SECURITIES AND EXCHANGE COMMISSION



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 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	☒

The registrant had 27,612,597 shares of common stock outstanding as of ~~November 8, 2019.~~August 12, 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		1517
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2429
Item 4. Controls and Procedures		2429

Part II - Other Information
Item 1. Legal Proceedings		2430
Item 1A. Risk Factors		2430
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2431
Item 3. Defaults Upon Senior Securities		2531
Item 4. Mine Safety Disclosures		2531
Item 5. Other Information		2531
Item 6. Exhibits		2531
Signatures		2532

Part I. Financial Information

Item 1. Financial Statements

XPEL, INC.

Condensed Consolidated Balance Sheets


	(Unaudited)			(Audited)				(Unaudited)		(Audited)
	September 30, 2019			December 31, 2018				June 30, 2020		December 31, 2019
Assets							Assets
Current							Current
Cash and cash equivalents	$	7,295,906		$	3,971,226		Cash and cash equivalents	$	25,795,909	$	11,500,973
Accounts receivable, net	7,285,327			5,554,313			Accounts receivable, net	7,215,230		7,154,084
Inventory, net	16,428,406			10,799,611			Inventory, net	14,706,582		15,141,153
Prepaid expenses and other current assets	2,071,833			706,718			Prepaid expenses and other current assets	2,103,656		2,391,340
Income tax receivable							Income tax receivable	—		93,150
Total current assets	33,081,472			21,031,868			Total current assets	49,821,377		36,280,700
Property and equipment, net	3,666,166			3,384,206			Property and equipment, net	4,549,533		4,014,653
Right-of-Use lease assets	4,515,591			—			Right-of-Use lease assets	5,260,732		5,079,110
Intangible assets, net	3,778,794			3,804,026			Intangible assets, net	4,586,343		3,820,460
Other assets	29,385			—			Other assets	457,020		—
Goodwill	2,334,505			2,322,788			Goodwill	3,497,883		2,406,512
Total assets	$	47,405,913		$	30,542,888		Total assets	$	68,172,888	$	51,601,435
Liabilities							Liabilities
Current							Current
Current portion of notes payable	$	586,154		$	853,150		Current portion of notes payable	$	2,543,301	$	462,226
Current portion lease liabilities	1,062,176			—			Current portion lease liabilities	1,321,116		1,126,701
Accounts payable and accrued liabilities	10,585,352			6,292,093			Accounts payable and accrued liabilities	13,787,059		10,197,353
Income tax payable	540,846			1,337,599			Income tax payable	1,456,136		—
Total current liabilities	12,774,528			8,482,842			Total current liabilities	19,107,612		11,786,280

Deferred tax liability, net	629,397			478,864			Deferred tax liability, net	844,928		604,715
Non-current portion of lease liabilities	3,544,207			—			Non-current portion of lease liabilities	4,001,669		4,009,949
Non-current portion of notes payable	399,209			968,237			Non-current portion of notes payable	4,819,237		307,281
Total liabilities	17,347,341			9,929,943			Total liabilities	28,773,446		16,708,225
Stockholders’ equity							Stockholders’ equity
Preferred stock, $0.001 par value; authorized 10,000,000; none 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	—		—
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	11,348,163			11,348,163			Additional paid-in-capital	10,412,471		11,348,163
Accumulated other comprehensive loss	(1,113,240		)	(1,190,055		)	Accumulated other comprehensive loss	(1,220,564)		(908,764)
Retained earnings	19,984,540			10,617,253			Retained earnings	30,179,922		24,594,878
	30,247,076			20,802,974				39,399,442		35,061,890
Non-controlling interest	(188,504		)	(190,029		)	Non-controlling interest	—		(168,680)
Total stockholders’ equity	30,058,572			20,612,945			Total stockholders’ equity	39,399,442		34,893,210
Total liabilities and stockholders’ equity	$	47,405,913		$	30,542,888		Total liabilities and stockholders’ equity	$	68,172,888	$	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,
	2020		2019		2020		2019
Revenue
Product revenue	$	30,961,996	$	25,425,489	$	54,711,913	$	46,480,212
Service revenue	4,843,862		4,668,665		9,482,408		8,339,388
Total revenue	35,805,858		30,094,154		64,194,321		54,819,600

Cost of Sales
Cost of product sales	22,556,696		18,551,030		39,318,109		34,239,063
Cost of service	1,510,085		917,111		2,840,247		1,804,444
Total cost of sales	24,066,781		19,468,141		42,158,356		36,043,507
Gross Margin	11,739,077		10,626,013		22,035,965		18,776,093

Operating Expenses
Sales and marketing	1,919,529		2,064,836		4,662,778		3,663,942
General and administrative	4,679,092		4,589,906		9,748,863		8,667,857
Total operating expenses	6,598,621		6,654,742		14,411,641		12,331,799

Operating Income	5,140,456		3,971,271		7,624,324		6,444,294

Interest expense	74,554		29,074		105,112		57,780
Foreign currency exchange loss (gain)	4,141		(3,518)		419,718		14,908

Income before income taxes	5,061,761		3,945,715		7,099,494		6,371,606
Income tax expense	1,088,071		938,405		1,514,450		1,504,293
Net income	3,973,690		3,007,310		5,585,044		4,867,313
Income attributed to non-controlling interest	—		1,293		—		2,709
Net income attributable to stockholders of the Company	$	3,973,690	$	3,006,017	$	5,585,044	$	4,864,604

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Revenue
Product revenue $ 30,815,251
$ 25,415,749
$ 77,295,463
$ 72,498,871
Service revenue 4,802,747
3,799,576
13,142,135
10,628,864
Total revenue 35,617,998
29,215,325
90,437,598
83,127,735

Cost of Sales
Cost of product sales 22,283,771
19,622,006
56,522,834
56,032,162
Cost of service 1,061,197
742,779
2,865,641
2,075,049
Total cost of sales 23,344,968
20,364,785
59,388,475
58,107,211
Gross Margin 12,273,030
8,850,540
31,049,123
25,020,524

Operating Expenses
Sales and marketing 1,805,038
1,898,586
5,468,980
4,935,194
General and administrative 4,798,833
3,962,674
13,466,690
10,857,814
Total operating expenses 6,603,871
5,861,260
18,935,670
15,793,008

Operating Income 5,669,159
2,989,280
12,113,453
9,227,516

Interest expense 23,851
31,301
81,631
135,385
Foreign currency exchange loss 136,951
85,551
151,859
108,675

Income before income taxes 5,508,357
2,872,428
11,879,963
8,983,456
Income tax expense 999,072
690,523
2,503,365
2,159,596
Net income 4,509,285
2,181,905
9,376,598
6,823,860
Income attributed to non-controlling interest 6,602
15,713
9,311
5,200
Net income attributable to stockholders of the Company $ 4,502,683
$ 2,166,192
$ 9,367,287
$ 6,818,660

Earnings per share attributable stockholders of the Company
Basic and diluted $ 0.16
$ 0.08
$ 0.34
$ 0.25
Weighted Average Number of Common Shares
Basic and diluted 27,612,597
27,612,597
27,612,597
27,229,720

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,
	2020		2019		2020		2019
Other comprehensive income
Net income	$	3,973,690	$	3,007,310	$	5,585,044	$	4,867,313
Foreign currency translation	443,722		133,306		(316,333)		212,564
Total comprehensive income	4,417,412		3,140,616		5,268,711		5,079,877
Total comprehensive income attributable to:
Stockholders of the Company	4,417,412		3,145,330		5,273,244		5,078,367
Non-controlling interest	—		(4,714)		(4,533)		1,510
Total comprehensive income	$	4,417,412	$	3,140,616	$	5,268,711	$	5,079,877

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Other comprehensive income
Net income $ 4,509,285
$ 2,181,905
$ 9,376,598
$ 6,823,860
Foreign currency translation (143,535 ) 165,187
69,029
(261,529 )
Total comprehensive income 4,365,750
2,347,092
9,445,627
6,562,331
Total comprehensive income attributable to:
Stockholders of the Company 4,365,735
2,346,843
9,444,102
6,594,905
Non-controlling interest 15
249
1,525
(32,574 )
Total comprehensive income $ 4,365,750
$ 2,347,092
$ 9,445,627
$ 6,562,331

See notes to condensed consolidated financial statements.

