10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

For the Quarterly Period Ended September 30, 2016.

or

☐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 001-37584

CPI Card Group Inc.

(Exact name of the registrant as specified in its charter)

Delaware	26-0344657
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)
10368 West Centennial Road
Littleton, CO	80127
(Address of principal executive offices)	(Zip Code)

(303) 973-9311

(Registrant’s telephone number, including area code)

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☒     No☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes☒     No☐

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
(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☐     No☒

Number of shares of Common Stock, $0.001 par value, outstanding as of November 4, 2016: 55,293,251

Table of Contents

	Page
Part I — Financial Information
Item 1 — Financial Statements (Unaudited)	3
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	32
Item 4 — Controls and Procedures	32
Part II — Other Information
Item 1 — Legal Proceedings	34
Item 1A — Risk Factors	35
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6 — Exhibits	36
Signatures	37

2

Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in Thousands, Except Share and Per Share Amounts)

	September 30,		December 31,
	2016		2015
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	21,270	$	13,606
Accounts receivable, net of allowances of $269 and $212, respectively		42,663		52,538
Inventories		23,384		25,640
Prepaid expenses and other current assets		4,203		4,260
Income taxes receivable		1,234		4,975
Total current assets		92,754		101,019
Plant, equipment and leasehold improvements, net		55,098		52,113
Intangible assets, net		50,355		53,988
Goodwill		72,339		73,123
Other assets		166		110
Total assets	$	270,712	$	280,353
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	13,408	$	17,832
Accrued expenses		15,598		11,315
Deferred revenue and customer deposits		5,082		3,874
Current maturities of long-term debt		—		9,000
Total current liabilities		34,088		42,021
Long-term debt, net of current maturities		301,437		300,000
Deferred income taxes		23,112		24,073
Other long-term liabilities		1,030		869
Total liabilities		359,667		366,963
Commitments and contingencies (Note 12)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; no shares issued and outstanding		—		—
Stockholders’ deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,293,251 and 56,542,116 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		55		56
Capital deficiency		(115,778)		(119,028)
Accumulated earnings		32,481		36,661
Accumulated other comprehensive loss		(5,713)		(4,299)
Total stockholders’ deficit		(88,955)		(86,610)
Total liabilities and stockholders’ deficit	$	270,712	$	280,353

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Net sales:
Products	$	37,482	$	65,567	$	132,535	$	178,338
Services		43,720		42,130		108,785		102,205
Total net sales		81,202		107,697		241,320		280,543
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		23,583		39,870		87,248		111,017
Services (exclusive of depreciation and amortization shown below)		25,855		22,463		64,682		58,047
Depreciation and amortization		2,701		2,315		7,928		7,087
Total cost of sales		52,139		64,648		159,858		176,151
Gross profit		29,063		43,049		81,462		104,392
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		15,838		14,485		46,969		41,175
Depreciation and amortization		1,529		1,503		4,602		4,771
Restructuring charges (Note 1)		—		681		—		681
Total operating expenses		17,367		16,669		51,571		46,627
Income from operations		11,696		26,380		29,891		57,765
Other expense, net:
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)
Foreign currency (loss) gain		(124)		(34)		(192)		115
Loss on debt modification and early extinguishment		—		(703)		—		(703)
Other income, net		3		295		17		356
Total other expense, net		(5,129)		(5,066)		(15,284)		(8,361)
Income before income taxes		6,567		21,314		14,607		49,404
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Net income from continuing operations		4,026		14,760		9,413		32,876
Discontinued operations:
Loss from a discontinued operation, net of taxes (Note 2)		—		—		—		(606)
Gain on sale of a discontinued operation, net of taxes (Note 2)		—		—		—		887
Net income	$	4,026	$	14,760	$	9,413	$	33,157
Preferred stock dividends		—		(7,096)		—		(32,454)
Income attributable to common stockholders	$	4,026	$	7,664	$	9,413	$	703
Basic and diluted earnings per share:
Continuing operations	$	0.07	$	0.19	$	0.17	$	0.01
Discontinued operation		—		—		—		0.01
	$	0.07	$	0.19	$	0.17	$	0.02
Dividends declared per common share	$	0.045	$	—	$	0.135	$	—
Comprehensive Income
Net income	$	4,026	$	14,760	$	9,413	$	33,157
Currency translation adjustment		(465)		(878)		(1,414)		(1,224)
Total comprehensive income	$	3,561	$	13,882	$	7,999	$	31,933

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2016		2015
Operating activities
Net income	$	9,413	$	33,157
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		12,530		11,858
Stock-based compensation expense		2,785		2,137
Amortization of debt issuance costs and debt discount		1,437		594
Loss on debt modification and early extinguishment		—		703
Loss on sale of a discontinued operation		—		1,039
Excess tax benefits from stock-based compensation		(526)		—
Deferred income taxes		(445)		11,304
Other, net		220		1,162
Changes in operating assets and liabilities:
Accounts receivable		9,053		(13,045)
Inventories		1,978		(5,719)
Prepaid expenses and other assets		(32)		(1,130)
Income taxes		4,522		(6,264)
Accounts payable		(4,352)		1,893
Accrued expenses		1,699		4,057
Deferred revenue and customer deposits		1,307		3,207
Other liabilities		183		(523)
Cash provided by operating activities		39,772		44,430
Investing activities
Acquisitions of plant, equipment and leasehold improvements		(12,369)		(13,866)
Proceeds from sale of a discontinued operation		—		5,000
Cash used in investing activities		(12,369)		(8,866)
Financing activities
Payment of long-term debt		—		(170,929)
Payment of Sellers Note		(9,000)		—
Proceeds from First Lien Term Loan		—		435,000
Loan issuance costs		—		(17,773)
Dividend distribution on Series A Preferred Stock		—		(220,742)
Redemption of preferred and common stock		—		(55,992)
Common stock repurchased		(6,008)		—
Dividends paid on common stock		(5,031)		—
Proceeds from employee note receivable		—		108
Excess tax benefits from stock-based compensation		526		—
Payment of deferred IPO cost		—		(2,138)
Cash used in financing activities		(19,513)		(32,466)
Effect of exchange rates on cash		(226)		(181)
Net increase in cash and cash equivalents:		7,664		2,917
Cash and cash equivalents, beginning of period		13,606		12,941
Cash and cash equivalents, end of period	$	21,270	$	15,858
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	10,718	$	3,772
Income taxes paid, net of refunds	$	1,113	$	9,586

See accompanying notes to condensed consolidated financial statements

5

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiaries, is referred to herein as “CPI” or the “Company”) is a leading provider of comprehensive Financial Payment Card solutions in North America. The Company defines Financial Payment Cards as credit, debit and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) and Interac (in Canada). The Company serves its customers through a network of ten production and card services facilities, including eight high-security facilities in North America that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by the Company’s customers, certified to be in compliance with the standards of the Payment Card Industry (“PCI”) Security Standards Council. In addition to its eight North American facilities, the Company has two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards that are not issued on the networks of the Payment Card Brands, and personalization services.

