10-Q 1 tv499822_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

 

FORM 10-Q

 

 

(Mark One)    
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
     
  For the Quarterly Period Ended: June 30, 2018  
     
  OR  
     
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the transition period from              to             

 

Commission file number: 0-23588

 

 

  

GAMING PARTNERS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

NEVADA   88-0310433
(State or other jurisdiction   (I.R.S. Employer Identification No.)
of incorporation or organization)    
     
3945 West Cheyenne Avenue,  
North Las Vegas, Nevada   89032
(Address of principal executive offices)   (Zip Code)

 

(702) 384-2425

(Registrant’s telephone number, including area code)

 

None

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files).  Yes x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Accelerated filer ¨
     
Non-accelerated filer ¨   Smaller reporting company x
(Do not check if a smaller reporting company)    
     
Emerging growth company ¨    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

 

The number of shares outstanding of each of the registrant’s classes of common stock as of August 2, 2018, the latest practicable date, was 7,954,523 shares of Common Stock.

 

 

  

  

 

  

GAMING PARTNERS INTERNATIONAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2018

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
     
ITEM 1. FINANCIAL STATEMENTS 1
     
  CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) 1
  CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited) 2
  CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) 3
  CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited) 4
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 5
  NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
     
ITEM 4. CONTROLS AND PROCEDURES 24
     
PART II.   OTHER INFORMATION 25
     
ITEM 1. LEGAL PROCEEDINGS 25
     
ITEM 1A. RISK FACTORS 25
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
     
ITEM 4. MINE SAFETY DISCLOSURES 25
     
ITEM 5. OTHER INFORMATION 25
     
ITEM 6. EXHIBITS 26
     
SIGNATURES 27

  

  

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share amounts and par value)

 

   June 30,   December 31, 
   2018   2017 
ASSETS          
Current Assets:          
Cash and cash equivalents  $14,957   $14,064 
Accounts receivable, net   8,446    7,415 
Inventories   14,340    15,118 
Prepaid expenses   916    1,290 
Other current assets   2,761    2,836 
Total current assets   41,420    40,723 
Property and equipment, net   23,038    24,933 
Goodwill   10,292    10,292 
Intangible assets, net   1,647    1,676 
Investment   383    411 
Deferred income tax assets   831    675 
Inventories, non-current   2,044    2,453 
Other assets, non-current   3,427    2,240 
Total assets  $83,082   $83,403 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities:          
Accounts payable  $5,126   $4,743 
Accrued liabilities   5,003    6,779 
Customer deposits and deferred revenue   5,122    3,020 
Current portion of long-term debt   1,514    1,401 
Income taxes payable   514    693 
Total current liabilities   17,279    16,636 
Long-term debt   2,466    5,265 
Other liabilities, non-current   183    186 
Total liabilities   19,928    22,087 
Commitments and contingencies - see Note 10          
Stockholders' Equity:          
Preferred stock, authorized 10,000,000 shares, $0.01 par value, none issued and outstanding   -    - 
Common stock, authorized 30,000,000 shares, $0.01 par value, 8,245,506 and 7,954,523 shares issued and outstanding, respectively, as of June 30, 2018, and 8,223,077 and 7,932,094 shares issued and outstanding, respectively, as of December 31, 2017   82    82 
Additional paid-in capital   19,411    19,272 
Treasury stock at cost: 290,983 shares   (2,263)   (2,263)
Retained earnings   46,816    44,718 
Accumulated other comprehensive loss   (892)   (493)
Total stockholders' equity   63,154    61,316 
Total liabilities and stockholders' equity  $83,082   $83,403 

 

See notes to unaudited condensed consolidated financial statements.

 

 1 

 

  

CONDENSED CONSOLIDATED INCOME STATEMENTS

(unaudited)

(in thousands, except per share amounts)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Revenues  $24,677   $16,274   $43,361   $35,187 
Cost of revenues   16,341    12,416    30,090    25,510 
Gross profit   8,336    3,858    13,271    9,677 
                     
Marketing and sales   1,861    1,476    3,628    3,203 
General and administrative   2,289    1,958    4,185    4,283 
Research and development   1,040    348    2,043    658 
Operating income   3,146    76    3,415    1,533 
Other income (expense), net   104    9    (162)   (83)
Income before income taxes   3,250    85    3,253    1,450 
Income tax expense   745    36    746    470 
Net income  $2,505   $49   $2,507   $980 
                     
Earnings per share:                    
Basic  $0.32   $0.01   $0.32   $0.12 
Diluted  $0.31   $0.01   $0.31   $0.12 
Weighted-average shares of common stock outstanding:                    
Basic   7,949    7,929    7,941    7,929 
Diluted   8,020    8,058    8,026    8,058 

 

See notes to unaudited condensed consolidated financial statements.

 

 2 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Net income  $2,505   $49   $2,507   $980 
Other comprehensive income:                    
Foreign currency translation adjustment, net of tax   (849)   909    (399)   1,116 
Total comprehensive income  $1,656   $958   $2,108   $2,096 

 

See notes to unaudited condensed consolidated financial statements.

 

 3 

 

 

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 at January 1, 2017   7,928,594   $82   $20,031   $(2,263)  $42,044   $(2,361)  $57,533 
Net income   -    -    -    -    980    -    980 
Common stock options exercised   3,500    -    35    -    -    -    35 
Stock compensation expense   -    -    56    -    -    -    56 
Foreign currency translation adjustment, net of tax   -    -    -    -    -    1,116    1,116 
Balance at June 30, 2017   7,932,094   $82   $20,122   $(2,263)  $43,024   $(1,245)  $59,720 
                                    
Balance at January 1, 2018   7,932,094   $82   $19,272   $(2,263)  $44,718   $(493)  $61,316 
Impact of change in accounting policy   -    -    -    -    (409)   -    (409)
Net income   -    -    -    -    2,507    -    2,507 
Common stock options exercised   22,429    -    139    -    -    -    139 
Foreign currency translation adjustment, net of tax   -    -    -    -    -    (399)   (399)
Balance at June 30, 2018   7,954,523   $82   $19,411   $(2,263)  $46,816   $(892)  $63,154 

 

See notes to unaudited condensed consolidated financial statements.

 

 4 

 

  

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

   Six Months Ended 
   June 30, 
   2018   2017 
         
Cash Flows from Operating Activities          
Net income  $2,507   $980 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation of property and equipment   2,336    1,886 
Amortization of intangible assets   124    128 
(Recovery) provision for bad debt   (70)   (322)
Deferred income taxes   76    (397)
Share based compensation expense   -    56 
Gain on disposal of property and equipment   -    (9)
Equity loss in affiliate   28    - 
Change in operating assets and liabilities:          
Accounts receivable   (962)   4,049 
Inventories   1,054    (4,026)
Prepaid expenses and other current assets   413    (467)
Other assets, non-current   (1,862)   447 
Accounts payable   326    3,383 
Accrued liabilities   (1,561)   (2,164)
Customer deposits and deferred revenue   2,108    1,731 
Income taxes payable   (178)   85 
Net cash provided by operating activities   4,339    5,360 
           
Cash Flows from Investing Activities          
Proceeds from sale of property and equipment   -    9 
Purchase of licensing rights   -    (100)
Purchase of equity method investment   -    (451)
Capital expenditures   (593)   (1,798)
Net cash used in investing activities   (593)   (2,340)
           
Cash Flows from Financing Activities          
Principal payments on long-term debt   (2,686)   (673)
Proceeds from exercise of stock options   139    35 
Cash paid for exercise of stock appreciation right   (170)   - 
Net cash used in financing activities   (2,717)   (638)
Effect of exchange rate changes on cash   (136)   192 
Net increase in cash and cash equivalents   893    2,574 
Cash and cash equivalents, beginning of period   14,064    10,604 
Cash and cash equivalents, end of period  $14,957   $13,178 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $125   $122 
Cash paid for income taxes, net of refunds  $10   $637 
           
Supplemental disclosure of non-cash investing and financing activities:          
Property and equipment acquired through accounts payable, accrued and non-current other liabilities  $142   $886 

 

See notes to unaudited condensed consolidated financial statements.