XPEL, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity


Stockholders' Equity - Three Months Ended June 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
	Shares	Amount
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
Net income	—	—		—		3,006,017		—		3,006,017		1,293		3,007,310
Foreign currency translation	—	—		—		—		139,313		139,313		(6,007)		133,306
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 March 31, 2020	27,612,597	27,613		10,412,471		26,206,232		(1,664,286)		34,982,030		—		34,982,030
Net income	—	—		—		3,973,690		—		3,973,690		—		3,973,690
Foreign currency translation	—	—		—		—		443,722		443,722		—		443,722
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

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
Shares Amount
Balance as of June 30, 2018 27,612,597
$ 27,613
$ 11,348,163
$ 6,557,187
$ (1,001,089 ) $ 16,931,874
$ (221,249 ) $ 16,710,625
Net income —
—
—
2,166,192
—
2,166,192
15,713
2,181,905
Foreign currency translation —
—
—
—
180,651
180,651
(15,464 ) 165,187
Balance as of September 30, 2018 27,612,597
27,613
11,348,163
8,723,379
(820,438 ) 19,278,717
(221,000 ) 19,057,717

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 —
—
—
4,502,683
—
4,502,683
6,602
4,509,285
Foreign currency translation —
—
—
—
(136,948 ) (136,948 ) (6,587 ) (143,535 )
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


Stockholders' Equity - Six Months Ended June 30																							Stockholders' Equity - Six Months Ended June 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
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
	Shares	Amount
Balance as of December 31, 2017	27,612,597	$	27,613			$		11,348,163				$				1,904,719								$	(596,683	)	$	12,683,812		$	(188,426	)	$	12,495,386
Net income	—	—		—			6,818,660		—				6,818,660				5,200			6,823,860
Foreign currency translation	—	—		—			—		(223,755		)		(223,755		)		(37,774		)	(261,529		)
Balance as of September 30, 2018	27,612,597	27,613		11,348,163			8,723,379		(820,438		)		19,278,717				(221,000		)	19,057,717
																									Shares				Amount									Additional Paid-in-Capital				Retained Earnings			Accumulated Other Comprehensive Loss			Equity Attributable to Stockholders of the Company			Non-Controlling Interest	Total Stockholders’ Equity
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
Net income	—	—		—			9,367,287		—				9,367,287				9,311			9,376,598			Net income		—				—					—		4,864,604					—			4,864,604			2,709			4,867,313
Foreign currency translation	—	—		—			—		76,815				76,815				(7,786		)	69,029			Foreign currency translation		—				—					—		—			213,763			213,763			(1,199)			212,564
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 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

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
Net income																							Net income		—				—					—		5,585,044			—			5,585,044			—			5,585,044
Foreign currency translation																							Foreign currency translation		—				—					—		—			(311,800)			(311,800)			(4,533)			(316,333)
Purchase of minority interest																							Purchase of minority interest		—				—					(935,692)		—			—			(935,692)			173,213			(762,479)
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		$	—		$	39,399,442

XPEL, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

(Unaudited)

The accompanying (a) condensed consolidated balance sheet as of December 31, ~~2018,~~2019, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and ~~nine~~six months ended ~~September~~June 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 ~~Amendment No. 2 to the~~annual report on Form 1010-K as filed with the SEC on ~~May 30, 2019.~~March 16, 2020. These condensed consolidated financial statements also should be read in conjunction with ~~Management’s~~the Management's Discussion and Analysis of Financial Condition and Results of Operations section appearing in this ~~report.~~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.

Nature of Business - The Company is based in San Antonio, Texas and ~~sells, distributes, and installs~~is a global provider of protective films and coatings, including automotive paint protection film, surface protection film, and automotive and ~~architectural~~commercial/residential window films and ceramic ~~coatings.~~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 ~~GAAP~~United States Generally Accepted Accounting Principles ("U.S. GAAP") and include the accounts of the Company and its wholly owned or majority owned subsidiaries. ~~The~~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 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 ~~recorded in other expense, net~~presented as foreign currency exchange loss in the accompanying condensed consolidated statements of income. The ownership percentages and functional currencies of the entities included in these condensed consolidated financial statements are as follows:

~~Notes to Condensed Consolidated Financial Statements~~

~~September 30, 2019 and 2018~~



Subsidiaries	Functional Currency	% Owned by XPEL, Inc.
XPEL, Ltd.	UK Pound Sterling	85100	%	*
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 ~~$169,010~~$198,786 and ~~$133,696~~$182,488 as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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 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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$73,041~~$57,434 and ~~$70,250,~~$65,591, respectively. The following tables present a summary of our accrued warranty liabilities for the six months ended June 30, 2020 and the twelve months ended December 31, 2019:

~~Recently Adopted Accounting Pronouncements~~

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases” (“the new lease standard” or “ASC 842”), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new lease standard requirements were effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. The Company adopted this standard effective January 1, 2019. In adopting this standard, the Company elected the package of practical expedients afforded thereby. This election allowed the Company, among other things, to carry forward prior lease classifications. Pursuant to the adoption of this standard, Right-Of-Use (“ROU”) assets and operating lease liabilities (current and long-term portions) as of September 30, 2019 were $4,515,591 and $4,606,383, respectively. Refer to Note 13 for additional information related to the adoption of this standard.

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

(Unaudited)


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


	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 ~~FASB~~Financial Accounting Standards Board ("FASB") issued ~~ASU~~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 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

~~XPEL Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~September 30, 2019 and 2018~~

~~(Unaudited)~~

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 ~~nine~~three and six months ended ~~September~~June 30, ~~2019:~~2020:

Balance, December 31, 2018 $ 136,213
Revenue recognized related to payments included in the December 31, 2018 balance (38,405 )
Payments received for which performance obligations have not been satisfied 217,195
Balance, March 31, 2019 315,003
Revenue recognized related to payments included in the March 31, 2019 balance (77,265 )
Payments received for which performance obligations have not been satisfied 1,493,645
Balance, June 30, 2019 1,731,383
Revenue recognized related to payments included in the June 30, 2019 balance (1,659,056 )
Payments received for which performance obligations have not been satisfied 1,345,633
Balance, September 30, 2019 $ 1,417,960

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

June 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

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Product Revenue
Paint protection film $ 26,527,586
$ 22,533,967
$ 66,150,360
$ 64,672,721
Window film 3,522,815
2,125,910
8,526,886
5,662,725
Other 764,850
755,872
2,618,217
2,163,425
Total 30,815,251
25,415,749
77,295,463
72,498,871

Service Revenue
Software $ 859,432
$ 653,090
$ 2,378,944
$ 1,886,176
Cutbank credits 1,957,224
1,641,337
5,487,320
4,583,739
Installation labor 1,843,936
1,414,326
4,790,279
3,854,328
Training 142,155
90,823
485,592
304,621
Total 4,802,747
3,799,576
13,142,135
10,628,864

Total $ 35,617,998
$ 29,215,325
$ 90,437,598
$ 83,127,735

~~XPEL Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~September 30, 2019 and 2018~~

~~(Unaudited)~~


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Product Revenue
Paint protection film	$	24,248,115	$	21,166,420	$	44,019,235	$	39,622,775
Window film	5,954,800		3,171,155		9,044,906		5,004,071
Other	759,081		1,087,914		1,647,772		1,853,366
Total	30,961,996		25,425,489		54,711,913		46,480,212

Service Revenue
Software	$	809,897	$	775,745	$	1,661,469	$	1,519,513
Cutbank credits	1,611,858		2,064,962		3,225,122		3,530,096
Installation labor	2,391,570		1,647,954		4,413,020		2,946,343
Training	30,537		180,004		182,797		343,436
Total	4,843,862		4,668,665		9,482,408		8,339,388

Total	$	35,805,858	$	30,094,154	$	64,194,321	$	54,819,600

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 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
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
United States $ 15,738,762
$ 13,334,294
$ 44,745,859
$ 33,148,006
China 9,359,531
8,035,746
17,006,451
25,289,752
Canada 4,937,514
3,659,902
13,253,413
11,912,203
Continental Europe 1,945,104
1,606,842
5,341,164
4,610,313
United Kingdom 1,032,399
638,023
2,842,682
2,073,656
Asia Pacific 1,168,570
966,709
3,100,088
2,185,023
Latin America 578,055
362,749
1,576,864
1,593,987
Middle East/Africa 770,842
550,783
2,374,321
2,136,786
Other 87,221
60,277
196,756
178,009
Total $ 35,617,998
$ 29,215,325
$ 90,437,598
$ 83,127,735