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2015 is derived from the audited financial statements as of that date.  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Certain prior year amounts were reclassified to conform to the current year presentation.

The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) pursuant to an asset purchase agreement for $5,000 in cash. The Nevada operations primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  See Note 2, “Discontinued Operation and Disposition.”

In August 2015, the Company completed its shut-down and closure of its operation in Petersfield, United Kingdom.  Petersfield primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  Accordingly, the Company accrued facility contract termination costs of $681 in the three and nine months ended September 30, 2015.

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets; valuation allowances for inventories and deferred tax assets; debt; and stock-based compensation expense. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to 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. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty

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of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018. Upon adoption, the Company must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.  The Company has not determined what transition method it will use.  The Company is currently assessing the impact that the future adoption of ASU 2014-09, as amended, may have on its condensed consolidated financial statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the new guidance. 

The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July 2015.  ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016.  The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets.  ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation:Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share based payment transactions, including the accounting for forfeitures, statutory withholding requirements, and classification in the statement of cash flows.  In addition, excess tax benefits recorded to equity under existing accounting guidance will be recognized in income tax expense under the new standard. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 (the Company’s fiscal year 2017), with early adoption permitted. The Company is in the process of assessing the impact of ASU 2016-09 on its results of operations, financial position and consolidated financial statements.

2. Discontinued Operation and Disposition

On January 12, 2015, the Company sold its Nevada non-secure operations pursuant to an asset purchase agreement for $5,000 in cash. The net carrying values of the assets sold as part of the discontinued operation included inventory and plant, equipment and leasehold improvements of $3,129 and $2,910, respectively. During the nine months ended September 30, 2015, the Company recognized a gain on the sale of a discontinued operation of $887, which is included in the gain from a discontinued operation, net of an income tax benefit of $1,926 in the Company’s Condensed Consolidated Statement of Operations.

The Nevada operations recognized a loss of $606 for the nine months ended September 30, 2015, net of an income tax benefit of $404.

After the Nevada sale, CPI retained no significant continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. The Nevada operations had $32,128 of tax deductible goodwill and intangible assets, of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the nine months ended September 30, 2015.

There was no recorded activity related to this transaction during the three months ended September 30, 2015.

3. Inventories

Inventories are summarized below:

7

	September 30, 2016		December 31, 2015
Raw materials	$	9,923	$	10,549
Work-in-process		10,499		11,460
Finished goods		2,962		3,631
	$	23,384	$	25,640

4. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consist of the following:

	September 30, 2016		December 31, 2015
Buildings	$	2,242	$	2,565
Machinery and equipment		58,173		57,482
Furniture, fixtures and computer equipment		6,969		4,440
Leasehold improvements		17,047		15,856
Construction in progress		7,570		2,373
		92,001		82,716
Less accumulated depreciation and amortization		(36,903)		(30,603)
	$	55,098	$	52,113

For the Company’s continuing operations, amounts recorded for the depreciation of plant, equipment and leasehold improvements was $3,098 and $2,673 for the three months ended September 30, 2016 and 2015, respectively, and $9,124 and $8,424 for the nine months ended September 30, 2016 and 2015, respectively.

5. Goodwill and Other Intangible Assets

Goodwill of $72,339 at September 30, 2016 is attributable to the Company’s segments as follows: U.S. Debit and Credit $64,330; U.K. Limited $6,211; and Other $1,798. The change in goodwill from December 31, 2015 to September 30, 2016 was a result of foreign currency translation adjustments, primarily in the U.K. Limited segment.

Intangible assets consist of customer relationships, technology and software, non-compete agreements, favorable leases and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 16 years. The changes in the cost basis of the intangibles from December 31, 2015 to September 30, 2016 are related to foreign currency translations. Intangible amortization expense was $1,132 and $1,145 for the three months ended September 30, 2016 and 2015, respectively.  Intangible amortization expense was $3,406 and $3,433 for the nine months ended September 30, 2016 and 2015, respectively.

As of September 30, 2016 and December 31, 2015, intangible assets, excluding goodwill, were comprised of the following:

				September 30, 2016						December 31, 2015
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	59,165	$	(20,183)	$	38,982	$	59,612	$	(17,747)	$	41,865
Technology and software	7	to	10		7,101		(1,935)		5,166		7,101		(1,238)		5,863
Non-compete agreements	5	to	8		491		(315)		176		491		(270)		221
Favorable leases		9.5			111		(109)		2		111		(101)		10
Intangible assets subject to amortization					66,868		(22,542)		44,326		67,315		(19,356)		47,959
Trademarks (indefinite-lived)					6,029		—		6,029		6,029		—		6,029
				$	72,897	$	(22,542)	$	50,355	$	73,344	$	(19,356)	$	53,988

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The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2016 is as follows:

2016 (remaining 3 months)	$	1,128
2017		4,514
2018		4,514
2019		4,494
2020		4,454
Thereafter		25,222
	$	44,326

6. Fair Value of Financial Instruments

Fair value is defined as 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 (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

· Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

· Level 2— Observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities.

· Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The Company’s financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

	Fair Value as of		Fair Value Measurement at September 30, 2016
	September 30,		(Using Fair Value Hierarchy)
	2016		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	304,688	$	—	$	304,688	$	—

	Fair Value as of		Fair Value Measurement at December 31, 2015
	December 31,		(Using Fair Value Hierarchy)
	2015		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	309,375	$	—	$	309,375	$	—
Sellers Note	$	9,000	$	—	$	—	$	9,000

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7. Long-Term Debt and Credit Facility

As of September 30, 2016 and December 31, 2015, long-term debt and credit facilities consist of the following:

	Interest		September 30,		December 31,
	Rate (1)		2016		2015
First lien term loan facility	5.5	%	$	312,500	$	312,500
Sellers note	5.0	%		—		9,000
Unamortized discount				(3,963)		(4,459)
Unamortized deferred financing costs				(7,100)		(8,041)
Total long-term debt				301,437		309,000
Less current maturities of long-term debt				—		(9,000)
Long-term debt, excluding current maturities			$	301,437	$	300,000

(1) Interest rate at September 30, 2016

First Lien Credit Facility

On August 17, 2015, the Company entered into a first lien credit agreement (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan facility (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.

