ITEM 1. FINANCIAL
STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share amounts and par
value)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,149
|
|
|
$
|
10,604
|
|
Accounts receivable, net
|
|
|
10,151
|
|
|
|
11,069
|
|
Inventories
|
|
|
16,444
|
|
|
|
14,987
|
|
Prepaid expenses
|
|
|
940
|
|
|
|
812
|
|
Other current assets
|
|
|
1,638
|
|
|
|
1,620
|
|
Total current assets
|
|
|
43,322
|
|
|
|
39,092
|
|
Property and equipment, net
|
|
|
25,365
|
|
|
|
24,310
|
|
Goodwill
|
|
|
10,292
|
|
|
|
10,292
|
|
Intangible assets, net
|
|
|
1,855
|
|
|
|
1,818
|
|
Deferred income tax assets
|
|
|
1,730
|
|
|
|
1,579
|
|
Inventories, non-current
|
|
|
604
|
|
|
|
598
|
|
Other assets, non-current
|
|
|
2,309
|
|
|
|
2,310
|
|
Total assets
|
|
$
|
85,477
|
|
|
$
|
79,999
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,995
|
|
|
$
|
3,466
|
|
Accrued liabilities
|
|
|
5,702
|
|
|
|
5,698
|
|
Customer deposits and deferred revenue
|
|
|
4,213
|
|
|
|
3,679
|
|
Current portion of long-term debt
|
|
|
1,374
|
|
|
|
1,367
|
|
Income taxes payable
|
|
|
936
|
|
|
|
531
|
|
Total current liabilities
|
|
|
19,220
|
|
|
|
14,741
|
|
Long-term debt
|
|
|
6,305
|
|
|
|
6,649
|
|
Other liabilities, non-current
|
|
|
1,253
|
|
|
|
1,076
|
|
Total liabilities
|
|
|
26,778
|
|
|
|
22,466
|
|
Commitments and contingencies - see Note 9
|
|
|
|
|
|
|
|
|
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, 8,219,577 shares issued and 7,928,594 shares outstanding
|
|
|
82
|
|
|
|
82
|
|
Additional paid-in capital
|
|
|
20,058
|
|
|
|
20,031
|
|
Treasury stock at cost: 290,983 shares
|
|
|
(2,263
|
)
|
|
|
(2,263
|
)
|
Retained earnings
|
|
|
42,976
|
|
|
|
42,044
|
|
Accumulated other comprehensive loss
|
|
|
(2,154
|
)
|
|
|
(2,361
|
)
|
Total stockholders' equity
|
|
|
58,699
|
|
|
|
57,533
|
|
Total liabilities and stockholders' equity
|
|
$
|
85,477
|
|
|
$
|
79,999
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per-share amounts)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
18,913
|
|
|
$
|
16,093
|
|
Cost of revenues
|
|
|
13,093
|
|
|
|
12,125
|
|
Gross profit
|
|
|
5,820
|
|
|
|
3,968
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
1,726
|
|
|
|
1,525
|
|
General and administrative
|
|
|
2,325
|
|
|
|
2,173
|
|
Research and development
|
|
|
310
|
|
|
|
307
|
|
Operating income (loss)
|
|
|
1,459
|
|
|
|
(37
|
)
|
Other expense, net
|
|
|
(93
|
)
|
|
|
(82
|
)
|
Income (loss) before income taxes
|
|
|
1,366
|
|
|
|
(119
|
)
|
Income tax expense (benefit)
|
|
|
434
|
|
|
|
(39
|
)
|
Net income (loss)
|
|
$
|
932
|
|
|
$
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
(0.01
|
)
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,929
|
|
|
|
7,929
|
|
Diluted
|
|
|
8,059
|
|
|
|
7,929
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(unaudited)
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income (loss)
|
|
$
|
932
|
|
|
$
|
(80
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
207
|
|
|
|
545
|
|
Total comprehensive income
|
|
$
|
1,139
|
|
|
$
|
465
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(unaudited)
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
7,928,594
|
|
|
$
|
82
|
|
|
$
|
20,033
|
|
|
$
|
(2,263
|
)
|
|
$
|
37,812
|
|
|
$
|
(1,876
|
)
|
|
$
|
53,788
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(80
|
)
|
|
|
-
|
|
|
|
(80
|
)
|
Stock compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
Tax impact of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
Foreign currency translation adjustment, net
of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
545
|
|
|
|
545
|
|
Balance, March 31, 2016
|
|
|
7,928,594
|
|
|
$
|
82
|
|
|
$
|
20,031
|
|
|
$
|
(2,263
|
)
|
|
$
|
37,732
|
|
|
$
|
(1,331
|
)
|
|
$
|
54,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 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, March 31, 2017
|
|
|
7,928,594
|
|
|
$
|
82
|
|
|
$
|
20,058
|
|
|
$
|
(2,263
|
)
|
|
$
|
42,976
|
|
|
$
|
(2,154
|
)
|
|
$
|
58,699
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited)
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
932
|
|
|
$
|
(80
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
927
|
|
|
|
666
|
|
Amortization of intangible assets
|
|
|
63
|
|
|
|
70
|
|
Provision for bad debt
|
|
|
177
|
|
|
|
12
|
|
Deferred income taxes
|
|
|
(148
|
)
|
|
|
(276
|
)
|
Stock compensation expense
|
|
|
27
|
|
|
|
21
|
|
Tax impact of stock options
|
|
|
-
|
|
|
|
(23
|
)
|
Gain on sale of marketable securities
|
|
|
-
|
|
|
|
(1
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
742
|
|
|
|
1,434
|
|
Inventories
|
|
|
(1,388
|
)
|
|
|
(837
|
)
|