 

 5 

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Nature of Business and Significant Accounting Policies

 

Organization and Nature of Business

 

Gaming Partners International Corporation (GPIC or the Company) is headquartered in North Las Vegas, Nevada. Our business activities include the manufacture and sale of casino currencies, playing cards, table accessories, table layouts, dice, gaming furniture, roulette wheels, and radio frequency identification (RFID) readers and software, all of which are used with casino table games such as blackjack, poker, baccarat, craps, and roulette.

 

The Company has three operating subsidiaries: Gaming Partners International USA, Inc. (GPI USA) (including GPI Mexicana S.A. de C.V. (GPI Mexicana), our maquiladora manufacturing operation in Mexico, and GPI USA Blue Springs, our manufacturing facility in Missouri); Gaming Partners International SAS (GPI SAS); and Gaming Partners International Asia Limited (GPI Asia).  Our subsidiaries have the following distribution and product focus:

 

•GPI USA sells in the United States, Canada, the Caribbean, and Latin America. GPI USA sells our full product line, with most of the products manufactured in either San Luis Rio Colorado, Mexico, or Blue Springs, Missouri. The remainder is either manufactured in France or purchased from United States vendors. We warehouse inventory in San Luis, Arizona; Blue Springs, Missouri; and North Las Vegas, Nevada. We have sales offices in North Las Vegas, Nevada; Atlantic City, New Jersey; Gulfport, Mississippi; and Blue Springs, Missouri.

 

•GPI SAS sells primarily in Europe and Africa out of its office in Beaune, France. GPI SAS predominantly sells casino currencies, including both American-style, known as chips, and European-style, known as plaques and jetons. Most of the products sold by GPI SAS are manufactured in France, with the remainder manufactured in Mexico.

 

•GPI Asia, located in Macau S.A.R., China, distributes our full product line in the Asia-Pacific region. GPI Asia also sells table layouts that it manufactures in Macau S.A.R.

 

We are one of the gaming industry’s leading manufacturers and suppliers of casino table game equipment. We custom manufacture and supply casino currencies, playing cards, table layouts, gaming furniture, table accessories, dice, roulette wheels, and RFID readers and software, all of which are used with casino table games such as blackjack, poker, baccarat, craps, and roulette. Our products fall into two categories – non-consumable and consumable. Non-consumable products consist of casino currencies, gaming furniture, and RFID solutions. These products typically have a useful life of several years or longer. Sales of non-consumables are typically driven by casino openings, expansions, and rebranding, as well as replacements in the normal course of business. Consumable products consist of playing cards, table accessories, table layouts, and dice. These products each have a useful life that ranges from several hours for playing cards and dice to several months for layouts. Casinos tend to buy these products annually if not more frequently.

 

Significant Accounting Policies

 

Basis of Consolidation and Presentation. The accompanying unaudited condensed consolidated financial statements include the accounts of GPIC and its wholly-owned subsidiaries GPI SAS, GPI USA, and GPI Asia. All material intercompany balances and transactions have been eliminated in consolidation. We use the equity method to account for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. Our proportionate share of the net income or loss of these companies is included in consolidated net earnings. Judgment regarding the level of influence over each equity method investment includes considering key factors such as our ownership interest or participation in policy-making decisions and material intercompany transactions. In the event we no longer have the ability to exercise significant influence over an equity-method investee, we would discontinue accounting for the investment under the equity method.

 

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and in the form prescribed by the Securities and Exchange Commission (SEC), and do not include all of the information and notes required by U.S. GAAP for complete financial statements. These statements should be read in conjunction with our annual audited consolidated financial statements and related notes included in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 23, 2018.

 

 6 

 

 

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 and Not Yet Adopted. In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. These amendments eliminate Step 2 from the goodwill impairment test. The amendments are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company does not expect the adoption of this guidance to significantly impact the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by reporting lease assets and lease liabilities, both finance (capital) and operating leases, on the balance sheet and disclosing key information about leasing arrangements. For public companies, the updated guidance is effective for the financial statements issued for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years). Early adoption is permitted. The Company is currently evaluating the impact of adoption and will consult with accounting experts as needed to assist with the implementation of this standard. While the Company continues to evaluate the impact of this new standard on its consolidated financial statements, the Company currently expects the primary impact will be to record right-of-use assets and lease liabilities for existing operating leases in the consolidated balance sheets. The Company currently has $3.8 million in operating lease commitments and does not currently expect the adoption of this new standard to have a material impact on its consolidated results of operations or cash flows.

 

Recently Adopted Accounting Standards. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (“Tax Act”). SAB 118 was added to the FASB codification in March 2018 with the issuance of ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.

 

In accordance with the SAB 118 guidance, some of the income tax effects recorded by the Company in 2017 are provisional, including the one-time transition tax and the re-measurement of our deferred tax assets and liabilities. In addition, we are still evaluating the global intangible low-taxed income (GILTI) provisions of the Tax Act and their impact, if any, on our consolidated financial statements. The accounting for these income tax effects may be adjusted during 2018 as a result of our continuing analysis of the Tax Act; additional implementation guidance from the IRS, state tax authorities, the SEC, the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign equity affiliates. As of June 30, 2018, the Company had not finalized its accounting and was still in the measurement period.

 

In March 2017, the FASB issued ASU 2017-17, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. In the first quarter of 2018 the Company adopted this guidance. It had no significant impact to the consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. These amendments clarify the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. In the first quarter of 2018 the Company adopted this guidance retrospectively. It had no significant impact to the consolidated financial statements.

 

 7 

 

  

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. These amendments require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance indicates that the former exception to income tax accounting that requires companies to defer the income tax effects of certain intercompany transactions would apply only to intercompany inventory transactions. That is, the exception no longer applies to intercompany sales and transfers of other assets (e.g., property and equipment or intangible assets). Under the former exception, income tax expense associated with intra-entity profits in an intercompany sale or transfer of assets was eliminated from earnings. Instead, that cost was deferred and recorded on the balance sheet (e.g., as a prepaid asset) until the assets left the consolidated group. Similarly, the entity was prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany sale or transfer. A modified retrospective basis of adoption was required for this guidance. As a result, a cumulative-effect adjustment of approximately $0.4 million has been recorded to accumulated deficit on January 1, 2018, in connection with this adoption. This cumulative-effect adjustment relates to the prepaid expense associated with intra-entity transfers of property and equipment included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet at December 31, 2017.

