UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission file number 001-38858
XPEL, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
20-1117381
(I.R.S. Employer Identification No.)
618 W. Sunset Road
San Antonio
Texas
(Address of Principal Executive Offices)
78216
(Zip Code)
Registrant's telephone number, including area code: (210) 678-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol
XPEL
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as identified in Rule 405 of the Securities
Act. Yes x No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes ☐ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x
No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to
be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment
of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act
(15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the Registrant, as of June 30, 2020, the
last business day of the Registrant’s most recently completed second fiscal quarter, was approximately
$255,070,696.
The registrant had 27,612,597 shares of common stock outstanding as of March 11, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the 2021 Annual
Meeting of stockholders to be held on May 27, 2021.
Part III
Document
Parts into which Incorporated
TABLE OF CONTENTS
Cautionary Notice Regarding Forward-Looking Statements.................................
Page
1
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Business................................................................................................................
Risk Factors..........................................................................................................
Unresolved Staff Comments.................................................................................
Properties..............................................................................................................
Legal Proceedings................................................................................................
Mine Safety Disclosures........................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities..................................................................
Selected Financial Data........................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................................................
Quantitative and Qualitative Disclosures about Market Risk................................
Financial Statements and Supplementary Data....................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................................................................
Controls and Procedures......................................................................................
Other Information..................................................................................................
Directors, Executive Officers and Corporate Governance....................................
Executive Compensation......................................................................................
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................................................
Certain Relationships and Related Transactions, and Director Independence ...
Item 14.
Principal Accounting Fees and Services...............................................................
Part IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules........................................................
Form 10-K Summary.............................................................................................
Signatures.............................................................................................................
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30
31
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32
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34
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47
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K (“Annual Report”) include forward-looking
statements, which reflect our current expectations and projections about future events and financial trends that
we believe may affect our business, financial condition and results of operations. These forward-looking
statements speak only as of the date of this Annual Report and are subject to a number of risks, uncertainties
and assumptions described under the sections entitled “Business,” “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary
Data” and elsewhere in this Annual Report.
Forward-looking statements include, but are not limited to, statements with respect to the nature of our
strategy and capabilities, the vertical and regional expansion of our market and business opportunities, and the
expansion of our product offerings in the future. Statements that include words like “believe,” “expect,”
“anticipate,” “intend,” “plan,” “seek,” “estimate,” “could,” “potentially” or similar expressions are forward-looking
statements and reflect future predictions that may not be correct, even though we believe they are reasonable.
These statements are not guarantees of future performance and involve risks and uncertainties that are difficult
to predict or are beyond our control. A number of important factors could cause actual outcomes and results to
differ materially from those expressed in these forward looking statements. Consequently, readers should not
place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate
to the date on which they are made.
The forward-looking statements reflect our current expectations and are based on information currently
available to us and on assumptions we believe to be reasonable. Forward-looking information is subject to
known and unknown risks, uncertainties and other factors that may cause our actual results, activities,
performance or achievements to be materially different from that expressed or implied by such forward-looking
statements.
Factors to consider when evaluating these forward-looking statements include, but are not limited to:
• One supplier is the main source of our products.
• We currently rely on one distributor for sales of our products in China.
•
A material portion of our business is in China, which may be an unpredictable market and is currently
suffering trade tensions with the U.S.
• We must continue to attract, retain and develop key personnel.
• Our accounting estimates and risk management processes rely on assumptions or models that may
prove inaccurate.
• We must maintain an effective system of internal control over financial reporting to keep stockholder
confidence.
• Our industry is highly competitive.
• Our business is highly dependent on automotive sales and production volumes.
• Our North American market is currently designed for the public’s use of car dealerships to purchase
automobiles which may dramatically change.
• Our revenue could be impacted by growing use of ride-sharing or other alternate forms of car
ownership.
•
The growing popularity of electric vehicles and other technology could impact our revenue or render
some of our products obsolete.
• We must be effective in developing new lines of business and new products to maintain growth.
•
Any disruptions in our relationships with independent installers and new car dealerships could harm
our sales.
• Our strategy related to acquisitions and investments could be unsuccessful or consume significant
resources.
• We must maintain and grow our network of sales, distribution channels and customer base to be
successful.
• We are exposed to a wide range of risks due to the multinational nature of our business.
• We must continue to manage our rapid growth effectively.
1
• We are subject to claims and litigation in the ordinary course of our business, including product liability
and warranty claims.
• We are an “emerging growth company” which may impact investor perception of our Company.
• We must comply with a broad and complicated regime of domestic and international trade compliance,
anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory
regimes.
• We may seek to incur substantial indebtedness in the future.
• Our growth may be dependent on the availability of capital and funding.
• Our Common Stock could decline or be downgraded at any time.
• Our stock price has been, and may continue to be, volatile.
• We may issue additional equity securities that may affect the priority of our Common Stock.
• We do not currently pay dividends on our Common Stock.
•
•
Shares eligible for future sale may depress our stock price.
Anti-takeover provisions could make a third party acquisition of our Company difficult.
• Our directors and officers have substantial control over us.
• Our bylaws may limit investors’ ability to obtain a favorable judicial forum for disputes.
•
The COVID-19 pandemic could materially affect our business.
• Our business faces unpredictable global, economic and business conditions.
Although we have attempted to identify important factors that could cause actual actions, events or results
to differ materially from those described in forward-looking information, there may be other factors that cause
actions, events or results to differ from those anticipated, estimated or intended. The forward-looking
information contained herein is made as of the date of this Annual Report and, other than as required by law,
we do not assume any obligation to update any forward-looking information, whether as a result of new
information, future events or results or otherwise.
You should also read the matters described in “Risk Factors” and the other cautionary statements made in
this Annual Report as being applicable to all related forward-looking statements wherever they appear in this
Annual Report. The forward-looking statements in this Annual Report may not prove to be accurate and
therefore you are encouraged not to place undue reliance on forward-looking statements. You should read this
Annual Report completely.
EXPLANATORY NOTE
This Annual Report also includes estimates and other statistical data made by independent parties and by
us relating to market size and growth and other data about our industry. This data involves a number of
assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition,
projections, assumptions and estimates of our future performance and the future performance of the markets in
which we operate are necessarily subject to a high degree of uncertainty and risk.
We own or have rights to trademarks or trade names that we use in connection with the operation of our
business, including our corporate names, logos and website names. In addition, we own or have the rights to
copyrights, trade secrets and other proprietary rights that protect the content of our products and the
formulations for such products. Solely for convenience, some of the trademarks, trade names and copyrights
referred to in this report are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent
under applicable law, our rights to our trademarks, trade names and copyrights.
Other trademarks and trade names in this Annual Report are the property of their respective owners.
Unless the context indicates otherwise, all references in this Annual Report to “XPEL,” the “Company,”
“we,” “us,” and “our” refer to XPEL, Inc. and all of its wholly-owned and majority-owned subsidiaries.
2
SUMMARY OF RISK FACTORS
The following is a summary of the most significant risks and uncertainties that we believe could adversely
affect our business, financial condition or results of operations. In addition to the following summary, you
should consider the other information set forth in the “Risk Factors” section and the other information contained
in this Annual Report.
Operational Risks
• One supplier is the main source of our paint protection film products.
• We currently rely on one distributor for our products in China.
•
A material portion of our business is in China, which may be an unpredictable market and is currently
suffering trade tensions with the U.S.
• We must continue to attract, retain and develop key personnel.
• Our accounting estimates and risk management processes rely on assumptions or models that may
prove inaccurate.
• We must maintain an effective system of internal control over financial reporting to keep stockholder
confidence.
Risks Related to Our Business and Industry
• Our industry is highly competitive.
• Our business is highly dependent on automotive sales and production volumes.
• Our market fluctuates rapidly, which could cause our results to fall short of expectations.
• Our North American market is currently designed for the public’s use of car dealerships to purchase
automobiles which may dramatically change.
• Our revenue could be impacted by growing use of ride-sharing or other alternate forms of car
ownership.
•
The growing popularity of electric vehicles and other technology could impact our revenue or render
some of our products obsolete.
Strategic Risks
• We must be effective in developing new lines of business and new products to maintain growth.
•
Any disruptions in our relationships with independent installers and new car dealerships could harm
our sales.
• Our strategy related to acquisitions and investments could be unsuccessful or consume significant
resources
• We must maintain and grow our network of sales, distribution channels and customer base to be
successful.
• We are exposed to a wide range of risks due to the multinational nature of our business.
• We must continue to manage our rapid growth effectively.
Legal, Regulatory and Compliance Risks
• We are subject to claims and litigation in the ordinary course of our business, including product liability
and warranty claims.
• We are an “emerging growth company” which may impact investor perception of our Company.
• We must comply with a broad and complicated regime of domestic and international trade compliance,
anti-corruption, economic, intellectual property, cybersecurity, data protection and other regulatory
regimes.
3
Liquidity Risks
• We may seek to incur substantial indebtedness in the future.
• Our growth may be dependent on the availability of capital and funding.
Risks Relating to Common Stock
• Our Common Stock could decline or be downgraded at any time.
• Our stock price has been, and may continue to be, volatile.
• We may issue additional equity securities that may affect the priority of our Common Stock.
• We do not currently pay dividends on our Common Stock.
•
•
Shares eligible for future sale may depress our stock price.
Anti-takeover provisions could make a third party acquisition of us difficult.
• Our directors and officers have substantial control over us.
• Our bylaws may limit investors’ ability to obtain a favorable judicial forum for disputes.
General Risk Factors
•
The COVID-19 pandemic could materially adversely affect our business.
• Our business faces unpredictable global economic and business conditions.
4
Part I
Item 1. Business
Company Overview
Founded in 1997 and incorporated in Nevada in 2003, XPEL has grown from an automotive product
design software company to a global provider of after-market automotive products, including automotive
surface and paint protection, headlight protection, and automotive window films, as well as a provider of
complementary proprietary software. In 2018, we expanded our product offerings to include architectural
window film (both commercial and residential) and security film protection for commercial and residential
uses, and in 2019 we further expanded our product line to include automotive ceramic coatings.
XPEL began as a software company designing vehicle patterns used to produce cut-to-fit protective
film for the painted surfaces of automobiles. In 2007, we began selling automotive surface and paint
protection film products to complement our software business. In 2011, we introduced our ULTIMATE
protective film product line 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 rocks
or other road debris, thereby fully protecting the painted surface of a vehicle. The film is described as
“self-healing” due to its ability to return to its original state after damage from surface scratches.
The 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, we established our
European headquarters in The Netherlands, and expanded our product offerings to include an automotive
protective window film branded as PRIME. We continued our international expansion in 2017 with the
acquisition of Protex Canada Corp., or Protex Canada, a leading franchisor of automotive protective film
franchises serving Canada, and 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 introduced the next generation of our highly successful ULTIMATE line,
ULTIMATE PLUS. As 2018 came to a close, we acquired Apogee Corporation which led to formation of
XPEL Asia based in Taiwan. In 2020, as a continuation of our get close to the customer strategy, we
acquired Protex Centre, a wholesale-focused paint protection installation business based in Montreal,
Canada, and expanded our presence in France with the acquisition of certain assets of France Auto
Racing. We also expanded our architectural window film presence with the acquisition of Houston based
Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and
industrial settings.
Products and Services
Surface and Paint Protection Film Rolls: Our primary products are paint and surface protection films.
Most of the products sold are destined for automotive application which principally protect painted
surfaces from rock chips, damage from bug acids and other road debris. Some of the products sold are
used for non-automotive applications, such as industrial protection, screen protection or architectural
protection. We sell a variety of product lines each with their own unique characteristics, warranty and
intended use.
Automotive Surface and Paint Protection
XPEL ULTIMATE PLUS: ULTIMATE PLUS is our flagship clear, thermoplastic polyurethane, or TPU,
based product which is a self-healing, stain-resistant film with exceptional clarity and durability. ULTIMATE
PLUS carries a 10-year warranty in most markets and is our top selling product.
5
XPEL STEALTH: STEALTH is a satin-finished paint protection film, made with the same construction
as ULTIMATE PLUS. STEALTH is designed to protect surfaces that already have a matte finish or to give
otherwise glossy surfaces a matte finish.
TRACWRAP: TRACWRAP is a temporary TPU-based paint protection film, for both do it yourself, or
DIY, and professional applications, that is designed to be used for a short period of time, including during
road trips, vehicle transport or vehicles pending a full installation of our other products such as XPEL
ULTIMATE PLUS.
LUX PLUS: LUX PLUS is our flagship clear, TPU-based paint protection film for the Chinese market.
Designed and formulated specifically for the demands of China, with excellent self-healing and stain-
resistance, it is offered for sale exclusively in that market.
XPEL RX: RX Protection Film provides protection for a variety of surfaces including screens and
other electronics and contains silver ions which inhibit the growth of microbes on the film’s surface.
XPEL ARMOR: ARMOR is a thick PVC-based protection film that looks and performs like a spray-on
bedliner. It is designed to resist abrasions and punctures from aggressive terrains.
OTHER FILMS: We sell a variety of other specialty films in smaller quantities for select customers or
in certain markets, including: LUX-M, ZEUS, PROTEX, MPD and ASP in the Chinese Market, F8000 Film
in Mexico and F9300 Film in Canada and Europe.
Most of our Surface and Paint Protection films are applied wet and can be installed in bulk or pre-cut
using our Design Access Program, or DAP, software. While we sell some pre-cut and Do-It-Yourself
products made from these rolls directly to consumers, the vast majority of the products are professionally
installed.
Surface and Paint Protection film sales represented 69.7% of our consolidated revenue for the year
ended December 31, 2020.
Automotive Window Film Rolls: We sell several lines of automotive window films, primarily under the
XPEL PRIME brand name, which exhibit a range of performance characteristics and appearances,
including:
XPEL PRIME XR PLUS: PRIME XR PLUS offers 98% infrared heat rejection developed with multi-
layer nano-particle technology. This is our most expensive flagship product with our best specifications
and characteristics. It is available in a variety of visible light transmission, or VLT, levels.
XPEL PRIME XR: PRIME XR utilizes a nano-ceramic construction, blocking 88% of infrared heat and
does not interfere with radio, cellular or Bluetooth signals like a metallized film.
XPEL PRIME CS: PRIME CS blocks solar heat radiation to keep vehicles at comfortable
temperatures and blocks 99% of harmful UV rays. Available in both a black and neutral charcoal color,
PRIME CS is designed to remain the same over the years and never fades or turns purple.
OTHER FILMS: We also sell a variety of other automotive window films both under the PRIME brand
and on a private-label basis, including: PRIME X-SERIES and PRIME AP in China, PRIME HP, PRIME
GL, PRIME SD and more. Generally, these products are lower cost and are sold only in certain markets.
Automotive window film sales represented 13.2% of our consolidated revenue for the year ended
December 31, 2020.
6
Architectural Window Film Rolls: We sell architectural glass solutions for commercial and residential
buildings under the VISION brand name, representing our first product set with a fully non-automotive
use. Architectural window films come in several broad categories, including:
SOLAR: Solar films are designed to provide solar energy rejection. We offer a variety of films with
varying colors, VLTs and price points.
SAFETY & SECURITY: Safety and Security films are clear, thick polyethylene terephthalate, or PET,
films to secure glass in the event of a breakage. We offer a variety of thicknesses and offer films with
varying adhesive characteristics for different types of installations.
OTHER: In addition to the main categories of SOLAR and SAFETY & SECURITY films, we also offer
anti-graffiti, exterior applied and decorative films.
Architectural window film sales represented less than 1.0% of our consolidated revenue for the year
ended December 31, 2020.
Design Access Program: A key component of our product offering is our Design Access Program
software. DAP is a proprietary software and database consisting of over 80,000 vehicle applications used
by the Company and its customers to cut automotive protection film into vehicle panel shapes for both
paint protection film and window film products.
We commit significant resources to keep the pattern database updated with a goal toward having a
pattern for every panel of every vehicle. When new vehicle models are introduced to the market, we strive
to create the pattern as soon as possible. Our patterns and software increase installer efficiency and
reduce waste.
Our DAP customers pay a monthly access fee to access our proprietary database. Monthly DAP
subscriptions represented 2.2% of our consolidated revenue for the year ended December 31, 2020.
Installation Services: We offer installation services of our various products directly to retail and
wholesale customers through our nine Company-owned installation facilities in their respective markets.
Our installation services are primarily automotive film installation but have grown to include architectural
film installation in certain markets. Installation services (including product and labor revenue) represented
8.2% of our consolidated revenue for the year ended December 31, 2020.
Miscellaneous Products, Tools and Pre-Cut: We sell a variety of other miscellaneous product sets
which include:
PRE-CUT FILM PRODUCTS: While most of our surface protection films, automotive window films
and architectural window films are sold as rolls, we also offer to pre-cut them into vehicle specific shapes
(if applicable) or cut them into smaller pieces or shapes to aide in the installation or to increase
affordability or efficiency for our customers.
XPEL FUSION PLUS CERAMIC COATING: XPEL FUSION PLUS is a hydrophobic, self-cleaning
coating that can be applied to paint and paint protection film and provides additional protection to a
vehicle’s painted surface to enhance its gloss and protect it from minor scratches. In 2020, we extended
our ceramic coating line to include ceramic coating for wheels and calipers, plastic and trim, upholstery,
glass and marine watercraft use.
TOOLS AND ACCESSORIES: We sell a variety of tools and accessories which are used in the
installation of our products, including squeegees and microfiber towels, application fluids, plotter cutters,
knives and more. Generally, these are offered as a service to our customers to provide one-stop
shopping.
7
MERCHANDISE AND APPAREL: We sell a variety of XPEL-branded merchandise and apparel
which helps represent and build our brand.
Strategic Overview
XPEL is currently pursuing several key strategic initiatives to drive continued growth. Our global
expansion strategy focuses establishing a local presence where possible, allowing us to better control the
delivery of our products and services. During 2020, we acquired certain assets of our distributor in
France, France Auto Racing, consistent with this objective. 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 pursuing 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 our 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 on our belief that the
closer the Company is to its end customers, the greater its ability to drive increased product sales. In
2020, we acquired Protex Centre, a wholesale-focused paint protection film installation business based in
Montreal, Canada, in furtherance of this strategy.
We also continue to drive expansion of our non-automotive product portfolio. Our acquisition of
Veloce Innovation, a leading provider of architectural films for use in residential, commercial, marine and
industrial settings, bolstered our reach and expanded the breadth of our commercial/residential window
film offering, which is our first non-automotive product line. The Company continues to explore other non-
automotive product lines to add to our portfolio.
Sales and Distribution
We sell and distribute our products through independent installers, new car dealerships, third-party
distributors, Company-owned installation centers, Protex Canada’s franchisees and online.
Independent Installers/New Car Dealerships
We primarily operate by selling a complete turn-key solution directly to independent installers and
new car dealerships, which includes XPEL protection films, installation training, access to our proprietary
DAP software, marketing support and lead generation. For the year ended December 31, 2020,
approximately 54% of the Company’s consolidated revenue was through this channel.
While we are principally a product company, we also offer a suite of services to complement our
products for our customers, including access to our proprietary DAP software. We believe that this
software greatly enhances installation efficiency and reduces film waste – a valuable feature to our
customers, as their highest cost tends to be labor. We also provide marketing and lead generation for our
customers by featuring them in our dealer locator on our website. To be considered an “authorized
dealer” (and thereby have end customers referred to them), independent installers must complete our
four-day, hands-on training class and meet other requirements. Trainees are certified upon completion.
Additionally, XPEL works closely with independent installers and new car dealerships to support local
events in their geographic markets.
8
XPEL also offers 24/7 customer service for independent installers and new car dealerships where we
provide installation, software and training support via our website and telephone technical support
services.
Finally, our customers in the independent installer/new car dealership channel tend to be smaller in
nature, and consequently frequently experience “just-in-time” inventory needs. To address this need, the
Company maintains inventory in several warehouse locations globally.
Distributors
In various parts of the world, XPEL operates primarily through third party distributors under written
agreements with the Company to develop a market or a region under our supervision and direction.
These distributors may sell to other distributors or customers who ultimately install the product on an end
customer’s vehicle. Due to the nature of this channel, product margins are generally less than other
channels. For the year ended December 31, 2020, approximately 32% of the Company’s consolidated
revenue was through this channel.
In China, we operate through a sole distributor under a distribution agreement, Shanghai Xing Ting
Trading Co., Ltd., which we refer to as the China Distributor. Approximately 20.6% of our consolidated
revenue for the year ended December 31, 2020, was derived from sales to the China Distributor.
Through our distribution agreement with the China Distributor entered into on May 31, 2018, the
China Distributor has rights to promote, market, distribute, sell and install our products in China.