The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.

Interest rates under the First Lien Credit Facility are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50%, or a base rate plus a margin of 3.50%. Letters of credit are subject to a 0.125% fronting fee payable to the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines.

The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets and affiliate transactions.  As of September 30, 2016, the Company was in compliance with all covenants under the First Lien Credit Facility.

The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an excess cash flow calculation, beginning as of the year ending December 31, 2016.   

The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage ratio not in excess of 7.0 times EBITDA.

As of September 30, 2016, the Company did not have any outstanding borrowings under the Revolving Credit Facility. The Company has one outstanding letter of credit for the security deposit on a real property lease agreement. This letter of credit totals $50, reducing availability under the Revolving Credit Facility to $39,950. The Company pays a fee on the outstanding letter of credit at the applicable margin, which was 4.50% as of September 30, 2016, in addition to a fronting fee of 0.125% per annum.

10

Sellers Note

The Company entered into a subordinated, unsecured promissory note for $9,000 (“Sellers Note”) with certain sellers of EFT Source, Inc. (“EFT Source”) in connection with its acquisition of EFT Source on September 2, 2014. All principal and unpaid interest under the Sellers Note was due and paid to the sellers on September 2, 2016.  Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly.

Deferred Financing Costs

Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance.  These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method.

8. Income Taxes

During the three months ended September 30, 2016, the Company recognized an income tax expense of $2,541 on pre-tax income of $6,567, representing an effective income tax rate of 38.7%, compared to an income tax expense from continuing operations of $6,554 on pre-tax income of $21,314, representing an effective tax rate of 30.7% during the three months ended September 30, 2015.

During the nine months ended September 30, 2016, the Company recognized an income tax expense of $5,194 on pre-tax income of $14,607, representing an effective income tax rate of 35.6%, compared to an income tax expense from continuing operations of $16,528 on pre-tax income of $49,404, representing an effective tax rate of 33.5% during the nine months ended September 30, 2015.  The increase in the effective tax rate for the nine months ended September 30, 2016 compared to the same period in the prior year was primarily due to the impact of state taxes.

The effective tax rates for all periods presented also differ from the federal U.S. statutory rate primarily due to a benefit from permanent deductions related to credits for domestic production activities and the impact of state and foreign income taxes.

9. Series A Preferred Stock

There were no outstanding shares of Series A Preferred Stock as of September 30, 2016 or December 31, 2015.  On August 17, 2015, the Company redeemed 62,140 shares of Series A Preferred Stock for $276,688, at $4,446.70 per share. Of the $276,688 redemption amount, $55,946 was treated as a return of capital and $220,742 was treated as a dividend. During the nine months ended September 30, 2015, the Company redeemed a total of 62,233 shares of Series A Preferred Stock at prices ranging from $3,950.33 to $4,446.70 per share.  In addition, Series A Preferred Stock accrued dividends were $7,096 and $32,454 during the three and nine months ended September 30, 2015, respectively.

10. Stockholders’ Equity

Common Stock

On May 11, 2016, the Board of Directors approved a stock repurchase program that authorizes repurchases of up to $20,000 of the Company’s common stock, limited to a maximum of 2,827,105 common shares, prior to May 11, 2017.  Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions.  During the three months ended September 30, 2016, there were no common shares repurchased.  During the nine months ended September 30, 2016, there were 1,439,422 common shares repurchased for $6,008, at an average cost of $4.17 per share.  The repurchase has been accounted for as a share retirement. At September 30, 2016, $13,992 remained available under the share repurchase authorization, up to a maximum of 1,387,683 shares.   

During the three and nine months ended September 30, 2016, there were 65,891 and 190,557 shares of common stock issued in connection with stock option exercises and the vesting of restricted stock units, respectively (Note 13, “Stock-Based Compensation”).  During the nine months ended September 30, 2015, the Company issued no common stock and redeemed 86,768 shares of common stock at values of $0.32 and $0.91 per share.  During the three months

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ended September 30, 2015, there was no common stock issued or redeemed.  The redeemed common stock share values were calculated in accordance with the terms of the applicable award agreements.

During the three and nine months ended September 30, 2016, the Company paid dividends of $2,487 and $5,031, representing $0.045 and $0.09 per share, respectively.  Additionally, on August 10, 2016, the Board of Directors approved a dividend of $0.045 per share, payable on October 7, 2016 to stockholders of record as of the close of business on September 16, 2016. The accrued dividend of $2,488 is reflected in “Accrued expenses” in the Condensed Consolidated Balance Sheet as of September 30, 2016.  For the nine months ended September 30, 2016, the Company has declared aggregate dividends of $0.135 per share.

On September 3, 2015, the Company’s Board of Directors approved a 22-for-1 stock split of its common stock. Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the Option Plan (as hereinafter defined) were increased accordingly. All of the share numbers, share prices and exercise prices have been retroactively adjusted to reflect the stock split in this Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and these notes.

11. Earnings per Share

Basic and diluted earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period.

The following table sets forth the computation of basic and diluted EPS attributable to continuing and discontinued operations:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Numerator:
Net income from continuing operations	$	4,026	$	14,760	$	9,413	$	32,876
Preferred stock dividends		—		(7,096)		—		(32,454)
Earnings from continuing operations attributable to common stockholders		4,026		7,664		9,413		422
Income from a discontinued operation, net of taxes		—		—		—		281
Net earnings attributable to common stockholders	$	4,026	$	7,664	$	9,413	$	703
Denominator:
Basic EPS—weighted average common shares outstanding		55,255,239		41,476,116		55,999,722		41,374,188
Diluted EPS—weighted average common shares outstanding		55,508,684		41,819,422		56,232,195		41,717,494
Basic and Diluted EPS:
Earnings from continuing operations	$	0.07	$	0.19	$	0.17	$	0.01
Earnings from a discontinued operation, net of taxes		—		—		—		0.01
Earnings per share	$	0.07	$	0.19	$	0.17	$	0.02

12. Commitments and Contingencies

Commitments

The Company incurred rent expense under non-cancellable operating leases of $907 and $757 for the three months ended September 30, 2016 and 2015, respectively, and $2,541 and $2,576 for the nine months ended September 30, 2016 and 2015, respectively.

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Contingencies

In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)

On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO.  The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs.  In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, the remainder of the fiscal year ending December 31, 2015, and the fiscal year .  The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. 

The Court has entered a briefing schedule on defendants' prospective motion(s) to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of such motions.  

