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: September 30, 2015
 
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)    
     
1700 Industrial Road,   89102
Las Vegas, Nevada   (Zip Code)
(Address of principal executive offices)    

 

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on the 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 o

 

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

 

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

 

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

 

The number of shares outstanding of each of the registrant’s classes of common stock as of November 4, 2015, the latest practicable date, was 7,928,594 shares of Common Stock.

 

 

 

 

 

 

GAMING PARTNERS INTERNATIONAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
     
ITEM 1. FINANCIAL STATEMENTS 1
     
  CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) 1
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) 2
  CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) 3
  CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited) 4
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 5
  CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (unaudited) 6
     
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
     
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
     
ITEM 4.   CONTROLS AND PROCEDURES 22
     
PART II.    OTHER INFORMATION 23
     
ITEM 1.   LEGAL PROCEEDINGS 23
     
ITEM 1A. RISK FACTORS 23
     
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 23
     
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES 23
     
ITEM 4.   MINE SAFETY DISCLOSURES 23
     
ITEM 5.   OTHER INFORMATION 23
     
ITEM 6.   EXHIBITS 24
     
SIGNATURES 25

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share amounts)

 

   September 30,   December 31, 
   2015   2014 
ASSETS          
Current Assets:          
Cash and cash equivalents  $12,829   $8,969 
Marketable securities   5,353    3,597 
Accounts receivable, net   10,663    10,327 
Inventories   10,727    9,063 
Prepaid expenses   729    749 
Deferred income tax assets   1,389    1,011 
Other current assets   2,778    2,273 
Total current assets   44,468    35,989 
Property and equipment, net   15,142    15,087 
Goodwill   10,292    10,292 
Intangibles, net   2,575    2,794 
Deferred income tax assets   2,149    2,003 
Inventories, non-current   380    523 
Other assets   1,530    1,706 
Total assets  $76,536   $68,394 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities:          
Accounts payable  $4,301   $3,321 
Accrued liabilities   4,165    3,906 
Customer deposits and deferred revenue   6,496    2,224 
Current portion of long term debt   1,334    10,000 
Income taxes payable   841    343 
Total current liabilities   17,137    19,794 
Long term debt   8,341    - 
Deferred income tax liabilities   210    272 
Other liabilities   80    63 
Total liabilities   25,768    20,129 
Commitments and contingencies - see Note 9          
Stockholders' Equity:          
Preferred stock, authorized 10,000,000 shares, $.01 par value,          
none issued and outstanding   -    - 
Common stock, authorized 30,000,000 shares, $.01 par value,          
8,219,577 and 7,928,594 issued and outstanding, respectively, as of September 30, 2015, and 8,207,077 and 7,916,094 issued and outstanding, respectively, as of December 31, 2014   82    82 
Additional paid-in capital   20,042    19,886 
Treasury stock at cost: 290,983 shares   (2,263)   (2,263)
Retained earnings   34,371    30,881 
Accumulated other comprehensive loss   (1,464)   (321)
Total stockholders' equity   50,768    48,265 
Total liabilities and stockholders' equity  $76,536   $68,394 

  

See notes to unaudited condensed consolidated financial statements.

 

1 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per-share amounts)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Revenues  $19,844   $20,253   $54,749   $41,028 
Cost of revenues   13,391    13,447    37,338    28,710 
Gross profit   6,453    6,806    17,411    12,318 
                     
Marketing and sales   1,616    1,840    4,800    4,486 
General and administrative   2,565    2,041    7,448    6,151 
Research and development   250    324    900    1,178 
Operating income   2,022    2,601    4,263    503 
Other income, net   127    127    59    232 
Income before income taxes   2,149    2,728    4,322    735 
Income tax provision (benefit)   474    (40)   832    252 
Net income  $1,675   $2,768   $3,490   $483 
                     
Earnings per share:                    
Basic  $0.21   $0.35   $0.44   $0.06 
Diluted  $0.21   $0.35   $0.43   $0.06 
Weighted-average shares of common stock outstanding:                    
Basic   7,929    7,916    7,924    7,916 
Diluted   8,049    8,015    8,038    8,016 

  

See notes to unaudited condensed consolidated financial statements.

 

2 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Net income  $1,675   $2,768   $3,490   $483 
Other comprehensive gain (loss):                    
Foreign currency translation adjustment   177    (1,145)   (1,143)   (1,295)
Other comprehensive income (loss), net of tax   177    (1,145)   (1,143)   (1,295)
Total comprehensive income (loss)  $1,852   $1,623   $2,347   $(812)

 

See notes to unaudited condensed consolidated financial statements.

 

3 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except per share amounts)

 

                       Accumulated     
   Common Stock   Additional           Other     
           Paid-In   Treasury   Retained   Comprehensive     
   Shares   Amount   Capital   Stock   Earnings   Income (Loss)   Total 
                                    
Balance, January 1, 2014   7,916,094   $82   $19,771   $(2,262)  $28,205   $1,677   $47,473 
Net income   -    -    -    -    483    -    483 
Stock compensation expense   -    -    106    -    -    -    106 
Foreign currency translation adjustment   -    -    -    -    -    (1,295)   (1,295)
Balance, September 30, 2014   7,916,094   $82   $19,877   $(2,262)  $28,688   $382   $46,767 
                                    
Balance, January 1, 2015   7,916,094   $82   $19,886   $(2,263)  $30,881   $(321)  $48,265 
Net income   -    -    -    -    3,490    -    3,490 
Common stock options exercised   12,500    -    87    -    -    -    87 
Tax benefit of stock options exercised   -    -    3    -    -    -    3 
Stock compensation expense   -    -    66    -    -    -    66 
Foreign currency translation adjustment   -    -    -    -    -    (1,143)   (1,143)
Balance, September 30, 2015   7,928,594   $82   $20,042   $(2,263)  $34,371   $(1,464)  $50,768 

 

See notes to unaudited condensed consolidated financial statements.

