ITEM 1. FINANCIAL
STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share amounts and par
value)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,463
|
|
|
$
|
14,064
|
|
Accounts receivable, net
|
|
|
6,053
|
|
|
|
7,415
|
|
Inventories
|
|
|
14,268
|
|
|
|
15,118
|
|
Prepaid expenses
|
|
|
1,182
|
|
|
|
1,290
|
|
Other current assets
|
|
|
3,146
|
|
|
|
2,836
|
|
Total current assets
|
|
|
41,112
|
|
|
|
40,723
|
|
Property and equipment, net
|
|
|
23,823
|
|
|
|
24,933
|
|
Goodwill
|
|
|
10,292
|
|
|
|
10,292
|
|
Intangible assets, net
|
|
|
1,709
|
|
|
|
1,676
|
|
Investment
|
|
|
397
|
|
|
|
411
|
|
Deferred income tax assets
|
|
|
972
|
|
|
|
675
|
|
Inventories, non-current
|
|
|
2,471
|
|
|
|
2,453
|
|
Other assets, non-current
|
|
|
3,713
|
|
|
|
2,240
|
|
Total assets
|
|
$
|
84,489
|
|
|
$
|
83,403
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,583
|
|
|
$
|
4,743
|
|
Accrued liabilities
|
|
|
6,768
|
|
|
|
6,779
|
|
Customer deposits and deferred revenue
|
|
|
5,565
|
|
|
|
3,020
|
|
Current portion of long-term debt
|
|
|
1,413
|
|
|
|
1,401
|
|
Income taxes payable
|
|
|
686
|
|
|
|
693
|
|
Total current liabilities
|
|
|
18,015
|
|
|
|
16,636
|
|
Long-term debt
|
|
|
4,912
|
|
|
|
5,265
|
|
Other liabilities, non-current
|
|
|
198
|
|
|
|
186
|
|
Total liabilities
|
|
|
23,125
|
|
|
|
22,087
|
|
Commitments and contingencies - see Note 10
|
|
|
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, authorized 10,000,000 shares, $0.01 par value, none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, authorized 30,000,000 shares, $0.01 par value, 8,223,777 and 7,932,794 shares issued and outstanding, respectively, as of March 31, 2018, and 8,223,077 and 7,932,094 shares issued and outstanding, respectively, as of December 31, 2017
|
|
|
82
|
|
|
|
82
|
|
Additional paid-in capital
|
|
|
19,276
|
|
|
|
19,272
|
|
Treasury stock at cost: 290,983 shares
|
|
|
(2,263
|
)
|
|
|
(2,263
|
)
|
Retained earnings
|
|
|
44,312
|
|
|
|
44,718
|
|
Accumulated other comprehensive loss
|
|
|
(43
|
)
|
|
|
(493
|
)
|
Total stockholders' equity
|
|
|
61,364
|
|
|
|
61,316
|
|
Total liabilities and stockholders' equity
|
|
$
|
84,489
|
|
|
$
|
83,403
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
(in thousands, except per share amounts)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
18,683
|
|
|
$
|
18,913
|
|
Cost of revenues
|
|
|
13,747
|
|
|
|
13,093
|
|
Gross profit
|
|
|
4,936
|
|
|
|
5,820
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
1,767
|
|
|
|
1,726
|
|
General and administrative
|
|
|
1,896
|
|
|
|
2,325
|
|
Research and development
|
|
|
1,003
|
|
|
|
310
|
|
Operating income
|
|
|
270
|
|
|
|
1,459
|
|
Other expense, net
|
|
|
(266
|
)
|
|
|
(93
|
)
|
Income before income taxes
|
|
|
4
|
|
|
|
1,366
|
|
Income tax expense
|
|
|
1
|
|
|
|
434
|
|
Net income
|
|
$
|
3
|
|
|
$
|
932
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-
|
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
-
|
|
|
$
|
0.12
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,933
|
|
|
|
7,929
|
|
Diluted
|
|
|
8,043
|
|
|
|
8,059
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(unaudited)
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
3
|
|
|
$
|
932
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
450
|
|
|
|
207
|
|
Total comprehensive income
|
|
$
|
453
|
|
|
$
|
1,139
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(unaudited)
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
7,928,594
|
|
|
$
|
82
|
|
|
$
|
20,031
|
|
|
$
|
(2,263
|
)
|
|
$
|
42,044
|
|
|
$
|
(2,361
|
)
|
|
$
|
57,533
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
932
|
|
|
|
-
|
|
|
|
932
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
Foreign currency translation adjustment, net
of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
207
|
|
|
|
207
|
|
Balance at March 31, 2017
|
|
|
7,928,594
|
|
|
$
|
82
|
|
|
$
|
20,058
|
|
|
$
|
(2,263
|
)
|
|
$
|
42,976
|
|
|
$
|
(2,154
|
)
|
|
$
|
58,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
|
7,932,094
|
|
|
$
|
82
|
|
|
$
|
19,272
|
|
|
$
|
(2,263
|
)
|
|
$
|
44,718
|
|
|
$
|
(493
|
)
|
|
$
|
61,316
|
|
Impact of change in accounting policy
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(409
|
)
|
|
|
-
|
|
|
|
(409
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Common stock options exercised
|
|
|
700
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
Foreign currency translation adjustment, net
of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
450
|
|
|
|
450
|
|
Balance at March 31, 2018
|
|
|
7,932,794
|
|
|
$
|
82
|
|
|
$
|
19,276
|
|
|
$
|
(2,263
|
)
|
|
$
|
44,312
|
|
|
$
|
(43
|
)
|
|
$
|
61,364
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3
|
|
|
$
|
932
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
1,082
|
|
|
|
927
|
|
Amortization of intangible assets
|
|
|
62
|
|
|
|
63
|
|
(Recovery) provision for bad debt
|
|
|
(69
|
)
|
|
|
177
|
|
Deferred income taxes
|
|
|
(57
|
)
|
|
|
(148
|
)
|
Share based compensation expense
|
|
|
-
|
|
|
|
27
|
|
Equity loss in affiliate
|
|
|
14
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,439
|
|
|
|
742
|
|
Inventories
|
|
|
966
|
|
|
|
(1,388
|
)
|
Prepaid expenses and other current assets
|
|
|
4
|
|
|
|
(131
|
)
|
Other assets, non-current
|
|
|
(2,017
|
)
|
|
|
23
|
|
Accounts payable
|
|
|
(1,187
|
)
|
|
|
1,781
|
|
Accrued liabilities
|
|
|
21
|
|
|
|
209
|
|
Customer deposits and deferred revenue
|
|
|
2,536
|
|
|
|
533
|
|
Other current liabilities
|
|
|
77
|
|
|
|
(56
|
)
|
Income taxes payable
|
|
|
(6
|
)
|
|
|
405
|
|
Net cash provided by operating activities
|
|
|
2,868
|
|
|
|
4,096
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of licensing rights
|
|
|
-
|
|
|
|
(100
|
)
|
Capital expenditures
|
|
|
(177
|
)
|
|
|
(168
|
)
|
Net cash used in investing activities
|
|
|
(177
|
)
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(341
|
)
|
|
|
(337
|
)
|
Proceeds from exercise of stock options
|
|
|
4
|
|
|
|
-
|
|
Cash paid for exercise of stock appreciation right
|
|
|
(154
|
)
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
(491
|
)
|
|
|
(337
|
)
|
Effect of exchange rate changes on cash
|
|
|
199
|
|
|
|
54
|
|
Net increase in cash and cash equivalents
|
|
|
2,399
|
|
|
|
3,545
|
|
Cash and cash equivalents, beginning of period
|
|
|
14,064
|
|
|
|
10,604
|
|
Cash and cash equivalents, end of period
|
|
$
|
16,463
|
|
|
$
|
14,149
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
63
|
|
|
$
|
60
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
5
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Property and equipment acquired through accounts payable, accrued and non-current other liabilities
|
|
$
|
21
|
|
|
$
|
1,741
|
|
See notes to unaudited condensed consolidated
financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Note 1. Nature of Business and Significant Accounting
Policies
Organization and Nature of Business
Gaming Partners International Corporation (GPIC
or the Company) is headquartered in North Las Vegas, Nevada. Our business activities include the manufacture and sale of casino
currencies, playing cards, table accessories, table layouts, dice, gaming furniture, roulette wheels, and radio frequency identification
(RFID) readers and software, all of which are used with casino table games such as blackjack, poker, baccarat, craps, and roulette.
