UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~June~~September 30, 2020


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

For the transition period from to

Commission file number 001-38858

XPEL, INC.

(Exact name of registrant as specified in its charter)

Nevada

20-1117381

(State or other jurisdiction of incorporation or organization)

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

618 W. Sunset Road

San Antonio

Texas

78216

(Address of Principal Executive Offices)

(Zip Code)

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

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


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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had 27,612,597 shares of common stock outstanding as of ~~August 12,~~November 10, 2020.

TABLE OF CONTENTS


			Page
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Income			2
Condensed Consolidated Statements of Comprehensive Income			3
Condensed Consolidated Statement of Changes in Equity			4
Condensed Consolidated Statement of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			2930

Part II - Other Information
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			3031
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. Mine Safety Disclosures			31
Item 5. Other Information			3132
Item 6. Exhibits			3132
Signatures			32

Part I. Financial Information

Item 1. Financial Statements

XPEL, INC.

Condensed Consolidated Balance Sheets


		(Unaudited)		(Audited)			(Unaudited)		(Audited)
		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Assets	Assets					Assets
Current	Current					Current
Cash and cash equivalents	Cash and cash equivalents	$	25,795,909	$	11,500,973	Cash and cash equivalents	$	27,224,471	$	11,500,973
Accounts receivable, net	Accounts receivable, net	7,215,230		7,154,084		Accounts receivable, net	8,967,710		7,154,084
Inventory, net	Inventory, net	14,706,582		15,141,153		Inventory, net	18,961,093		15,141,153
Prepaid expenses and other current assets	Prepaid expenses and other current assets	2,103,656		2,391,340		Prepaid expenses and other current assets	2,803,733		2,391,340
Income tax receivable	Income tax receivable	—		93,150		Income tax receivable	0		93,150
Total current assets	Total current assets	49,821,377		36,280,700		Total current assets	57,957,007		36,280,700
Property and equipment, net	Property and equipment, net	4,549,533		4,014,653		Property and equipment, net	4,591,787		4,014,653
Right-of-Use lease assets	Right-of-Use lease assets	5,260,732		5,079,110		Right-of-Use lease assets	5,100,499		5,079,110
Intangible assets, net	Intangible assets, net	4,586,343		3,820,460		Intangible assets, net	4,510,161		3,820,460
Other assets	Other assets	457,020		—		Other assets	478,291		0
Goodwill	Goodwill	3,497,883		2,406,512		Goodwill	3,559,614		2,406,512
Total assets	Total assets	$	68,172,888	$	51,601,435	Total assets	$	76,197,359	$	51,601,435
Liabilities	Liabilities					Liabilities
Current	Current					Current
Current portion of notes payable	Current portion of notes payable	$	2,543,301	$	462,226	Current portion of notes payable	$	2,554,529	$	462,226
Current portion lease liabilities	Current portion lease liabilities	1,321,116		1,126,701		Current portion lease liabilities	1,326,466		1,126,701
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	13,787,059		10,197,353		Accounts payable and accrued liabilities	16,692,018		10,197,353
Income tax payable	Income tax payable	1,456,136		—		Income tax payable	326,590		0
Total current liabilities	Total current liabilities	19,107,612		11,786,280		Total current liabilities	20,899,603		11,786,280

Deferred tax liability, net	Deferred tax liability, net	844,928		604,715		Deferred tax liability, net	851,329		604,715
Non-current portion of lease liabilities	Non-current portion of lease liabilities	4,001,669		4,009,949		Non-current portion of lease liabilities	3,826,003		4,009,949
Non-current portion of notes payable	Non-current portion of notes payable	4,819,237		307,281		Non-current portion of notes payable	4,193,436		307,281
Total liabilities	Total liabilities	28,773,446		16,708,225		Total liabilities	29,770,371		16,708,225
Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
Preferred stock, $0.001 par value; authorized 10,000,000; 0ne issued and outstanding	Preferred stock, $0.001 par value; authorized 10,000,000; 0ne issued and outstanding	—		—		Preferred stock, $0.001 par value; authorized 10,000,000; 0ne issued and outstanding	0		0
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,612,597 issued and outstanding	Common stock, $0.001 par value; 100,000,000 shares authorized; 27,612,597 issued and outstanding	27,613		27,613		Common stock, $0.001 par value; 100,000,000 shares authorized; 27,612,597 issued and outstanding	27,613		27,613
Additional paid-in-capital	Additional paid-in-capital	10,412,471		11,348,163		Additional paid-in-capital	10,412,471		11,348,163
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(1,220,564)		(908,764)		Accumulated other comprehensive loss	(801,266)		(908,764)
Retained earnings	Retained earnings	30,179,922		24,594,878		Retained earnings	36,788,170		24,594,878
		39,399,442		35,061,890			46,426,988		35,061,890
Non-controlling interest	Non-controlling interest	—		(168,680)		Non-controlling interest	0		(168,680)
Total stockholders’ equity	Total stockholders’ equity	39,399,442		34,893,210		Total stockholders’ equity	46,426,988		34,893,210
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	68,172,888	$	51,601,435	Total liabilities and stockholders’ equity	$	76,197,359	$	51,601,435

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Income (Unaudited)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Revenue	Revenue									Revenue
Product revenue	Product revenue	$	30,961,996	$	25,425,489	$	54,711,913	$	46,480,212	Product revenue	$	39,528,383	$	30,815,251	$	94,240,296	$	77,295,463
Service revenue	Service revenue	4,843,862		4,668,665		9,482,408		8,339,388		Service revenue	6,594,413		4,802,747		16,076,821		13,142,135
Total revenue	Total revenue	35,805,858		30,094,154		64,194,321		54,819,600		Total revenue	46,122,796		35,617,998		110,317,117		90,437,598

Cost of Sales	Cost of Sales									Cost of Sales
Cost of product sales	Cost of product sales	22,556,696		18,551,030		39,318,109		34,239,063		Cost of product sales	28,369,882		22,283,771		67,687,991		56,522,834
Cost of service	Cost of service	1,510,085		917,111		2,840,247		1,804,444		Cost of service	1,723,082		1,061,197		4,563,329		2,865,641
Total cost of sales	Total cost of sales	24,066,781		19,468,141		42,158,356		36,043,507		Total cost of sales	30,092,964		23,344,968		72,251,320		59,388,475
Gross Margin	Gross Margin	11,739,077		10,626,013		22,035,965		18,776,093		Gross Margin	16,029,832		12,273,030		38,065,797		31,049,123

Operating Expenses	Operating Expenses									Operating Expenses
Sales and marketing	Sales and marketing	1,919,529		2,064,836		4,662,778		3,663,942		Sales and marketing	2,326,900		1,805,038		6,989,678		5,468,980
General and administrative	General and administrative	4,679,092		4,589,906		9,748,863		8,667,857		General and administrative	5,289,277		4,798,833		15,038,140		13,466,690
Total operating expenses	Total operating expenses	6,598,621		6,654,742		14,411,641		12,331,799		Total operating expenses	7,616,177		6,603,871		22,027,818		18,935,670

Operating Income	Operating Income	5,140,456		3,971,271		7,624,324		6,444,294		Operating Income	8,413,655		5,669,159		16,037,979		12,113,453

Interest expense	Interest expense	74,554		29,074		105,112		57,780		Interest expense	68,368		23,851		173,480		81,631
Foreign currency exchange loss (gain)		4,141		(3,518)		419,718		14,908
Foreign currency exchange loss										Foreign currency exchange loss	709		136,951		420,427		151,859

Income before income taxes	Income before income taxes	5,061,761		3,945,715		7,099,494		6,371,606		Income before income taxes	8,344,578		5,508,357		15,444,072		11,879,963
Income tax expense	Income tax expense	1,088,071		938,405		1,514,450		1,504,293		Income tax expense	1,736,330		999,072		3,250,780		2,503,365
Net income	Net income	3,973,690		3,007,310		5,585,044		4,867,313		Net income	6,608,248		4,509,285		12,193,292		9,376,598
Income attributed to non-controlling interest	Income attributed to non-controlling interest	—		1,293		—		2,709		Income attributed to non-controlling interest	0		6,602		0		9,311
Net income attributable to stockholders of the Company	Net income attributable to stockholders of the Company	$	3,973,690	$	3,006,017	$	5,585,044	$	4,864,604	Net income attributable to stockholders of the Company	$	6,608,248	$	4,502,683	$	12,193,292	$	9,367,287

Earnings per share attributable stockholders of the Company
Earnings per share attributable to stockholders of the Company										Earnings per share attributable to stockholders of the Company
Basic and diluted	Basic and diluted	$	0.14	$	0.11	$	0.20	$	0.18	Basic and diluted	$	0.24	$	0.16	$	0.44	$	0.34
Weighted Average Number of Common Shares	Weighted Average Number of Common Shares									Weighted Average Number of Common Shares
Basic and diluted	Basic and diluted	27,612,597		27,612,597		27,612,597		27,612,597		Basic and diluted	27,612,597		27,612,597		27,612,597		27,612,597

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Other comprehensive income	Other comprehensive income									Other comprehensive income
Net income	Net income	$	3,973,690	$	3,007,310	$	5,585,044	$	4,867,313	Net income	$	6,608,248	$	4,509,285	$	12,193,292	$	9,376,598
Foreign currency translation	Foreign currency translation	443,722		133,306		(316,333)		212,564		Foreign currency translation	419,298		(143,535)		102,965		69,029
Total comprehensive income	Total comprehensive income	4,417,412		3,140,616		5,268,711		5,079,877		Total comprehensive income	7,027,546		4,365,750		12,296,257		9,445,627
Total comprehensive income attributable to:	Total comprehensive income attributable to:									Total comprehensive income attributable to:
Stockholders of the Company	Stockholders of the Company	4,417,412		3,145,330		5,273,244		5,078,367		Stockholders of the Company	7,027,546		4,365,735		12,300,790		9,444,102
Non-controlling interest	Non-controlling interest	—		(4,714)		(4,533)		1,510		Non-controlling interest	0		15		(4,533)		1,525
Total comprehensive income	Total comprehensive income	$	4,417,412	$	3,140,616	$	5,268,711	$	5,079,877	Total comprehensive income	$	7,027,546	$	4,365,750	$	12,296,257	$	9,445,627

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity


Stockholders' Equity - Three Months Ended June 30
Stockholders' Equity - Three Months Ended September 30																	Stockholders' Equity - Three Months Ended September 30
		Common Stock					Additional Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Equity Attributable to Stockholders of the Company		Non-Controlling Interest				Total Stockholders’ Equity	Common Stock				Additional Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Gain (Loss)				Equity Attributable to Stockholders of the Company		Non-Controlling Interest			Total Stockholders’ Equity
		Shares	Amount																																	Non-Controlling Interest			Total Stockholders’ Equity
Balance as of March 31, 2019		27,612,597	$	27,613	$	11,348,163	$	12,475,840	$	(1,115,605)	$	22,736,011	$	(183,805)	$	22,552,206
Balance as of June 30, 2019																	Balance as of June 30, 2019	27,612,597		$	27,613	$	11,348,163	$	15,481,857	$	(976,292)			$	25,881,341			$	(188,519)		$	25,692,822
Net income	Net income	—	—		—		3,006,017		—		3,006,017		1,293		3,007,310		Net income	—		—		—		4,502,683		—		4,502,683				6,602		4,509,285
Foreign currency translation	Foreign currency translation	—	—		—		—		139,313		139,313		(6,007)		133,306		Foreign currency translation	—		—		—		—		(136,948)		(136,948)				(6,587)		(143,535)
Balance as of June 30, 2019		27,612,597	27,613		11,348,163		15,481,857		(976,292)		25,881,341		(188,519)		25,692,822
Balance as of September 30, 2019																	Balance as of September 30, 2019	27,612,597		27,613		11,348,163		19,984,540		(1,113,240)		30,247,076				(188,504)		30,058,572

