GPIC Gaming Partners International Corp.

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, 2015, filed with the SEC on March 24, 2016.

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, 2015, filed with the SEC on March 24, 2016.

Overview of Our Business

We custom manufacture and supply casino currency, with multiple security and design options, playing cards, table layouts, gaming furniture, table accessories, dice, and roulette wheels. We also provide multiple RFID technologies including low- and high-frequency RFID casino currency, RFID solutions for casino currency (consisting of low- and high-frequency RFID casino currency readers, antennas, casino currency authentication software, casino currency inventory software applications, and software maintenance services). Our products and services are used with casino table games such as blackjack, poker, baccarat, craps, and roulette. GPIC sells its casino table game equipment under the brand names of Paulson ^® , Bourgogne et Grasset ^® (BG ^® ), Gemaco ^® , Blue Chip ^® (BC ^® ), Dolphin ^® and Bud Jones ^® .

GPIC is headquartered in North Las Vegas, Nevada, with offices in Blue Springs, Missouri; Atlantic City, New Jersey; Gulfport, Mississippi; San Luis Rio Colorado, Mexico; Beaune, France; and Macau S.A.R., China. We primarily sell our products to licensed casinos worldwide. We operate in one segment and have three operating subsidiaries: GPI USA (including GPI Mexicana, our maquiladora manufacturing operation in Mexico, and our manufacturing operation in Blue Springs, Missouri), GPI SAS, and GPI Asia. Our subsidiaries have the following distribution and product focus:

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 continue to experience steady growth in our consumable products which now represent a significant percentage of our overall revenues. Our backlog, which reflects signed orders scheduled to be delivered in the following twelve months, was as follows at September 30, 2016 and September 30, 2015 (in millions):

Outlook

The acquisition of Dolphin’s assets strengthened our position in the growing Asian market. We anticipate shipping our first orders under the Dolphin brand in the fourth quarter of 2016. While there are a number of casinos scheduled to open in 2016 and 2017 in Macau, continuing uncertainty arising from regulators’ decisions on the timing of openings and the number of tables allotted to each new casino will impact both the amount of revenue we recognize and the timing of revenue recognition.

In the Americas, we have continued to experience steady growth in our playing cards product line. This has the promise of continuing to provide the Company with a more consistent and predictable revenue stream. To support this growth and to allow for additional growth in the future, we anticipate finalizing the expansion of our Blue Springs manufacturing facility in the fourth quarter of 2016.

Financial and Operational Highlights

For the third quarter of 2016, our revenues were $22.6 million, an increase of $2.8 million, or 13.7%, compared to revenues of $19.8 million for the same period of 2015. For the third quarter of 2016, our net income was $2.4 million, an increase of $0.7 million compared to net income of $1.7 million for the same period in 2015.

For the first nine months of 2016, our revenues were $59.0 million, an increase of $4.3 million, or 7.8%, compared to revenues of $54.7 million for the same period of 2015. For the first nine months of 2016, our net income was $4.4 million, compared to net income of $3.5 million for the same period of 2015.

The increase in our net income for the three months and the nine months ended September 30, 2016, compared to the same periods in 2015, is primarily due to an increase in casino currency sales and a decrease in our general and administrative 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.

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, 2015, filed with the SEC on March 24, 2016. 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.

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

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

Comparison of Operations for the Three Months and Nine Months Ended September 30, 2016 and 2015

Revenues . For the three months ended September 30, 2016, our revenues were $22.6 million, an increase of $2.8 million, or 13.7%, compared to revenues of $19.8 million for the same period of 2015. The increase was primarily due to an increase in the casino currency, the gaming furniture and the RFID solutions product lines.

For the nine months ended September 30, 2016, our revenues were $59.0 million, an increase of $4.3 million, or 7.8%, compared to revenues of $54.7 million for the same period of 2015. The increase in revenues was primarily attributable to an increase in the casino currency and the playing cards product lines.

Cost of Revenues. For the three months ended September 30, 2016, cost of revenues was $15.0 million, an increase of $1.6 million, or 12.3%, compared to cost of revenues of $13.4 million for the same period in 2015. As a percentage of revenues, our cost of revenues decreased to 66.7% in 2016 compared to 67.5% in 2015. The increased cost of revenues was driven by the same factors described under Revenues above and Gross Profit below.