Prepaid expenses and other current assets
|
|
|
(131
|
)
|
|
|
(219
|
)
|
Other assets, non-current
|
|
|
23
|
|
|
|
10
|
|
Accounts payable
|
|
|
1,781
|
|
|
|
(1,127
|
)
|
Accrued liabilities
|
|
|
209
|
|
|
|
(1,340
|
)
|
Customer deposits and deferred revenue
|
|
|
533
|
|
|
|
1,086
|
|
Other current liabilities
|
|
|
(56
|
)
|
|
|
13
|
|
Income taxes payable
|
|
|
405
|
|
|
|
(314
|
)
|
Net cash provided by (used in) operating activities
|
|
|
4,096
|
|
|
|
(905
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of marketable securities
|
|
|
-
|
|
|
|
1,880
|
|
Purchase of licensing rights
|
|
|
(100
|
)
|
|
|
-
|
|
Capital expenditures
|
|
|
(168
|
)
|
|
|
(851
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(268
|
)
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(337
|
)
|
|
|
(330
|
)
|
Net cash used in financing activities
|
|
|
(337
|
)
|
|
|
(330
|
)
|
Effect of exchange rate changes on cash
|
|
|
54
|
|
|
|
172
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,545
|
|
|
|
(34
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
10,604
|
|
|
|
17,788
|
|
Cash and cash equivalents, end of period
|
|
$
|
14,149
|
|
|
$
|
17,754
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
60
|
|
|
$
|
63
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
4
|
|
|
$
|
435
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Property and equipment acquired through accounts payable, accrued and non-current other liabilities
|
|
$
|
1,741
|
|
|
$
|
36
|
|
See notes to unaudited condensed consolidated
financial statements.
CONDENSED CONSOLIDATED NOTES TO 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 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.
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 of our products
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.
|
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. 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,
2016, filed with the SEC on March 24, 2017.
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.
In March 2017,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 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. The Company does not expect the adoption
of this guidance to significantly impact the consolidated financial statements.
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 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. The amendments
eliminate the exception for an intra-entity transfer of an asset other than inventory. The ASU becomes effective for annual reporting
periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company
has not adopted this guidance for 2016 or to date in 2017 and is currently evaluating the impact of adoption but does not expect
the adoption 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 has not adopted this guidance
for 2016 or to date in 2017 and is currently evaluating the impact of adoption and will consult with accounting experts as needed
to assist with the implementation of this standard.
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). The guidance is effective in 2018, with early adoption permitted.
We are utilizing a comprehensive approach to
assess the impact of the guidance on our current accounting policies and practices to identify potential differences that would
result from applying the new requirements to our revenue contracts, including evaluation of our performance obligations. We continue
to evaluate the impact, if any, on changes to our business processes, systems and controls to support recognition and disclosure
under the new guidance and, based on the foregoing, we do not currently expect this guidance to have a material impact on our financial
statements. We are continuing with our implementation plan and currently expect to adopt the new guidance beginning in 2018 using
the cumulative effect approach.
Recently Adopted
Accounting Standards.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation
(Topic 718)
, to simplify several aspects of the accounting for share-based payment award transactions including: income
tax consequences; classification of awards as either equity or liabilities; and classification on the statement of cash
flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. During the first quarter of 2017, the Company adopted this guidance. The adoption of
this guidance did not have a significant impact on our consolidated financials. We did not change our accounting method for
forfeitures. We continue to account for forfeitures when they occur as the historical forfeiture activity has been minimal
and not conducive to creating a reasonable forfeiture rate.