 

In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers (Topic 606). This guidance applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This guidance supersedes existing revenue recognition guidance, including most industry-specific guidance, as well as certain related guidance on accounting for contract costs. To further assist with adoption and implementation of ASU 2014-09, the FASB issued the following ASUs:

 

•ASU 2016-08 (Issued March 2016) - Principal versus Agent Consideration (Reporting Revenue Gross versus Net)

•ASU 2016-10 (Issued April 2016) - Identifying Performance Obligations and Licensing

•ASU 2016-12 (Issued May 2016) - Narrow-Scope Improvements and Practical Expedients

•ASU 2016-20 (Issued December 2016) - Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

 

The guidance provides for a five-step model to determine the revenue recognized for the transfer of goods or services to customers that reflects the expected entitled consideration in exchange for those goods or services. It also provides clarification for principal versus agent considerations and identifying performance obligations. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes. Financial statement disclosures required under the guidance will enable users to understand the nature, amount, timing, judgments, and uncertainty of revenue and cash flows relating to customer contracts. The two permitted transition methods under the guidance are the full retrospective approach or a cumulative effect adjustment to the opening retained earnings in the year of adoption (cumulative effect approach). In the first quarter of 2018, we adopted this guidance using a modified retrospective method. It had no significant impact to the consolidated financial statements. Regarding the contract acquisition cost component of the guidance, the Company’s analysis supports use of the practical expedient when recognizing expense related to incremental costs incurred to acquire a contract, as the recovery of such costs is completed in less than one year’s time. Additionally, incremental costs to obtain contracts have been immaterial to date. Accordingly, the Company does not expect any material changes to the timing of when it recognizes expenses related to contract acquisition costs.

 

Note 2. Revenue Recognition

 

The majority of our revenue is derived from selling and distributing manufactured table game equipment to the casino industry. We recognize revenue after we have completed all of the following steps:

 

-Identification of the contract, or contracts, with a customer
-Identification of the performance obligations in the contract
-Determination of the transaction price
-Allocation of the transaction price to the performance obligations in the contract
-Recognition of revenue when, or as, the Company satisfies a performance obligation

 

Determining whether these steps have been met may require us to make assumptions and exercise judgment that could significantly impact the timing and amount of revenue reported each period.

 

The majority of our contracts have a similar performance obligation which is the transfer of the individual goods ordered. The Company typically invoices the customer upon shipment. Depending on the size of the customer order we may require deposits that range from 30% to 100% of the total order.

 

On occasion, we may recognize revenue under a bill and hold arrangement. 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.

 

 8 

 

 

Under the RFID solutions product line, we may recognize revenue from entering into new arrangements which include software and/or multiple elements or deliverables, which include RFID equipment, embedded software licenses, and software maintenance services. In such cases, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on the Company's overall pricing objectives, taking into consideration historical selling prices, market conditions, costs to provide certain services and other factors.

 

A portion of our revenue under RFID solutions is generated by new or existing software and hardware maintenance arrangements. Under these arrangements, customers pay in advance for the maintenance of the hardware or the software. As of June 30, 2018, the Company had contracts with unsatisfied performance obligations extending throughout 2020. Most of our contracts are for one year and renew on March 1st 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 June 30, 2018 and December 31, 2017, these amounts were $0.4 million and $0.1 million, respectively. For the three months ended on each of June 30, 2018 and 2017, we recognized $150,000 of revenue for software and hardware maintenance contracts. In each of the first six months of 2018 and 2017, we recognized $300,000 of revenue for software and hardware maintenance contracts.

 

The application of our revenue recognition policies and changes in our assumptions or judgments affect the timing and amounts of our revenues and costs, as well as deferred revenue.

 

Note 3. Cash and Cash Equivalents

 

We hold our cash and cash equivalents in various financial institutions in the countries shown below. Substantially all accounts have balances in excess of government-insured limits. The following table summarizes our holdings (in thousands):

 

   June 30, 2018   December 31, 2017 
Macau S.A.R., China  $6,101   $2,517 
United States (including Mexico)   5,839    4,936 
France   3,017    6,611 
Total  $14,957   $14,064 

 

Note 4. Accounts Receivable

 

At June 30, 2018, and December 31, 2017, no casino customer accounted for 10% or more of our accounts receivable balance.

 

Note 5. Inventories

 

Inventories consisted of the following (in thousands):

 

   June 30, 2018   December 31, 2017 
Raw materials  $10,752   $11,637 
Work in progress   1,350    2,432 
Finished goods   4,282    3,502 
Total inventories  $16,384   $17,571 

 

We classified a portion of our inventories as non-current because we do not expect this portion to be used within one year. The classification of our inventories on our unaudited condensed consolidated balance sheets was as follows (in thousands):

 

 9 

 

 

 

   June 30, 2018   December 31, 2017 
Current  $14,340   $15,118 
Non-current   2,044    2,453 
Total inventories  $16,384   $17,571 

 

Note 6. Property and Equipment

 

Property and equipment consisted of the following (in thousands):

 

   June 30, 2018   December 31, 2017 
Land  $669   $669 
Buildings and improvements   11,204    11,196 
Equipment and furniture   40,696    40,714 
Vehicles   407    408 
Construction in progress   192    529 
    53,168    53,516 
Less accumulated depreciation   (30,130)   (28,583)
Property and equipment, net  $23,038   $24,933 

 

Depreciation expense for the three months ended June 30, 2018 and 2017 was $1.3 million and $1.0 million, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $2.3 million and $1.9 million, respectively.

 

Note 7. Goodwill and Intangible Assets

 

We had goodwill of $10.3 million as of both June 30, 2018 and December 31, 2017.

 

Intangible assets consisted of the following (in thousands):

 

   June 30, 2018   December 31, 2017    
   Gross
Carrying
Amount		   Accum
Amort		   Net 
Carrying
Amount		   Gross 
Carrying 
Amount		   Accum 
Amort		   Net 
Carrying 
Amount		   Estimated 
Useful Life
(Years)
Trademarks  $1,711   $(761)  $950   $1,711   $(700)  $1,011   10-15
Customer list   1,101    (508)   593    897    (353)   544   10-15
Patents   542    (537)   5    542    (534)   8   13-14
Other intangible assets   472    (373)   99    472    (359)   113   3-10
Total intangible assets  $3,826   $(2,179)  $1,647   $3,622   $(1,946)  $1,676    

 

Amortization expense for intangible assets for the three months ended June 30, 2018 and 2017 was $62,000 and $65,000, respectively. Amortization expense for intangible assets for the six months ended June 30, 2018 and 2017 was $124,000 and $128,000, 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 for more details.

 

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 June 30, 2018.

 

 10 

 

 

Interest on funds borrowed under the term loan and the revolving loan are charged at a rate per annum equal to LIBOR, 2.1% at June 30, 2018, plus 2.25%. The term loan has a straight-line seven-year amortization schedule.

 

In June 2018, we made a $2.0 million early principal repayment against the outstanding term loan.

 

At June 30, 2018, estimated repayment obligations for the principal balance of long-term debt were as follows (in thousands):

 

Years Ending December 31,  Outstanding
Debt		 
2018 (6 months)  $749 
2019   1,546 
2020   1,613 
2021   72 
   $3,980 

 

Note 9. Stock Appreciation Rights Liability

 

At June 30, 2018 and at December 31, 2017 the stock appreciation rights liability was $0.6 million and $1.2 million, respectively. The $0.6 million decrease is due to the period change in the fair value of the outstanding rights for $0.4 million and the payment of $0.2 million of stock appreciation rights, offset by $40,000 for additional stock appreciation rights granted in 2018.