For the nine months ended September 30, 2016, cost of revenues was $40.2 million, an increase of $2.9 million, or 7.6%, compared to cost of revenues of $37.3 million for the same period in 2015. As a percentage of revenues, our cost of revenues decreased to 68.1% in 2016 compared to 68.2% in 2015. The increased cost of revenues was driven by the same factors described under Revenues above and Gross Profit below.

Gross Profit. For the three months ended September 30, 2016, gross profit was $7.5 million, an increase of $1.0 million, or 16.6%, compared to gross profit of $6.5 million for the same period in 2015. As a percentage of revenues, our gross profit increased to 33.3% from 32.5%.

For the nine months ended September 30, 2016, gross profit was $18.8 million, an increase of $1.4 million, or 8.0%, compared to gross profit of $17.4 million for the same period in 2015. As a percentage of revenues, our gross profit increased to 31.9% from 31.8%.

The amount of gross profit increase and the improvement in gross margins for the three months and the nine months ended September 30, 2016, compared to the same periods in 2015, is primarily due to the increase in casino currency sales.

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

For the three months ended September 30, 2016, selling, administrative, and research and development expenses were $4.0 million, a decrease of $0.4 million, or 8.8%, compared to selling, administrative, and research and development expenses of $4.4 million during the same period in 2015. Selling, administrative, and research and development expenses decreased as a percentage of revenue to 17.9% in the third quarter of 2016 from 22.3% in the same period in 2015.

Marketing and sales expenses and research and development expenses remained relatively unchanged in the three months ended September 30, 2016, compared to the same period in 2015.

General and administrative expenses decreased by $0.4 million during the three months ended September 30, 2016, compared to the same period in 2015, primarily due to decreases of $0.2 million in our bad debt accrual and $0.1 million in legal fee expense.

For the nine months ended September 30, 2016, selling, administrative, and research and development expenses were $12.5 million, a decrease of $0.6 million, or 5.0% compared to selling, administrative, and research and development expenses of $13.1 million during the same period in 2015. Selling, administrative, and research and development expenses decreased as a percentage of revenue to 21.2% in the first nine months of 2016 from 24.0% in the same period in 2015.

Marketing and sales expenses decreased by $0.1 million during the first nine months of 2016, compared to the same period in 2015, primarily due to a decrease in compensation and related costs.

General and administrative expenses decreased by $0.6 million during the first nine months of 2016, compared to the same period in 2015. This was primarily due to decreases of $0.7 million in bad debt expense and $0.4 million in compensation and related costs, offset by increases of $0.2 million in information technology license expense, $0.1 million in legal fees and $0.1 million in rent costs.

Research and development expenses remained relatively unchanged during the first nine months of 2016 compared to the same period in 2015.

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

GPI SAS uses the euro as its functional currency. At September 30, 2016 and December 31, 2015, the U.S. dollar to euro exchange rates were $1.12 and $1.09, respectively, which represents a 2.8% weaker dollar compared to the euro. The average exchange rates for the nine months ended September 30, 2016 and 2015 were stable at $1.12.

GPI Mexicana uses the U.S. dollar as its functional currency. At September 30, 2016 and December 31, 2015, the Mexican peso to U.S. dollar exchange rates were 19.50 pesos and 17.21 pesos, respectively, which represents a 13.3% stronger dollar compared to the Mexican peso. The peso to U.S. dollar average exchange rates for the nine months ended September 30, 2016 and 2015 were 18.31 pesos and 15.57 pesos, respectively, which represents a 17.6% stronger dollar compared to the Mexican peso.

GPI Asia uses the U.S. dollar as its functional currency. At September 30, 2016 and December 31, 2015, the Macau pataca to U.S. dollar exchange rates were 8.16 patacas and 8.19 patacas, respectively, which represents a 0.4% weaker dollar compared to the Macau pataca. The Macau pataca to U.S. dollar average exchange rates for the nine months ended September 30, 2016 and 2015 were 8.17 patacas and 8.15 patacas, respectively, which represents a 0.3% stronger dollar compared to the Macau pataca.

Income Taxes. Our effective income tax rate for the three months ended September 30, 2016 and 2015 was 30.6% and 22.1%, respectively. Our effective tax rate for the three months ended September 30, 2016 was favorably affected by the foreign rate differential on income from our Macau S.A.R. subsidiary, GPI Asia, and the benefit from a research credit from our French subsidiary, GPI SAS, partially offset by our Subpart F income adjustment. Our effective tax rate for the three months ended September 30, 2015 was favorably affected by 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 2015 tax impact of a deemed dividend from GPI Asia and our Subpart F income adjustment.