In July 2015, the FASB issued ASU 2015-11,
Inventory
(Topic 330): Simplifying the Measurement of Inventory
. The guidance applies to any entity measuring inventory using first-in,
first-out or average cost. The main provision of this guidance requires an entity to measure inventory within the scope of this
ASU at the lower of cost and net realizable value. This guidance is effective for fiscal years beginning after December 15, 2016,
and interim periods within fiscal years beginning after December 15, 2016. A reporting entity should apply the amendments prospectively
with earlier application permitted as of the beginning of an interim or annual reporting period. During the first quarter of 2017,
the Company adopted this guidance. The adoption of this guidance had no impact on our consolidated statements of income and comprehensive
income.
Note 2. Dolphin Asset Acquisition
On May 11, 2016, the Company entered into and
closed an Asset Purchase Agreement to purchase certain assets used in the design and manufacture of casino currency from Dolphin
Products Limited (Dolphin), a wholly owned subsidiary of Entertainment Gaming Asia Inc. (EGT). The purchased assets were primarily
equipment and inventory.
The acquisition was treated as an asset acquisition.
The total cost of the acquisition was $7.3 million, with $5.1 million paid as of March 31, 2017 and $1.1 million, included in accrued
liabilities and non-current other liabilities, to be paid on each of the first two anniversaries of the closing. In May 2017, we
paid the current liability of $1.1 million to EGT. The acquisition cost has been allocated as follows (in thousands):
|
|
Assets
acquired
|
|
Property and equipment
|
|
$
|
5,691
|
|
Inventory
|
|
|
1,622
|
|
Total acquired
|
|
$
|
7,313
|
|
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 summarizes our holdings (in thousands):
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Macau S.A.R., China
|
|
$
|
7,318
|
|
|
$
|
4,104
|
|
United States (including Mexico)
|
|
|
4,454
|
|
|
|
3,237
|
|
France
|
|
|
2,377
|
|
|
|
3,263
|
|
Total
|
|
$
|
14,149
|
|
|
$
|
10,604
|
|
Note 4. Accounts Receivable and Allowance for Doubtful Accounts
At March 31, 2017, one casino customer accounted
for 14% of our accounts receivable balance. At December 31, 2016, a different casino customer accounted for 25% of our accounts
receivable balance.
Note 5. Inventories
Inventories consisted of the following (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
10,673
|
|
|
$
|
11,129
|
|
Work in progress
|
|
|
1,660
|
|
|
|
1,137
|
|
Finished goods
|
|
|
4,715
|
|
|
|
3,319
|
|
Total inventories
|
|
$
|
17,048
|
|
|
$
|
15,585
|
|
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 is as follows (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Current
|
|
$
|
16,444
|
|
|
$
|
14,987
|
|
Non-current
|
|
|
604
|
|
|
|
598
|
|
Total inventories
|
|
$
|
17,048
|
|
|
$
|
15,585
|
|
Note 6. Property and Equipment
Property and equipment consisted of the following
(in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Land
|
|
$
|
636
|
|
|
$
|
636
|
|
Buildings and improvements
|
|
|
10,432
|
|
|
|
10,280
|
|
Equipment and furniture
|
|
|
37,279
|
|
|
|
35,618
|
|
Vehicles
|
|
|
379
|
|
|
|
379
|
|
Construction in progress
|
|
|
1,319
|
|
|
|
1,327
|
|
|
|
|
50,045
|
|
|
|
48,240
|
|
Less accumulated depreciation
|
|
|
(24,680
|
)
|
|
|
(23,930
|
)
|
Property and equipment, net
|
|
$
|
25,365
|
|
|
$
|
24,310
|
|
Depreciation expense for the three months ended
March 31, 2017 and 2016 was $927,000 and $666,000, respectively. Both at the end of March 2017 and at the end of December
2016, the $1.3 million of construction in progress was primarily related to Dolphin assets waiting to be placed in service. The
building expansion at our Blue Springs, Missouri facility also contributed to this amount.
Note 7. Goodwill and Intangible Assets
We had goodwill valued at $10,292,000
as of March 31, 2017 and December 31, 2016.
Intangible assets consisted
of the following (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accum
Amort
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accum
Amort
|
|
|
Net
Carrying
Amount
|
|
Trademarks
|
|
$
|
1,711
|
|
|
$
|
(610
|
)
|
|
$
|
1,101
|
|
|
$
|
1,711
|
|
|
$
|
(579
|
)
|
|
$
|
1,132
|
|
Customer list
|
|
|
897
|
|
|
|
(296
|
)
|
|
|
601
|
|
|
|
897
|
|
|
|
(278
|
)
|
|
|
619
|
|
Patents
|
|
|
542
|
|
|
|
(528
|
)
|
|
|
14
|
|
|
|
542
|
|
|
|
(527
|
)
|
|
|
15
|
|
Other intangible assets
|
|
|
472
|
|
|
|
(333
|
)
|
|
|
139
|
|
|
|
372
|
|
|
|
(320
|
)
|
|
|
52
|
|
Total intangible assets
|
|
$
|
3,622
|
|
|
$
|
(1,767
|
)
|
|
$
|
1,855
|
|
|
$
|
3,522
|
|
|
$
|
(1,704
|
)
|
|
$
|
1,818
|
|
Amortization expense for intangible assets for
the three months ended March 31, 2017 and 2016 was $63,000 and $70,000, 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, 2017 and December 31, 2016.