Balance as of March 31, 2020		27,612,597	27,613		10,412,471		26,206,232		(1,664,286)		34,982,030		—		34,982,030
Balance as of June 30, 2020																	Balance as of June 30, 2020	27,612,597		27,613		10,412,471		30,179,922		(1,220,564)		39,399,442				0		39,399,442
Net income	Net income	—	—		—		3,973,690		—		3,973,690		—		3,973,690		Net income	—		—		—		6,608,248		—		6,608,248				—		6,608,248
Foreign currency translation	Foreign currency translation	—	—		—		—		443,722		443,722		—		443,722		Foreign currency translation	—		—		—		—		419,298		419,298				0		419,298
Balance as of June 30, 2020		27,612,597	$	27,613	$	10,412,471	$	30,179,922	$	(1,220,564)	$	39,399,442	$	—	$	39,399,442
Balance as of September 30, 2020																	Balance as of September 30, 2020	27,612,597		$	27,613	$	10,412,471	$	36,788,170	$	(801,266)	$	46,426,988			$	0	$	46,426,988


Stockholders' Equity - Six Months Ended June 30
Stockholders' Equity - Nine Months Ended September 30																	Stockholders' Equity - Nine Months Ended September 30
		Common Stock					Additional Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Equity Attributable to Stockholders of the Company		Non-Controlling Interest				Total Stockholders’ Equity	Common Stock				Additional Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Gain (Loss)				Equity Attributable to Stockholders of the Company		Non-Controlling Interest			Total Stockholders’ Equity
		Shares	Amount																																	Non-Controlling Interest				Total Stockholders’ Equity
Balance as of December 31, 2018	Balance as of December 31, 2018	27,612,597	$	27,613	$	11,348,163	$	10,617,253	$	(1,190,055)	$	20,802,974	$	(190,029)	$	20,612,945	Balance as of December 31, 2018	27,612,597		$	27,613	$	11,348,163	$	10,617,253	$	(1,190,055)			$	20,802,974			$	(190,029)			$	20,612,945
Net income	Net income	—	—		—		4,864,604		—		4,864,604		2,709		4,867,313		Net income	—		—		—		9,367,287		—		9,367,287				9,311		9,376,598
Foreign currency translation	Foreign currency translation	—	—		—		—		213,763		213,763		(1,199)		212,564		Foreign currency translation	—		—		—		—		76,815		76,815				(7,786)		69,029
Balance as of June 30, 2019		27,612,597	27,613		11,348,163		15,481,857		(976,292)		25,881,341		(188,519)		25,692,822
Balance as of September 30, 2019																	Balance as of September 30, 2019	27,612,597		27,613		11,348,163		19,984,540		(1,113,240)		30,247,076				(188,504)		30,058,572

Balance as of December 31, 2019	Balance as of December 31, 2019	27,612,597	27,613		11,348,163		24,594,878		(908,764)		35,061,890		(168,680)		34,893,210		Balance as of December 31, 2019	27,612,597		27,613		11,348,163		24,594,878		(908,764)		35,061,890				(168,680)		34,893,210
Net income	Net income	—	—		—		5,585,044		—		5,585,044		—		5,585,044		Net income	—		—		—		12,193,292		—		12,193,292				—		12,193,292
Foreign currency translation	Foreign currency translation	—	—		—		—		(311,800)		(311,800)		(4,533)		(316,333)		Foreign currency translation	—		—		—		—		107,498		107,498				(4,533)		102,965
Purchase of minority interest	Purchase of minority interest	—	—		(935,692)		—		—		(935,692)		173,213		(762,479)		Purchase of minority interest	—		—		(935,692)		—		—		(935,692)				173,213		(762,479)
Balance as of June 30, 2020		27,612,597	$	27,613	$	10,412,471	$	30,179,922	$	(1,220,564)	$	39,399,442	$	—	$	39,399,442
Balance as of September 30, 2020																	Balance as of September 30, 2020	27,612,597		$	27,613	$	10,412,471	$	36,788,170	$	(801,266)	$	46,426,988			$	0	$	46,426,988

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)


		Six Months Ended June 30,							Nine Months Ended September 30,
		2020		2019			2020		2019
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	5,585,044	$	4,867,313	Net income	$	12,193,292	$	9,376,598
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment	Depreciation of property, plant and equipment	564,177		421,088		Depreciation of property, plant and equipment	889,820		655,385
Amortization of intangible assets	Amortization of intangible assets	466,121		371,372		Amortization of intangible assets	705,692		570,954
Impairments	Impairments	—		66,364		Impairments	0		66,364
Loss on sale of property and equipment		5,106		24,605
(Gain) loss on sale of property and equipment						(Gain) loss on sale of property and equipment	(3,101)		1,521
Bad debt expense	Bad debt expense	88,451		123,753		Bad debt expense	85,535		153,949
Deferred income tax	Deferred income tax	(50,738)		58,405		Deferred income tax	(47,886)		135,221
Accretion on notes payable	Accretion on notes payable	24,956		36,843		Accretion on notes payable	36,760		50,346

Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable	Accounts receivable	(45,427)		(2,063,400)		Accounts receivable	(1,692,396)		(1,883,620)
Inventory, net	Inventory, net	270,890		(4,427,940)		Inventory, net	(3,803,836)		(5,679,694)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	257,599		(603,016)		Prepaid expenses and other current assets	(413,354)		(1,372,894)
Income tax receivable	Income tax receivable	94,729		—		Income tax receivable	94,729		0
Other assets	Other assets	(419,802)		26,194		Other assets	(468,400)		61,795
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	3,520,202		4,975,948		Accounts payable and accrued liabilities	6,361,659		4,308,679
Income tax payable	Income tax payable	1,421,453		(799,700)		Income tax payable	300,582		(799,052)
Net cash provided by operating activities	Net cash provided by operating activities	11,782,761		3,077,829		Net cash provided by operating activities	14,239,096		5,645,552
Cash flows used in investing activities	Cash flows used in investing activities					Cash flows used in investing activities
Purchase of property, plant and equipment	Purchase of property, plant and equipment	(1,041,987)		(764,125)		Purchase of property, plant and equipment	(1,358,108)		(994,074)
Proceeds from sale of property and equipment	Proceeds from sale of property and equipment	38,469		11,386		Proceeds from sale of property and equipment	50,809		41,197
Acquisition of a business, net of cash acquired	Acquisition of a business, net of cash acquired	(1,247,843)		—		Acquisition of a business, net of cash acquired	(1,247,843)		0
Development of intangible assets	Development of intangible assets	(198,284)		(138,097)		Development of intangible assets	(306,635)		(534,720)
Net cash used in investing activities	Net cash used in investing activities	(2,449,645)		(890,836)		Net cash used in investing activities	(2,861,777)		(1,487,597)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Borrowings on revolving credit agreements	Borrowings on revolving credit agreements	8,932,016		—		Borrowings on revolving credit agreements	8,932,016		0

Repayments of revolving credit agreements	Repayments of revolving credit agreements	(8,932,016)		—		Repayments of revolving credit agreements	(8,932,016)		0
Borrowing on term loan	Borrowing on term loan	6,000,000		—		Borrowing on term loan	6,000,000		0
Repayments of notes payable	Repayments of notes payable	(392,394)		(714,668)		Repayments of notes payable	(1,043,818)		(908,909)
Purchase of minority interest	Purchase of minority interest	(784,653)		—		Purchase of minority interest	(784,653)		0

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	4,822,953		(714,668)		Net cash provided by (used in) financing activities	4,171,529		(908,909)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	14,156,069		1,472,325		Net change in cash and cash equivalents	15,548,848		3,249,046
Foreign exchange impact on cash and cash equivalents	Foreign exchange impact on cash and cash equivalents	138,867		30,413		Foreign exchange impact on cash and cash equivalents	174,650		75,634
Increase in cash and cash equivalents during the period	Increase in cash and cash equivalents during the period	14,294,936		1,502,738		Increase in cash and cash equivalents during the period	15,723,498		3,324,680
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	11,500,973		3,971,226		Cash and cash equivalents at beginning of period	11,500,973		3,971,226
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	25,795,909	$	5,473,964	Cash and cash equivalents at end of period	$	27,224,471	$	7,295,906

Supplemental schedule of non-cash activities	Supplemental schedule of non-cash activities					Supplemental schedule of non-cash activities
Notes payable issued for acquisitions	Notes payable issued for acquisitions	$	893,317	$	—	Notes payable issued for acquisitions	$	893,317	$	0

Supplemental cash flow information	Supplemental cash flow information					Supplemental cash flow information
Cash paid for income taxes	Cash paid for income taxes	$	77,026	$	2,058,925	Cash paid for income taxes	$	2,949,838	$	3,004,758
Cash paid for interest	Cash paid for interest	$	50,955	$	10,997	Cash paid for interest	$	129,117	$	15,890

See notes to condensed consolidated financial statements.

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)

1. INTERIM FINANCIAL INFORMATION

The accompanying (a) condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 have been prepared by XPEL, Inc. (“XPEL” or the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period due to variability in customer purchasing patterns and seasonal, operating and other factors.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s annual report on Form 10-K as filed with the SEC on March 16, 2020. These condensed consolidated financial statements also should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section appearing in this Report.

Certain immaterial amounts in the prior year consolidated financial statements have been reclassified in order to conform to the presentation adopted in the current year. None of these changes in presentation affect previously reported results of operations.

On February 1, 2020, the Company acquired the remaining 15% minority interest in XPEL, Ltd., the subsidiary of the Company operating in the United Kingdom, for a purchase price of £600,000, or $762,479. This purchase is reflected in the Condensed Consolidated Statement of Changes in Stockholders' Equity.

2. SIGNIFICANT ACCOUNTING POLICIES

Nature of Business - The Company is based in San Antonio, Texas and is a global provider of protective films and coatings, including automotive paint protection film, surface protection film, and automotive and commercial/residential window films and ceramic coatings as well as a provider of complementary proprietary software.

The Company was incorporated in the state of Nevada, U.S.A. in October 2003 and its registered office is 618 W. Sunset Road, San Antonio, Texas, 78216.

Basis of Presentation - The condensed consolidated financial statements are prepared in conformity with United States Generally Accepted Accounting Principles ("U.S. GAAP") and include the accounts of the Company and its wholly owned or majority owned subsidiaries. In applicable years, the ownership interest of non-controlling participants in subsidiaries that are not wholly-owned is included as a separate component of stockholders’ equity. The non-controlling participants’ share of the net income is included as “Income attributable to noncontrolling interest” on the Condensed Consolidated Statements of Income and Comprehensive Income. Intercompany accounts and transactions have been eliminated.

