NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting
Policies
Organization and Nature of Business
Gaming Partners International Corporation
(GPIC, Our 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 RFID readers
and software, all of which are used with casino table games such as blackjack, poker, baccarat, craps, and roulette.
We have 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.
Merger Agreement
On November 27, 2018, we entered into the
Merger Agreement with Angel and Merger Sub, pursuant to which Angel will acquire the Company in exchange for cash. The Merger
Agreement was unanimously adopted by the Special Transaction Committee of independent directors of the Board of Directors of the
Company as well as the full Board.
Pursuant to the terms of the Merger Agreement,
Merger Sub will merge with and into the Company (the “Merger”), the separate existence of Merger Sub will cease, and
the Company will continue as the surviving corporation, which will be a wholly owned subsidiary of Angel. The surviving corporation
shall succeed to and assume all of the rights and obligations of Merger Sub and the Company. At the Effective Time , by virtue
of the Merger and without any further action on the part of Angel, Merger Sub, the Company or the holders of any capital stock
or other securities of the Company: (i) any shares owned immediately prior to the Effective Time by the Company (or held in the
Company’s treasury), Angel or Merger Sub or any of their respective direct or indirect wholly owned subsidiaries (the “Excluded
Shares”) will be cancelled and retired and shall cease to exist; (ii) except for Excluded Shares, each share of our common
stock outstanding immediately prior to the Effective Time will be automatically converted into the Merger Consideration of $13.75
in cash; and (iii) each share of common stock of Merger Sub, $0.01 par value per share, outstanding immediately prior to the Effective
Time will be converted into one share of common stock of the surviving corporation.
Each of Angel, Merger Sub and the Company
has made customary representations and warranties and agreed to customary covenants in the Merger Agreement. The Merger is subject
to various closing conditions, including but not limited to (i) approval of the Merger Agreement by the holders of a majority
of the outstanding shares of our common stock, (ii) receipt by Angel of certain specified gaming licenses, (iii) if required,
the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
(iv) the absence of any law, order or injunction prohibiting the Merger. Each party’s obligation to consummate the Merger
is also subject to certain additional customary conditions, including (A) subject to certain exceptions and generally subject
to certain materiality qualifiers, the accuracy of the representations and warranties of the other party and (B) performance in
all material respects by the other party of its obligations under the Merger Agreement.
On March 12, 2019, our shareholders approved
the Merger Agreement. The parties currently anticipate that the Merger Agreement will be consummated by December 1, 2019.
Significant Accounting Policies
Basis of Consolidation and Presentation.
The
consolidated financial statements include the accounts of GPIC and its wholly-owned subsidiaries GPI USA, GPI SAS, GPI
Asia and GPI Mexicana. We also include the income or loss earned on our equity method investments, based on our share of the Company’s
assets. All material intercompany balances and transactions have been eliminated in consolidation. The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States. Certain amounts
reported in prior years' consolidated financial statements have been reclassified to conform to the current presentation. These
reclassifications had no impact on net revenues or net income.
Cash and Cash Equivalents.
We consider all highly-liquid
investments with original maturities of three months or less to be cash and cash equivalents. We maintain cash and cash equivalents
in various United States banks. Several accounts are in excess of the federally-insured limit of $250,000. We also maintain cash
and cash equivalents in foreign banks that are not insured.
Fair Value of Financial Instruments
.
The fair
value of cash and cash equivalents, accounts receivable, accounts payable and the current portion of long-term debt approximates
the carrying amount of these financial instruments due to their short-term nature. The carrying values of the Company's long-term
debt instruments are considered to approximate their fair values because the interest rates of these instruments are variable
or comparable to current rates available to the Company.
Accounts Receivables and Customer Deposits.
We
perform ongoing credit evaluations of our customers and for casino currency and most significant orders, such as those orders
for casino openings, generally require a deposit prior to commencing work on a customer order. These customer deposits are classified
as a current liability on the consolidated balance sheets. We also maintain an allowance for doubtful accounts to state trade
receivables at their estimated realizable value. This allowance applies to all customers and is estimated based on a variety of
factors, including the length of time the receivables are past due, economic conditions and trends, significant one-time events,
and historical experience. Changes are made to the allowance based on our awareness of a particular customer’s ability to
meet its financial obligations. Receivables are written-off when management determines that collectability is remote.
Inventories.
Inventories are stated at the lower
of cost or an estimate of net realizable value. Cost is determined using a weighted-average method for GPI SAS and a first-in,
first-out method for GPI USA and GPI Asia. Market value is determined by comparing inventory item carrying values to estimates
of net realizable value. The analysis of net realizable value includes reviewing overall inventory levels, historical and projected
sales, usage of these items, the projected markets for our products, and selling costs. Inventory that we estimate will not be
used within one year is considered non-current inventory. Inventory that we estimate will not be used within the next three years
is written down.
Property and Equipment
.
Property and equipment
are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line
method for financial reporting purposes over the following estimated useful lives:
|
|
|
Years
|
|
Buildings and Improvements
|
|
3 - 40
|
|
Equipment and Furniture
|
|
2 - 15
|
|
Vehicles
|
|
5 - 7
|
Goodwill.
Goodwill is recorded when the consideration
paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. Goodwill is measured and tested
for impairment on an annual basis or more frequently if we believe indicators of impairment exist. We test goodwill for impairment
using qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, including goodwill. If it is not more likely than not that the fair value of the reporting unit is less than
its carrying amount, no further testing is performed. If it is more likely than not that the fair value of the reporting unit
is less than its carrying amount, we perform a quantitative two-step impairment test. The first step compares the fair value of
the reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then the second step
is used to measure the amount of impairment loss.