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
United States	$	16,118,729	$	16,497,347	$	31,671,767	$	29,007,097
China	9,987,370		3,127,723		12,011,879		7,646,920
Canada	3,958,167		5,217,535		8,133,364		8,315,899
Continental Europe	2,897,562		1,974,328		5,691,304		3,396,060
United Kingdom	630,720		926,925		1,747,148		1,810,283
Asia Pacific	1,141,191		1,059,560		1,911,235		1,931,518
Latin America	484,358		512,680		962,053		998,809
Middle East/Africa	561,510		720,347		1,850,566		1,603,479
Other	26,251		57,709		215,005		109,535
Total	$	35,805,858	$	30,094,154	$	64,194,321	$	54,819,600

Our largest customer accounted for ~~26.3%~~27.9% and ~~27.4%~~10.4% of our net sales during the three months ended ~~September~~June 30, 2020 and 2019, respectively and ~~2018, respectively. Our largest customer accounted for 18.8%~~18.7% and ~~30.1%~~13.9% of our net sales during the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~As of September 30, 2019 and December 31, 2018, there was no significant accounts receivable concentration.~~

~~XPEL Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~September 30, 2019 and 2018~~

~~(Unaudited)~~

4. PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

September 30, 2019 December 31, 2018
Furniture and fixtures $ 1,101,141
$ 956,467
Computer equipment 1,069,427
939,979
Vehicles 711,959
730,765
Equipment 1,425,975
1,079,503
Leasehold improvements 1,325,282
941,627
Plotters 722,581
544,080
Construction in Progress 338,762
646,576
Total property and equipment 6,695,127
5,838,997
Less: accumulated depreciation 3,028,961
2,454,791
Property and equipment, net $ 3,666,166
$ 3,384,206


	June 30, 2020		December 31, 2019
Furniture and fixtures	$	1,241,569	$	1,168,894
Computer equipment	1,293,000		1,151,295
Vehicles	733,560		683,213
Equipment	1,816,629		1,648,656
Leasehold improvements	1,857,920		1,479,594
Plotters	1,040,553		839,455
Construction in Progress	311,910		306,100
Total property and equipment	8,295,141		7,277,207
Less: accumulated depreciation	3,745,608		3,262,554
Property and equipment, net	$	4,549,533	$	4,014,653

Depreciation expense for the three months ended ~~September~~June 30, 2020 and 2019 was $293,860 and ~~2018 was $234,297 and $200,512,~~$220,270, respectively. ~~Depreciation expense for~~For the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, depreciation expense was $564,177 and ~~2018 was $655,385 and $539,379,~~$421,088, respectively.

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2020 and 2019

(Unaudited)

5. INTANGIBLE ASSETS, NET

Intangible assets consists of the following:

September 30, 2019 December 31, 2018
Trademarks $ 301,542
$ 289,734
Software 2,158,500
1,635,731
Trade name 462,775
457,766
Contractual and customer relationships 2,967,383
2,947,264
Non-compete 266,054
261,914
Other 148,965
150,267
Total cost 6,305,219
5,742,676
Less: Accumulated amortization 2,526,425
1,938,650
Intangible assets, net $ 3,778,794
$ 3,804,026


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

Amortization expense for the three months ended ~~September~~June 30, 2020 and 2019 was $232,225 and ~~2018 was $199,582 and $160,506,~~$186,824, respectively. ~~Amortization expense for~~For the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, amortization expense was $466,121 and ~~2018 was $570,954 and $472,675,~~$371,372, respectively.

~~During~~The Company completed the ~~nine~~acquisition of a business during the six months ended ~~September~~June 30, ~~2019, the Company sold a franchise territory~~2020. Refer to ~~a new franchisee in Quebec. In connection with this arrangement, the Company closed its Quebec City installation location and recorded an impairment against all previously recognized~~Note 12 for additional information related to intangible assets ~~for that location. The Company recorded an impairment loss of $30,480 related to the intangible assets other than goodwill associated with~~added from this ~~closed location. This impairment loss is reflected in general and administrative expense on the condensed consolidated statement of income.~~acquisition.

6. GOODWILL

The following table summarizes goodwill transactions for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:


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

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

Balance at December 31, 2017 $ 1,856,642
Acquisitions of subsidiaries 572,544
Foreign Exchange (31,876 )
Balance at September 30, 2018 $ 2,397,310

Balance at December 31, 2018 $ 2,322,788
Impairment (35,884 )
Foreign Exchange 47,601
Balance at September 30, 2019 $ 2,334,505
The Company completed the acquisition of a business during the six months ended June 30, 2020. Refer to Note 12 for additional information related to goodwill added from this acquisition.

~~During the nine months ended September~~

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

June 30, ~~2019, the Company sold a franchise territory to a new franchisee in Quebec. In connection with this arrangement, the Company closed its Quebec City installation location~~2020 and recorded an impairment against all previously recognized intangible assets for that location. The Company recorded an impairment loss of $35,884 related to the Goodwill associated with this closed location. This impairment loss is reflected in general and administrative expense on the condensed consolidated statement of income.2019

(Unaudited)

7. INVENTORIES

The components of inventory are summarized as follows:


	June 30, 2020		December 31, 2019
Film and film based products	$	12,930,514	$	13,538,610
Other products	1,430,560		1,226,708
Packaging and supplies	438,905		496,661
Inventory reserve	(93,397)		(120,826)
	$	14,706,582	$	15,141,153

September 30, 2019 December 31, 2018
Film and film based products $ 14,712,742
$ 9,399,067
Other products 1,372,248
1,264,862
Packaging and supplies 473,141
320,738
Inventory reserve (129,725 ) (185,056 )
$ 16,428,406
$ 10,799,611

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. ~~The line of~~Borrowings under the credit ~~has~~agreement bear interest at a variable ~~interest~~ rate of the Wall Street Journal prime rate ~~plus 0.75%~~minus 1.00% with a floor of ~~4.25% and matures on~~3.50%. In May 2020, the Company renewed this line of credit, extending its maturity date to June 5, ~~2020.~~2022. The interest rate was ~~6.00%~~3.50% and ~~6.25%~~5.50% as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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 ~~September~~both June 30, ~~2019~~2020 and December 31, ~~2018,~~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 ~~(EBITDA~~(Earnings Before Interest Taxes Depreciation and Amortization, or EBITDA, divided by the current portion of long-term debt ~~+interest)~~+ interest) of 1.25:1 and funded debt ~~to tangible net worth~~ of ~~4.0:1~~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

~~XPEL Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~September 30, 2019 and 2018~~

~~(Unaudited)~~

of principal and interest, the breach of any covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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 ~~both September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~5.75%.~~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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, 0 balance was outstanding on this line of credit. This facility is guaranteed by the parent company.

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 30, 2020, $6,000,000 was

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2020 and 2019

(Unaudited)

outstanding under the term-loan. The term-note 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:

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

Financial instruments include cash and cash equivalents (level 1)~~, accounts receivable, accounts payable~~ 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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~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 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.

~~XPEL Inc.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~September 30, 2019 and 2018~~

~~(Unaudited)~~

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or Tax Reform Act. The Tax Reform Act makes broad and complex changes to the U.S. tax code that impacted the Company’s fiscal year ended December 31, 2018, including but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, generally eliminating the U.S. federal income taxes on dividends received from foreign subsidiaries and joint ventures after December 31, 2017, and imposing a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries and joint ventures.

The Company recorded income tax expense during the three months ended September 30, 2019 and 2018 of $999,072 and $690,523, respectively. The Company recorded income tax expense during the nine months ended September 30, 2019 and 2018 of $2,503,365 and $2,159,596, respectively.

~~12.~~ COMMITMENTS AND CONTINGENCIES

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

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, ~~2020,~~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.