 

Note 10. Commitments and Contingencies

 

On January 26, 2018, the Company entered into global strategic agreements for development, licensing, and revenue sharing with both BrainChip Holdings Limited (ASX: BRN), a leading developer of software and hardware accelerated solutions for advanced artificial intelligence and machine learning applications, and Xuvi, LLC, developers of an immersive data analytics and automation platform. The companies plan to jointly develop products for worldwide deployment in casino currency security, table game operations, and player behavior applications. The terms require payments to BrainChip Holdings Limited and Xuvi, LLC of approximately $0.6 million and $0.7 million, respectively, and are contingent upon completion of project phases. GPI paid $1.0 million during the six months ended June 30, 2018.

 

Operating Lease Commitments

 

The Company has various operating leases that are used in the normal course of business. The operating leases consist of buildings and equipment that expire on various dates through 2023.

 

At June 30, 2018, minimum lease payment obligations were as follows (in thousands):

 

   Minimum 
   Lease 
Years Ending December 31,  Payments 
2018 (6 months)  $609 
2019   944 
2020   670 
2021   634 
2022   567 
Thereafter   339 
Total  $3,763 

 

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 condensed 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.

 

 11 

 

 

Note 11. Geographic and Product Line Information

 

We manufacture and sell casino table game equipment in one operating segment - casino table game products. Although the Company derives its revenues from a number of different product lines, the Company neither allocates resources based on the operating results from the individual product lines, nor manages each individual product line as a separate business unit. Our chief operating decision maker is our Chief Executive Officer (CEO). The CEO manages our operations on a consolidated basis to make decisions about overall corporate resource allocation and to assess overall corporate profitability. Our CEO is also the chief operating manager for each of our entities in the United States, France, and Macau S.A.R.; that is, the individual locations do not have “segment,” or “product line,” managers who report to our CEO.

 

The following tables present our revenue by geographic area (dollars in thousands):

 

   Three Months Ended 
   June 30, 
   2018   2017 
Revenues                
The Americas  $16,940    68.6%  $13,560    83.3%
Asia-Pacific   6,759    27.4%   2,087    12.8%
Europe and Africa   978    4.0%   627    3.9%
Total  $24,677    100.0%  $16,274    100.0%

 

   Six Months Ended 
   June 30, 
   2018   2017 
Revenues                
The Americas  $30,807    71.0%  $27,823    79.1%
Asia-Pacific   10,821    25.0%   6,208    17.6%
Europe and Africa   1,733    4.0%   1,156    3.3%
Total  $43,361    100.0%  $35,187    100.0%

 

 12 

 

 

The following tables present our revenue by product line (dollars in thousands):

 

   Three Months Ended 
   June 30, 
   2018   2017 
Casino currency without RFID  $5,671    23.0%  $3,498    21.5%
Casino currency with RFID   5,542    22.5%   1,204    7.4%
Total casino currency   11,213    45.5%   4,702    28.9%
                     
Playing cards   6,084    24.6%   6,181    38.0%
Table accessories and other products   2,147    8.7%   1,591    9.8%
Table layouts   1,522    6.2%   1,246    7.7%
Gaming furniture   1,384    5.6%   790    4.9%
Dice   756    3.1%   723    4.4%
RFID solutions   506    2.0%   317    1.9%
Shipping   1,065    4.3%   724    4.4%
Total  $24,677    100.0%  $16,274    100.0%

 

   Six Months Ended 
   June 30, 
   2018   2017 
Casino currency without RFID  $9,518    22.0%  $7,393    21.0%
Casino currency with RFID   9,318    21.5%   3,962    11.3%
Total casino currency   18,836    43.5%   11,355    32.3%
                     
Playing cards   11,840    27.3%   12,516    35.6%
Table accessories and other products   3,611    8.3%   3,484    9.9%
Table layouts   2,971    6.9%   2,548    7.2%
Gaming furniture   1,869    4.3%   1,542    4.4%
Dice   1,441    3.3%   1,424    4.0%
RFID solutions   961    2.2%   689    2.0%
Shipping   1,832    4.2%   1,629    4.6%
Total  $43,361    100.0%  $35,187    100.0%

 

 13 

 

 

For the six months ended June 30, 2018 and 2017, no customer accounted for 10% or more of revenues.

 

The following table presents our property and equipment by geographic area (in thousands):

 

Property and equipment, net:  June 30, 2018   December 31, 2017 
United States  $12,917   $13,708 
Mexico   5,678    6,851 
France   3,999    3,936 
Macau S.A.R., China   444    438 
Total  $23,038   $24,933 

 

The following table presents our intangible assets by geographic area (in thousands):

 

Intangible assets, net:  June 30, 2018   December 31, 2017 
United States  $1,522   $1,634 
Asia   125    42 
Total  $1,647   $1,676 

 

Note 12. Earnings Per Share

 

The weighted-average number of common shares outstanding used in the computation of basic and diluted earnings per share was as follows (in thousands):

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Weighted-average number of common shares outstanding - basic   7,949    7,929    7,941    7,929 
Potential dilution from equity grants   71    129    85    129 
Weighted-average number of common shares outstanding - diluted   8,020    8,058    8,026    8,058 

 

At June 30, 2018, we had certain outstanding stock options to purchase common stock which had exercise prices greater than the average market price. These anti-dilutive options have been excluded from the computation of diluted earnings per share (in thousands):

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Outstanding anti-dilutive options   85    20    58    16 

 

Note 13. Income Taxes

 

The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017 and reduces the U.S. statutory federal corporate tax rate from 34% to 21%. The effective date of the tax rate change was January 1, 2018. As a result, we adjusted our annual effective tax rate for the three and six months ended June 30, 2018, as well as adjusted our U.S. net deferred tax asset balance at the lower rates. In the first six months of 2018, the Company did not record an expense or benefit related to the Tax Act.

 

We are subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, the tax years 2014 through 2017 remain open to examination under the statute of limitations by the U.S. Internal Revenue Service (IRS) and various states for GPIC and GPI USA and by the Government of the Macau Special Administrative Region - Financial Services Bureau for GPI Asia. Only tax years 2015 to 2017 remain open to examination under the statute of limitations by the French Tax Administration (FTA) for GPI SAS.

 

In 2015, the FTA started an examination of GPI SAS for tax years 2013 and 2012 that is on-going. In the first quarter of 2018, in connection with the FTA’s examination of GPI SAS for tax years 2013 and 2012, GPI paid €1.4 million to the FTA. While we were legally obligated to pay this amount, which represents the FTA’s calculation of the taxes owed, this payment does not represent a settlement nor the end of the examination and we are actively disputing the findings of the FTA.

 

 14 

 

 

In addition to the on-going FTA examination of GPI SAS for tax years 2013 and 2012, the Company received notification in August 2017 of a federal income tax examination by the IRS for the 2015 tax year. The examination is substantially completed and as a result, at the end of June 30, 2018, we accrued $0.1 million of additional tax expense.

 

As of June 30, 2018, there was no change to the $0.3 million unrecognized tax benefits reported at December 31, 2017. The $0.1 million accrual in relation to the FTA examination is in addition to the unrecognized tax benefit amount.