 

4 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
         
Cash Flows from Operating Activities          
Net income  $3,490   $483 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation of property and equipment   1,950    1,861 
Amortization of intangible assets   218    140 
Provision for bad debt   744    100 
Deferred income taxes   (574)   376 
Stock compensation expense   66    106 
Tax on exercise of stock options   3    - 
(Gain) loss on sale or disposal of property, plant and equipment   (12)   25 
Gain on sale of marketable securities   (5)   (6)
Change in operating assets and liabilities:          
Accounts receivable   (1,108)   (2,547)
Inventories   (1,743)   (1,953)
Prepaid expenses and other current assets   (624)   868 
Non-current other assets   138    (833)
Accounts payable   1,022    1,297 
Accrued liabilities   325    473 
Customer deposits and deferred revenue   4,258    1,548 
Other current liabilities   48    - 
Income taxes payable   515    (7)
Net cash provided by operating activities   8,711    1,931 
           
Cash Flows from Investing Activities          
Purchases of marketable securities   (7,136)   (4,603)
Proceeds from sale of marketable securities   5,132    8,537 
Purchase of business assets   -    (19,750)
Purchase of intangible assets   -    (25)
Proceeds from sale of property and equipment   42    14 
Capital expenditures   (2,299)   (402)
Net cash used in investing activities   (4,261)   (16,229)
           
Cash Flows from Financing Activities          
Cash (paid) received for demand line of credit   (10,000)   10,000 
Proceeds from debt obligation   10,000    - 
Principal payments on long-term debt   (325)   - 
Proceeds from exercise of stock options   87    - 
Net cash (used in) provided by financing activities   (238)   10,000 
Effect of exchange rate changes on cash   (352)   (449)
Net increase (decrease) in cash and cash equivalents   3,860    (4,747)
Cash and cash equivalents, beginning of period   8,969    14,492 
Cash and cash equivalents, end of period  $12,829   $9,745 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $(64)  $(63)
Cash (paid) received for income taxes, net of refunds  $(560)  $780 
           
Supplemental disclosure of non-cash investing and financing activities          
Property, plant and equipment acquired through accounts payable  $46   $163 

 

See notes to unaudited condensed consolidated financial statements.

 

5 

 

 

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Nature of Business and Significant Accounting Policies

 

Organization and Nature of Business

 

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

 

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

 

•GPI USA sells in the United States, Canada, the Caribbean, and Latin America. GPI USA sells our full product line, with most of the products manufactured in either San Luis Rio Colorado, Mexico, or Blue Springs, Missouri. The remainder is either manufactured in France or purchased from United States vendors. We warehouse inventory in San Luis, Arizona, Blue Springs, Missouri, and Las Vegas, Nevada. We have sales offices in 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 and upholstery that it manufactures in Macau S.A.R.

 

Significant Accounting Policies

 

Basis of Consolidation and Presentation. The accompanying condensed consolidated financial statements include the accounts of GPIC and its wholly-owned subsidiaries GPI SAS, GPI USA, GPI Mexicana, and GPI Asia. All material intercompany balances and transactions have been eliminated in consolidation. The 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/A for the fiscal year ended December 31, 2014, filed with the SEC on March 20, 2015.

 

These unaudited condensed consolidated financial statements, in the opinion of management, reflect only normal and recurring adjustments necessary for a fair presentation of results and cash flows for the interim periods presented. The results of operations for an interim period are not necessarily indicative of the results for any other interim period or a full fiscal year.

 

Recently Issued Accounting Standards. In July 2015, The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The guidance applies to any entity measuring inventory using first-in, first-out or average cost. The main provision of this guidance requires an entity to measure inventory within the scope of this Update at the lower of cost and net realizable value. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. A reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

6 

 

 

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. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance supersedes existing revenue recognition guidance, including most industry-specific guidance, as well as certain related guidance on accounting for contract costs. In July 2015, the FASB approved a deferral of the effective date of ASU 2014-09 to January 1, 2017, and would permit early application though in no case could the new guidance be applied before the original effective date. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

Note 2. Acquisition

 

On July 1, 2014, we acquired substantially all of the net gaming assets of GemGroup Inc. (GemGroup Acquisition), a manufacturer of playing cards, table layouts and casino currency primarily sold under the Gemaco® brand. The acquisition was consolidated on the Company’s financial statements as of the date of acquisition.

 

Note 3. Cash, Cash Equivalents, and Marketable Securities

 

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

 

   September 30, 2015   December 31, 2014 
   Cash and  Cash Equivalents   Marketable Securities   Total   Cash and  Cash Equivalents   Marketable Securities   Total 
United States (including Mexico)  $7,141   $           -   $7,141   $3,160   $           -   $3,160 
France   857    5,353    6,210    644    3,597    4,241 
Macau S.A.R., China   4,831    -    4,831    5,165    -    5,165 
Total  $12,829   $5,353   $18,182   $8,969   $3,597   $12,566 

 

Available-for-sale marketable securities consist of investments in securities such as certificates of deposit offered by French banks and bond mutual funds (in thousands):

 

   September 30, 2015   December 31, 2014 
   Cost   Unrealized Gain/(Loss)   Fair Value   Cost   Unrealized Gain/(Loss)   Fair Value 
Certificates of deposit  $2,811   $           -   $2,811   $1,215   $           -   $1,215 
Bond mutual funds   2,542    -    2,542    2,382    -    2,382 
Total marketable securities  $5,353   $-   $5,353   $3,597   $-   $3,597 

 

We present our marketable securities at their estimated fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have determined that all of our marketable securities are Level 1 financial instruments, with asset values recorded at quoted prices in active markets for identical assets.

