XPEL, Inc. (XPEL)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Executive Summary

Set forth below is summary financial information for the years ended December 31, 2024, 2023, and 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).

Company Overview

We are a supplier of protective films, coatings and related services primarily to the automobile aftermarket, new car dealerships and OEMs. The majority of our revenue is derived from the sale of our automotive products and related services while the remainder of our revenue is derived from non-automotive products including architectural window film and marine and flat surface protection films.

Key Business Metric - Non-GAAP Financial Measures

Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).

EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.

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The following table is a reconciliation of Net Income to EBITDA for the years ended December 31, 2024, 2023, and 2022 (dollars in thousands):

Use of Non-GAAP Financial Measures

EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.

EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

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Results of Operations

This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2024 and 2023 and year-over-year comparisons between those years. Discussions of the periods prior to the year ended December 31, 2023 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, 2023 and the discussion therein for the year ended December 31, 2023 compared to the year ended December 31, 2022 is incorporated by reference into this Annual Report.

The following tables summarize revenue results for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):

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Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the years ended December 31, 2024 and 2023 (dollars in thousands):

Revenue

Product Revenue. Product revenue increased 2.4% during the year ended December 31, 2024 as compared to 2023 and represented 75.8% of our consolidated 2024 revenue. Within this category, revenue from our paint protection film product line decreased 1.4% as compared to the prior year and represented 53.9% of total consolidated revenue for the year ended December 31, 2024. This decrease was primarily the result of a decline in sales into China offset by increases in most other operating regions. Sales into China were negatively impacted as our distributor continued to sell through excess inventory levels during the year.

Revenue from our window film product line grew 14.3% during the year ended December 31, 2024 and represented 18.5% of our consolidated annual 2024 revenue. This product line includes both automotive and architectural window film. Automotive window film revenue grew 12.5% to $65.8 million for the year ended December 31, 2024 and represented 84.7% of total window film revenue and 15.7% of total consolidated revenue for the year ended December 31. 2024 . This increase was due to continued channel focus, increased product adoption in multiple regions and increased demand. Architectural window film revenue increased 9.4% to $10.4 million and represented 13.4% of total window film revenue and 2.5% of total consolidated revenue for the year ended December 31, 2024. 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, 2024 grew 6.6% to $14.5 million and represented 3.4% of total consolidated revenue. 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 4.1% to $6.4 million. This increase was driven primarily by increased channel focus and increased demand for our ceramic coating products.

Geographically, we experienced continued growth in most of our regions including 7.0% growth in the US region, our most mature market. These increases were primarily due to increasing product awareness and adoption.

Service revenue. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue, which represents the value of pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our Company-owned installation centers, labor revenue from our dealership services business, and revenue from training services provided to our customers. During 2024, service revenue grew 19.6% over service revenue for the year ended December 31, 2023.

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Within the service revenue category, software revenue increased 23.7% from the year ended December 31, 2023. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit revenue decreased 3.5% from the year ended December 31, 2023. This decrease was due primarily to the decrease in paint protection film revenue. Installation labor revenue increased 27.4% from the year ended December 31, 2023, due mainly to strong demand across our dealership service and OEM businesses.

Total installation revenue (labor and product combined) at our Company-owned installation centers for the year ended December 31, 2024 increased 27.4% over the year ended December 31, 2023. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased by 2.1% from the year ended December 31, 2023 due mainly to the same factors described above.

Cost of Sales

Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, certain personnel costs, shipping costs, warranty costs and other costs related to providing products to our customers. Cost of service includes the labor costs associated with installation of product in our Company-owned facilities and across our dealer-service network, costs of labor associated with pattern design for our film-cutting software and the costs incurred to provide training for our customers. Product costs in the year ended December 31, 2024 increased 0.9% over the year ended December 31, 2023, commensurate with the growth in product revenue. Cost of service revenue grew 20.6% during the year ended December 31, 2024, commensurate with the related serviced revenue growth. Refer to the Gross Margin section below for discussion of this cost relative to revenue.