The Company believes these claims are without merit and intends to defend the action vigorously. Given the current stage of these matters, the range of any potential loss is not estimable and no accrual has been recognized as of September 30, 2016.

Gemalto S.A. v. CPI Card Group Inc. (2 cases)

First case.  This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent will expire in 2017. The Company successfully moved to transfer the lawsuit to the United States District Court for the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors.

On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board, seeking re-examination of Gemalto’s asserted patent.  In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the Patent Trial & Appeal Board’s consideration of the Company’s challenge to the patentability of asserted claims. 

Second case.  On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering.  Gemalto’s patent will expire in 2018.  On May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on September 2, 2016.  The Company’s motion to dismiss remains pending. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. 

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  With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. While a risk of loss is reasonably possible, given the current stage of these matters, as well as the aforementioned defenses, counterclaims and indemnity rights, the range of potential loss is not estimable and no accrual has been recognized as of September 30, 2016 and December 31, 2015.

In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business.  The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations.

13. Stock-Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

 During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan.  As of September 30, 2016, there were 2,266,481 shares available for grant under the Omnibus Plan.

During the three months ended September 30, 2016, the Company granted awards of non-qualified stock options under the Omnibus Plan for 112,500 shares of common stock.  The stock option awards have an exercise price of $5.52 per share, a 10 year term, and vest 25% on each anniversary date of the awards over a four year period.  The fair value of the stock option awards was determined using a Black-Scholes option-pricing model with the following assumptions: volatility of 35.3%, risk-free interest rate of 1.4%, dividend yield of 3.3% and an expected term of approximately 6 years.

Outstanding and exercisable stock options under the Omnibus Plan are as follows:

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2015	795,450	$	10.00
Granted	765,190		7.43
Forfeited	(104,000)		10.00
Outstanding as of September 30, 2016	1,456,640	$	8.65	9.21

Unvested options as of September 30, 2016 will vest as follows:

2016	—
2017	392,669
2018	475,978
2019	475,723
2020	112,270
Total unvested options as of September 30, 2016	1,456,640

During the three months ended September 30, 2016, the Company granted awards of restricted stock units for 18,562 shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or service, and vest 25% on each anniversary date of the awards over a four year period.  On the vesting dates, shares of common stock will be issued to the award recipients. 

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The following table summarizes the changes in the number of outstanding restricted stock units for the nine month period ended September 30, 2016:

		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Outstanding as of December 31, 2015	—	$	—
Granted	289,377		7.29
Vested	(15,803)		7.91
Forfeited	(7,586)		7.91
Outstanding as of September 30, 2016	265,988	$	7.24

Compensation expense for the Omnibus Plan for the three and nine months ended September 30, 2016 was $840 and $2,045, respectively.  As of September 30, 2016, the total unrecognized compensation expense related to unvested options and restricted stock units under the Omnibus Plan was $3,368, which the Company expects to recognize over an estimated weighted average period of 1.6 years.

CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan

In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted.

As a result of the Company’s adoption of the Omnibus Plan, as further described above, no further awards will be made under the Option Plan.  The outstanding stock options under the Option Plan have a 10-year life and vest as noted in each respective grant letter.  All stock options are non-qualified.  No stock options were granted during the three and nine month period ended September 30, 2015.

The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the nine month period ended September 30, 2016:

				Weighted-
				Average
				Remaining
		Weighted- Average		Contractual Term
	Options	Exercise Price		(in Years)
Outstanding as of December 31, 2015	462,000	$	0.0003
Granted	—		—
Exercised	(179,667)		0.0004
Forfeited	—		—
Outstanding as of September 30, 2016	282,333	$	0.0004	5.50
Exercisable as of September 30, 2016	275,000	$	0.0004	5.50

Unvested options as of September 30, 2016 will vest as follows:

2016	7,333
Total unvested options as of September 30, 2016	7,333

Compensation expense related to options previously granted under the Option Plan for the three and nine months ended September 30, 2016 and 2015, and unrecorded compensation expense at September 30, 2016, were de minimis.  The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of September 30, 2016 was $1,705 and $1,661, respectively.

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Other Stock-Based Compensation Awards

During June 2015, the Company issued 191,664 restricted shares of common stock to executives of the Company with a weighted-average grant date fair value of $9.48 per share.  The awards contain conditions associated with continued employment or service.  The terms of the unvested restricted shares of common stock provide voting and regular dividend rights to the holders, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings per share calculation.  See Note 11, “Earnings per Share”.  As of September 30, 2016, 94,864 restricted shares of common stock were outstanding, which vest over a three-year period from the grant date.

Total compensation expense related to these restricted shares of common stock awards was $94 and $740 for the three and nine month periods ended September 30, 2016, respectively.  Compensation expense for the three and nine month periods ended September 30, 2015 was $323.  As of September 30, 2016, there was $431 of total remaining unrecognized compensation expense related to these unvested restricted shares of common stock that will be recognized over a weighted average period of 1.34 years.

Phantom Stock Plan

The Company recognized $311 and $1,813 of compensation expense during the three and nine month periods ended September 30, 2015, respectively, related to the phantom stock plan. The phantom stock plan was terminated, and all outstanding obligations thereunder were settled, during October 2015 in conjunction with the Company’s IPO. 

14. Segment Reporting

The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA.

EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments.

As of September 30, 2016, the Company’s reportable segments are as follows:

· U.S. Debit and Credit;

· U.S. Prepaid Debit; and

· U.K. Limited.

The “Other” category includes the Company’s corporate headquarters and less significant operating segments that derive their revenue from the production of Financial Payment Cards and retail gift cards in Canada (CPI—Canada) and the U.K. (CPI—Petersfield).

In August 2015, the Company completed its shut-down and closure of its operation in Petersfield, United Kingdom. 