The Company has three operating subsidiaries:
Gaming Partners International USA, Inc. (GPI USA) (including GPI Mexicana S.A. de C.V. (GPI Mexicana), our maquiladora manufacturing
operation in Mexico, and GPI USA Blue Springs, our manufacturing facility in Missouri); Gaming Partners International SAS (GPI
SAS); and Gaming Partners International Asia Limited (GPI Asia). Our subsidiaries have the following distribution and
product focus:
|
•
|
GPI USA sells in the United States, Canada, the Caribbean, and Latin America. GPI USA sells our full product line, with most
of the products manufactured in either San Luis Rio Colorado, Mexico, or Blue Springs, Missouri. The remainder is either manufactured
in France or purchased from United States vendors. We warehouse inventory in San Luis, Arizona; Blue Springs, Missouri; and North
Las Vegas, Nevada. We have sales offices in North Las Vegas, Nevada; Atlantic City, New Jersey; Gulfport, Mississippi; and Blue
Springs, Missouri.
|
|
•
|
GPI SAS sells primarily in Europe and Africa out of its office in Beaune, France. GPI SAS predominantly sells casino currencies,
including both American-style, known as chips, and European-style, known as plaques and jetons. Most of the products sold by GPI
SAS are manufactured in France, with the remainder manufactured in Mexico.
|
|
•
|
GPI Asia, located in Macau S.A.R., China, distributes our full product line in the Asia-Pacific region. GPI Asia also sells
table layouts that it manufactures in Macau S.A.R.
|
We are one of the gaming industry’s leading
manufacturers and suppliers of casino table game equipment. We custom manufacture and supply casino currencies, playing cards,
table layouts, gaming furniture, table accessories, dice, roulette wheels, and RFID readers and software, all of which are used
with casino table games such as blackjack, poker, baccarat, craps, and roulette. Our products fall into two categories –
non-consumable and consumable. Non-consumable products consist of casino currencies, gaming furniture, and RFID solutions. These
products typically have a useful life of several years or longer. Sales of non-consumables are typically driven by casino openings,
expansions, and rebranding, as well as replacements in the normal course of business. Consumable products consist of playing cards,
table accessories, table layouts, and dice. These products each have a useful life that ranges from several hours for playing cards
and dice to several months for layouts. Casinos tend to buy these products annually if not more frequently.
Significant Accounting Policies
Basis of Consolidation and Presentation.
The accompanying
unaudited condensed consolidated financial statements include the accounts of GPIC and its wholly-owned subsidiaries GPI SAS, GPI
USA, and GPI Asia. All material intercompany balances and transactions have been eliminated in consolidation. We use the equity
method to account for investments in companies if the investment provides the ability to exercise significant influence, but not
control, over operating and financial policies of the investee. Our proportionate share of the net income or loss of these companies
is included in consolidated net earnings. Judgment regarding the level of influence over each equity method investment includes
considering key factors such as our ownership interest or participation in policy-making decisions and material intercompany transactions.
In the event we no longer have the ability to exercise significant influence over an equity-method investee, we would discontinue
accounting for the investment under the equity method.
The accompanying unaudited condensed consolidated
financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally
accepted in the United States (U.S. GAAP) for interim financial information and in the form prescribed by the Securities and Exchange
Commission (SEC), and do not include all of the information and notes required by U.S. GAAP for complete financial statements. These
statements should be read in conjunction with our annual audited consolidated financial statements and related notes included in
our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 23,
2018.
These unaudited condensed consolidated financial
statements, in the opinion of management, reflect only normal and recurring adjustments necessary for a fair presentation of results
and cash flows for the interim periods presented. The results of operations for an interim period are not necessarily indicative
of the results for any other interim period or a full fiscal year.
Recently Issued Accounting Standards.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting
for the tax effects of the Tax Cuts and Jobs Act (“Tax Act”). SAB 118 was added to the Financial Accounting Standards
Board (FASB) codification in March 2018 with the issuance of Accounting Standards Update (ASU) 2018-05,
Income Taxes (Topic
740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
. SAB 118 allows registrants to record
provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations.
However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information
necessary to finalize its accounting. Provisional treatment is also necessary if the company is waiting for final financial information
from domestic and foreign equity investments. If a company cannot determine a provisional amount to be included in the financial
statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately
before the enactment of the Tax Act. During the measurement period, impacts of the law are expected to be recorded at the time
a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as
information becomes available, prepared or analyzed.
In the fourth quarter of 2017 the Company had
determined a reasonable estimate related to the reduction in the U.S. corporate income tax rate to 21%, which resulted in the Company
reporting additional income tax expense of $0.3 million as a result of the Tax Act. In the first quarter of 2018, the Company did
not record an additional expense or benefit related to the Tax Act.
In accordance with the SAB 118 guidance, some
of the income tax effects recorded by the Company in 2017 are provisional, including the one-time transition tax and the re-measurement
of our deferred tax assets and liabilities. In addition, we are still evaluating the global intangible low-taxed income (GILTI)
provisions of the Tax Act and their impact, if any, on our consolidated financial statements. The accounting for these income tax
effects may be adjusted during 2018 as a result of our continuing analysis of the Tax Act; additional implementation guidance from
the IRS, state tax authorities, the SEC, the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign
equity affiliates. As of March 31, 2018, the Company had not finalized its accounting and was still in the measurement period.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. These amendments eliminate Step
2 from the goodwill impairment test. The amendments are effective for annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019. The Company does not expect the adoption of this guidance to significantly impact the
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, to increase transparency and comparability among organizations by reporting lease assets and lease liabilities,
both finance (capital) and operating leases, on the balance sheet and disclosing key information about leasing arrangements. For
public companies, the updated guidance is effective for the financial statements issued for fiscal years beginning after December
15, 2018 (including interim periods within those fiscal years). Early adoption is permitted. The Company is currently evaluating
the impact of adoption and will consult with accounting experts as needed to assist with the implementation of this standard.
Recently Adopted Accounting Standards.