Gross Margin

The following table summarizes gross margin for product and services for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):

Product gross margin for the year ended December 31, 2024 increased approximately $5.7 million, or 5.0%, over the year ended December 31, 2023 and represented 37.3% and 36.4% of total product revenue for the years ended December 31, 2024 and 2023, 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 $9.3 million for the year ended December 31, 2024, and represented 57.4% and 57.7% of total service revenue for the years ended December 31, 2024 and 2023, respectively. 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, 2024 increased 34.7% compared to 2023. These expenses represented 10.2% and 8.0% of consolidated revenue for the years ended December 31, 2024 and 2023, respectively. This increase was due mainly to increased personnel, and additional marketing projects including sponsorships and increased marketing efforts to dealerships and end customers.

General and administrative expenses for the year ended December 31, 2024 increased 18.4% compared to 2023. These costs represented 17.9% and 16.1% of total consolidated revenue for the years ended December 31, 2024 and 2023, respectively. The increase was due mainly to increases in personnel,

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occupancy costs, depreciation and amortization, and information technology costs to support the ongoing growth of the business.

Interest Expense

Interest expense decreased 20.2% to $1.0 million in the year ended December 31. 2024 compared to the year ended December 31. 2023. This decrease was due to the reduction in the amount of our debt facility throughout the year.

Foreign Currency Exchange Loss

Foreign currency loss for the year ended December 31, 2024 was $1.4 million compared to a foreign currency gain of $.3 million for the year ended December 31, 2023. This increase in foreign currency loss was due to the significant strengthening of the U.S. dollar during the year.

Income Tax Expense

Our provision for income taxes was $11.3 million in the year ended December 31, 2024 as compared to $13.2 million in the year ended December 31, 2023. Our effective income tax rates for the years ended December 31, 2024 and 2023 were 19.9% and 20.0%, respectively. See Note 14 of the Notes to our Consolidated Financial Statements for further information.

Net Income

Net income for the year ended December 31, 2024 decreased by 13.8% to $45.5 million.

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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. As of December 31, 2024, we had cash and cash equivalents of $22.1 million, and we had approximately $128.1 million in funds available under our credit facilities. For the year ended December 31, 2024, cash flows provided by operations were $47.8 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. 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 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 $47.8 million for the year ended December 31, 2024, compared to $37.4 million for the year ended December 31, 2023. The increase in operating cash flows for the year ended December 31, 2024 was driven primarily by a reduction in inventory purchases partially offset by a decline in net income and other changes in working capital.

Investing activities. Cash flows used in investing activities totaled approximately $18.4 million during the year ended December 31, 2024 compared to cash use of $26.4 million for the year ended December 31, 2023. This decrease in cash used was due to a reduction in expenditures for acquisitions in the year ended December 31, 2024.

Financing activities. Cash flows used in financing activities during the year ended December 31, 2024 totaled approximately $19.3 million compared to cash use of $7.3 million in the prior year. This use of cash was due primarily to net repayments on our credit facilities.

Debt obligations, including balances outstanding on committed credit facilities and contingent liabilities, as of December 31, 2024 and December 31, 2023 totaled approximately $2.1 million and $20.2 million, respectively.

Future liquidity and capital resource requirements

We expect to fund ongoing operating expenses, capital expenditures, acquisitions, interest payments, tax payments, credit facility maturities, future lease obligations, and payments for other long-term liabilities with cash flow from operations. In the short-term, we are contractually obligated to make lease payments and make payments on contingent liabilities related to certain completed acquisitions. In the long-term, we are contractually obligated to make lease payments, pay contingent liabilities as they are earned, and repay borrowings on our line of credit. We believe that we have sufficient cash and cash equivalents, as well as borrowing capacity, to cover our estimated short-term and long-term funding needs.

Credit Facilities

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"). As of December 31, 2024, the Company had no outstanding balance under this agreement. As of December 31, 2023, the Company had an outstanding balance of $19.0 million under the Credit Agreement.

Borrowings under the Credit Agreement bear interest, at XPEL’s option, at a rate equal to either (a) Base Rate or (b) Adjusted Term SOFR. In addition to the applicable interest rate, the Credit Agreement

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includes a commitment fee ranging from 0.20% to 0.25% per annum for the unused portion of the aggregate commitment and an applicable margin ranging from 0.00% to 0.50% for Base Rate Loans and 1.00% to 1.50% for Adjusted Term SOFR Loans. At December 31, 2024, these rates were 7.5% and 5.6%, respectively. Both the margin applicable to the interest rate and the commitment fee are dependent on XPEL’s Consolidated Total Leverage Ratio. The Credit Agreement's maturity date is April 6, 2026. All capitalized terms in this description of the credit facility that are not otherwise defined in this report have the meaning assigned to them in the Credit Agreement.