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

The total preliminary purchase price for ~~office space, warehouse facilities,~~the acquisition completed during the six months ended June 30, 2020 and ~~installation locations. These leases do~~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 have significant rent holidays, rent escalation provisions, leasehold improvement incentives, or other build-out clauses. Neither do these leases contain contingent rent provisions. We also lease vehicles and equipment to support our global operations. We have elected the practical expedient to combine lease and non-lease components. We have also elected to adopt the package of practical expedients that allow us not to reassess whether expired leases are or contain leases, not to reassess the lease classification of existing leases, and not to reassess initial direct costs for existing leases.yet been finalized.

Some of our leases contain options to renew. The exercise of lease renewals is at our sole discretion; therefore, the renewals to extend the lease terms are not included in our ROU assets as it is not reasonably certain that they will be exercised. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

(Unaudited)

~~Balance sheet information related to operating leases is as follows:~~

September 30, 2019
Operating lease right-of-use assets $ 4,515,591

Current portion of operating lease liabilities 1,062,176
Noncurrent portion of operating lease liabilities 3,544,207
Total operating lease liabilities $ 4,606,383

We had operating lease expense of $286,534 and $876,868 for the three and nine months ended September 30, 2019, respectively. Variable lease payments for the same periods were $119,425 and $358,776, respectively. For the same periods, we also had short-term lease expenses of $15,636, and $56,239, respectively, and we made cash payments of $293,148 and $868,074, respectively, on leases subject to the accounting treatment described above in Note 2.

~~Weighted-average information associated with the measurement of our remaining operating lease obligations is as follows:~~


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

Allocation	~~September 30, 2019~~
~~Weighted-average remaining lease term (in years)~~ Cash	~~6.0~~	$	242,808
~~Weighted-average discount rate~~ Accounts receivable	~~5.86~~	%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 months ended June 30, 2020 was $1,167,815 and $189,322, respectively.

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

XPEL Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2020 and 2019

(Unaudited)


	Six Months Ended June 30,
	2020 (unaudited)	2019 (unaudited)
Revenue	64,321,080	56,140,866
Net income	5,434,874	4,856,487

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 ~~September 30, 2019:~~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.

2019 $ 282,149
2020 1,071,630
2021 962,701
2022 888,620
2023 781,377
Thereafter 1,528,116
Total operating lease payments 5,514,593
Less: interest (908,210 )
Total operating lease liabilities $ 4,606,383

During the three and nine months ended September 30, 2018, rent expense related to operating leases was approximately $310,075 and $852,553, respectively. Future minimum lease payments, under non-cancelable operating leases as of December 31, 2018 were as follows:

2019 $ 869,492
2020 736,169
2021 667,551
2022 601,593
2023 528,427
Thereafter 1,372,388
$ 4,775,620

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 ~~Amendment No. 2 to~~annual report on Form 1010-K which was filed with the Securities and Exchange Commission (“SEC”) on ~~May 30, 2019~~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~~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 ~~Amendment No. 2 to~~annual report on Form ~~10,~~10-K as filed with the SEC on ~~May 30, 2019.~~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 ~~214~~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 ~~debris impingement.~~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 ~~2017,~~early 2016, we ~~established our European headquarters in The Netherlands, and~~ 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 ~~protection~~ 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 the second quarter of 2020 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 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 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~~Income to EBITDA for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:


	(Unaudited)								(Unaudited)
	Three Months Ended June 30,								Six Months Ended June 30, 2020
	2020		2019		% Change		2020		2019		% Change
Net Income	$	3,973,690	$	3,007,310	32.1	%	$	5,585,044	$	4,867,313	14.7	%
Interest	74,554		29,074		156.4	%	105,112		57,780		81.9	%
Taxes	1,088,071		938,405		15.9	%	1,514,450		1,504,293		0.7	%
Depreciation	293,860		220,270		33.4	%	564,177		421,088		34.0	%
Amortization	232,225		186,824		24.3	%	466,121		371,372		25.5	%
EBITDA	$	5,662,400	$	4,381,883	29.2	%	$	8,234,904	$	7,221,846	14.0	%

(Unaudited) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net Income $ 4,509,285
$ 2,181,905
$ 9,376,598
$ 6,823,860
Interest 23,851
31,301
81,631
135,385
Taxes 999,072
690,523
2,503,365
2,159,596
Depreciation 234,297
200,512
655,385
539,379
Amortization 199,582
160,506
570,954
472,675
EBITDA $ 5,966,087
$ 3,264,747
$ 13,187,933
$ 10,130,895

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 ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~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, 2019
%
of Total Revenue
Three Months Ended September 30, 2018
%
of Total Revenue

$
Change

%
Change
Total revenue $ 35,617,998
100.0 % $ 29,215,325
100.0 % $ 6,402,673
21.9 %
Total cost of sales 23,344,968
65.5 % 20,364,785
69.7 % 2,980,183
14.6 %
Gross margin 12,273,030
34.5 % 8,850,540
30.3 % 3,422,490
38.7 %
Total operating expenses 6,603,871
18.5 % 5,861,260
20.1 % 742,611
12.7 %
Operating income 5,669,159
15.9 % 2,989,280
10.2 % 2,679,879
89.6 %
Other expenses 160,802
0.5 % 116,852
0.4 % 43,950
37.6 %
Income tax 999,072
2.8 % 690,523
2.4 % 308,549
44.7 %
Net income $ 4,509,285
12.7 % $ 2,181,905
7.5 % $ 2,327,380
106.7 %

Nine Months Ended September 30, 2019
%
of Total Revenue
Nine Months Ended September 30, 2018
%
of Total Revenue

$
Change

%
Change
Total revenue $ 90,437,598
100.0 % $ 83,127,735
100.0 % $ 7,309,863
8.8 %
Total cost of sales 59,388,475
65.7 % 58,107,211
69.9 % 1,281,264
2.2 %
Gross margin 31,049,123
34.3 % 25,020,524
30.1 % 6,028,599
24.1 %
Total operating expenses 18,935,670
20.9 % 15,793,008
19.0 % 3,142,662
19.9 %
Operating income 12,113,453
13.4 % 9,227,516
11.1 % 2,885,937
31.3 %
Other expenses 233,490
0.3 % 244,060
0.3 % (10,570 ) (4.3 )%
Income tax 2,503,365
2.8 % 2,159,596
2.6 % 343,769
15.9 %
Net income $ 9,376,598
10.4 % $ 6,823,860
8.2 % $ 2,552,738
37.4 %


	Six Months Ended June 30, 2020		% of Total Revenue		Six Months Ended June 30, 2019		% of Total Revenue		$ Change		% Change
Total revenue	$	64,194,321	100.0	%	$	54,819,600	100.0	%	$	9,374,721	17.1	%
Total cost of sales	42,158,356		65.7	%	36,043,507		65.7	%	6,114,849		17.0	%
Gross margin	22,035,965		34.3	%	18,776,093		34.3	%	3,259,872		17.4	%
Total operating expenses	14,411,641		22.5	%	12,331,799		22.5	%	2,079,842		16.9	%
Operating income	7,624,324		11.9	%	6,444,294		11.8	%	1,180,030		18.3	%
Other expenses	524,830		0.8	%	72,688		0.1	%	452,142		622.0	%
Income tax	1,514,450		2.4	%	1,504,293		2.7	%	10,157		0.7	%
Net income	$	5,585,044	8.7	%	$	4,867,313	8.9	%	$	717,731	14.7	%

The following tables summarize revenue results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~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	%

Three Months Ended
September 30, % % of Total Revenue
2019 2018 Inc (Dec) 2019 2018
Product Revenue
Paint protection film $ 26,527,586
$ 22,533,967
17.7 % 74.5 % 77.1 %
Window film 3,522,815
2,125,910
65.7 % 9.9 % 7.3 %
Other 764,850
755,872
1.2 % 2.1 % 2.6 %
Total $ 30,815,251
$ 25,415,749
21.2 % 86.5 % 87.0 %

Service Revenue
Software $ 859,432
$ 653,090
31.6 % 2.4 % 2.2 %
Cutbank credits 1,957,224
1,641,337
19.2 % 5.5 % 5.6 %
Installation labor 1,843,936
1,414,326
30.4 % 5.2 % 4.8 %
Training 142,155
90,823
56.5 % 0.4 % 0.4 %
Total $ 4,802,747
$ 3,799,576
26.4 % 13.5 % 13.0 %