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, 2017, estimated
repayment obligations for the principal balance of long-term debt were as follows (in thousands):
Year Ending
|
|
Outstanding
Debt
|
|
2017
|
|
$
|
1,026
|
|
2018
|
|
|
1,405
|
|
2019
|
|
|
1,448
|
|
2020
|
|
|
1,493
|
|
2021
|
|
|
1,539
|
|
2022
|
|
|
768
|
|
|
|
$
|
7,679
|
|
Note 9. Commitments and Contingencies
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 2022.
At March 31, 2017, minimum lease payment obligations
were as follows (in thousands):
|
|
Minimum
|
|
|
|
Lease
|
|
Year Ending
|
|
Payments
|
|
2017
|
|
$
|
671
|
|
2018
|
|
|
679
|
|
2019
|
|
|
290
|
|
2020
|
|
|
265
|
|
2021
|
|
|
270
|
|
2022
|
|
|
216
|
|
Total
|
|
$
|
2,391
|
|
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 10. 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 net sales by
geographic area (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas
|
|
$
|
14,263
|
|
|
|
75.5
|
%
|
|
$
|
12,294
|
|
|
|
76.4
|
%
|
Asia-Pacific
|
|
|
4,121
|
|
|
|
21.8
|
%
|
|
|
2,761
|
|
|
|
17.2
|
%
|
Europe and Africa
|
|
|
529
|
|
|
|
2.7
|
%
|
|
|
1,038
|
|
|
|
6.4
|
%
|
Total
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
16,093
|
|
|
|
100.0
|
%
|
The following table presents our net sales by
product line (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Casino currency without RFID
|
|
$
|
3,894
|
|
|
|
20.6
|
%
|
|
$
|
2,808
|
|
|
|
17.4
|
%
|
Casino currency with RFID
|
|
|
2,759
|
|
|
|
14.6
|
%
|
|
|
2,139
|
|
|
|
13.3
|
%
|
Total casino currency
|
|
|
6,653
|
|
|
|
35.2
|
%
|
|
|
4,947
|
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Playing cards
|
|
|
6,336
|
|
|
|
33.4
|
%
|
|
|
6,565
|
|
|
|
40.8
|
%
|
Table accessories and other products
|
|
|
1,893
|
|
|
|
10.0
|
%
|
|
|
1,367
|
|
|
|
8.5
|
%
|
Table layouts
|
|
|
1,302
|
|
|
|
6.9
|
%
|
|
|
1,365
|
|
|
|
8.5
|
%
|
Gaming furniture
|
|
|
752
|
|
|
|
4.0
|
%
|
|
|
408
|
|
|
|
2.5
|
%
|
Dice
|
|
|
701
|
|
|
|
3.7
|
%
|
|
|
638
|
|
|
|
4.0
|
%
|
RFID solutions
|
|
|
372
|
|
|
|
2.0
|
%
|
|
|
75
|
|
|
|
0.5
|
%
|
Shipping
|
|
|
904
|
|
|
|
4.8
|
%
|
|
|
728
|
|
|
|
4.5
|
%
|
Total
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
16,093
|
|
|
|
100.0
|
%
|
For the three months ended March 31, 2017, one
customer accounted for 13% of revenues and for the three months ended March 31, 2016, a different customer accounted for 13% of
revenues.
The following table presents our property and
equipment by geographic area (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Property and equipment, net:
|
|
|
|
|
|
|
United States
|
|
$
|
14,347
|
|
|
$
|
13,242
|
|
Mexico
|
|
|
5,944
|
|
|
|
6,142
|
|
France
|
|
|
4,709
|
|
|
|
4,614
|
|
Macau S.A.R., China
|
|
|
365
|
|
|
|
312
|
|
Total
|
|
$
|
25,365
|
|
|
$
|
24,310
|
|
The following table presents our intangible
assets by geographic area (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Intangible assets, net:
|
|
|
|
|
|
|
United States
|
|
$
|
1,810
|
|
|
$
|
1,772
|
|
Asia
|
|
|
45
|
|
|
|
46
|
|
Total
|
|
$
|
1,855
|
|
|
$
|
1,818
|
|
Note 11. Earnings per Share (EPS)
Shares used to compute basic and diluted earnings
per share from operations were as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted-average number of common shares outstanding - basic
|
|
|
7,929
|
|
|
|
7,929
|
|
Potential dilution from equity grants
|
|
|
130
|
|
|
|
-
|
|
Weighted-average number of common shares outstanding - diluted
|
|
|
8,059
|
|
|
|
7,929
|
|
As of March 31, 2017, and 2016, there were up
to 129,536 and 113,653, respectively, shares potentially issuable under option agreements that could potentially dilute basic earnings
per share in the future. For the three months ended March 31, 2016, these shares were excluded from the calculation of diluted
earnings per share because their inclusion would have been anti-dilutive to the Company’s loss.