Obligations under the Credit Agreement are secured by a first priority perfected security interest, subject to certain permitted encumbrances, in all of XPEL’s material property and assets.

The 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. 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.

XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., also has a CAD $4.5 million revolving credit facility. This facility can be utilized to fund our working capital needs in Canada. This facility bears interest at the Royal Bank of Canada’s prime rate plus 0.25% per annum and is guaranteed by the parent company. As of December 31, 2024 and December 31, 2023, 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. We identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.

Certain of the most critical estimates that require significant judgment are as follows:

Business Combinations

The accounting for a business combination requires the excess of the purchase price for the acquisition over the net book value of assets acquired to be allocated to the identifiable assets of the acquired entity. Any unallocated portion is recognized as goodwill. We engaged an independent third-party valuation specialist to assist with the fair value allocation of the purchase price paid for our various acquisitions to intangible assets. This required the use of several estimates and assumptions including the customer attrition rate, forecasted cash flows attributable to existing customers, the discount rate for the customer relationship intangible asset and future royalties, contributory asset charges, and forecasted revenue growth rates. 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.

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Inventory Valuation

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a weighted average cost basis. We record inventory write-downs for scrap and excess or obsolete inventories based on assumptions about historical demand calculations, forecasted usage, estimated customer requirements and product line updates. These assumptions are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.

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. There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.

Item 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. 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).

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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 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. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).

EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.

The following table is a reconciliation of Net Income to EBITDA for the years ended December 31, 2023, 2022, and 2021 (dollars in thousands):

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Use of Non-GAAP Financial Measures

EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.

EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

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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. 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.

The following tables summarize revenue results for the years ended December 31, 2023, 2022 and 2021 (dollars in thousands):

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Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the years ended December 31, 2023 and 2022 (dollars in thousands):

Revenue

Product Revenue. 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. 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. 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. 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. 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.

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. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue, which represents the value of pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our Company-owned installation centers, revenue from our dealership services business, and revenue from training services provided to our customers. 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. This increase was due primarily to the

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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. 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. 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. Product costs consist of material costs, certain personnel costs, shipping costs, warranty costs and other costs related to providing products to our customers. Cost of service includes the labor costs associated with installation of product in our Company-owned facilities and across our dealer-service network, costs of labor associated with pattern design for our film-cutting software and the costs incurred to provide training for our customers. 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.

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):

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. 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. 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. 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. These costs represented 16.1% and 14.9% of total consolidated revenue for the years ended December 31, 2023 and 2022, 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.

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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. 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.

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.

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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. 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. 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. 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. 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. 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. 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.

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.

Future liquidity and capital resource requirements

We expect to fund ongoing operating expenses, capital expenditures, acquisitions, interest payments, tax payments, credit facility maturities, future lease obligations, and payments for other long-term liabilities with cash flow from operations. In the short-term, we are contractually obligated to make lease payments and make payments on contingent liabilities related to certain completed acquisitions. In the long-term, we are contractually obligated to make lease payments, pay contingent liabilities as they are earned, and repay borrowings on our line of credit. We believe that we have sufficient cash and cash equivalents, as well as borrowing capacity, to cover our estimated short-term and long-term funding needs.

Credit Facilities

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"). 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.

Borrowings under the Credit Agreement bear interest, at XPEL’s option, at a rate equal to either (a) Base Rate or (b) Adjusted Term SOFR. In addition to the applicable interest rate, the Credit Agreement includes a commitment fee ranging from 0.20% to 0.25% per annum for the unused portion of the

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aggregate commitment and an applicable margin ranging from 0.00% to 0.50% for Base Rate Loans and 1.00% to 1.50% for Adjusted Term SOFR Loans. At 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. 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.

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. 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.

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. 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. We identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.