 

7 

 

 

Note 4. Accounts Receivable and Allowance for Doubtful Accounts

 

At September 30, 2015, no customer accounted for greater than 10% of our accounts receivable balance. At December 31, 2014, one Macau customer accounted for 30% of our accounts receivable balance.

 

The allowance for doubtful accounts consists of the following (in thousands):

 

   Balance at
Beginning of
Year		   Provision   Write-offs, Net
of Recoveries		   Exchange
Rate Effect		   Balance at End
of Period		 
September 30, 2015  $302   $744   $(35)  $(4)  $1,007 
December 31, 2014  $114   $193   $(5)  $-   $302 

 

Note 5. Inventories

 

Inventories consist of the following (in thousands):

 

   September 30, 2015   December 31, 2014 
Raw materials  $7,408   $5,747 
Work in progress   1,606    1,257 
Finished goods   2,093    2,582 
Total inventories  $11,107   $9,586 

 

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 condensed consolidated balance sheets is as follows (in thousands):

 

   September 30, 2015   December 31, 2014 
Current  $10,727   $9,063 
Non-current   380    523 
Total inventories  $11,107   $9,586 

 

Note 6. Property and Equipment

 

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

 

   September 30, 2015   December 31, 2014 
Land  $1,763   $1,784 
Buildings and improvements   9,689    9,857 
Equipment and furniture   27,206    26,033 
Vehicles   382    368 
    39,040    38,042 
Less accumulated depreciation   (23,898)   (22,955)
Property and equipment, net  $15,142   $15,087 

 

Depreciation expense for the three months ended September 30, 2015 and 2014 was $633,000 and $751,000, respectively. Depreciation expense for the nine months ended September 30, 2015 and 2014 was $1,950,000 and $1,861,000, respectively.

 

8 

 

 

Note 7. Goodwill and Intangible Assets

 

We have goodwill valued at $10.3 million as of September 30, 2015 arising from the GemGroup Acquisition.

 

Intangible assets consist of the following (in thousands):

 

   September 30, 2015   December 31, 2014    
   Gross
Carrying
Amount		   Accum
Amort		   Net
Carrying
Amount		   Gross
Carrying
Amount		   Accum
Amort		   Net
Carrying
Amount		   Estimated
Useful Life
(Years)
Trademarks  $1,772   $(422)  $1,350   $1,772   $(327)  $1,445   10-15
Customer list   1,324    (219)   1,105    1,327    (107)   1,220   10-15
Patents   542    (518)   24    542    (503)   39   13-14
Other intangible assets   372    (276)   96    372    (282)   90   3-10
Total intangible assets  $4,010   $(1,435)  $2,575   $4,013   $(1,218)  $2,794    

 

Amortization expense for intangible assets for the three months ended September 30, 2015 and 2014 was $69,000 and $79,000, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2015 and 2014 was $218,000 and $140,000, respectively.

 

Note 8. Debt

 

On June 26, 2015, the Company entered into a credit agreement (Credit Agreement) with Nevada State Bank (Lender) for a combined $15.0 million, consisting of a $10.0 million seven-year term loan (Term Loan) and a $5.0 million five-year revolving loan (Revolving Loan). The Term Loan will mature on June 26, 2022, and the Revolving Loan will mature on June 26, 2020.

 

The Company borrowed the full amount under the Term Loan and repaid its existing $10.0 million demand line of credit with HSBC Bank USA, National Association (HSBC) on June 26, 2015. Upon repayment of the $10.0 million demand line of credit with HSBC, all obligations, security interests, liens and guarantees were released by HSBC. The Company has not drawn any funds under the Revolving Loan.

 

Interest on funds borrowed under the Term Loan and the Revolving Loan will be charged at a rate per annum equal to LIBOR plus 2.25%. The Term Loan has a straight-line seven year amortization schedule.

 

Estimated repayment obligations for the principal balance of long-term debt are as follows (in thousands):

 

Years ending December 31:     
2015  $334 
2016   1,343 
2017   1,376 
2018   1,410 
2019   1,444 
Thereafter   3,768 
   $9,675 

 

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 and its subsidiary, GPI USA, granted to the Lender a first priority security interest in substantially all of their assets as collateral. In addition, the Credit Agreement is guaranteed by the Company’s subsidiaries GPI USA and GPI Asia.

 

The above 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 are filed as Exhibits 10.1, 10.2, and 10.3 to Form 8-K filed with the SEC on July 2, 2015.

 

9 

 

 

Note 9. Commitments and Contingencies

 

Legal Proceedings and Contingencies

 

From time to time we are engaged in disputes and claims that arose in the normal course of business. We believe the ultimate outcome of these proceedings will not have a material adverse impact on our consolidated financial position or results of operations, but the outcome of these actions is inherently difficult to predict. There can be no assurance that we will prevail in any such litigation. Liabilities for material claims against us are accrued when a loss is considered probable and can be reasonably estimated. Legal costs associated with claims are expensed as incurred.