We have certain outstanding stock options to
purchase common stock which have exercise prices greater than the average market price. These anti-dilutive options have been excluded
from the computation of diluted net income per share. Outstanding anti-dilutive options for the 3 months ended March 31, 2017 totaled
to 17,678.
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, 2016, filed with the SEC on March 24, 2017.
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, 2016, filed with the SEC on March 24, 2017.
Overview of Our Business
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 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. GPIC sells its casino table game equipment under the brand
names of Paulson
®
, Bourgogne et Grasset
®
(BG
®
), Gemaco
®
, Blue Chip
®
(BC
®
), Dolphin
®
and Bud Jones
®
.
GPIC is headquartered in North Las Vegas, Nevada,
with offices in Blue Springs, Missouri; Atlantic City, New Jersey; Gulfport, Mississippi; San Luis Rio Colorado, Mexico; Beaune,
France; and Macau S.A.R., China. We primarily sell our products to licensed casinos worldwide. We operate in one segment and have
three operating subsidiaries: GPI USA (including GPI Mexicana, our maquiladora manufacturing operation in Mexico, and our manufacturing
operation in Blue Springs, Missouri), GPI SAS, and 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 of our products
are 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.
|
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, 2017 and March 31, 2016 (in millions):
|
|
|
GPI USA
|
|
|
|
GPI Asia
|
|
|
|
GPI SAS
|
|
|
|
Total
|
|
March 31, 2017
|
|
$
|
13.5 million
|
|
|
$
|
8.5 million
|
|
|
$
|
0.5 million
|
|
|
$
|
22.5 million
|
|
March 31, 2016
|
|
$
|
11.1 million
|
|
|
$
|
2.4 million
|
|
|
$
|
0.9 million
|
|
|
$
|
14.4 million
|
|
Outlook
While we had a strong backlog in Asia as of
March 31, 2017, and anticipate to win new business in the Asia market, continuing uncertainty arising from regulators’ decisions
on the timing of casino opening dates and the number of tables allotted to each new casino will impact both the amount of revenue
we may recognize and the timing of revenue recognition.
Our backlog as of March 31, 2017 reflects strong
sales results in the Americas and Asia. At the same time, we continue to experience operating issues and reduced margins in our
playing card business arising from the rapid growth of our card business and our significant expansion of the Blue Springs, Missouri,
facility. First quarter 2017 margins were significantly better than the last three months of 2016, and while we expect to continue
to improve playing card profitability, 2017 results could continue to be negatively impacted.
Financial and Operational Highlights
For the first quarter of 2017, our revenues
were $18.9 million, an increase of $2.8 million, or 17.5%, compared to revenues of $16.1 million for the same period of 2016. For
the first quarter of 2017, our net income was $0.9 million, an increase of $1.0 million compared to a net loss of $0.1 million
for the same period in 2016. The increase in our results for the three months ended March 31, 2017 was primarily due to increases
in casino currency sales in the Americas and Asia, table accessories and furniture sales in the Americas, and RFID solutions in
Asia, partially offset by a reduction in profitability on our playing cards product line.