Certain of the most critical estimates that require significant judgment are as follows:

Business Combinations

The accounting for a business combination requires the excess of the purchase price for the acquisition over the net book value of assets acquired to be allocated to the identifiable assets of the acquired entity. Any unallocated portion is recognized as goodwill. We engaged an independent third-party valuation specialist to assist with the fair value allocation of the purchase price paid for our various acquisitions to intangible assets. This required the use of several estimates and assumptions including the customer attrition rate, forecasted cash flows attributable to existing customers, the discount rate for the customer relationship intangible asset and future royalties, contributory asset charges, and forecasted revenue growth rates. 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.

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Inventory Valuation

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a weighted average cost basis. We record inventory write-downs for scrap and excess or obsolete inventories based on assumptions about historical demand calculations, forecasted usage, estimated customer requirements and product line updates. These assumptions are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.

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. There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.

Item 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. 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).

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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 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. 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. This economic uncertainty could impact vehicle sales in the U.S. or other parts of the world which could adversely affect our business, results of operations and financial condition.. See Risk Factors - “We are highly dependent on the automotive industry. A prolonged or material contraction in the automotive sales and production volumes could adversely affect our business, results of operations and financial condition.”

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. If COVID-19 continues to persist over the long-term, it could continue to have an adverse effect on our China sales. 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. 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. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).

EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is

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not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.

The following table is a reconciliation of Net income to EBITDA for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands):

Use of Non-GAAP Financial Measures

EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.

EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

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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. 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.

The following tables summarize revenue results for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands):

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Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the years ended December 31, 2022 and 2021 (dollars in thousands):

Revenue

Product Revenue. 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. 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.

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 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. 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. 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. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue, which represents the value of pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our Company-owned installation centers, revenue from our dealership services business, and revenue from training services provided to our customers. 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. This increase was due primarily to the aforementioned increases in demand for our products and services. 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.

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Training revenue increased 48.8% from the year ended December 31, 2021 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, 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. 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. Product costs consist of material costs, certain personnel costs, shipping costs, warranty costs and other costs related to providing products to our customers. Cost of service includes the labor costs associated with installation of product in our Company-owned facilities and across our dealer-service network, costs of labor associated with pattern design for our film-cutting software and the costs incurred to provide training for our customers. 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.

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):

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. 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.

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 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. 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.

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. The increase was due mainly to increases in personnel, occupancy costs, information technology costs and professional fees to support the ongoing growth of the

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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. 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.

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 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.

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.

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Liquidity and Capital Resources

The primary source of liquidity for our business is cash and cash equivalents and cash flows provided by operations. 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. 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 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. 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 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 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. 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.

Future liquidity and capital resource requirements

We expect to fund ongoing operating expenses, capital expenditures, acquisitions, interest payments, tax payments, credit facility maturities, future lease obligations, and payments for other long-term liabilities with cash flow from operations. In the short-term, we are contractually obligated to make lease payments and make payments on contingent liabilities related to certain completed acquisitions. In the long-term, we are contractually obligated to make lease payments, pay contingent liabilities as they are earned, and repay borrowings on our line of credit. We believe that we have sufficient cash and cash equivalents, as well as borrowing capacity, to cover our estimated short-term and long-term funding needs.

Credit Facilities

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. 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. 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. 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,

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payment of taxes and maintaining insurance. 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.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. 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.

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. We identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.

Certain of the most critical estimates that require significant judgment are as follows:

Business Combinations

The accounting for a business combination requires the excess of the purchase price for the acquisition over the net book value of assets acquired to be allocated to the identifiable assets of the acquired entity. Any unallocated portion is recognized as goodwill. We engaged an independent third-party valuation specialist to assist with the fair value allocation of the purchase price paid for our various acquisitions to intangible assets. This required the use of several estimates and assumptions including the customer attrition rate, forecasted cash flows attributable to existing customers, the discount rate for the customer relationship intangible asset and future royalties, contributory asset charges, and forecasted revenue growth rates. 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. We record inventory write-downs for scrap and excess or obsolete inventories based on assumptions about historical demand calculations, forecasted usage, estimated customer requirements and product line updates. These assumptions are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.

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.

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Related Party Relationships

There are no family relationships between or among any of our directors or executive officers. There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.

