief Executive Officer and Barry R.
Similarly, our automotive and architectural window films could be impacted by changes or enhancements from automotive manufacturers or window manufacturers that would reduce the need for our products. Infringement of our intellectual property could impact our ability to compete effectively Our intellectual property, particularly our patterns, are susceptible to being copied without our authorization.
Infringement of our intellectual property could impact our ability to compete effectively. Our intellectual property, particularly our patterns, is susceptible to being copied without our authorization. We maintain an aggressive approach to defending our intellectual property.
Removed
Management of COVID-19 The Chinese government continues to grapple with COVID-19 in country. Throughout much of 2022, the government enforced a total lockdown in most parts of the country which negatively impacted the Company’s revenue from China. Recently, the lockdowns were lifted resulting in rampant infections across China.
Added
As we continue to grow, we cannot guarantee that we will continue to attract the personnel we need to maintain our competitive position. As we grow, the incentives to attract, retain, and motivate employees may not be as effective as in the past.
Removed
We cannot predict the impact of the continuing spread of COVID-19 in China.
Added
Such competition may result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products. 14 Additionally, as we introduce new products and as our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition.
Removed
If COVID-19 persists over the long-term, it could negatively impact our China sales which, in turn, could have a material adverse effect on our business, financial condition, results of operations and cash flows. 16 The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
Added
We create patterns for our DAP platform through a combination of technology and skilled labor.
Removed
Automobile manufacturers continue to experience a global semiconductor shortage which has affected production of vehicles and, in turn, the inventory of vehicles at new car dealerships.
Added
We cannot assure you that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or third-party intermediaries.
Removed
If we are unable to retain and acquire new customers, our financial performance may be materially and adversely affected. Our financial performance and operations are dependent on retaining our current customers and acquiring new customers. A number of factors could negatively affect our customer retention or acquisition.
Added
Failure, inadequacy, or breach of our information technology systems, infrastructure, and business information or violations of data protection laws could result in material harm to our business and reputation. A great deal of confidential information owned by us is stored in our information systems, networks, and facilities or those of third parties.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties Our principal office is located in leased premises in San Antonio, Texas. Our operations are conducted in facilities throughout North America, Europe, and Asia. These facilities house production, distribution and operations, installation services, sales and marketing, and administrative functions. A summary of our principal facilities as of December 31, 2022 is set forth in the chart below.
Biggest changeItem 2. Properties Our principal office is located in leased premises in San Antonio, Texas. Our operations are conducted in facilities throughout North America, Europe, Asia and Australia. These facilities house production, distribution and operations, installation services, sales and marketing, and administrative functions.
Country Installation and Sales Locations Warehouse Locations Administrative, Training, and Other Locations Leased Square Footage United States 8 4 1 273,342 Continental Europe 1 1 2 85,360 Canada 3 3 1 42,379 Mexico — 1 — 13,659 United Kingdom 1 1 — 14,835 Taiwan 1 — — 6,381 We believe that our facilities are suitable for their purpose and are sufficient to support our current business needs.
Country or Region Installation and Sales Locations Warehouse Locations Administrative, Training, and Other Locations Leased Square Footage United States 10 3 1 291,900 Continental Europe 3 1 2 88,451 Canada 10 3 1 73,506 Mexico 1 1 — 13,659 United Kingdom 1 1 — 14,835 Asia Pacific 2 1 — 20,484 We believe that our facilities are suitable for their purpose and are sufficient to support our current business needs. 28
Added
A summary of our principal facilities as of December 31, 2023 is set forth in the chart below.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWhile 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 32 charges that could have a material adverse impact.
Biggest changeWhile 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.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeWe have chosen to use the Russell 2000 Index rather than an industry or line-business index because we do not believe our company is comparable to companies in a particular industry or line-of-business such as after-market automotive product companies and we have not used a peer group of companies because our major competitors are either much larger than we are and their competitive products constitute small lines of business for these companies or other competitors are private companies. 33 Purchases of Equity Securities In the year ended December 31, 2022 we did not repurchase any shares of our Common Stock.
Biggest changeThe historical stock performance presented below is not intended to and may not be indicative of future stock performance. 29 We have chosen to use the Russell 2000 Index rather than an industry or line-business index because we do not believe our company is comparable to companies in a particular industry or line-of-business such as after-market automotive or consumer discretionary product companies and we have not used a peer group of companies because our major competitors are either much larger than we are and their competitive products constitute small lines of business for these companies or other competitors are private companies.