The functional currency for the Company is the United States dollar. The assets and liabilities of each of its foreign subsidiaries are translated into ~~U.S~~U.S. dollars using the exchange rate at the end of the balance sheet date. Revenues and expenses are translated at the average exchange rates for the

~~XPEL Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2020 and 2019~~

~~(Unaudited)~~

period. Gains and losses from translations are recognized in foreign currency translation included in accumulated other comprehensive income in the accompanying consolidated balance sheets. Foreign currency exchange gains and losses are presented as foreign currency exchange loss in the accompanying condensed consolidated statements of income. The ownership percentages and

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 and 2019

(Unaudited)

functional currencies of the entities included in these condensed consolidated financial statements are as follows:


Subsidiaries	Functional Currency	% Owned by XPEL, Inc.
XPEL, Ltd.	UK Pound Sterling	100	%	*
Armourfend CAD, LLC	US Dollar	100	%
XPEL Canada Corp.	Canadian Dollar	100	%
XPEL B.V.	Euro	100	%
XPEL Germany GmbH	Euro	100	%
XPEL de Mexico S. de R.L. de C.V.	Peso	100	%
XPEL Acquisition Corp.	Canadian Dollar	100	%
Protex Canada, Inc.	Canadian Dollar	100	%
Apogee Corp.	New Taiwan Dollar	100	%
XPEL Slovakia	Euro	100	%
*Refer to Note 1 for information related to purchase of minority interest

Segment Reporting - Management has concluded that our chief operating decision maker (“CODM”) is our chief executive officer. The Company’s CODM reviews the entire organization’s consolidated results as a whole on a monthly basis to evaluate performance and make resource allocation decisions. Management views the Company’s operations and manages its business as 1 operating segment.

Use of Estimates - The preparation of these condensed consolidated financial statements in conformity to U.S. GAAP requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and underlying assumptions are reviewed on an ongoing basis. Actual outcomes may differ from these estimates under different assumptions and conditions.

Accounts Receivable - Accounts receivable are shown net of an allowance for doubtful accounts of ~~$198,786~~$128,237 and $182,488 as of ~~June~~September 30, 2020 and December 31, 2019, respectively. The Company evaluates the adequacy of its allowances by analyzing the aging of receivables, customer financial condition, historical collection experience, the value of any collateral and other economic and industry factors. Actual collections may differ from historical experience, and if economic, business or customer conditions deteriorate significantly, adjustments to these reserves may be required. When the Company becomes aware of factors that indicate a change in a specific customer’s ability to meet its financial obligations, the Company records a specific reserve for credit losses. Accounts receivable from a large customer accounted for 18.8% of the Company's total accounts receivable balance as of December 31, 2019. As of ~~June~~September 30, 2020, the Company had no similar accounts receivable concentration.

Provisions and Warranties - We provide a warranty on our products. Liability under the warranty policy is based on a review of historical warranty claims. Adjustments are made to the accruals as claims data experience warrant. Our liability for warranties as of ~~June~~September 30, 2020 and December 31, 2019 was ~~$57,434~~$55,591 and $65,591, respectively. The following tables present a summary of our accrued warranty liabilities for the ~~six~~nine months ended ~~June~~September 30, 2020 and the twelve months ended December 31, 2019:

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)


	2020
Warranty liability, January 1	$	65,591
Warranties assumed in period	~~128,599~~211,622
Payments	~~(136,756)~~(221,622)
Warranty liability, ~~June~~September 30	$	~~57,434~~55,591


	2019
Warranty liability, January 1	$	70,250
Warranties assumed in period	384,214
Payments	(388,873)
Warranty liability, December 31	$	65,591

Recent Accounting Pronouncements Issued and Not Yet Adopted

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Financial Instruments — Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2023 and is required to be applied prospectively. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.

In December 2019, the FASB issued Accounting Standards Update ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and changes in tax laws or rates, as well as clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company beginning January 1, 2021. We do not expect this standard to have a material effect on our consolidated financial statements.

3. REVENUE

Revenue recognition

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods and services to a customer, in an amount that reflects the consideration that it expects to receive in exchange for those goods or services. This is achieved through applying the following five-step model:

•Identification of the contract, or contracts, with a customer

•Identification of the performance obligations in the contract

•Determination of the transaction price

•Allocation of the transaction price to the performance obligations in the contract

•Recognition of revenue when, or as, the Company satisfies a performance obligation

The Company generates substantially all of its revenue from contracts with customers, whether formal or implied. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)

and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes, with the exception of taxes assessed during the procurement process of select inventories. Shipping and handling costs are included in cost of sales.

Revenues from product and services sales are recognized when control of the goods is transferred to the customer which occurs at a point in time typically upon shipment to the customer or completion of the service. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

Based upon the nature of the products the Company sells, its customers have limited rights of return which are immaterial. Discounts provided by the Company to customers at the time of sale are recognized as a reduction in sales as the products are sold.

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

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

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

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

The following table summarizes transactions within contract liabilities for the three and ~~six~~nine months ended ~~June~~September 30, 2020:

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)


Balance, December 31, 2019	$	559,232
Revenue recognized related to payments included in the December 31, 2019 balance	(526,202)
Payments received for which performance obligations have not been satisfied	1,043,767
Effect of foreign currency translation	(734)
Balance, March 31, 2020	$	1,076,063
Revenue recognized related to payments included in the March 31, 2020 balance	(1,022,851)
Payments received for which performance obligations have not been satisfied	163,903
Effect of foreign currency translation	1,215
Balance, June 30, 2020	$	218,330
Revenue recognized related to payments included in the June 30, 2020 balance	(211,537)
Payments received for which performance obligations have not been satisfied	1,635,572
Effect of foreign currency translation	1,626
Balance, September 30, 2020	$	1,643,991

The table below sets forth the disaggregation of revenue by product category for the periods indicated below:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
Product Revenue	Product Revenue									Product Revenue
Paint protection film	Paint protection film	$	24,248,115	$	21,166,420	$	44,019,235	$	39,622,775	Paint protection film	$	31,977,210	$	26,527,586	$	75,996,444	$	66,150,360
Window film	Window film	5,954,800		3,171,155		9,044,906		5,004,071		Window film	6,302,364		3,522,815		15,347,270		8,526,886
Other	Other	759,081		1,087,914		1,647,772		1,853,366		Other	1,248,809		764,850		2,896,582		2,618,217
Total	Total	30,961,996		25,425,489		54,711,913		46,480,212		Total	39,528,383		30,815,251		94,240,296		77,295,463

Service Revenue	Service Revenue									Service Revenue
Software	Software	$	809,897	$	775,745	$	1,661,469	$	1,519,513	Software	$	889,709	$	859,432	$	2,551,177	$	2,378,944
Cutbank credits	Cutbank credits	1,611,858		2,064,962		3,225,122		3,530,096		Cutbank credits	2,304,651		1,957,224		5,529,773		5,487,320
Installation labor	Installation labor	2,391,570		1,647,954		4,413,020		2,946,343		Installation labor	3,268,399		1,843,936		7,681,420		4,790,279
Training	Training	30,537		180,004		182,797		343,436		Training	131,654		142,155		314,451		485,592
Total	Total	4,843,862		4,668,665		9,482,408		8,339,388		Total	6,594,413		4,802,747		16,076,821		13,142,135

Total	Total	$	35,805,858	$	30,094,154	$	64,194,321	$	54,819,600	Total	$	46,122,796	$	35,617,998	$	110,317,117	$	90,437,598

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

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)

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:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019			2020		2019		2020		2019
United States	United States	$	16,118,729	$	16,497,347	$	31,671,767	$	29,007,097	United States	$	22,041,941	$	15,738,762	$	53,713,708	$	44,745,859
China	China	9,987,370		3,127,723		12,011,879		7,646,920		China	9,397,486		9,359,531		21,409,365		17,006,451
Canada	Canada	3,958,167		5,217,535		8,133,364		8,315,899		Canada	6,213,949		4,937,514		14,347,313		13,253,413
Continental Europe	Continental Europe	2,897,562		1,974,328		5,691,304		3,396,060		Continental Europe	3,656,477		1,945,104		9,347,780		5,341,164
United Kingdom	United Kingdom	630,720		926,925		1,747,148		1,810,283		United Kingdom	1,481,174		1,032,399		3,228,322		2,842,682
Asia Pacific	Asia Pacific	1,141,191		1,059,560		1,911,235		1,931,518		Asia Pacific	1,454,119		1,168,570		3,365,354		3,100,088
Latin America	Latin America	484,358		512,680		962,053		998,809		Latin America	537,892		578,055		1,499,944		1,576,864
Middle East/Africa	Middle East/Africa	561,510		720,347		1,850,566		1,603,479		Middle East/Africa	1,326,589		770,842		3,177,155		2,374,321
Other	Other	26,251		57,709		215,005		109,535		Other	13,169		87,221		228,176		196,756
Total	Total	$	35,805,858	$	30,094,154	$	64,194,321	$	54,819,600	Total	$	46,122,796	$	35,617,998	$	110,317,117	$	90,437,598

Our largest customer accounted for ~~27.9%~~20.4% and ~~10.4%~~26.3% of our net sales during the three months ended ~~June~~September 30, 2020 and 2019, respectively and ~~18.7%~~19.4% and ~~13.9%~~18.8% of our net sales during the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

4. PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Furniture and fixtures	Furniture and fixtures	$	1,241,569	$	1,168,894	Furniture and fixtures	$	1,304,112		$	1,168,894
Computer equipment	Computer equipment	1,293,000		1,151,295		Computer equipment	1,362,805			1,151,295
Vehicles	Vehicles	733,560		683,213		Vehicles	709,905			683,213
Equipment	Equipment	1,816,629		1,648,656		Equipment	1,870,191			1,648,656
Leasehold improvements	Leasehold improvements	1,857,920		1,479,594		Leasehold improvements	1,913,398			1,479,594
Plotters	Plotters	1,040,553		839,455		Plotters	1,131,936			839,455
Construction in Progress	Construction in Progress	311,910		306,100		Construction in Progress	344,696			306,100
Total property and equipment	Total property and equipment	8,295,141		7,277,207		Total property and equipment	8,637,043			7,277,207
Less: accumulated depreciation	Less: accumulated depreciation	3,745,608		3,262,554		Less: accumulated depreciation	4,045,256			3,262,554
Property and equipment, net	Property and equipment, net	$	4,549,533	$	4,014,653	Property and equipment, net	$	4,591,787		$	4,014,653

Depreciation expense for the three months ended ~~June~~September 30, 2020 and 2019 was ~~$293,860~~$325,643 and ~~$220,270,~~$234,297, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, depreciation expense was ~~$564,177~~$889,820 and ~~$421,088,~~$655,385, respectively.