 

Note 10. Accumulated Other Comprehensive Loss

 

Changes in accumulated other comprehensive loss for the three months ended September 30, 2015, were as follows (in thousands):

 

   Foreign
Currency
Translation		   Unrealized
Gains on
Securities		   Total 
Balance at June 30, 2015  $(1,642)  $1   $(1,641)
Other comprehensive income   177    -    177 
Balance at September 30, 2015  $(1,465)  $1   $(1,464)

 

Changes in accumulated other comprehensive loss for the nine months ended September 30, 2015, were as follows (in thousands):

 

   Foreign
Currency
Translation		   Unrealized
Gains on
Securities		   Total 
Balance at January 1, 2015  $(322)  $1   $(321)
Other comprehensive loss   (1,143)   -    (1,143)
Balance at September 30, 2015  $(1,465)  $1   $(1,464)

 

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 net sales by geographic area (in thousands):

 

   Three Months Ended 
   September 30, 
   2015   2014 
Revenues                    
The Americas  $13,360    67.4%  $12,323    60.9%
Asia-Pacific   4,968    25.0%   6,909    34.1%
Europe and Africa   1,516    7.6%   1,021    5.0%
Total  $19,844    100.0%  $20,253    100.0%

 

10 

 

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Revenues                    
The Americas  $38,947    71.1%  $24,553    59.8%
Asia-Pacific   13,173    24.1%   14,399    35.1%
Europe and Africa   2,629    4.8%   2,076    5.1%
Total  $54,749    100.0%  $41,028    100.0%

 

The following tables present our net sales by product line (in thousands):

 

   Three Months Ended 
   September 30, 
   2015   2014 
                 
Casino currency without RFID  $6,476    32.6%  $5,006    24.8%
Casino currency with RFID   850    4.3%   4,636    22.9%
Total casino currency   7,326    36.9%   9,642    47.7%
                     
Playing cards   6,628    33.4%   6,281    31.0%
Table accessories and other products   1,804    9.1%   672    3.3%
Table layouts   1,630    8.2%   1,790    8.8%
Dice   706    3.6%   609    3.0%
RFID solutions   485    2.4%   180    0.9%
Gaming furniture   390    2.0%   223    1.1%
Shipping   875    4.4%   856    4.2%
Total  $19,844    100.0%  $20,253    100.0%

 

   Nine Months Ended 
   September 30, 
   2015   2014 
                 
Casino currency without RFID  $13,102    23.9%  $11,270    27.5%
Casino currency with RFID   5,507    10.1%   9,297    22.7%
Total casino currency   18,609    34.0%   20,567    50.2%
                     
Playing cards   18,255    33.4%   9,468    23.0%
Table accessories and other products   5,372    9.8%   2,310    5.6%
Table layouts   4,754    8.7%   3,651    8.9%
Dice   2,043    3.7%   1,774    4.3%
RFID solutions   1,939    3.5%   556    1.4%
Gaming furniture   1,353    2.5%   1,056    2.6%
Shipping   2,424    4.4%   1,646    4.0%
Total  $54,749    100.0%  $41,028    100.0%

 

For the nine months ended September 30, 2015, no customer accounted for greater than 10% of revenues. For the nine months ended September 30, 2014, one customer accounted for 10% of revenues.

 

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

 

   September 30, 2015   December 31, 2014 
United States  $8,746   $8,199 
France   3,423    3,699 
Mexico   2,862    3,055 
Asia   111    134 
Total  $15,142   $15,087 

 

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

 

Intangible assets, net  September 30, 2015   December 31, 2014 
United States  $2,065   $2,249 
Asia   506    535 
France   4    10 
Total  $2,575   $2,794 

 

Note 12. Earnings per Share (EPS)

 

Shares used to compute basic and diluted earnings per share from operations are as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Weighted-average number of common shares outstanding - basic   7,929    7,916    7,924    7,916 
Potential dilution from equity grants   120    99    114    100 
Weighted-average number of common shares outstanding - diluted   8,049    8,015    8,038    8,016 

 

Note 13. Income Taxes

 

As of December 31, 2014, we had a valuation allowance of $2.0 million related to foreign tax credit carryovers. In the second quarter of 2015, the Company pledged all of the net assets of GPI Asia as collateral under the new Credit Agreement (see Note 8 – Debt). Under Section 956 of the Internal Revenue Code, this pledge results in a deemed dividend from GPI Asia to the Company of approximately $7.0 million in 2015, subjecting that amount to U.S. taxation. The Company is able to offset the taxes payable on this deemed dividend with foreign tax credits equal to the taxes previously paid in Macau S.A.R. on the earnings deemed repatriated plus unused foreign tax credit carryovers. As a result, the valuation allowance previously recorded was released into tax expense in the second quarter and will continue to be released through the remainder of 2015. Except for the amount of the deemed dividend, the Company continues to assert that earnings from GPI Asia will be permanently reinvested.

 

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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 results of operations and our present financial condition and should be read in conjunction with our consolidated condensed financial statements and related notes and the other financial information included in this Quarterly Report on Form 10-Q. The 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/A for the fiscal year ended December 31, 2014, filed with the SEC on March 20, 2015.

 

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/A for the fiscal year ended December 31, 2014, filed with the SEC on March 20, 2015.