Total $ 35,617,998
$ 29,215,325
21.9 % 100.0 % 100.0 %


	Nine Months Ended September 30,				%		% of Total Revenue					Six Months Ended June 30,						%		% of Total Revenue
	2019		2018		Inc (Dec)		2019		2018			2020		2019		Inc (Dec)		2020		2019
Product Revenue											Product Revenue
Paint protection film	$	66,150,360	$	64,672,721	2.3	%	73.1	%	77.8	%	Paint protection film	$	44,019,235	$	39,622,775	11.1	%	68.6	%	72.3	%
Window film	8,526,886		5,662,725		50.6	%	9.4	%	6.8	%	Window film	9,044,906		5,004,071		80.8	%	14.1	%	9.1	%
Other	2,618,217		2,163,425		21.0	%	2.9	%	2.5	%	Other	1,647,772		1,853,366		(11.1)	%	2.5	%	3.4	%
Total	$	77,295,463	$	72,498,871	6.6	%	85.5	%	87.2	%	Total	$	54,711,913	$	46,480,212	17.7	%	85.2	%	84.8	%

Service Revenue											Service Revenue
Software	$	2,378,944	$	1,886,176	26.1	%	2.6	%	2.3	%	Software	$	1,661,469	$	1,519,513	9.3	%	2.6	%	2.8	%
Cutbank credits	5,487,320		4,583,739		19.7	%	6.1	%	5.5	%	Cutbank credits	3,225,122		3,530,096		(8.6)	%	5.0	%	6.4	%
Installation labor	4,790,279		3,854,328		24.3	%	5.3	%	4.6	%	Installation labor	4,413,020		2,946,343		49.8	%	6.9	%	5.4	%
Training	485,592		304,621		59.4	%	0.5	%	0.4	%	Training	182,797		343,436		(46.8)	%	0.3	%	0.6	%
Total	$	13,142,135	$	10,628,864	23.6	%	14.5	%	12.8	%	Total	$	9,482,408	$	8,339,388	13.7	%	14.8	%	15.2	%

Total	$	90,437,598	$	83,127,735	8.8	%	100.0	%	100.0	%	Total	$	64,194,321	$	54,819,600	17.1	%	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 ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~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	%


	Three Months Ended September 30,				%		% of Total Revenue					Six Months Ended June 30,						%		% of Total Revenue
	2019		2018		Inc (Dec)		2019		2018			2020		2019		Inc (Dec)		2020		2019
United States	$	15,738,762	$	13,334,294	18.0	%	44.2	%	45.6	%	United States	$	31,671,767	$	29,007,097	9.2	%	49.3	%	52.9	%
China	9,359,531		8,035,746		16.5	%	26.3	%	27.5	%	China	12,011,879		7,646,920		57.1	%	18.7	%	13.9	%
Canada	4,937,514		3,659,902		34.9	%	13.9	%	12.5	%	Canada	8,133,364		8,315,899		(2.2)	%	12.7	%	15.2	%
Continental Europe	1,945,104		1,606,842		21.1	%	5.5	%	5.5	%	Continental Europe	5,691,304		3,396,060		67.6	%	8.9	%	6.2	%
United Kingdom	1,032,399		638,023		61.8	%	2.9	%	2.2	%	United Kingdom	1,747,148		1,810,283		(3.5)	%	2.7	%	3.3	%
Asia Pacific	1,168,570		966,709		20.9	%	3.3	%	3.3	%	Asia Pacific	1,911,235		1,931,518		(1.1)	%	3.0	%	3.5	%
Latin America	578,055		362,749		59.4	%	1.6	%	1.2	%	Latin America	962,053		998,809		(3.7)	%	1.5	%	1.8	%
Middle East/Africa	770,842		550,783		40.0	%	2.2	%	1.9	%	Middle East/Africa	1,850,566		1,603,479		15.4	%	2.9	%	2.9	%
Other	87,221		60,277		44.7	%	0.1	%	0.3	%	Other	215,005		109,535		96.3	%	0.3	%	0.3	%
Total	$	35,617,998	$	29,215,325	21.9	%	100.0	%	100.0	%	Total	$	64,194,321	$	54,819,600	17.1	%	100.0	%	100.0	%

Nine Months Ended
September 30, % % of Total Revenue
2019 2018 Inc (Dec) 2019 2018
United States $ 44,745,859
$ 33,148,006
35.0 % 49.5 % 39.9 %
China 17,006,451
25,289,752
(32.8 )% 18.8 % 30.4 %
Canada 13,253,413
11,912,203
11.3 % 14.7 % 14.3 %
Continental Europe 5,341,164
4,610,313
15.9 % 5.9 % 5.5 %
United Kingdom 2,842,682
2,073,656
37.1 % 3.1 % 2.5 %
Asia Pacific 3,100,088
2,185,023
41.9 % 3.4 % 2.6 %
Latin America 1,576,864
1,593,987
(1.1 )% 1.7 % 1.9 %
Middle East/Africa 2,374,321
2,136,786
11.1 % 2.6 % 2.6 %
Other 196,756
178,009
10.5 % 0.3 % 0.3 %
Total $ 90,437,598
$ 83,127,735
8.8 % 100.0 % 100.0 %

Product Revenue. Product revenue for the three months ended June 30, 2020 increased ~~21.2%~~21.8% over the three months ended ~~September~~June 30, ~~2018 and 6.6% over the nine months ended September 30, 2018.~~2019. Product revenue represented 86.5% ~~and 85.5%~~ of our total revenue ~~for~~compared to 84.5% in the three ~~and nine~~ months ended ~~September~~June 30, ~~2019, respectively.~~2019. Revenue from our paint protection film product line increased ~~17.7% and 2.3%, respectively, for~~14.6% over the three ~~and nine~~ months ended ~~September~~June 30, 2019. Paint protection film sales represented ~~74.5%~~67.7% and ~~77.1%~~70.3% of our total consolidated revenues for the three months ended ~~September~~June 30, 2020 and 2019, ~~and 2018, respectively, and 73.1% and 77.8% of our total consolidated revenues for the nine months ended September 30, 2019 and 2018,~~ respectively. ~~These increases~~The increase in paint protection film sales ~~were~~was primarily attributable to ~~continued increases~~a significant increase in demand ~~across all regions.~~for our products in China pursuant to that market's re-emergence 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 ~~65.7% and 50.6%~~87.8% for the three ~~and nine~~ months ended ~~September~~June 30, ~~2019.~~2020. Window film sales represented ~~9.9%~~16.6% and ~~7.3%~~10.5% of our total consolidated revenues for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively, and 9.4% and 6.8% of our total consolidated revenues for the nine months ended September 30,~~ 2019, ~~and 2018,~~ respectively. This increase in window film sales was due mainly to continued ~~strong~~increases in demand for our window film products ~~throughout~~primarily in China and the ~~world.~~United States regions.

Product revenue for the six months ended June 30, 2020 increased 17.7% over the the six months ended June 30, 2019. This increase was driven primarily by increased demand for our products in the United States, China and Continental Europe. 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. Window film revenue for the six months ended June 30, 2020 increased 80.8% over the six months ended June 30, 2019 due primarily to increased demand in China and the United States regions.

Service revenue. Service revenue consists of revenue from fees for DAP software access, cutbank credit revenue which represents per-cut fees ~~charged~~sold for pattern access or the ~~use~~value of ~~our DAP software,~~pattern access provided with eligible product revenue, revenue from the labor portion of installation sales in our ~~company-owned~~ installation centers and revenue from training services provided to our customers. Service revenue grew ~~26.4% and 23.6%~~3.8% over the ~~service~~three months ended June 30, 2019. Software revenue ~~for~~increased 4.4% over the three ~~and nine~~ months ended ~~September~~June 30, ~~2018, respectively. Service~~2019. These increases were due mainly to increases in total subscribers for our DAP software. Cutbank credit revenue ~~represented 13.5% and 13.0% of our total consolidated revenue~~declined 21.9% from the three months ended ~~September~~June 30, 2019 due mainly to declines in product revenue in the United States and ~~2018, respectively, and 14.5% and 12.8% of our total consolidated revenue~~Canada resulting from the ~~nine~~impacts of COVID-19. Installation labor revenue increased 45.1% over the three months ended ~~September~~June 30, 2019. Excluding acquisition related growth, installation labor revenue grew 16.0% due to increases in demand for installation services primarily in Europe. Training revenue declined 83.0% over the three months ended June 30, 2019 ~~and 2018, respectively.~~due mainly to reduced attendance in our training classes resulting from COVID-19.