 

Note 14. Subsequent Event

 

On August 1, 2018, the Company issued an 8-K announcing Gregory Gronau’s resignation as Chief Executive Officer, President, Director, Secretary, and Treasurer, effective September 21, 2018. Mr. Gronau’s resignation is for personal reasons, and not a result of any disagreement with the Company or its management. The Company and Mr. Gronau also entered in a consulting agreement pursuant to which Mr. Gronau will provide part-time consulting services to the Company following his date of departure until December 31, 2018 in exchange for payments of $10,000 per month.

 

To ensure continuity going forward, Chief Financial Officer and Chairman of the Board Alain M. Thieffry, age 62, will act as the Company’s Chief Executive Officer, President, Secretary, and Treasurer beginning September 21, 2018, until a successor is appointed.

 

The Company will begin an executive search for a new CEO and no changes in its goals or objectives are planned.

 

 15 

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion is intended to assist in the understanding of our consolidated results of operations and our present financial condition and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and the other financial information included in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and the accompanying notes contain additional detailed information that should be referred to when reviewing this material. Statements in this discussion may be forward-looking. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those expressed. See Item 1A. “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 23, 2018.

 

For a more extensive overview and information on our products, as well as general information, see Item 1. “Business” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 23, 2018.

 

Overview of Our Business

 

Gaming Partners International Corporation, a Nevada corporation, is headquartered in North Las Vegas, Nevada. The Company was formed in 2002 through a reverse merger between Paul-Son Gaming and Bourgogne et Grasset. GPIC has three operating subsidiaries: Gaming Partners International USA, Inc. (GPI USA) (including GPI Mexicana S.A. de C.V. (GPI Mexicana), our maquiladora manufacturing operation in Mexico, and GPI USA Blue Springs, our manufacturing facility in Missouri); Gaming Partners International SAS (GPI SAS); and Gaming Partners International Asia Limited (GPI Asia).  Our subsidiaries have the following distribution and product focus:

 

•GPI USA sells in the United States, Canada, the Caribbean, and Latin America. GPI USA sells our full product line, with most of the products manufactured in either San Luis Rio Colorado, Mexico, or Blue Springs, Missouri. The remainder is either manufactured in France or purchased from United States vendors. We warehouse inventory in San Luis, Arizona; Blue Springs, Missouri; and North Las Vegas, Nevada. We have sales offices in North Las Vegas, Nevada; Atlantic City, New Jersey; Gulfport, Mississippi; and Blue Springs, Missouri.

 

•GPI SAS sells primarily in Europe and Africa out of its office in Beaune, France. GPI SAS predominantly sells casino currencies, including both American-style, known as chips, and European-style, known as plaques and jetons. Most of the products sold by GPI SAS are manufactured in France, with the remainder manufactured in Mexico.

 

•GPI Asia, located in Macau S.A.R., China, distributes our full product line in the Asia-Pacific region. GPI Asia also sells table layouts that it manufactures in Macau S.A.R.

 

We are one of the gaming industry’s leading manufacturers and suppliers of casino table game equipment. We custom manufacture and supply casino currency, with multiple security and design options, playing cards, table layouts, gaming furniture, table accessories, dice, and roulette wheels. We also provide multiple radio frequency identification (RFID) technologies including low- and high-frequency RFID casino currency, RFID solutions for casino currency (consisting of low- and high-frequency RFID casino currency readers, antennas, casino currency authentication software, casino currency inventory software applications, and software maintenance services). Our products and services are used with casino table games such as blackjack, poker, baccarat, craps, and roulette. Our products fall into two categories – non-consumable and consumable. Non-consumable products consist of casino currencies, gaming furniture, and RFID solutions. These products typically have a useful life of several years or longer. Sales of non-consumables are typically driven by casino openings, expansions, and re-brandings, as well as replacement in the normal course of business. Consumable products consist of playing cards, table layouts, dice, and table accessories. These products each have a useful life that ranges from several hours for playing cards and dice to several months for layouts. Casinos tend to buy these products annually if not more frequently.

 

The majority of our products are specifically designed and produced to meet our customers’ requirements, whether they are related to use, branding, aesthetic appeal, security, or anti-counterfeiting features. We believe our ability to produce products with a variety of styles and features, in combination with years of reliable delivery, enhance our competitive position. Our strategy is to be the exclusive supplier of table game products for every new casino. Through this strategy, revenues are generated both from the initial sale and replenishment of consumable products.

 

 16 

 

 

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 June 30, 2018 and 2017 (in millions):

 

   GPI USA  GPI Asia  GPI SAS  Total  
June 30, 2018  $14.2 million  $6.9 million  $0.4 million  $21.5 million  
June 30, 2017  $11.5 million  $14.4 million  $0.3  million  $26.2 million  

 

Outlook

 

Our backlog of signed orders through June 30, 2019 was $21.5 million. The decrease in backlog is primarily due to the timing of receiving confirmed orders in Asia. We anticipate winning additional business, particularly in the Asia market due to the number of planned casino openings and expansions in the region. However, there is always uncertainty surrounding the timing of casino openings and the number of tables to be allotted to each new casino, which will impact both the amount of revenue we recognize and the timing of revenue recognition.

 

As previously disclosed in a Form 8-K filed with the SEC on January 31, 2018, we entered into global licensing and development agreements with BrainChip Holdings Limited and Xuvi, LLC. We plan to jointly develop products to provide a table management solution that would combine visioning technology and immersive data analytics with our RFID technology to better secure table currency, increase fraud protection, improve table productivity, and provide data for player behavior applications. GPI’s initial commitment to BrainChip Holdings Limited and Xuvi, LLC totals $1.3 million. Due to positive customer response, we plan to commit a minimum of $0.5 million in the second half of the year to develop product enhancements and speed up product development.

 

In prior quarters we reported we had made progress in resolving difficulties arising from the rapid expansion of our playing cards manufacturing facility in Blue Springs, MO. It was our belief margins had stabilized and would improve over time. However, the first six months of 2018 were disappointing, as lower revenue and higher fixed costs reduced margins and profitability. We continue to work diligently to remedy the issues at the facility. However, it may be several quarters before we return to acceptable levels of performance and profitability.

 

Financial and Operational Highlights

 

For the second quarter of 2018, our revenues were $24.7 million, an increase of $8.4 million, or 51.6%, compared to revenues of $16.3 million for the same period of 2017. For the second quarter of 2018, our net income was $2.5 million, an increase of $2.5 million compared to net income of $49,000 for the same period in 2017.

 

For the first six months of 2018, our revenues were $43.4 million, an increase of $8.2 million or 23.2%, compared to revenues of $35.2 million for the same period of 2017. For the first six months of 2018, our net income was $2.5 million, an increase of $1.5 million, or 155.8%, compared to net income of $1.0 million for the same period of 2017.

 

The increase in our revenues and net income for the three months ended June 30, 2018 was primarily due to an increase in casino currency sales, table accessories and furniture, partially offset by an increase in research and development expenses. The increase in our revenues and net income for the six months ended June 30, 2018 was primarily due to an increase in casino currency sales, partially offset by an increase in research and development expenses.

 

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.