This does not include shares held in “street name.” Dividend Policy Holders of our Common Stock are entitled to receive such dividends as declared by our Board. No dividends have been paid with respect to our Common Stock and no dividends are anticipated to be paid in the foreseeable future.
This number of stockholders does not include shares held in “street name.” Dividend Policy Holders of our Common Stock are entitled to receive such dividends as declared by our Board. No dividends have been paid with respect to our Common Stock and no dividends are anticipated to be paid in the foreseeable future.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company’s Common Stock is traded on The Nasdaq Stock Market LLC under the symbol “XPEL”. Holders As of February 28, 2023, there were 11 stockholders of record.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company’s Common Stock is traded on The Nasdaq Stock Market LLC under the symbol “XPEL”. Holders As of February 28, 2024, there were 11 stockholders of record.
The following data and graph show a comparison of the cumulative total stockholder return for XPEL’s common stock, the Russell 2000 Index and the S&P 500 Index from July 19, 2019 (the date our Common Stock began trading on the Nasdaq Stock Market) through December 31, 2022.
The following data and graph show a comparison of the cumulative total stockholder return for XPEL’s common stock, the Russell 2000 Index and the S&P 500 Index from December 31, 2019 through December 31, 2023.
The data assumes a hypothetical investment of $100 on July 19, 2019 in our common stock and each of the indices, and reinvestment of any dividends. The historical stock performance presented below is not intended to and may not be indicative of future stock performance.
The data assumes a hypothetical investment of $100 on July 19, 2019 in our common stock and each of the indices, and reinvestment of any dividends.
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Purchases of Equity Securities In the year ended December 31, 2023 we did not repurchase any shares of our Common Stock. Item 6. [Reserved]

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe following tables summarize revenue results for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands): Year Ended December 31, % Change % of Total Revenue 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 2022 2021 2020 Product Revenue Paint protection film $ 192,374 $ 169,880 $ 110,786 13.2 % 53.3 % 59.4 % 65.5 % 69.7 % Window film 54,370 38,363 20,951 41.7 % 83.1 % 16.8 % 14.8 % 13.2 % Other 11,430 9,040 4,525 26.4 % 99.8 % 3.5 % 3.5 % 2.8 % Total $ 258,174 $ 217,283 $ 136,262 18.8 % 59.5 % 79.7 % 83.8 % 85.7 % Service Revenue Software $ 5,213 $ 4,373 $ 3,489 19.2 % 25.3 % 1.6 % 1.7 % 2.2 % Cutbank credits 16,317 12,372 7,785 31.9 % 58.9 % 5.0 % 4.8 % 4.9 % Installation labor 42,828 24,253 10,925 76.6 % 122.0 % 13.2 % 9.4 % 6.9 % Training and other 1,461 982 463 48.8 % 112.1 % 0.5 % 0.3 % 0.3 % Total $ 65,819 $ 41,980 $ 22,662 56.8 % 85.2 % 20.3 % 16.2 % 14.3 % Total $ 323,993 $ 259,263 $ 158,924 25.0 % 63.1 % 100.0 % 100.0 % 100.0 % 37 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.
Biggest changeThe following tables summarize revenue results for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands): Year Ended December 31, % Change % of Total Revenue 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 2023 2022 2021 Product Revenue Paint protection film $ 229,880 $ 192,374 $ 169,880 19.5 % 13.2 % 58.0 % 59.4 % 65.5 % Window film 67,951 54,370 38,363 25.0 % 41.7 % 17.1 % 16.8 % 14.8 % Other 13,575 11,430 9,040 18.8 % 26.4 % 3.5 % 3.5 % 3.5 % Total $ 311,406 $ 258,174 $ 217,283 20.6 % 18.8 % 78.6 % 79.7 % 83.8 % Service Revenue Software $ 6,518 $ 5,213 $ 4,373 25.0 % 19.2 % 1.6 % 1.6 % 1.7 % Cutbank credits 17,626 16,317 12,372 8.0 % 31.9 % 4.4 % 5.0 % 4.8 % Installation labor 58,477 42,828 24,253 36.5 % 76.6 % 14.8 % 13.2 % 9.4 % Training and other 2,266 1,461 982 55.1 % 48.8 % 0.6 % 0.5 % 0.3 % Total $ 84,887 $ 65,819 $ 41,980 29.0 % 56.8 % 21.4 % 20.3 % 16.2 % Total $ 396,293 $ 323,993 $ 259,263 22.3 % 25.0 % 100.0 % 100.0 % 100.0 % 33 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.