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, 2016, filed with the SEC on March 24, 2017. 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 statements of operations (dollars in thousands) and as a percentage of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Revenues
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
16,093
|
|
|
|
100.0
|
%
|
|
$
|
2,820
|
|
|
|
17.5
|
%
|
Cost of revenues
|
|
|
13,093
|
|
|
|
69.2
|
%
|
|
|
12,125
|
|
|
|
75.3
|
%
|
|
|
968
|
|
|
|
8.0
|
%
|
Gross profit
|
|
|
5,820
|
|
|
|
30.8
|
%
|
|
|
3,968
|
|
|
|
24.7
|
%
|
|
|
1,852
|
|
|
|
46.7
|
%
|
Selling, administrative, and research and development
|
|
|
4,361
|
|
|
|
23.1
|
%
|
|
|
4,005
|
|
|
|
24.9
|
%
|
|
|
356
|
|
|
|
8.9
|
%
|
Operating income (loss)
|
|
|
1,459
|
|
|
|
7.7
|
%
|
|
|
(37
|
)
|
|
|
(0.2
|
)%
|
|
|
1,496
|
|
|
|
(4,043.2
|
)%
|
Other expense, net
|
|
|
(93
|
)
|
|
|
(0.5
|
)%
|
|
|
(82
|
)
|
|
|
(0.5
|
)%
|
|
|
(11
|
)
|
|
|
13.4
|
%
|
Income (loss) before income taxes
|
|
|
1,366
|
|
|
|
7.2
|
%
|
|
|
(119
|
)
|
|
|
(0.7
|
)%
|
|
|
1,485
|
|
|
|
(1,247.9
|
)%
|
Income tax expense (benefit)
|
|
|
434
|
|
|
|
2.3
|
%
|
|
|
(39
|
)
|
|
|
(0.2
|
)%
|
|
|
473
|
|
|
|
(1,212.8
|
)%
|
Net income (loss)
|
|
$
|
932
|
|
|
|
4.9
|
%
|
|
$
|
(80
|
)
|
|
|
(0.5
|
)%
|
|
$
|
1,012
|
|
|
|
(1,265.0
|
)%
|
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
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas
|
|
$
|
14,263
|
|
|
|
75.5
|
%
|
|
$
|
12,294
|
|
|
|
76.4
|
%
|
|
$
|
1,969
|
|
|
|
16.0
|
%
|
Asia-Pacific
|
|
|
4,121
|
|
|
|
21.8
|
%
|
|
|
2,761
|
|
|
|
17.2
|
%
|
|
|
1,360
|
|
|
|
49.3
|
%
|
Europe and Africa
|
|
|
529
|
|
|
|
2.7
|
%
|
|
|
1,038
|
|
|
|
6.4
|
%
|
|
|
(509
|
)
|
|
|
-49.0
|
%
|
Total
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
16,093
|
|
|
|
100.0
|
%
|
|
$
|
2,820
|
|
|
|
17.5
|
%
|
The following table present our revenues
by product line (dollars in thousands) and as a percentage of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Casino currency without RFID
|
|
$
|
3,894
|
|
|
|
20.6
|
%
|
|
$
|
2,808
|
|
|
|
17.4
|
%
|
|
$
|
1,086
|
|
|
|
38.7
|
%
|
Casino currency with RFID
|
|
|
2,759
|
|
|
|
14.6
|
%
|
|
|
2,139
|
|
|
|
13.3
|
%
|
|
|
620
|
|
|
|
29.0
|
%
|
Total casino currency
|
|
|
6,653
|
|
|
|
35.2
|
%
|
|
|
4,947
|
|
|
|
30.7
|
%
|
|
|
1,706
|
|
|
|
34.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Playing cards
|
|
|
6,336
|
|
|
|
33.4
|
%
|
|
|
6,565
|
|
|
|
40.8
|
%
|
|
|
(229
|
)
|
|
|
(3.5
|
)%
|
Table accessories and other products
|
|
|
1,893
|
|
|
|
10.0
|
%
|
|
|
1,367
|
|
|
|
8.5
|
%
|
|
|
526
|
|
|
|
38.5
|
%
|
Table layouts
|
|
|
1,302
|
|
|
|
6.9
|
%
|
|
|
1,365
|
|
|
|
8.5
|
%
|
|
|
(63
|
)
|
|
|
(4.6
|
)%
|
Gaming furniture
|
|
|
752
|
|
|
|
4.0
|
%
|
|
|
408
|
|
|
|
2.5
|
%
|
|
|
344
|
|
|
|
84.3
|
%
|
Dice
|
|
|
701
|
|
|
|
3.7
|
%
|
|
|
638
|
|
|
|
4.0
|
%
|
|
|
63
|
|
|
|
9.8
|
%
|
RFID solutions
|
|
|
372
|
|
|
|
2.0
|
%
|
|
|
75
|
|
|
|
0.5
|
%
|
|
|
297
|
|
|
|
395.9
|
%
|
Shipping
|
|
|
904
|
|
|
|
4.8
|
%
|
|
|
728
|
|
|
|
4.5
|
%
|
|
|
176
|
|
|
|
24.1
|
%
|
Total
|
|
$
|
18,913
|
|
|
|
100.0
|
%
|
|
$
|
16,093
|
|
|
|
100.0
|
%
|
|
$
|
2,820
|
|
|
|
17.5
|
%
|
Comparison of Operations for the Three Months Ended March 31,
2017 and 2016
Revenues
.
For the three
months ended March 31, 2017, our revenues were $18.9 million, an increase of $2.8 million, or 17.5%, compared to revenues of $16.1
million for the same period in 2016. The increase in revenues was primarily due to an increase in casino currency sales in the
Americas and in Asia, an increase in table accessories and furniture sales in the Americas, and an increase in sales of RFID solutions
in Asia.
Cost of Revenues.