Our effective income tax rate for the nine months ended September 30, 2016 and 2015 was 29.3% and 19.3%, respectively. Our effective tax rate for the nine months ended September 30, 2016 was favorably affected by the foreign rate differential on income from GPI Asia, and the benefit from a research credit from GPI SAS, partially offset by our Subpart F income adjustment. 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 GPI SAS, partially offset by the 2015 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 nine months ended September 30, 2015 would have been 23.1%.

We account for uncertain tax positions in accordance with applicable accounting guidance. At December 31, 2015, we reported unrecognized tax benefits related to the French Tax Administration’s examination of GPI SAS for tax years 2013 and 2012. As of September 30, 2016, there was no change to the unrecognized tax benefits reported at December 31, 2015.

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 which will mature on June 26, 2022, 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.

Other potential sources of capital include, but are not limited to, additional bank credit facilities and the sale of stock. We believe we have the resources to satisfy our 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 September 30, 2016, the Company had $10.5 million in cash and cash equivalents. Of this amount, $5.0 million is held by GPI Asia, $2.9 million is held by GPI USA, $1.7 million is held by GPI SAS and $0.9 million is held by GPI Mexicana. Of those amounts held in France by GPI SAS and in Mexico by GPI Mexicana, we would be subject to taxation in the United States if we were to repatriate those amounts, though foreign tax credits may be available to offset such taxes. All of the amounts currently held in Asia by GPI Asia could be repatriated tax free due to the deemed dividend from GPI Asia. 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 unaudited condensed consolidated financial statements reflect the tax impacts that would result from repatriation.

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

At September 30, 2016, working capital totaled $27.0 million, a decrease of $4.1 million when compared to working capital of $31.1 million at December 31, 2015. The change in cash is mostly due to capital expenditures, including the Dolphin asset acquisition. See Note 2 to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

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

The increase in cash flows used by operating activities was primarily caused by an increase in assets, a decrease in accounts payable and accrued liabilities, partially offset by an increase in customer deposits and deferred revenue.

The increase in cash flows used by investing activities was primarily due to an increase in capital expenditures, including the Dolphin acquisition, partially offset by a decrease in net purchases of marketable securities.

The increase in cash flows used by financing activities was primarily due to an increase in principal payments on long-term debt.

C apital Expenditures . We intend to purchase approximately $3.0 million in property and equipment during the remainder of 2016. This is primarily related to the expansion of our Blue Springs, Missouri facility described below at “Contractual Obligations and Commercial Commitments.”

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 in the future.

Backlog . At September 30, 2016, our backlog of signed orders for the next twelve months was $19.1 million, consisting of $10.1 million for GPI Asia, $8.4 million for GPI USA, and $0.6 million for GPI SAS. At September 30, 2015, the backlog of signed orders for the next twelve months was $17.2 million, consisting of $9.1 million for GPI Asia, $7.7 million for GPI USA, and $0.4 million for GPI SAS.

Contractual Obligations and Commercial Commitments

On May 11, 2016, the Company purchased certain assets dedicated to the design and manufacture of chips and plaques for gaming tables from EGT and Dolphin as described in Note 2 to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

On February 24, 2016, the Company entered into a construction contract with Miller Staunch Construction Co., Inc. (Contractor) to expand its Blue Springs, Missouri manufacturing facility. The Blue Springs building expansion is expected to be completed before the end of the fourth quarter of 2016 for a fixed price of $2.2 million, subject to any additions or deductions agreed to by the Company and the Contractor. The Company expects to fund the construction of the Blue Springs expansion with available cash and cash from operations.

On December 30, 2015, the Company sold its building and land in Las Vegas, Nevada to an unrelated third party for $3.95 million in cash. In early 2016, the Company relocated its headquarters to 3945 West Cheyenne Avenue, North Las Vegas, Nevada. The lease term for the building (approximately 15,000 square feet) is seven years commencing on January 1, 2016 for approximately $16,000 per month.

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 described in Note 8 to the unaudited condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Forward-Looking Information Statements and Risk Factors

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

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties such as those identified in Part I-Item 1A. “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 24, 2016. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.