Although we believe the assumptions and estimates made were reasonable and appropriate, these estimates require judgment and are based in part on historical experience and information obtained from the management of the acquired entities. Inventory Valuation Inventories are stated at the lower of cost or net realizable value. Cost is determined on a weighted average cost basis.
Although we believe the assumptions and estimates made were reasonable and appropriate, these estimates require judgment and are based in part on historical experience and information obtained from the management of the acquired entities. 38 Inventory Valuation Inventories are stated at the lower of cost or net realizable value. Cost is determined on a weighted average cost basis.
We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is 35 not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations.
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.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted Refer to Note 1 to the Consolidated Financial Statements for discussion of recently adopted accounting standards and accounting standards not yet adopted. 42 Related Party Relationships There are no family relationships between or among any of our directors or executive officers.
Recently Adopted Accounting Pronouncements and Accounting Pronouncements Not Yet Adopted Refer to Note 1 to the Consolidated Financial Statements for discussion of recently adopted accounting standards and accounting standards not yet adopted. Related Party Relationships There are no family relationships between or among any of our directors or executive officers.
Discussions of the periods prior to the year ended December 31, 2021 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 and the discussion therein for the year ended December 31, 2021 compared to the year ended December 31, 2020 is incorporated by reference into this Annual Report.
Discussions of the periods prior to the year ended December 31, 2022 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 and the discussion therein for the year ended December 31, 2022 compared to the year ended December 31, 2021 is incorporated by reference into this Annual Report.
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 its usefulness as a comparative measure. 36 Results of Operations This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2022 and 2021 and year-over-year comparisons between those years.
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 its usefulness as a comparative measure. 32 Results of Operations This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2023 and 2022 and year-over-year comparisons between those years.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Executive Summary Set forth below is summary financial information for the years ended December 31, 2022, 2021, and 2020.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Executive Summary Set forth below is summary financial information for the years ended December 31, 2023, 2022, and 2021.
Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased by 19.5% from the year ended December 31, 2021 due mainly to the same factors described previously. Cost of Sales Cost of sales consists of product costs and the costs to provide our services.
Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased by 19.9% from the year ended December 31, 2022 due mainly to the same factors described previously. Cost of Sales Cost of sales consists of product costs and the costs to provide our services.
The decrease in service gross margin percentage was primarily due to a higher percentage of lower margin installation labor revenue relative to other higher margin service revenue components. Operating Expenses Sales and marketing expenses for the year ended December 31, 2022 increased 38.8% compared to 2021.
The decrease in service gross margin percentage was primarily due to a higher percentage of lower margin installation labor revenue relative to other higher margin service revenue components. Operating Expenses Sales and marketing expenses for the year ended December 31, 2023 increased 25.3% compared to 2022.
This information is not necessarily indicative of results of future operations, and should be read in conjunction with Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report to fully understand factors that may affect the comparability of the information presented below (dollars in thousands). 34 Year Ended December 31, % Change 2022 % of Total Revenue 2021 % of Total Revenue 2020 % of Total Revenue 2022 vs. 2021 2021 vs. 2020 Total revenue $ 323,993 100.0 % $ 259,263 100.0 % $ 158,924 100.0 % 25.0 % 63.1 % Total cost of sales 196,481 60.6 % 166,586 64.3 % 104,899 66.0 % 17.9 % 58.8 % Gross margin 127,512 39.4 % 92,677 35.7 % 54,025 34.0 % 37.6 % 71.5 % Total operating expenses 73,575 22.7 % 52,561 20.3 % 30,655 19.3 % 40.0 % 71.5 % Operating income 53,937 16.6 % 40,116 15.5 % 23,370 14.7 % 34.5 % 71.7 % Other expenses 1,972 0.6 % 676 0.3 % 565 0.4 % 191.7 % 19.5 % Income tax 10,584 3.3 % 7,873 3.0 % 4,523 2.8 % 34.4 % 74.1 % Net income $ 41,381 12.8 % $ 31,567 12.2 % $ 18,282 11.5 % 31.1 % 72.7 % Company Overview The Company is a leading provider of protective films and coatings, including automotive paint protection film, surface protection film, automotive and commercial/residential window films, and ceramic coatings with a global footprint, a network of trained installers and proprietary DAP software.