In
March 2017, the FASB issued ASU 2017-17,
Compensation — Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. The amendments require that an employer report the
service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent
employees during the period. The amendments are effective for annual periods beginning after December 15, 2017, including interim
periods within those annual periods. In the first quarter of 2018 the Company adopted this guidance. It had no significant impact
to the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. These amendments clarify the definition of a
business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired
or sold a business. The amendments are effective for public companies for annual periods beginning after December 15, 2017, including
interim periods within those periods. In the first quarter of 2018 the Company adopted this guidance retrospectively. It had no
significant impact to the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. These amendments require an entity to recognize
the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance
indicates that the former exception to income tax accounting that requires companies to defer the income tax effects of certain
intercompany transactions would apply only to intercompany inventory transactions. That is, the exception no longer applies to
intercompany sales and transfers of other assets (e.g., property and equipment or intangible assets). Under the former exception,
income tax expense associated with intra-entity profits in an intercompany sale or transfer of assets was eliminated from earnings.
Instead, that cost was deferred and recorded on the balance sheet (e.g., as a prepaid asset) until the assets left the consolidated
group. Similarly, the entity was prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany
sale or transfer. A modified retrospective basis of adoption was required for this guidance. As a result, a cumulative-effect adjustment
of approximately $0.4 million has been recorded to accumulated deficit on January 1, 2018, in connection with this adoption. This
cumulative-effect adjustment relates to the prepaid expense associated with intra-entity transfers of property and equipment included
in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet at December 31, 2017.
In May 2014, the FASB issued ASU 2014-09,
Revenues
from Contracts with Customers (Topic 606)
. This guidance applies to any entity that either enters into contracts with customers
to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within
the scope of other standards. This guidance supersedes existing revenue recognition guidance, including most industry-specific
guidance, as well as certain related guidance on accounting for contract costs. To further assist with adoption and implementation
of ASU 2014-09, the FASB issued the following ASUs:
•ASU 2016-08 (Issued March 2016) -
Principal
versus Agent Consideration (Reporting Revenue Gross versus Net)
•ASU 2016-10 (Issued April 2016) -
Identifying
Performance Obligations and Licensing
•ASU 2016-12 (Issued May 2016) -
Narrow-Scope
Improvements and Practical Expedients
•ASU 2016-20 (Issued December 2016) -
Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
The guidance provides for a five-step model
to determine the revenue recognized for the transfer of goods or services to customers that reflects the expected entitled consideration
in exchange for those goods or services. It also provides clarification for principal versus agent considerations and identifying
performance obligations. In addition, the FASB introduced practical expedients related to disclosures of remaining performance
obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and
other similar taxes. Financial statement disclosures required under the guidance will enable users to understand the nature, amount,
timing, judgments, and uncertainty of revenue and cash flows relating to customer contracts. The two permitted transition methods
under the guidance are the full retrospective approach or a cumulative effect adjustment to the opening retained earnings in the
year of adoption (cumulative effect approach). In the first quarter of 2018 we adopted this guidance using a modified retrospective
method. It had no significant impact to the consolidated financial statements. Regarding the contract acquisition cost component
of the guidance, the Company’s analysis supports use of the practical expedient when recognizing expense related to incremental
costs incurred to acquire a contract, as the recovery of such costs is completed in less than one year’s time. Additionally,
incremental costs to obtain contracts have been immaterial to date. Accordingly, the Company does not expect any material changes
to the timing of when it recognizes expenses related to contract acquisition costs.
Note 2. Revenue recognition
The majority of our revenue is derived from
selling and distributing manufactured table game equipment to the casino industry. We recognize revenue after we have completed
all of the following steps:
|
-
|
Identification of the contract, or contracts, with a customer
|
|
-
|
Identification of the performance obligations in the contract
|
|
-
|
Determination of the transaction price
|
|
-
|
Allocation of the transaction price to the performance
obligations in the contract
|
|
-
|
Recognition of revenue when, or as, the Company satisfies
a performance obligation
|
Determining whether these steps have been met
may require us to make assumptions and exercise judgment that could significantly impact the timing and amount of revenue reported
each period.
The majority of our contracts have a similar
performance obligation which is the transfer of the individual goods ordered. The Company typically invoices the customer upon
shipment. Depending on the size of the customer order we may require deposits that range from 30% to 100% of the total order.
On occasion, we may recognize revenue under
a bill and hold arrangement. Under this type of arrangement revenue is recognized when title has transferred. The transfer of title
occurs at the point the items are ready for physical delivery and the customer is notified – i.e. when the product is manufactured,
completed, invoiced, and segregated from our other inventory so that it is not subject to being used to fill other orders. The
customer must request a bill and hold arrangement, preferably in writing, and must commit to the purchase.
Under the RFID solutions product line, we may
recognize revenue from entering into new arrangements which include software and/or multiple elements or deliverables, which include
RFID equipment, embedded software licenses, and software maintenance services. In such cases, the Company accounts for individual
performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations
on a relative standalone selling price basis. The Company determines the standalone selling prices based on the Company's overall
pricing objectives, taking into consideration historical selling prices, market conditions, costs to provide certain services and
other factors.
A portion of our revenue under RFID solutions
is generated by new or existing software and hardware maintenance arrangements. Under these arrangements, customers pay in advance
for the maintenance of the hardware or the software. As of March 31, 2018, the Company had contracts with unsatisfied performance
obligations extending throughout September 2020. Most of our contracts are for one year and renew on March 1
st
of every
year. The Company recognizes as revenue the amount billed over the length of the arrangement. The un-recognized portion of the
amount billed is accounted for as deferred revenue. At March 31,2018 and December 31, 2017, these amounts were $0.5 million and
$0.1 million. In each of the first quarters of 2018 and 2017 we recognized $0.2 million of revenue for software and hardware maintenance
contracts.
The application of our revenue recognition policies
and changes in our assumptions or judgments affect the timing and amounts of our revenues and costs, as well as deferred revenue.
Note 3. Cash and Cash Equivalents
We hold our cash and cash equivalents in various
financial institutions in the countries shown below. Substantially all accounts have balances in excess of government-insured limits.
The following table summarizes our holdings (in thousands):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
France
|
|
$
|
6,112
|
|
|
|
6,611
|
|
United States (including Mexico)
|
|
|
5,723
|
|
|
|
4,936
|
|
Macau S.A.R., China
|
|
|
4,628
|
|
|
|
2,517
|
|
Total
|
|
$
|
16,463
|
|
|
$
|
14,064
|
|
Note 4. Accounts Receivable
At both March 31, 2018 and December 31, 2017,
no casino customer accounted for 10% or more of our accounts receivable balance.
Note 5. Inventories
Inventories consisted of the following (in thousands):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Raw materials
|
|
$
|
11,467
|
|
|
$
|
11,637
|
|
Work in progress
|
|
|
1,747
|
|
|
|
2,432
|
|
Finished goods
|
|
|
3,525
|
|
|
|
3,502
|
|
Total inventories
|
|
$
|
16,739
|
|
|
$
|
17,571
|
|
We classified a portion of our inventories as
non-current because we do not expect this portion to be used within one year. The classification of our inventories on our
unaudited condensed consolidated balance sheets was as follows (in thousands):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Current
|
|
$
|
14,268
|
|
|
$
|
15,118
|
|
Non-current
|
|
|
2,471
|
|
|
|
2,453
|
|
Total inventories
|
|
$
|
16,739
|
|
|
$
|
17,571
|
|
Note 6. Property and Equipment
Property and equipment consisted of the following
(in thousands):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Land
|
|
$
|
673
|
|
|
$
|
669
|
|
Buildings and improvements
|
|
|
11,308
|
|
|
|
11,196
|
|
Equipment and furniture
|
|
|
40,622
|
|
|
|
40,714
|
|
Vehicles
|
|
|
410
|
|
|
|
408
|
|
Construction in progress
|
|
|
526
|
|
|
|
529
|
|
|
|
|
53,539
|
|
|
|
53,516
|
|
Less accumulated depreciation
|
|
|
(29,716
|
)
|
|
|
(28,583
|
)
|
Property and equipment, net
|
|
$
|
23,823
|
|
|
$
|
24,933
|
|
Depreciation expense for the three months ended
March 31, 2018 and 2017 was $1,082,000 and $927,000, respectively.