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)

5. INTANGIBLE ASSETS, NET

Intangible assets consists of the following:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Trademarks	Trademarks	$	323,076	$	309,395	Trademarks	$	368,948	$	309,395
Software	Software	2,473,813		2,288,062		Software	2,536,467		2,288,062
Trade name	Trade name	481,744		492,408		Trade name	486,586		492,408
Contractual and customer relationships	Contractual and customer relationships	3,881,040		3,010,480		Contractual and customer relationships	3,948,381		3,010,480
Non-compete	Non-compete	394,844		268,459		Non-compete	400,748		268,459
Other	Other	201,734		208,012		Other	205,810		208,012
Total cost	Total cost	7,756,251		6,576,816		Total cost	7,946,940		6,576,816
Less: Accumulated amortization	Less: Accumulated amortization	3,169,908		2,756,356		Less: Accumulated amortization	3,436,779		2,756,356
Intangible assets, net	Intangible assets, net	$	4,586,343	$	3,820,460	Intangible assets, net	$	4,510,161	$	3,820,460

Amortization expense for the three months ended ~~June~~September 30, 2020 and 2019 was ~~$232,225~~$239,571 and ~~$186,824,~~$199,582, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, amortization expense was ~~$466,121~~$705,692 and ~~$371,372,~~$570,954, respectively.

The Company completed the acquisition of a business during the ~~six~~nine months ended ~~June~~September 30, 2020. Refer to Note 12 for additional information related to intangible assets added from this acquisition.

6. GOODWILL

The following table summarizes goodwill transactions for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:


Balance at December 31, 2018	$	2,322,788
Impairment	(35,884)
Foreign Exchange	~~62,597~~47,601
Balance at ~~June~~September 30, 2019	$	~~2,349,501~~2,334,505

Balance at December 31, 2019	$	2,406,512
Additions	1,184,774
Foreign Exchange	~~(93,403)~~(31,672)
Balance at ~~June~~September 30, 2020	$	~~3,497,883~~3,559,614

The Company completed the acquisition of a business during the ~~six~~nine months ended ~~June~~September 30, 2020. Refer to Note 12 for additional information related to goodwill added from this acquisition.

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)

7. INVENTORIES

The components of inventory are summarized as follows:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Film and film based products	Film and film based products	$	12,930,514	$	13,538,610	Film and film based products	$	16,951,250	$	13,538,610
Other products	Other products	1,430,560		1,226,708		Other products	1,585,041		1,226,708
Packaging and supplies	Packaging and supplies	438,905		496,661		Packaging and supplies	517,444		496,661
Inventory reserve	Inventory reserve	(93,397)		(120,826)		Inventory reserve	(92,642)		(120,826)
		$	14,706,582	$	15,141,153		$	18,961,093	$	15,141,153

8. DEBT

REVOLVING FACILITIES

The Company has a $8,500,000 revolving line of credit agreement with The Bank of San Antonio to support its continuing working capital needs. The Bank of San Antonio has been granted a security interest in substantially all of the Company’s current and future assets. Borrowings under the credit agreement bear interest at a variable rate of the Wall Street Journal prime rate minus 1.00% with a floor of 3.50%. In May 2020, the Company renewed this line of credit, extending its maturity date to June 5, 2022. The interest rate was 3.50% and 5.50% as of ~~June~~September 30, 2020 and December 31, 2019, respectively. ~~During the three months ended June 30, 2020, the Company repaid a total of $6,000,000 under this facility plus interest of $41,806.~~ As of both ~~June~~September 30, 2020 and December 31, 2019, 0 balance was outstanding on this line.

The credit agreement contains customary covenants including covenants relating to complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The credit agreement also requires that XPEL must maintain debt service coverage (Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, divided by the current portion of long-term debt + interest) of 1.25:1 and funded debt of no more than 2.5 times EBITDA on a rolling four quarter basis. The credit agreement also contains customary events of default including the failure to make payments of principal and interest, the breach of any covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events.

As of ~~June~~September 30, 2020 and December 31, 2019, the Company was in compliance with all debt covenants.

XPEL Canada Corp., a wholly owned subsidiary of XPEL, Inc., also has a CAD $4,500,000 revolving line of credit agreement with HSBC Bank Canada to support its continuing working capital needs. The line has a variable interest rate of the HSBC Canada Bank’s prime rate plus 0.25%. The interest rate as of ~~June~~September 30, 2020 and December 31, 2019 was 2.70% and 4.20%, respectively. ~~During the three months ended June 30, 2020, the Company borrowed and repaid CAD $4,000,000 under this facility plus interest of CAD $13,051.~~ As of ~~June~~September 30, 2020 and December 31, 2019, 0 balance was outstanding on this line of credit. This facility is guaranteed by the parent company.

NOTES PAYABLE

On May 11, 2020, the Company borrowed $6,000,000 pursuant to a 36-month term-loan with The Bank of San Antonio. The term-loan bears interest at a rate of 3.5% per annum, requires monthly payments of principal and interest and matures in June 2023. As of ~~June~~September 30, 2020, ~~$6,000,000~~$5,537,782 was

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)

outstanding under the term-loan. The ~~term-note~~term-loan is secured by a security interest in substantially all of our current and future assets.

As part of its acquisition strategy, the Company uses a combination of cash and unsecured non-interest bearing promissory notes payable to fund its business acquisitions. The Company discounts the promissory note to fair value using market interest rates at the time of the acquisition.

Notes payable are summarized as follows:


		Weighted Average Interest Rate	Matures	June 30, 2020		December 31, 2019				Weighted Average Interest Rate			Matures		September 30, 2020		December 31, 2019
Term-loan	Term-loan	3.50%	2023	$	6,000,000	$	—	Term-loan		3.50%			2023		$	5,537,782	$	0
Acquisition notes payable	Acquisition notes payable	3.23%	2023	1,362,538		769,507		Acquisition notes payable		3.15%			2023		1,210,183		769,507
Total debt	Total debt							7,362,538			769,507			Total debt					6,747,965		769,507
Current portion								2,543,301			462,226
Less: current portion								Less: current portion							2,554,529		462,226
Total long-term debt	Total long-term debt							$	4,819,237		$	307,281		Total long-term debt					$	4,193,436	$	307,281

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The following table presents significant accounts payable and accrued liability balances as of the periods ending:


		June 30, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Trade payables	Trade payables	$	11,339,567	$	7,440,965	Trade payables	$	11,868,312	$	7,440,965
Payroll liabilities	Payroll liabilities	1,230,156		1,367,340		Payroll liabilities	2,050,389		1,367,340
Contract liabilities	Contract liabilities	218,330		559,232		Contract liabilities	1,643,991		559,232
Other liabilities	Other liabilities	999,006		829,816		Other liabilities	1,129,326		829,816
		$	13,787,059	$	10,197,353		$	16,692,018	$	10,197,353

10. FAIR VALUE MEASUREMENTS

Financial instruments include cash and cash equivalents (level 1) and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings approximate fair value because of the near-term maturities of these financial instruments. The carrying value of the Company’s notes payable approximates fair value due to the relatively short-term nature and interest rates of the notes. For discussion of the fair value measurements related to goodwill refer to Note 6, Goodwill of the financial statements for periods ended ~~June~~September 30, 2020 and December 31, 2019.

The estimated fair value of debt is based on market quotes for instruments with similar terms and remaining maturities (Level 2 inputs and valuation techniques).

ASC 820 prioritizes the inputs to valuation techniques used to measure fair value into the following hierarchy:

Level 1 – Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Inputs other than the quoted prices in active markets that are observable either directly or indirectly, including: quoted prices for similar assets and liabilities in active markets; quoted prices for

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)

identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.

11. COMMITMENTS AND CONTINGENCIES

CONTINGENCIES

In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Management also has determined that the likelihood of any litigation and claims having a material impact on our results of operations, cash flows or financial position is remote.

SUPPLY AGREEMENT

Through our Amended and Restated Supply Agreement that we entered into with our primary supplier in March 2017, we have exclusive rights to commercialize, market, distribute and sell its automotive aftermarket products through March 21, 2022, which term automatically renews for successive two year periods thereafter unless terminated at the option of either party with two months’ notice. During such term, we have agreed to use commercially reasonable efforts to purchase a minimum of $5,000,000 of products quarterly from this principal supplier, with a yearly minimum purchasing requirement of $20,000,000.

12. ACQUISITION OF A BUSINESS

The Company completed the following acquisition during the ~~six~~nine months ended ~~June~~September 30, 2020:

Acquisition Date

Name/Location/Description

Purchase Price

Acquisition Type

Acquisition Purpose

February 1, 2020

Protex Centre, Laval, Quebec, Canada - Paint protection installation shop

$2,383,968

Share Purchase

Local market expansion

The total preliminary purchase price for the acquisition completed during the ~~six~~nine months ended ~~June~~September 30, 2020 and a preliminary allocation of that purchase price are set forth in the table below. The purchase agreement provides for customary purchase price adjustments related to acquired working capital that have not yet been finalized.

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)


	Protex Centre
Purchase Price
Cash	$	1,490,651
Promissory notes	893,317
	$	2,383,968

Allocation
Cash	$	242,808
Accounts receivable	206,808
Inventory	27,732
Prepaid assets	3,764
Other long-term assets	6,197
Property, plant, and equipment	161,702
Software	1,027
Customer relationships	987,556
Non-compete	136,395
Goodwill	1,184,774
Accounts payable and accrued liabilities	(142,175)
Assumed debt	(108,766)
Deferred tax liability	(281,565)
Taxes payable	(42,289)
	$	2,383,968

Intangible assets acquired in 2020 have a weighted average useful life of 8.51 years.

Goodwill for these acquisitions relates to expansion in a local market and is deductible for tax purposes. The goodwill represents the acquired employee knowledge of the various markets, distribution knowledge by the employees of the acquired businesses, as well as the expected synergies resulting from the acquisitions.

Acquisition costs incurred related to these acquisitions were immaterial and were included in selling, general and administrative expenses.

The acquired company was consolidated into our financial statements on its acquisition date. The amount of revenue and net income of this acquisition which has been consolidated into our financial statements for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$1,167,815~~$2,559,347 and ~~$189,322,~~$571,701, respectively.

The following unaudited consolidated pro forma combined financial information presents our results, including the estimated expenses relating to the amortization of intangibles purchased, as if this acquisition had occurred on January 1, 2020 and 2019:

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~June~~September 30, 2020 and 2019

(Unaudited)


		Six Months Ended June 30,				Nine Months Ended September 30,
		2020 (unaudited)	2019 (unaudited)		2020 (unaudited)	2019 (unaudited)
Revenue	Revenue	64,321,080	56,140,866	Revenue	110,443,876	92,516,775
Net income	Net income	5,434,874	4,856,487	Net income	12,043,122	9,516,929

The unaudited consolidated pro forma combined financial information does not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest period presented or of results that may be obtained in the future. In addition, they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.

13. SUBSEQUENT EVENTS

The Company completed the acquisition of certain assets of its France-based distributor, France Auto Racing, on November 2, 2020. The preliminary purchase price of this acquisition was $352,765.

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

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess the financial condition and results of operations of XPEL, Inc. (“XPEL” or the “Company”) or its subsidiaries. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Forward-Looking Statements” in this report and under “Item 1A. Risk Factors” in our annual report on Form 10-K which was filed with the Securities and Exchange Commission (“SEC”) on March 16, 2020 and is available on the SEC’s website at www.sec.gov.