Long-Lived and Intangible Assets.
We evaluate
the carrying value of long-lived assets (including property and equipment and intangible assets) for possible impairment when
events or change in circumstances indicate that the carrying value of an asset may not be recoverable. In general, we will identify
a potential impairment loss when the sum of undiscounted expected cash flows from the asset is less than the carrying amount of
such asset. We record an impairment loss when the carrying amount of the long-lived asset is not recoverable and the carrying
amount exceeds the estimated fair value. Intangible assets, such as patents and trademarks, are amortized using the straight-line
method over their economic lives.
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.
We generally warrant our products from defects of material and workmanship for a period of ninety days.
On occasion, we may recognize revenue under
a bill and hold arrangement. The transfer of ownership, and revenue recognition, 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 hardware or software. As of December 31, 2018, the Company had contracts with unsatisfied performance obligations
extending throughout 2020. Most of our contracts are for one year and renew on March 1 of every year. The Company recognizes as
revenue the amount billed over the length of the arrangement. The unrecognized portion of the amount billed is accounted for as
deferred revenue. At December 31, 2018 and December 31, 2017, these amounts were $0.1 million and $0.1 million, respectively.
For the years ended on December 31, 2018 and 2017, we recognized $0.7 million and $0.6 million, respectively, 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.
Research and Development.
Research and development
costs are the costs related to developing new and improved products and manufacturing processes, including staff compensation
and related expenses, subcontract costs, materials, and supplies. Such costs are charged to expense when incurred and are included
in our consolidated statements of income.
Income Taxes.
We recognize a current tax liability
or asset for estimated taxes payable or refundable on tax returns for the current year and a deferred non-current tax liability
or asset for estimated future tax effects, attributable to temporary differences and carryforwards.
The Tax Act made significant changes to
federal tax law, including a reduction in the federal income tax rate from 34% to 21% effective January 1, 2018, a 100% bonus
depreciation for qualified assets placed in service after September 27, 2017, and certain additional provisions including the
global intangible low-taxed income (GILTI) inclusion and base erosion anti-avoidance tax (BEAT). Given the significance of the
legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional
amounts during a one year “measurement period” similar to that used when accounting for business combinations. As
a result of our initial analysis of the Tax Act and existing implementation guidance, we reported $0.3 million of deferred tax
expense due to the remeasurement of deferred tax assets at the 21% tax rate, and $1.4 million of additional tax expense related
to a one-time transition tax which is completely offset by associated deferred tax assets for foreign tax credits. As of December
22, 2018, we completed our accounting for the Tax Act. As such, we finalized our measurement period adjustments in relation to
SAB 118 and recognized measurement period adjustments related to our net deferred tax revaluation and deemed repatriation tax.
This resulted in a net income tax benefit of $0.4 million primarily due to the acceleration of deductions on our 2017 tax return.
We have not changed our indefinite reinvestment assertion, and we have elected to account for the impact of GILTI and BEAT based
on the period cost method. While we consider our accounting for the Tax Act to be complete, we continue to evaluate new guidance
and legislation as it is issued.
GPIC and its subsidiaries file separate
income tax returns in their respective jurisdictions. Income taxes are provided for the tax effects of transactions reported in
the consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences
between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent
the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes.
We review all of our tax positions and
make a determination as to whether our position is more likely than not to be sustained upon examination by tax authorities. If
a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on the cumulative probability
that the amount is more likely than not to be realized upon ultimate settlement or disposition of the underlying issue.
We
recognize interest and penalties related to unrecognized tax positions in the provision for income taxes on our consolidated statements
of income.
Foreign Currency Transactions
.
The financial
statements of GPI SAS are measured using the euro as the functional currency. Assets and liabilities of GPI SAS are
translated into the U.S. dollar at exchange rates at the balance sheet date. Revenues and expenses are translated into the U.S.
dollar at average rates of exchange in effect during the year. The resulting cumulative translation adjustments are recorded within
accumulated other comprehensive loss.
The financial statements of GPI Asia
and GPI Mexicana are measured using the U.S. dollar as the functional currency. Non-monetary assets and liabilities are translated
at historical exchange rates, and monetary assets and liabilities are translated at current exchange rates. Exchange gains and
losses arising from translation are included in other income and expense in the consolidated statements of income.
Transaction gains and losses that arise
from exchange rate fluctuations on transactions with third parties denominated in a currency other than the functional currency
are included in the results of operations as incurred.
Other Comprehensive Income (Loss).
Comprehensive
Income (Loss) includes net income and foreign currency translation adjustments.
Estimates.
The preparation of consolidated financial
statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates and
assumptions have been made in determining the allowance for doubtful accounts receivable; write-downs of slow moving, excess,
and obsolete inventories; the depreciable lives of fixed and intangible assets; estimates for the recoverability of long-lived
assets, including intangible assets; the recoverability of deferred tax assets; and potential exposures relating to litigation,
claims, and assessments. Actual results could differ from those estimates and assumptions.
Recently Issued Accounting Standards and Not Yet
Adopted.
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2018-14,
Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework
.