Note 7. Goodwill and Intangible Assets
We had goodwill of $10.3 million
as of both March 31, 2018 and December 31, 2017.
Intangible assets consisted
of the following (in thousands):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accum
Amort
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accum
Amort
|
|
|
Net
Carrying
Amount
|
|
|
Estimated
Useful Life
(Years)
|
Trademarks
|
|
$
|
1,711
|
|
|
$
|
(730
|
)
|
|
$
|
981
|
|
|
$
|
1,711
|
|
|
$
|
(700
|
)
|
|
$
|
1,011
|
|
|
10-15
|
Customer list
|
|
|
1,101
|
|
|
|
(486
|
)
|
|
|
615
|
|
|
|
897
|
|
|
|
(353
|
)
|
|
|
544
|
|
|
10-15
|
Patents
|
|
|
542
|
|
|
|
(535
|
)
|
|
|
7
|
|
|
|
542
|
|
|
|
(534
|
)
|
|
|
8
|
|
|
13-14
|
Other intangible assets
|
|
|
472
|
|
|
|
(366
|
)
|
|
|
106
|
|
|
|
472
|
|
|
|
(359
|
)
|
|
|
113
|
|
|
3-10
|
Total intangible assets
|
|
$
|
3,826
|
|
|
$
|
(2,117
|
)
|
|
$
|
1,709
|
|
|
$
|
3,622
|
|
|
$
|
(1,946
|
)
|
|
$
|
1,676
|
|
|
|
Amortization expense for intangible assets for
the three months ended March 31, 2018 and 2017 was $62,000 and $63,000, respectively.
Note 8. Debt
On June 26, 2015, the Company
entered into a Credit Agreement with Nevada State Bank to borrow a combined $15.0 million, consisting of a $10.0 million seven-year
term loan and a $5.0 million five-year revolving loan. The Company borrowed the full amount under the term loan and has not drawn
on funds under the revolving loan. The term loan will mature on June 26, 2022, and the revolving loan will mature on June 26, 2020.
The Credit Agreement contains customary representations, warranties, and events of default, and affirmative, negative and financial
covenants. The covenants contain, among other things, limitations on the Company's and its subsidiaries' ability to merge, consolidate,
dispose of assets, or incur liens or certain indebtedness. The Company is required to maintain a fixed charge coverage ratio greater
than 1.15 to 1.00 and leverage ratio less than 3.00 to 1.00. The Company was in compliance with all financial covenants as of March
31, 2018 and December 31, 2017.
Interest on funds borrowed
under the term loan and the revolving loan are charged at a rate per annum equal to LIBOR plus 2.25%. The term loan has a straight-line
seven-year amortization schedule.
At March 31, 2018, estimated
repayment obligations for the principal balance of long-term debt were as follows (in thousands):
Year Ending December 31,
|
|
Outstanding
Debt
|
|
2018 (9 months)
|
|
$
|
1,055
|
|
2019
|
|
|
1,455
|
|
2020
|
|
|
1,513
|
|
2021
|
|
|
1,573
|
|
2022
|
|
|
729
|
|
|
|
$
|
6,325
|
|
Note 9. Stock appreciation rights liability
At March 31, 2018 and at December 31, 2017 the
stock appreciation rights liability was $0.8 million and $1.2 million, respectively. The $0.4 million decrease is due to the payment
of $0.2 million of stock appreciation rights exercised in December 2017 and the end of period re-evaluation of the outstanding
rights, offset by the additional stock appreciation rights granted in the first quarter of 2018.
Note 10. Commitments and Contingencies
On January 26, 2018, the Company entered into
global strategic agreements for development, licensing, and revenue sharing with both BrainChip Holdings Limited (ASX: BRN), a
leading developer of software and hardware accelerated solutions for advanced artificial intelligence and machine learning applications,
and Xuvi, LLC, developers of an immersive data analytics and automation platform. The companies plan to jointly develop products
for worldwide deployment in casino currency security, table game operations, and player behavior applications. The terms require
payments to BrainChip Holdings Limited and Xuvi, LLC of approximately $0.6 million and $0.7 million, respectively, and are contingent
upon completion of project phases. At March 31, 2018, GPI had made $0.6 million in cumulative payments.
Operating Lease Commitments
The Company has various operating leases that
are used in the normal course of business. The operating leases consist of buildings and equipment that expire on various dates
through 2023.
At March 31, 2018, minimum lease payment obligations
were as follows (in thousands):
|
|
Minimum
|
|
|
|
Lease
|
|
Year Ending December 31,
|
|
Payments
|
|
2018 (9 months)
|
|
$
|
805
|
|
2019
|
|
|
911
|
|
2020
|
|
|
797
|
|
2021
|
|
|
683
|
|
2022
|
|
|
560
|
|
Thereafter
|
|
|
337
|
|
Total
|
|
$
|
4,093
|
|
Legal Proceedings and Contingencies
From time to time we are engaged in disputes
and claims that arise in the normal course of business. We believe that the ultimate outcome of these proceedings will not have
a material adverse impact on our consolidated financial position or results of operations, but the outcome of these actions is
inherently difficult to predict. There can be no assurance that we will prevail in any such litigation. Liabilities for material
claims against us are accrued when a loss is considered probable and can be reasonably estimated. Legal costs associated with claims
are expensed as incurred.
Note 11. Geographic and Product Line Information
We manufacture and sell casino table game equipment
in one operating segment - casino table game products. Although the Company derives its revenues from a number of different product
lines, the Company neither allocates resources based on the operating results from the individual product lines, nor manages each
individual product line as a separate business unit. Our chief operating decision maker is our Chief Executive Officer (CEO). The
CEO manages our operations on a consolidated basis to make decisions about overall corporate resource allocation and to assess
overall corporate profitability. Our CEO is also the chief operating manager for each of our entities in the United States, France,
and Macau S.A.R.; that is, the individual locations do not have “segment,” or “product line,” managers
who report to our CEO.