This information is not necessarily indicative of results of future operations, and should be read in conjunction with Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report to fully understand factors that may affect the comparability of the information presented below (dollars in thousands). 30 Year Ended December 31, % Change 2023 % of Total Revenue 2022 % of Total Revenue 2021 % of Total Revenue 2023 vs. 2022 2022 vs. 2021 Total Revenue $ 396,293 100.0 % $ 323,993 100.0 % $ 259,263 100.0 % 22.3 % 25.0 % Total Cost of Sales 233,879 59.0 % 196,481 60.6 % 166,586 64.3 % 19.0 % 17.9 % Gross Margin 162,414 41.0 % 127,512 39.4 % 92,677 35.7 % 27.4 % 37.6 % Total Operating Expenses 95,442 24.1 % 73,575 22.7 % 52,561 20.3 % 29.7 % 40.0 % Operating Income 66,972 16.9 % 53,937 16.6 % 40,116 15.5 % 24.2 % 34.5 % Other Expenses 941 0.2 % 1,972 0.6 % 676 0.3 % (52.3) % 191.7 % Income Tax 13,231 3.3 % 10,584 3.3 % 7,873 3.0 % 25.0 % 34.4 % Net Income $ 52,800 13.3 % $ 41,381 12.8 % $ 31,567 12.2 % 27.6 % 31.1 % Company Overview The Company is a leading provider of protective films and coatings, including automotive paint protection film, surface protection film, automotive and commercial/residential window films, and ceramic coatings with a global footprint, a network of trained installers and proprietary DAP software.
The U.S. and Canadian markets are our most mature markets. Our continued strong growth in these markets was being driven primarily by increased paint protection film attachment rates. Outside of these more mature markets, our continued strong growth was driven by increased product awareness and adoption.
Geographically, we experienced growth in many regions during the year. The U.S. and Canadian markets are our most mature markets. Our continued strong growth in these markets was being driven primarily by increased paint protection film attachment rates. Outside of these more mature markets, our continued strong growth was driven by increased product awareness and adoption. Service revenue.
During 2022, service revenue grew 56.8% over service revenue for the year ended December 31, 2021. Within the service revenue category, software revenue increased 19.2% from the year ended December 31, 2021. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit revenue grew 31.9% from the year ended December 31, 2021.
During 2023, service revenue grew 29.0% over service revenue for the year ended December 31, 2022. Within the service revenue category, software revenue increased 25.0% from the year ended December 31, 2022. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit revenue grew 8.0% from the year ended December 31, 2022.
The following table is a reconciliation of Net income to EBITDA for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands): 2022 % of Total Revenue 2021 % of Total Revenue 2020 % of Total Revenue Net Income $ 41,381 12.8 % $ 31,567 12.2 % $ 18,282 11.5 % Interest 1,410 0.4 % 303 0.1 % 249 0.2 % Taxes 10,584 3.3 % 7,873 3.0 % 4,523 2.8 % Depreciation 3,433 1.1 % 1,887 0.7 % 1,274 0.8 % Amortization 4,401 1.4 % 2,501 1.0 % 956 0.6 % EBITDA $ 61,209 18.9 % $ 44,131 17.0 % $ 25,284 15.9 % Use of Non-GAAP Financial Measures EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.
The following table is a reconciliation of Net Income to EBITDA for the years ended December 31, 2023, 2022, and 2021 (dollars in thousands): 2023 % of Total Revenue 2022 % of Total Revenue 2021 % of Total Revenue Net Income $ 52,800 13.3 % $ 41,381 12.8 % $ 31,567 12.2 % Interest 1,248 0.3 % 1,410 0.4 % 303 0.1 % Taxes 13,231 3.3 % 10,584 3.3 % 7,873 3.0 % Depreciation 4,534 1.1 % 3,433 1.1 % 1,887 0.7 % Amortization 5,059 1.3 % 4,401 1.4 % 2,501 1.0 % EBITDA $ 76,872 19.4 % $ 61,209 18.9 % $ 44,131 17.0 % 31 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.
Cash flows used in investing activities totaled approximately $14.2 million during the year ended December 31, 2022 compared to cash use of $56.8 million the year ended December 31, 2021. This decrease in cash used was due mainly to less cash outlay for acquisitions in 2022. Financing activities.
Cash flows used in investing activities totaled approximately $26.4 million during the year ended December 31, 2023 compared to cash use of $14.2 million for the year ended December 31, 2022. This increase in cash used was due mainly to additional cash outlay for acquisitions in 2023. Financing activities.