For the three
months ended March 31, 2017, cost of revenues was $13.1 million, an increase of $1.0 million, or 8,0%, when compared to the
same period in 2016. As a percentage of revenues, our cost of revenues decreased to 69.2% in 2017 compared to 75.3% in 2016. The
decrease in cost of revenues as a percentage of revenues was driven by the same factors described under Revenues above and Gross
Profit below. In addition, we continued to experience operational challenges in our playing cards product line, which increased
our cost and reduced our profitability.
Gross Profit.
For the three months
ended March 31, 2017, gross profit was $5.8 million, an increase of $1.8 million, or 46.7%, compared to gross profit of $4.0 million
for the same period in 2016. As a percentage of revenues, our gross profit increased to 30.8% from 24.7%. The increase was primarily
attributable to an increase in casino currency sales, table accessories sales, and sales of RFID solutions. Results for the quarter
were negatively impacted by reduced gross profit on our playing cards product line compared to the first quarter of 2016. While
playing card margins were higher than those experienced in the fourth quarter of last year, additional expenditures arising from
the opening of the new facility, one-time process improvement and equipment fine-tuning, and depreciation on new plant and equipment
resulted in lower margins than a year ago.
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
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Marketing and sales
|
|
$
|
1,726
|
|
|
|
9.1
|
%
|
|
$
|
1,525
|
|
|
|
9.5
|
%
|
|
$
|
201
|
|
|
|
13.2
|
%
|
General and administrative
|
|
|
2,325
|
|
|
|
12.4
|
%
|
|
|
2,173
|
|
|
|
13.5
|
%
|
|
|
152
|
|
|
|
7.0
|
%
|
Research and development
|
|
|
310
|
|
|
|
1.6
|
%
|
|
|
307
|
|
|
|
1.9
|
%
|
|
|
3
|
|
|
|
1.0
|
%
|
Total
selling, administrative, and research and development
|
|
$
|
4,361
|
|
|
|
23.1
|
%
|
|
$
|
4,005
|
|
|
|
24.9
|
%
|
|
$
|
356
|
|
|
|
8.9
|
%
|
For the three months ended
March 31, 2017, selling, administrative, and research and development expenses were $4.4 million, an increase of $0.4 million,
or 8.9%, compared to selling, administrative, and research and development expenses of $4.0 million during the same period in 2016.
Marketing and sales expenses
increased by $0.2 million during the first quarter of 2017, compared to the same period in 2016, primarily because in 2016 we made
a one-time reduction in a deferred compensation item for an employee that left the Company.
General and administrative
expenses increased by $0.2 million during the first quarter of 2017, compared to the same period in 2016, primarily due to an increase
in bad debt reserve for various customers.
Research and development expenses
remained relatively unchanged in the first quarter of 2017 compared to the same period in 2016.
Other Income and
(Expense), net
. The following table presents other net income and (expense) (dollars in thousands) and as a percentage
of revenues:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Interest income
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
5
|
|
|
|
0.0
|
%
|
|
$
|
(5
|
)
|
|
|
(100.0
|
)%
|
Interest expense
|
|
|
(60
|
)
|
|
|
(0.3
|
)%
|
|
|
(63
|
)
|
|
|
(0.4
|
)%
|
|
|
3
|
|
|
|
(4.1
|
)%
|
Loss on foreign currency transactions
|
|
|
(50
|
)
|
|
|
(0.3
|
)%
|
|
|
(27
|
)
|
|
|
(0.2
|
)%
|
|
|
(23
|
)
|
|
|
84.1
|
%
|
Other income, net
|
|
|
17
|
|
|
|
0.1
|
%
|
|
|
3
|
|
|
|
0.0
|
%
|
|
|
14
|
|
|
|
392.8
|
%
|
Total other (expense) income, net
|
|
$
|
(93
|
)
|
|
|
(0.6
|
)%
|
|
$
|
(82
|
)
|
|
|
(0.6
|
)%
|
|
$
|
(11
|
)
|
|
|
13.4
|
%
|
GPI SAS uses the euro as its
functional currency. At March 31, 2017 and December 31, 2016, the U.S. dollar to euro exchange rates were $1.07 and $1.05, respectively,
which represents a 1.6% weaker dollar compared to the euro. The average exchange rates for the three months ended March 31, 2017
and 2016 were $1.07 and $1.10, respectively, which represents a 3.2% stronger dollar compared to the euro.
GPI Mexicana uses the U.S.
dollar as its functional currency. At March 31, 2017 and December 31, 2016, the Mexican peso to U.S. dollar exchange rates were
18.73 pesos and 20.75 pesos, respectively, which represents a 9.7% weaker dollar compared to the Mexican peso. The average exchange
rates for the three months ended March 31, 2017 and 2016 were 20.32 pesos and 18.04 pesos to the U.S. dollar, respectively, which
represents a 12.6% stronger dollar compared to the Mexican peso.