The following table presents our revenue by
geographic area (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas
|
|
$
|
13,867
|
|
|
|
74.3
|
%
|
|
$
|
14,263
|
|
|
|
75.5
|
%
|
Asia-Pacific
|
|
|
4,062
|
|
|
|
21.7
|
%
|
|
|
4,121
|
|
|
|
21.8
|
%
|
Europe and Africa
|
|
|
754
|
|
|
|
4.0
|
%
|
|
|
529
|
|
|
|
2.7
|
%
|
Total
|
|
$
|
18,683
|
|
|
|
100.0
|
%
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
The following table presents our revenue by
product line (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Casino currency without RFID
|
|
$
|
3,847
|
|
|
|
20.6
|
%
|
|
$
|
3,894
|
|
|
|
20.6
|
%
|
Casino currency with RFID
|
|
|
3,776
|
|
|
|
20.2
|
%
|
|
|
2,759
|
|
|
|
14.6
|
%
|
Total casino currency
|
|
|
7,623
|
|
|
|
40.8
|
%
|
|
|
6,653
|
|
|
|
35.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Playing cards
|
|
|
5,756
|
|
|
|
30.8
|
%
|
|
|
6,336
|
|
|
|
33.4
|
%
|
Table accessories and other products
|
|
|
1,464
|
|
|
|
7.8
|
%
|
|
|
1,893
|
|
|
|
10.0
|
%
|
Table layouts
|
|
|
1,449
|
|
|
|
7.8
|
%
|
|
|
1,302
|
|
|
|
6.9
|
%
|
Dice
|
|
|
685
|
|
|
|
3.7
|
%
|
|
|
701
|
|
|
|
3.7
|
%
|
Gaming furniture
|
|
|
485
|
|
|
|
2.6
|
%
|
|
|
752
|
|
|
|
4.0
|
%
|
RFID solutions
|
|
|
455
|
|
|
|
2.4
|
%
|
|
|
372
|
|
|
|
2.0
|
%
|
Shipping
|
|
|
766
|
|
|
|
4.1
|
%
|
|
|
904
|
|
|
|
4.8
|
%
|
Total
|
|
$
|
18,683
|
|
|
|
100.0
|
%
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
For the three months ended March 31, 2018, no
customer accounted for 10% or more of revenues. For the three months ended March 31, 2017 one customer accounted for 13% of revenues.
The following table presents our property and
equipment by geographic area (in thousands):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Property and equipment, net:
|
|
|
|
|
|
|
United States
|
|
$
|
13,235
|
|
|
$
|
13,708
|
|
Mexico
|
|
|
6,225
|
|
|
|
6,851
|
|
France
|
|
|
3,932
|
|
|
|
3,936
|
|
Macau S.A.R., China
|
|
|
431
|
|
|
|
438
|
|
Total
|
|
$
|
23,823
|
|
|
$
|
24,933
|
|
The following table presents our intangible
assets by geographic area (in thousands):
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Intangible assets, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,578
|
|
|
$
|
1,634
|
|
Asia
|
|
|
131
|
|
|
|
42
|
|
Total
|
|
$
|
1,709
|
|
|
$
|
1,676
|
|
Note 12. Earnings per Share
The weighted-average number of common shares
outstanding used in the computation of basic and diluted earnings per share was as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Weighted-average number of common shares outstanding - basic
|
|
|
7,933
|
|
|
|
7,929
|
|
Potential dilution from equity grants
|
|
|
110
|
|
|
|
130
|
|
Weighted-average number of common shares outstanding - diluted
|
|
|
8,043
|
|
|
|
8,059
|
|
At March 31, 2018 we had certain outstanding
stock options to purchase common stock which had exercise prices greater than the average market price. These anti-dilutive options
have been excluded from the computation of diluted earnings per share. Outstanding anti-dilutive options for the three months ended
March 31, 2018 and 2017 totaled to 34,000 and 17,678, respectively.
Note 13. Income taxes
We are subject to taxation in the U.S. and various
states and foreign jurisdictions. With few exceptions, the tax years 2014 through 2017 remain open to examination under the statute
of limitations by the U.S. Internal Revenue Service (IRS) and various states for GPIC and GPI USA and by the Government of the
Macau Special Administrative Region - Financial Services Bureau for GPI Asia. Only tax years 2015 to 2017 remain open to examination
under the statute of limitations by the French Tax Administration (FTA) for GPI SAS.
In 2015, the FTA started an examination of GPI
SAS for tax years 2013 and 2012 that is on-going. In the first quarter of 2018, in connection with the FTA’s examination
of GPI SAS for tax years 2013 and 2012, GPI paid €1.4 million to the FTA. While we were legally obligated to pay this amount,
which represents the FTA’s calculation of the taxes owed, this payment does not represent a settlement nor the end of the
examination and we are actively disputing the findings of the FTA.
In addition to the on-going FTA examination
of GPI SAS for tax years 2013 and 2012, the Company received notification in August 2017 of a federal income tax examination by
the IRS for the 2015 tax year.
As of March 31, 2018, there was no change to
the unrecognized tax benefits reported at December 31, 2017.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion is intended to assist
in the understanding of our consolidated results of operations and our present financial condition and should be read in conjunction
with our unaudited condensed consolidated financial statements and related notes and the other financial information included in
this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and the accompanying notes contain
additional detailed information that should be referred to when reviewing this material. Statements in this discussion may be forward-looking.
Such forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those
expressed. See Item 1A. “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31,
2017, filed with the SEC on March 23, 2018.
For a more extensive overview and information
on our products, as well as general information, see Item 1. “Business” of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2017, filed with the SEC on March 23, 2018.
Overview of Our Business
Gaming Partners International Corporation, a
Nevada corporation, is headquartered in North Las Vegas, Nevada. The Company was formed in 2002 through a reverse merger between
Paul-Son Gaming and Bourgogne et Grasset. GPIC has three operating subsidiaries: Gaming Partners International USA, Inc. (GPI
USA) (including GPI Mexicana S.A. de C.V. (GPI Mexicana), our maquiladora manufacturing operation in Mexico, and GPI USA Blue Springs,
our manufacturing facility in Missouri); Gaming Partners International SAS (GPI SAS); and Gaming Partners International Asia Limited
(GPI Asia). Our subsidiaries have the following distribution and product focus:
|
•
|
GPI USA sells in the United States, Canada, the Caribbean, and Latin America. GPI USA sells our full product line, with most
of the products manufactured in either San Luis Rio Colorado, Mexico, or Blue Springs, Missouri. The remainder is either manufactured
in France or purchased from United States vendors. We warehouse inventory in San Luis, Arizona; Blue Springs, Missouri; and North
Las Vegas, Nevada. We have sales offices in North Las Vegas, Nevada; Atlantic City, New Jersey; Gulfport, Mississippi; and Blue
Springs, Missouri.
|
|
•
|
GPI SAS sells primarily in Europe and Africa out of its office in Beaune, France. GPI SAS predominantly sells casino currencies,
including both American-style, known as chips, and European-style, known as plaques and jetons. Most of the products sold by GPI
SAS are manufactured in France, with the remainder manufactured in Mexico.
|
|
•
|
GPI Asia, located in Macau S.A.R., China, distributes our full product line in the Asia-Pacific region. GPI Asia also sells
table layouts that it manufactures in Macau S.A.R.
|
We are one of the gaming industry’s leading
manufacturers and suppliers of casino table game equipment. We custom manufacture and supply casino currency, with multiple security
and design options, playing cards, table layouts, gaming furniture, table accessories, dice, and roulette wheels. We also provide
multiple radio frequency identification (RFID) technologies including low- and high-frequency RFID casino currency, RFID solutions
for casino currency (consisting of low- and high-frequency RFID casino currency readers, antennas, casino currency authentication
software, casino currency inventory software applications, and software maintenance services). Our products and services are used
with casino table games such as blackjack, poker, baccarat, craps, and roulette. Our products fall into two categories –
non-consumable and consumable. Non-consumable products consist of casino currencies, gaming furniture, and RFID solutions. These
products typically have a useful life of several years or longer. Sales of non-consumables are typically driven by casino openings,
expansions, and re-brandings, as well as replacement in the normal course of business. Consumable products consist of playing cards,
table layouts, dice, and table accessories. These products each have a useful life that ranges from several hours for playing cards
and dice to several months for layouts. Casinos tend to buy these products annually if not more frequently.