Forward-Looking Statements

This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to the safe harbor created by those sections. In addition, the Company or others on the Company’s behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on the Company’s internet web site, or otherwise. All statements other than statements of historical facts included in this report or expressed by the Company orally from time to time that address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future are forward-looking statements, including, in particular, the statements about the Company’s plans, objectives, strategies, and prospects regarding, among other things, the Company’s financial condition, results of operations and business, and the outcome of contingencies, such as legal proceedings. The Company has identified some of these forward-looking statements in this report with words like “believe,” “can,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “outlook,” or “continue” or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to the Company’s condensed consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are based on current expectations about future events affecting the Company and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to the Company. These uncertainties and factors are difficult to predict, and many of them are beyond the Company’s control. The following are some of the uncertainties and factors known to us that could cause the Company’s actual results to differ materially from what the Company has anticipated in its forward-looking statements:

•our ability to continue to effectively manage through the COVID-19 pandemic;

•the highly competitive nature of our industry;

•our current reliance on a limited number of suppliers;

•our ability to successfully introduce new products and services;

•our ability to achieve benefits from our business initiatives, including identifying and completing suitable acquisitions and investments;

•fluctuating revenue and operating results;

•our reliance on a single distributor in China;

•political, regulatory, economic, and other risks arising from the multi-national nature of our business, including our extensive business in China;

•volatility in currency exchange rates;

•the potential exit of current key personnel or possibility of failure to attract future qualified personnel;

•significant demands related to our rapid growth;

•risks related to possible future indebtedness or the availability of future financing;

•risks related to internal control over financial reporting;

•our lack of experience, and the requirements related to operating, as a U.S. publicly traded company;

•our status as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012;

•risks related to our intellectual property;

•general global and economic business conditions that may affect demand for our products; and

•considerations related to listing our common stock (“Common Stock”) on The Nasdaq Stock Market.

We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed these factors in more detail in in our annual report on Form 10-K as filed with the SEC on March 16, 2020. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.

Company Overview

Founded in 1997 and incorporated in 2003, XPEL has grown from an automotive product design software company to a global provider of protective films and coatings, including automotive paint protection film, surface protection film, and automotive and commercial/residential window films and ceramic coatings, as well as a provider of complementary proprietary software. In 2018, we expanded

our product offerings to include window film (both commercial and residential) and security film protection for commercial and residential uses. ~~Today, we employ approximately 270 employees and serve over 2,400 direct customers and several thousand indirect customers around the world.~~

XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective film for the painted surfaces of automobiles. In 2007, we began selling automobile protective film products to complement our software business. In 2011, we introduced the ULTIMATE protective film

which, at the time, was the industry’s first protective film with self-healing properties. The ULTIMATE technology allows the protective film to better absorb the impacts from rock impingement or other road debris, thereby fully protecting the painted surface of a vehicle. The film is described as “self-healing” due to its ability to return to its original state after damage from surface scratches.

The launch of the ULTIMATE product catapulted XPEL into several years of strong revenue growth. In 2014, we began our international expansion by establishing an office in the United Kingdom. In 2015, we acquired Parasol Canada, a distributor of our products in Canada. In early 2016, we expanded our product offerings to include an automotive protective window film branded as PRIME. In 2017, we established our European headquarters in The Netherlands. We continued our international expansion in 2017 with the acquisition of Protex Canada, a leading franchisor of automotive protective film franchises serving Canada, as well as opened our XPEL Mexico office. In 2018, we launched our first product offering outside of the automotive industry, a window and security film for commercial and residential uses. Also in 2018, we launched the next generation of our highly successful ULTIMATE line, ULTIMATE PLUS. In 2019, we established an office in Germany to better serve our customers in that market. Also, in 2019 we launched our ceramic coating product. In 2020, the Company purchased Protex Centre in Montreal, Canada as a continuation of its acquisition strategy.

Strategic Overview

XPEL is currently pursuing several key strategic initiatives to drive continued growth. Our global expansion strategy focuses on the need to establish a local presence where possible, allowing us to better control the delivery of our products and services. In furtherance of this approach, we established our European headquarters in early 2017 to capture market share in what we believed to be an under-penetrated region. We are continuing to add locally based regional sales personnel, leveraging local knowledge and relationships to expand the markets in which we operate.

We seek to increase global brand awareness in strategically important areas, including seeking high visibility at premium events such as major car shows and high value placement in advertising media consumed by car enthusiasts, to help further expand the Company’s premium brand.

XPEL also continues to expand its delivery channels by acquiring select installation facilities in key markets and acquiring international partners to enhance its global reach. As we expand globally, we strive to tailor our distribution model to adapt to target markets. We believe this flexibility allows us to penetrate and grow market share more efficiently. Our acquisition strategy centers around our belief that the closer the Company is to its end customers, the greater its ability to drive increased product sales.

We also continue to drive expansion of our non-automotive product portfolio. The Company launched its new commercial/residential window film product line in 2018, giving us access to a large new market and representing the first non-automotive product line in XPEL’s history. While there is some overlap with our existing customers, we believe that this new product line exposes the Company to several new addressable markets.

Impacts of COVID-19

The COVID-19 pandemic has caused us to modify our business practices, including implementing a global work from home policy for all employees who are able to perform their duties remotely. The majority of our world-wide locations remain open for business pursuant to governmental authority

guidelines. We have taken actions to promote the welfare of our employees by enhancing safety protocols, including requiring administrative employees to work from home where applicable and implementing social distancing and robust sanitization practices at all of our locations.

We have taken and expect to continue to take proactive steps to maintain business continuity, manage our costs and bolster our balance sheet and cash position in light of the pandemic, including but not limited to, the following:

•As more fully described under “Liquidity and Capital Resources,” in May 2020, we borrowed $6.0 million under a term loan with The Bank of San Antonio.

•As more fully described under “Liquidity and Capital Resources,” in May 2020, we renewed and extended our revolving credit facility until June 2022.

As a result of these actions, we have increased our cash position and believe that our level of liquidity and cost cutting measures will help us to continue to effectively navigate the current economic disruption associated with the ongoing COVID-19 pandemic.

Trends and Uncertainties

~~The effects of the~~ COVID-19 ~~pandemic~~ impacted our ~~financial results in~~operations during the ~~second quarter~~first six months of 2020, but revenue has recovered substantially during the three months ended September 30, 2020. During this most recent three-month period, revenue has increased in all ~~operating regions outside of China and Continental Europe. For all regions outside of China and Continental Europe, our revenue declined 8.3% in~~major geographic areas except Latin America. Despite the aggregate compared to the same quarter for the prior year, including a 2.3% decline in the United States, our largest region. This decline in sales in other parts of the world was offset primarily by a resurgence in demand within the Chinese market, where we realized a 219.3% increase in ~~sales compared to~~revenue in this most recent quarter, the ~~same quarter in the prior year. The~~ effects of the pandemic on our financial results in future periods could be significant and cannot currently 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 II, Item 1A “Risk Factors” of this 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 overall impact the COVID-19 pandemic will have on our customers, vendors and suppliers or our business, results of operations, or financial condition. Significant uncertainty still exists concerning the overall magnitude of the impact and the duration of the COVID-19 pandemic. For example, automotive sales and production are highly cyclical. As demand for automotive products fluctuate or decrease, the demand for our products may also fluctuate or decrease. Refer to "Item 1A Risk Factors" in our annual report on Form 10-K for additional consideration of the cyclical nature of the automotive industry. As a result, we will continue to closely monitor updates regarding the spread of COVID-19 and adjust our operations according to guidelines from local, state and federal officials. In light of the foregoing, we may take further actions that alter our business operations or that we determine are in the best interests of our employees, customers, suppliers and shareholders.

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

The following table is a reconciliation of Net Income to EBITDA for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:


		(Unaudited)								(Unaudited)									(Unaudited)						(Unaudited)
		Three Months Ended June 30,								Six Months Ended June 30, 2020									Three Months Ended September 30,						Nine Months Ended September 30,
		2020		2019		% Change		2020		2019		% Change			2020		2019		% Change		2020		2019		% Change
Net Income	Net Income	$	3,973,690	$	3,007,310	32.1	%	$	5,585,044	$	4,867,313	14.7	%	Net Income	$	6,608,248	$	4,509,285	46.5	%	$	12,193,292	$	9,376,598	30.0	%
Interest	Interest	74,554		29,074		156.4	%	105,112		57,780		81.9	%	Interest	68,368		23,851		186.6	%	173,480		81,631		112.5	%
Taxes	Taxes	1,088,071		938,405		15.9	%	1,514,450		1,504,293		0.7	%	Taxes	1,736,330		999,072		73.8	%	3,250,780		2,503,365		29.9	%
Depreciation	Depreciation	293,860		220,270		33.4	%	564,177		421,088		34.0	%	Depreciation	325,643		234,297		39.0	%	889,820		655,385		35.8	%
Amortization	Amortization	232,225		186,824		24.3	%	466,121		371,372		25.5	%	Amortization	239,571		199,582		20.0	%	705,692		570,954		23.6	%
EBITDA	EBITDA	$	5,662,400	$	4,381,883	29.2	%	$	8,234,904	$	7,221,846	14.0	%	EBITDA	$	8,978,160	$	5,966,087	50.5	%	$	17,213,064	$	13,187,933	30.5	%

Use of Non-GAAP Financial Measures

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

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

Results of Operations

The following tables summarize the Company’s consolidated results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:

Three Months Ended June 30, 2020 %
of Total Revenue Three Months Ended June 30, 2019 %
of Total Revenue $
Change %
Change
Total revenue $ 35,805,858 100.0 % $ 30,094,154 100.0 % $ 5,711,704 19.0 %
Total cost of sales 24,066,781 67.2 % 19,468,141 64.7 % 4,598,640 23.6 %
Gross margin 11,739,077 32.8 % 10,626,013 35.3 % 1,113,064 10.5 %
Total operating expenses 6,598,621 18.4 % 6,654,742 22.1 % (56,121) (0.8) %
Operating income 5,140,456 14.4 % 3,971,271 13.2 % 1,169,185 29.4 %
Other expenses 78,695 0.2 % 25,556 0.1 % 53,139 207.9 %
Income tax 1,088,071 3.0 % 938,405 3.1 % 149,666 15.9 %
Net income $ 3,973,690 11.1 % $ 3,007,310 10.0 % $ 966,380 32.1 %


	Three Months Ended September 30, 2020		% of Total Revenue		Three Months Ended September 30, 2019		% of Total Revenue		$ Change		% Change
Total revenue	$	46,122,796	100.0	%	$	35,617,998	100.0	%	$	10,504,798	29.5	%
Total cost of sales	30,092,964		65.2	%	23,344,968		65.5	%	6,747,996		28.9	%
Gross margin	16,029,832		34.8	%	12,273,030		34.5	%	3,756,802		30.6	%
Total operating expenses	7,616,177		16.5	%	6,603,871		18.5	%	1,012,306		15.3	%
Operating income	8,413,655		18.2	%	5,669,159		15.9	%	2,744,496		48.4	%
Other expenses	69,077		0.1	%	160,802		0.5	%	(91,725)		(57.0)	%
Income tax	1,736,330		3.8	%	999,072		2.8	%	737,258		73.8	%
Net income	$	6,608,248	14.3	%	$	4,509,285	12.7	%	$	2,098,963	46.5	%