 

Overview of Our Business

 

We custom manufacture and supply casino currency with multiple security and design options, playing cards, table layouts, gaming furniture, table accessories, dice, upholstery, and roulette wheels. We also provide multiple RFID technologies including low- and high-frequency RFID casino currency, RFID solutions for casino currency (consisting of low- and high-frequency RFID casino currency readers, antennas, casino currency authentication software, casino currency inventory software applications, and software maintenance services). Our products and services are used with casino table games such as blackjack, poker, baccarat, craps, and roulette. GPIC sells its casino table game equipment under the brand names of Paulson®, Bourgogne et Grasset® (BG®), Gemaco®, Blue Chip (BC®) and Bud Jones®.  GPIC is headquartered in Las Vegas, Nevada, with offices in Beaune, France; Macau S.A.R., China; San Luis Rio Colorado, Mexico; Blue Springs, Missouri; Atlantic City, New Jersey; and Gulfport, Mississippi. We sell our products to licensed casinos worldwide. We operate in one segment and have three operating subsidiaries: GPI USA (including GPI Mexicana, our maquiladora manufacturing operation in Mexico, and our manufacturing operation in Blue Springs, Missouri), GPI SAS, and GPI Asia. Our subsidiaries have the following distribution and product focus:

 

•GPI USA sells in the United States, Canada, the Caribbean, and Latin America. GPI USA sells our full product line, with most of the products manufactured in either San Luis Rio Colorado, Mexico, or Blue Springs, Missouri. The remainder is either manufactured in France or purchased from United States vendors. We warehouse inventory in San Luis, Arizona, Blue Springs, Missouri, and Las Vegas, Nevada. We have sales offices in 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 and upholstery that it manufactures in Macau S.A.R.

 

On July 1, 2014, GPIC started manufacturing and selling playing cards and table layouts under the Gemaco® brand name in connection with the GemGroup Acquisition. In December 2014, we completed the relocation of all our playing card production from Mexico to Gemaco’s facility in Blue Springs, Missouri in order to take advantage of their capacity and manufacturing expertise. The consolidation was part of our strategic plan to improve the efficiency of our playing card production and has provided savings in the manufacturing of playing cards. Further, the GemGroup Acquisition expanded our product offerings in the growing Asia-Pacific region as the Gemaco brand has a strong market presence in the Asia-Pacific layout business.

 

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. However, we anticipate such fluctuations to somewhat lessen as a result of the GemGroup Acquisition due to our increased market share of both playing cards and table layouts, two important sources of recurring revenue. Our backlog, which reflects signed orders, was as follows at September 30, 2015 and September 30, 2014 (in millions):

 

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    GPI USA   GPI Asia   GPI SAS   Total  
September 30, 2015   $ 5.9 million   $ 7.2 million   $ 0.4 million   $ 13.5 million  
September 30, 2014   $ 3.7 million   $ 5.7 million   $ 0.4 million   $ 9.8 million  

 

Outlook

 

The backlog at September 30, 2015 contains a significant order of $7.2 million for a new casino in Macau S.A.R. The order includes the Company’s Bourgogne et Grasset brand of plaques as well as the newly released V-Series American style chips. While we anticipate that all of the orders included in the September 30, 2015 backlog will ship to customers by December 31, it is possible that production delays or customer requests for later ship dates could result in some of this revenue being recognized in 2016. Moreover, not all of the potential revenue for the current year is included in the backlog, in that orders are often signed and shipped in the same quarter.

 

Due to the nature of the Company’s business, future revenue streams are subject to a number of conditions beyond its control. Global economic conditions have had a well-publicized negative impact on casino revenues throughout the world. In particular, the slowdown of the Chinese economy continues to impact both the timing and size of orders (i.e. number of new tables scheduled to come on-line) in what had been the single largest growth area in the casino business. We continue to monitor these conditions closely, and work with customers to understand and meet their needs.

  

Financial and Operational Highlights

 

For the third quarter of 2015, our revenues were $19.9 million, a decrease of $0.4 million, or 2.0%, compared to revenues of $20.3 million for the same period of 2014.  For the third quarter of 2015, our net income was $1.7 million, compared to a net income of $2.8 million for the same period in 2014. The decrease in net income was primarily due to an increase in bad debt expense in 2015, and the absence of a tax benefit similar to the income tax benefit recorded in the third quarter of 2014.

 

For the first nine months of 2015, our revenues were $54.7 million, an increase of $13.7 million, or 33.4%, compared to revenues of $41.0 million for the same period of 2014. For the first nine months of 2015, our net income was $3.5 million, compared to net income of $0.5 million for the same period of 2014. The increase was primarily due to the additional revenue generated and synergies created as a result of the GemGroup Acquisition.

 

GPI SAS uses the euro as its functional currency. At September 30, 2015 and December 31, 2014, the U.S. dollar to euro exchange rates were $1.12 and $1.22, respectively, which represents a 8.2% stronger dollar compared to the euro. The average exchange rates for the nine months ended September 30, 2015 and 2014 were $1.11 and $1.36, respectively, which represents a 18.4% stronger dollar compared to the euro.

 

GPI Mexicana uses the U.S. dollar as its functional currency. At September 30, 2015 and December 31, 2014, the Mexican peso to U.S. dollar exchange rates were 17.08 and 14.47, respectively, which represents a 18.0% stronger dollar compared to the peso. The average exchange rates for the nine months ended September 30, 2015 and 2014 were 15.57 pesos and 13.11 pesos to the U.S. dollar, respectively, which represents a 18.8% stronger dollar compared to the Mexican peso.

 

GPI Asia uses the U.S. dollar as its functional currency. We believe the impact of the Macanese pataca to U.S. dollar exchange rate is immaterial because of the number of transactions using the local currency is minimal.

 

Other Matters

 

On June 26, 2015, the Company 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 (see Note 8 – Debt).

 

CRITICAL ACCOUNTING ESTIMATES

 

Our consolidated condensed financial statements included in this report, 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 condensed consolidated financial statements are prepared using the same critical accounting estimates discussed in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2014, filed with the SEC on March 20, 2015. 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.