Critical Accounting Estimates We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates.
As of December 31, 2023 and December 31, 2022, no balance was outstanding on this facility. Critical Accounting Estimates We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates.
Gross Margin The following table summarizes gross margin for product and services for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands): Year Ended December 31, % Change % of Category Revenue 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 2022 2021 2020 Product $ 88,269 $ 65,997 $ 37,760 33.7 % 74.8 % 34.2 % 30.4 % 26.7 % Service 39,243 26,680 16,265 47.1 % 64.0 % 59.6 % 63.6 % 71.8 % Total $ 127,512 $ 92,677 $ 54,025 37.6 % 71.5 % 39.4 % 35.7 % 34.0 % Product gross margin for the year ended December 31, 2022 increased approximately $22.3 million, or 33.7%, over the year ended December 31, 2021 and represented 34.2% and 30.4% of total product revenue for the years ended December 31, 2022 and 2021, respectively.
Gross Margin The following table summarizes gross margin for product and services for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands): Year Ended December 31, % Change % of Category Revenue 2023 2022 2021 2023 vs. 2022 2022 vs. 2021 2023 2022 2021 Product $ 113,398 $ 88,269 $ 65,997 28.5 % 33.7 % 36.4 % 34.2 % 30.4 % Service 49,016 39,243 26,680 24.9 % 47.1 % 57.7 % 59.6 % 63.6 % Total $ 162,414 $ 127,512 $ 92,677 27.4 % 37.6 % 41.0 % 39.4 % 35.7 % Product gross margin for the year ended December 31, 2023 increased approximately $25.1 million, or 28.5%, over the year ended December 31, 2022 and represented 36.4% and 34.2% of total product revenue for the years ended December 31, 2023 and 2022, respectively.
Cash flows provided by financing activities during the year ended December 31, 2022 totaled approximately $0.6 million compared $19.2 million in the prior year. This decrease was due primarily to less incremental borrowing on our committed credit facilities.
Cash flows used in financing activities during the year ended December 31, 2023 totaled approximately $7.3 million compared to cash provided by financing activities of $0.6 million in the prior year. This use of cash was due primarily to net repayments on our credit facilities.
The following table represents our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the years ended December 31, 2022 and 2021 (dollars in thousands): Year Ended December 31, % % of Total Revenue 2022 2021 Increase 2022 2021 United States $ 189,890 $ 133,457 42.3 % 58.6 % 51.5 % China 33,993 46,305 (26.6) % 10.5 % 17.9 % Canada 38,997 30,540 27.7 % 12.0 % 11.8 % Continental Europe 24,713 19,605 26.1 % 7.6 % 7.6 % Middle East/Africa 10,499 9,736 7.8 % 3.2 % 3.8 % United Kingdom 10,298 7,714 33.5 % 3.2 % 3.0 % Asia Pacific 9,026 7,706 17.1 % 2.8 % 2.9 % Latin America 5,411 3,788 42.8 % 1.7 % 1.4 % Other 1,166 412 183.0 % 0.4 % 0.1 % Total $ 323,993 $ 259,263 25.0 % 100.0 % 100.0 % Revenue Product Revenue.
The following table represents our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the years ended December 31, 2023 and 2022 (dollars in thousands): Year Ended December 31, % % of Total Revenue 2023 2022 Increase 2023 2022 United States $ 224,839 $ 189,890 18.4 % 56.7 % 58.6 % Canada 43,506 38,997 11.6 % 11.0 % 12.0 % China 41,576 33,993 22.3 % 10.5 % 10.5 % Continental Europe 34,883 24,713 41.2 % 8.8 % 7.6 % Middle East/Africa 16,472 10,499 56.9 % 4.2 % 3.2 % United Kingdom 13,438 10,298 30.5 % 3.4 % 3.2 % Asia Pacific 11,943 9,026 32.3 % 3.0 % 2.8 % Latin America 8,737 5,411 61.5 % 2.2 % 1.7 % Other 899 1,166 (22.9) % 0.2 % 0.4 % Total $ 396,293 $ 323,993 22.3 % 100.0 % 100.0 % Revenue Product Revenue.
Net Income Net income for the year ended December 31, 2022 increased by 31.1% to $41.4 million compared to the prior year due primarily to continued strong revenue growth and improved margins. 40 Liquidity and Capital Resources The primary source of liquidity for our business is cash and cash equivalents and cash flows provided by operations.