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, 2021, 2020, and 2019. This information is not necessarily indicative of results of future operations, and should be read in conjunction with Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report to fully understand factors that may affect the comparability of the information presented below.

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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 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

During 2021, we continued to see strong recovery from the initial impacts of COVID-19. Revenue continued to increase markedly in all major geographic areas. Despite recent positive trends, the long-term effects of the pandemic on our financial results in future periods could still be significant and cannot be reasonably estimated due to the volatility, uncertainty and economic disruption caused by the pandemic. See the risk factor “The COVID-19 pandemic could materially adversely affect our financial condition and results of operations” included in Part I, Item 1A “Risk Factors” in this Annual Report for further discussion of the potential impact of the COVID-19 pandemic on our business, results of operations and financial condition.

As we look ahead, we are unable to determine or predict the continuing impact that the COVID-19 pandemic will have on our customers, vendors and suppliers or our business, results of operations or financial condition. Despite the gradual reduction of restrictions related to the COVID-19 pandemic and the apparent recovery of our operations, significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic. Additionally, automotive sales and production are highly cyclical, and the cyclical nature of the industry could be, and has been, compounded by the pandemic. As demand for automotive products fluctuates or decreased, the demand for our products may also fluctuate or decrease. Automotive manufacturers have experienced a global semiconductor shortage which has affected production of vehicles and, in turn, available inventory at dealerships. As long as this shortage persists, it could have a material adverse effect on our business, financial condition and results of operations. Please refer to risk factor ‘We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and production volumes could adversely affect our business, results of operations and financial condition” in this Annual Report for additional consideration of the cyclical nature of the automotive industry. We will continue to closely monitor updates regarding the continuing impact of COVID-19 and automotive sales and adjust our operations according to guidelines form local, state and federal officials. In light of the foregoing, we may take actions that alter our business operations or that we determine are in the best interest of our employees, customers, suppliers and stockholders.

Key Business Metric - Non-GAAP Financial Measures

Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important measure to the Company is Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).

EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with respect to our operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-day operations. Management uses EBITDA (1) to compare our operating performance on a consistent basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of our operational strategies, and (5) to assess compliance with various metrics associated with the agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information in understanding and evaluating our operating performance in the same manner as management. We

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define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and (c) income tax expense.

The following table is a reconciliation of Net income to EBITDA for the years ended December 31,

Use of Non-GAAP Financial Measures

EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as alternatives to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.

EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

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Results of Operations

This section of this Annual Report on Form 10-K generally discusses the years ended December 31, 2021 and 2020 and year-over-year comparisons between those years. Discussions of the periods prior to the year ended December 31, 2020 that are not included in this Annual Report on Form 10-K are found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 and the discussion therein for the year ended December 31, 2020 compared to the year ended December 31, 2019 is incorporated by reference into this Annual Report.

The following tables summarize revenue results for the years ended December 31, 2021, 2020 and 2019:

Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following table represents our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the years ended December 31, 2021 and 2020:

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Revenue

Product Revenue. Product revenue increased 59.5% during the year ended December 31, 2021 as compared to 2020 and represented 83.8% of our consolidated annual 2021 revenue. Within this category, revenue from our paint protection film product line increased 53.3% as compared to 2020 and represented 65.5% of total revenue for the year ended December 31, 2021. This growth was due mainly to increases in demand for our film products across multiple regions. This increase in demand was driven by both an increase in the number of customers and increased revenue from our existing customers. Our paint protection film products experienced strong growth throughout the year in virtually all operating regions.

Revenue from our window film product line grew 83.1% in the year ended December 31, 2021 and represented 14.8% of our consolidated annual 2021 revenue. This increase was due mainly to increases in demand resulting from continuing channel focus and increased product adoption among our customer base.

Geographically, we experienced growth in all of our regions during the year. The US and Canadian markets are our most mature markets. Our continued strong growth in these markets is being driven primarily by increased paint protection film attachment rates. Outside of these more mature markets, our continued strong growth was driven by increased product awareness and adoption.

Service revenue. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue, which represents per-cut fees sold for pattern access or the value of pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our Company-owned installation centers as well as from our newly acquired PermaPlate Films and TintNet businesses and revenue from training services provided to our customers. During 2021, service revenue grew 85.2% over service revenue for the year ended December 31, 2020.