 

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RESULTS OF OPERATIONS

 

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

 

   Three Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Revenues  $19,844    100.0%  $20,253    100.0%  $(409)   (2.0)%
Cost of revenues   13,391    67.5%   13,447    66.4%   (56)   (0.4)%
Gross profit   6,453    32.5%   6,806    33.6%   (353)   (5.2)%
Selling, administrative, and research and development   4,431    22.3%   4,205    20.8%   226    5.4%
Operating income   2,022    10.2%   2,601    12.8%   (579)   (22.3)%
Other income, net   127    0.6%   127    0.6%   -    0.0%
Income before income taxes   2,149    10.8%   2,728    13.4%   (579)   (21.2)%
Income tax provision (benefit)   474    2.4%   (40)   (0.2)%   514    1,285.0%
Net income  $1,675    8.4%  $2,768    13.6%  $(1,093)   (39.5)%

 

   Nine Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Revenues  $54,749    100.0%  $41,028    100.0%  $13,721    33.4%
Cost of revenues   37,338    68.2%   28,710    70.0%   8,628    30.1%
Gross profit   17,411    31.8%   12,318    30.0%   5,093    41.3%
Selling, administrative, and research and development   13,148    24.0%   11,815    28.8%   1,332    11.3%
Operating income   4,263    7.8%   503    1.2%   3,761    747.6%
Other income, net   59    0.1%   232    0.6%   (173)   (74.6)%
Income before income taxes   4,322    7.9%   735    1.8%   3,588    488.1%
Income tax provision   832    1.5%   252    0.6%   580    230.2%
Net income  $3,490    6.4%  $483    1.2%  $3,008    622.7%

 

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

 

   Three Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Revenues                              
The Americas  $13,360    67.4%  $12,323    60.9%  $1,037    8.4%
Asia-Pacific   4,969    25.0%   6,909    34.1%   (1,940)   (28.1%)
Europe and Africa   1,516    7.6%   1,021    5.0%   495    48.5%
Total  $19,844    100.0%  $20,253    100.0%  $(409)   (2.0%)

 

   Nine Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Revenues                              
The Americas  $38,947    71.1%  $24,553    59.8%  $14,394    58.6%
Asia-Pacific   13,173    24.1%   14,399    35.1%   (1,226)   (8.5%)
Europe and Africa   2,629    4.8%   2,076    5.1%   553    26.6%
Total  $54,749    100.0%  $41,028    100.0%  $13,721    33.4%

 

16 

 

 

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

 

   Three Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
                         
Casino currency without RFID  $6,476    32.6%  $5,006    24.8%  $1,470    29.4%
Casino currency with RFID   850    4.3%   4,636    22.9%   (3,786)   (81.7%)
Total casino currency   7,326    36.9%   9,642    47.7%   (2,316)   (24.0%)
                               
Playing cards   6,628    33.4%   6,281    31.0%   347    5.5%
Table accessories and other products   1,804    9.1%   672    3.3%   1,132    168.4%
Table layouts   1,630    8.2%   1,790    8.8%   (160)   (8.9%)
Dice   706    3.6%   609    3.0%   97    16.0%
RFID solutions   485    2.4%   180    0.9%   305    169.4%
Gaming furniture   390    2.0%   223    1.1%   167    75.0%
Shipping   875    4.4%   856    4.2%   19    2.2%
Total  $19,844    100.0%  $20,253    100.0%  $(409)   (2.0%)

 

   Nine Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
                         
Casino currency without RFID  $13,102    23.9%  $11,270    27.5%  $1,832    16.3%
Casino currency with RFID   5,507    10.1%   9,297    22.7%   (3,790)   (40.8%)
Total casino currency   18,609    34.0%   20,567    50.2%   (1,958)   (9.5%)
                               
Playing cards   18,255    33.4%   9,468    23.0%   8,787    92.8%
Table accessories and other products   5,372    9.8%   2,310    5.6%   3,062    132.5%
Table layouts   4,754    8.7%   3,651    8.9%   1,103    30.2%
Dice   2,043    3.7%   1,774    4.3%   269    15.1%
RFID solutions   1,939    3.5%   556    1.4%   1,383    248.8%
Gaming furniture   1,353    2.5%   1,056    2.6%   297    28.2%
Shipping   2,424    4.4%   1,646    4.0%   778    47.3%
Total  $54,749    100.0%  $41,028    100.0%  $13,721    33.4%

 

Comparison of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

 

Revenues. For the three months ended September 30, 2015, our revenues were $19.9 million, a decrease of $0.4 million, or 2.0%, compared to revenues of $20.3 million for the same period of 2014.  The decrease was primarily due to a decrease in casino currency revenue largely offset by an increase in consumable products.

 

For the nine months ended September 30, 2015, our revenues were $54.7 million, an increase of $13.7 million, or 33.4%, compared to revenues of $41.0 million for the same period of 2014. The increase in revenues was primarily attributable to the additional business generated by the GemGroup Acquisition.

 

Cost of Revenues. For the three months ended September 30, 2015, cost of revenues was $13.4 million, which was relatively flat compared to cost of revenues for the same period in 2014.

 

For the nine months ended September 30, 2015, cost of revenues was $37.3 million, an increase of $8.6 million, or 30.1%, compared to cost of revenues of $28.7 million for the same period in 2014. As a percentage of revenues, our cost of revenues decreased to 68.2% in 2015 compared to 70.0% in 2014. The increased cost of revenues was primarily attributable to the additional business generated by the GemGroup Acquisition. The decrease in our cost of revenues as a percent of revenues was primarily due to efficiency improvement in our playing card production as a result of completing the relocation of all our playing card production from Mexico to our facility in Blue Springs, Missouri.