These amendments modify the disclosure requirements for defined benefit plans. The amendments are effective for annual periods,
including interim periods within those annual periods, beginning after December 15, 2019. 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 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. We adopted the new standard effective
January 1, 2019, on a modified retrospective basis. Among the practical expedients permitted under the transition guidance, we
will elect to apply to the new lease standard using the effective date option, which allows the Company to apply ASU 2016-02 at
the effective date of January 1, 2019, not record leases with an initial term of 12 months or less on the balance sheet, not reassess (1) the definition of a lease, (2) lease classification, and (3) initial direct costs for
existing leases during transition and not
separate non-lease components of leases from the lease components. We estimate approximately $3.4 million would be recognized
as total right of use assets and operating lease liabilities on our consolidated balance sheet as of January 1, 2019. Other than
as disclosed we do not expect the new standard to have a material impact on our remaining consolidated financial statements.
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
on 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 prospectively. It had no significant
impact on 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 retained earnings on January 1, 2018, in connection with this adoption.
This cumulative-effect adjustment relates to the prepaid expense associated with intra-entity transfers of intangible property
included in prepaid expenses and other current assets in the accompanying 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 on 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 did not experience any material changes
to the timing of when it recognizes expenses related to contract acquisition costs.
Note 2. 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 at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
United States (including Mexico)
|
|
$
|
4,510
|
|
|
$
|
4,936
|
|
|
France
|
|
|
3,854
|
|
|
|
6,611
|
|
|
Macau S.A.R., China
|
|
|
3,736
|
|
|
|
2,517
|
|
|
Total
|
|
$
|
12,100
|
|
|
$
|
14,064
|
|
Note 3. Accounts Receivable and Allowance for Doubtful
Accounts
At December 31, 2018 and 2017, no casino
customer accounted for 10% or more of our accounts receivable balance.
The allowance for doubtful accounts consists
of the following (in thousands):
|
|
|
Balance at
Beginning
of
Year
|
|
|
Reduction of
provision
|
|
|
Exchange
Rate Effect
|
|
|
Balance at
End of
Period
|
|
|
2018
|
|
$
|
307
|
|
|
$
|
(120
|
)
|
|
$
|
-
|
|
|
$
|
187
|
|
|
2017
|
|
$
|
804
|
|
|
$
|
(498
|
)
|
|
$
|
1
|
|
|
$
|
307
|
|
Note 4. Inventories
Inventories consist of the following at
December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Raw materials
|
|
$
|
9,800
|
|
|
$
|
11,637
|
|
|
Work in progress
|
|
|
2,787
|
|
|
|
2,432
|
|
|
Finished goods
|
|
|
3,517
|
|
|
|
3,502
|
|
|
Total inventories
|
|
$
|
16,104
|
|
|
$
|
17,571
|
|
We classified a portion of our inventories
as non-current because we currently do not expect this portion to be used within one year. The classification of our inventories
on our consolidated balance sheets is as follows at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Current
|
|
$
|
13,885
|
|
|
$
|
15,118
|
|
|
Non-current
|
|
|
2,219
|
|
|
|
2,453
|
|
|
Total inventories
|
|
$
|
16,104
|
|
|
$
|
17,571
|
|
Note 5. Other Current Assets
Other current assets consist of the following
at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Income tax-related assets
|
|
$
|
2,650
|
|
|
$
|
1,435
|
|
|
Deposits
|
|
|
775
|
|
|
|
327
|
|
|
Refundable value-added tax
|
|
|
591
|
|
|
|
996
|
|
|
Other, net
|
|
|
28
|
|
|
|
78
|
|
|
Total other current assets
|
|
$
|
4,044
|
|
|
$
|
2,836
|
|
Note 6. Property and Equipment
Property and equipment consist of the following
at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Land
|
|
$
|
657
|
|
|
$
|
669
|
|
|
Buildings and improvements
|
|
|
11,306
|
|
|
|
11,196
|
|
|
Equipment and furniture
|
|
|
40,841
|
|
|
|
40,714
|
|
|
Vehicles
|
|
|
405
|
|
|
|
408
|
|
|
Construction in progress
|
|
|
412
|
|
|
|
529
|
|
|
|
|
|
53,621
|
|
|
|
53,516
|
|
|
Less accumulated depreciation
|
|
|
(31,074
|
)
|
|
|
(28,583
|
)
|
|
Property and equipment, net
|
|
$
|
22,547
|
|
|
$
|
24,933
|
|
Depreciation expense for the years ended
December 31, 2018 and 2017 was $4.5 million and $4.4 million, respectively.
Note 7. Goodwill and Intangible Assets
We have goodwill of $10.3
million as of December 31, 2018 and 2017 arising from the GemGroup acquisition in 2014.
Intangible assets consist
of the following at December 31 (dollars in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accum
Amort
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accum
Amort
|
|
|
Net
Carrying
Amount
|
|
|
Estimated
Useful
Life
(Years)
|
|
|
Trademarks
|
|
$
|
1,711
|
|
|
$
|
(821
|
)
|
|
$
|
890
|
|
|
$
|
1,711
|
|
|
$
|
(700
|
)
|
|
$
|
1,011
|
|
|
|
10-15
|
|
|
Customer list
|
|
|
1,101
|
|
|
|
(557
|
)
|
|
|
544
|
|
|
|
897
|
|
|
|
(353
|
)
|
|
|
544
|
|
|
|
10-15
|
|
|
Patents
|
|
|
542
|
|
|
|
(541
|
)
|
|
|
1
|
|
|
|
542
|
|
|
|
(534
|
)
|
|
|
8
|
|
|
|
14
|
|
|
Other intangible assets
|
|
|
472
|
|
|
|
(384
|
)
|
|
|
88
|
|
|
|
472
|
|
|
|
(359
|
)
|
|
|
113
|
|
|
|
3-10
|
|
|
Total intangible assets
|
|
$
|
3,826
|
|
|
$
|
(2,303
|
)
|
|
$
|
1,523
|
|
|
$
|
3,622
|
|
|
$
|
(1,946
|
)
|
|
$
|
1,676
|
|
|
|
|
|
Amortization expense for intangible assets
for the years ended December 31, 2018 and 2017 was $248,000 and $242,000, respectively. The increase in the gross carrying
value of the customer list is a result of ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.