		Six Months Ended June 30, 2020		% of Total Revenue		Six Months Ended June 30, 2019		% of Total Revenue		$ Change		% Change			Nine Months Ended September 30, 2020		% of Total Revenue		Nine Months Ended September 30, 2019		% of Total Revenue		$ Change		% Change
Total revenue	Total revenue	$	64,194,321	100.0	%	$	54,819,600	100.0	%	$	9,374,721	17.1	%	Total revenue	$	110,317,117	100.0	%	$	90,437,598	100.0	%	$	19,879,519	22.0	%
Total cost of sales	Total cost of sales	42,158,356		65.7	%	36,043,507		65.7	%	6,114,849		17.0	%	Total cost of sales	72,251,320		65.5	%	59,388,475		65.7	%	12,862,845		21.7	%
Gross margin	Gross margin	22,035,965		34.3	%	18,776,093		34.3	%	3,259,872		17.4	%	Gross margin	38,065,797		34.5	%	31,049,123		34.3	%	7,016,674		22.6	%
Total operating expenses	Total operating expenses	14,411,641		22.5	%	12,331,799		22.5	%	2,079,842		16.9	%	Total operating expenses	22,027,818		20.0	%	18,935,670		20.9	%	3,092,148		16.3	%
Operating income	Operating income	7,624,324		11.9	%	6,444,294		11.8	%	1,180,030		18.3	%	Operating income	16,037,979		14.5	%	12,113,453		13.4	%	3,924,526		32.4	%
Other expenses	Other expenses	524,830		0.8	%	72,688		0.1	%	452,142		622.0	%	Other expenses	593,907		0.5	%	233,490		0.3	%	360,417		154.4	%
Income tax	Income tax	1,514,450		2.4	%	1,504,293		2.7	%	10,157		0.7	%	Income tax	3,250,780		2.9	%	2,503,365		2.8	%	747,415		29.9	%
Net income	Net income	$	5,585,044	8.7	%	$	4,867,313	8.9	%	$	717,731	14.7	%	Net income	$	12,193,292	11.1	%	$	9,376,598	10.4	%	$	2,816,694	30.0	%

The following tables summarize revenue results for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:

Three Months Ended June 30, % % of Total Revenue
2020 2019 Inc (Dec) 2020 2019
Product Revenue
Paint protection film $ 24,248,115 $ 21,166,420 14.6 % 67.7 % 70.3 %
Window film 5,954,800 3,171,155 87.8 % 16.6 % 10.5 %
Other 759,081 1,087,914 (30.2) % 2.2 % 3.7 %
Total $ 30,961,996 $ 25,425,489 21.8 % 86.5 % 84.5 %
Service Revenue
Software $ 809,897 $ 775,745 4.4 % 2.3 % 2.6 %
Cutbank credits 1,611,858 2,064,962 (21.9) % 4.5 % 6.9 %
Installation labor 2,391,570 1,647,954 45.1 % 6.7 % 5.5 %
Training 30,537 180,004 (83.0) % 0.0 % 0.5 %
Total $ 4,843,862 $ 4,668,665 3.8 % 13.5 % 15.5 %
Total $ 35,805,858 $ 30,094,154 19.0 % 100.0 % 100.0 %


		Six Months Ended June 30,						%		% of Total Revenue							Three Months Ended September 30,				%		% of Total Revenue
		2020		2019		Inc (Dec)		2020		2019			2020		2019		Inc (Dec)		2020		2019
Product Revenue	Product Revenue											Product Revenue
Paint protection film	Paint protection film	$	44,019,235	$	39,622,775	11.1	%	68.6	%	72.3	%	Paint protection film	$	31,977,210	$	26,527,586	20.5	%	69.3	%	74.5	%
Window film	Window film	9,044,906		5,004,071		80.8	%	14.1	%	9.1	%	Window film	6,302,364		3,522,815		78.9	%	13.7	%	9.9	%
Other	Other	1,647,772		1,853,366		(11.1)	%	2.5	%	3.4	%	Other	1,248,809		764,850		63.3	%	2.6	%	2.1	%
Total	Total	$	54,711,913	$	46,480,212	17.7	%	85.2	%	84.8	%	Total	$	39,528,383	$	30,815,251	28.3	%	85.7	%	86.5	%

Service Revenue	Service Revenue											Service Revenue
Software	Software	$	1,661,469	$	1,519,513	9.3	%	2.6	%	2.8	%	Software	$	889,709	$	859,432	3.5	%	1.9	%	2.4	%
Cutbank credits	Cutbank credits	3,225,122		3,530,096		(8.6)	%	5.0	%	6.4	%	Cutbank credits	2,304,651		1,957,224		17.8	%	5.0	%	5.5	%
Installation labor	Installation labor	4,413,020		2,946,343		49.8	%	6.9	%	5.4	%	Installation labor	3,268,399		1,843,936		77.3	%	7.1	%	5.2	%
Training	Training	182,797		343,436		(46.8)	%	0.3	%	0.6	%	Training	131,654		142,155		(7.4)	%	0.3	%	0.4	%
Total	Total	$	9,482,408	$	8,339,388	13.7	%	14.8	%	15.2	%	Total	$	6,594,413	$	4,802,747	37.3	%	14.3	%	13.5	%

Total	Total	$	64,194,321	$	54,819,600	17.1	%	100.0	%	100.0	%	Total	$	46,122,796	$	35,617,998	29.5	%	100.0	%	100.0	%


	Nine Months Ended September 30,				%		% of Total Revenue
	2020		2019		Inc (Dec)		2020		2019
Product Revenue
Paint protection film	$	75,996,444	$	66,150,360	14.9	%	68.9	%	73.1	%
Window film	15,347,270		8,526,886		80.0	%	13.9	%	9.4	%
Other	2,896,582		2,618,217		10.6	%	2.6	%	3.0	%
Total	$	94,240,296	$	77,295,463	21.9	%	85.4	%	85.5	%

Service Revenue
Software	$	2,551,177	$	2,378,944	7.2	%	2.3	%	2.6	%
Cutbank credits	5,529,773		5,487,320		0.8	%	5.0	%	6.1	%
Installation labor	7,681,420		4,790,279		60.4	%	7.0	%	5.3	%
Training	314,451		485,592		(35.2)	%	0.3	%	0.5	%
Total	$	16,076,821	$	13,142,135	22.3	%	14.6	%	14.5	%

Total	$	110,317,117	$	90,437,598	22.0	%	100.0	%	100.0	%

Because many of our international customers require us to ship their orders to freight forwarders located in the United States, we cannot be certain about the ultimate destination of the product. The following tables represent our estimate of sales by geographic regions based on our understanding of ultimate product destination based on customer interactions, customer locations and other factors for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:

Three Months Ended
June 30, % % of Total Revenue
2020 2019 Inc (Dec) 2020 2019
United States $ 16,118,729 $ 16,497,347 (2.3) % 45.0 % 54.8 %
China 9,987,370 3,127,723 219.3 % 27.9 % 10.4 %
Canada 3,958,167 5,217,535 (24.1) % 11.1 % 17.3 %
Continental Europe 2,897,562 1,974,328 46.8 % 8.1 % 6.6 %
United Kingdom 630,720 926,925 (32.0) % 1.8 % 3.1 %
Asia Pacific 1,141,191 1,059,560 7.7 % 3.2 % 3.5 %
Latin America 484,358 512,680 (5.5) % 1.4 % 1.7 %
Middle East/Africa 561,510 720,347 (22.1) % 1.5 % 2.4 %
Other 26,251 57,709 (54.5) % 0.0 % 0.2 %
Total $ 35,805,858 $ 30,094,154 19.0 % 100.0 % 100.0 %


		Six Months Ended June 30,						%		% of Total Revenue							Three Months Ended September 30,				%		% of Total Revenue
		2020		2019		Inc (Dec)		2020		2019			2020		2019		Inc (Dec)		2020		2019
United States	United States	$	31,671,767	$	29,007,097	9.2	%	49.3	%	52.9	%	United States	$	22,041,941	$	15,738,762	40.0	%	47.8	%	44.2	%
China	China	12,011,879		7,646,920		57.1	%	18.7	%	13.9	%	China	9,397,486		9,359,531		0.4	%	20.4	%	26.3	%
Canada	Canada	8,133,364		8,315,899		(2.2)	%	12.7	%	15.2	%	Canada	6,213,949		4,937,514		25.9	%	13.5	%	13.9	%
Continental Europe	Continental Europe	5,691,304		3,396,060		67.6	%	8.9	%	6.2	%	Continental Europe	3,656,477		1,945,104		88.0	%	7.9	%	5.5	%
United Kingdom	United Kingdom	1,747,148		1,810,283		(3.5)	%	2.7	%	3.3	%	United Kingdom	1,481,174		1,032,399		43.5	%	3.2	%	2.9	%
Asia Pacific	Asia Pacific	1,911,235		1,931,518		(1.1)	%	3.0	%	3.5	%	Asia Pacific	1,454,119		1,168,570		24.4	%	3.2	%	3.3	%
Latin America	Latin America	962,053		998,809		(3.7)	%	1.5	%	1.8	%	Latin America	537,892		578,055		(6.9)	%	1.2	%	1.6	%
Middle East/Africa	Middle East/Africa	1,850,566		1,603,479		15.4	%	2.9	%	2.9	%	Middle East/Africa	1,326,589		770,842		72.1	%	2.8	%	2.2	%
Other	Other	215,005		109,535		96.3	%	0.3	%	0.3	%	Other	13,169		87,221		(84.9)	%	0.0	%	0.1	%
Total	Total	$	64,194,321	$	54,819,600	17.1	%	100.0	%	100.0	%	Total	$	46,122,796	$	35,617,998	29.5	%	100.0	%	100.0	%


	Nine Months Ended September 30,				%		% of Total Revenue
	2020		2019		Inc (Dec)		2020		2019
United States	$	53,713,708	$	44,745,859	20.0	%	48.7	%	49.5	%
China	21,409,365		17,006,451		25.9	%	19.4	%	18.8	%
Canada	14,347,313		13,253,413		8.3	%	13.0	%	14.7	%
Continental Europe	9,347,780		5,341,164		75.0	%	8.5	%	5.9	%
United Kingdom	3,228,322		2,842,682		13.6	%	2.9	%	3.1	%
Asia Pacific	3,365,354		3,100,088		8.6	%	3.1	%	3.4	%
Latin America	1,499,944		1,576,864		(4.9)	%	1.4	%	1.7	%
Middle East/Africa	3,177,155		2,374,321		33.8	%	2.9	%	2.6	%
Other	228,176		196,756		16.0	%	0.1	%	0.3	%
Total	$	110,317,117	$	90,437,598	22.0	%	100.0	%	100.0	%

Product Revenue. Product revenue for the three months ended ~~June~~September 30, 2020 increased ~~21.8%~~28.3% over the three months ended ~~June~~September 30, 2019. Product revenue represented ~~86.5%~~85.7% of our total revenue compared to ~~84.5%~~86.5% in the three months ended ~~June~~September 30, 2019. Revenue from our paint protection film product line increased ~~14.6%~~20.5% over the three months ended ~~June~~September 30, 2019. Paint protection film sales represented ~~67.7%~~69.3% and ~~70.3%~~74.5% of our total consolidated revenues for the three months ended ~~June~~September 30, 2020 and 2019, respectively. The increase in paint protection film sales was primarily attributable to a ~~significant increase~~resurgence in demand for our ~~products~~film in ~~China pursuant to that market's re-emergence~~most of our geographical sales regions as those markets emerged from COVID-19 impacts. ~~This increase was partially offset by declines in product revenue in the United States, Canada and other regions due to the impacts of COVID-19.~~ Revenue from our window film product line grew ~~87.8%~~78.9% for the three months ended ~~June~~September 30, 2020. Window film sales represented ~~16.6%~~13.7% and ~~10.5%~~9.9% of our total consolidated revenues for the three months ended ~~June~~September 30, 2020 and 2019, respectively. This increase in window film sales was due mainly to continued increases in demand ~~for our window film products primarily in China~~resulting from continuing channel focus and ~~the United States regions.~~increased product adoption.