The majority of our products are specifically
designed and produced to meet our customers’ requirements, whether they are related to use, branding, aesthetic appeal, security,
or anti-counterfeiting features. We believe our ability to produce products with a variety of styles and features, in combination
with years of reliable delivery, enhance our competitive position. Our strategy is to be the exclusive supplier of table game products
for every new casino. Through this strategy, revenues are generated both from the initial sale and replenishment of consumable
products.
Historically, we have experienced significant
fluctuations in quarterly results primarily due to large, discrete currency orders as a result of casino openings, casino expansions,
or large replacement orders.
Our backlog, which reflects signed orders scheduled
to be delivered over the following twelve months, was as follows at March 31, 2018 and 2017 (in millions):
|
|
GPI USA
|
|
|
GPI Asia
|
|
|
GPI SAS
|
|
|
Total
|
|
March 31, 2018
|
|
$
|
17.0 million
|
|
|
$
|
2.5 million
|
|
|
$
|
0.6 million
|
|
|
$
|
20.1 million
|
|
March 31, 2017
|
|
$
|
13.5 million
|
|
|
$
|
8.5 million
|
|
|
$
|
0.5 million
|
|
|
$
|
22.5 million
|
|
Outlook
We have a strong backlog for the next twelve
months and anticipate winning additional business, particularly in the Asia market due to a number of planned casino openings and
expansions in the region. However, there is continuing uncertainty arising from regulators’ decisions on the timing of casino
opening dates and the number of tables to be allotted to each new casino, which will impact both the amount of revenue we recognize
and the timing of revenue recognition.
As previously disclosed in a Form 8-K filed
with the SEC on January 31, 2018, we entered into global licensing and development agreements with BrainChip Holdings Limited and
Xuvi, LLC. We plan to jointly develop products to provide a table management solution that would combine visioning technology and
immersive data analytics with our RFID technology to better secure table currency, increase fraud protection, improve table productivity,
and provide data for player behavior applications. We currently hope to introduce this table management solution at the end of
2018 or early 2019. During the first quarter of 2018, we paid $0.6 million to BrainChip Holdings Limited and Xuvi for the advancement
of the project. There remains $0.7 million to be paid pursuant to these agreements upon successful completion of certain project
phases.
In prior quarters we reported we had made progress
in resolving difficulties arising from the rapid expansion of our playing cards manufacturing facility in Blue Springs, MO. It
was our belief margins had stabilized and would improve over time. However, the first quarter of 2018 was disappointing for the
playing cards product line, as lower revenues and higher fixed costs reduced margins and profitability. While we continue to work
to remedy these issues, we can no longer assure there will be uninterrupted progress in achieving acceptable levels of profitability.
Financial and Operational Highlights
For the first quarter of 2018, our revenues
were $18.7 million, a decrease of $0.2 million, or 1.2%, compared to revenues of $18.9 million for the same period of 2017. The
decrease in our revenues was mostly due to a decrease in playing card sales, table accessories and other products and gaming furniture,
partially offset by an increase in casino currency sales. For the first quarter of 2018, our net income was $3.0 thousand, a decrease
of $1.0 million compared to net income of $1.0 million for the same period in 2017. The decrease in our net income was primarily
due to an increase in our research and development expenses, an increase in our costs due to the weakening of the U.S. dollar compared
to the euro and the Mexico peso. In addition, the margins from the casino playing cards product line declined in the quarter. This
is mainly due to a combination of an increase in depreciation expense and other fixed costs incurred to improve quality and a decrease
in sales.
Other Matters
See the discussion under “Contractual
Obligations and Commercial Commitments” in Part I, Item 2, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES
Our condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q, while unaudited, have been prepared in accordance with U.S. GAAP. Financial statement
preparation requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and disclosure of contingent assets and liabilities. The accompanying unaudited condensed consolidated financial
statements are prepared using the same critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2017, filed with the SEC on March 23, 2018. Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS
The following table summarizes selected items
from our unaudited condensed consolidated income statements (dollars in thousands) and as a percentage of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenues
|
|
$
|
18,683
|
|
|
|
100.0
|
%
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
(230
|
)
|
|
|
(1.2
|
)%
|
Cost of revenues
|
|
|
13,747
|
|
|
|
73.6
|
%
|
|
|
13,093
|
|
|
|
69.2
|
%
|
|
|
654
|
|
|
|
5.0
|
%
|
Gross profit
|
|
|
4,936
|
|
|
|
26.4
|
%
|
|
|
5,820
|
|
|
|
30.8
|
%
|
|
|
(884
|
)
|
|
|
(15.2
|
)%
|
Selling, administrative, and research and development
|
|
|
4,666
|
|
|
|
25.0
|
%
|
|
|
4,361
|
|
|
|
23.1
|
%
|
|
|
305
|
|
|
|
7.0
|
%
|
Operating income
|
|
|
270
|
|
|
|
1.4
|
%
|
|
|
1,459
|
|
|
|
7.7
|
%
|
|
|
(1,189
|
)
|
|
|
(81.5
|
)%
|
Other expense, net
|
|
|
(266
|
)
|
|
|
(1.4
|
)%
|
|
|
(93
|
)
|
|
|
(0.5
|
)%
|
|
|
(173
|
)
|
|
|
186.0
|
%
|
Income before income taxes
|
|
|
4
|
|
|
|
0.0
|
%
|
|
|
1,366
|
|
|
|
7.2
|
%
|
|
|
(1,362
|
)
|
|
|
(99.7
|
)%
|
Income tax expense
|
|
|
1
|
|
|
|
0.0
|
%
|
|
|
434
|
|
|
|
2.3
|
%
|
|
|
(433
|
)
|
|
|
(99.8
|
)%
|
Net income
|
|
$
|
3
|
|
|
|
0.0
|
%
|
|
$
|
932
|
|
|
|
4.9
|
%
|
|
$
|
(929
|
)
|
|
|
(99.7
|
)%
|
The following table presents certain data by
geographic area (dollars in thousands) and as a percentage of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas
|
|
$
|
13,867
|
|
|
|
74.3
|
%
|
|
$
|
14,263
|
|
|
|
75.5
|
%
|
|
$
|
(396
|
)
|
|
|
(2.8
|
)%
|
Asia-Pacific
|
|
|
4,062
|
|
|
|
21.7
|
%
|
|
|
4,121
|
|
|
|
21.8
|
%
|
|
|
(59
|
)
|
|
|
(1.4
|
)%
|
Europe and Africa
|
|
|
754
|
|
|
|
4.0
|
%
|
|
|
529
|
|
|
|
2.7
|
%
|
|
|
225
|
|
|
|
42.5
|
%
|
Total
|
|
$
|
18,683
|
|
|
|
100.0
|
%
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
(230
|
)
|
|
|
(1.2
|
)%
|
The following table presents our revenues by
product line (dollars in thousands) and as a percentage of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Casino currency without RFID
|
|
$
|
3,847
|
|
|
|
20.6
|
%
|
|
$
|
3,894
|
|
|
|
20.6
|
%
|
|
$
|
(47
|
)
|
|
|
(1.2
|
)%
|
Casino currency with RFID
|
|
|
3,776
|
|
|
|
20.2
|
%
|
|
|
2,759
|
|
|
|
14.6
|
%
|
|
|
1,017
|
|
|
|
36.9
|
%
|
Total casino currency
|
|
|
7,623
|
|
|
|
40.8
|
%
|
|
|
6,653
|
|
|
|
35.2
|
%
|
|
|
970
|
|
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Playing cards
|
|
|
5,756
|
|
|
|
30.8
|
%
|
|
|
6,336
|
|
|
|
33.4
|
%
|
|
|
(580
|
)
|
|
|
(9.2
|
)%
|
Table accessories and other products
|
|
|
1,464
|
|
|
|
7.8
|
%
|
|
|
1,893
|
|
|
|
10.0
|
%
|
|
|
(429
|
)
|
|
|
(22.7
|
)%
|
Table layouts
|
|
|
1,449
|
|
|
|
7.8
|
%
|
|
|
1,302
|
|
|
|
6.9
|
%
|
|
|
147
|
|
|
|
11.3
|
%
|
Dice
|
|
|
685
|
|
|
|
3.7
|
%
|
|
|
701
|
|
|
|
3.7
|
%
|
|
|
(16
|
)
|
|
|
(2.3
|
)%
|
Gaming furniture
|
|
|
485
|
|
|
|
2.6
|
%
|
|
|
752
|
|
|
|
4.0
|
%
|
|
|
(267
|
)
|
|
|
(35.5
|
)%
|
RFID solutions
|
|
|
455
|
|
|
|
2.4
|
%
|
|
|
372
|
|
|
|
2.0
|
%
|
|
|
83
|
|
|
|
22.3
|
%
|
Shipping
|
|
|
766
|
|
|
|
4.1
|
%
|
|
|
904
|
|
|
|
4.8
|
%
|
|
|
(138
|
)
|
|
|
(15.3
|
)%
|
Total
|
|
$
|
18,683
|
|
|
|
100.0
|
%
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
(230
|
)
|
|
|
(1.2
|
)%
|
Comparison of Operations for the Three Months Ended March 31,
2018 and 2017
Revenues
.