Net Income Net income for the year ended December 31, 2023 increased by 27.6% to $52.8 million compared to the prior year due primarily to continued strong revenue growth and improved margins. 36 Liquidity and Capital Resources The primary sources of liquidity for our business are available cash and cash equivalents, cash flows provided by operations, and borrowings under our credit facilities.
Product revenue increased 18.8% during the year ended December 31, 2022 as compared to 2021 and represented 79.7% of our consolidated 2022 revenue. Within this category, revenue from our paint protection film product line increased 13.2% as compared to the prior year and represented 59.4% of total revenue for the year ended December 31, 2022.
Product revenue increased 20.6% during the year ended December 31, 2023 as compared to 2022 and represented 78.6% of our consolidated 2023 revenue. Within this category, revenue from our paint protection film product line increased 19.5% as compared to the prior year and represented 58.0% of total consolidated revenue for the year ended December 31, 2023.
Product costs in the year ended December 31, 2022 increased 12.3% over the year ended December 31, 2021 commensurate with the growth in product revenue. Cost of service revenue grew 73.7% during the year ended December 31, 2022. The increase was due primarily to increased labor costs associated with our dealership services businesses acquired in 2021.
Product costs in the year ended December 31, 2023 increased 16.5% over the year ended December 31, 2022 commensurate with the growth in product revenue. Cost of service revenue grew 35.0% during the year ended December 31, 2023. The increase was due primarily to increased labor costs associated with our expanding installation business.
Debt obligations, including balances outstanding on committed credit facilities, as of December 31, 2022 and December 31, 2021 totaled approximately $26.1 million and $25.5 million, respectively.
Debt obligations, including balances outstanding on committed credit facilities and contingent liabilities, as of December 31, 2023 and December 31, 2022 totaled approximately $19.9 million and $27.0 million, respectively.
This facility is utilized to fund our 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 December 31, 2022 and December 31, 2021, no balance was outstanding on this facility.
XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada. This facility is utilized to fund our 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.
General and administrative expenses grew approximately $13.9 million, or 40.6%, during the year ended December 31, 2022. These costs represented 14.9% and 13.2% of total consolidated revenue for the years ended December 31, 2022 and 2021, respectively.
These costs represented 16.1% and 14.9% of total consolidated revenue for the years ended December 31, 2023 and 2022, respectively.
Total installation revenue (labor and product combined) at our Company-owned installation centers for the year ended December 31, 2022 increased 76.6% over the year ended December 31, 2021. Same store sales growth was approximately 40.5% from the year ended December 31, 2022.
Training revenue increased 55.1% from the year ended December 31, 2022 as we continue to grow our global training presence. Total installation revenue (labor and product combined) at our Company-owned installation centers for the year ended December 31, 2023 increased 36.5% over the year ended December 31, 2022.
We believe we have the ability and sufficient resources to meet these cash requirements by using available cash, internally generated funds and borrowing under committed credit facilities. We are focused on continuing to generate positive operating cash to fund our operational and capital investment initiatives.
We expect to continue to have sufficient access to cash to support working capital needs, capital expenditures (including acquisitions), and to pay interest and service debt. We believe we have the ability and sufficient resources to meet these cash requirements by using available cash, internally generated funds and borrowing under committed credit facilities.
The decrease in operating cash flows for the year ended December 31, 2022 was driven primarily by changes in working capital and increased inventory purchases to offset supply chain risk. This decrease was partially offset by an increase in operating earnings. Investing activities .
Cash flows provided by operations totaled approximately $37.4 million for the year ended December 31, 2023, compared to $12.1 million for the year ended December 31, 2022. The increase in operating cash flows for the year ended December 31, 2023 was driven primarily by an increase in operating earnings and a reduction in inventory purchases. Investing activities .
This increase was due to continued channel focus, increased product adoption in multiple regions and increased demand. Architectural window film revenue increased 98.2% to $5.7 million. This increase was due mainly to increased product awareness and adoption in most of our regions. Geographically, we experienced growth in many regions during the year.
This product line includes both automotive and architectural window film. Automotive window film grew 20.2% to $58.5 million for the year ended December 31, 2023. This increase was due to continued channel focus, increased product adoption in multiple regions and increased demand. Architectural window film revenue increased 65.9% to $9.5 million.
Service gross margin increased approximately $12.6 million for the year ended December 31, 2022, and represented 59.6% and 63.6% of total service revenue for the years ended December 31, 2022 and 2021, respectively.