Product revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 increased ~~17.7%~~21.9% over the ~~the six~~nine months ended ~~June~~September 30, 2019. This increase was driven primarily by increased demand for our products in most of our geographical sales regions. For the ~~United States, China and Continental Europe.~~nine months ended September 30, 2020, sales of paint protection film increased by 14.9% over the same period in 2019. The increase in paint protection film sales was primarily attributable to an increase in demand for our products in ~~China and the United States during the six months ended June 30, 2020.~~most sales regions. Window film revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 increased ~~80.8%~~80.0% over the ~~six months ended June 30,~~

same period in 2019 due primarily to increased demand in ~~China~~most geographical sales regions resulting from strong channel execution and ~~the United States regions.~~increased product 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 installation centers and revenue from training services provided to our customers. Service revenue grew ~~3.8%~~37.3% over the three months ended ~~June~~September 30, 2019. Software revenue increased ~~4.4%~~3.5% over the three months ended ~~June~~September 30, 2019. These increases were due mainly to increases in total subscribers for our DAP software. Cutbank credit revenue ~~declined 21.9%~~increased 17.8% from the three months ended ~~June~~September 30, 2019 due mainly to ~~declines~~a widespread resurgence in ~~product revenue in the United States and Canada resulting from the impacts of COVID-19.~~demand for our paint protection film. Installation labor revenue increased ~~45.1%~~77.3% over the three months ended ~~June~~September 30, 2019. Excluding acquisition related growth, installation labor revenue ~~grew 16.0%~~increased 32.1% during the three months ended September 30, 2020 due primarily to ~~increases in~~increased demand for installation services primarily in the United States, Canada and Europe. Training revenue declined ~~83.0%~~7.4% over the three months ended ~~June~~September 30, 2019 due mainly to reduced attendance in our training classes resulting from COVID-19.

Service revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 grew ~~13.7%~~22.3% over the ~~six~~nine months ended ~~June~~September 30, 2019. Software revenue grew ~~9.3%~~7.2% over the ~~six~~nine months ended ~~June~~September 30, 2019. These increases were due primarily to increases in total subscribers to our DAP software. Cutbank credits revenue ~~declined 8.6%~~increased 0.8% over the ~~six~~nine months ended ~~June~~September 30, 2019 due primarily to ~~declines~~increases in product revenue in most sales regions in the ~~United States~~most recently ended three-month period offset by significant COVID-19 impacts during April and ~~Canada resulting from the impacts~~May of ~~COVID-19.~~2020. Installation labor increased ~~49.8%~~60.4% over the ~~six~~nine months ended ~~June~~September 30, 2019. Excluding acquisition related growth, installation labor revenue increased ~~25.2% over~~27.9% during the ~~six~~nine months ended ~~June~~September 30, ~~2019 due primarily to increases in demand for installation services in our installation facilities.~~2020.

Total installation revenue (labor and product combined) at our installation centers increased ~~45.2%~~77.3% over the three months ended ~~June~~September 30, 2019. This represented ~~8.0%~~8.4% and ~~6.5%~~6.2% of our total consolidated revenue for the three months ended ~~June~~September 30, 2020 and 2019, respectively. Excluding acquisition related growth, total installation revenue grew ~~28.3%~~39.3%. Total installation revenue increased ~~49.8%~~60.4% over the ~~six~~nine months ended ~~June~~September 30, ~~2019.~~2019 due primarily to increased demand for installation services in the United States, Canada and Europe. This represented ~~8.2%~~8.3% and ~~6.4%~~6.3% of our total consolidated revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. Excluding acquisition related growth, total installation revenue grew ~~28.8%~~33.1% over the ~~six~~nine months ended ~~June~~September 30, ~~2019.~~2020.

Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased ~~18.5%~~27.6% over the three months ended ~~June~~September 30, 2019 due mainly to ~~returning demand~~a broad-based resurgence in ~~China.~~demand. Adjusted product revenue increased ~~15.9%~~20.5% versus the ~~six~~nine months ended ~~June~~September 30, 2019.

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 installation facilities, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers.

Cost of sales increased 28.9% in the three months ended September 30, 2020 over the three months ended September 30, 2019 as a result of increased sales volume. Product costs in the three months ended ~~June~~September 30, 2020 increased ~~21.6%~~27.3% over the three months ended ~~June~~September 30, 2019. This increase was the result of the increased sales of our products during the 2020 quarter. Cost of product sales represented ~~63.0%~~61.5% and ~~61.6%~~62.6% of total revenue in the three months ended ~~June~~September 30, 2020 and

2019, respectively. This decrease was the result of certain economies of scale as a result of increased sales of our products during the 2020 quarter. Cost of service revenue grew ~~64.7%~~62.4% during the three months ended ~~June~~September 30, 2020 due mainly to the increased installation labor costs associated with increased installation sales at our installation centers.

Cost of sales increased 21.7% in the nine months ended September 30, 2020 over the nine months ended September 30, 2019 as a result of increased sales volume. Product costs in the ~~six~~nine months ended ~~June~~September 30, 2020 increased ~~14.8%~~19.8% over the ~~six~~nine months ended ~~June~~September 30, 2019. This increase was the result of the increased sales of our products during the 2020 period. Cost of product sales represented ~~61.2%~~61.4% and 62.5% of total revenue in the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. This decrease was the result of certain economies of scale as a result of increased sales of our products during the 2020 period. Cost of service revenue grew ~~57.4%~~59.2% during the ~~six~~nine months ended ~~June~~September 30, ~~2020.~~2020 due mainly to the increased installation labor costs associated with increased installation sales at our installation centers.

Gross Margin

Gross margin for the three months ended ~~June~~September 30, 2020 grew approximately ~~$1.1~~$3.8 million, or ~~10.5%~~30.6%, from the three months ended ~~June~~September 30, 2019. For the three months ended ~~June~~September 30, 2020, gross margin represented ~~32.8%~~34.8% of revenue.

Gross margin for the ~~six~~nine months ended ~~June~~September 30, 2020 grew approximately ~~$3.3~~$7.0 million, or ~~17.4%~~22.6%, from the ~~six~~nine months ended ~~June~~September 30, 2019. For the ~~six~~nine months ended ~~June~~September 30, 2020, gross margin represented ~~34.3%~~34.5% of revenue. The following tables summarize gross margin for product and services for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019:


		Three Months Ended June 30,						%		% of Category Revenue							Three Months Ended September 30,				%		% of Category Revenue
		2020		2019		Inc (Dec)		2020		2019			2020		2019		Inc (Dec)		2020		2019
Product	Product	$	8,405,300	$	6,874,459	22.3	%	27.1	%	27.0	%	Product	$	11,158,501	$	8,531,480	30.8	%	28.2	%	27.7	%
Service	Service	3,333,777		3,751,554		(11.1)	%	68.8	%	80.4	%	Service	4,871,331		3,741,550		30.2	%	73.9	%	77.9	%
Total	Total	$	11,739,077	$	10,626,013	10.5	%	32.8	%	35.3	%	Total	$	16,029,832	$	12,273,030	30.6	%	34.8	%	34.5	%


		Six Months Ended June 30,						%		% of Category Revenue							Nine Months Ended September 30,				%		% of Category Revenue
		2020		2019		Inc (Dec)		2020		2019			2020		2019		Inc (Dec)		2020		2019
Product	Product	$	15,393,804	$	12,241,149	25.8	%	28.1	%	26.3	%	Product	$	26,552,305	$	20,772,629	27.8	%	28.2	%	26.9	%
Service	Service	6,642,161		6,534,944		1.6	%	70.0	%	78.4	%	Service	11,513,492		10,276,494		12.0	%	71.6	%	78.2	%
Total	Total	$	22,035,965	$	18,776,093	17.4	%	34.3	%	34.3	%	Total	$	38,065,797	$	31,049,123	22.6	%	34.5	%	34.3	%

Product gross margin for the three months ended ~~June~~September 30, 2020 increased approximately ~~$1.5~~$2.6 million, or ~~22.3%~~30.8%, over the three months ended ~~June~~September 30, 2019 and represented ~~27.1%~~28.2% and ~~27.0%~~27.7% of total product revenue for the three months ended ~~June~~September 30, 2020 and 2019, respectively.

Product gross margin for the nine months ended September 30, 2020 increased approximately $5.8 million, or 27.8%, over the nine months ended September 30, 2019 and represented 28.2% and 26.9% of total product revenue for the nine months ended September 30, 2020 and 2019, respectively. This increase was due primarily to increases in revenue, changes in revenue mix, improvements in product costs and operating leverage.

Product gross margin for the six months ended June 30, 2020 increased approximately $3.2 million, or 25.8%, over the six months ended June 30, 2019 and represented 28.1% and 26.3% of total product revenue for the six months ended June 30, 2020 and 2019, respectively. This increase was due primarily to increases in revenue, improvements in product costs and operating leverage.

Service gross margin ~~decreased~~increased approximately ~~$0.4~~$1.1 million, or ~~11.1%~~30.2%, over the three months ended ~~June~~September 30, 2019. This represented ~~68.8%~~73.9% and ~~80.4%~~77.9% of total service revenue for the three months ended ~~June~~September 30, 2020 and 2019, respectively. The decrease in service gross margin percentage for the ~~the~~ three months ended ~~June~~September 30, 2020 was primarily due to higher installation labor revenue, which is lower margin than software related revenue, growing at a faster rate than software related revenue. During the period, revenues at our Company-owned installation facilities in the United States and Canada were impacted by reductions in demand because of the COVID-19 pandemic. The Company retained and continued to pay its installation personnel during this period which further impacted installation labor margins.

Service gross margin increased approximately ~~$0.1~~$1.2 million, or ~~1.6%~~12.0%, over the ~~six~~nine months ended ~~June~~September 30, 2019. This represented ~~70.0%~~71.6% and ~~78.4%~~78.2% of total service revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. This decrease was primarily due to margin mix and the Company's decision to continue to pay installation personnel during COVID-19 related shutdowns.

Operating Expenses

Sales and marketing expenses for the three months ended ~~June~~September 30, 2020 ~~decreased 7.0%~~increased 28.9% compared to the same period in 2019. These expenses represented ~~5.4%~~5.0% and ~~6.9%~~5.1% of total consolidated revenue for the three months ended ~~June~~September 30, 2020 and 2019, respectively. This ~~decrease~~increase was due primarily to ~~a reduction~~increased hiring of sales personnel and increases in marketing related expenses ~~pursuant~~ to ~~the COVID-19 pandemic which forced the suspension and/or cancellation of certain events.~~support ongoing operations.