Additionally, we have granted the non-exclusive right to the China Distributor to use our software in
connection with customers’ purchases of our products. The China Distributor places orders with us on a
prepaid basis at a price set by us, which we may change with 30 days’ notice. Certain of our products
have minimum purchase requirements that increase annually.
We have also granted the China Distributor a non-exclusive license to use our brands to promote
sales of our products to end-users. The distribution agreement applies to separate product categories,
distinguished by their exclusive or non-exclusive relationship with the China Distributor, each for a term of
five years, each of which will automatically renew for up to three additional five-year periods unless
otherwise terminated by either party with 60 days’ notice.
We consider our relations with the China Distributor to be good, but the loss of our relationship could
result in the delay of the distribution and a decrease in marketing of our products in China. For more
information, see Part I, Item 1A—Risk Factors—We rely on one distributor of our products and services in
China. The loss of this relationship, or a material disruption in sales by this distributor, could severely
harm our business” and “A significant percentage of our revenue is generated from our business in China,
a market that is associated with certain risks.”
Company-Owned Installation Centers
XPEL operates nine Company-owned installation centers: six in the United States, two in Canada and
one in the United Kingdom. These locations serve wholesale and retail customers in their respective
markets. This channel represented approximately 10% of the Company’s consolidated revenue for the
year ended December 31, 2020.
Some of our Company-owned installation centers are located in geographic areas where we also
serve customers in our independent installer/dealership channel, which could be perceived to generate
channel conflict. However, we believe these channels have a synergistic relationship with our Company-
owned centers supporting independent installers and dealerships by allowing us to implement local
marketing, making inventory available locally for fast delivery, offering overflow installation capacity and
9
assisting with training needs. We believe this channel strategy benefits our goal of generating the most
product revenue possible.
Canadian Franchisee Channel
Our wholly owned subsidiary, Protex Canada, operates as a franchisor in certain parts of Canada.
Franchisees are authorized to sell our automotive paint film and window film. A franchisee must pay a
franchise fee to be assigned an exclusive area in which to offer sale and installation of protective films.
As the franchisor, Protex Canada provides brand, training and other support to franchisees. Franchisees
pay a royalty to Protex Canada based on percent of revenues. Franchisees, as part of their franchise
agreement, are required to purchase paint protection and window films from XPEL. The revenue from this
channel which consists of franchise fee and royalty revenue represented approximately 1% of the
Company’s consolidated revenue for the year ended December 31, 2020.
Online and Catalog Sales
XPEL offers certain products such as paint protection kits, car wash products, after-care products and
installation tools via its website. Revenues from this channel are negligible but we believe that by offering
these products on our website, we increase brand awareness. The revenue from this channel
represented approximately 1% of the Company’s consolidated revenue for the year ended December 31,
2020.
Competition
The Company principally competes with other manufacturers and distributors of automotive protective
film products. While the Company considers itself a product company competing with other product
companies, the Company believes its suite of services which accompany the Company’s product
offerings including its software, marketing and lead generation to its customers and customer service
provide for substantial differentiation from its competitors. Within the market for surface and paint
protection film, our principal competitors include Eastman Chemical Company (under the LLumar and
Suntek brands) and several other smaller companies. For more information, see Part I, Item 1A—Risk
Factors—The after-market automotive product supply business is highly competitive. Competition
presents an ongoing threat to the success of our Company.
Suppliers
The Company’s paint and surface protection, automotive window films and architectural window films
are sourced from five suppliers. Approximately 75% of the Company’s inventory purchases in the year
ended December 31, 2020 were sourced from one of these suppliers, entrotech inc., which we refer to as
the primary supplier.
Through our Amended and Restated Supply Agreement, which we refer to as the Supply Agreement,
that was renewed with our primary supplier in March 2020, we have exclusive rights to commercialize,
market, distribute and sell its automotive aftermarket products through March 21, 2022, at which time the
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 primary supplier, with a yearly
minimum purchasing requirement of $20,000,000. Under the terms of the Supply Agreement, the primary
supplier has retained all of the rights to its technology and products relating to protective films subject to
the Company’s exclusive right to commercialize, market, distribute and sell products manufactured by the
primary supplier to the automotive aftermarket including to new car dealerships.
The primary supplier manufactures paint protection film products according to mutually agreed-upon
specifications, quality assurance programs and other standards that are mutually established. We
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consider our relations with the primary supplier to be good, but the loss of our relationship with the
primary supplier could result in the delay of the manufacture and delivery of some of our automotive film
products. For more information, see Part I, Item 1A—Risk Factors—A material disruption from our primary
supplier could cause us to be unable to meet customer demands or increase our costs.
Film Conversion Process
The Company receives its surface and paint protection, automotive window film and architectural
window film in a variety of roll forms, including short and master roll format. For some of the Company’s
products, the Company engages in a variety of conversion activities in its facilities in San Antonio, Texas
and in other locations. Depending on the product and the format in which it was received, conversion
activities may include: inspection, slitting, rewinding or boxing. Additionally, for some of the Company’s
products, including pre-cut film products, the Company performs further conversion which includes cutting
film into specific shapes using computer aided cutting equipment.
Government Regulation and Legislation
The manufacturing, packaging, storage, distribution, advertising and labeling of our products and our
business operations all must comply with extensive federal, state and foreign laws and regulations and
consumer protection laws. Governmental regulations also affect taxes and levies, capital markets,
healthcare costs, energy usage, international trade, immigration and other labor issues, all of which may
have a direct or indirect negative effect on our business and our customers’ and suppliers’ businesses.
We are also required to comply with certain federal, state and local laws and regulations and industry self-
regulatory codes concerning privacy and date security. These laws and regulations require us to provide
customers with our policies on sharing information with third parties, and advance notice of any changes
to these policies. Related laws may govern the manner in which we store or transfer sensitive information,
or impose obligations on us in the event of a security breach or inadvertent disclosure of such information.
International jurisdictions impose different, and sometimes more stringent, consumer and privacy
protections.
Our products are subject to export controls, including the U.S. Department of Commerce’s Export
Administration Regulations and economic and trade sanctions regulations administered by the U.S.
Treasury Department’s Office of Foreign Asset Controls, and similar laws that apply in other jurisdictions
in which we distribute or sell our products. Export control and economic sanctions laws include
prohibitions on the sale or supply of certain products and services to certain embargoed or sanctioned
countries, regions, governments, persons and entities. In addition, various countries regulate the import of
certain products, through import permitting and licensing requirements, as well as customs, duties and
similar charges, and have enacted laws that could limit our ability to distribute our products. The
exportation, re-exportation, and importation of our products, including by our distributors, must comply
with these laws or else we may be adversely affected, through reputational harm, government
investigations, penalties, and a denial or curtailment of our ability to export our products. Complying with
export control and sanctions laws for a particular sale may be time consuming and may result in the delay
or loss of sales opportunities. If we are found to be in violation of U.S. sanctions or export control laws, it
could result in substantial fines and penalties for us and for the individuals working for us. Changes in
export, sanctions or import laws, may delay the introduction and sale of our product in international
markets, or, in some cases, prevent the export or import of our products to certain countries, regions,
governments, persons or entities altogether, which could adversely affect our business, financial condition
and operating results.
We are also subject to various domestic and international anti-corruption laws, such as the U.S.
Foreign Corrupt Practices Act and the U.K. Bribery Act, as well as other similar anti-bribery and anti-
kickback laws and regulations. These laws and regulations generally prohibit companies and their
intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or
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retaining business. Our exposure for violating these laws would increase to the extent our international
presence expands and as we increase sales and operations in foreign jurisdictions.
Proposed or new legislation and regulations could also significantly affect our business. For example,
the European General Data Protection Regulation, or “GDPR”, took effect in May 2018 and applies to all
of our products and services used by people in Europe. The GDPR includes operational requirements for
companies that receive or process personal data of residents of the European Union that are different
from those previously in place in the European Union. In addition, the GDPR requires submission of
breach notifications to our designated European privacy regulator and includes significant penalties for
non-compliance with the notification obligation as well as other requirements of the regulation. The
California Consumer Privacy Act, or AB 375, was also recently passed and creates new data privacy
rights for users, effective in 2020. Similarly, there are a number of legislative proposals in the European
Union, the United States, at both the federal and state level, as well as other jurisdictions that could
impose new obligations in areas affecting our business. In addition, some countries are considering or
have passed legislation implementing data protection requirements or requiring local storage and
processing of data or similar requirements that could increase the cost and complexity of delivering our
services.
Environmental Matters
We are subject to a variety of federal, state, local and foreign environmental, health and safety laws
and regulations governing, among other things, the generation, storage, handling, use and transportation
of hazardous materials; the emission and discharge of hazardous materials into the environment; and the
health and safety of our employees. We have incurred and expect to continue to incur costs to maintain or
achieve compliance with environmental, health and safety laws and regulations. To date, these costs
have not been material to the Company.
Intellectual Property
We regard some of the features of our DAP software, our brands and marketing message, and our
documentation as proprietary and rely on copyright, patent, trademark and service mark laws and trade
secret protection, such as confidentiality procedures, contractual arrangements, non-disclosure
agreements and other measures to protect our proprietary information. Our intellectual property is an
important and valuable asset that enables us to gain recognition for our products, services, and DAP
software and enhance our competitive position and market value.
We have obtained United States copyright registrations for our DAP software applications and also
have two patents in the United States related to our DAP software.
We also have trademarks registrations in the United States and other countries.
XPEL®, XPEL & DESIGN®, XPEL ULTIMATE®, XPEL STEALTH®, PELTI®, PROTEX®,
TRACWRAP®, FUSION®, XPEL FUSION®, XPEL FUSION PLUS®, XPELLUXPLUS®, PROTEX
(STYLIZED)®, ARES®, ASP®, ZEUS®, MPD®, LUX®, PROTECTION EXPERTS AND DESIGN® are
registered trademarks of the Company.
XPEL™, XPEL ULTIMATE PLUS™, XPEL RX™, XPEL ARMOR™, XPEL PRIME XR™, XPEL
PRIME XR PLUS™, XPEL PRIME CS™, PRIME X-SERIES™, PRIME AP™, PRIME GL™, PRIME
SD™, LUX PLUS™, LUX-M™, F8000 Film™ and F9300 Film™ are trademarks of the Company.
Human Capital Resources
On December 31, 2020, the Company employed approximately 330 people (full-time equivalents),
with approximately 195 employed in the United States and 135 employed internationally. We believe that
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the ability to recruit, retain, develop, protect and fairly compensate our global workforce greatly
contributes to the Company’s success.
Compensation and Benefits
In addition to a professional work environment that promotes innovation and rewards performance,
the Company’s total compensation for employees includes a variety of components that support
sustainable employment and the ability to build a strong financial future, including competitive market-
based pay and comprehensive benefits. In addition to earning a base salary, eligible employees are
compensated for their contributions to the Company’s goals with short-term cash incentives. Through its
global pay philosophy, principles and consistent implementation, the Company is committed to providing
fair and equitable pay for employees. Eligible full-time employees in the United States also have access
to medical, dental and vision plans, savings plans and other resources. Programs and benefits differ
internationally for a variety of reasons, such as local legal requirements, market practices and
negotiations with work councils, trade unions and other employee representative bodies.
Available Information
XPEL was incorporated in Nevada in 2003. Our street address is 618 W. Sunset Road, San Antonio,
Texas 78216 and our phone number is (210) 678-3700. The address of our website is www.xpel.com. The
inclusion of the Company’s website address in this Annual Report does not include or incorporate by
reference the information on or accessible through the Company’s website, and the information contained
on or accessible through the website should not be considered as part of this Annual Report.
The Company will make its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and other reports (and amendments to those reports) filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act,
available on the Company’s website as soon as reasonably practicable after the Company electronically
files or furnishes such materials with the Securities and Exchange Commission (“SEC”). Interested
persons can view such materials without charge under the “Investor Relations” section and then by
clicking “Corporate Filings / Financial Results” on the Company’s web site. The SEC also maintains a
website at www.sec.gov that contains reports, proxy statements and other information about SEC
registrants, including XPEL.
XPEL, Inc. is an “emerging growth company” within the meaning of Rule 12b-2 under the Securities
Exchange Act.
Item 1A. Risk Factors
This Annual Report contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-looking statements as a result
of certain factors, including the risks we face as described below and elsewhere in this Annual Report.
See “Cautionary Notice Regarding Forward-Looking Statements.”
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Operational Risks
A material disruption from the primary supplier could cause us to be unable to meet customer
demands or increase our costs.
Pursuant to an Amended and Restated Supply Agreement, dated as of March 21, 2017 and renewed
in March 2020 for an additional two year period, between us and our primary supplier, which we refer to
as the Supply Agreement, we have engaged the primary supplier to act as the primary source of our
automotive paint protection film products. During the year ended December 31, 2020, approximately 75%
of our annual inventory purchases were purchased from the primary supplier.
Any failure by the primary supplier to perform its obligations under the Supply Agreement, including a
failure to provide sufficient supply of our products to satisfy customer demand, could have a material
adverse effect on our revenue, operating results and operating cash flows.
Additionally, if our relationship with the primary supplier were to terminate or if operations at its
manufacturing facility were to be disrupted as a result of COVID-19, significant equipment failures, natural
disasters, earthquakes, power outages, fires, explosions, terrorism, adverse weather conditions, labor
disputes or other reasons, we may be unable to fill customer orders or otherwise meet customer demand
for our products, and such disruption could increase our costs and reduce our sales, any of which could
have a material adverse effect our business, financial condition, results of operations and cash flows.
We rely on one distributor of our products and services in China. The loss of this relationship, or a
material disruption in sales by this distributor, could severely harm our business.
The Company distributes all of its products in China through one distributor, with sales to such
distributor representing 20.6% of our consolidated revenue for the year ended December 31, 2020. The
China Distributor places orders with us on a prepaid basis at a price set by us, which we may change with
30 days’ notice. The China Distributor then generates orders, sells and distributes our products to its end
customers in China.
Any failure by the China Distributor to perform its obligations, including a failure to procure sufficient
orders of our products to satisfy customer demand or a failure to adequately market our products, could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Because of our dependence on the China Distributor, any loss of our relationship or any adverse
change in the financial health of such distributor that would affect its ability to distribute our products may
have a material adverse effect on our business, financial condition, results of operations and cash flows.
A significant percentage of our revenue is generated from our business in China, a market that is
associated with certain risks.
Maintaining a strong position in the Chinese market is a key component of our global growth strategy.
During the year ended December 31, 2020, approximately 20.6% of our consolidated revenue was
generated in China, more than any other country outside of the U.S. in which we operate, and we expect
such portion will increase with the expansion of our business in China. However, there are risks generally
associated with doing business in China, including:
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Significant political and economic uncertainties
Historically, the Chinese government has exerted substantial influence over the business activities of
private companies. Under its current leadership, the Chinese government has been pursuing economic
reform policies that encourage private economic activity and greater economic decentralization. There is
no assurance, however, that the Chinese government will continue to pursue these policies, or that it will
not significantly alter these policies from time to time without notice. Furthermore, the Chinese
government continues to exercise significant control over the Chinese economy through regulation and
state ownership. Changes in China’s laws, regulations or policies, including those affecting taxation,
currency, imports, or the nationalization of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Furthermore, government actions in the future
could have a significant effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese properties.
Trade policy
In 2018, the U.S. government took the stance that China was engaged in unfair trade practices, and
instituted a series of tariffs and other trade barriers on China in response. Though the U.S. and China
reached a phase one agreement in January 2020, tension persists between the two countries, and with
the recent change in U.S. administration, the future of U.S. and Chinese trade relations is uncertain. If
the current agreement is abandoned, changed or violated by either party, we could be forced to increase
the sales price of our products, reduce margins, or otherwise suffer from trade restrictions or changes in
policy levied by the U.S. or Chinese governments, any of which may have a material adverse effect on
our business.
Limited recourse in China
While the Chinese government has enacted a legal regime surrounding corporate governance and
trade, its history of implementing such laws and regulations is limited. It is unclear how successful any
attempt to enforce commercial claims or resolve commercial disputes will be. The resolution of any such
dispute may be subject to the exercise of considerable discretion by the Chinese government and its
agencies and forces unrelated to the legal merits of a particular matter or dispute may influence their
determination.
Additionally, any rights we may have to specific performance, or to seek an injunction under China
law are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may
be unable to prevent these situations from occurring. The occurrence of any such events could have a
material adverse effect on our business, financial condition and results of operations.
Uncertain interpretation of law
There are substantial uncertainties regarding the interpretation and application of the laws and
regulations in the greater China area, including, but not limited to, the laws and regulations governing our
business. China’s laws and regulations are frequently subject to change due to rapid economic and social
development and many of them were newly enacted within the last ten years. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future businesses may also be
applied retroactively.
The Chinese government has broad discretion in dealing with violations of laws and regulations,
including levying fines, revoking business permits and other licenses and requiring actions necessary for
compliance. In particular, licenses and permits issued or granted to our Company by relevant
governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the
effect of the interpretation of existing or new Chinese laws or regulations on our businesses. We cannot
15
assure you that our current ownership and operating structure would not be found to be in violation of any
current or future Chinese laws or regulations. As a result, we may be subject to sanctions, including fines,
and could be required to restructure our operations or cease to provide certain services. In addition, any
litigation in China may be protracted and result in substantial costs and diversion of resources and
management attention. Any of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations, which could materially and
adversely affect our business, financial condition and results of operations.
The loss of one or more of our key personnel, or our failure to attract and retain other highly
qualified personnel in the future, could harm our business.
We currently depend on the continued services and performance of our executive officers, Ryan L.
Pape, our President and Chief Executive Officer, and Barry R. Wood, our Senior Vice President and Chief
Financial Officer, neither of whom has an employment agreement. Loss of key personnel, including
members of management as well as key product development, marketing, and sales personnel, could
disrupt our operations and have an adverse effect on our business. As we continue to grow, we cannot
guarantee that we will continue to attract the personnel we need to maintain our competitive position. As
we grow, the incentives to attract, retain, and motivate employees may not be as effective as in the past. If
we do not succeed in attracting, hiring, and integrating effective personnel, or retaining and motivating
existing personnel, our business could be adversely affected.
The preparation of our financial statements will involve the use of estimates, judgments and
assumptions, and our financial statements may be materially affected if such estimates,
judgments and assumptions prove to be inaccurate.
Financial statements prepared in accordance with United States Generally Accepted Accounting
Principles (“U.S. GAAP”) require the use of estimates, judgments and assumptions that affect the
reported amounts. Different estimates, judgments and assumptions reasonably could be used that would
have a material effect on the consolidated financial statements, and changes in these estimates,
judgments and assumptions are likely to occur from period to period in the future. Significant areas of
accounting requiring the application of management’s judgment include, but are not limited to,
determining the fair value of our assets and the timing and amount of cash flows from our assets. These
estimates, judgments and assumptions are inherently uncertain and, if they prove to be wrong, we face
the risk that charges to income will be required. Any such charges could significantly harm our business,
financial condition, results of operations and the price of our securities. Estimates and assumptions are
made on an ongoing basis for the following: revenue recognition, capitalization of software development
costs, impairment of long-lived assets, inventory reserves, allowances for doubtful accounts, fair value for
business combinations, and impairment of goodwill.
If we fail to maintain an effective system of internal control over financial reporting, we may not be
able to accurately report our financial results or prevent fraud. As a result, stockholders could
lose confidence in our financial and other public reporting, which would likely negatively affect
our business and the market price of our Common Stock.
Effective internal control over financial reporting is necessary for us to provide reliable financial
reports and prevent fraud. Any failure to implement required new or improved controls, or difficulties
encountered in their implementation could cause us to fail to meet our reporting obligations. In addition,
any testing conducted by us, or any testing conducted by our independent registered public accounting
firm may reveal deficiencies in our internal control over financial reporting that are deemed to be material
weaknesses or that may require prospective or retroactive changes to our consolidated financial
statements or identify other areas for further attention or improvement. Inferior internal controls could also
cause investors to lose confidence in our reported financial information, which is likely to negatively affect
our business and the market price of our Common Stock.
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We will be required to disclose changes made in our internal controls and procedures on a quarterly
basis and our management will be required to assess the effectiveness of these controls annually.
However, for as long as we are an “emerging growth company” under the JOBS Act, our independent
registered public accounting firm will not be required to attest to the effectiveness of our internal control
over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-
Oxley Act”). We could be an “emerging growth company” for up to five years. An independent assessment
of the effectiveness of our internal controls could detect problems that our management’s assessment
might not. Undetected material weaknesses in our internal controls could lead to financial statement
restatements and require us to incur the expense of remediation.
Risks Related to Our Business and Industry
The after-market automotive product supply business is highly competitive. Competition presents
an ongoing threat to the success of our Company.