The increase in product gross margin percentages was primarily due to decreases in product costs, favorable changes in product mix and improved operating leverage. Service gross margin increased approximately $9.8 million for the year ended December 31, 2023, and represented 57.7% and 59.6% of total service revenue for the years ended December 31, 2023 and 2022, respectively.
We believe we have sufficient liquidity to operate for at least the next 12 months from the date of filing this Annual Report. Operating activities . Cash flows provided by operations totaled approximately $12.1 million for the year ended December 31, 2022, compared to $18.3 million for the year ended December 31, 2021.
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 Annual Report. Operating activities .
These expenses represented 7.8% and 7.0% of consolidated revenue for the years ended December 31, 2022 and 2021, respectively. This increase was due mainly to increased personnel, increased expenses related to marketing events that were suspended in 2021 due to COVID-19 and travel related expenses to support the on-going growth of the business.
These expenses represented 8.0% and 7.8% of consolidated revenue for the years ended December 31, 2023 and 2022, respectively. This increase was due mainly to increased personnel, and additional marketing projects intended to increase awareness of our brand globally. General and administrative expenses grew approximately $15.4 million, or 32.0%, during the year ended December 31, 2023.
This growth was due mainly to increases in demand for our film products across multiple regions partially offset by a decrease in sales to China resulting from regional impacts of the COVID-19 pandemic. The increase in demand in non-China regions was driven by both an increase in the number of customers and increased revenue from our existing customers.
This growth was due mainly to increases in demand for our film products across multiple regions. This increase was driven by both new customer additions and revenue growth in existing customers. Revenue from our window film product line grew 25.0% in the year ended December 31, 2023 and represented 17.1% of our consolidated annual 2023 revenue.
The Company is dedicated to exceeding customer expectations by providing high-quality products, leading customer service, expert technical support and world-class training. Trends and Uncertainties Macroeconomic uncertainties persist in the U.S. and other parts of the world as inflation, rising interest rates and the strengthening of the U.S.
The Company is dedicated to exceeding customer expectations by providing high-quality products, leading customer service, expert technical support and world-class training. 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.
This increase was due primarily to the aforementioned increases in demand for our products and services.
This increase was due primarily to the 34 aforementioned increases in demand for our products and services. Installation labor revenue increased 36.5% from the year ended December 31, 2022, due mainly to strong demand across our dealership service and OEM businesses and at our Company-owned installation facilities.
Income Tax Expense Our provision for income taxes increased 34.4% to $10.6 million in the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to the increase in our pre-tax income year over year. Our effective income tax rates for the years ended December 31, 2022 and 2021 were 20.4% and 20.0%, respectively.
The increase was due mainly to increases in personnel, occupancy costs, information technology costs, research and development costs and professional fees to support the ongoing growth of the business. 35 Income Tax Expense Our provision for income taxes was $13.2 million in the year ended December 31, 2023 as compared to $10.6 million in the year ended December 31, 2022.
The increase in our effective rate was primarily due to the impact of international operations. See Note 14 of the Notes to our Consolidated Financial Statements for further information.
Our effective income tax rates for the years ended December 31, 2023 and 2022 were 20.0% and 20.4%, respectively. See Note 14 of the Notes to our Consolidated Financial Statements for further information.
Revenue from our window film product line grew 41.7% in the year ended December 31, 2022 and represented 16.8% of our consolidated annual 2022 revenue. This product line contains both automotive and architectural window film. Automotive window film grew 37.1% to $48.7 million for the year ended December 31, 2022.
This increase was due mainly to increased product awareness and adoption in most of our regions. Other product revenue for the year ended December 31, 2023 grew 18.8% to $13.6 million and represented 3.5% of total consolidated revenue.
As of December 31, 2022, we had cash and cash equivalents of $8.1 million. For the year ended December 31, 2022, cash flows provided by operations were $12.1 million. We expect to continue to have sufficient access to cash to support working capital needs, capital expenditures (including acquisitions), and to pay interest and service debt.
As of December 31, 2023, we had cash and cash equivalents of $11.6 million, for the year ended December 31, 2023, cash flows provided by operations were $37.4 million, and as of December 31, 2023 we had approximately $109.4 million in funds available under our credit facilities.
Removed
Dollar relative to major currencies affected the economic environment and consumer behaviors in 2022. 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 persist into 2023.