For the ~~six~~nine months ended ~~June~~September 30, 2020, sales and marketing expenses increased ~~27.3%~~27.8% compared to the same period in 2019. These expenses represented ~~7.3%~~6.3% and ~~6.7%~~6.0% of total consolidated revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. This increase was due to additional marketing and personnel costs incurred to support the ongoing growth of the Company.

General and administrative expenses grew approximately ~~$0.1~~$0.5 million, or ~~1.9%~~10.2% over the three months ended ~~June~~September 30, 2019. These costs represented ~~13.1%~~11.5% and ~~15.3%~~13.5% of total consolidated revenue for the three months ended ~~June 30, 2020 and 2019, respectively.~~

General and administrative expenses grew approximately $1.1 million, or 12.5%, during the six months ended June 30, 2020 over the same period in 2019. These costs represented 15.2% and 15.8% of total consolidated revenue for the six months ended JuneSeptember 30, 2020 and 2019, respectively. The increase was due mainly to increases in personnel, occupancy costs and information technology costs to support the on-going growth of the business.

General and administrative expenses grew approximately $1.6 million, or 11.7%, during the nine months ended September 30, 2020 over the same period in 2019. These costs represented 13.6% and 14.9% of total consolidated revenue for the nine months ended September 30, 2020 and 2019, respectively. The increase was due mainly to increases in personnel, occupancy costs and information technology costs to support the on-going growth of the business.

Other Expense

Other expense consists of interest expense and foreign currency exchange gain/loss. Interest expense increased during the ~~three~~nine months ended ~~June~~September 30, 2020 due primarily to the Company's increased borrowings on its revolving credit facilities and borrowings under its term-loan in response to the COVID-19 pandemic. The Company incurred approximately $0.4 million in foreign currency exchange losses during the ~~six~~nine months ended ~~June~~September 30, 2020 resulting from foreign currency fluctuations in response to the COVID-19 pandemic.

Income Tax Expense

Income tax expense for the three months ended ~~June~~September 30, 2020 increased ~~$0.1~~$0.7 million from the three months ended ~~June~~September 30, 2019, Our effective tax rate was ~~21.5%~~20.8% for the three months ended ~~June~~September 30, 2020 compared with ~~23.8%~~18.1% for the three months ended ~~June~~September 30, 2019. This ~~reduction~~increase in the effective tax rate was due primarily to ~~larger expected~~a true up recorded in the prior year related to permanent tax benefits ~~we expect to realize compared~~related to the ~~same period last year.~~Jobs Act.

Income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2020 increased ~~$0.01~~$0.7 million from the same period in 2019, Our effective tax rate was ~~21.3%~~21.0% for the ~~six~~nine months ended ~~June~~September 30, 2020 compared with ~~23.6%~~21.1% for the ~~six~~nine months ended ~~June~~September 30, 2019. ~~This reduction in the effective tax rate was due primarily to larger expected permanent tax benefits we expect to realize compared to the same period last year.~~

~~Net income for the three months ended June 30, 2020 increased 32.1% to $4.0 million.~~

~~Net income for the six months ended June 30, 2020 increased 14.7% to $5.6 million.~~

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 ~~June~~September 30, 2020, we had cash and cash equivalents of ~~$25.8~~$27.2 million. For the ~~six~~nine months ended ~~June~~September 30, 2020, cash flows provided by operations were ~~$11.8~~$14.2 million. We expect to continue to have cash requirements to support working capital needs, capital expenditures (including acquisitions), and to pay interest and service debt, if applicable. 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 report.

Operating activities. Cash flows provided by operations totaled approximately ~~$11.8~~$14.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$3.1~~$5.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019. This increase was due mainly to increases in operating earnings and changes in working capital.

Investing activities. Cash flows used in investing activities totaled approximately ~~$2.4~~$2.9 million during the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~$0.9~~$1.5 million during the ~~six~~nine months ended ~~June~~September 30, 2019. This increase was due mainly to the acquisition of Protex Centre (Note 12) ~~and increases in capital expenditures.~~.

Financing activities. Cash flows provided by financing activities during the ~~six~~nine months ended ~~June~~September 30, 2020 totaled approximately ~~$4.8~~$4.2 million compared to cash use in the prior year of ~~$0.7~~$0.9 million. This increase was due primarily to new borrowing under a term loan agreement with the Bank of San Antonio (Note 8)~~. This increase~~ which was partially offset by the purchase of the minority interest in the Company's subsidiary in the United Kingdom (Note 1).

Debt obligations as of ~~June~~September 30, 2020 and December 31, 2019 totaled approximately ~~$7.4~~$6.7 million and $0.8 million, respectively.

Credit Facilities

As of ~~June~~September 30, 2020, our credit facilities consisted of an $8.5 million revolving line of credit agreement with The Bank of San Antonio and a revolving credit facility maintained by our Canadian subsidiary. The Bank of San Antonio facility is utilized to fund our working capital needs and is secured by a security interest in substantially all of our current and future assets. Borrowings under the credit agreement bear interest at a variable rate of the Wall Street Journal prime rate minus 1.00% with a floor of 3.50%. The interest rate as of ~~June~~September 30, 2020 and December 31, 2019 was 3.50% and 5.50%, respectively. ~~During the three months ended June 30, 2020, the Company repaid a total of $6,000,000 under this facility plus interest of $41,806.~~ As of both ~~June~~September 30, 2020 and December 31, 2019, no balance was outstanding on this line. We renewed and extended this revolving credit facility for an additional two years in May 2020. The renewed credit agreement matures on June 5, 2022.

The credit agreement contains customary covenants including covenants relating to complying with applicable laws, delivery of financial statements, payment of taxes and maintaining insurance. The credit agreement also requires that the Company must maintain debt service coverage (EBITDA divided by the current portion of long-term debt plus interest) of 1.25:1 and funded debt to EBITDA of 2.5 times on a rolling four quarter basis. The credit agreement also contains customary events of default including the failure to make payments of principal and interests, the breach of any covenants, the occurrence of a

material adverse change, and certain bankruptcy and insolvency events. As of ~~June~~September 30, 2020, the Company was in compliance with all covenants.

On May 11, 2020, the Company borrowed $6,000,000 pursuant to a 36-month term loan with the Bank of San Antonio. The ~~term loan~~term-loan bears interest at 3.5% annually, requires monthly payments of principal and interest and matures in June 2023. At ~~June~~September 30, 2020, ~~$6,000,000~~$5,537,782 was outstanding under the term-loan. The ~~term-note~~term-loan is secured by a security interest in substantially all of our current and future assets.

XPEL Canada Corp., a wholly-owned subsidiary of XPEL, Inc., also has a Canadian Dollar (“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 .25% per annum and is guaranteed by the parent company. ~~During the three months ended June 30, 2020, the Company borrowed and repaid CAD $4,000,000 under this facility plus interest of CAD $13,051.~~ As of ~~June~~September 30, 2020 and December 31, 2019, no balance was outstanding on this facility.

Contractual Obligations

There has been no material change to the Company’s contractual obligations as described in the Company’s annual report on Form 10-K as filed with the SEC on March 16, 2020.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies and estimates from the information provided in the Company’s annual report on Form 10-K as filed with the SEC on March 16, 2020.

Related Party Relationships

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

Off-Balance Sheet Arrangements

As of ~~June~~September 30, 2020 and December 31, 2019, we did not have any relationships with unconsolidated organizations or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange contracts.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have operations that expose us to currency risk in the British Pound Sterling, the Canadian Dollar, the Euro, the Mexican Peso, and the New Taiwanese Dollar. Amounts invested in our foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as accumulated other comprehensive income, a component of

stockholders’ equity in our condensed consolidated balance sheets. We do not currently hedge our exposure to potential foreign currency translation adjustments.

If we borrow under our revolving lines of credit, we will be subject to market risk resulting from changes in interest rates related to our floating rate bank credit facilities. If we were to make such borrowings, a hypothetical 100 basis point increase in variable interest rates may result in a material impact to our financial statements. We do not currently have any derivative contracts to hedge our exposure to interest rate risk. During each of the periods presented, we have not experienced a significant effect on our business due to changes in interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.

Management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have each concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

From time to time, we are made parties to actions filed or have been given notice of potential claims relating to the ordinary conduct of our business, including those pertaining to commercial disputes, product liability, patent infringement and employment matters.

While we believe that a material impact on our financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, it is possible that an unforeseen future adverse ruling or unfavorable development could result in future charges that could have a material adverse impact. We do and will continue to periodically reexamine our

estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our financial position, results of operations and cash flows for the proceedings and claims described in the notes to our consolidated financial statements could change in the future.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A Risk Factors” in our annual report on Form 10-K as filed with the SEC on March 16, 2020, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K as filed with the SEC on March 16, 2020 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The COVID-19 pandemic could materially adversely affect our financial condition and results of operations.

The global pandemic resulting from the outbreak of COVID-19 has disrupted global health, economic and market conditions, consumer behavior and the Company's global operations beginning in early 2020. We cannot predict how the pandemic will continue to develop or to what extent the pandemic may have longer term unanticipated impacts on our global operations.

The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, cancellation of physical participation in meetings, events and conferences, and social distancing measures), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our product development, validation, and qualification, customer support, and other activities, which could have an adverse effect on our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company did not issue any shares of its common stock or other equity securities of the Company that were not registered under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On May 11, 2020, the Company entered into a new a three-year, $6$6.0 million ~~term debt~~term-loan agreement with The Bank of San Antonio. For more information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

As more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities,” the Company renewed its existing revolving line of credit facility with The Bank of San Antonio for two years maturing on June 5, 2022.

Item 6. Exhibits

The following exhibits are being filed or furnished with this quarterly report on Form 10-Q:


Exhibit No.	Description	Method of Filing

31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith

101	The following materials from XPEL’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Consolidated Balance Sheets, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income, (iv) the unaudited Consolidated Statements of Equity, (v) the unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		XPEL, Inc. (Registrant)

	By:	/s/ Barry R. Wood
		Barry R. Wood
		Senior Vice President and Chief Financial Officer
~~August 12,~~November 10, 2020		(Authorized Officer and Principal Financial and Accounting Officer)

3233


	Three Months Ended June 30, 2020		% of Total Revenue		Three Months Ended June 30, 2019		% of Total Revenue		$ Change		% Change
Total revenue	$	35,805,858	100.0	%	$	30,094,154	100.0	%	$	5,711,704	19.0	%
Total cost of sales	24,066,781		67.2	%	19,468,141		64.7	%	4,598,640		23.6	%
Gross margin	11,739,077		32.8	%	10,626,013		35.3	%	1,113,064		10.5	%
Total operating expenses	6,598,621		18.4	%	6,654,742		22.1	%	(56,121)		(0.8)	%
Operating income	5,140,456		14.4	%	3,971,271		13.2	%	1,169,185		29.4	%
Other expenses	78,695		0.2	%	25,556		0.1	%	53,139		207.9	%
Income tax	1,088,071		3.0	%	938,405		3.1	%	149,666		15.9	%
Net income	$	3,973,690	11.1	%	$	3,007,310	10.0	%	$	966,380	32.1	%