We face significant competition from a number of companies, many of whom have greater financial,
marketing and technical resources than us, as well as regional and local companies and lower-cost
manufacturers of automotive and other products. Such competition may result in pressure on our profit
margins and limit our ability to maintain or increase the market share of our products.
Additionally, as we introduce new products and as our existing products evolve, or as other
companies introduce new products and services, we may become subject to additional competition. Our
principal competitors have significantly greater resources than we do. This may allow our competitors to
respond more effectively than we can to new or emerging technologies and changes in market
requirements. Our competitors may also develop products, features, or services that are similar to ours or
that achieve greater market acceptance, may undertake more far-reaching and successful product
development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Certain
competitors could use strong or dominant positions in one or more markets to gain a competitive
advantage against us.
We believe that our ability to compete effectively depends upon many factors both within and beyond
our control, including:
•
•
•
the usefulness, ease of use, performance, and reliability of our products compared to our
competitors;
the timing and market acceptance of products, including developments and enhancements to our
products or our competitors’ products;
customer service and support efforts;
• marketing and selling efforts;
•
•
•
•
•
•
our financial condition and results of operations;
acquisitions or consolidation within our industry, which may result in more formidable competitors;
our ability to attract, retain, and motivate talented employees;
our ability to cost-effectively manage and grow our operations;
our ability to meet the demands of local markets in high-growth emerging markets, including
some in which we have limited experience; and
our reputation and brand strength relative to that of our competitors.
If we are unable to differentiate or successfully adapt our products, services and solutions from
competitors, or if we decide to cut prices or to incur additional costs to remain competitive, it could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
17
We are highly dependent on the automotive industry. A prolonged or material contraction in
automotive sales and production volumes could adversely affect our business, results of
operations and financial condition.
Automotive sales and production are cyclical and depend on, among other things, general economic
conditions consumer spending, vehicle demand and preferences (which can be affected by a number of
factors, including fuel costs, employment levels and the availability of consumer financing). As the volume
of automotive production and the mix of vehicles produced fluctuate, the demand for our products may
also fluctuate. Prolonged or material contraction in automotive sales and production volumes, or
significant changes in the mix of vehicles produced, could cause our customers to reduce purchases of
our products and services, which could adversely affect our business, results of operations and financial
condition.
Recently, some automotive manufacturers announced that they were experiencing a global
semiconductor shortage which has affected production of vehicles. To the extent that this shortage
persists, it could have a material adverse effect on our business, financial conditions and results of
operations.
Harm to our reputation or the reputation of one or more of our products could have an adverse
effect on our business.
We believe that maintaining and developing the reputation of our products is critical to our success
and that the importance of brand recognition for our products increases as competitors offer products
similar to our products. We devote significant time and incur substantial marketing and promotional
expenditures to create and maintain brand loyalty as well as increase brand awareness of our products.
Adverse publicity about us or our brands, including product safety or quality or similar concerns, whether
real or perceived, could harm our image or that of our brands and result in an adverse effect on our
business, as well as require resources to rebuild our reputation.
Our revenue and operating results may fluctuate, which may make our results difficult to predict
and could cause our results to fall short of expectations.
As a result of the rapidly changing nature of the markets in which we compete, our quarterly and
annual revenue and operating results may fluctuate from period to period. These fluctuations may be
caused by a number of factors, many of which are beyond our control. For example, changes in industry
or third-party specifications may alter our development timelines and consequently our ability to deliver
and monetize new or updated products and services. Other factors that may cause fluctuations in our
revenue and operation results include but are not limited to:
•
•
•
•
•
any failure to maintain strong customer relationships;
any failure of significant customers, including distributors, to renew their agreements with us;
variations in the demand for our services and products and the use cycles of our services and
products by our customers;
changes in our pricing policies or those of our competitors; and
general economic, industry and market conditions and those conditions specific to our business.
For these reasons and because the market for our services and products is relatively new and rapidly
changing, it is difficult to predict our future financial results.
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If the model of selling vehicles through dealerships in North America changes dramatically, our
revenue could be impacted.
Generally, most vehicles in North America are sold through franchised new car dealerships. These
dealerships have a strong profit motive and are historically very good at selling accessories and other
products. Going forward, if the dealership model were to change in the form of fewer franchised
dealerships, or the possibility of manufacturer owned distribution, the prospects in this channel may
diminish. Manufacturer-owned sales of new cars might become harder to penetrate or more streamlined
with fewer opportunities to sell accessories. This would make us more reliant on our independent
installer, retail-oriented channel, which requires more work to create consumer awareness.
If ride-sharing or alternate forms of vehicle ownership gain in popularity, our revenue could be
impacted.
If ride-sharing or alternate forms of vehicle ownership including rental, ride-sharing, or peer-to-peer
car sharing gain in popularity, consumers may own fewer vehicles per household, which would reduce our
revenue. More vehicles entering a ride-sharing or car-sharing fleet could have an uncertain impact on our
revenue as consumers are more or less interested in accessorizing vehicles they own that are in the ride-
sharing fleet.
Environmental regulation, changing fuel-economy standards and/or the drive toward electric
vehicles could impact our revenue.
Many manufacturers have announced plans to transition from internal-combustion engines into
electric vehicle platforms over the coming years. There is no assurance that consumers will respond
positively to this fundamental shift in the auto industry, should it occur. If the change results in vehicles
that are more utilitarian or otherwise less interesting to a large portion of our customers who are
automotive enthusiasts, our revenue could be impacted.
Technology could render the need for some of our products obsolete.
We derive the majority of our revenue from surface and paint protection films, with the majority of
products applied on painted surfaces of vehicles. If automotive paint technology were to improve
substantially, such that newer paint did not chip, scratch or was generally not as susceptible to damage,
our revenue could be impacted.
Similarly, our automotive and architectural window films could be impacted by changes or
enhancements from automotive manufacturers or window manufacturers that would reduce the need for
our products.
Strategic Risks
If changes to our existing products or introduction of new products or services do not meet our
customers’ expectations or fail to generate revenue, we could lose our customers or fail to
generate any revenue from such products or services and our business may be harmed.
We may introduce significant changes to our existing products or develop and introduce new and
unproven products or services, including using products with which we have little or no prior development
or operating experience. The trend of the automotive industry towards autonomous vehicles and car- and
ride-sharing services may result in a rapid increase of new and untested products in the aftermarket
automotive industry. If new or enhanced products fail to attract or retain customers or to generate
sufficient revenue, operating margin, or other value to justify certain investments, our business may be
adversely affected. If we are not successful with new approaches to monetization, we may not be able to
maintain or grow our revenue as anticipated or recover any associated development costs.
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We depend on our relationships with independent installers and new car dealerships and their
ability to sell and service our products. Any disruption in these relationships could harm our
sales.
The largest portion of our products are distributed through independent installers and new car
dealerships. We do not have direct control over the management or the business of these independent
installers and new car dealerships, except indirectly through terms as negotiated with us. Should the
terms of doing business with them change, our business may be disrupted, which could have an adverse
effect on our business, financial condition and results of operations.
Because some of our independent installer and new car dealership customers also may offer our
competitors’ products, our competitors may incent such customers to favor their products. We do not have
long-term contracts with a majority of the independent installers and new car dealerships, and these
customers are not obligated to purchase specified amounts of our products but instead buy from us on a
purchase order basis. Consequently, the independent installers and new car dealerships may terminate
their relationships with us or materially reduce their purchases of our products with little or no notice. If we
were to lose any significant independent installers or new car dealerships, for any reason, including if an
independent installer and new car dealership acquired or were acquired by a competitor such that they
became a direct competitor, then we would need to obtain one or more new independent installers or new
car dealerships to cover the particular location or product line, which may not be possible on favorable
terms or at all.
We may not be able to identify, finance and complete suitable acquisitions and investments, and
any completed acquisitions and investments could be unsuccessful or consume significant
resources.
Our business strategy is expected to include acquiring businesses and making investments that
complement our existing business. We expect to analyze and evaluate the acquisition of strategic
businesses or product lines with the potential to strengthen our industry position or enhance our existing
set of product and service offerings. We may not be able to identify suitable acquisition candidates, obtain
financing or have sufficient cash necessary for acquisitions or successfully complete acquisitions in the
future. Acquisitions and investments may involve significant cash expenditures, debt issuance, equity
issuance, operating losses and expenses. Acquisitions involve numerous other risks, including:
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diversion of management time and attention from daily operations;
difficulties integrating acquired businesses, technologies and personnel into our business;
difficulties in obtaining and verifying the financial statements and other business information of
acquired businesses;
inability to obtain required regulatory approvals;
potential loss of key employees, key contractual relationships or key customers of acquired
companies or of ours;
assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and
dilution of interests of holders of our common stock through the issuance of equity securities or
equity-linked securities.
If we are unable to maintain our network of sales and distribution channels, it could adversely
affect our net sales, profitability and the implementation of our growth strategy.
Our ability to continue to grow our business depends on our ability to maintain effective sales and
distribution channels in each of the markets in which we operate. We make use of a variety of distribution
channels, including independent installers, new car dealerships, distributors and franchisees. We believe
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that this network of distribution channels enables us to efficiently reach consumers at a variety of points of
sale. If we are not able to maintain our sales and distribution channels, we could experience a decline in
sales, as well as reduced market share, as consumers may decide to purchase competing products that
are more easily obtainable. The failure to deliver our products in accordance with our delivery schedules
could harm our relationships with independent installers and new car dealerships, distributors and
franchisees, which could adversely affect our net sales, profitability and the implementation of our growth
strategy.
If we are unable to retain and acquire new customers, our financial performance may be materially
and adversely affected.
Our financial performance and operations are dependent on retaining our current customers and
acquiring new customers. A number of factors could negatively affect our customer retention or
acquisition. For example, potential customers may request products or services that we currently do not
provide and may be unwilling to wait until we can develop or source such additional features.
Other factors that affect our ability to retain or acquire new customers include customers’ increasing
use of competing products or services, our failure to develop and introduce new and improved products
or new products or services not achieving a high level of market acceptance, changes in customer
preference or customer sentiment about the quality or usefulness of our products and services, including
customer service, consolidation or vertical integration of our customers, adverse changes in our products
mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees, and
technical or other problems preventing us from delivering our products in a rapid and reliable manner.
If we are unable to retain and acquire new customers, our financial performance may be materially
and adversely affected.
We are exposed to political, regulatory, economic and other risks that arise from operating a
multinational business.
Sales outside of the U.S. for the year ended December 31, 2020 accounted for approximately 53% of
our consolidated revenue. Accordingly, our business is subject to the political, regulatory, economic and
other risks that are inherent in operating in numerous countries. These risks include:
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changes in general economic and political conditions in countries where we operate, particularly
in emerging markets;
relatively more severe economic conditions in some international markets than in the U.S.;
the difficulty of enforcing agreements and collecting receivables through non-U.S. legal systems;
the difficulty of communicating and monitoring standards and directives across our global
facilities;
the imposition of trade protection measures and import or export licensing requirements,
restrictions, tariffs or exchange controls;
the possibility of terrorist action affecting us or our operations;
the threat of nationalization and expropriation;
difficulty in staffing and managing widespread operations in non-U.S. labor markets;
changes in tax treaties, laws or rulings that could have a material adverse impact on our effective
tax rate;
limitations on repatriation of earnings;
the difficulty of protecting intellectual property in non-U.S. countries; and
changes in and required compliance with a variety of non-U.S. laws and regulations.
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Our success depends in part on our ability to anticipate and effectively manage these and other risks.
We cannot assure you that these and other factors will not have a material adverse effect on our
international operations or on our business as a whole.
Volatility in currency exchange rates could have a material adverse effect on our financial
condition, results of operations and cash flows.
Our financial statements reflect translation of items denominated in non-U.S. currencies to U.S.
dollars. Therefore, if the U.S. dollar strengthens in relation to the principal non-U.S. currencies from which
we derive revenue as compared to a prior period, our U.S. dollar-reported revenue and income will
effectively be decreased to the extent of the change in currency valuations and vice-versa. Fluctuations in
foreign currency exchange rates, most notably the strengthening of the U.S. dollar against other various
foreign currencies in markets where we operate, could continue to have a material adverse effect on our
reported revenue in future periods. In addition, currency variations could have a material adverse effect
on margins on sales of our products in countries outside of the U.S.
If we fail to manage our growth effectively, our business, financial condition and results of
operations may suffer.
We have experienced rapid growth over the last several years and we believe we will continue to
grow at a rapid pace. This growth has put significant demands on our processes, systems and personnel.
We have made and we expect to make further investments in additional personnel, systems and internal
control processes to help manage our growth. In addition, we have sought to, and may continue to seek
to grow through strategic acquisitions. Our growth strategy may place significant demands on our
management and our operational and financial infrastructure. Our ability to manage our growth effectively
and to integrate new technologies and acquisitions into our existing business will require us to continue to
expand our operational, financial and management information systems and to continue to retain, attract,
train, motivate and manage key employees. Growth could strain our ability to develop and improve our
operational, financial and management controls, enhance our reporting systems and procedures, recruit,
train and retain highly skilled personnel, maintain our quality standards; and maintain our customer
satisfaction.
Managing our growth will require significant expenditures and allocation of valuable management
resources. If we fail to achieve the necessary level of efficiency in our organization as it grows or if we are
unable to successfully manage and support our rapid growth and the challenges and difficulties
associated with managing a larger, more complex business, this could cause a material adverse effect on
our business, financial position and results of operations, and the market value of our shares could
decline.
Legal, Regulatory and Compliance Risks
The Company may incur material losses and costs as a result of product liability and warranty
claims.
The Company faces an inherent risk of exposure to product liability claims if the use of its products
results, or is alleged to result, in personal injury and/or property damage. If the Company manufactures a
defective product, it may experience material product liability losses. Whether or not its products are
defective, the Company may incur significant costs to defend product liability claims. It also could incur
significant costs in correcting any defects, lose sales and suffer damage to its reputation. Product liability
insurance coverage may not be adequate for the liabilities and may not continue to be available on
acceptable terms.
The Company is also subject to product warranty claims in the ordinary course of business. If the
Company sells poor-quality products or uses defective materials, the Company may incur unforeseen
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costs in excess of what it has reserved in its financial statements. These costs could have a material
adverse effect on the Company’s business, financial condition, operating cash flows and ability to make
required debt payments.
We sell our products under limited warranties. We have established a liability reserve under these
warranties based on a review of historical warranty claims. Our liability for warranties as of the year ended
December 31, 2020 was $52,006. The warranty reserve may not be sufficient to cover the costs
associated with future warranty claims. A significant increase in these costs could adversely affect the
Company’s operating results for future periods in which these additional costs materialize. Warranty
reserves may need to be adjusted from time to time in the future if actual warranty claim experience
differs from estimates. Any of the foregoing matters could have a material adverse effect on the
Company’s business, financial condition, operating cash flows and ability to make required debt
payments.
We are an “emerging growth company,” and we cannot be certain if the reduced SEC reporting
requirements applicable to emerging growth companies will make our Common Stock less
attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging
growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total
annual revenue is $1.07 billion, (ii) the last day of the fiscal year following the fifth anniversary of the date
of the first sale of common equity securities pursuant to an effective registration statement, (iii) the date
on which we have, during the previous three-year period, issued more than $1 billion in non-convertible
debt securities and (iv) the date on which we are deemed to be a “large accelerated filer” under the
Securities Exchange Act. We intend to take advantage of exemptions from various reporting requirements
that are applicable to most other public companies, whether or not they are classified as “emerging
growth companies,” including, an exemption from the provisions of Section 404(b) of the Sarbanes-Oxley
Act requiring that our independent registered public accounting firm provide an attestation report on the
effectiveness of our internal control over financial reporting and reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements and exemptions from the
requirements of holding a non-binding advisory vote on executive compensation and stockholder approval
of any golden parachute payments not previously approved.
If some investors find our Common Stock less attractive because we intend to rely on certain of these
exemptions and benefits under the JOBS Act, there may be a less active, liquid or orderly trading market
for our Common Stock and the market price and trading volume of our Common Stock may be more
volatile and decline significantly.
Violations of the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the
U.S. could have a material adverse effect on us.
The Foreign Corrupt Practices Act, or FCPA, and similar anti-corruption laws in other jurisdictions
generally prohibit companies and their intermediaries from making improper payments to government
officials or other persons for the purpose of obtaining or retaining business. Recent years have seen a
substantial increase in anti-bribery law enforcement activity, with more frequent and aggressive
investigations and enforcement proceedings by both the U.S. Department of Justice and the SEC,
increased enforcement activity by non-U.S. regulators and increases in criminal and civil proceedings
brought against companies and individuals. Our policies mandate compliance with these anti-bribery
laws. We operate in many parts of the world that are recognized as having governmental and commercial
corruption and in certain circumstances, strict compliance with anti-bribery laws may conflict with local
customs and practices. We cannot assure you that our internal control policies and procedures will always
protect us from reckless or criminal acts committed by our employees or third-party intermediaries. In the
event that we believe or have reason to believe that our employees or agents have or may have violated
applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside
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counsel investigate the relevant facts and circumstances, which can be expensive and require significant
time and attention from senior management. Violations of these laws may require self-disclosure to
governmental agencies and result in criminal or civil sanctions, which could disrupt our business and
result in a material adverse effect on our reputation, business, financial condition, results of operations
and cash flows.
Our failure to satisfy international trade compliance regulations, and changes in U.S. government
sanctions, could have a material adverse effect on us.
Our global operations require importing and exporting goods and technology across international
borders on a regular basis. Our policy mandates strict compliance with U.S. and non-U.S. trade laws
applicable to our products. Nonetheless, our policies and procedures may not always protect us from
actions that would violate U.S. or non-U.S. laws. Any improper actions could subject us to civil or criminal
penalties, including material monetary fines, or other adverse actions including denial of import or export
privileges, and could damage our reputation and business prospects.
Changes in U.S. administrative policy, including changes to existing trade agreements and any
resulting changes in international relations, could adversely affect our financial performance.
As a result of changes to U.S. administrative policy, among other possible changes, there may be (i)
changes to existing trade agreements; (ii) greater restrictions on free trade generally; and (iii) significant
increases in tariffs on goods imported into the United States. The United States, Mexico and Canada
signed the United States-Mexico-Canada Agreement ("U.S.MCA"), the successor agreement to the North
American Free Trade Agreement ("NAFTA"). The U.S.MCA became effective on July 1, 2020. On January
15, 2020, the United States signed the "Phase 1" trade agreement with China. It remains unclear what the
U.S. administration or foreign governments, including China, will or will not do with respect to tariffs, the
U.S.MCA or other international trade agreements and policies. A trade war, other governmental action
related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and
economic conditions or in laws and policies governing foreign trade, manufacturing, development and
investment in the territories and countries where we currently manufacture and sell products or any
resulting negative sentiments towards the United States could adversely affect our business, financial
condition, operating results and cash flows.
Changes in the United Kingdom's economic and other relationships with the European Union
could adversely affect us.
On January 31, 2020, the United Kingdom withdrew from the European Union. Pursuant to the
Withdrawal Agreement Bill, the United Kingdom remained in the European Union's free market and
customs union until December 31, 2020. After sometimes bitter negotiations, the two sides agreed to a
new trade deal on December 24, 2020. The new deal contains new rules for how the United Kingdom
and European Union will live, work and trade together. On January 1, 2021, the United Kingdom formally
withdrew from the European Union.
We have significant operations in both the European Union and the United Kingdom. In the year
ended December 31, 2020, our European Union (excluding the United Kingdom) and United Kingdom
sales totaled $12,772,441 and $4,716,531, respectively. Expressed as a percentage of total consolidated
revenue for the year ended December 31, 2020, these figures represented 8.0% and 3.0%, respectively.
If modifications to existing terms of the agreement between the United Kingdom and the European Union
were to occur, the changes could negatively impact our competitive position, supplier and customer
relationships and financial performance.
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Intellectual property challenges may hinder our ability to develop and market our products, and
we may incur significant costs in our efforts to successfully avoid, manage, defend and litigate
intellectual property matters.
Proprietary technologies, customer relationships, trademarks, trade names and brand names are
important to our business. Intellectual property protection, however, may not preclude competitors from
developing products similar to ours or from challenging our names or products. Further, as we expand on
a multi-national level and in some jurisdictions where the protection of intellectual property rights is less
robust, the risk of competitors duplicating our proprietary technologies increases. We may need to spend
significant resources monitoring our intellectual property rights, and we may or may not be able to detect
infringement by third parties. Assertions by or against us relating to intellectual property rights, and any
inability to protect these rights, could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
We may face design limitations or liability associated with the use of products for which patent
ownership or other intellectual property rights are claimed.