Added
This increase was driven by an increase in demand for our non-film related products such as ceramic coating, plotters, chemicals and other film installation tools and accessories. Our FUSION ceramic coating product revenue grew 51.7% to $6.2 million. This increase was driven primarily by increased channel focus and increased demand for our ceramic coating products.
Removed
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.
Added
Credit Facilities The Company has a revolving credit 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 dated April 6, 2023 (the "Credit Agreement").
Removed
A prolonged or material contraction in the automotive sales and production volumes could adversely affect our business, results of operations and financial condition.” The Chinese government recently modified its approach to managing the COVID-19 pandemic when it halted its prolonged lockdown. Consequently, China is experiencing rampant increases in COVID-19 cases.
Added
As of December 31, 2023, the Company had an outstanding balance of $19.0 million 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.
Removed
If COVID-19 continues to persist over the long-term, it could continue to have an adverse effect on our China sales.
Added
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.
Removed
Refer to Risk Factors - ‘A significant percentage of our revenue is generated from our business in China, a market that is associated with certain risks.” Finally, while Russia’s invasion of Ukraine has not had a material direct impact on our business, the nature and degree of the effects of that conflict, as well as the other effects of the current business environment over time remain uncertain.
Added
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 37 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.
Removed
See Risk Factors- “We are exposed to political, regulatory, economic and other risks that arise from operating a multinational business.” 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.
Added
At December 31, 2023, these rates were 6.5% and 6.4%, 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.
Removed
An exception to this generally positive trend was our market in China, which saw repeated disruptions during the year as a result of ongoing COVID-related impacts. Service revenue.
Added
All capitalized terms in this 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.
Removed
Installation labor revenue increased 76.6% from the year ended December 31, 2021, due mainly to acquisition related revenue growth coupled with strong demand at our Company-owned installation facilities and across our dealer service and OEM network. 38 Training revenue increased 48.8% from the year ended December 31, 2021 as we continue to grow our global training presence.
Added
The terms of the Credit Agreement include certain affirmative and negative covenants that require, among other things, XPEL to maintain legal existence and remain in good standing, comply with applicable laws, maintain accounting records, deliver financial statements and certifications on a timely 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.
Removed
The increase in product gross margin percentages was primarily due to improved product costs, lower percentage of sales to lower margin distributors (primarily our China Distributor), and favorable changes in product mix.
Added
The Credit Agreement provides for 2 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.
Removed
The increase was due mainly to increases in personnel, occupancy costs, information technology costs and professional fees to support the ongoing growth of the 39 business and acquisition related expenses including amortization associated with the intangible assets acquired in 2021. Other Expense Other expense consists of interest expense and foreign currency gain/loss.
Removed
Interest expense increased during the year as a result of increased borrowings and increased interest rates under the Company’s line of credit facility. Foreign currency exchange loss increased during the year due to fluctuations in the various currencies in which we conduct business.
Removed
Credit Facilities As of December 31, 2022, we had a $75.0 million revolving line of credit agreement with a financial institution. The facility is used to fund the Company’s working capital needs and other strategic initiatives, and is secured by substantially all the Company’s current and future assets.
Removed
Borrowings under the credit agreement bear interest on borrowed amounts at the Wall Street Journal U.S. Prime Rate less 0.75% per annum if the Company's EBITDA ratio (as defined in the facility) is equal to or less than 2.00 to 1.00 or the Wall Street Journal U.S.
Removed
Prime rate less 0.25% if the Company's EBITDA ratio is greater than 2.00 to 1.00. The interest rate for this credit facility as of December 31, 2022 was 6.75%. The Company paid interest charges on borrowings under the facility of $1.3 million during the year ended December 31, 2022.
Removed
As of December 31, 2022, the Company had borrowed $26.0 million under this line of credit. This facility matures on July 5, 2024. The Loan Agreement governing the facility contains customary covenants relating to maintaining legal existence and good standing, complying with applicable laws, delivery of financial statements, 41 payment of taxes and maintaining insurance.
Removed
The Loan Agreement contains two financial covenants. The Company must maintain: 1. Senior Funded Debt divided (as defined in the Loan Agreement) 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.
Removed
A minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of 1.25 : 1.00 at the end of each fiscal quarter when measured on a rolling four-quarter basis. XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., also has a CAD $4.5 million revolving credit facility through HSBC Bank Canada.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

1 edited+0 added−0 removed4 unchanged
Biggest changeIf 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.
Biggest changeIf 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. 39

Other XPEL 10-K year-over-year comparisons