Service revenue for the six months ended June 30, 2020 grew 13.7% over the six months ended June 30, 2019. Software revenue ~~increased 31.6%~~grew 9.3% over the six months ended June 30, 2019. These increases were due primarily to increases in total subscribers to our DAP software. Cutbank credits revenue declined 8.6% over the six months ended June 30, 2019 due primarily to declines in product revenue in the United States and ~~26.1%~~Canada resulting from the ~~three and nine~~impacts of COVID-19. Installation labor increased 49.8% over the six months ended ~~September~~June 30, ~~2018. Software~~2019. Excluding acquisition related growth, installation labor increased 25.2% over the six months ended June 30, 2019 due primarily to increases in demand for installation services in our installation facilities.

Total installation revenue (labor and product combined) at our installation centers increased 45.2% over the three months ended June 30, 2019. This represented ~~2.4%~~8.0% and ~~2.2%~~6.5% of our total consolidated revenue for the three months ended ~~September~~June 30, 2020 and 2019, respectively. Excluding acquisition related growth, total installation revenue grew 28.3%. Total installation revenue increased 49.8% over the six months ended June 30, 2019. This represented 8.2% and ~~2018, respectively, and 2.6% and 2.3%~~6.4% of our total consolidated revenue for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~The increases were due mainly to increases in~~Excluding acquisition related growth, total ~~subscribers resulting from increased demand for our DAP software. Cutbank credit~~installation revenue grew ~~19.2% and 19.7% from~~28.8% over the ~~three and nine~~six months ended ~~September~~June 30, 2018, respectively. Cutbank sales represented 5.5% and 5.6% of our total consolidated revenue for the three months ended September 30, 2019 and 2018, respectively, and 6.1% and 5.5% of our total consolidated revenue for the nine months ended September 30, 2019 and 2018, respectively. These increases were due mainly to our growth in product revenue in the United States and Canada. Software and cutbank credit revenue combined grew 22.8% and 21.6% for the three and nine months ended September 30, 2019, due mainly to the increased demand for our products and services. Installation labor revenue increased 30.4% and 24.3% from the three and nine months ended September 30, 2018, due mainly to increases in demand for installation services. Training revenue increased 56.5% and 59.4% from the three and nine months ended September 30, 2018, respectively, due to increased demand for training from new and existing customers.2019.

Total installation revenue (labor and product combined) at our Company-owned installation centers for the three and nine months ended September 30, 2019 increased 30.4% and 24.3%, respectively, over the three and nine months ended September 30, 2018. This represented 6.2% and 5.8% of our total consolidated revenue for the three months ended September 30, 2019 and 2018, respectively, and 6.3% and 5.5% of our total consolidated revenue for the nine months ended September 30, 2019 and 2018, respectively. Adjusted product revenue, which combines the cutbank credit revenue service component with product revenue, increased ~~21.1% in~~18.5% over the three months ended ~~September~~June 30, 2019 ~~versus the three months ended September 30, 2018~~ due mainly to ~~strong~~

returning demand ~~across all regions.~~in China. Adjusted product revenue ~~for~~increased 15.9% versus the ~~nine~~six months ended ~~September~~June 30, ~~2019 increased by 7.4% from the nine months ended September 30, 2018 due mainly to the same factors that contributed to the growth during the three month period noted above.~~2019.

Cost of sales consists of product costs and the costs to provide our services. Product costs consist of material costs, personnel costs related to warehouse personnel, shipping costs, warranty costs and other related costs to provide products to our customers. Cost of service includes the labor costs associated with installation of product in our ~~Company-owned~~installation facilities, costs of labor associated with pattern design for our cutting software and the costs incurred to provide training for our customers. Product costs in the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 increased ~~13.6% and 0.9%~~21.6% over the three ~~and nine~~ months ended ~~September~~June 30, ~~2018, respectively.~~2019. Cost of product sales represented ~~62.6%~~63.0% and ~~67.2%~~61.6% of total revenue in the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively, and 62.5% and 67.4% of total revenue in the nine months ended September 30,~~ 2019, ~~and 2018,~~ respectively. Cost of service revenue grew ~~42.9% and 38.1%~~64.7% during the three ~~and nine~~ months ended ~~September~~June 30, ~~2019, respectively,~~2020 due mainly to the increased installation labor costs associated with increased installation ~~sales.~~sales at our installation centers.

Product costs in the six months ended June 30, 2020 increased 14.8% over the six months ended June 30, 2019. Cost of product sales represented 61.2% and 62.5% of total revenue in the six months ended June 30, 2020 and 2019, respectively. Cost of service revenue grew 57.4% during the six months ended June 30, 2020.

Gross margin for the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 grew approximately ~~$3.4~~$1.1 million, or ~~38.7%, and $6.0 million, or 24.1%~~10.5%, from the three ~~and nine~~ months ended ~~September~~June 30, ~~2018, respectively.~~2019. For the three ~~and nine~~ months ended ~~September~~June 30, ~~2019,~~2020, gross margin represented ~~34.5% and~~32.8% of revenue.

Gross margin for the six months ended June 30, 2020 grew approximately $3.3 million, or 17.4%, from the six months ended June 30, 2019. For the six months ended June 30, 2020, gross margin represented 34.3% of ~~revenue, respectively.~~revenue. The following tables ~~summarizes~~summarize gross margin for product and services for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:

Product gross margin for the three months ended ~~September~~June 30, ~~2019~~2020 increased approximately ~~$2.7~~$1.5 million, or ~~47.3%~~22.3%, over the three months ended ~~September~~June 30, ~~2018~~2019 and represented ~~27.7%~~27.1% and ~~22.8%~~27.0% of total product revenue for the three months ended ~~September~~June 30, 2020 and 2019, respectively. This increase was due primarily to increases in revenue, improvements in product costs and ~~2018, respectively.~~ operating leverage.

Product gross margin for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased approximately ~~$4.3~~$3.2 million, or ~~26.1%~~25.8%, over the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and represented ~~26.9%~~28.1% and ~~22.7%~~26.3% of total product revenue for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~The~~This increase was due primarily to increases in ~~product gross margin percentages were primarily due to a slightly lower percentage of sales to lower margin distributors (primarily our China Distributor) and~~revenue, improvements in product costs and operating leverage.

Service gross margin ~~increased~~decreased approximately ~~$0.7~~$0.4 million, ~~and $1.7 million, respectively,~~ or ~~22.4% and 20.1%~~11.1%, ~~respectively,~~ over the three ~~and nine~~ months ended ~~September~~June 30, ~~2018.~~2019. This represented ~~77.9%~~68.8% and ~~80.5%~~80.4% of total service revenue for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively, and 78.2% and 80.5% of total service revenue for the nine months ended September 30,~~ 2019, ~~and 2018,~~ respectively. The decrease in service gross margin percentage for ~~these periods versus~~ the ~~prior year periods~~the three months ended June 30, 2020 was primarily due to ~~a higher percentage of~~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 ~~costs relative to other higher~~margins.

Service gross margin increased approximately $0.1 million, or 1.6%, over the six months ended June 30, 2019. This represented 70.0% and 78.4% of total service revenue ~~components.~~

for the six months ended June 30, 2020 and 2019, respectively.

Sales and marketing expenses for the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 decreased ~~4.9% and increased 10.8%, respectively,~~7.0% compared to the same ~~periods~~period in ~~2018.~~2019. These expenses represented ~~5.1%~~5.4% and ~~6.5%~~6.9% of total consolidated revenue for the three months ended ~~September~~June 30, 2020 and 2019, respectively. This decrease was due primarily to a reduction in expenses pursuant to the COVID-19 pandemic which forced the suspension and/or cancellation of certain events.