From time to time we are subject to claims or inquiries regarding alleged unauthorized use of a third
party’s intellectual property and cannot be certain that the conduct of our business does not and will not
infringe the intellectual property rights of others. An adverse outcome in any intellectual property litigation
could subject us to significant liabilities to third parties, require us to license technology or other
intellectual property rights from others, require us to comply with injunctions to cease marketing or using
certain products or brands, or require us to redesign, re-engineer, or re-brand certain products or
packaging, any of which could affect our business, financial condition and operating results. Third-party
intellectual property rights may also make it more difficult or expensive for us to meet market demand for
particular product or design innovations. If we are required to seek licenses under patents or other
intellectual property rights of others, we may not be able to acquire these licenses on acceptable terms, if
at all. In addition, the cost of responding to an intellectual property infringement claim, in terms of legal
fees and expenses and the diversion of management resources, whether or not the claim is valid, could
have a material adverse effect on our business, results of operations and financial condition.
Failure, inadequacy, or breach of our information technology systems, infrastructure, and
business information or violations of data protection laws could result in material harm to our
business and reputation.
A great deal of confidential information owned by us is stored in our information systems, networks,
and facilities or those of third parties. This includes valuable trade secrets and intellectual property,
corporate strategic plans, marketing plans, customer information, and personally identifiable information,
such as employee information (collectively, “confidential information”). We also rely to a large extent on
the efficient and uninterrupted operation of complex information technology systems, infrastructure, and
hardware (together “IT systems”), some of which are within our control and some of which are within the
control of third parties, to accumulate, process, store, and transmit large amounts of confidential
information and other data. We are subject to a variety of continuously evolving and developing laws and
regulations around the world related to privacy, data protection, and data security. Maintaining the
confidentiality, integrity and availability of our IT systems and confidential information is vital to our
business.
IT systems are vulnerable to system inadequacies, operating failures, service interruptions or failures,
security breaches, malicious intrusions, or cyber-attacks from a variety of sources. Cyber-attacks are
growing in their frequency, sophistication, and intensity, and are becoming increasingly difficult to detect,
mitigate, or prevent. Cyber-attacks come in many forms, including the deployment of harmful malware,
exploitation of vulnerabilities, denial-of-service attacks, the use of social engineering, and other means to
compromise the confidentiality, integrity and availability of our IT systems, confidential information, and
other data. Breaches resulting in the compromise, disruption, degradation, manipulation, loss, theft,
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destruction, or unauthorized disclosure or use of confidential information, or the unauthorized access to,
disruption of, or interference with our products and services, can occur in a variety of ways, including but
not limited to, negligent or wrongful conduct by employees or others with permitted access to our systems
and information, or wrongful conduct by hackers, competitors, certain governments, or other current or
former company personnel.
The failure or inadequacy of our IT systems, the compromise, disruption, degradation, manipulation,
loss, theft, destruction, or unauthorized disclosure or use of confidential information, or the unauthorized
access to, disruption of, or interference with our products and services that rely on IT systems, could
impair our ability to secure and maintain intellectual property rights; result in a product manufacturing
interruption or failure, or in the interruption or failure of products or services that rely on IT systems;
damage our operations, customer relationships, or reputation; and cause us to lose trade secrets or other
competitive advantages. Unauthorized disclosure of personally identifiable information could expose us to
significant sanctions for violations of data privacy laws and regulations around the world and could
damage public trust in our company. For example, the European Union adopted the GDPR in 2018. The
GDPR requires companies to meet new requirements regarding the handling of personal data, including
its use, protection and transfer and the ability of persons whose data is stored to correct or delete such
data about themselves. Failure to meet the GDPR requirements could result in penalties of up to 40% of
annual worldwide revenue. The GDPR also confers a private right of action on certain individuals and
associations. In addition, the state of California’s California Consumer Privacy Act (“CCPA”) became
effective in January 2020 and has similar requirements to GDPR.
To date, system inadequacies, operating failures, unauthorized access, service interruptions or
failures, security breaches, malicious intrusions, cyber-attacks, and the compromise, disruption,
degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential
information have not had a material impact on our consolidated results of operations. We continue to
implement measures in an effort to protect, detect, respond to, and minimize or prevent these risks and to
enhance the resiliency of our IT systems; however, these measures may not be successful. If they are not
successful, any of these events could result in material financial, legal, business, or reputational harm to
our business.
Liquidity Risks
We may seek to incur substantial indebtedness in the future.
Our business strategy may include incurring indebtedness in the future. If this occurs, our degree of
leverage could have important consequences for the holders of our Common Stock, including increasing
our vulnerability to general economic and industry conditions; requiring a substantial portion of cash flow
from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore
reducing our ability to use our cash flow to fund our operations, capital expenditures and future business
opportunities; restricting us from making strategic acquisitions or causing us to make non-strategic
divestitures, limiting our ability to obtain additional financing for working capital, capital expenditures,
product development, debt service requirements, acquisitions and general corporate or other purposes;
and limiting our ability to adjust to changing market conditions and placing us at a competitive
disadvantage compared to our competitors who are less highly leveraged. Any of the above
consequences could result in a material adverse effect on our business, financial condition and results of
operations.
We cannot be certain that additional financing will be available on reasonable terms when
required, or at all.
From time to time, we may need additional financing. Our ability to obtain additional financing, if and
when required, will depend on investor demand, our operating performance, the condition of the capital
markets, and other factors. To the extent we draw on credit facilities, if any, to fund certain obligations, we
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may need to raise additional funds and we cannot assure investors that additional financing will be
available to us on favorable terms when required, or at all. If we raise additional funds through the
issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or
privileges senior to the rights of our Common Stock, and existing stockholders may experience dilution.
Risks Relating to Common Stock
If research analysts issue unfavorable commentary or downgrade our Common Stock, the price of
our Common Stock and their trading volume could decline.
The trading market for our Common Stock may depend in part on the research and reports that
research analysts publish about us and our business. If we do not maintain adequate research coverage,
or if one or more analysts who covers us downgrades our Common Stock or publishes inaccurate or
unfavorable research about our business, the price of our Common Stock could decline. If one or more of
the research analysts ceases to cover us or fails to publish reports on us regularly, demand for our
Common Stock could decrease, which could cause the price or trading volume to decline.
Our stock price has been, and may continue to be, volatile.
The trading price of our Common Stock has been and could continue to be subject to wide
fluctuations in response to certain factors, including:
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U.S. and global economic conditions leading to general declines in market capitalizations, with
such declines not associated with operating performance.
• Quarter-to-quarter variations in results of operations.
• Our announcements of new products.
• Our announcements of acquisitions or divestitures.
• Our announcements of significant new customers or contracts.
• Our competitors’ announcements of new products.
• Our product development.
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Changes in our management team.
• General conditions in our industry.
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Investor perceptions and expectations regarding our products, services, plans and strategic
position and those of our competitors and clients.
In addition, the public stock markets experience extreme price and trading volume volatility,
particularly in growth sectors of the market. This volatility has significantly affected the market prices of
securities of many companies for reasons often unrelated to the operating performance of the specific
companies. The broad market fluctuations may adversely affect the market price of our Common Stock.
We may issue additional equity securities, or engage in other transactions that could dilute our
book value or affect the priority of our Common Stock, which may adversely affect the market
price of our Common Stock.
Our articles of incorporation allow our Board to issue up to 100,000,000 shares of Common Stock.
Our Board may determine from time to time that we need to raise additional capital by issuing Common
Stock or other equity securities. Except as otherwise described in this Annual Report, we are not
restricted from issuing additional securities, including securities that are convertible into or exchangeable
for, or that represent the right to receive, shares of our Common Stock. Because our decision to issue
securities in any future offering will depend on market conditions and other factors beyond our control, we
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cannot predict or estimate the amount, timing, or nature of any future offerings, or the prices at which
such offerings may be affected. Additional equity offerings may dilute the holdings of our existing
stockholders or reduce the market price of our Common Stock, or both. Holders of our Common Stock
are not entitled to pre-emptive rights or other protections against dilution. New investors also may have
rights, preferences and privileges that are senior to, and that adversely affect, the then-current holders of
our Common Stock. Additionally, if we raise additional capital by making offerings of debt or shares of
preferred stock, upon our liquidation, holders of our debt securities and shares of preferred stock, and
lenders with respect to other borrowings, may receive distributions of our available assets before the
holders of our Common Stock.
We may issue shares of preferred stock with greater rights than our Common Stock.
Subject to the rules of The Nasdaq Stock Market, our articles of incorporation authorize our board of
directors to issue one or more series of preferred stock and set the terms of the preferred stock without
seeking any further approval from holders of our Common Stock. Any preferred stock that is issued may
rank ahead of our Common Stock in terms of dividends, priority and liquidation premiums and may have
greater voting rights than our Common Stock.
We have not paid any cash dividends in the past and have no plans to issue cash dividends in the
future, which could cause our Common Stock to have a lower value than that of similar companies
which do pay cash dividends.
We have not paid any cash dividends on our Common Stock to date and do not anticipate any cash
dividends being paid to holders of our Common Stock in the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our Board.
While our dividend policy will be based on the operating results and capital needs of the business, it is
anticipated that any earnings will be retained to finance our future expansion. As we have no plans to
issue cash dividends in the future, our Common Stock could be less desirable to other investors and as a
result, the value of our Common Stock may decline, or fail to reach the valuations of other similarly
situated companies that pay cash dividends.
Shares eligible for future sale may depress our stock price.
As of March 11, 2021, we had 27,612,597 shares of Common Stock outstanding of which 9,869,839
shares were held by affiliates. All of the shares of Common Stock held by affiliates are restricted or are
control securities under Rule 144 promulgated under the Securities Act of 1933 as amended (the
“Securities Act”). Sales of shares of Common Stock under Rule 144 or another exemption under the
Securities Act or pursuant to a registration statement could have a material adverse effect on the price of
our Common Stock and could impair our ability to raise additional capital through the sale of equity
securities. Furthermore, all Common Stock beneficially owned by persons who are not our affiliates and
have beneficially owned such shares for at least one year may be sold at any time by these existing
stockholders in accordance with Rule 144 of the Securities Act. However, there can be no assurance that
any of these existing stockholders will sell any or all of their Common Stock and there may be a lack of
supply of, or demand for, our Common Stock on The Nasdaq Stock Market. In the case of a lack of supply
of our Common Stock offered in the market, the trading price of our Common Stock may rise to an
unsustainable level, particularly in instances where institutional investors may be discouraged from
purchasing our Common Stock because they are unable to purchase a block of our Common Stock in the
open market due to a potential unwillingness of our existing stockholders to sell the amount of Common
Stock at the price offered by such investors and the greater influence individual investors have in setting
the trading price. In the case of a lack of market demand for our Common Stock, the trading price of our
Common Stock could decline significantly and rapidly after our listing.
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Percentage of ownership in our Common Stock may be diluted in the future.
In the future, the percentage ownership in our Common Stock owned by our stockholders may be
diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including
equity awards that we expect to be granting to our directors, officers and employees. Such issuances may
have a dilutive effect on our earnings per share, which could materially adversely affect the market price
of our Common Stock.
Anti-takeover provisions could make a third party acquisition of us difficult.
Our bylaws eliminate the ability of stockholders to call special meetings or take action by written
consent. These provisions in our bylaws could make it more difficult for a third party to acquire us without
the approval of our board. In addition, the Nevada corporate statute also contains certain provisions that
could make an acquisition by a third party more difficult.
Our directors and officers have substantial control over us.
Our directors and executive officers, together with their affiliates and related persons, beneficially
owned, in the aggregate, approximately 35.7% of our outstanding Common Stock as of March 11, 2021.
These stockholders have the ability to substantially control our operations and direct our policies including
the outcome of matters submitted to our stockholders for approval, such as the election of directors and
any acquisition or merger, consolidation or sale of all or substantially all of our assets.
Our bylaws provide that the state and federal courts located in Bexar County, Texas will be the
exclusive forum for substantially all disputes between us and our stockholders, which could limit
our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors,
officers or employees.
Our bylaws provide that, with certain limited exceptions, unless we consent in writing to the selection
of an alternative forum, the state and federal courts located in Bexar County, Texas will be the sole and
exclusive forum for any stockholder (including any beneficial owner) to bring any (i) derivative action or
proceeding brought on our behalf, (ii) any action asserting a claim of, or a claim based on, breach of a
fiduciary duty owed by any current or former director, officer, employee or stockholder to us or our
stockholders, (iii) any action asserting a claim against us or any current or former director, officer,
employee or stockholder arising pursuant to any provision of Chapters 78 and 92 of the Nevada Revised
Statutes or our articles of incorporation or bylaws or (iv) any action asserting a claim against us or any
current or former director, officer, employee or stockholder (including any beneficial owner of stock)
governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any
interest in our Common Stock is deemed to have notice of and consented to the foregoing provisions.
This choice of forum provision may limit a stockholder’s ability to bring claim in a judicial forum that it finds
favorable for disputes with us or our directors, officers or other employees, which may discourage such
lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this
choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified
types of actions or proceedings, we may incur additional costs associated with resolving such matters in
other jurisdictions, which could adversely affect our business, financial condition or results of operations.
The choice of forum provision does not apply to any actions arising under the Securities Act or the
Securities Exchange Act.
General Risk Factors
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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 since its spread 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
instituting 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, 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. Any one of these factors could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
General global economic and business conditions affect demand for our products.
We compete in various geographic regions and markets around the world. We expect to experience
fluctuations in revenue and results of operations due to economic and business cycles. Important factors
for our business and the businesses of our customers include the overall strength of the economy and our
customers’ confidence in the economy, unemployment rates, availability of consumer financing and
interest rates. Our products and services are discretionary purchases for most consumers. Consumers
are generally more willing to make discretionary purchases on products and services such as ours during
periods of favorable general economic conditions. While we attempt to minimize our exposure to
economic or market fluctuations by offering a balanced mix of end markets and geographic regions, any
of the above factors, individually or in the aggregate, or a significant or sustained downturn in a specific
end market or geographic region could reduce demand for our products and services, which could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal office is located in leased premises in San Antonio, Texas. Our operations are
conducted in facilities throughout North America, Europe and Asia. These facilities house production,
30
distribution and operations, as well as installation services, sales and marketing. A description of our
principal facilities as of December 31, 2020 is set forth in the chart below.
Location
Headquarters:
Leased or
Owned
Square
Footage
Facility Activity
San Antonio, Texas.........................................
Leased
16,651
Training/Admin functions
Other Properties:
Austin, Texas...................................................
Boise, Idaho....................................................
Calgary, Alberta, Canada................................
Dallas, Texas...................................................
Guadalajara, Jalisco, Mexico..........................
Houston, Texas...............................................
Las Vegas, Nevada.........................................
Letchworth, United Kingdom...........................
San Antonio, Texas.........................................
San Antonio, Texas.........................................
San Antonio, Texas.........................................
Charlotte, North Carolina................................
Terrebonne, Quebec, Canada.........................
Brossard , Quebec, Canada............................
Laval, Quebec, Canada..................................
Tilburg, The Netherlands.................................
Yilan City, Yilan County, Taiwan......................
Renningen, Baden-Württemberg, Germany....
Fullerton, California.........................................
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
8,522
4,986
5,680
1,625
6,830
7,780
6,864
3,632
48,770
4,992
Sales/Installation
Sales/Installation
Warehouse/Sales/Training
Sales/Installation
Warehouse/Sales/Training
Sales/Installation
Sales/Installation
Sales/Installation/Training
Warehouse/production
Sales/Installation
115,825
Warehouse/Production/Training
13,950
12,440
4,658
6,342
21,527
6,381
21,689
14,121
Warehouse/Production
Warehouse/Sales/Training
Sales/Installation
Sales/Installation
Warehouse/Sales/Training
Warehouse/Sales
Sales/Installation
Warehouse/production
We believe that our facilities are suitable for their purpose and are sufficient to support our current
business needs.
Item 3. Legal Proceedings
From time to time, we are made parties to actions filed or have been given notice of potential claims
relating to the ordinary conduct of our business, including those pertaining to commercial disputes,
product liability, patent infringement and employment matters.
While we believe that a material impact on our financial position, results of operations or cash flows
from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, it is
possible that an unforeseen future adverse ruling or unfavorable development could result in future
charges that could have a material adverse impact. We do and will continue to periodically reexamine our
estimates of probable liabilities and any associated expenses and receivables and make appropriate
adjustments to such estimates based on experience and developments in litigation. As a result, the
current estimates of the potential impact on our financial position, results of operations and cash flows for
the proceedings and claims described in the notes to our consolidated financial statements could change
in the future.
Item 4. Mine Safety Disclosures
Not applicable.
31
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Company’s common stock is traded on The Nasdaq Stock Market LLC under the symbol XPEL.
Holders
As of March 11, 2021, there were 11 shareholders of record.
Dividend Policy
Holders of our Common Stock are entitled to receive such dividends as declared by our Board. No
dividends have been paid with respect to our Common Stock and no dividends are anticipated to be paid
in the foreseeable future. Any future decisions as to payment of dividends will be at the discretion of our
Board, subject to applicable law.
Stock Performance
The information contained in the following graph shall not be deemed to be “soliciting material” or to be
“filed” with the Securities and Exchange Commission, nor shall such information be incorporated by
reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference
in such filing.
The following data and graph show a comparison of the cumulative total shareholder return for
XPEL’s common stock, the Russell 2000 Index and the S&P 500 Index from July 19, 2019 through
December 31, 2020. The data assumes a hypothetical investment of $100 on July 19, 2019 in our
common stock and each of the indices, and reinvestment of any dividends. The historical stock
performance presented below is not intended to and may not be indicative of future stock performance.
We have chosen to use the Russell 2000 Index rather than an industry or line-business index
because we do not believe our company is comparable to companies in a particular industry or line-of-
business such as after-market automotive product companies and we have not used a peer group of
companies because our major competitors are either much larger than we are and their competitive
products constitute small lines of business for these companies and other competitors are private
companies.
32
Purchases of Equity Securities
In the year ended December 31, 2020 we did not repurchase any shares of our Common Stock.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial
statements and the related notes included elsewhere in this Annual Report on Form 10-K and from the
historical consolidated financial statements not included herein to fully understand factors that may affect
the comparability of the information presented below (in millions, except per share data).
33
Consolidated Statements of Income Data
Total revenues
Gross margin
Income from operations
Net income attributable to stockholders of the
Year Ended December 31,
2020
2019 (2)
2018 (1)
2017 (1)
$ 158,924,448 $ 129,932,881 $ 109,920,614 $ 67,297,044
$ 54,025,009 $ 43,506,259 $ 33,436,605 $ 16,683,832
$ 23,369,932 $ 17,087,347 $ 11,806,003 $ 2,211,505
Company
$ 18,281,691 $ 13,977,625 $ 8,712,534 $ 1,047,331
Earnings per share attributable to stockholders of
the Company
Basic and diluted
$
0.66 $
0.51 $
0.32 $
0.04
Weighted average shares used in computing net
income per common stock
27,612,597
27,612,597
27,612,597
27,326,261
Consolidated Balance Sheet Data:
Net working capital
Total assets
$ 41,576,868 $ 24,494,420 $ 12,549,026 $ 6,324,611
$ 83,839,831 $ 51,601,435 $ 30,542,888 $ 27,812,143
Long-term obligations
$ 9,256,619 $ 4,921,945 $ 1,447,101 $ 1,401,872
(1) We adopted ASC 606 in 2018. For further details, refer to Note 2, Summary of Significant
Accounting Policies, of the notes to the consolidated financial statements included in our Amendment No.
2 to Form 10 filed on May 30, 3019.
(2) We adopted ASC 842 in 2019. Prior periods have not been revised. For further details, refer to
Note 2, Summary of Significant Accounting Policies, of the notes to the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Set forth below is summary financial information for the years ended December 31, 2020, 2019 and
2018. This information is not necessarily indicative of results of future operations, and should be read in
conjunction with Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the consolidated financial statements and
accompanying notes thereto included in Part II, Item 8 of this Annual Report to fully understand factors
that may affect the comparability of the information presented below.
34
Year Ended December 31,
% Change
%
of Total
Revenue
2019
%
of Total
Revenue
%
of Total
Revenue
2020 vs
2019
2019 vs
2018
2018
2020
Total revenue.. $ 158,924,448
Total cost of
sales...............
104,899,439
100.0 % $ 129,932,881
100.0 % $ 109,920,614
100.0 % 22.3 % 18.2 %
66.0 % 86,426,622
66.5 %
76,484,009
69.6 % 21.4 % 13.0 %
Gross margin..
54,025,009
34.0 % 43,506,259
33.5 %
33,436,605
30.4 % 24.2 % 30.1 %
Total operating
expenses........
Operating
income............
Other
expenses........