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Performance Measures of Reportable Segments

Revenue and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Revenue
	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
U.S. Debit and Credit	$	49,156	$	72,785	$	165,055	$	196,190
U.S. Prepaid Debit		23,087		23,659		47,419		53,482
U.K. Limited		7,675		9,668		21,896		23,586
Other		2,710		3,995		9,530		13,917
Intersegment eliminations		(1,426)		(2,410)		(2,580)		(6,632)
Total:	$	81,202	$	107,697	$	241,320	$	280,543

	EBITDA
	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
U.S. Debit and Credit	$	12,917	$	23,368	$	43,242	$	59,961
U.S. Prepaid Debit		8,593		9,973		15,417		19,733
U.K. Limited		942		1,235		1,841		2,076
Other		(6,647)		(4,820)		(18,254)		(12,379)
Total:	$	15,805	$	29,756	$	42,246	$	69,391

The following table provides a reconciliation of total segment EBITDA to net income from continuing operations for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Total segment EBITDA from continuing operations	$	15,805	$	29,756	$	42,246	$	69,391
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Depreciation and amortization		(4,230)		(3,818)		(12,530)		(11,858)
Net income from continuing operations	$	4,026	$	14,760	$	9,413	$	32,876

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments as of September 30, 2016 and December 31, 2015 were as follows:

	September 30, 2016		December 31, 2015
U.S. Debit and Credit	$	205,481	$	221,274
U.S. Prepaid Debit		30,971		20,960
U.K. Limited		24,368		25,897
Other		9,892		12,222
Total assets:	$	270,712	$	280,353

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Plant, Equipment and Leasehold Improvement Additions of Geographic Locations

Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
U.S.	$	4,757	$	3,625	$	11,580	$	13,598
Canada		47		136		208		417
Total North America		4,804		3,761		11,788		14,015
U.K.		374		437		1,165		573
Total plant, equipment and leasehold improvement additions	$	5,178	$	4,198	$	12,953	$	14,588

Net Sales of Geographic Locations

Net sales of the Company’s geographic locations for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
U.S.	$	69,573	$	94,125	$	205,027	$	244,636
Canada		2,792		3,084		10,221		7,209
Total North America		72,365		97,209		215,248		251,845
U.K.		7,910		8,236		22,697		22,089
Other (a)		927		2,252		3,375		6,609
Total net sales	$	81,202	$	107,697	$	241,320	$	280,543

(a) Amounts in Other include sales to various countries that individually are not material.

Long-Lived Assets of Geographic Segments

Long-lived assets of the Company’s geographic segments as of September 30, 2016 and December 31, 2015 were as follows:

	September 30, 2016		December 31, 2015
U.S.	$	163,271	$	164,377
Canada		3,024		2,254
Total North America:		166,295		166,631
U.K.		11,497		12,593
Total long-lived assets	$	177,792	$	179,224

Net Sales by Product and Services

Net sales from products and services sold by the Company for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Product net sales (a)	$	37,482	$	65,567	$	132,535	$	178,338
Services net sales (b)		43,720		42,130		108,785		102,205
Total net sales:	$	81,202	$	107,697	$	241,320	$	280,543

(a) Product net sales include the design and production of Financial Payment Cards in contact-EMV, Dual-Interface EMV, contactless and magnetic stripe card formats.  The Company also generates product revenue from the sale of Card@Once® instant issuance systems, private label credit cards and retail gift cards.

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(b) Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards.  The Company also generates service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images.

15.  Subsequent Events

On November 9, 2016, the Board of Directors approved a dividend of $0.045 per share. This dividend is payable on January 12, 2017, to stockholders of record as of the close of business on December 16, 2016.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (“SEC”).

Special Note Regarding Forward-Looking Statements

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding the Company’s financial position, business strategy and the plans, objectives, expectations, or assumptions of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue” and other similar expressions are intended to identify forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks and uncertainties include, among others: material breaches in the security of our systems; market acceptance of developing technologies that make Financial Payment Cards less relevant; a slower or less widespread adoption of EMV and Dual-Interface EMV technology than we anticipate; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers; competition and/or erosion in the payment card industry; unpredictability in the ordering patterns of our customers and the resulting impact on production volumes; extension of card expiration cycles; our failure to operate our business in accordance with the PCI security standards or other industry standards such as Payment Card Brand certification standards; infringement on our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; difficulties in our production processes; defects in our software; a decline in U.S. and global market and economic conditions; our substantial indebtedness; failure to meet our customers’ demands in a timely manner; economic and regulatory changes resulting from Brexit, including volatility in foreign currency exchange rates; costs relating to product defects and product liability and warranty claims; our dependence on licensing arrangements; inability to renew leases for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on specialized equipment from third party suppliers; and other risk factors or uncertainties identified from time to time in our filings with the SEC. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more complete discussion of forward-looking statements and applicable risks contained under the captions “Forward-Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 24, 2016, and Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 11, 2016. CPI Card Group Inc. undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a leading provider of comprehensive Financial Payment Card solutions in North America. We define Financial Payment Cards as credit, debit and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) and Interac (in Canada). Our customers are primarily leading national and regional banks, independent community banks, credit unions, managers of prepaid debit card programs, group service providers (organizations that assist small issuers with managing their credit and debit card programs) and card processors. We serve a diverse set of direct and indirect customers, including many of the largest North American issuers of debit and credit cards, the largest global managers of prepaid debit and credit card programs, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors.

We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in North America that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by our customers, certified to be in compliance with the Payment Card Industry Security

20

Standards Council. We have the largest such network of high-security production facilities in North America, allowing us to optimize our solutions offerings to serve the needs of our diverse and long-term customer base.

Results of Operations

The following table presents the components of our condensed consolidated statements of operations and comprehensive income for each of the periods presented:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016			2015
	(dollars in thousands)
Net sales:
Products	$	37,482	$	65,567	$	132,535	$	178,338
Services		43,720		42,130		108,785		102,205
Total net sales		81,202		107,697		241,320		280,543
Cost of sales		52,139		64,648		159,858		176,151
Gross profit		29,063		43,049		81,462		104,392
Operating expenses		17,367		16,669		51,571		46,627
Income from operations		11,696		26,380		29,891		57,765
Other expense, net:
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)
Foreign exchange (loss) gain		(124)		(34)		(192)		115
Loss on debt modification and early extinguishment		—		(703)		—		(703)
Other income, net		3		295		17		356
Income before taxes		6,567		21,314		14,607		49,404
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Net income from continuing operations		4,026		14,760		9,413		32,876
Income from a discontinued operation		—		—		—		281
Net income	$	4,026	$	14,760	$	9,413	$	33,157

Segment Discussion

Three Months Ended September 30, 2016 Compared With Three Months Ended September 30, 2015

Net Sales

	Three Months Ended  September 30,
	2016		2015		$ Change		% Change
	(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	49,156	$	72,785	$	(23,629)	(32.5)	%
U.S. Prepaid Debit		23,087		23,659		(572)	(2.4)	%
U.K. Limited		7,675		9,668		(1,993)	(20.6)	%
Other		2,710		3,995		(1,285)	(32.2)	%
Eliminations		(1,426)		(2,410)		984	*	%
Total	$	81,202	$	107,697	$	(26,495)	(24.6)	%

* Not meaningful

Net sales for the three months ended September 30, 2016 decreased $26.5 million, or 24.6%, to $81.2 million compared to $107.7 million for the three months ended September 30, 2015. The decrease in net sales was due to a 32.5% decline in U.S. Debit and Credit, a 2.4% decline in U.S. Prepaid Debit, a 20.6% decline in U.K. Limited and a 32.2% decline in Other.