See Note 1 – Nature of Business and Significant Accounting Policies for more details.
The following table provides estimated
amortization expense for the years ending December 31 (in thousands):
|
|
|
Amortization
|
|
|
Year
|
|
Expense
|
|
|
2019
|
|
$
|
243
|
|
|
2020
|
|
|
241
|
|
|
2021
|
|
|
233
|
|
|
2022
|
|
|
169
|
|
|
2023
|
|
|
119
|
|
|
Thereafter
|
|
|
518
|
|
|
Total
|
|
$
|
1,523
|
|
Note 8. Equity Method Investment
On
May 31, 2017, GPIC acquired 20% of the outstanding shares of Onlive Gaming SAS for $451,000. In November 2018, GPIC acquired 6.5%
of the outstanding shares of Onlive Gaming SAS for $150,000 for an aggregate ownership of 26.5%. Onlive Gaming SAS is a company
dedicated to the development of electronic products using the RFID technology. The Company used the equity method to account for
this investment because of its ability to exercise significant influence, but not control, over the operating and financial policies
of Onlive Gaming SAS. Since the acquisition in 2017, we reduced the book value of the investment by $40,000, which represents
our percentage of the accumulated net loss.
Note 9. Accrued Liabilities
Accrued liabilities consist of the following
at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Accrued bonuses and commissions
|
|
$
|
1,381
|
|
|
$
|
953
|
|
|
Accrued salaries, wages, and related costs
|
|
|
1,331
|
|
|
|
1,359
|
|
|
Stock appreciation rights liability
|
|
|
1,244
|
|
|
|
1,153
|
|
|
Accrued vacation
|
|
|
942
|
|
|
|
964
|
|
|
Miscellaneous taxes
|
|
|
475
|
|
|
|
560
|
|
|
Legal and bank fees
|
|
|
309
|
|
|
|
52
|
|
|
Accrued fixed asset acquisition liability
|
|
|
-
|
|
|
|
1,076
|
|
|
Other
|
|
|
475
|
|
|
|
368
|
|
|
Total accrued liabilities
|
|
$
|
6,157
|
|
|
$
|
6,485
|
|
The stock appreciation
rights liability is the result of the Board of Director’s decision to grant stock appreciation rights to certain non-employee
directors. See Note 15 – Stock Option Programs and Share-based Compensation Expense.
Note 10. Debt
On June 26, 2015,
the Company entered into a Credit Agreement with Nevada State Bank to borrow up to 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 would have matured on June 26, 2022, and the revolving
loan will mature on June 26, 2020. On October 26, 2018, we paid the full amount outstanding under the term loan. On January 3,
2019, as part of the Merger Agreement, Nevada State Bank issued a $4.0 million letter of credit to us for the benefit of Angel.
This letter of credit reduced our available balance on the revolving loan to $1.0 million. 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
a leverage ratio less than 3.00 to 1.00. The Company was in compliance with all financial covenants as of December 31, 2018.
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 had
a straight-line seven-year amortization schedule.
Note 11. 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 at various points through 2023.
Operating lease expense for the years ended
December 31, 2018 and 2017 was $1.2 million and $1.0 million, respectively. The Company’s operating lease expenses
are recognized on a straight-line basis.
The following schedule reflects our future
minimum lease payments under operating leases, including related-party payments described at Note 20. Related-Party Transactions
for the years ending December 31 (in thousands):
|
|
|
Minimum
|
|
|
|
|
Lease
|
|
|
Year
|
|
Payments
|
|
|
2019
|
|
$
|
1,057
|
|
|
2020
|
|
|
683
|
|
|
2021
|
|
|
644
|
|
|
2022
|
|
|
641
|
|
|
2023
|
|
|
338
|
|
|
Total
|
|
$
|
3,363
|
|
Legal Proceedings and Contingencies.
Liabilities for material claims against the Company are accrued when a loss is considered probable and can be reasonably
estimated. Legal costs associated with claims are expensed as incurred.
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.
Employment Agreements.
The
Company has employment agreements with key employees which include severance commitments in the event the Company terminates the
employee without cause. Total commitments under the agreements aggregate approximately $1.4 million as of December 31, 2018.