For the three
months ended March 31, 2018, our revenues were $18.7 million, a decrease of $0.2 million, or 1.2%, compared to revenues of $18.9
million for the same period of 2017.
The decrease in revenues was primarily attributable
to a decrease in playing card sales, table accessories and other products and gaming furniture, partially offset by an increase
in casino currency sales.
Cost of Revenues.
For the three
months ended March 31, 2018, cost of revenues was $13.7 million, an increase of $0.7 million, or 5.0%, compared to the same
period in 2017. As a percentage of revenues, our cost of revenues increased to 73.6% in 2018 compared to 69.2% in 2017.
The increase in cost of revenues as a percentage
of revenues was driven by the same factors described under Revenues above and Gross Profit below.
Gross Profit.
For the three months
ended March 31, 2018, gross profit was $4.9 million, a decrease of $0.9 million, or 15.2%, compared to gross profit of $5.8 million
for the same period in 2017. As a percentage of revenues, our gross profit decreased to 26.4% from 30.8%. This decrease in gross
profit was mainly due to the weakening of the U.S. dollar compared to the euro and the Mexico peso. In addition, the margins from
the casino playing cards product line declined in the quarter, a combination of an increase in depreciation and other fixed costs
incurred to improve quality and a decrease in sales.
Selling, Administrative, and Research
and Development Expenses
. The following table presents the selling, administrative, and research and development expenses
(dollars in thousands) and as a percentage of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Marketing and sales
|
|
$
|
1,767
|
|
|
|
9.5
|
%
|
|
$
|
1,726
|
|
|
|
9.1
|
%
|
|
$
|
41
|
|
|
|
2.4
|
%
|
General and administrative
|
|
|
1,896
|
|
|
|
10.1
|
%
|
|
|
2,325
|
|
|
|
12.4
|
%
|
|
|
(429
|
)
|
|
|
(18.5
|
)%
|
Research and development
|
|
|
1,003
|
|
|
|
5.4
|
%
|
|
|
310
|
|
|
|
1.6
|
%
|
|
|
693
|
|
|
|
223.5
|
%
|
Total selling, administrative, and research and development
|
|
$
|
4,666
|
|
|
|
25.0
|
%
|
|
$
|
4,361
|
|
|
|
23.1
|
%
|
|
$
|
305
|
|
|
|
7.0
|
%
|
For the three months ended
March 31, 2018, selling, administrative, and research and development expenses were $4.7 million, an increase of $0.3 million,
or 7.0%, compared to selling, administrative, and research and development expenses of $4.4 million during the same period in 2017.
General and administrative
expenses decreased by $0.4 million during the first quarter of 2018, compared to the same period in 2017. This is mainly due to
a decrease of $0.2 million in stock compensation expense and a decrease of $0.2 million in the Company’s bad debt provision.
Research and development expenses
for the three months ended March 31, 2018 increased to $1.0 million, or 223.5% compared to $0.3 million for the same period in
2017. The increase is mainly due to payments made to BrainChip Holdings Limited and Xuvi, LLC for achieving certain milestones
in our global licensing and development agreements described at “Outlook” in Part I, Item 2—“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
Other Expense, net
.
The following table presents other expense net, (dollars in thousands) and as a percentage of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Interest expense
|
|
|
(63
|
)
|
|
|
(0.3
|
)%
|
|
|
(60
|
)
|
|
|
(0.3
|
)%
|
|
|
(3
|
)
|
|
|
5.0
|
%
|
Loss on foreign currency transactions
|
|
|
(193
|
)
|
|
|
(1.0
|
)%
|
|
|
(50
|
)
|
|
|
(0.3
|
)%
|
|
|
(143
|
)
|
|
|
286.0
|
%
|
Other (expense) income, net
|
|
|
(10
|
)
|
|
|
(0.1
|
)%
|
|
|
17
|
|
|
|
0.1
|
%
|
|
|
(27
|
)
|
|
|
(158.8
|
)%
|
Total other (expense) income, net
|
|
$
|
(266
|
)
|
|
|
(1.4
|
)%
|
|
$
|
(93
|
)
|
|
|
(0.5
|
)%
|
|
$
|
(173
|
)
|
|
|
186.0
|
%
|
GPI SAS uses the euro as its
functional currency. At March 31, 2018 and December 31, 2017, the U.S. dollar to euro exchange rates were $1.23 and $1.20, respectively,
which represents a 2.9% weaker dollar compared to the euro. The average exchange rates for the three months ended March 31, 2018
and 2017 was $1.23 and $1.07, respectively, which represents a 15.5% weaker dollar compared to the euro.
GPI Mexicana uses the U.S.
dollar as its functional currency. At March 31, 2018 and December 31, 2017, the Mexican peso to U.S. dollar exchange rates were
18.22 pesos and 19.69 pesos, respectively, which represents a 7.5% weaker dollar compared to the Mexican peso. The average exchange
rates for the three months ended March 31, 2018 and 2017 was 18.74 pesos and 20.32 pesos, respectively, which represents a 7.8%
weaker dollar compared to the Mexican peso.
GPI Asia uses the U.S. dollar as its functional
currency. At March 31, 2018 and December 31, 2017, the Macau pataca to U.S. dollar exchange rates were 8.08 patacas and 8.05 patacas,
respectively, which represents a 0.4% stronger dollar compared to the Macau pataca. The average exchange rates for the three months
ended March 31, 2018 and 2017 was 8.06 patacas and 8.18 patacas, respectively, which represents a 1.5% weaker dollar compared to
the Macau pataca.
Income Taxes.