Within the service revenue category, software revenue increased 25.3% from the year ended December 31, 2020. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit revenue grew 58.9% from the year ended December 31, 2020. This increase was due primarily to the aforementioned increases in demand for our products and services. Installation labor revenue increased 122.0% from the year ended December 31, 2020, due mainly to strong demand in our company-owned installation facilities and our newly acquired PermaPlate Films and TintNet businesses. Training revenue increased 112.3% from the year ended December 31, 2020. This increase was due primarily to heavily restricted training hours and classes in the year ended December 31, 2020 as a result of the COVID-19 pandemic.

Total installation revenue (labor and product combined) at our Company-owned installation centers for the year ended December 31, 2021 increased 122.0% over the year ended December 31, 2020. Excluding the impact from our 2021 acquisitions, total installation revenue grew 36.4%. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased by 59.4% from the year ended December 31, 2020 due mainly to the same factors described previously.

Cost of Sales

Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, personnel costs related to warehouse personnel, shipping costs, warranty costs and other related costs to provide products to our customers. Cost of service includes the labor costs associated with installation of product in our Company-owned facilities, the labor cost associated with our new acquisitions, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers. Product costs in the year ended December 31, 2021 increased 53.6% over the year ended December 31, 2020 commensurate with the growth in product revenue. Cost of service revenue grew 139.2% during the year ended December 31, 2021. The increase was due primarily to increased labor costs commensurate with increased installation revenue in our company-owned facilities, increased labor cost associated with our 2021 acquisitions and increased labor costs related to headcount growth required in our production facility to meet increased demand.

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Gross Margin

The following table summarizes gross margin for product and services for the years ended December 31, 2021, 2020 and 2019:

Product gross margin for the year ended December 31, 2021 increased approximately $28.2 million, or 74.8%, over the year ended December 31, 2020 and represented 30.4% and 27.7% of total product revenue for the years ended December 31, 2021 and 2020, respectively. The increase in product gross margin percentages was primarily due to a lower percentage of sales to lower margin distributors (primarily our China Distributor), favorable changes in product mix and improvements in product costs and operating leverage.

Service gross margin increased approximately $10.4 million for the year ended December 31, 2021, and represented 63.6% and 71.8% of total service revenue for the years ended December 31, 2021 and 2020, respectively. This decrease in service gross margin percentage for was primarily due to an approximate $3.8 million impact from low new car dealership inventories that impacted our on-site business.

Operating Expenses

Sales and marketing expenses for the year ended December 31, 2021 increased 87.5% compared to 2020. These expenses represented 7.0% and 6.1% of consolidated revenue for the years ended December 31, 2021 and 2020, respectively. This increase was primarily attributable to increases in sales and marketing staff and other marketing related expenses incurred to support the ongoing growth of the business including the return to event related activities that were suspended in 2020 due to the pandemic.

General and administrative expenses grew approximately $13.4 million, or 64.0%, during the year ended December 31, 2021. These costs represented 13.2% and 13.2% of total consolidated revenue for the years ended December 31, 2021 and 2020, respectively. The increase was due mainly to increases in personnel, occupancy costs and information technology costs to support the ongoing growth of the business and acquisition related expenses including increased amortization associated with intangible assets acquired during 2021.

Other Expense

Other expense consists of interest expense and foreign currency gain/loss. Interest expense increased during the year in conjunction with increased borrowings on the Company’s credit facility. Foreign currency exchange loss increased during the year due to foreign currency fluctuations in response to various uncertainties in the macroeconomic environment.

Income Tax Expense

Income tax expense for the year ended December 31, 2021 grew 74.1% to $7.87 million. Our effective income tax rates for the years ended December 31, 2021 and 2020 were 20.0% and 19.8%, respectively. The increase in our effective rate was primarily due to an increase in our state effective rate. See Note 14 of the Notes to our Consolidated Financial Statements for further information.

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Net Income

Net income for the year ended December 31, 2021 increased by 72.7% to $31.6 million compared to the prior year due primarily to continued strong revenue growth and improved margins.