GPI Asia uses the U.S. dollar as its functional
currency. At March 31, 2017 and December 31, 2016, the Macau pataca to U.S. dollar exchange rates were 8.21 patacas and 8.20 patacas,
respectively, which represents a 0.2% stronger dollar compared to the Macau pataca. The Macau pataca to U.S. dollar average exchange
rates for the three months ended March 31, 2017 and 2016 were 8.18 patacas and 8.16 patacas, respectively, which represents a 0.2%
stronger dollar compared to the Macau pataca.
Income Taxes.
Our effective income
tax rate for the three months ended March 31, 2017 and 2016 was 31.8% and 32.8%, respectively. 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.
Our effective tax rate for the three months
ended March 31, 2016 was favorably affected by the foreign rate differential on income from GPI Asia, and the benefit from a research
credit from GPI SAS, partially offset by the 2016 tax impact of a deemed dividend from GPI Asia and our Subpart F income adjustment.
We account for uncertain tax positions in accordance
with applicable accounting guidance. At December 31, 2016, we reported unrecognized tax benefits related to the French Tax Administration’s
examination of GPI SAS for tax years 2013 and 2012 which is on-going. As of March 31, 2017, there was no change to the unrecognized
tax benefits reported at December 31, 2016.
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 8 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, 2017, we had $14.1 million
in cash and cash equivalents. Of this amount, $7.3 million was held by GPI Asia, $4.4 million was held by GPI USA, and $2.4 million
was held by GPI SAS. Of those amounts held in France by GPI SAS and in Mexico by GPI Mexicana, we would be subject to taxation
in the United States if we were to repatriate those amounts, although foreign tax credits may be available to offset such taxes.
All of the amounts currently held in Asia by GPI Asia could be repatriated tax free because U.S. Federal Income Taxes have already
been paid on these funds. Except for the $7.7 million of deemed dividends from the year 2015, we continue to assert that earnings
from GPI Asia will be permanently reinvested. We may repatriate amounts from GPI SAS and, accordingly, our unaudited condensed
consolidated financial statements reflect the tax impacts that would result from repatriation.
Working Capital
.
The following summarizes our cash and cash equivalents, marketable securities, and working capital (dollars in thousands), and
our current ratio:
|
|
March 31,
|
|
|
December 31,
|
|
|
Period-to-Period
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Cash and cash equivalents
|
|
$
|
14,149
|
|
|
$
|
10,604
|
|
|
$
|
3,545
|
|
|
|
33.4
|
%
|
Working capital
|
|
$
|
24,102
|
|
|
$
|
24,351
|
|
|
$
|
(249
|
)
|
|
|
(1.0
|
)%
|
Current ratio
|
|
|
2.3
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Cash Flows
. The following summarizes
our cash flows (dollars in thousands):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Period-to-Period
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
4,096
|
|
|
$
|
(905
|
)
|
|
$
|
5,001
|
|
|
|
(552.6
|
)%
|
Investing activities
|
|
|
(268
|
)
|
|
|
1,029
|
|
|
|
(1,297
|
)
|
|
|
(126.0
|
)%
|
Financing activities
|
|
|
(337
|
)
|
|
|
(330
|
)
|
|
|
(7
|
)
|
|
|
2.1
|
%
|
Effect of exchange rates
|
|
|
54
|
|
|
|
172
|
|
|
|
(118
|
)
|
|
|
(68.6
|
)%
|
Net change
|
|
$
|
3,545
|
|
|
$
|
(34
|
)
|
|
$
|
3,579
|
|
|
|
(10,526.5
|
)%
|
The increase in cash flows provided by operating
activities was primarily caused by an increase in net income, an overall increase in liabilities, partially offset by a decrease
in assets.
The decrease in cash flows provided by investing
activities was primarily due to a decrease in proceeds from the sale of marketable securities, partially offset by a decrease in
capital expenditures.
C
apital
Expenditures
. We currently intend to purchase approximately $6.3 million in property and equipment during the
remainder of 2017 primarily related to improving our operations at our Blue Springs, Missouri facility and our other facilities.
In the first quarter of 2017, we purchased $0.2 million of property and equipment.
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 dividend from time to time.
Backlog
.
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 USA, $8.5 million for GPI Asia, and $0.5 million for GPI SAS. At March 31, 2016, our backlog of signed orders for the following
twelve months was $14.4 million, consisting of $11.1 million for GPI USA, $2.4 million for GPI Asia, and $0.9 million for GPI SAS.
Contractual Obligations and Commercial Commitments
On May 11, 2016, the Company purchased certain
assets dedicated to the design and manufacture of chips and plaques for gaming tables from EGT and Dolphin as described in Note
2 to the unaudited condensed consolidated financial statements included in Part I, Item 1, of 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, 2016, filed with
the SEC on March 24, 2017. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect
future events or circumstances.