Note 12. 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 certain data
by geographic area for the years ended December 31 (dollars in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas
|
|
$
|
57,868
|
|
|
|
66.5
|
%
|
|
$
|
54,638
|
|
|
|
67.8
|
%
|
|
Asia-Pacific
|
|
|
26,098
|
|
|
|
30.0
|
%
|
|
|
23,200
|
|
|
|
28.8
|
%
|
|
Europe and Africa
|
|
|
3,043
|
|
|
|
3.5
|
%
|
|
|
2,764
|
|
|
|
3.4
|
%
|
|
Total
|
|
$
|
87,009
|
|
|
|
100.0
|
%
|
|
$
|
80,602
|
|
|
|
100.0
|
%
|
The following table presents our net sales
by product line for the years ended December 31 (dollars in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino currency without RFID
|
|
$
|
20,867
|
|
|
|
24.1
|
%
|
|
$
|
14,754
|
|
|
|
18.3
|
%
|
|
Casino currency with RFID
|
|
|
17,520
|
|
|
|
20.1
|
%
|
|
|
18,041
|
|
|
|
22.4
|
%
|
|
Total casino currency
|
|
|
38,387
|
|
|
|
44.2
|
%
|
|
|
32,795
|
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Playing cards
|
|
|
23,466
|
|
|
|
27.0
|
%
|
|
|
24,864
|
|
|
|
30.8
|
%
|
|
Table accessories and other products
|
|
|
6,996
|
|
|
|
8.0
|
%
|
|
|
6,802
|
|
|
|
8.4
|
%
|
|
Table layouts
|
|
|
5,753
|
|
|
|
6.6
|
%
|
|
|
5,315
|
|
|
|
6.6
|
%
|
|
Gaming furniture
|
|
|
3,404
|
|
|
|
3.9
|
%
|
|
|
3,255
|
|
|
|
4.0
|
%
|
|
Dice
|
|
|
2,999
|
|
|
|
3.4
|
%
|
|
|
2,791
|
|
|
|
3.5
|
%
|
|
RFID solutions
|
|
|
2,521
|
|
|
|
2.9
|
%
|
|
|
1,623
|
|
|
|
2.0
|
%
|
|
Shipping
|
|
|
3,483
|
|
|
|
4.0
|
%
|
|
|
3,157
|
|
|
|
4.0
|
%
|
|
Total
|
|
$
|
87,009
|
|
|
|
100.0
|
%
|
|
$
|
80,602
|
|
|
|
100.0
|
%
|
In 2018 and 2017, we had no casino customer
that accounted for 10% or more of revenues.
The following table presents our property
and equipment, net by geographic area at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
United States
|
|
$
|
12,561
|
|
|
$
|
13,708
|
|
|
Mexico
|
|
|
6,011
|
|
|
|
6,851
|
|
|
France
|
|
|
3,581
|
|
|
|
3,936
|
|
|
Macau S.A.R., China
|
|
|
394
|
|
|
|
438
|
|
|
Total
|
|
$
|
22,547
|
|
|
$
|
24,933
|
|
The following table presents our intangible
assets, net by geographic area at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
United States
|
|
$
|
1,409
|
|
|
$
|
1,634
|
|
|
Macau S.A.R., China
|
|
|
114
|
|
|
|
42
|
|
|
Total
|
|
$
|
1,523
|
|
|
$
|
1,676
|
|
Note 13. Pension Plans
For employees of GPI SAS, we sponsor a
non-contributory, defined-benefit pension plan (the Pension Plan) which funds a mandatory payment when employees retire at age
65. The lump-sum benefit amount is based on years of service, job classification, and compensation in the 12 months prior to retirement.
The following amounts relate to the Pension Plan at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
630
|
|
|
$
|
497
|
|
|
Service cost
|
|
|
36
|
|
|
|
31
|
|
|
Interest cost
|
|
|
8
|
|
|
|
8
|
|
|
Actuarial loss
|
|
|
23
|
|
|
|
29
|
|
|
Benefits paid
|
|
|
(20
|
)
|
|
|
(8
|
)
|
|
Effect of foreign exchange rate changes
|
|
|
(30
|
)
|
|
|
73
|
|
|
Benefit obligation at end of year
|
|
$
|
647
|
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
370
|
|
|
$
|
317
|
|
|
Actual (loss) return on plan assets
|
|
|
(40
|
)
|
|
|
8
|
|
|
Effect of foreign exchange rate changes
|
|
|
(16
|
)
|
|
|
45
|
|
|
Fair value of plan assets at end of year
|
|
|
314
|
|
|
|
370
|
|
|
Funded status and accrued benefit cost
|
|
$
|
(333
|
)
|
|
$
|
(260
|
)
|
At both December 31, 2018 and 2017, the
accrued benefit cost of $0.3 million was recognized in the consolidated balance sheet in other accrued liabilities.
Pension Plan assets are measured using
a Level 1 valuation methodology and consist of the following asset funds at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Worldwide bond fund
|
|
$
|
167
|
|
|
$
|
179
|
|
|
Guaranteed equity fund
|
|
|
17
|
|
|
|
34
|
|
|
European equity fund
|
|
|
130
|
|
|
|
157
|
|
|
Fair value of plan assets at end of year
|
|
$
|
314
|
|
|
$
|
370
|
|
We did not make any contribution to the
Pension Plan in either 2018 or 2017.
The weighted-average assumptions used in
measuring the net periodic benefit cost and Pension Plan obligations as of December 31 are:
|
|
|
2018
|
|
|
2017
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
1.60
|
%
|
|
|
1.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan obligations:
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
1.60
|
%
|
|
|
1.30
|
%
|
|
Rate of compensation increase
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
The accumulated benefit obligation was
$0.6 million and $0.5 million as of December 31, 2018 and 2017, respectively.
Net pension expense consisted of the following
for the years ended December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Service-cost benefits earned during the period
|
|
$
|
36
|
|
|
$
|
31
|
|
|
Interest expense on benefit obligation
|
|
|
8
|
|
|
|
8
|
|
|
Actual (return) loss on plan assets
|
|
|
40
|
|
|
|
(8
|
)
|
|
Actuarial loss
|
|
|
23
|
|
|
|
29
|
|
|
Net pension expense
|
|
$
|
107
|
|
|
$
|
60
|
|
Projected benefit payments from the Pension
Plan as of December 31, 2018 are estimated at $0.1 million for 2019 through 2022, and an aggregate of $0.2 million for 2023
through 2027.