 

 17 

 

 

CRITICAL ACCOUNTING ESTIMATES

 

Our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, while unaudited, have been prepared in accordance with U.S. GAAP. Financial statement preparation requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. The accompanying unaudited condensed consolidated financial statements are prepared using the same critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 23, 2018. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

RESULTS OF OPERATIONS

 

The following tables summarize selected items from our unaudited condensed consolidated income statements (dollars in thousands) and as a percentage of revenues:

 

   Three Months Ended         
   June 30,   Period-to-Period 
   2018   2017   Change 
Revenues  $24,677    100.0%  $16,274    100.0%  $8,403    51.6%
Cost of revenues   16,341    66.2%   12,416    76.3%   3,925    31.6%
Gross profit   8,336    33.8%   3,858    23.7%   4,478    116.1%
Selling, administrative, and research and development   5,190    21.0%   3,782    23.2%   1,408    37.2%
Operating income   3,146    12.8%   76    0.5%   3,070    4039.5%
Other income, net   104    0.4%   9    0.1%   95    1055.6%
Income before income taxes   3,250    13.2%   85    0.6%   3,165    3723.5%
Income tax expense   745    3.0%   36    0.2%   709    1969.4%
Net income  $2,505    10.2%  $49    0.4%  $2,456    5012.2%

 

   Six Months Ended         
   June 30,   Period-to-Period 
   2018   2017   Change 
Revenues  $43,361    100.0%  $35,187    100.0%  $8,174    23.2%
Cost of revenues   30,090    69.4%   25,510    72.5%   4,580    18.0%
Gross profit   13,271    30.6%   9,677    27.5%   3,594    37.1%
Selling, administrative, and research and development   9,856    22.7%   8,144    23.1%   1,712    21.0%
Operating income   3,415    7.9%   1,533    4.4%   1,882    122.8%
Other expense, net   (162)   (0.4)%   (83)   (0.2)%   (79)   95.2%
Income before income taxes   3,253    7.5%   1,450    4.2%   1,803    124.3%
Income tax expense   746    1.7%   470    1.3%   276    58.7%
Net income  $2,507    5.8%  $980    2.9%  $1,527    155.8%

 

 18 

 

 

The following tables present certain data by geographic area (dollars in thousands) and as a percentage of revenues:

 

   Three Months Ended         
   June 30,   Period-to-Period 
   2018   2017   Change 
Revenues                        
The Americas  $16,940    68.6%  $13,560    83.3%  $3,380    24.9%
Asia-Pacific   6,759    27.4%   2,087    12.8%   4,672    223.9%
Europe and Africa   978    4.0%   627    3.9%   351    56.0%
Total  $24,677    100.0%  $16,274    100.0%  $8,403    51.6%

 

   Six Months Ended         
   June 30,   Period-to-Period 
   2018   2017   Change 
Revenues                        
The Americas  $30,807    71.0%  $27,823    79.1%  $2,984    10.7%
Asia-Pacific   10,821    25.0%   6,208    17.6%   4,613    74.3%
Europe and Africa   1,733    4.0%   1,156    3.3%   577    49.9%
Total  $43,361    100.0%  $35,187    100.0%  $8,174    23.2%

 

The following tables present our revenues by product line (dollars in thousands) and as a percentage of revenues:

 

   Three Months Ended     
   June 30,   Period-to-Period 
   2018   2017   Change 
Casino currency without RFID  $5,671    23.0%  $3,498    21.5%  $2,173    62.1%
Casino currency with RFID   5,542    22.5%   1,204    7.4%   4,338    360.3%
Total casino currency   11,213    45.5%   4,702    28.9%   6,511    138.5%
                               
Playing cards   6,084    24.6%   6,181    38.0%   (97)   (1.6)%
Table accessories and other products   2,147    8.7%   1,591    9.8%   556    34.9%
Table layouts   1,522    6.2%   1,246    7.7%   276    22.2%
Gaming furniture   1,384    5.6%   790    4.9%   594    75.2%
Dice   756    3.1%   723    4.4%   33    4.6%
RFID solutions   506    2.0%   317    1.9%   189    59.6%
Shipping   1,065    4.3%   724    4.4%   341    47.1%
Total  $24,677    100.0%  $16,274    100.0%  $8,403    51.6%

 

   Six Months Ended     
   June 30,   Period-to-Period 
   2018   2017   Change 
Casino currency without RFID  $9,518    22.0%  $7,393    21.0%  $2,125    28.7%
Casino currency with RFID   9,318    21.5%   3,962    11.3%   5,356    135.2%
Total casino currency   18,836    43.5%   11,355    32.3%   7,481    65.9%
                               
Playing cards   11,840    27.3%   12,516    35.6%   (676)   (5.4)%
Table accessories and other products   3,611    8.3%   3,484    9.9%   127    3.6%
Table layouts   2,971    6.9%   2,548    7.2%   423    16.6%
Gaming furniture   1,869    4.3%   1,542    4.4%   327    21.2%
Dice   1,441    3.3%   1,424    4.0%   17    1.2%
RFID solutions   961    2.2%   689    2.0%   272    39.5%
Shipping   1,832    4.2%   1,629    4.6%   203    12.5%
Total  $43,361    100.0%  $35,187    100.0%  $8,174    23.2%

 

Comparison of Operations for the Three and Six Months Ended June 30, 2018 and 2017

 

Revenues. For the three months ended June 30, 2018, our revenues were $24.7 million, an increase of $8.4 million, or 51.6%, compared to revenues of $16.3 million for the same period of 2017. The increase in revenues was primarily attributable to an increase in casino currency sales, table accessories and gaming furniture.

 

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For the six months ended June 30, 2018, our revenues were $43.4 million, an increase of $8.2 million, or 23.2%, compared to revenues of $35.2 million for the same period of 2017. The increase in revenues was primarily attributable to an increase in sales of all product lines, especially casino currency, partially offset by a decrease in playing card sales.

 

Cost of Revenues. For the three months ended June 30, 2018, cost of revenues was $16.3 million, an increase of $3.9 million, or 31.6%, compared to cost of revenues of $12.4 million for the same period in 2017. As a percentage of revenues, our cost of revenues decreased to 66.2% in 2018 compared to 76.3% in 2017.

 

For the six months ended June 30, 2018, cost of revenues was $30.1 million, an increase of $4.6 million, or 18.0%, compared to cost of revenues of $25.5 million for the same period in 2017. As a percentage of revenues, our cost of revenues decreased to 69.4% in 2018 compared to 72.5% in 2017.

 

The increase in cost of revenues as a percentage of revenues was driven by the same factors described under Revenues above and Gross Profit below.

 

Gross Profit. For the three months ended June 30, 2018, gross profit was $8.3 million, an increase of $4.5 million, or 116.1%, compared to gross profit of $3.9 million for the same period in 2017. As a percentage of revenues, our gross profit increased to 33.8% from 23.7%. The increase in gross profit was mainly due to an increase in casino currency sales, table accessories and furniture.

 

For the six months ended June 30, 2018, gross profit was $13.3 million, an increase of $3.6 million, or 37.1%, compared to gross profit of $9.7 million for the same period in 2017. As a percentage of revenues, our gross profit increased to 30.6% from 27.5%. The increase in gross profit was mainly due to an increase in casino currency sales.