30,655,077
19.3 % 26,418,912
20.3 %
21,630,602
19.7 % 16.0 % 22.1 %
23,369,932
14.7 % 17,087,347
13.2 %
11,806,003
10.7 % 36.8 % 44.7 %
565,573
0.4 %
136,919
0.1 %
324,698
0.3 % 313.1 % (57.8) %
Income tax......
4,522,668
2.8 %
2,955,356
2.3 %
2,760,073
2.5 % 53.0 % 7.1 %
Net income...... $ 18,281,691
11.5 % $ 13,995,072
10.8 % $
8,721,232
7.9 % 30.6 % 60.5 %
Key Business Metric - Non-GAAP Financial Measures
Our management regularly monitors certain financial measures to track the progress of our business
against internal goals and targets. We believe that the most important measure to the Company is
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).
EBITDA is a non-GAAP financial measure. We believe EBITDA provides helpful information with
respect to our operating performance as viewed by management, including a view of our business that is
not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of our day-to-
day operations. Management uses EBITDA (1) to compare our operating performance on a consistent
basis, (2) to calculate incentive compensation for our employees, (3) for planning purposes including the
preparation of our internal annual operating budget, (4) to evaluate the performance and effectiveness of
our operational strategies, and (5) to assess compliance with various metrics associated with the
agreements governing our indebtedness. Accordingly, we believe that EBITDA provides useful information
in understanding and evaluating our operating performance in the same manner as management. We
define EBITDA as net income plus (a) total depreciation and amortization, (b) interest expense, net, and
(c) income tax expense.
The following table is a reconciliation of Net income to EBITDA for the years ended December 31,
2020
%
of Total
Revenue
2019
%
of Total
Revenue
2018
%
of Total
Revenue
Net Income..... $ 18,281,691
11.5 % $ 13,995,072
10.8 % $ 8,721,232
Interest...........
Taxes..............
Depreciation...
Amortization..
249,480
4,522,668
1,274,095
955,937
0.2 %
96,646
0.1 %
168,389
2.8 %
2,955,356
2.3 %
2,760,073
0.8 %
0.6 %
915,918
781,105
0.7 %
735,983
0.5 %
642,801
7.9 %
0.2 %
2.5 %
0.7 %
0.6 %
EBITDA........... $ 25,283,871
15.9 % $ 18,744,097
14.4 % $ 13,028,478
11.9 %
Use of Non-GAAP Financial Measures
EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures
calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP
35
and should not be considered as alternatives to revenue or net income, as applicable, or any other
performance measures derived in accordance with GAAP and may not be comparable to other similarly
titled measures of other businesses. EBITDA has limitations as an analytical tool and you should not
consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.
EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to
be indicative of ongoing operations; and other companies in our industry may calculate EBITDA differently
than we do, limiting its usefulness as a comparative measure.
36
Results of Operations
The following tables summarize revenue results for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
% Change
% of Total Revenue
2020
2019
2018
2020 vs
2019
2019 vs
2018
2020
2019
2018
Product Revenue
Paint protection film.. $ 110,786,164 $ 97,341,865 $ 85,495,382
13.8 % 13.9 % 69.7 % 74.9 % 77.8 %
Window film..............
20,950,591
11,384,437
7,309,773
84.0 % 55.7 % 13.2 %
8.8 % 6.7 %
Other........................
4,525,312
3,478,437
2,721,195
30.1 % 27.8 %
2.8 %
2.7 % 2.4 %
Total....................... $ 136,262,067 $ 112,204,739 $ 95,526,350
21.4 % 17.5 % 85.7 % 86.4 % 86.9 %
Service Revenue
Software................... $ 3,489,348 $
3,263,391 $ 2,566,960
6.9 % 27.1 %
Cutbank credits........
7,784,554
7,253,610
6,197,250
7.3 % 17.0 %
Installation labor.......
10,925,525
6,620,527
5,211,633
65.0 % 27.0 %
Training....................
462,954
590,614
418,421
(21.6) % 41.2 %
2.2 %
4.9 %
6.9 %
0.3 %
2.5 % 2.3 %
5.6 % 5.6 %
5.1 % 4.7 %
0.4 % 0.5 %
Total....................... $ 22,662,381 $ 17,728,142 $ 14,394,264
27.8 % 23.2 % 14.3 % 13.6 % 13.1 %
Total...................... $ 158,924,448 $ 129,932,881 $ 109,920,614
22.3 % 18.2 % 100.0 % 100.0 % 100.0 %
Because many of our international customers require us to ship their orders to freight forwarders located in
the United States, we cannot be certain about the ultimate destination of the product. The following table
represents our estimate of sales by geographic regions based on our understanding of ultimate product
destination based on customer interactions, customer locations and other factors for years ended December
31, 2020 and 2019:
Year Ended December 31,
2020
2019
%
Increase
(Decrease)
% of Total Revenue
2020
2019
United States........................... $ 75,078,562 $ 60,452,238
China.......................................
32,807,976
30,490,859
Canada....................................
20,524,371
17,912,548
Continental Europe..................
12,772,441
United Kingdom.......................
4,716,531
Asia Pacific..............................
5,262,733
Latin America...........................
2,274,341
Middle East/Africa....................
5,167,595
Other........................................
319,898
7,419,524
3,784,535
4,370,156
2,098,873
3,149,235
254,913
Total..................................... $ 158,924,448 $ 129,932,881
24.2 %
7.6 %
14.6 %
72.1 %
24.6 %
20.4 %
8.4 %
64.1 %
25.5 %
22.3 %
47.2 %
20.6 %
12.9 %
8.0 %
3.0 %
3.3 %
1.4 %
3.3 %
0.3 %
46.5 %
23.5 %
13.8 %
5.7 %
2.9 %
3.4 %
1.6 %
2.4 %
0.2 %
100.0 %
100.0 %
37
The following table represents our estimate of sales by geographic regions based on our understanding of
ultimate product destination based on customer interactions, customer locations and other factors for the years
ended December 31, 2019 and 2018:
Year Ended December 31,
2019
2018
%
Increase
(Decrease)
% of Total Revenue
2019
2018
United States........................... $ 60,452,238 $ 46,077,624
China.......................................
30,490,859
32,279,335
Canada....................................
17,912,548
15,146,869
Continental Europe..................
7,419,524
United Kingdom.......................
3,784,535
Asia Pacific..............................
4,370,156
Latin America...........................
2,098,873
Middle East/Africa....................
3,149,235
Other........................................
254,913
5,734,925
2,725,925
2,754,495
1,799,180
2,806,502
595,759
Total..................................... $ 129,932,881 $ 109,920,614
31.2 %
(5.5) %
18.3 %
29.4 %
38.8 %
58.7 %
16.7 %
12.2 %
(57.2) %
18.2 %
46.5 %
23.5 %
13.8 %
5.7 %
2.9 %
3.4 %
1.6 %
2.4 %
0.2 %
41.9 %
29.4 %
13.8 %
5.2 %
2.5 %
2.5 %
1.6 %
2.6 %
0.5 %
100.0 %
100.0 %
Revenue
2020 Compared with 2019
Product Revenue. Product revenue increased 21.4% for the year ended December 31, 2020 and
represented 85.7% of our total consolidated annual 2020 revenue. Within this category, revenue from our paint
protection film product line increased 13.8% for the year ended December 31, 2020. This growth was due
mainly to increases in demand for our film products across multiple regions. This increase in demand was
driven by both an increase in the number of customers and increased revenue from our existing customers.
We saw some impact from the COVID-19 pandemic early in the year. Our China revenues declined in the first
quarter and our U.S. business saw revenue declines in April. The China business rebounded beginning in the
second quarter while the U.S. business began its comeback in mid-May. Our paint production film products
experienced strong growth for the rest of the year as the U.S., China and other regions where we operate
emerged from these early impacts due to the pandemic.
Revenue from our window film product line grew 84.0% in the year ended December 31, 2020 and
represented 13.2% of our total consolidated annual 2020 revenue. This increase was due mainly to increases
in demand resulting from continuing channel focus and increased product adoption.
Geographically, we experienced growth in all of our regions during the year. The COVID-19 pandemic
impacted China primarily in January and February and impacted other regions, including the US, primarily in
April and early May. All regions experienced solid growth beginning in June coming out of the COVID-19
related impacts.
Service revenue. Service revenue consists of revenue from fees for DAP software access, cutbank credit
revenue which represents per-cut fees sold for pattern access or the value of pattern access provided with
eligible product revenue, revenue from the labor portion of installation sales in our Company-owned installation
centers and revenue from training services provided to our customers. Service revenue grew 27.8% over the
service revenue for the year ended December 31, 2019.
Within the service revenue category, software revenue increased 6.9% from the year ended December 31,
2019. This increase was due primarily to increases in customers subscribing to our software. Cutbank credit
revenue grew 7.3% from the year ended December 31, 2019. This increase was due primarily to the
aforementioned increases in demand for our products and services. Installation labor revenue increased
65.0% from the year ended December 31, 2019, due mainly to the increase in demand for installation services.
Excluding the impact from our acquisition of Protex Centre in Montreal, Canada during the year, installation
sales would have grown 32.3%. Training revenue decreased 21.6% from the year ended December 31, 2019.
This decrease was due primarily to reduced training hours and classes as a result of the COVID-19 pandemic.
38
Total installation revenue (labor and product combined) at our Company-owned installation centers for the
year ended December 31, 2020 increased 65.0% over the year ended December 31, 2019. Excluding the
impact form our acquisition of Protex Centre in Montreal, Canada, total installation revenue would have grown
32.3%. Adjusted product revenue, which combines the cutbank credit revenue service component with
product revenue, increased by 20.6% from the year ended December 31, 2019 due mainly to the same factors
described previously.
2019 Compared with 2018
Product Revenue. Product revenue increased 17.5% for the year ended December 31, 2019 and represented
86.4% of our total consolidated annual 2019 revenue. Within this category, revenue from our paint protection
film product line increased 13.9% for the year ended December 31, 2019. Paint protection film sales
represented 74.9% and 77.8% of our consolidated revenue for the years ended December 31, 2019 and 2018,
respectively. Overall, this growth was due mainly to increases in the square footage of film product sold owing
to increased demand for our products. This increase in demand was driven by both an increase in the number
of customers and an increase in revenue to existing customers. Revenue from our window film product line
grew 55.7% in the year ended December 31, 2019. Window film sales represented 8.8% and 6.7% of our
consolidated revenue for the years ended December 31, 2019 and 2018, respectively. This growth was
attributable to increased demand for our window film products commensurate with increased window film
adoption within our distribution channels and an increase in new customers.
Geographically, growth was strong in most of the regions in which we operate except for China. The
decline in the China business in 2019 was primarily due to build up in inventory in the region during 2018.
Once the 2018 inventory was sold through during the first half of 2019, normal growth in sales to China
resumed.
Service revenue. Service revenue grew 23.2% over the service revenue for the year ended December 31,
2018. Service revenue represented 13.6% and 13.1% of our total consolidated revenue from the years ended
December 31, 2019 and 2018, respectively.
Within the service revenue category, software revenue increased 27.1% from the year ended December
31, 2018. Software revenue represented 2.5% and 2.3% of our total consolidated revenue for the years ended
December 31, 2019 and 2018, respectively. This increase was due primarily to increases in customers
subscribing to our software. Cutbank credit revenue grew 17.0% from the year ended December 31, 2018.
Cutbank sales represented 5.6% and 5.6% of our total consolidated revenue for the years ended December
31, 2019 and 2018, respectively. This increase was due primarily to the aforementioned increases in demand
for our products and services. Installation labor revenue increased 27.0% from the year ended December 31,
2018, due mainly to the increase in demand for installation services. Training revenue increased 41.2% from
the year ended December 31, 2018. This growth was due to continued strong interest in the Company’s
training program coupled with increased training capacity added in 2019.
Total installation revenue (labor and product combined) at our Company-owned installation centers for the year
ended December 31, 2019 increased 27.0% over the year ended December 31, 2018. Installation revenue
represented 6.1% and 5.6% of our total consolidated revenue for the years ended December 31, 2019 and
2018, respectively. Adjusted product revenue, which combines the cutbank credit revenue service component
with product revenue, increased by 17.4% from the year ended December 31, 2018 due mainly to the same
factors described previously.
Cost of Sales
2020 Compared with 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
39
installation of product in our Company-owned 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 year ended
December 31, 2020 increased 19.7% over the year ended December 31, 2019 commensurate with the growth
in product revenue. Cost of service revenue grew 55.3% during the year ended December 31, 2020. The
increase was due primarily to increases in labor installation costs commensurate with increased installation
revenue and increases in design costs related to continued investments in DAP.
2019 Compared with 2018
Product costs in the year ended December 31, 2019 increased 11.7% over the year ended December 31,
2018 commensurate with the growth in product revenue. Cost of product sales represented 63.3% and 67.0%
of total revenue in the years ended December 31, 2019 and 2018, respectively. Cost of service revenue grew
45.6% during the year ended December 31, 2019. The increase was due primarily to increases in labor
installation costs commensurate with increased installation revenue and increases in design costs related to
continued investments in DAP.
Gross Margin
The following table summarizes gross margin for product and services for the years ended December 31,
2020, 2019 and 2018:
Year Ended December 31,
% Change
% of Category Revenue
2020
2019
2018
2020 vs
2019
2019 vs
2018
Product
Service
$ 37,759,788 $ 29,896,483 $ 21,869,961
26.3 % 36.7 %
16,265,221
13,609,776
11,566,644
19.5 % 17.7 %
Total............ $ 54,025,009 $ 43,506,259 $ 33,436,605
24.2 % 30.1 %
2020
2019
2018
27.7 %
71.8 %
34.0 %
26.6 %
76.8 %
33.5 %
22.9 %
80.4 %
30.4 %
2020 Compared with 2019
Product gross margin for the year ended December 31, 2020 increased approximately $7.9 million, or
26.3%, over the year ended December 31, 2019 and represented 27.7% and 26.6% of total product revenue
for the years ended December 31, 2020 and 2019, respectively. The increase in product gross margin
percentages was primarily due to a lower percentage of sales to lower margin distributors (primarily our China
Distributor) and improvements in product costs and operating leverage.
Service gross margin increased approximately $2.7 million for the year ended December 31, 2020, and
represented 71.8% and 76.8% of total service revenue for the years ended December 31, 2020 and 2019,
respectively. The decrease in service gross margin percentage for these periods versus the prior year periods
was primarily due to higher installation labor revenue, which is lower margin than software related revenue,
growing at a faster rate than software related revenue and the Company’s decision to continue to pay
installation personnel during COVID-19 pandemic related shutdowns earlier in the year.
2019 Compared with 2018
Product gross margin for the year ended December 31, 2019 increased approximately $8.0 million, or
36.7%, over the year ended December 31, 2018 and represented 26.6% and 22.9% of total product revenue
for the years ended December 31, 2019 and 2018, respectively. The increases in product gross margin
percentages were primarily due to a lower percentage of sales to lower margin distributors (primarily our China
Distributor) and improvements in product costs and operating leverage.
Service gross margin increased approximately $2.0 million for the year ended December 31, 2019, and
represented 76.8% and 80.4% of total service revenue for the years ended December 31, 2019 and 2018,
respectively. The decrease in service gross margin percentage for these periods versus the prior year periods
was primarily due to a higher percentage of lower margin installation labor costs relative to other higher margin
service revenue components and increases in design costs related to continued investments in DAP.
40
Operating Expenses
2020 Compared with 2019
Sales and marketing expenses for the year ended December 31, 2020 increased 28.5% compared to
2019. These expenses represented 6.1% and 5.8% of consolidated revenue for the years ended December
31, 2020 and 2019, respectively. This increase was primarily attributable to increases in sales and marketing
staff and other marketing related expenses incurred to support the ongoing growth of the business partially
offset by declines in travel related expenses in connection with the COVID-19 pandemic.
General and administrative expenses grew approximately $2.1 million, or 11.0%, during the year ended
December 31, 2020. These costs represented 13.2% and 14.5% of total consolidated revenue for the years
ended December 31, 2020 and 2019, respectively. The increase was due mainly to increases in personnel,
occupancy costs and information technology costs to support the ongoing growth of the business.
2019 Compared with 2018
Sales and marketing expenses for the year ended December 31, 2019 increased 11.5% compared to
2018. These expenses represented 5.8% and 6.2% of consolidated revenue for the years ended December
31, 2019 and 2018, respectively. This increase was primarily attributable to increases in sales staff and other
marketing related expenses incurred to support the ongoing growth of the business.
General and administrative expenses grew approximately $4.0 million, or 27.0%, during the year ended
December 31, 2019. These costs represented 14.5% and 13.5% of total consolidated revenue for the years
ended December 31, 2019 and 2018, respectively. The increase was due mainly to increases in personnel,
occupancy costs, information technology costs and research and development costs to support the ongoing
growth of the business and increases in professional fees due primarily to the ancillary costs associated with
the preparation and filing of the Company’s registration statement.
Other Expense
2020 Compared with 2019
Other expense consists of interest expense and foreign currency gain/loss. Interest expense for the year
ended December 31, 2020 increased approximately $0.2 million compared to the year ended December 31,
2019 due primarily to the Company’s increased borrowings on its revolving credit facilities and borrowings on
its new term loan. Foreign currency exchange loss for the year ended December 31, 2020 increased
approximately $0.3 million compared to the year ended December 31, 2019. This increase was primarily due
to foreign currency fluctuations in connection with the COVID-19 pandemic.
2019 Compared with 2018
Interest expense for the year ended December 31, 2019 decreased approximately $0.07 million compared
to the year ended December 31 2018 due primarily to the Company’s decreased debt levels. Foreign currency
exchange loss for the year ended December 31, 2019 decreased approximately $0.1 million compared to the
year ended December 31, 2018.
Income Tax Expense
2020 Compared with 2019
Income tax expense for the year ended December 31, 2020 grew 53.0% to $4.5 million. Our effective
income tax rates for the years ended December 31, 2020 and 2019 were 19.8% and 17.4%, respectively. The
increase in the effective rate was due primarily to an increase in state taxes and a one-time true up recorded in
the 2019 tax provision related to a return to provision adjustment in connection with the Tax Reform Act. See
Note 13 of the Notes to our Consolidated Financial Statements for further information.
2019 Compared with 2018
41
Income tax expense for the year ended December 31, 2019 grew 7.1% to $3.0 million. On December 22,
2017, the U.S. government enacted comprehensive tax legislation commonly referred to herein as the Tax
Reform Act. The Tax Reform Act made broad and complex changes to the U.S. tax code that affected the
Company including, but not limited to, a permanent reduction of the U.S. corporate income tax rate from 34%
to 21% effective January 1, 2018. Our effective income tax rates for the years ended December 31, 2019 and
2018 was 17.4% and 24.0%, respectively. The decrease in the effective rate was due primarily to 2018 return
to provision adjustments and the impact of certain provisions of the Tax Reform Act.
Net Income
2020 Compared with 2019
Net income for the year ended December 31, 2020 increased by 30.6% to $18.3 million compared to the
prior year due primarily to increased revenue and improved margins.
2019 Compared with 2018
Net income for the year ended December 31, 2019 increased by 60.4% to $14.0 million compared to the
prior year due primarily to increased revenue and improved margins.
42
Liquidity and Capital Resources
The primary sources of liquidity for our business are cash and cash equivalents and cash flows
provided by operations. As of December 31, 2020, we had cash and cash equivalents of $29.0 million.
We expect to continue to have sufficient 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 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 $18.5 million for the
year ended December 31, 2020, compared to $11.0 million for the year ended December 31, 2019. This
increase was driven primarily by increased net income partially offset by increases in net working capital
investments. Cash flows provided by operations totaled approximately $11.0 million for the year ended
December 31, 2019, compared to $6.8 million for the year ended December 31, 2018. This increase was
driven primarily by increased net income partially offset by increases in net working capital investments.
Investing activities. Cash flows used in investing activities totaled approximately $4.7 million during
the year ended December 31, 2020 compared to $2.3 million during the year ended December 31, 2019.
This increase was due primarily to acquisitions made during the year ended December 31, 2020. See
Footnote 16 for further information with regard to acquisitions made during the year ended December 31,
2020. Cash flows used in investing activities totaled approximately $2.3 million during the year ended
December 31, 2019 compared $3.1 million during the year ended December 31, 2018. This was due
primarily to acquisitions made during the year ended December 31, 2018.
Financing activities. Cash flows provided by financing activities during the year ended December 31,
2020 totaled approximately $3.5 million compared to cash flows used in financing activities totaling $1.1
million for the same period in 2019. This increase was primarily due to new borrowings under a term-loan
agreement with Texas Partners Bank, formerly the Bank of San Antonio, which was partially offset by the
purchase of the minority interest in the Company’s subsidiary in the United Kingdom. Cash flows used in
financing activities during the year ended December 31, 2019 totaled approximately $1.1 million
compared to cash flows used in financing activities totaling $3.1 million for the same period in 2018. The
decrease was primarily due to lower debt levels.