We also sponsor a 401(k) plan for employees
in the United States (the 401K Plan) who have worked for us for longer than six months and are 21 years of age or older.
Our contributions to the 401K Plan are based on the amounts contributed by eligible employees. Eligible employees can elect to
contribute into the 401K Plan up to the lesser of the IRS annual limit or 75 percent of their earnings. We contribute $0.50 for
each $1.00 contributed by a participant in the 401K Plan up to 4 percent of the participant’s wages. Our contributions to
the 401K Plan for each of the years ended December 31, 2018 and 2017 was $0.1 million.
For employees of GPI Mexicana, there is
a legal obligation to compensate departing employees after fifteen years of services. In 2017, our accrual and estimate of the
present benefit obligation was $0.2 million. In 2018, we increased the liability to $0.3 million. The increase was mainly recorded
in stockholder’s equity.
Note 14. Stockholders’ Equity
On December 1, 2011, the Board of Directors
approved a stock repurchase program which authorized the repurchase of up to 5%, or 409,951 shares, of our common stock. On November
30, 2012, the Board of Directors increased the number of shares available for repurchase to 498,512 shares. From the program’s
inception through December 31, 2018, we have repurchased an aggregate of 283,322 shares of our common stock at a cost of $2.1 million,
or a weighted-average price of $7.30 per share. During November 2018, we repurchased 400 shares at $8.00 per share. No shares were
repurchased in 2017. As of December 31, 2018, 215,190 shares remained authorized for repurchase.
In each of December 2018 and December 2017,
we paid a cash dividend of $0.12 per issued and outstanding common share for an aggregate dividend of $1.0 million in each year.
Note 15. Stock Option Programs and Share-based Compensation
Expense
We have one active stock option plan which
is the 1994 Directors’ Stock Option Plan, as amended and extended (the Directors’ Plan). Until September 21, 2018,
we were also party to a stock option agreement (the Gronau Agreement) with our former CEO, Gregory S. Gronau. The Directors’
Plan and the Gronau Agreement were both approved by our stockholders.
The Directors’ Plan provides that
each non-employee director, upon joining the Board of Directors, will receive an initial option to purchase 6,000 shares of common
stock. The initial option grant vests over a three-year period, with one-third of the option grant vesting at the end of each
year. At the beginning of the fourth year of service on the Board of Directors, and each year thereafter, each non-employee director
receives an annual grant to purchase 2,000 shares of common stock. In addition, each non-employee director annually receives options
to purchase 1,500 shares of common stock for serving on certain committees of the Board of Directors. Options granted after the
initial option grant vest immediately and are exercisable after six months.
The Board of Directors may grant discretionary
stock options covering up to 100,000 shares to non-employee directors. Discretionary stock options vest immediately and are exercisable
after six months. There were no discretionary stock option grants in 2018 or 2017. A maximum of 450,000 shares of common stock
may be issued pursuant to options granted under the Directors’ Plan. At December 31, 2018, there were 211,250 options available
for future issuance.
The Directors’
Plan allows for the grant of stock appreciation rights to non-employee directors in addition to grants of stock options. Each
stock appreciation right entitles a non-employee director to surrender to the Company a vested option and to receive from the
Company in exchange a cash payment equal to an amount by which the fair market value of a share of common stock immediately prior
to exercise exceeds the related stock option exercise price.
On December 26, 2017,
the Board of Directors granted stock appreciation rights to our non-employee directors relating to outstanding stock options for
an aggregate 262,750 shares of common stock previously granted to them under the Directors’ Plan which grant was ratified
by our stockholders. As a result, we modified the accounting treatment of the outstanding stock options. On December 31, 2017,
we accounted for a $1.2 million current liability, which represents the fair value of all outstanding options, generated by a
$0.3 million stock compensation expense and a $0.9 million reclassification from additional paid in capital. On December 31, 2018,
this liability was $1.2 million.
Mr. Gronau, was granted options to
purchase 150,000 shares of our common stock in 2009 pursuant to the Gronau Agreement. The stock options had a ten-year term and
vested over a five-year period, between 2009 and 2014. All options were exercised prior to December 21, 2018.
The following table summarizes stock option
activity for the years ended December 31, 2018 and 2017:
|
|
|
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Outstanding at January 1, 2017
|
|
|
402,750
|
|
|
$
|
7.34
|
|
|
|
3.9
|
|
|
$
|
1,855
|
|
|
Granted
|
|
|
25,500
|
|
|
|
10.97
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(12,000
|
)
|
|
|
10.72
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(49,500
|
)
|
|
|
7.07
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
366,750
|
|
|
|
7.35
|
|
|
|
3.8
|
|
|
$
|
1,431
|
|
|
Granted
|
|
|
22,000
|
|
|
|
8.88
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,000
|
)
|
|
|
5.80
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(156,500
|
)
|
|
|
6.13
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
230,250
|
|
|
$
|
8.35
|
|
|
|
5.1
|
|
|
$
|
1,072
|
|
|
Exercisable at December 31, 2018
|
|
|
221,750
|
|
|
$
|
8.35
|
|
|
|
5.1
|
|
|
$
|
1,047
|
|
Of the options for 156,500 shares of common
stock exercised in 2018, options for 3,000 shares were surrendered in connection with the exercise of stock appreciation rights.
Of the 49,500 options exercised in 2017,
46,000 were surrendered in connection with the exercise of stock appreciation rights, subject to stockholder approval at the annual
meeting in May 2018. At December 31, 2017, 36,000 stock appreciation rights remained to be paid. The liability related to the
surrender of those options was accrued under accrued liabilities.