 

Selling, Administrative, and Research and Development Expenses. The following table presents the selling, administrative, and research and development expenses (dollars in thousands) and as a percentage of revenues:

 

   Three Months Ended     
   June 30,   Period-to-Period 
   2018   2017   Change 
Marketing and sales  $1,861    7.5%  $1,476    9.1%  $385    26.1%
General and administrative   2,289    9.3%   1,958    12.0%   331    16.9%
Research and development   1,040    4.2%   348    2.1%   692    198.9%
Total selling, administrative, and research and development  $5,190    21.0%  $3,782    23.2%  $1,408    37.2%

 

For the three months ended June 30, 2018, selling, administrative, and research and development expenses were $5.2 million, an increase of $1.4 million, or 37.2%, compared to selling, administrative, and research and development expenses of $3.8 million during the same period in 2017.

 

Marketing and sales expenses increased by $0.4 million, or 26.1%, during the second quarter of 2018 compared to the same period in 2017, primarily related to an increase in number of employees and compensation-related expenses.

 

General and administrative expenses increased by $0.3 million, or 16.9%, during the second quarter of 2018, compared to the same period in 2017. This is mainly due to increases of $0.2 million in compensation-related expenses for the increased number of employees and $0.3 million in bad debt accrual expenses, partially offset by a $0.2 million decrease in stock compensation-related expenses.

 

Research and development expenses for the three months ended June 30, 2018 increased by $0.7 million, or 198.9% compared to the same period in 2017. The increase is mainly due to payments made to BrainChip Holdings Limited and Xuvi, LLC for achieving certain milestones in our global licensing and development agreements described at “Outlook” in Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

 

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   Six Months Ended     
   June 30,   Period-to-Period 
   2018   2017   Change 
Marketing and sales  $3,628    8.4%  $3,203    9.1%  $425    13.3%
General and administrative   4,185    9.6%   4,283    12.1%   (98)   (2.3)%
Research and development   2,043    4.7%   658    1.9%   1,385    210.5%
Total selling, administrative, and research and development  $9,856    22.7%  $8,144    23.1%  $1,712    21.0%

 

For the six months ended June 30, 2018, selling, administrative, and research and development expenses were $9.9 million, an increase of $1.7 million, or 21.0% compared to selling, administrative, and research and development expenses of $8.1 million during the same period in 2017.

 

Marketing and sales expenses increased by $0.4 million, or 13.3%, during the first six months of 2018 compared to the same period in 2017, primarily due to an increase in number of employees and compensation-related expenses.

 

General and administrative expenses remained relatively unchanged during the first six months of 2018 compared to the same period in 2017. However, a $0.5 million decrease in stock compensation related expenses was partially offset by increases of $0.2 million in compensation-related expenses for the increased number of employees, $0.1 million in bad debt accrual expenses and $0.1 million in gaming license expenses.

 

Research and development expenses increased $1.4 million, or 210.5%, during the first six months of 2018 compared to the same period in 2017. The increase is mainly due to payments made to BrainChip Holdings Limited and Xuvi, LLC for achieving certain milestones in our global licensing and development agreements described at “Outlook” in Part I, Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

 

Other Income (Expense), net. The following tables present other income (expense) net, (dollars in thousands) and as a percentage of revenues:

 

   Three Months Ended     
   June 30,   Period-to-Period 
   2018   2017   Change 
Interest income  $22    0.1%  $-    0.0%  $22    .0%
Interest expense   (62)   (0.3)%   (63)   (0.4)%   1    (1.6)%
Gain on foreign currency transactions   94    0.4%   74    0.5%   20    27.0%
Other income (expense), net   50    0.2%   (2)   0.0%   52    (2600.0)%
Total other (expense) income, net  $104    0.4%  $9    0.1%  $95    1055.6%

 

   Six Months Ended     
   June 30,   Period-to-Period 
   2018   2017   Change 
Interest income  $22    0.1%  $-    0.0%  $22    .0%
Interest expense   (125)   (0.3)%   (122)   (0.3)%   (3)   2.5%
(Loss) Gain on foreign currency transactions   (99)   (0.2)%   23    0.1%   (122)   (530.4)%
Other income, net   40    0.1%   16    0.0%   24    150.0%
Total other (expense) income, net  $(162)   (0.4)%  $(83)   (0.2)%  $(79)   95.2%

 

GPI SAS uses the euro as its functional currency. At June 30, 2018 and December 31, 2017, the U.S. dollar to euro exchange rates were $1.17 and $1.20, respectively, which represents a 2.5% stronger dollar compared to the euro. The average exchange rates for the six months ended June 30, 2018 and 2017 was $1.21 and $1.08, respectively, which represents a 11.9% weaker dollar compared to the euro.

 

GPI Mexicana uses the U.S. dollar as its functional currency. At June 30, 2018 and December 31, 2017, the Mexican peso to U.S. dollar exchange rates were 19.94 pesos and 19.69 pesos, respectively, which represents a 1.3% stronger dollar compared to the Mexican peso. The average exchange rates for the six months ended June 30, 2018 and 2017 was 19.07 pesos and 19.44 pesos, respectively, which represents a 1.9% weaker dollar compared to the Mexican peso.

 

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GPI Asia uses the U.S. dollar as its functional currency. At June 30, 2018 and December 31, 2017, the Macau pataca to U.S. dollar exchange rates were 8.08 patacas and 8.05 patacas, respectively, which represents a 0.4% stronger dollar compared to the Macau pataca. The average exchange rates for the six months ended June 30, 2018 and 2017 was 8.07 patacas and 8.18 patacas, respectively, which represents a 1.3% weaker dollar compared to the Macau pataca.

 

Income Taxes. The Tax Act reduces the U.S. statutory federal corporate tax rate from 34% to 21%. The effective date of the tax rate change was January 1, 2018. As a result, we adjusted our annual effective tax rate for the three and six months ended June 30, 2018, and our U.S. net deferred tax asset balance at the lower rates. This had a favorable impact on both the three and six months effective income tax rates.

 

Our effective income tax rate for the three months ended June 30, 2018 and 2017 was 22.9% and 42.4%, respectively. Our effective tax rate for the three months ended June 30, 2018 was unfavorably affected by our Subpart F income adjustment and tax liability from the IRS audit of the 2015 tax year, partially offset by the foreign rate differential on the income from our Macau S.A.R. subsidiary, GPI Asia, and the benefit from research tax credits from GPI USA and our French subsidiary, GPI SAS. Our effective tax rate for the three months ended June 30, 2017 was unfavorably affected by our Subpart F income adjustment and non-statutory stock options that expired during 2017, partially offset by the foreign rate differential on the income from GPI Asia and the benefit from research and low wage tax credits from GPI SAS.

 

Our effective income tax rate for the six months ended June 30, 2018 and 2017 was 22.9% and 32.4%, respectively. Our effective tax rate for the six months ended June 30, 2018 was unfavorably affected by our Subpart F income adjustment and tax liability from the IRS audit of the 2015 tax year, partially offset by the foreign rate differential on income from GPI Asia and the benefit from research tax credits from GPI USA and GPI SAS. Our effective tax rate for the six months ended June 30, 2017 was favorably affected by the foreign rate differential on income from GPI Asia and the benefit from research and low wage tax credits from GPI SAS, partially offset by our Subpart F income adjustment and non-statutory stock options that expired during 2017.