Debt obligations as of December 31, 2020 and December 31, 2019 totaled approximately $6.1 million
and $0.8 million, respectively. This increase was primarily due to borrowings under our term loan facility
withTexas Partners Bank described below. Debt obligations as of December 31, 2019 and December 31,
2018 totaled approximately $0.8 million and $1.8 million, respectively. This decrease was primarily due to
periodic payments of loans during the year ended December 31, 2019.
Credit Facilities
The Company has an $8.5 million revolving line of credit to support its continuing working capital
needs. The line of credit has a variable interest rate of the Wall Street Journal prime rate plus 1.00% with
a floor of 3.50%, and it reaches maturity on June 5, 2022. This line of credit is secured by substantially all
of the Company’s current and future assets.The interest rate was 3.50% and 5.50% as of December 31,
2020 and 2019, respectively. As of December 31, 2020 and 2019, no 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 certain debt coverage ratios, and it contains customary
43
events of default including the failure to make payments of principal and interest, the breach of any
covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events.
As of December 31, 2020 and 2019, the Company was in compliance with all debt covenants.
On May 11, 2020, the Company borrowed $6,000,000 pursuant to a 36-month term-loan with Texas
Partners Bank. The term-loan bears interest at a rate of 3.5% per annum, requires monthly payments of
principal and interest of $176,373 and matures in June 2023. As of December 31, 2020, $5,056,240 was
outstanding under the term-loan. The term-loan is secured by a security interest in substantially all of
our current and future assets.
XPEL Canada Corp., a wholly owned subsidiary of XPEL, Inc., also has a CAD $4.5 million
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 was 2.70% and 4.20% as of December 31, 2020 and 2019, respectively. As of December
31, 2020 and 2019, no balance was outstanding on this line of credit. This facility is guaranteed by the
Company.
Contractual Obligations
We are party to contractual obligations involving commitments to make payments to third parties
including certain debt financing arrangements and leases, primarily for warehouse and production
facilities, sales and training facilities and certain corporate offices. We also have a contractual obligation
with our primary supplier of paint protection film. The following table sets forth, as of December 31, 2020,
certain significant obligations that will affect our future liquidity:
Note
Reference
Within One
Year
After One But
Within Three
Years
After Three
But Within
Five years
After Five
Years
Total
Long-term debt.........................
Operating leases.......................
Purchase obligations (1)...........
7
15
14
$
2,761,140 $
3,705,844 $
17,640 $
— $ 6,484,624
1,702,807
3,047,436
1,177,694
990,187
6,918,124
Long-term liabilities...................
13, 14
—
729,408
20,000,000
—
—
—
—
—
20,000,000
729,408
Total contractual obligations
$ 24,463,947 $
7,482,688 $ 1,195,334 $
990,187 $ 34,132,156
(1) This amount represents our contractual obligation to our primary paint protection film supplier,
entrotech, inc. See Note 14 for further information.
Critical Accounting Policies
We have adopted various accounting policies to prepare the consolidated financial statements in
accordance with U.S. GAAP. Certain of our accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating financial estimates.
We identified the critical accounting policies which affect our more significant estimates and assumptions
used in preparing our consolidated financial statements.
Certain of the most critical estimates that require significant judgment are as follows:
Allowance for Doubtful Accounts
When evaluating the adequacy of the allowance for doubtful accounts, we analyze accounts
receivable, historical write-offs of bad debts, customer concentrations, customer credit-worthiness, current
44
economic trends and changes in customer payment terms. We maintain an allowance for doubtful
accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting
from collecting less than full payment on outstanding accounts receivable. An amount of judgment is
required when assessing the ability to realize accounts receivable, including assessing the probability of
collection and the current credit-worthiness of each customer. If the financial condition of our customers
was to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for
uncollectible accounts may be required. This allowance was $0.1 million and $0.2 million as of
December 31, 2020 and 2019, respectively. Based on our analysis, we believe the reserve is adequate
for any exposure to credit losses.
Inventory Reserves
Inventory reserves are maintained for the estimated value of the inventory that may have a lower
value than stated or quantities in excess of future production needs. We have an evaluation process to
assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis. We
evaluate our inventory based on current usage and the latest forecasts of product demand and production
requirements from our customers. This reserve was $0.1 million and $0.1 million as of December 31,
2020 and 2019, respectively. Based on our evaluation, we believe the reserve to be adequate.
Recoverability of Long-Lived Assets
The Company reviews its long-lived assets whenever events or changes in circumstances indicate
the carrying amount of the assets may not be recoverable and determines potential impairment by
comparing the carrying value of the assets with expected net cash flows expected to be provided by
operating activities of the business or related products. If the sum of the expected undiscounted future net
cash flows were less than the carrying value, we would determine whether an impairment loss should be
recognized. An impairment loss would be measured by comparing the amount by which the carrying value
exceeds the fair value of the asset.
Goodwill and Intangible Assets
Goodwill represents the excess purchase price over the fair value of tangible net assets acquired in
business combinations after amounts have been allocated to intangible assets. Goodwill is tested for
impairment at the reporting unit level on an annual basis (at December 31) and between annual tests if an
event occurs or circumstances change that would more likely than not reduce the fair value of a reporting
unit below its carrying value. Measuring the fair value of reporting units is a Level 3 measurement under
the fair value hierarchy. See Note 12, Fair Value Measurements, for a discussion of levels.
Intangible assets primarily consist of capitalized software, customer relationships, trademarks and
non-compete agreements. These assets are amortized on a straight-line basis over the period of time in
which their expected benefits will be realized.
Revenue Recognition
Our revenue is comprised primarily of product and services sales where we act as principal to the
transaction. All revenue is recognized when the Company satisfies its performance obligation(s) by
transferring the promised product or service to our customer when our customer obtains control of the
product or service, with the majority of our revenue being recognized at a point in time. A performance
obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s
transaction price is allocated to each distinct performance obligation. Revenue is recorded net of
returns, allowances. Sales, value add, and other taxes collected from customers and remitted to
governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and
handling costs are accounted for as a fulfillment obligation, on a net basis, and are included in cost of
sales.
45
Business Combinations
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date, irrespective of the extent of
any non-controlling interest. The excess of the fair value of the consideration transferred including the
recognized amount of any non-controlling interest in the acquiree, over the fair value of the Company’s
share of the identifiable net assets acquired is recorded as goodwill. Acquisition-related expenses are
recognized separately from the business combination and are recognized as general and administrative
expense as incurred.
There have been no other material changes to our critical accounting policies and estimates from
those previously disclosed in our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Measurement of Credit
Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses
for financial assets held. 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 ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes. The ASU removes certain exceptions to the general principles in Topic 740
and also clarifies and amends existing guidance to improve consistent application. This ASU is effective
for fiscal years beginning after December 15 2020, including interim periods within that fiscal year, with
early adoption permitted. The Company is currently evaluating the impact of this ASU, but does not
expect a material impact to the financial statements upon adoption.
Related Party Relationships
There are no family relationships between or among any of our directors or executive officers. There
are no arrangements or understandings between any two or more of our directors or executive officers,
and there is no arrangement, plan or understanding as to whether non-management stockholders will
exercise their voting rights to continue to elect the current Board. There are also no arrangements,
agreements or understandings between non-management stockholders that may directly or indirectly
participate in or influence the management of our affairs.
Off-Balance Sheet Arrangements
As of December 31 of 2020, 2019 and 2018, respectively, we did not have any relationships with
unconsolidated organizations or special purpose entities, that were established for the purpose of
facilitating off-balance sheet arrangements. We do not engage in off-balance sheet financing
arrangements. In addition, we do not engage in trading activities involving non-exchange contracts.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We have operations that expose us to currency risk in the British Pound Sterling, the Canadian Dollar,
the Euro, the Mexican Peso, and the New Taiwanese Dollar. Amounts invested in our foreign operations
are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. The resulting
translation adjustments are recorded as accumulated other comprehensive income, a component of
stockholders’ equity in our consolidated balance sheets. We do not currently hedge our exposure to
potential foreign currency translation adjustments.
46
If we borrow under our revolving lines of credit, we will be subject to market risk resulting from
changes in interest rates related to our floating rate bank credit facilities. If we were to make such
borrowings, a hypothetical 100 basis point increase in variable interest rates may result in a material
impact to our financial statements. We do not currently have any derivative contracts to hedge our
exposure to interest rate risk. During each of the periods presented, we have not experienced a
significant effect on our business due to changes in interest rates.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the board of directors of XPEL, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of XPEL, Inc. (the "Company") as of
December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows, for each of the three years in the period ended
December 31, 2020, and the related notes (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2020 and 2019, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2020, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the Company's consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audits, we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)
47
We have served as the Company's auditor since 2017.
Minneapolis, Minnesota
March 11, 2021
48
XPEL, INC.
Consolidated Balance Sheets
December 31,
2020
December 31,
2019
Assets
Current
Cash and cash equivalents..................................................................................... $ 29,027,124 $ 11,500,973
7,154,084
Accounts receivable, net.........................................................................................
15,141,153
Inventory, net...........................................................................................................
2,391,340
Prepaid expenses and other current assets............................................................
Income tax receivable..............................................................................................
93,150
36,280,700
Total current assets.............................................................................................
4,014,653
Property and equipment, net......................................................................................
5,079,110
Right-of-use lease assets...........................................................................................
3,820,460
Intangible assets, net.................................................................................................
Other non-current assets...........................................................................................
—
2,406,512
Goodwill.....................................................................................................................
Total assets.......................................................................................................... $ 83,839,831 $ 51,601,435
9,944,213
22,364,126
1,441,749
—
62,777,212
4,706,248
5,973,702
5,423,980
486,472
4,472,217
Liabilities
Current
Current portion of notes payable............................................................................. $
Current portion of lease liabilities............................................................................
Accounts payable and accrued liabilities.................................................................
Income tax payable.................................................................................................
Total current liabilities........................................................................................
Deferred tax liability, net.............................................................................................
Other long-term liabilities...........................................................................................
Non-current portion of lease liabilities........................................................................
Non-current portion of notes payable.........................................................................
Total liabilities......................................................................................................
2,568,172 $
1,650,749
16,797,462
183,961
21,200,344
627,806
729,408
4,331,214
3,568,191
30,456,963
462,226
1,126,701
10,197,353
—
11,786,280
604,715
—
4,009,949
307,281
16,708,225
Commitments and Contingencies (Note 14)
Stockholders’ equity
Preferred stock, $0.001 par value; authorized 10,000,000; none issued and
outstanding.................................................................................................................
—
—
Common stock, $0.001 par value; 100,000,000 shares authorized; 27,612,597
issued and outstanding..............................................................................................
Additional paid-in-capital............................................................................................
Accumulated other comprehensive income (loss).....................................................
Retained earnings......................................................................................................
27,613
11,348,163
(908,764)
24,594,878
35,061,890
(168,680)
Non-controlling interest..............................................................................................
Total stockholders’ equity..................................................................................
34,893,210
Total liabilities and stockholders’ equity.......................................................... $ 83,839,831 $ 51,601,435
27,613
10,412,471
66,215
42,876,569
53,382,868
—
53,382,868
See notes to consolidated financial statements.
49
XPEL, INC.
Consolidated Statements of Income
Year Ended December 31,
2020
2019
2018
Revenue
Product revenue.......................................................... $
Service revenue..........................................................
Total revenue...........................................................
136,262,067 $
112,204,739 $
22,662,381
158,924,448
17,728,142
129,932,881
95,526,350
14,394,264
109,920,614
Cost of Sales
Cost of product sales..................................................
Cost of service............................................................
Total cost of sales...................................................
Gross Margin................................................................
98,502,279
6,397,160
104,899,439
54,025,009
82,308,256
4,118,366
86,426,622
43,506,259
73,656,389
2,827,620
76,484,009
33,436,605
Operating Expenses
Sales and marketing...................................................
General and administrative.........................................
Total operating expenses..................................
9,748,292
20,906,785
30,655,077
7,584,377
18,834,535
26,418,912
6,802,241
14,828,361
21,630,602
Operating Income........................................................
23,369,932
17,087,347
11,806,003
Interest expense..........................................................
Foreign currency exchange loss.................................
249,480
316,093
96,646
40,273
168,389
156,309
Income before income taxes......................................
Income tax expense....................................................
Net income...................................................................
Income attributed to non-controlling interest...........
Net income attributable to stockholders of the
Company......................................................................
Earnings per share attributable stockholders of
the Company
22,804,359
4,522,668
18,281,691
—
16,950,428
2,955,356
13,995,072
17,447
11,481,305
2,760,073
8,721,232
8,698
$
18,281,691 $
13,977,625 $
8,712,534
Basic and diluted......................................................
$
0.66 $
0.51 $
0.32
Weighted Average Number of Common Shares
Basic and diluted......................................................
27,612,597
27,612,597
27,612,597
See notes to consolidated financial statements.
50
XPEL, INC.
Consolidated Statements of Comprehensive Income
Other comprehensive income
Net income.................................................................. $
Foreign currency translation........................................
Total comprehensive income.....................................
Total comprehensive income attributable to:
Stockholders of the Company....................................
Non-controlling interest..............................................
Total comprehensive income.....................................
$
Year Ended December 31,
2020
2019
2018
18,281,691 $
970,446
19,252,137
13,995,072 $
285,193
14,280,265
19,256,670
(4,533)
19,252,137 $
14,258,916
21,349
14,280,265 $
8,721,232
(603,673)
8,117,559
8,119,162
(1,603)
8,117,559
See notes to consolidated financial statements.
51
XPEL, INC.
Consolidated Statements of Changes in Stockholders’ Equity
Balance as of December 31, 2017.
Net income.......................................
Foreign currency translation.............
Balance as of December 31, 2018.
Net income.......................................
Foreign currency translation.............
Balance as of December 31, 2019.
Net income.......................................
Foreign currency translation.............
Purchase of minority interest............
27,612,597 $
—
—
27,612,597 $
—
—
27,612,597 $
—
—
—
Common Stock
Shares
Amount
Additional
Paid-in-Capital
Retained
Earnings
—
—
27,613 $ 11,348,163 $ 1,904,719 $
—
—
27,613 $ 11,348,163 $ 10,617,253 $
—
—
13,977,625
—
8,712,534
—
—
—
Accumulated
Other
Comprehensive
Loss
(596,683) $ 12,683,812 $
Equity
attributable to
Stockholders
of
the Company
—
8,712,534
(593,372)
(593,372)
(1,190,055) $ 20,802,974 $
—
281,291
13,977,625
281,291
Total
Stockholders’
Equity
Non-
Controlling
Interest
(188,426) $ 12,495,386
8,721,232
(603,673)
(190,029) $ 20,612,945
13,995,072
285,193
8,698
(10,301)
17,447
3,902
27,613 $ 11,348,163 $ 24,594,878 $
—
—
18,281,691
—
—
—
(908,764) $ 35,061,890 $
—
974,979
18,281,691
974,979
(168,680) $ 34,893,210
18,281,691
970,446
—
(4,533)
—
(935,692)
—
—
(935,692)
173,213
(762,479)
Balance as of December 31, 2020.
27,612,597 $
27,613 $ 10,412,471 $ 42,876,569 $
66,215 $ 53,382,868 $
— $ 53,382,868
See notes to consolidated financial statements.
52
XPEL, INC.
Consolidated Statements of Cash Flows
Year Ended December 31,
2020
2019
2018
Cash flows from operating activities
Net income.................................................................................................................. $ 18,281,691 $ 13,995,072 $ 8,721,232
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment........................................................
Amortization of intangible assets.............................................................................
Impairment expense................................................................................................
(Gain) loss on sale of property and equipment........................................................
Bad debt expense...................................................................................................
Deferred income tax................................................................................................
Accretion on notes payable.....................................................................................
1,274,095
955,937
—
(3,198)
113,771
(273,299)
64,982
915,918
781,105
66,364
(11,298)
242,091
117,328
61,316
735,983
642,801
—
25,733
190,230
(86,218)
43,416
Changes in assets and liabilities:
Accounts receivable................................................................................................
Inventory, net...........................................................................................................
Prepaid expenses and other current assets............................................................
Income tax receivable..............................................................................................
Other assets............................................................................................................
Accounts payable and accrued liabilities.................................................................
Income tax payable.................................................................................................
Net cash provided by operating activities..............................................................
Cash flows used in investing activities
Purchase of property, plant and equipment..............................................................
Proceeds from sale of property and equipment.......................................................
Acquisitions, net of cash acquired and notes payable.............................................
Development or purchase of intangible assets........................................................
Net cash used in investing activities......................................................................
Cash flows from financing activities
(2,431,292)
(6,758,855)
948,666
94,729
(442,188)
6,359,365
281,607
18,466,011
(1,773,371)
(4,251,134)
(1,653,420)
(93,611)
32,576
3,877,024
(1,340,441)
10,965,519
(261,256)
11,148
132,682
—
—
(3,635,246)
276,280
6,796,785
(1,781,464)
60,806
(2,568,538)
(374,358)
(4,663,554)
(1,569,823)
68,457
(127,623)
(674,581)
(2,303,570)
(2,030,314)
155,277
(831,934)
(386,985)
(3,093,956)
—
Borrowings on revolving credit agreements.............................................................
(2,000,000)
Repayments of revolving credit agreements............................................................
—
Borrowing on term-loan............................................................................................
(1,098,181)
Repayments of notes payable..................................................................................
—
Purchase of minority interest....................................................................................
(3,098,181)
Net cash provided by (used in) financing activities..............................................
604,648
Net change in cash and cash equivalents..............................................................
(132,326)
Foreign exchange impact on cash and cash equivalents.....................................
472,322
Increase in cash and cash equivalents during the period....................................
Cash and cash equivalents at beginning of year...................................................
3,498,904
Cash and cash equivalents at end of year.............................................................. $ 29,027,124 $ 11,500,973 $ 3,971,226
3,511,229
17,313,686
212,465
17,526,151
11,500,973
(1,143,240)
7,518,709
11,038
7,529,747
3,971,226
8,932,016
(8,932,016)
6,000,000
(1,704,118)
(784,653)
(1,143,240)
—
—
—
—
Supplemental schedule of non-cash activities
Notes payable issued for acquisitions................................................................. $
Contingent consideration...................................................................................... $
Forgiveness of debt for acquired entities............................................................ $
893,314 $
541,000 $
— $
— $
— $
— $
998,668
—
88,216
Supplemental cash flow information
Cash paid for income taxes................................................................................... $ 4,461,256 $ 4,079,962 $ 2,514,727
86,417
Cash paid for interest............................................................................................ $
178,385 $
17,850 $
See notes to consolidated financial statements.
53
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
1.
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company is based in San Antonio, Texas and sells, distributes, and
installs protective films and coatings, including automotive surface and paint protection film, headlight
protection, automotive and architectural window films and ceramic coatings.
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 consolidated financial statements are prepared in conformity with
GAAP and include the accounts of the Company and its wholly-owned or majority-owned subsidiaries.
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 non-controlling interest” on the Consolidated
Statements of Income and Comprehensive Income. Intercompany accounts and transactions have
been eliminated. Certain reclassifications have been made to conform to the current year presentation.
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
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 in the accompanying
consolidated statements of income. The ownership percentages and functional currencies of the
entities included in these consolidated financial statements are as follows:
Subsidiaries
Functional Currency
% Owned by XPEL, Inc.
XPEL, Ltd....................................................................................... UK Pound Sterling
Armourfend CAD, LLC................................................................... U.S. Dollar
XPEL Canada Corp........................................................................ Canadian Dollar
XPEL B.V....................................................................................... Euro
XPEL Germany GmbH................................................................... Euro
XPEL de Mexico S. de R.L. de C.V................................................ Peso
XPEL Acquisition Corp................................................................... Canadian Dollar
Protex Canada, Inc........................................................................ Canadian Dollar
Apogee Corp.................................................................................. New Taiwan Dollar
XPEL Slovakia............................................................................... Euro
XPEL France.................................................................................. Euro
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
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 one operating segment.
Use of Estimates - The preparation of these 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.
54
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Foreign Currency Translation - The financial statements of subsidiaries located outside of the U.S.
are generally measured using the local currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items
are translated at average monthly rates of exchange. The resultant translation adjustments are included
in accumulated other comprehensive income, a separate component of stockholders’ equity.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and highly liquid
investments with an original maturity of three months or less at the date of purchase. The balance, at
times, may exceed federally insured limits.
Accounts Receivable - Accounts receivable are shown net of an allowance for doubtful accounts of
$90,844 and $182,488 as of December 31, 2020 and 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 two large customers
accounted for 24.7% of the Company’s total accounts receivable balance at December 31, 2020. As of
December 31, 2019, a large customer accounted for 18.8% of the Company’s total accounts receivable
balance.