For the year ended December 31, 2018, the
total intrinsic value of options exercised was $1.5 million. For the year ended December 31, 2017, the total intrinsic value of
options exercised was $0.2 million.
We estimate the fair value of each stock
option award on the grant date, and at each subsequent remeasurement, using the Black-Scholes valuation model. Dividends and expected
volatility are based on historical factors related to our common stock. The risk-free rate is based on United States Treasury
rates appropriate for the expected term, which is based on the contractual term of the options, as well as historical exercise
and termination behavior.
The following table summarizes the weighted-average
assumptions used, and related information, for option activity for the years indicated.
|
Option valuation assumptions:
|
|
2018
|
|
|
2017
|
|
|
Dividend yield
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
|
Expected volatility
|
|
|
37.9
|
%
|
|
|
36.5
|
%
|
|
Risk-free interest rate
|
|
|
2.64
|
%
|
|
|
1.91
|
%
|
|
Expected term of options
|
|
|
5.6 yrs
|
|
|
|
5.6 yrs
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
3.06
|
|
|
$
|
4.05
|
|
The following table summarizes our reported
stock compensation expense, which is included in general and administrative expenses in our consolidated statements of income
as of December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Stock appreciation right expense
|
|
$
|
261
|
|
|
$
|
296
|
|
|
Estimated tax benefit
|
|
|
(55
|
)
|
|
|
(144
|
)
|
|
Total stock compensation, net of tax benefit
|
|
$
|
206
|
|
|
$
|
152
|
|
Note 16. Other Income and Expense
Other income and expense consist of the
following for the years ended December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Interest income
|
|
$
|
79
|
|
|
$
|
1
|
|
|
Interest expense
|
|
|
(176
|
)
|
|
|
(249
|
)
|
|
(Loss) gain on foreign currency transactions
|
|
|
(188
|
)
|
|
|
182
|
|
|
Other income (expense), net
|
|
|
70
|
|
|
|
(19
|
)
|
|
Total other expense, net
|
|
$
|
(215
|
)
|
|
$
|
(85
|
)
|
Note 17. Income Taxes
The Tax Act was enacted on December
22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period
of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the
case of certain other provisions, January 1, 2018. As such, January 1, 2018 would be the first day of the taxable year for
purposes of applying the effective date of the new tax legislation for provisions which are applicable to tax years beginning
after December 31, 2017. New tax legislation provisions that were applicable for the tax year ended December 31, 2017 were
accounted for within the period ended December 31, 2017.
The Tax Act made significant changes to
federal tax law, including a reduction in the federal income tax rate from 34% to 21% effective January 1, 2018, a 100% bonus
depreciation for qualified assets placed in service after September 27, 2017, and certain additional provisions including the
global intangible low-taxed income (GILTI) inclusion and base erosion anti-avoidance tax (BEAT). As a result of our initial analysis
of the Tax Act and existing implementation guidance, we reported $0.3 million of deferred tax expense due to the remeasurement
of deferred tax assets at the 21% tax rate, and $1.4 million of additional tax expense related to a one-time transition tax which
was completely offset by associated deferred tax assets for foreign tax credits. As of December 22, 2018, we completed our accounting
for the Tax Act. As such, we finalized our measurement period adjustments in relation to SAB 118 and recognized measurement period
adjustments related to our net deferred tax revaluation and deemed repatriation tax. This resulted in a net income tax benefit
of $0.4 million primarily due to the acceleration of deductions on our 2017 tax return. We have not changed our indefinite reinvestment
assertion, and we have elected to account for the impact of GILTI and BEAT based on the period cost method. While we consider
our accounting for the Tax Act to be complete, we continue to evaluate new guidance and legislation as it is issued.
The following table provides an analysis
of our provision for income taxes for the years ended December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(845
|
)
|
|
$
|
(47
|
)
|
|
U.S. State
|
|
|
(15
|
)
|
|
|
182
|
|
|
Foreign
|
|
|
712
|
|
|
|
494
|
|
|
Total Current
|
|
|
(148
|
)
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
921
|
|
|
|
759
|
|
|
U.S. State
|
|
|
133
|
|
|
|
48
|
|
|
Foreign
|
|
|
(18
|
)
|
|
|
379
|
|
|
Total Deferred
|
|
|
1,036
|
|
|
|
1,186
|
|
|
Income tax provision
|
|
$
|
888
|
|
|
$
|
1,815
|
|
Income before income taxes consisted of
the following for the years ended December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Foreign
|
|
$
|
4,813
|
|
|
$
|
5,185
|
|
|
United States
|
|
|
(208
|
)
|
|
|
256
|
|
|
Income before income taxes
|
|
$
|
4,605
|
|
|
$
|
5,441
|
|
A reconciliation of our income tax expense
as compared to the tax expense calculated by applying the statutory federal tax rate to income before income taxes for the years
ended December 31 is as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Computed expected income tax expense
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
State income taxes, net of federal benefits
|
|
|
1.7
|
%
|
|
|
1.2
|
%
|
|
Subpart F income adjustment
|
|
|
4.1
|
%
|
|
|
7.4
|
%
|
|
Foreign rate differential (excluding research credit)
|
|
|
(1.2
|
)%
|
|
|
(13.3
|
)%
|
|