  

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Gross Profit. For the three months ended September 30, 2015, gross profit was $6.5 million, a decrease of $0.3 million, or 5.2%, compared to gross profit of $6.8 million for the same period in 2014. As a percentage of revenues, our gross profit decreased to 32.5% from 33.6%.

 

For the nine months ended September 30, 2015, gross profit was $17.4 million, an increase of $5.1 million, or 41.3%, compared to gross profit of $12.3 million for the same period in 2014. The increase in gross profit for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily due to the additional business generated by the GemGroup Acquisition. As a percentage of revenues, our gross profit increased to 31.8% from 30.0%. The gross profit percent improvements for the nine months ended September 30, 2015, were primarily due to efficiency improvement in our playing card production as a result of completing the relocation of all our playing card production from Mexico to our facility in Blue Springs, Missouri. An additional factor was a stronger dollar as compared to the euro.

  

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

 

   Three Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Marketing and sales  $1,616    8.1%  $1,840    9.1%  $(224)   (12.2%)
General and administrative   2,565    12.9%   2,041    10.1%   524    25.7%
Research and development   250    1.3%   324    1.6%   (74)   (22.8%)
Total selling, administrative, and research and development  $4,431    22.3%  $4,205    20.8%  $226    5.4%

 

For the three months ended September 30, 2015, selling, administrative, and research and development expenses were $4.4 million, an increase of $0.2 million, or 5.4%, compared to selling, administrative, and research and development expenses of $4.2 million during the same period in 2014. Selling, administrative, and research and development expenses remained relatively flat as a percent of revenue in the third quarter of 2015 as compared to the same period in 2014.

 

Marketing and sales expenses decreased $0.2 million for the three months ended September 30, 2015 as compared to the same period in 2014. This was primarily due to staff reductions.

 

General and administrative expenses increased $0.5 million for the three months ended September 30, 2015 as compared to the same period in 2014. This was primarily due to an increase in bad debt expense and legal fees.

 

Research and development expenses remained relatively flat for the three months ended September 30, 2015 as compared to the same period in 2014.

  

   Nine Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Marketing and sales  $4,800    8.8%  $4,486    10.9%  $314    7.0%
General and administrative   7,448    13.6%   6,151    15.0%   1,296    21.1%
Research and development   900    1.6%   1,178    2.9%   (278)   (23.6%)
Total selling, administrative, and research and development  $13,147    24.0%  $11,815    28.8%  $1,332    11.3%

 

For the nine months ended September 30, 2015, selling, administrative, and research and development expenses were $13.1 million, an increase of $1.3 million, or 11.3% compared to selling, administrative, and research and development expenses of $11.8 million during the same period in 2014. Selling, administrative, and research and development expenses decreased as a percent of revenue to 24.0% in the first nine months of 2015 from 28.8% in the same period in 2014 as revenues increased faster than expenses.

 

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Marketing and sales expenses increased by $0.3 million during the first nine months of 2015, compared to the same period in 2014 which was primarily due to an increase in sales expenses for additional personnel associated with the GemGroup Acquisition.

 

General and administrative expenses increased by $1.3 million during the first nine months of 2015, compared to the same period in 2014. This was primarily due to an increase in personnel and other general and administrative expenses associated with the GemGroup Acquisition, and an increase of $0.6 million in bad debt expense due to customer bankruptcy filings.

  

Research and development expenses decreased by $0.3 million during the first nine months of 2015, compared to the same period in 2014 primarily due to staff reductions.

 

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

 

   Three Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Interest income  $3    0.0%  $3    0.0%  $-    0.0%
Interest expense   (64)   (0.3%)   (64)   (0.3%)   -    0.0%
Gain on foreign currency transactions   185    0.9%   186    0.9%   (1)   (0.5%)
Other income   3    0.0%   2    0.0%   1    50.0%
Total other income  $127    0.6%  $127    0.6%  $-    0.0%

 

   Nine Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
Interest income  $16    0.0%  $130    0.3%  $(114)   (87.7%)
Interest expense   (188)   (0.3%)   (64)   (0.2%)   (124)   193.8%
Gain on foreign currency transactions   151    0.3%   159    0.5%   (8)   (5.0%)
Other income   80    0.1%   7    0.0%   73    1,042.9%
Total other income  $59    0.1%  $232    0.6%  $(173)   (74.6%)

 

Income Taxes. Our effective income tax rate for the three months ended September 30, 2015 and 2014 was 22.1% and (1.5%), respectively. As of December 31, 2014, we had a valuation allowance of $2.0 million related to foreign tax credit carryovers. During the second quarter of 2015, the Company pledged all of the net assets of GPI Asia as collateral under the new Credit Agreement. Under Section 956 of the Internal Revenue Code, this pledge results in a deemed dividend from GPI Asia to the Company of approximately $7 million in 2015, subjecting that amount to U.S. taxation. The Company is able to offset the taxes payable on this deemed dividend with foreign tax credits equal to the taxes previously paid in Macau S.A.R. on the earnings deemed repatriated plus unused foreign tax credit carryovers. As a result, the valuation allowance previously recorded was released into tax expense in the second quarter and will continue to be released through the remainder of 2015. Related to this, there was a discrete benefit of approximately $0.2 million recorded through the second quarter of 2015, with minimal change in the third quarter of 2015.

 

Our effective income tax rate for the nine months ended September 30, 2015 and 2014 was 19.2% and 34.6%, respectively. Our effective tax rate for the nine months ended September 30, 2015 was favorably affected by the release of the valuation allowance related to foreign tax credits, the foreign rate differential on income from GPI Asia, and the benefit from a research credit from our French subsidiary, GPI SAS; partially offset by the current year tax impact of a deemed dividend from GPI Asia and our Subpart F income adjustment. Without the discrete release in the valuation allowance related to foreign tax credits, our effective tax rate for the three and nine months ended September 30, 2015 would have been 22.2% and 23.1%, respectively.