Inventory - Inventory is comprised of film, film-based products, film installation support products, and
supplies which are valued at lower of cost or net realizable value, with cost determined on a weighted
average cost basis. We provide reserves for discontinued and excess inventory based upon historical
demand, forecasted usage, estimated customer requirements and product line updates. As of
December 31, 2020 and 2019, inventory reserves were $113,091 and $120,826, respectively.
Property, Plant and Equipment - Property and equipment are recorded at cost, except property and
equipment acquired in connection with the Company’s business combinations, which are recorded at fair
value on the date of acquisition. Expenditures which improve or extend the life of the respective assets
are capitalized, whereas expenditures for normal repairs and maintenance are charged to operations as
incurred. Depreciation expense is computed using the straight-line method as follows:
Furniture and fixtures................................................ 5 years
Computer equipment................................................ 3-4 years
Vehicles..................................................................... 5 years
Equipment................................................................. 5-8 years
Leasehold improvements.......................................... shorter of lease term or estimated useful life
Plotters...................................................................... 4 years
The following table presents geographic property, plant and equipment, net by region as of December
31:
United States............................................................................................................. $
3,110,979 $
2,410,737
Canada......................................................................................................................
Europe.......................................................................................................................
Other..........................................................................................................................
674,821
584,084
336,364
519,066
679,112
405,738
Consolidated.............................................................................................................. $
4,706,248 $
4,014,653
2020
2019
55
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Goodwill - Goodwill represents the excess purchase price over the fair value of tangible net assets
acquired in business combinations after amounts have been allocated to intangible assets. Goodwill is
tested for impairment at the reporting unit level on an annual basis (at December 31) and between annual
tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. The Company recognized a goodwill impairment loss in connection
with the closing of one installation location during the year ended December 31, 2019. Refer to Note 5,
Goodwill for more information related to this impairment.
The following table presents geographic Goodwill by region as of December 31:
United States............................................................................................................. $
1,246,383 $
617,334
Canada......................................................................................................................
3,137,153
1,740,884
Other..........................................................................................................................
88,681
48,294
Consolidated.............................................................................................................. $
4,472,217 $
2,406,512
2020
2019
Intangible Assets - Intangible assets consist primarily of software, customer relationships,
trademarks and non-compete agreements. These assets are amortized on a straight-line basis over the
period of time in which their expected benefits will be realized.
The following table presents geographic intangible assets, net by region as of December 31:
United States............................................................................................................. $
2,597,670 $
2,074,235
Canada......................................................................................................................
2,273,627
1,431,247
Europe.......................................................................................................................
Other..........................................................................................................................
337,282
215,401
81,612
233,366
Consolidated.............................................................................................................. $
5,423,980 $
3,820,460
2020
2019
The following table presents the anticipated useful lives of intangible assets:
Trademarks........................................................................................................................................... 10 years
Software............................................................................................................................................... 5 years
Trade name.......................................................................................................................................... 10-15 years
Contractual and customer relationships............................................................................................... 9-10 years
Non-compete........................................................................................................................................ 3-5 years
Other..................................................................................................................................................... 10 years
Impairment of Long-Lived Assets - The Company reviews and evaluates long-lived assets for
impairment when events or circumstances indicate that the carrying amount of an asset may not be
recoverable. When the undiscounted expected future cash flows are not sufficient to recover an asset’s
carrying amount, the fair value is compared to the carrying value to determine the impairment loss to be
recorded. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value,
less the cost to sell. Fair values are determined by independent appraisals or expected sales prices
based upon market participant data developed by third party professionals or by internal licensed real
estate professionals. Estimates of future cash flows and expected sales prices are judgments based upon
the Company’s experience and knowledge of operations. These estimates project cash flows several
years into the future and are affected by changes in the economy, real estate market conditions and
inflation.
56
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
No impairment was recorded during the year ended December 31, 2020. The Company recognized
an intangible asset impairment loss in connection with the closing of one installation location during the
year ended December 31, 2019. Refer to Note 4, Intangible Assets, Net for more information related to
this impairment.
Other Long-Term Liabilities - The balance presented as other long-term liabilities on the Company’s
consolidated balance sheet at December 31, 2020 relate to contingent liabilities, primarily associated with
the Company’s 2020 acquisition of Veloce Innovation, and a reserve for uncertain tax positions. For
further information, refer to Footnotes 13 and 16, respectively.
Revenue Recognition - Our revenue is comprised primarily of product and services sales where
we act as principal to the transaction. All revenue is recognized when the Company satisfies its
performance obligation(s) by transferring control/final benefit from the promised product or service to our
customer. Due to the nature of our sales contracts, the majority of our revenue is recognized at a point
in time. A performance obligation is a contractual promise to transfer a distinct product or service to a
customer. A contract’s transaction price is allocated to each distinct performance obligation. Revenue is
recorded net of returns and allowances. Sales, value add, and other taxes collected from customers and
remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.
Shipping and handling costs are accounted for as a fulfillment obligation, on a net basis, and are
included in cost of sales. See Note 2, Revenue Recognition, for additional accounting policies and
transition disclosures.
Research and Development - Research costs are charged to operations when incurred. Software
development costs, including costs associated with developing software patterns, are expensed as
incurred unless the Company incurred these expenses in the development of a new product or long-lived
asset. Research and development costs were $143,568, $602,446, and $223,886 in the years ended
December 31, 2020, 2019 and 2018 respectively.
Advertising costs - Advertising costs are charged to operations when incurred. Advertising costs
were $571,204, $908,585 and $572,218 in the years ended December 31, 2020, 2019 and 2018
respectively.
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. The following table presents a summary of our warranty liabilities as of
December 31, 2020 and 2019:
Warranty balance at beginning of period...................................................... $
Warranties assumed in period......................................................................
Payments......................................................................................................
Warranty balance at end of period................................................................ $
2020
2019
65,591 $
70,250
283,458
384,214
(297,043)
(388,873)
52,006 $
65,591
Income Taxes - Deferred income tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts
in the future. Such deferred income tax asset and liability computations are based on enacted tax laws
and rates applicable to periods in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the amounts expected to be
realized. Income tax expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred and other tax assets and liabilities.
Accumulated Other Comprehensive
Income (Loss) (“AOCI”) - The Company reports
comprehensive income (loss) that includes net income (loss) and other comprehensive income (loss).
57
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Other comprehensive income (loss) refers to expenses, gains and losses that are not included in net
earnings. These amounts are also presented in the consolidated statements of comprehensive income.
As of December 31, 2020, 2019 and 2018, respectively, AOCI relates to foreign currency translation
adjustments.
Earnings Per Share - Basic earnings per share amounts are calculated by dividing net income for
the year attributable to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net income
attributable to common stockholders by the weighted average number of shares outstanding during the
period plus the weighted average number of shares that would be issued on the conversion of all the
dilutive potential ordinary shares into common shares.
Business Combinations - Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The excess of the fair value of the consideration
transferred including the recognized amount of any non-controlling interest in the acquiree, over the fair
value of the Company’s share of the identifiable net assets acquired is recorded as goodwill. Acquisition-
related expenses are recognized separately from the business combination and are recognized as
general and administrative expense as incurred. The Company evaluates the materiality of required
disclosures related to our business combinations using quantitative and qualitative measures.
Fair Value - Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. Assets
and liabilities measured at fair value are classified using the following hierarchy, which is based upon the
transparency of inputs to the valuation as of the measurement date:
Level 1:.................. Valuation is based on observable inputs such as quoted market prices
(unadjusted) for identical assets or liabilities in active markets.
Level 2:.................. Valuation is based on inputs such as quoted market prices for similar assets or
liabilities in active markets or other inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument.
Level 3:.................. Valuation is based upon other unobservable inputs that are significant to the fair
value measurement.
In making fair value measurements, observable market data must be used when available. When
inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair
value measurement is categorized is based on the lowest level input that is significant to the fair value
measurement.
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. Refer to Note 15 for additional information related to the adoption of
this standard.
58
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Recent Accounting Pronouncements Issued and Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Measurement of Credit
Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses
for financial assets held. As a smaller reporting company, 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 ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes. The ASU removes certain exceptions to the general principles in Topic 740
and also clarifies and amends existing guidance to improve consistent application. This ASU is effective
for fiscal years beginning after December 15 2020, including interim periods within that fiscal year, with
early adoption permitted. The Company is currently evaluating the impact of this ASU, but does not
expect a material impact to the financial statements upon adoption.
2.
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; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.
The Company generates substantially all of its revenue from contracts with customers, whether
formal or implied. Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions
and are excluded from sales revenue as the Company considers itself a pass-through conduit for
collecting and remitting sales taxes, with the exception of taxes assessed during the procurement process
of select inventories. Shipping and handling costs are included in cost of sales.
Revenue 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.
59
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
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. See Note 9 of the Notes to our Consolidated
Financial Statements for further information. As the performance obligation is part of a contract that has
an original expected duration of less than one year, the Company has applied the practical expedient
under ASC 606 to omit disclosures regarding remaining performance obligations.
The following table summarizes transactions included within contract liabilities for the years ended
December 31, 2020, 2019 and 2018, respectively.
Balance, December 31, 2017..................................................................................................... $
Revenue recognized related to payments included in the December 31, 2018 balance...........
Balance, Payments received for which performance obligations have not been satisfied.........
Effect of Foreign Currency Translation.......................................................................................
Balance, December 31, 2018..................................................................................................... $
Revenue recognized related to payments included in the December 31, 2018 balance...........
Balance, Payments received for which performance obligations have not been satisfied.........
Effect of Foreign Currency Translation.......................................................................................
Balance, December 31, 2019..................................................................................................... $
Revenue recognized related to payments included in the December 31, 2019 balance...........
Payments received for which performance obligations have not been satisfied........................
Effect of Foreign Currency Translation
Balance, December 31, 2020..................................................................................................... $
1,701,356
(1,701,356)
136,213
—
136,213
(115,670)
537,683
1,006
559,232
(529,268)
210,064
4,809
244,837
When the Company transfers goods or 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.
60
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
The table below sets forth the disaggregation of revenue by product category for the years ended
December 31,
Product Revenue
Paint protection film............................................................................ $ 110,786,164 $ 97,341,865 $ 85,495,382
Window film........................................................................................
20,950,591
11,384,437
7,309,773
Other...................................................................................................
4,525,312
3,478,437
2,721,195
Total................................................................................................
136,262,067
112,204,739
95,526,350
2020
2019
2018
Service Revenue
Software............................................................................................. $ 3,489,348 $ 3,263,391 $ 2,566,960
Cutbank credits...................................................................................
7,784,554
7,253,610
6,197,250
Installation labor.................................................................................
10,925,525
6,620,527
5,211,633
Training...............................................................................................
462,954
590,614
418,421
Total................................................................................................
22,662,381
17,728,142
14,394,264
Total................................................................................................ $ 158,924,448 $ 129,932,881 $ 109,920,614
Because many of our international customers require us to ship their orders to freight forwarders
located in the United States, we cannot be certain about the ultimate destination of the product. The
following table represents our estimate of sales by geographic regions based on our understanding of
ultimate product destination based on customer interactions, customer locations and other factors:
Twelve Months Ended
December 31,
2020
2019
2018
United States....................................................................................... $ 75,078,562 $ 60,452,238 $ 46,077,624
China................................................................................................... 32,807,976
30,490,859
32,279,335
Canada................................................................................................ 20,524,371
17,912,548
15,146,869
Continental Europe.............................................................................
12,772,441
7,419,524
5,734,925
United Kingdom...................................................................................
4,716,531
3,784,535
2,725,925
Asia Pacific..........................................................................................
5,262,733
4,370,156
2,754,495
Latin America......................................................................................
2,274,341
2,098,873
1,799,180
Middle East/Africa...............................................................................
5,167,595
3,149,235
2,806,502
Other...................................................................................................
319,898
254,913
595,759
Total................................................................................................ $ 158,924,448 $ 129,932,881 $ 109,920,614
Our largest customer (the China Distributor) accounted for 20.6%, 23.5% and 29.2% of our net sales
during the years ended December 31, 2020, 2019 and 2018 respectively.
61
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
3.
PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
December 31, 2020 December 31, 2019
Furniture and fixtures...................................................................................... $
1,349,037 $
Computer equipment......................................................................................
Vehicles..........................................................................................................
Equipment.......................................................................................................
Leasehold improvements................................................................................
Plotters............................................................................................................
Construction in Progress................................................................................
Total property and equipment.........................................................................
Less: accumulated depreciation.....................................................................
1,482,911
760,335
1,955,254
2,055,798
1,282,630
321,764
9,207,729
4,501,481
Property and equipment, net.......................................................................... $
4,706,248 $
1,168,894
1,151,295
683,213
1,648,656
1,479,594
839,455
306,100
7,277,207
3,262,554
4,014,653
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $1,274,095,
$915,918 and $735,983, respectively.
4.
INTANGIBLE ASSETS, NET
Intangible assets consists of the following:
December 31,
2020
December 31,
2019
Trademarks............................................................................................................... $
373,374 $
309,395
Software....................................................................................................................
2,598,985
2,288,062
Trade name...............................................................................................................
497,545
492,408
Contractual and customer relationships....................................................................
5,043,915
3,010,480
Non-compete............................................................................................................
Other.........................................................................................................................
458,536
213,218
Total cost....................................................................................................................
9,185,573
Less: Accumulated amortization................................................................................
3,761,593
268,459
208,012
6,576,816
2,756,356
Intangible assets, net................................................................................................. $
5,423,980 $
3,820,460
Amortization expense for the years ended December 31, 2020, 2019 and 2018 was $955,937,
$781,105 and $642,801, respectively. Based on the carrying value of definite-lived intangible assets as of
December 31, 2020, we estimate our future amortization expense will be as follows:
2021
2022
2023
2024
2025
Thereafter
$
1,035,158
947,587
903,786
774,585
511,263
$
1,251,601
During the year ended December 31, 2019, the Company’s wholly-owned subsidiary, Protex Canada,
sold a franchise territory to a new franchisee in Quebec. In connection with this arrangement, the
62
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Company closed its Quebec City installation location and recorded an impairment against all previously
recognized intangible assets for that location. The Company recorded an impairment loss of $30,480
related to the intangible assets other than goodwill associated with this closed location. This impairment
loss is reflected in general and administrative expense on the consolidated statement of income.
5.
GOODWILL
The following table summarizes changes in the carrying amounts of goodwill for the years ended
December 31, 2020 and 2019:
Balance at December 31, 2018............................................................................................................. $
Additions................................................................................................................................................
Impairment.............................................................................................................................................
Foreign currency translation...................................................................................................................
Balance at December 31, 2019............................................................................................................. $
2,322,788
44,584
(35,884)
75,024
2,406,512
Balance at December 31, 2019............................................................................................................. $
Additions................................................................................................................................................
2,406,512
1,938,656
Foreign currency translation...................................................................................................................
127,049
Balance at December 31, 2020............................................................................................................. $
4,472,217
No impairment was recorded during the year ended December 31, 2020. During the year ended
December 31, 2019, the Company’s wholly-owned subsidiary, Protex Canada, sold a franchise territory
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 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
consolidated statement of income. This impairment represents the full accumulated impairment balance
at both December 31, 2020 and 2019, respectively.
6.
INVENTORIES
The components of inventory are summarized as follows:
Film and film based products..................................................................................... $ 20,170,756 $ 13,538,610
Other products...........................................................................................................
1,717,236
1,226,708
Packaging and supplies.............................................................................................
589,225
496,661
Inventory reserve.......................................................................................................
(113,091)
(120,826)
$ 22,364,126 $ 15,141,153
December 31,
2020
December 31,
2019
7.
DEBT
REVOLVING FACILITIES
The Company has an $8,500,000 revolving line of credit to support its continuing working capital
needs. The line of credit has a variable interest rate of the Wall Street Journal prime rate plus 1.00% with
a floor of 3.50%, and it reaches maturity on June 5, 2022. This line of credit is secured by substantially all
of the Company’s current and future assets.The interest rate was 3.50% and 5.50% as of December 31,
63
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
2020 and 2019, respectively. As of December 31, 2020 and 2019, no 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 certain debt coverage ratios, and it contains customary
events of default including the failure to make payments of principal and interest, the breach of any
covenants, the occurrence of a material adverse change, and certain bankruptcy and insolvency events.
As of December 31, 2020 and 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 was 2.70% and 4.20% as of December 31, 2020 and 2019, respectively. As of December
31, 2020 and 2019, no balance was outstanding on this line of credit. This facility is guaranteed by the
Company.
NOTES PAYABLE
On May 11, 2020, the Company borrowed $6,000,000 pursuant to a 36-month term-loan with Texas
Partners Bank. The term-loan bears interest at a rate of 3.5% per annum, requires monthly payments of
principal and interest of $176,373 and matures in June 2023. As of December 31, 2020, $5,056,240 was
outstanding under the term-loan. The term-loan is secured by a security interest in substantially all of our
current and future assets.
As part of its acquisition strategy, the Company uses a combination of cash and unsecured non-
interest bearing promissory notes payable to fund its business acquisitions. The Company discounts the
promissory note to fair value using market interest rates at the time of the acquisition.
Notes payable are summarized as follows:
Weighted
Average Interest
Rate
Term-loan.........................................................
Face value of acquisition notes payable..........
3.50%
3.02%
Total face value of notes payable....................
Unamortized discount......................................
Current portion.................................................
Total long-term debt.........................................
Matures
2023
2023
December 31,
2020
December 31,
2019
$
$
$
$
$
$
5,056,240 $
1,428,384 $
—
806,867
6,484,624 $
806,867
(348,261) $
(37,360)
(2,568,172) $
(462,226)
3,568,191 $
307,281
The approximate future principal payments on notes payable are as presented in the table below.
2021.................................................................................................................................... $
2,761,140
2022....................................................................................................................................
2023....................................................................................................................................
2024....................................................................................................................................
2025....................................................................................................................................
Thereafter............................................................................................................................
2,549,623
1,156,221
16,283
1,357
—
$
6,484,624
64
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
8.
EMPLOYEE BENEFIT PLAN
The Company sponsors defined contribution plans for substantially all employees. Annual Company
contributions under the plans are discretionary. Company contribution expenses during the years ended
December 31, 2020, 2019 and 2018 were $278,434, $174,744 and $124,431, respectively.
9.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table presents significant accounts payable and accrued liability balances as of the
periods ending:
Trade payables.......................................................................................... $
Payroll liabilities.........................................................................................
Contract liabilities......................................................................................
Other liabilities...........................................................................................
12,987,487 $
2,266,643
244,837
1,298,495
7,440,965
1,367,340
559,232
829,816
December 31, 2020
December 31, 2019
$
16,797,462 $
10,197,353
10.
CAPITAL STOCK
Shares issued and outstanding at both December 31, 2020 and 2019 were 27,612,597. Par value of
these shares for these same dates was $27,613.
11.
STOCK OPTIONS
The Company’s 2020 Equity Incentive Plan was approved during the May 28, 2020 Annual Meeting
of Stockholders. Under this plan, 275,000 shares of the Company’s Common Stock are reserved for
issuance, as administered by the Company’s Compensation Committee. Awards may be granted to
employees, consultants, or directors of the Company or any parent or subsidiary of the Company;
provided that incentive stock options may be granted only to employees. If an award made under this
plan expires, if it is terminated, surrendered, cancelled, or otherwise becomes unexercisable, or if an
award is forfeit in whole or in part or is forfeited due to failure to vest, then the unpurchased shares under
such award will become available for future grant under this plan. This plan allows for the bestowal of
different types of awards.
Stock options awarded under this plan must be at least equal to the fair market value of a share of
our Common Stock on the date of the grant. Any option period will not exceed 10 years, except with
respect to any participant who owns more than 10% of the voting power of all classes of stock of the
Company.
Restricted stock, RSUs, Performance Units and Performance Shares, and Other Share-based
Awards may be granted at the discretion of the Compensation Committee according to terms and
conditions set by the Compensation Committee, subject to the provisions of the 2020 Equity Incentive
Plan.
No awards were granted under the plan during years presented within this annual report.
65
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
12.
FAIR VALUE MEASUREMENTS
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
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.
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. The carrying value of the
Company's long-term debt approximates fair value due to the interest rates being market rates. For
discussion of the fair value measurements related to goodwill refer to Note 5, Goodwill, of the
consolidated financial statements for periods ended December 31, 2020 and 2019, respectively.
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).
As more fully described in footnote 16, the Company incurred contingent liabilities in relation to the
2020 acquisition of Veloce Innovation. The payment of these liabilities is contingent on attainment of
certain revenue performance metrics in future years. The fair value of these liabilities was determined
using a Monte Carlo Simulation method based on the probability and timing of certain future payments
related to these metrics. These liabilities are accounted for as Level 3 liabilities within the fair value
hierarchy.