Impact of the Tax Act
|
|
|
(7.9
|
)%
|
|
|
5.2
|
%
|
|
Impact of GILTI
|
|
|
3.2
|
%
|
|
|
-
|
|
|
French research and low wage credit
|
|
|
(6.8
|
)%
|
|
|
(4.3
|
)%
|
|
Impact of tax-return true-ups
|
|
|
4.7
|
%
|
|
|
1.0
|
%
|
|
Other, net
|
|
|
0.5
|
%
|
|
|
2.2
|
%
|
|
Income tax expense
|
|
|
19.3
|
%
|
|
|
33.4
|
%
|
The primary components
of net deferred income tax assets (liabilities) at December 31 are as follows (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Tax credits
|
|
$
|
44
|
|
|
$
|
2
|
|
|
Stock compensation
|
|
|
223
|
|
|
|
371
|
|
|
Macau intangible assets
|
|
|
186
|
|
|
|
-
|
|
|
Other - France
|
|
|
323
|
|
|
|
367
|
|
|
Bad debt reserves and inventory
|
|
|
461
|
|
|
|
608
|
|
|
Accrued expenses
|
|
|
249
|
|
|
|
188
|
|
|
Other
|
|
|
29
|
|
|
|
6
|
|
|
Total deferred tax assets
|
|
|
1,515
|
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Other - France
|
|
$
|
190
|
|
|
$
|
246
|
|
|
Property and equipment
|
|
|
722
|
|
|
|
80
|
|
|
Intangible assets
|
|
|
695
|
|
|
|
541
|
|
|
Total deferred tax liabilities
|
|
|
1,607
|
|
|
|
867
|
|
|
Deferred tax (liabilities) assets, net
|
|
$
|
(92
|
)
|
|
$
|
675
|
|
Unrepatriated earnings
were approximately $6.3 million as of December 31, 2018. Except for the $2.9 million earnings from GPI SAS, these unrepatriated
earnings are considered permanently reinvested, since it is management’s intention to reinvest these foreign earnings in
future operations. We project that we will have sufficient cash flow in the U.S. and will not need to repatriate the foreign earnings
from GPI Asia to finance U.S. operations. Except for the deemed dividends under Section 956 in 2015 and under Subpart F, we continue
to assert that earnings from GPI Asia will be permanently reinvested. Due to the Tax Act, there is no U.S. federal tax on cash
repatriation from foreign subsidiaries but it could be subject to foreign withholding tax and U.S. state income taxes.
We are subject to
taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, the tax years 2015 through 2018
remain open to examination under the statute of limitations by the 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. Tax years 2016 through 2018 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 euros 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. The Company received notification in August 2017, of a federal income tax
examination by the IRS for the 2015 tax year. The examination was completed in the third quarter of 2018 and as a result we
paid an audit adjustment of $0.1 million.
A reconciliation of the beginning and ending
amounts of unrecognized tax benefits, including estimated interest and penalties, related to the FTA audit, is as follows (in
thousands):
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
294
|
|
|
$
|
258
|
|
|
Foreign currency translation
|
|
|
(14
|
)
|
|
|
36
|
|
|
Balance at end of year
|
|
$
|
280
|
|
|
$
|
294
|
|
All of the liability as of December 31,
2018 would affect our effective tax rate if recognized and amounts of interest and penalties are not expected to be significant.
We do not anticipate that the balance of the unrecognized tax benefits will be eliminated within the next twelve months.
Note 18. Accumulated Other Comprehensive Loss
Accumulated other comprehensive
loss consists of the following at December 31 (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Foreign currency translation
|
|
$
|
(1,223
|
)
|
|
$
|
(493
|
)
|
|
Minimum pension liability adjustment, net of tax
|
|
|
(79
|
)
|
|
|
-
|
|
|
Total accumulated other comprehensive loss
|
|
$
|
(1,302
|
)
|
|
$
|
(493
|
)
|
Note 19. Earnings per Share
The weighted-average number of common shares
outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
Weighted-average number of common shares outstanding - basic
|
|
|
7,970
|
|
|
|
7,930
|
|
|
Potential dilution from equity grants
|
|
|
81
|
|
|
|
115
|
|
|
Weighted-average number of common shares outstanding - diluted
|
|
|
8,051
|
|
|
|
8,045
|
|
At December 31, 2017, 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. There were 13,018 outstanding anti-dilutive options for
the year ended December 31, 2017 and none at December 31, 2018.
Note 20. Related-Party Transactions
We lease two manufacturing facilities totaling
approximately 80,000 square feet located in San Luis Rio Colorado, Mexico, from an entity controlled by the family of Frank Moreno,
the General Manager of GPI Mexicana. The facilities are leased through December 2023 at a monthly rent amount of $0.31 per square
foot, or approximately $28,000. We also have an immaterial service agreement with a company owned by a relative of the General
Manager.
In 2016, Alexandre Thieffry became our
Executive Vice President of Finance. Mr. Alexandre Thieffry is the son of Alain Thieffry, our Chief Financial Officer, President,
Secretary, Treasurer and Chairperson of the Board. Mr. Alexandre Thieffry served as our Controller from 2011 through 2015.
Neither Mr. Moreno nor Alexandre Thieffry
are directors or executive officers of the Company. Mr. Alain Thieffry is a director and executive officer of the Company. Our
audit committee reviews any related party transactions involving our directors and executive officers.
Note 21. Subsequent Events
On January 3, 2019, as part of the Merger
Agreement, Nevada State Bank issued to us a $4.0 million letter of credit for the benefit of Angel. See Note 10. Debt.
On March 12, 2019, the Company’s stockholders
approved the Merger Agreement.