For the six months ended June 30, 2020, sales and ~~2018, respectively,~~marketing expenses increased 27.3% compared to the same period in 2019. These expenses represented 7.3% and ~~6.0% and 5.9%~~6.7% of total consolidated revenue for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~The decrease in this line item for the three months ended September 30, 2019 compared to the prior year period~~This increase was due ~~primarily~~ to ~~one-time~~additional marketing and personnel costs incurred ~~during~~to support the ~~three months ended September 30, 2018. The increase for~~ongoing growth of the ~~nine month period related to the Company’s increased global presence and increased marketing and sales personnel.~~Company.

General and administrative expenses grew approximately ~~$0.8~~$0.1 million, ~~and $2.6 million, respectively, during the three and nine months ended September 30, 2019,~~ or ~~21.1% and 24.0%, respectively,~~1.9% over the three ~~and nine~~ months ended ~~September~~June 30, ~~2018.~~2019. These costs represented ~~13.5%~~13.1% and ~~13.6%~~15.3% of total consolidated revenue for the three months ended ~~September~~June 30, 2020 and 2019, respectively.

General and ~~2018, respectively,~~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 ~~14.9% and 13.1%~~15.8% of total consolidated revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The increase was due mainly to increases in personnel, occupancy costs and information technology ~~costs and research and development~~ costs to support the on-going growth of the business.

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

Income tax expense for the three months ended ~~September~~June 30, ~~2019~~2020 increased ~~$0.3~~$0.1 million from the three months ended ~~September~~June 30, ~~2018, primarily due to increased profitability~~2019, Our effective tax rate was 21.5% for the three months ended ~~September~~June 30, 2020 compared with 23.8% for the three months ended June 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.

Income tax expense for the six months ended June 30, 2020 increased $0.01 million from the same period in 2019, Our effective tax rate was ~~18.1%~~21.3% for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 compared with ~~24.0%~~23.6% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. This ~~improvement~~reduction in the effective tax rate was ~~mainly~~ due primarily to ~~a one-time~~larger expected permanent tax ~~adjustment related~~benefits we expect to realize compared to the ~~Tax Cut and Jobs Act. Income tax expense for the nine months ended September 30, 2019 increased $0.3 million from the nine months ended September 30, 2018.~~

~~Net Income~~same period last year.

Net income for the three ~~and nine~~ months ended ~~September~~June 30, ~~2019~~2020 increased ~~by $2.3 million~~32.1% to ~~$4.5 million and by $2.6 million to $9.4 million, respectively, from~~$4.0 million.

Net income for the ~~three and nine~~six months ended ~~September~~June 30, ~~2018, due mainly~~2020 increased 14.7% to ~~increased revenue, improved gross margins, and improved operating leverage in each period.~~$5.6 million.

The primary source of liquidity for our business is cash and cash equivalents and cash flows provided by operations. As of June 30, 2020, we had cash and cash equivalents of $25.8 million. For the six months ended June 30, 2020, cash flows provided by operations were $11.8 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 ~~capacity~~resources to meet these cash requirements by using available cash, ~~and~~ 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 ~~$5.6~~$11.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$4.3~~$3.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018. The~~2019. This increase was ~~driven primarily by~~due mainly to increases in ~~net income~~operating earnings and ~~accounts payable and accrued liabilities partially offset by increases~~changes in inventory and accounts receivable. The increase in accounts payable and accrued liabilities was primarily due to timing of billings and payments to our suppliers in the normal course of business. The increase in accounts receivable was due primarily to the timing of collections. The increase in inventory was primarily due to planned increased inventory levels to facilitate inter-company shipping of product via lower cost ocean shipment versus higher cost air shipment.working capital.

Investing activities. Cash flows used in investing activities totaled approximately ~~$1.5~~$2.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019 which is comparable~~2020 compared to ~~$1.5~~$0.9 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. This increase was due mainly to the acquisition of Protex Centre (Note 12) and increases in capital expenditures.

Financing activities. Cash flows ~~used in~~provided by financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 totaled approximately ~~$0.9~~$4.8 million compared to ~~$2.9 million~~cash use in the ~~same period in 2018.~~prior year of $0.7 million. This ~~decrease~~increase was due ~~mainly~~primarily to ~~repayments made on our revolving credit~~new borrowing under a term loan agreement ~~during~~with the ~~2018 period.~~Bank of San Antonio (Note 8). This increase 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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 totaled approximately ~~$1.0~~$7.4 million and ~~$1.8~~$0.8 million, respectively.

~~Our~~As of June 30, 2020, our credit facilities ~~consist~~consisted of aan $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. ~~The line has~~Borrowings under the credit agreement bear interest at a variable ~~interest~~ rate of the Wall Street Journal prime rate ~~plus 0.75%~~minus 1.00% with a floor of ~~4.25% and matures in May 2020.~~3.50%. The interest rate as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~6.25%~~3.50% and ~~6.00%~~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 ~~September~~both June 30, ~~2019~~2020 and December 31, ~~2018,~~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 ~~XPEL~~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 ~~tangible net worth~~EBITDA of ~~4.0:1~~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 ~~September~~June 30, ~~2019,~~2020, the Company was in compliance with all covenants.

~~During 2018,~~ 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 3.5% annually, requires monthly payments of principal and interest and matures in June 2023. At June 30, 2020, $6,000,000 was outstanding under the term-loan. The term-note 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., ~~entered into~~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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, no balance was outstanding on this facility.

There has been no material change to the Company’s contractual obligations as described in the Company’s ~~Amendment No. 2 to~~annual report on Form 1010-K as filed with the SEC on ~~May 30, 2019.~~March 16, 2020.

There have been no material changes to the Company’s critical accounting policies and estimates from the information provided in the Company’s ~~Amendment No. 2 to~~annual report on Form 1010-K as filed with the SEC on ~~May 30, 2019.~~March 16, 2020.

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.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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 ~~engaged~~engage in trading activities involving non-exchange contracts.

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.

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

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.

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 ~~Amendment No. 2 to~~annual report on Form 1010-K as filed with the SEC on ~~May 30, 2019,~~March 16, 2020, which could materially affect our business, financial condition or future results. The risks described in our ~~Amendment No 2 to~~annual report on Form 1010-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.

During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~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.

~~Not applicable.~~On May 11, 2020, the Company entered into a new a three-year, $6 million term debt 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.

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


Exhibit No.		Description		Method of Filing

~~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 ~~September 30, 2019,~~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

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
~~November 8, 2019~~August 12, 2020		(Authorized Officer and Principal Financial and Accounting Officer)


	Nine Months Ended September 30,							Six Months Ended June 30,
	2019			2018				2020		2019
Cash flows from operating activities							Cash flows from operating activities
Net income	$	9,376,598		$	6,823,860		Net income	$	5,585,044	$	4,867,313
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	655,385			539,379			Depreciation of property, plant and equipment	564,177		421,088
Amortization of intangible assets	570,954			472,675			Amortization of intangible assets	466,121		371,372
Impairments	66,364			—			Impairments	—		66,364
Loss on sale of property and equipment	1,521			36,930			Loss on sale of property and equipment	5,106		24,605
Bad debt expense	153,949			172,019			Bad debt expense	88,451		123,753
Deferred income tax	135,221			(67,462		)	Deferred income tax	(50,738)		58,405
Accretion on notes payable	50,346			49,311			Accretion on notes payable	24,956		36,843

Changes in current assets and liabilities:
Changes in assets and liabilities:							Changes in assets and liabilities:
Accounts receivable	(1,883,620		)	(1,623,508		)	Accounts receivable	(45,427)		(2,063,400)
Inventory, net	(5,679,694		)	(2,116,295		)	Inventory, net	270,890		(4,427,940)
Prepaid expenses and other current assets	(1,372,894		)	(429,881		)	Prepaid expenses and other current assets	257,599		(603,016)
Income tax receivable							Income tax receivable	94,729		—
Other assets	61,795			—			Other assets	(419,802)		26,194
Accounts payable and accrued liabilities	4,308,679			696,860			Accounts payable and accrued liabilities	3,520,202		4,975,948
Income tax payable	(799,052		)	(205,842		)	Income tax payable	1,421,453		(799,700)
Net cash provided by operating activities	5,645,552			4,348,046			Net cash provided by operating activities	11,782,761		3,077,829
Cash flows used in investing activities							Cash flows used in investing activities
Purchase of property, plant and equipment	(994,074		)	(1,064,909		)	Purchase of property, plant and equipment	(1,041,987)		(764,125)
Proceeds from sale of property and equipment	41,197			117,122			Proceeds from sale of property and equipment	38,469		11,386
Acquisition of subsidiaries, net of cash acquired and notes payable	—			(429,360		)
Acquisition of a business, net of cash acquired							Acquisition of a business, net of cash acquired	(1,247,843)		—
Development of intangible assets	(534,720		)	(129,947		)	Development of intangible assets	(198,284)		(138,097)
Net cash used in investing activities	(1,487,597		)	(1,507,094		)	Net cash used in investing activities	(2,449,645)		(890,836)
Cash flows from financing activities							Cash flows from financing activities
Net repayments on revolving credit agreement	—			(2,000,000		)
Repayment of bank loan payable	—			(440,126		)
Borrowings on revolving credit agreements							Borrowings on revolving credit agreements	8,932,016		—