Liabilities measured at December 31, 2020 and 2019 at fair value on a recurring basis are as follows:
Level 3:
Contingent Liabilities............................................................................................. $
571,833 $
—
Due to the timing of the Veloce acquisition on December 31, 2020, no changes to the initial valuation
were recorded, and a presentation of changes during the year would contain no additional meaningful
information.
2020
2019
66
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
13.
INCOME TAXES
Income before income taxes on which the provision for income taxes was computed is as follows:
Domestic........................................................................ $ 20,546,504 $ 15,375,731 $ 10,008,013
International...................................................................
2,257,855
1,574,697
1,473,292
Income before income taxes.......................................... $ 22,804,359 $ 16,950,428 $ 11,481,305
2020
2019
2018
The provision for income taxes differs from the United States federal statutory rate as follows:
Income before income taxes.............................................. $ 22,804,359
$ 16,950,428
$ 11,481,305
Statutory rate.....................................................................
21 %
21 %
21 %
4,788,915
3,559,590
2,411,074
2020
2019
2018
State taxes net of federal benefit.......................................
295,097
Nondeductible/nontaxable items........................................
49,252
Foreign tax rate differential................................................
101,625
Foreign derived intangible income benefit.........................
(703,328)
Return to provision estimated revision...............................
(195,577)
Other - net..........................................................................
186,684
31,446
115,679
45,994
(287,606)
(358,986)
(150,761)
183,468
—
81,474
—
—
84,057
Income tax expense........................................................... $ 4,522,668
$ 2,955,356
$ 2,760,073
The foreign tax rate differential reflects the impact of the differences in our various international tax
rates and our US statutory rate.
The components of the income tax provision (benefit) are as follows:
Years ended December 31
2020
2019
2018
Current Income Tax Expense
Federal........................................................................................ $
3,572,812 $
2,412,157 $
2,182,415
Foreign........................................................................................
State............................................................................................
815,968
407,187
518,528
3,068
431,638
232,238
Total Current Income Tax Expense.............................................
4,795,967
2,933,753
2,846,291
Deferred Income Tax Expense/(Benefit)
Federal........................................................................................
(234,176)
99,870
Foreign........................................................................................
13,854
(78,267)
State............................................................................................
(52,977)
—
(65,801)
(20,417)
—
Total Deferred Income Tax Expense/(Benefit).............................
(273,299)
21,603
(86,218)
Total............................................................................................ $
4,522,668 $
2,955,356 $
2,760,073
67
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company’s net deferred income taxes are as follows:
Years ended December 31
2020
2019
DEFERRED TAX ASSETS:
Allowance for Doubtful Accounts............................................................................... $
16,081 $
263(A) Adjustment.....................................................................................................
Accrued Expenses.....................................................................................................
Inventory Reserve......................................................................................................
Unrealized loss..........................................................................................................
State Tax Credit.........................................................................................................
NOL Carryforward and Other.....................................................................................
59,852
399,240
25,436
37,432
103,350
160,883
Right of Use Lease Liability.......................................................................................
1,280,737
Total deferred tax assets.........................................................................................
2,083,011
31,073
31,427
212
9,725
6,282
27,867
162,005
1,046,467
1,315,058
DEFERRED TAX LIABILITIES:
Fixed and Intangible Assets....................................................................................... $
1,399,311 $
860,592
Unrealized Gain.........................................................................................................
Accretion....................................................................................................................
Cumulative Translation Adjustment............................................................................
15,150
6,852
9,436
Right of Use Lease Asset...........................................................................................
1,280,068
Total deferred tax liabilities....................................................................................
2,710,817
12,713
—
—
1,046,467
1,919,772
Total net deferred tax liabilities.............................................................................. $
(627,806) $
(604,714)
In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The Company regularly
assesses the likelihood that the deferred tax assets will be recovered from future taxable income. The
Company considers projected future taxable income and ongoing tax planning strategies, then records a
valuation allowance, if deemed necessary, to reduce the carrying value of the net deferred taxes to an
amount that is more likely than not able to be realized. Based upon the Company’s assessment of all
available evidence, including the previous two years of taxable income and loss after permanent items,
estimates of future profitability, and the Company’s overall prospects of future business, the Company
determined that it is more likely than not that the Company will realize all of its deferred tax assets in the
future. The Company will continue to assess the potential realization of deferred tax assets on an annual
basis, or an interim basis if circumstances warrant. If the Company’s actual results and updated
projections vary significantly from the projections used as basis for this determination, the Company may
need to change the valuation allowance against the gross deferred tax assets.
The Company has net operating losses of approximately $0.8 million available to apply against future
taxable income. These losses have no expiration date. The Company has state tax credits of $0.1 million
available to apply against future taxable income. These credits begin to expire in 2039.
68
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Reconciliation of Unrecognized Tax Benefits from Uncertain Tax Positions
Beginning unrecognized tax benefits
$
Increase related to tax positions of the current year
Increase related tax positions of prior years
Lapse of statute of limitations
Audit Settlements
Years Ended December 31,
2020
2019
2018
— $
—
129,082
—
—
— $
—
—
—
—
Ending unrecognized tax benefits
$
129,082 $
— $
—
—
—
—
—
—
The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not to
be sustained based solely upon its technical merits at the reporting date. The unrecognized tax benefit is
the difference between the tax benefit recognized and the tax benefit claimed on the Company’s income
tax return. The Company recognized a previously unrecognized tax benefit during the year ended
December 31, 2020 in the amount of approximately $0.2 million related to an uncertain tax position in
one of its foreign subsidiaries. This amount includes an estimate for interest and penalties. The liability is
reflected in other long term liabilities on the Company’s balance sheet. The Company does not expect
any changes to this position in the next twelve months. The unrecognized tax benefits in the table above
includes $0.1 million as of December 31, 2020, that, if recognized, would have impacted income tax
expense. The Company believes that all material tax positions in the current and prior years have been
analyzed and properly accounted for and that the risk of additional material uncertain tax positions that
have not been identified is remote.
The Company plans to indefinitely reinvest foreign earnings and does not expect to repatriate
earnings for the foreseeable future. Determination of the amount of unrecognized deferred tax liabilities
related to investment in these foreign subsidiaries is not practicable.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and
foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related
tax laws and regulations and require significant judgment to apply. The Company is still subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities for the years 2013 and
after. There are no ongoing or pending IRS, state or foreign examinations.
14.
COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
In the ordinary course of business activities, the Company may be contingently liable for litigation
and claims with customers, suppliers and former employees. Management believes that adequate
provisions have been recorded in the accounts where required. Management also has determined that
the likelihood of any litigation and claims having a material impact on our results of operations, cash
flows or financial position is remote. See Note 16 of the Notes to our Consolidated Financial Statements
for further information.
SUPPLY AGREEMENT
Through our Amended and Restated Supply Agreement that we entered into with our primary supplier
in March 2017 and renewed in March 2020, we have exclusive rights to commercialize, market, distribute
and sell its automotive aftermarket products through March 21, 2022, which term automatically renews for
successive two year periods thereafter unless terminated at the option of either party with two months’
69
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
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 of paint protection film products, with a
yearly minimum purchasing requirement of $20,000,000.
OTHER COMMITMENTS
In December 2020, the Company entered into an agreement to lease additional warehouse space in
San Antonio, Texas. In January 2021, the Company entered into an agreement to lease additional
warehouse space in Charlotte, North Carolina. The inception date of the Texas lease is scheduled for
June 2021, is for a term of 88 months, and includes total base rent payments of $4,706,016. The
inception of the North Carolina lease is scheduled for the second quarter of 2021, is for a term of 84
months, and includes total base rent payments of $949,601.
15.
LEASES
We lease space under non-cancelable operating leases for office space, warehouse facilities, and
installation locations. 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.
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.
Balance sheet information related to operating leases is as follows:
Operating lease right-of-use assets
December 31, 2020
December 31, 2019
$
5,973,702 $
5,079,110
Current portion of operating lease liabilities
Noncurrent portion of operating lease liabilities
1,650,749
4,331,214
Total operating lease liabilities
$
5,981,963 $
1,126,701
4,009,949
5,136,650
We had operating lease expense of $1,515,848 and $1,210,969, respectively, for the years ended
December 31, 2020 and 2019. For the year ended December 31, 2018, rent expense related to operating
leases accounted for under the prior lease standard was approximately $1,209,208. Variable lease
payments, short-term lease expenses, and cash payments on leases subject to the accounting treatment
described above in Note 1 were $234,175, $513,016 and $1,460,422, respectively, for the year ended
December 31, 2020. For the year ended December 31, 2019, these same costs were $492,771,
$157,253, and $1,235,264, respectively.
Weighted-average information associated with the measurement of our remaining operating lease
obligations is as follows:
70
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
Weighted-average remaining lease term (in years)
Weighted-average discount rate
December 31, 2020
December 31, 2019
4.9
5.84 %
5.6
5.84 %
The following table summarizes the maturity of our operating lease liabilities as of December 31,
2020:
2021
2022
2023
2024
2025
Thereafter
Total operating lease payments
Less: interest
Total operating lease liabilities
$
$
1,702,807
1,620,862
1,426,574
762,478
415,216
990,187
6,918,124
(936,161)
5,981,963
71
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
16.
ACQUISITION OF BUSINESSES
The Company completed the following acquisitions during the years ended December 31, 2020, 2019 and
2018:
Acquisition
Date
December 31,
2020.................
October 30,
2020.................
Name/Location/Description
Veloce Innovation, Houston, Texas, United States,
Window film installation business
France Auto Racing, Dijon, France, Paint protection film
distributor
February 1,
2020.................
Protex Centre, Laval, Quebec, Canada - Paint protection
installation shop
December 20,
2019.................
Paintshield, Ltd., Salisbury, Wiltshire, United Kingdom -
Paint protection and window film installation shop
November 1,
2018.................
Apogee, Corp., Yilan City, Yilan County, Taiwan - Paint
protection and window film distributor
August 1, 2018
9846905 Canada, Inc., Calgary, Alberta, Canada - Paint
protection and window film installation shop
August 1, 2018
9341-9182 Quebec, Inc., Pointe Claire, Quebec, Canada
- Paint protection and window film installation shop
Purchase
Price
Acquisition
Type
$ 1,441,000 Asset
Purchase
$ 329,390 Asset
Purchase
$ 2,475,270 Share
Purchase
$ 127,623 Asset
Purchase
$ 638,552 Share
Purchase
$ 332,798 Share
Purchase
$ 363,239 Share
Purchase
June 1, 2018.... eShields, LLC, La Verne, CA, USA - Antimicrobial film
$ 496,982 Asset
distributor
Purchase
April 1, 2018..... 9352-4692 Quebec, Inc. Quebec City, Quebec, Canada -
$
87,248 Share
Paint protection and window film installation shop
Purchase
Acquisition
Purpose
Local market
expansion
Local market
expansion
Local market
expansion
Local market
expansion
Local market
expansion
Local market
expansion
Local market
expansion
Product line
expansion
Local market
expansion
The total purchase price for acquisitions completed during the years ended December 31, 2020, 2019 and
2018 are as follows:
72
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
December 31,
2020
2019
2018
2020
Acquisitions
2019
Acquisitions
2018
Acquisitions
Purchase Price
Cash......................................................................................................... $ 2,811,346 $
127,623 $
831,934
Promissory note........................................................................................
Contingent consideration..........................................................................
Forgiveness of debt
Allocation
893,314
541,000
—
—
—
—
998,668
—
88,216
$ 4,245,660 $
127,623 $ 1,918,818
Cash......................................................................................................... $
242,808 $
— $
41,407
Accounts receivable..................................................................................
Inventory...................................................................................................
Prepaid expenses and other assets.........................................................
Other long-term assets.............................................................................
Property and equipment...........................................................................
Right-of-use lease assets.........................................................................
Software....................................................................................................
Trade name...............................................................................................
Acquired patterns......................................................................................
206,808
182,336
3,764
6,197
161,702
587,587
1,027
—
—
Customer relationships.............................................................................
1,896,220
Non-compete............................................................................................
179,093
—
—
—
—
155,434
494,663
78,631
—
5,038
167,622
—
—
25,918
52,083
—
—
—
—
—
—
609,751
—
Goodwill....................................................................................................
1,938,656
44,584
576,173
Current portion of lease liabilities..............................................................
(73,297)
Accounts payable and accrued liabilities..................................................
(154,802)
Non-current portion of lease liabilities.......................................................
(514,290)
Assumed debt...........................................................................................
Deferred tax liability..................................................................................
Taxes payable
(108,764)
(274,333)
(35,052)
—
—
—
—
—
—
—
(204,863)
—
—
—
—
$ 4,245,660 $
127,623 $ 1,918,818
Intangible assets acquired in 2020 have a weighted average useful life of 9 years. Intangible assets
acquired in 2019 have a weighted average useful life of 2 years. Intangible assets acquired in 2018 have a
weighted average useful life of 9 years.
Goodwill for these acquisitions relates to the expansion into new geographical areas. The goodwill also
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.
Goodwill and other intangibles acquired in taxable asset purchases are analyzed for allowable amortization
for tax purposes over appropriate periods as prescribed by applicable regulatory jurisdictions.
Acquisition costs incurred related to these acquisitions were immaterial and were included in selling,
general and administrative expenses.
73
XPEL Inc.
Notes to Consolidated Financial Statements
December 31, 2020, 2019, and 2018
The acquired companies were consolidated into our financial statements on their respective acquisition
dates. The aggregate revenue and operating income of our 2020 acquisitions consolidated into our 2020
consolidated financial statements from the respective dates of acquisition were $3,816,509 and $1,125,311,
respectively. Due to the timing of the transaction, the aggregate revenue and operating income of the Veloce
Innovation and Paintshield acquisitions were immaterial to our 2020 and 2019 consolidated financial
statements, respectively. The aggregate revenue and operating income of our 2018 acquisitions consolidated
into our 2018 consolidated financial statements from the respective dates of acquisition were $613,701 and
$43,030, respectively. The following unaudited financial information presents our results, including the
estimated expenses relating to the amortization of intangibles purchased, as if the acquisitions during the
years ended December 31, 2020 had occurred on January 1, 2019:
Twelve Months Ended
December 31,
2020
(Unaudited)
2019
(Unaudited)
Revenue............................................................................................................... $ 160,746,877 $ 133,400,046
Net income........................................................................................................... $ 18,274,591 $ 13,927,429
The pro forma unaudited results do not purport to be indicative of the results which would have been
obtained had the acquisition been completed as of the beginning of the earliest period presented or of results
that may be obtained in the future. In addition, they do not include any benefits that may result from the
acquisition due to synergies that may be derived from the elimination of any duplicative costs.
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 Consolidated Statement of Changes in Stockholders' Equity.
74
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed
to provide reasonable assurance that information required to be disclosed in our reports filed with the
SEC pursuant to the Securities Exchange Act, 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 Securities 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 Securities 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.
Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive and Corporate Governance
Part III
The information required by this Item is set forth under the headings “Corporate Governance,”
“Directors,” “Executive Officers” and “Other Information—Security Ownership of Certain Beneficial
Owners and Management” in the Company’s 2021 Proxy Statement to be filed with the SEC within 120
days after December 31, 2020, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is set forth under the heading “Executive Compensation,” under
the subheadings “Board Oversight of Risk Management” and “Compensation Committee Interlocks and
Insider Participation” under
the subheadings
“Compensation of Directors” and “Director Compensation—2020” under the heading “Directors” in the
Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after December 31, 2020, and
is incorporated herein by reference.
the heading “Corporate Governance” and under
75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information required by this Item is set forth under the headings “Other Information—Security
Ownership of Certain Beneficial Owners and Management” and
Information—Equity
Compensation Plan Information” in the Company’s 2021 Proxy Statement to be filed with the SEC within
120 days after December 31, 2020, and is incorporated herein by reference.
“Other
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is set forth under the subheadings “Board Committees”,
“Review, Approval, or Ratification of Transactions with Related Persons” and “Transactions with Related
Persons” under the heading “Corporate Governance” in the Company’s 2021 Proxy Statement to be filed
with the SEC within 120 days after December 31, 2020, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item is set forth under the subheadings “Fees Paid to Auditors” and
“Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent
Registered Public Accounting Firm” under the proposal “Ratification of Appointment of Independent
Registered Public Accounting Firm” in the Company’s 2021 Proxy Statement to be filed with the SEC
within 120 days after December 31, 2020, and is incorporated herein by reference.
Part IV
76
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
See Index to Financial Statements at Item 8 herein.
2. Financial Statement Schedules
Schedules not listed above have been omitted because they are not required, not applicable, or the
required information is otherwise included.
3. Exhibits
The exhibits listed below are filed or furnished as part of this Annual Report or are incorporated herein
by reference, in each case as indicated below.
Exhibit
Number
3.1
3.2
3.3
3.4
Description
Articles of Incorporation of the Company, filed with the
Nevada Secretary of State on October 14, 2003.
Certificate of Amendment to the Articles of Incorporation of
the Company, filed with the Nevada Secretary of State on
December 29, 2003.
Certificate of Amendment to the Articles of Incorporation of
the Company, filed with the Nevada Secretary of State on
June 3, 2018.
Amended and Restated Bylaws of the Company, effective as
of November 18, 2019.
Incorporated by Reference
Form
10-12B
Exhibit/
Appendix
3.1
Filing Date
04/03/2019
10-12B
3.2
04/03/2019
10-12B
3.3
04/03/2019
8-K
3.1
11/18/2019
4.1
Description of Securities of the Registrant.
10-K
4.1
3/16/2020
10.1
10.2
10.3
10.4
10.5
10.6
Business Loan Agreement, dated as of August 5, 2017,
between XPEL Technologies Corp., as borrower, and The
Bank of San Antonio, as lender.
Change in Terms Agreement, dated as of May 5, 2018,
modifying that certain Business Loan Agreement dated as of
August 5, 2017, between XPEL Technologies, Corp., as
borrower, and The Bank of San Antonio, as lender.
10-12B/A 10.1
05/30/2019
10-12B/A 10.2
05/30/2019
Change in Terms Agreement, dated as of May 11, 2020,
between the Company, as borrower, and The Bank of San
Antonio, as lender.
10-Q
10.1
05/14/2020
Modification to Loan Agreement dated as of May 11, 2020
between the Company, as borrower, and The Bank of San
Antonio, as lender.
10-Q
10.2
05/14/2020
Promissory Note, dated as of May 11, 2020, between the
Company, as borrower, and The Bank of San Antonio, as
Lender.
Credit Facility Letter, dated September 11, 2018, by and
among XPEL Canada Corp., as borrower, XPEL, Inc., as
guarantor, and HSBC Bank Canada, as lender.
10-Q
10.3
05/14/2020
10-12B/A 10.3
05/30/2019
77
10.7
10.8
Amended and Restated Supply Agreement by and between
XPEL Technologies Corp., and entrotech, inc.
10-12B/A 10.4
04/24/2019
Distribution Agreement dated May 31, 2018 by and between
the Company and Shanghai Xing Ting Trading Co., Ltd.
10-12B/A 10.5
05/30/2019
10.9+
XPEL, Inc. 2020 Equity Incentive Plan
Schedule
14A
A
04/17/2020
14.1
Code of Business Conduct and Ethics.
10-12B/A 14.1
04/24/2019
21.1*
Subsidiaries of the Company.
31.1*
31.2*
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive
Officer.
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial
Officer.
32.1**
Section 1350 Certifications of Chief Executive Officer.
32.2**
Section 1350 Certifications of Chief Financial Officer.
101*
104*
Inline XBRL Document Set for the consolidated financial
statements and accompanying notes in Part II, Item 8,
“Financial Statements and Supplementary Data” of this
Annual Report on Form 10-K.
Inline XBRL for the cover page of this Annual Report on
Form 10-K, included in the Exhibit 101 Inline XBRL
Document Set.
* Filed herewith
** Furnished herewith
+Management Compensatory Plan or Agreement
78
Item 16. Form 10-K Summary
None.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 11, 2021
Senior Vice President and Chief Financial Officer
(Authorized Officer and Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
Name and Signature
Title
/s/ Ryan L. Pape
Ryan L. Pape
/s/ Barry R. Wood
Barry R. Wood
/s/ John A. Constantine
John A. Constantine
/s/ Richard K. Crumly
Richard K. Crumly
/s/ Michael A. Klonne
Michael A. Klonne
/s/ Mark E. Adams
Mark E. Adams
Chairman of the Board, President and
Director (Principal Executive Officer)
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Director
Director
Director
Director
Date
March 11, 2021
March 11, 2021
March 11, 2021
March 11, 2021
March 11, 2021
March 11, 2021
80