21

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the three months ended September 30, 2016 decreased $23.6 million, or 32.5%, to $49.2 million compared to $72.8 million for the three months ended September 30, 2015. The decrease in net sales was primarily due to a $17.0 million decrease in EMV related revenue and a $10.9 million decrease in magnetic stripe card and other sales due to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by an increase of $4.3 million from growth in card personalization and fulfillment. 

The decrease in EMV revenue is due to a reduction of EMV card purchases from large issuers and processors, reflecting the carryover impact of overstocked EMV card inventories purchased in 2015.  For the three months ended September 30, 2016, we sold 22.6 million EMV cards at an average selling price (“ASP”) of $0.96 compared to 41.2 million EMV cards at an ASP of $0.94 for the three months ended September 30, 2015. The increase in ASP for EMV cards during the three months ended September 30, 2016 compared to September 30, 2015 is primarily due to customer mix.  

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit for the three months ended September 30, 2016 decreased $0.6 million, or 2.4%, to $23.1 million compared to $23.7 million for the three months ended September 30, 2015. The decrease was driven primarily by lower prices, partially offset by increased sales activity.      

U.K. Limited:  

Net sales for U.K. Limited for the three months ended September 30, 2016 decreased $2.0 million, or 20.6%, to $7.7 million compared to $9.7 million for the three months ended September 30, 2015.  Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a $1.4 million reduction of net sales in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.  A further decrease of $0.6 million in net sales was related to softening volumes within our retail gift card customer base.   

Other:

Net sales in Other decreased $1.3 million, or 32.2%, to $2.7 million during the three months ended September 30, 2016 compared to $4.0 million in the three months ended September 30, 2015. The decrease was primarily due to a $1.1 million decrease in net sales in Canada related to timing of orders from one of our larger customers in Canada, and to the shut-down of the Petersfield, U.K. operation in August 2015.  See Note 1, “Business Overview and Summary of Significant Accounting Policies” to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for further discussion of the Petersfield, U.K. shut-down.   

Cost of Sales

	Three Months Ended  September 30,
	2016		2015		$ Change		% Change
	(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	32,063	$	44,600	$	(12,537)	(28.1)	%
U.S. Prepaid Debit		13,919		12,680		1,239	9.8	%
U.K. Limited		5,506		6,934		(1,428)	(20.6)	%
Other		2,021		3,729		(1,708)	(45.8)	%
Eliminations		(1,370)		(3,295)		1,925	*	%
Total	$	52,139	$	64,648	$	(12,509)	(19.3)	%

* Not meaningful

Cost of sales for the three months ended September 30, 2016 decreased $12.5 million, or 19.3%, to $52.1 million compared to $64.6 million for the three months ended September 30, 2015. The decrease in cost of sales was driven primarily by a 28.1% decrease in U.S. Debit and Credit, a 20.6% decrease in U.K. Limited and a 45.8% decrease in Other, partially offset by a 9.8% increase in U.S. Prepaid Debit.  

22

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the three months ended September 30, 2016 decreased $12.5 million, or 28.1%, to $32.1 million compared to $44.6 million for the three months ended September 30, 2015.  The decrease was driven by lower EMV chip and magnetic stripe card sales volumes resulting in lower corresponding manufacturing costs.  Lower per unit EMV chip prices also contributed to the decreased cost of sales during the quarter.  Higher cost of sales from growth in card personalization, fulfillment and other services partially offset the above decreases.

U.S. Prepaid Debit:

Cost of sales for U.S. Prepaid Debit for the three months ended September 30, 2016 increased $1.2 million or 9.8%, to $13.9 million compared to $12.7 million for the three months ended September 30, 2015.  The increase was primarily due to increased materials and labor costs of $0.7 and $0.4 million, respectively, as a result of increased production volumes during the three months ended September 30, 2016 compared to the three months ended September 30, 2015.   

U.K. Limited:

Cost of sales for U.K. Limited for the three months ended September 30, 2016 decreased $1.4 million, or 20.6%, to $5.5 million compared to $6.9 million for the three months ended September 30, 2015, primarily due to foreign currency exchange rate fluctuations and lower overhead costs, partially offset by higher labor costs.  Fluctuations in exchange rates between the United States dollar and the British Pound resulted in a $1.0 million reduction of cost of sales in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

Other:

Cost of sales in Other decreased $1.7 million, or 45.8%, to $2.0 million during the three months ended September 30, 2016 compared to $3.7 million in the three months ended September 30, 2015, primarily related to our Petersfield, U.K. operation, which was shut-down in August 2015, and to a lesser extent, lower materials costs related to the decreased net sales in Canada.

Gross Profit and Gross Profit Margin

	Three Months Ended  September 30,
			% of				% of
	2016		net sales		2015		net sales		$ Change		% Change
	(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	17,093	34.8	%	$	28,185	38.7	%	$	(11,092)	(39.4)	%
U.S. Prepaid Debit		9,168	39.7	%		10,979	46.4	%		(1,811)	(16.5)	%
U.K. Limited		2,169	28.3	%		2,734	28.3	%		(565)	(20.7)	%
Other		633	23.4	%		1,151	28.8	%		(518)	(45.0)	%
Total	$	29,063	35.8	%	$	43,049	40.0	%	$	(13,986)	(32.5)	%

Gross profit for the three months ended September 30, 2016 decreased $14.0 million, or 32.5%, to $29.1 million compared to $43.0 million for the three months ended September 30, 2015. Gross profit margin for the three months ended September 30, 2016 decreased to 35.8% compared to 40.0% for the three months ended September 30, 2015.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the three months ended September 30, 2016 decreased $11.1 million, or 39.4%, to $17.1 million compared to $28.2 million during the three months ended September 30, 2015. The decrease in gross profit for U.S. Debit and Credit was primarily driven by the reduction in net sales discussed above. Gross profit margin for U.S. Debit and Credit for the three months ended September 30, 2016 decreased to 34.8% compared to 38.7% for the same period in the prior year due to lower overhead cost absorption attributed to reduced production volumes. 

23

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the three months ended September 30, 2016 decreased 16.5% to $9.2 million compared to $11.0 million for the three months ended September 30, 2015. Gross profit margin for U.S. Prepaid Debit for the three months ended September 30, 2016 decreased to 39.7% compared to 46.4% for the three months ended September 30, 2015.  The decrease in gross profit and gross profit margin was due to lower sales prices and higher materials and labor costs attributed to the higher sales activity discussed above.