 

We account for uncertain tax positions in accordance with applicable accounting guidance. At December 31, 2017, we reported unrecognized tax benefits related to the FTA’s on-going examination of GPI SAS for tax years 2013 and 2012. In the first quarter of 2018, in connection with this examination, GPI paid €1.4 million to the FTA. While we were legally obligated to pay this amount, which represents the FTA’s calculation of the taxes owed, this payment does not represent a settlement nor the end of the examination and we are actively disputing the findings of the FTA. At this time, an estimate of the range of the reasonably possible outcomes cannot be made. We do not expect the examination to be completed within the next twelve months. It is reasonably possible that the amount of the unrecognized benefit with respect to our unrecognized tax position could change within the next twelve months. This change may be the result of settlement of the ongoing audit or competent authority proceedings.

 

In addition to the on-going FTA examination of GPI SAS for tax years 2013 and 2012, the Company received notification in August 2017, of a federal income tax examination by the IRS for the 2015 tax year. The examination is substantially completed and as a result, at the end of June 30, 2018, we accrued $0.1 million of additional tax expense.

 

As of June 30, 2018, there was no change to the unrecognized tax benefits reported at December 31, 2017.

 

Liquidity and Capital Resources

 

Sources of Liquidity and Capital Resources. Historically, our primary source of liquidity and capital has been cash from operations. On June 26, 2015, the Company entered into a Credit Agreement with Nevada State Bank for a combined $15.0 million credit facility, consisting of a $10.0 million seven-year term loan and a $5.0 million five-year revolving loan. The Company borrowed the full amount under the term loan and has not drawn any funds under the revolving loan. Additional information can be found at Note 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.

 

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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 June 30, 2018, we had $15.0 million in cash and cash equivalents. Of this amount, $6.1 million was held by GPI Asia, $5.8 million was held by GPI USA and $3.0 million was held by GPI SAS. As a consequence of the Tax Act, we would not be subject to further taxation if we were to repatriate those amounts held outside of the United States, except for potential minimal withholding taxes.

 

Working Capital. The following table summarizes our cash and cash equivalents, and working capital (dollars in thousands), and our current ratio:

 

   June 30,   December 31,   Period-to-Period 
   2018   2017   Change 
Cash and cash equivalents  $14,957   $14,064   $893    6.3%
Working capital  $24,141   $24,087   $54    0.2%
Current ratio   2.4    2.4           

 

Cash Flows. The following table summarizes our cash flows (dollars in thousands):

 

   Six Months Ended     
   June 30,   Period-to-Period 
   2018   2017   Change 
                 
Operating activities  $4,339   $5,360   $(1,021)   (19.0)%
Investing activities   (593)   (2,340)   1,747    (74.7)%
Financing activities   (2,717)   (638)   (2,079)   325.9%
Effect of exchange rates   (136)   192    (328)   (170.8)%
Net change  $893   $2,574   $(1,681)   (65.3)%

 

The decrease in cash flows provided by operating activities was primarily caused by a negative impact in the change of liabilities for $1.9 million and in the change of assets for $1.4 million, partially offset by an increase in net income of $1.5 million and an increase in non-cash items of $0.7 million.

 

The decrease in cash flows used by investing activities was primarily due to a decrease in capital expenditures and purchase of equity method investments.

 

The increase in cash flows used in financing activities was primarily due to a $2.0 million principal payment on our term loan.

 

Capital Expenditures. In the first six months of 2018 we purchased $0.6 million of property, plant and equipment. We currently intend to purchase approximately $1.5 million in property and equipment during the remainder of 2018.

 

Cash Dividend. Our Board of Directors has no current plans to pay a regular dividend on our common stock, but may evaluate the merit of paying a special dividend from time to time.

 

Backlog. At June 30, 2018, our backlog of signed orders for the following twelve months was $21.5 million, consisting of $14.2 million for GPI USA, $6.9 million for GPI ASIA, and $0.4 million for GPI SAS. At June 30, 2017, our backlog of signed orders for the following twelve months was $26.2 million, consisting of $14.4 million for GPI ASIA, $11.5 million for GPI USA, and $0.3 million for GPI SAS.

 

 23 

 

 

Contractual Obligations and Commercial Commitments

 

On June 26, 2015, we entered into a Credit Agreement with Nevada State Bank for a combined $15.0 million, consisting of a $10.0 million seven-year term loan and a $5.0 million five-year revolving loan described under “Liquidity and Capital Resources” in Part I, Item 2— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.

 

On January 26, 2018, we entered into global licensing and development agreements with BrainChip Holdings Ltd. and Xuvi, LLC described under “Outlook” in Part I, Item 2— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.

 

Forward-Looking Information Statements and Risk Factors

 

Throughout this Quarterly Report on Form 10-Q, we make some forward-looking statements which do not relate to historical or current facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable that, while considered reasonable by us, are inherently subject to significant business, economic, and competitive risks and uncertainties, many of which are beyond our control and are subject to change. The statements also relate to our future prospects and anticipated performance, development, and business strategies such as statements relating to anticipated future sales or the timing thereof, potential acquisitions, the long-term growth and prospects of our business or any jurisdiction, the duration or effects of unfavorable economic conditions which may reduce our product sales, and the long-term potential of the RFID gaming chips market and our ability to capitalize on any such growth opportunities. These statements are identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations thereof, and other similar terms and phrases, including references to assumptions.

 

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties such as those identified in Part I, Item 1A—“Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 23, 2018. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of June 30, 2018. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of June 30, 2018, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act was (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

Effective January 1, 2018, we adopted the new revenue guidance under ASC Topic 606, Revenue from Contracts with Customers. The adoption of this guidance requires the implementation of new accounting policies and processes which changed the Company’s internal controls over financial reporting for revenue recognition and related disclosures. Other than this change, there was no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended June 30, 2018, that materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.

 

 24 

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not required for a smaller reporting company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)      Not applicable.

(b)      Not applicable.

(c)      As previously disclosed in a Form 8-K filed with the SEC on March 28, 2018, the Company adopted a stock repurchase plan to repurchase up to 100,000 shares of its common stock as part of the formal stock repurchase program adopted in November 2011. No common shares were repurchased by the Company in the second quarter of 2018.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a)      Not applicable.

(b)      Not applicable.

 

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ITEM 6. EXHIBITS

 

Exhibit    
Number   Description  
     
3.1   Registrant’s Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.01 to the Registrant’s Form 10-K filed with the SEC on March 24, 2016)
   
3.2   Registrant’s Amended and Restated Bylaws (incorporated by reference to Exhibit 3.02 to the Registrant’s Form 8-K filed with the SEC on December 28, 2007)
     
4.1   Specimen Stock Certificate for Registrant’s Common Stock (incorporated by reference to Exhibit 4.01 to the Registrant’s Form 10-K filed with the SEC on May 15, 2007)
     
10.1   Consulting Agreement between the Company and Mr. Gronau dated July 31, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on August 1, 2018)

 

31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation
     
101.DEF   XBRL Taxonomy Extension Definition
     
101.LAB   XBRL Taxonomy Extension Labels
     
101.PRE   XBRL Taxonomy Extension Presentation

 

*This exhibit is intended to be furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise.

 

 26 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  GAMING PARTNERS INTERNATIONAL CORPORATION
   
   
Date: August 10, 2018 By: /s/ Gregory S. Gronau
    Gregory S. Gronau
    President and Chief Executive Officer
     
Date: August 10, 2018 By: /s/ Alain Thieffry
    Alain Thieffry
    Chief Financial Officer, and Chairperson of the Board

 

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