Repayments of revolving credit agreements							Repayments of revolving credit agreements	(8,932,016)		—
Borrowing on term loan							Borrowing on term loan	6,000,000		—
Repayments of notes payable	(908,909		)	(444,690		)	Repayments of notes payable	(392,394)		(714,668)
Net cash used in financing activities	(908,909		)	(2,884,816		)
Purchase of minority interest							Purchase of minority interest	(784,653)		—

Net cash provided by (used in) financing activities							Net cash provided by (used in) financing activities	4,822,953		(714,668)
Net change in cash and cash equivalents	3,249,046			(43,864		)	Net change in cash and cash equivalents	14,156,069		1,472,325
Foreign exchange impact on cash and cash equivalents	75,634			(8,470		)	Foreign exchange impact on cash and cash equivalents	138,867		30,413
Increase (decrease) in cash and cash equivalents during the period	3,324,680			(52,334		)
Increase in cash and cash equivalents during the period							Increase in cash and cash equivalents during the period	14,294,936		1,502,738
Cash and cash equivalents at beginning of period	3,971,226			3,498,904			Cash and cash equivalents at beginning of period	11,500,973		3,971,226
Cash and cash equivalents at end of period	$	7,295,906		$	3,446,570		Cash and cash equivalents at end of period	$	25,795,909	$	5,473,964

Supplemental schedule of non-cash activities							Supplemental schedule of non-cash activities
Notes payable issued for acquisitions	$	—		$	762,690		Notes payable issued for acquisitions	$	893,317	$	—
Forgiveness of debt for acquired entities	$	—		$	88,216


Supplemental cash flow information							Supplemental cash flow information
Cash paid for income taxes	$	3,004,758		$	2,314,334		Cash paid for income taxes	$	77,026	$	2,058,925
Cash paid for interest	$	15,890		$	84,974		Cash paid for interest	$	50,955	$	10,997



	Weighted Average Interest Rate	Matures	September 30, 2019		December 31, 2018
Acquisition notes payable	5.02%	2022	$	985,363	$	1,821,387
Total debt			985,363		1,821,387
Current portion			586,154		853,150
Total long-term debt			$	399,209	$	968,237


	June 30, 2020		December 31, 2019
Trade payables	$	11,339,567	$	7,440,965
Payroll liabilities	1,230,156		1,367,340
Contract liabilities	218,330		559,232
Other liabilities	999,006		829,816
	$	13,787,059	$	10,197,353



	September 30, 2019		December 31, 2018
Trade payables	$	7,126,796	$	3,905,187
Payroll liabilities	1,000,777		1,194,237
Contract liabilities	1,417,960		136,213
Other liabilities	1,039,819		1,056,456
	$	10,585,352	$	6,292,093



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



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



Balance, December 31, 2018	$	136,213
Revenue recognized related to payments included in the December 31, 2018 balance	(38,405		)
Payments received for which performance obligations have not been satisfied	217,195
Balance, March 31, 2019	315,003
Revenue recognized related to payments included in the March 31, 2019 balance	(77,265		)
Payments received for which performance obligations have not been satisfied	1,493,645
Balance, June 30, 2019	1,731,383
Revenue recognized related to payments included in the June 30, 2019 balance	(1,659,056		)
Payments received for which performance obligations have not been satisfied	1,345,633
Balance, September 30, 2019	$	1,417,960



Balance at December 31, 2017	$	1,856,642
Acquisitions of subsidiaries	572,544
Foreign Exchange	(31,876		)
Balance at September 30, 2018	$	2,397,310

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



	September 30, 2019
Operating lease right-of-use assets	$	4,515,591

Current portion of operating lease liabilities	1,062,176
Noncurrent portion of operating lease liabilities	3,544,207
Total operating lease liabilities	$	4,606,383



2019	$	282,149
2020	1,071,630
2021	962,701
2022	888,620
2023	781,377
Thereafter	1,528,116
Total operating lease payments	5,514,593
Less: interest	(908,210		)
Total operating lease liabilities	$	4,606,383



2019	$	869,492
2020	736,169
2021	667,551
2022	601,593
2023	528,427
Thereafter	1,372,388
	$	4,775,620



	(Unaudited)				(Unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net Income	$	4,509,285	$	2,181,905	$	9,376,598	$	6,823,860
Interest	23,851		31,301		81,631		135,385
Taxes	999,072		690,523		2,503,365		2,159,596
Depreciation	234,297		200,512		655,385		539,379
Amortization	199,582		160,506		570,954		472,675
EBITDA	$	5,966,087	$	3,264,747	$	13,187,933	$	10,130,895



	Three Months Ended September 30, 2019		% of Total Revenue		Three Months Ended September 30, 2018		% of Total Revenue		$ Change		% Change
Total revenue	$	35,617,998	100.0	%	$	29,215,325	100.0	%	$	6,402,673	21.9	%
Total cost of sales	23,344,968		65.5	%	20,364,785		69.7	%	2,980,183		14.6	%
Gross margin	12,273,030		34.5	%	8,850,540		30.3	%	3,422,490		38.7	%
Total operating expenses	6,603,871		18.5	%	5,861,260		20.1	%	742,611		12.7	%
Operating income	5,669,159		15.9	%	2,989,280		10.2	%	2,679,879		89.6	%
Other expenses	160,802		0.5	%	116,852		0.4	%	43,950		37.6	%
Income tax	999,072		2.8	%	690,523		2.4	%	308,549		44.7	%
Net income	$	4,509,285	12.7	%	$	2,181,905	7.5	%	$	2,327,380	106.7	%



	Nine Months Ended September 30, 2019		% of Total Revenue		Nine Months Ended September 30, 2018		% of Total Revenue		$ Change			% Change
Total revenue	$	90,437,598	100.0	%	$	83,127,735	100.0	%	$	7,309,863		8.8	%
Total cost of sales	59,388,475		65.7	%	58,107,211		69.9	%	1,281,264			2.2	%
Gross margin	31,049,123		34.3	%	25,020,524		30.1	%	6,028,599			24.1	%
Total operating expenses	18,935,670		20.9	%	15,793,008		19.0	%	3,142,662			19.9	%
Operating income	12,113,453		13.4	%	9,227,516		11.1	%	2,885,937			31.3	%
Other expenses	233,490		0.3	%	244,060		0.3	%	(10,570		)	(4.3	)%
Income tax	2,503,365		2.8	%	2,159,596		2.6	%	343,769			15.9	%
Net income	$	9,376,598	10.4	%	$	6,823,860	8.2	%	$	2,552,738		37.4	%


	Three Months Ended September 30,				%		% of Category Revenue					Three Months Ended June 30,						%		% of Category Revenue
	2019		2018		Inc (Dec)		2019		2018			2020		2019		Inc (Dec)		2020		2019
Product	$	8,531,480	$	5,793,743	47.3	%	27.7	%	22.8	%	Product	$	8,405,300	$	6,874,459	22.3	%	27.1	%	27.0	%
Service	3,741,550		3,056,797		22.4	%	77.9	%	80.5	%	Service	3,333,777		3,751,554		(11.1)	%	68.8	%	80.4	%
Total	$	12,273,030	$	8,850,540	38.7	%	34.5	%	30.3	%	Total	$	11,739,077	$	10,626,013	10.5	%	32.8	%	35.3	%