U.K. Limited:

Gross profit for U.K. Limited decreased 20.7% in the three months ended September 30, 2016 to $2.2 million compared to $2.7 million for the three months ended September 30, 2015, primarily due to foreign currency exchange rate fluctuations of $0.4 million. Gross profit margin for U.K. Limited was 28.3% during both the three months ended September 30, 2016 and 2015. 

Other:

Other gross profit during the three months ended September 30, 2016 was $0.6 million compared to $1.2 million during the same period in 2015.  The decrease is primarily due to decreased sales during the three months ended September 30, 2016 compared to the same period in 2015. 

Operating Expenses

	Three Months Ended  September 30,
	2016		2015		$ Change		% Change
	(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	6,324	$	6,608	$	(284)	(4.3)	%
U.S. Prepaid Debit		1,154		1,514		(360)	(23.8)	%
U.K. Limited		1,328		1,749		(421)	(24.1)	%
Other		8,561		6,798		1,763	25.9	%
Total	$	17,367	$	16,669	$	698	4.2	%

Operating expenses for the three months ended September 30, 2016 increased $0.7 million, or 4.2%, to $17.4 million compared to $16.7 million for the three months ended September 30, 2015. The increase in operating expenses was driven primarily by a 25.9% increase in Other expenses, partially offset by a 4.3% decrease in U.S. Debit and Credit,  a 23.8% decrease in U.S. Prepaid Debit, and a 24.1% decrease in U.K. Limited.

U.S. Debit and Credit operating expenses decreased $0.3 million, or 4.3%, primarily due to general cost reductions in sales and administrative expenses.

Operating expenses in U.S. Prepaid Debit decreased $0.4 million, or 23.8%, primarily driven by cost reductions in sales and administrative salaries.

The $0.4 million decrease in U.K. Limited, representing a 24.1% decrease, was due to foreign currency exchange rate fluctuations of $0.2 million, and a $0.2 million decrease in administrative salaries and other salary related expenses.

The $1.8 million increase in Other operating expenses was primarily due to $1.4 million in public company costs, $0.6 million in patent and shareholder litigation and related charges, and a $0.3 million increase in stock-based compensation incurred during the three months ended September 30, 2016, partially offset by a $0.5 million reduction relating to the prior year shut-down of the Petersfield U.K. operation.  Public company costs during the three months ended September 30, 2016 included $0.4 million of legal and insurance costs, $0.4 million of accounting, reporting and public filing expenses, and $0.6 million in salaries and benefits, board fees, contract labor and hiring expenses. 

24

Income from Operations and Operating Margin

	Three Months Ended  September 30,
			% of				% of
	2016		net sales		2015		net sales		$ Change		% Change
	(dollars in thousands)
Income from operations by segment:
U.S. Debit and Credit	$	10,769	21.9	%	$	21,577	29.6	%	$	(10,808)	(50.1)	%
U.S. Prepaid Debit		8,014	34.7	%		9,465	40.0	%		(1,451)	(15.3)	%
U.K. Limited		841	11.0	%		985	10.2	%		(144)	(14.6)	%
Other		(7,928)	*	%		(5,647)	*	%		(2,281)	*	%
Total	$	11,696	14.4	%	$	26,380	24.5	%	$	(14,684)	(55.7)	%

* Not meaningful

Income from operations for the three months ended September 30, 2016 decreased $14.7 million, or 55.7%, to $11.7 million compared to $26.4 million for the three months ended September 30, 2015. Operating margins for the three months ended September 30, 2016 decreased to 14.4% compared to 24.5% for the three months ended September 30, 2015.

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the three months ended September 30, 2016 decreased $10.8 million, or 50.1%, to $10.8 million compared to $21.6 million for the three months ended September 30, 2015. Operating margins for the three months ended September 30, 2016 decreased to 21.9% compared to 29.6% for the three months ended September 30, 2015 due primarily to the lower sales volumes, and the lower overhead cost absorption from the decline in EMV production volumes discussed above.

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the three months ended September 30, 2016 decreased $1.5 million, or 15.3%, to $8.0 million compared to $9.5 million for the three months ended September 30, 2015. Operating margins for the three months ended September 30, 2016 decreased to 34.7% compared to 40.0% for the three months ended September 30, 2015 due to the increased materials and labor costs and decreased sales, partially offset by the lower operating expenses discussed above.

U.K. Limited:

Income from operations for U.K. Limited for the three months ended September 30, 2016 decreased to $0.8 million from $1.0 million due to $0.2 million of foreign currency exchange rate fluctuations, as noted above. 

Other:

The loss from operations in Other was $7.9 million in the three months ended September 30, 2016 compared to $5.6 million in the three months ended September 30, 2015.  The increased loss was primarily attributable to the higher corporate expenses partially offset by the reduction in operating losses related to the prior year shut-down of the Petersfield, U.K. operation discussed above.

Interest, net:  

Interest expense for the three months ended September 30, 2016 increased to $5.0 million compared to $4.6 million for the three months ended September 30, 2015. The increase in interest expense was driven by the $435.0 million First Lien Term Loan that the Company entered into in August 2015 in conjunction with the partial redemption of the Series A Preferred Stock.

Income tax expense:

During the three months ended September 30, 2016, there was income tax expense of $2.5 million compared to $6.6 million for the three months ended September 30, 2015.  The decrease in income tax expense was driven by the

25

decrease in income before taxes. The effective tax rate was 38.7% and 30.7% for the three months ended September 30, 2016 and 2015, respectively. Our effective tax rate was higher in the current year period primarily due to the impact of state and foreign income taxes.

Nine Months Ended September 30, 2016 Compared With Nine Months Ended September 30, 2015

Net Sales

	Nine Months Ended September 30,
	2016		2015		$ Change		% Change
	(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	165,055	$	196,190	$	(31,135)	(15.9)	%
U.S. Prepaid Debit		47,419		53,482		(6,063)	(11.3)	%
U.K. Limited		21,896		23,586		(1,690)	(7.2)	%
Other		9,530		13,917		(4,387)	(31.5)	%
Eliminations		(2,580)		(6,632)		4,052	*	%
Total	$	241,320	$	280,543	$	(39,223)	(14.0)	%

* Not meaningful

Net sales for the nine months ended September 30, 2016 decreased $39.2 million, or 14.0%, to $241.3 million compared to $280.5 million for the nine months ended September 30, 2015. The decrease in net sales was due to a 15.9% decrease in U.S. Debit and Credit, an 11.3% decrease in U.S. Prepaid Debit, a 7.2% decrease in U.K. Limited, and a 31.5% decrease in Other, compared to the same period in the prior year.