Our effective income
tax rate for the three months ended March 31, 2018 and 2017 was 14.8% and 29.8%, respectively. Our effective tax rate for the three
months ended March 31, 2018 was favorably affected by the foreign rate differential on the income from our Macau S.A.R. subsidiary,
GPI Asia, and the benefit from research tax credits from GPI USA and our French subsidiary, GPI SAS, partially offset by our Subpart
F income adjustment.
Our effective tax rate for the three months
ended March 31, 2017 was favorably affected by the foreign rate differential on the income from our Macau S.A.R. subsidiary, GPI
Asia, and the benefit from research and low wage tax credits from our French subsidiary, GPI SAS, partially offset by our Subpart
F income adjustment.
We account for uncertain tax positions in accordance
with applicable accounting guidance. At December 31, 2017, we reported unrecognized tax benefits related to the FTA’s on-going
examination of GPI SAS for tax years 2013 and 2012. In the first quarter of 2018, in connection with this examination, GPI paid
€1.4 million to the FTA. While we were legally obligated to pay this amount, which represents the FTA’s calculation
of the taxes owed, this payment does not represent a settlement nor the end of the examination and we are actively disputing the
findings of the FTA. At this time, an estimate of the range of the reasonably possible outcomes cannot be made. We do not expect
the examination to be completed within the next twelve months. It is reasonably possible that the amount of the unrecognized benefit
with respect to our unrecognized tax position could change within the next twelve months. This change may be the result of settlement
of the ongoing audit or competent authority proceedings.
In addition to the on-going FTA examination
of GPI SAS for tax years 2013 and 2012, the Company received notification in August 2017, of a federal income tax examination by
the IRS for the 2015 tax year. We expect this audit to be finalized in 2018.
As of March 31, 2018, there was no change to
the unrecognized tax benefits reported at December 31, 2017.
Liquidity and Capital Resources
Sources of Liquidity and Capital Resources
.
Historically, our primary source of liquidity and capital has been cash from operations. On June 26, 2015, the Company entered
into a Credit Agreement with Nevada State Bank for a combined $15.0 million credit facility, consisting of a $10.0 million seven-year
term loan and a $5.0 million five-year revolving loan. The Company borrowed the full amount under the term loan and has not drawn
any funds under the revolving loan. Additional information can be found at Note 9 to the unaudited condensed consolidated financial
statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q. This description of the material terms and conditions
of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full texts of the
Credit Agreement, the Pledge and Security Agreement and Irrevocable Proxy, and the Guaranty, which were filed as Exhibits 10.1,
10.2 and 10.3 to the Form 8-K filed with the SEC on July 2, 2015.
Other potential sources of capital include,
but are not limited to, additional bank credit facilities and the sale of stock. We believe that we have the resources to satisfy
our operating needs for working capital, capital expenditures, purchases of common stock under our stock repurchase program, litigation,
dividends or acquisitions for our operations for a minimum of the next twelve months.
At March 31, 2018, we had $16.5 million
in cash and cash equivalents. Of this amount, $6.1 million was held by GPI SAS, $5.7 million was held by GPI USA and $4.6 million
was held by GPI Asia. As a consequence of the Tax Act, we would not be subject to further taxation if we were to repatriate those
amounts held outside of the United States, except for potential minimal withholding taxes.
Working
Capital
. The following table summarizes our cash and cash equivalents, and working capital (dollars in thousands),
and our current ratio:
|
|
March 31,
|
|
|
December 31,
|
|
|
Period-to-Period
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Cash and cash equivalents
|
|
$
|
16,463
|
|
|
$
|
14,064
|
|
|
$
|
2,399
|
|
|
|
17.1
|
%
|
Working capital
|
|
$
|
23,097
|
|
|
$
|
24,087
|
|
|
$
|
(990
|
)
|
|
|
(4.1
|
)%
|
Current ratio
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Cash Flows
. The following table
summarizes our cash flows (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2,868
|
|
|
$
|
4,096
|
|
|
$
|
(1,228
|
)
|
|
|
(30.0
|
)%
|
Investing activities
|
|
|
(177
|
)
|
|
|
(268
|
)
|
|
|
91
|
|
|
|
34.0
|
%
|
Financing activities
|
|
|
(491
|
)
|
|
|
(337
|
)
|
|
|
(154
|
)
|
|
|
45.7
|
%
|
Effect of exchange rates
|
|
|
199
|
|
|
|
54
|
|
|
|
145
|
|
|
|
(268.5
|
)%
|
Net change
|
|
$
|
2,399
|
|
|
$
|
3,545
|
|
|
$
|
(1,146
|
)
|
|
|
(32.3
|
)%
|
The decrease in cash flows provided by operating
activities was primarily caused by an increase in other current assets and decreases in accounts payable and net income, partially
offset by a decrease in inventory, in accounts receivable, and increases in customer deposits and deferred revenue.
The decrease in cash flows used by investing
activities was primarily due to a decrease in purchase of license rights.
The increase in cash flows used in financing
activities was primarily due to an increase in stock appreciation right payments.
C
apital
Expenditures
. In the first quarter of 2018 we purchased $0.2 million of property, plant and equipment. We currently
intend to purchase approximately $4.8 million in property and equipment during the remainder of 2018.
Cash Dividend.
Our Board of Directors has no current plans to pay a regular dividend on our common stock, but may evaluate the merit of paying
a special dividend from time to time.
Backlog
.
At March 31, 2018, our backlog of signed orders for the following twelve months was $20.1 million, consisting of $17.0 million
for GPI USA, $2.5 million for GPI ASIA, and $0.6 million for GPI SAS. At March 31, 2017, our backlog of signed orders for the following
twelve months was $22.5 million, consisting of $13.5 million for GPI ASIA, $8.5 million for GPI USA, and $0.5 million for GPI SAS.
Contractual Obligations and Commercial Commitments
On June 26, 2015, we entered into a Credit Agreement
with Nevada State Bank for a combined $15.0 million, consisting of a $10.0 million seven-year term loan and a $5.0 million five-year
revolving loan described under “Liquidity and Capital Resources” in Part I, Item 2— “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.
On January 26, 2018, we entered into global
licensing and development agreements with BrainChip Holdings Ltd. and Xuvi, LLC described under “Outlook” in Part I,
Item 2— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this
Quarterly Report on Form 10-Q.
Forward-Looking Information Statements and Risk Factors
Throughout this Quarterly Report on Form 10-Q,
we make some forward-looking statements which do not relate to historical or current facts, but are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other
information based on forecasts of future results and estimates of amounts not yet determinable that, while considered reasonable
by us, are inherently subject to significant business, economic, and competitive risks and uncertainties, many of which are beyond
our control and are subject to change. The statements also relate to our future prospects and anticipated performance, development,
and business strategies such as statements relating to anticipated future sales or the timing thereof, potential acquisitions,
the long-term growth and prospects of our business or any jurisdiction, the duration or effects of unfavorable economic conditions
which may reduce our product sales, and the long-term potential of the RFID gaming chips market and our ability to capitalize on
any such growth opportunities. These statements are identified by their use of terms and phrases such as anticipate, believe,
could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations
thereof, and other similar terms and phrases, including references to assumptions.
Although
we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ
materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward-looking
statements, are subject to change and to inherent known and unknown risks and uncertainties such as those identified in Part I,
Item 1A
—
“Risk Factors,” of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2017, filed with the SEC on March 23, 2018. We do not intend, and undertake no obligation, to
update our forward-looking statements to reflect future events or circumstances.