 

We account for uncertain tax positions in accordance with applicable accounting guidance. In 2015, the French Tax Administration started an examination of GPI SAS for tax years 2013 and 2012. There were no unrecognized tax benefits reported at September 30, 2015 or December 31, 2014.

 

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Liquidity and Capital Resources

 

Sources of Liquidity and Capital Resources. Historically, our primary source of liquidity and capital resources 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, 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 repaid its existing $10.0 million demand line of credit with HSBC Bank USA, National Association (HSBC) on June 26, 2015. The Company has not drawn any funds under the Revolving Loan.

 

Interest on funds borrowed under the Term Loan and the Revolving Loan will be charged at a rate per annum equal to LIBOR plus 2.25%. The Term Loan has a straight-line seven year amortization schedule. The Credit Agreement is guaranteed by GPIC and its subsidiaries GPI USA and GPI Asia.

 

Other potential sources of capital include, but are not limited to, marketable securities and bank credit facilities both in the United States and abroad. We believe that the combination of these resources will satisfy our needs for working capital, capital expenditures, purchases of common stock under our stock repurchase program, litigation, dividends or acquisitions.

 

At September 30, 2015, we had $12.8 million in cash and cash equivalents and $5.4 million in marketable securities, totaling $18.2 million. Of this amount, $7.2 million is held by GPI USA, $6.2 million is held by GPI SAS, and $4.8 million is held by GPI Asia. Of those amounts held outside of the United States, we would be subject to taxation in the United States if we were to repatriate those amounts, though foreign tax credits may be available to offset such taxes. All of the amounts currently held in Asia could be repatriated tax free due to the deemed dividend from GPI Asia (see Note 13 – Income Tax). Except for the amount of the deemed dividend, the Company continues to assert that earnings from GPI Asia will be permanently reinvested. We may repatriate amounts from GPI SAS and, accordingly, our consolidated condensed financial statements reflect the tax impacts that would result from repatriation.

 

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

 

   September 30,   December 31,   Period-to-Period 
   2015   2014   Change 
Cash and cash equivalents  $12,829   $8,969   $3,860    43.0%
Marketable securities   5,353    3,597    1,756    48.8%
Working capital   27,331    16,195    11,136    68.8%
Current ratio   2.6    1.8           

 

At September 30, 2015, working capital totaled $27.3 million, an increase of $11.1 million, or 68.8%, compared to working capital of $16.2 million at December 31, 2014. This increase was due to an increase in current assets of $8.5 million and a decrease in current liabilities of $2.6 million. The increase in current assets was primarily related to an increase in cash and marketable securities of $5.6 million, an increase of $1.7 million in inventories, an increase in other current assets of $0.5 million, an increase in deferred tax assets of $0.4 million, and an increase in net accounts receivable of $0.3 million. The decrease in current liabilities is primarily related to the payoff of the $10.0 million demand line of credit somewhat offset by $1.3 million of current portion of the seven-year term loan, a $4.3 million increase in customer deposits and deferred revenue, and a $1.7 million increase in payables.

 

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

 

   Nine Months Ended         
   September 30,   Period-to-Period 
   2015   2014   Change 
                 
Operating activities  $8,711   $1,931   $6,780    351.1%
Investing activities   (4,261)   (16,229)   11,968    73.7%
Financing activities   (238)   10,000    (10,238)   (102.4%)
Effect of exchange rates   (352)   (449)   97    21.6%
Net change  $3,860   $(4,747)  $8,607    181.3%

 

The increase in cash flows provided by operating activities was primarily caused by an increase in net income of $3.0 million, an increase in assets of $1.1 million, an increase in liabilities of $2.9 million, and a decrease in non-cash items of $0.2 million.

 

The decrease in cash flows used by investing activities was primarily due to the decrease in the purchase of business assets somewhat offset by the net purchase of marketable securities of $2.0 million and capital expenditures of $2.3 million.

 

The decrease in cash flows provided by financing activities was due to the payoff of the HSBC $10.0 million demand line of credit.

 

Capital Expenditures. We plan to purchase approximately $1.5 million in property, plant, and equipment during the remainder of 2015. In the first nine months of 2015, we purchased $2.3 million of property, plant, and equipment.

 

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

 

Backlog. At September 30, 2015, our backlog of signed orders for 2015 was $13.5 million, consisting of $7.2 million for GPI Asia, $5.9 million for GPI USA, and $0.4 million for GPI SAS. At September 30, 2014, our backlog of signed orders was $9.8 million, consisting of $5.7 million for GPI Asia, $3.7 million for GPI USA, and $0.4 million for GPI SAS.

 

Contractual Obligations and Commercial Commitments

 

On June 26, 2015, the Company 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 (see Note 8 – Debt).

 

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.

 

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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/A for the fiscal year ended December 31, 2014, filed with the SEC on March 20, 2015. 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 the 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 September 30, 2015. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2015, 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 is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and (ii) is 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

 

Management has determined that 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 September 30, 2015, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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

 

No common shares were repurchased by the Company in the third quarter or first nine months of 2015.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

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ITEM 6. EXHIBITS

 

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 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

 

 

 

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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: November 12, 2015 By: /s/ Gregory S. Gronau
    Gregory S. Gronau
    President and Chief Executive Officer
     
Date: November 12, 2015 By: /s/ Alain Thieffry
    Alain Thieffry
    Chief Financial Officer, and Chairperson of the Board

 

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