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Liquidity and Capital Resources

The primary source of liquidity for our business is cash and cash equivalents and cash flows provided by operations. As of December 31, 2021, we had cash and cash equivalents of $9.6 million. For the year ended December 31, 2021, cash flows provided by operations were $18.3 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. 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 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 $18.3 million for the year ended December 31, 2021, compared to $18.5 million for the year ended December 31, 2020. The decrease in operating cash flows for the year ended December 31, 2021 was driven primarily by inventory purchases and other changes in working capital. Use of funds in those areas was significantly offset by increases in operating earnings.

Investing activities. Cash flows used in investing activities totaled approximately $56.8 million during the year ended December 31, 2021 compared to cash used of $4.7 million the year ended December 31, 2020. This increase in cash used was due mainly to increased cash outflows pursuant to several acquisitions completed during 2021 as the Company continues investing to support its ongoing growth. See Note 3, Acquisitions of Businesses, of the Notes to our Consolidated Financial Statements for further information with regard to our 2021 acquisitions.

Financing activities. Cash flows provided by financing activities during the year ended December 31, 2021 totaled approximately $19.2 million compared to cash outflows of $4.7 million in the prior year. This increase was due primarily to increases in net borrowings on our credit facilities. Debt obligations, including balances outstanding on committed credit facilities, as of December 31, 2021 and December 31, 2020 totaled approximately $25.5 million and $6.1 million, respectively.

Future liquidity and capital resource requirements

We expect to fund ongoing operating expenses, capital expenditures, acquisitions, interest payments, tax payments, credit facility maturities, future lease obligations, and payments for other long-term liabilities with cash flow from operations. In the short-term, we are contractually obligated to make lease payments, purchase paint protection film for a minimum of $5,000,000, and make payments on unsecured non-interest bearing promissory notes payable and contingent liabilities related to certain completed acquisitions. In the long-term, we are contractually obligated to make lease payments and for the above referenced unsecured non-interest bearing promissory notes payable and contingent liabilities, and for repayment of borrowings on our line of credit. We believe that we have sufficient cash and cash equivalents, as well as borrowing capacity, to cover our estimated short-term and long-term funding needs.

Credit Facilities

As of December 31, 2021, we had a $75 million revolving line of credit agreement with Texas Partners Bank (which does business as the Bank of San Antonio) and a CAD $4.5 million revolving credit facility maintained through HSBC Bank Canada. The Texas Partners Bank facility was established on May 21, 2021 and amended on December 29, 2021 to increase the capacity on the line of credit from its old limit of $57 million to its current $75 million limit. This facility replaced an $8.5 million revolving facility and a $6 million term loan facility through that lender. The outstanding balances on the prior loan agreements were fully repaid by the Company and the agreements were terminated when we entered into the new facility. The facility is utilized to fund our working capital needs and other strategic initiatives and is secured by a

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security interest in substantially all of our current and future assets. 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. 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, 2021 was 2.50%. The Company paid interest charges on borrowings under this facility of $154,549 during the year ended December 31, 2021. As of December 31, 2021, the Company had borrowed $25 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, payment of taxes and maintaining insurance. 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.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. 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, 2021 and December 31, 2020, 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. We identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.

Certain of the most critical estimates that require significant judgment are as follows:

Business Combinations

The accounting for a business combination requires the excess of the purchase price for the acquisition over the net book value of assets acquired to be allocated to the identifiable assets of the acquired entity. Any unallocated portion is recognized as goodwill. We engaged an independent third-party valuation specialist to assist with the fair value allocation of the purchase price paid for our various acquisitions to intangible assets. This required the use of several estimates and assumptions including the customer attrition rate, forecasted cash flows attributable to existing customers, the discount rate for the customer relationship intangible asset and future royalties, contributory asset charges, and forecasted revenue growth rates. 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. We record inventory write-downs for excess or obsolete inventories based on

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assumptions about historical demand calculations, forecasted usage, estimated customer requirements and product line updates. These assumptions are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.

Income Taxes

We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations , administrative practices, principles and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.

Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes to our forecasts of income and loss and the mix of jurisdictions to which they relate, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals.

Recently Adopted Accounting Pronouncements and Accounting Pronouncements Net 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. There are no arrangements or understandings between any two or more of our directors or executive officers, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.