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the nine months ended September 30, 2016 decreased $31.1 million, or 15.9%, to $165.1 million compared to $196.2 million for the nine months ended September 30, 2015. The decrease in net sales was primarily driven by a $26.5 million decrease in EMV related revenue, and an $18.0 million decrease in net sales from non-EMV cards, including magnetic stripe cards due to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by a $13.4 million net sales increase from growth in card personalization, fulfillment and other services.

The decrease in EMV revenue is the result of reduced EMV card purchases from large issuers and processors, reflecting the carryover impact of overstocked EMV card inventories purchased in 2015.  For the nine months ended September 30, 2016, we sold 86.5 million EMV cards at an ASP of $0.94 compared to 115.9 million EMV cards at an ASP of $0.93 for the nine months ended September 30, 2015.  The increase in ASP for EMV cards during the nine months ended September 30, 2016 compared to 2015 is primarily due to customer mix.

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit during the nine months ended September 30, 2016 decreased $6.1 million, or 11.3%, to $47.4 million compared to $53.5 million for the nine months ended September 30, 2015. The decrease was primarily driven by net reductions in volumes, and to a lesser extent lower prices.  The decrease in volumes related to a large customer shifting some of its business to a competitor, who we believe is infringing on a company patent, as further described in Part II, Item 1, “Legal Proceedings”, of this Quarterly Report on Form 10-Q.

U.K. Limited:

Net sales for U.K. Limited for the nine months ended September 30, 2016 decreased $1.7 million, or 7.2%, to $21.9 million compared to $23.6 million for the nine months ended September 30, 2015.  The decrease is attributable to $2.3 million of foreign currency exchange rate fluctuations, partially offset by an increase in retail gift and loyalty card services of $0.5 million. 

26

Other:

Net sales for Other decreased $4.4 million, or 31.5%, to $9.5 million during the nine months ended September 30, 2016 compared to $13.9 million in the nine months ended September 30, 2015.  The decrease related primarily to the shut-down of the Petersfield, U.K. operation in August 2015, which contributed $4.1 million in net sales during the nine months ended September 30, 2015, and to a lesser extent, a $0.3 million decrease to net sales in Canada, driven primarily by foreign currency exchange rate fluctuations between the United States dollar and the Canadian dollar, which resulted in a $0.4 million reduction of net sales during the nine months ended September 30, 2016, compared to the nine months ended September 30, 2015.

Cost of Sales

	Nine Months Ended  September 30,
	2016		2015		$ Change		% Change
	(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	109,091	$	122,698	$	(13,607)	(11.1)	%
U.S. Prepaid Debit		30,018		31,206		(1,188)	(3.8)	%
U.K. Limited		16,079		17,484		(1,405)	(8.0)	%
Other		7,123		11,686		(4,563)	(39.0)	%
Eliminations		(2,453)		(6,923)		4,470	*	%
Total	$	159,858	$	176,151	$	(16,293)	(9.2)	%

* Not meaningful

Cost of sales for the nine months ended September 30, 2016 decreased $16.3 million, or 9.2%, to $159.9 million compared to $176.2 million for the nine months ended September 30, 2015. The decrease in cost of sales was due to an 11.1% decrease in U.S. Debit and Credit, a 3.8% decrease in U.S. Prepaid Debit, an 8.0% decrease in U.K. Limited and a 39.0% decrease in Other.  

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the nine months ended September 30, 2016 decreased $13.6 million, or 11.1%, to $109.1 million compared to $122.7 million for the nine months ended September 30, 2015.  The decrease was driven by lower EMV chip and magnetic stripe card sales volumes resulting in lower corresponding manufacturing costs.   Lower per unit EMV chip prices also contributed to the decreased cost of sales. Higher cost of sales from growth in card personalization, fulfillment and other services partially offset the above decreases.

U.S. Prepaid Debit:

Cost of sales for U.S. Prepaid Debit for the nine months ended September 30, 2016 decreased $1.2 million, or 3.8%, to $30.0 million compared to $31.2 million for the nine months ended September 30, 2015. The decrease was primarily due to a decrease in materials, and to a lesser extent lower labor costs, corresponding to the decrease in net sales described above.

U.K. Limited:

Cost of sales for U.K. Limited during the nine months ended September 30, 2016 was $16.1 million, representing a decrease of $1.4 million, or 8.0%, compared to the nine months ended September 30, 2015. Foreign currency exchange rate fluctuations between the United States dollar and the British Pound of $1.7 million, and lower overhead costs, were partially offset by higher labor and material costs related to increased net sales activity in card personalization and fulfillment services.

Other:

Cost of sales in Other decreased $4.6 million, or 39.0%, to $7.1 million during the nine months ended September 30, 2016 compared to $11.7 million in the nine months ended September 30, 2015, primarily related to our Petersfield,

27

U.K. operation, which was shut-down in August 2015, and decreased costs related to foreign currency exchange rate fluctuations between the United States dollar and the Canadian dollar of $0.3 million, partially offset by increased material costs from a higher percentage of Canada net sales relating to EMV card sales.

Gross Profit and Gross Profit Margin

	Nine Months Ended  September 30,
			% of				% of
	2016		net sales		2015		net sales		$ Change		% Change
	(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	55,964	33.9	%	$	73,492	37.5	%	$	(17,528)	(23.9)	%
U.S. Prepaid Debit		17,401	36.7	%		22,276	41.7	%		(4,875)	(21.9)	%
U.K. Limited		5,817	26.6	%		6,102	25.9	%		(285)	(4.7)	%
Other		2,280	23.9	%		2,522	18.1	%		(242)	(9.6)	%
Total	$	81,462	33.8	%	$	104,392	37.2	%	$	(22,930)	(22.0)	%

Gross profit for the nine months ended September 30, 2016 decreased $22.9 million, or 22.0%, to $81.5 million compared to $104.4 million for the nine months ended September 30, 2015. Gross profit margin for the nine months ended September 30, 2016 decreased to 33.8% compared to 37.2% for the nine months ended September 30, 2015.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the nine months ended September 30, 2016 decreased $17.5 million, or 23.9%, to $56.0 million compared to $73.5 million during the nine months ended September 30, 2015. The decrease in gross profit for U.S. Debit and Credit was primarily a result of decreased EMV revenues offset by growth in our card personalization and fulfillment services. Gross profit margin for the U.S. Debit and Credit segment for the nine months ended September 30, 2016 decreased to 33.9% compared to 37.5% for the nine months ended September 30, 2015 due to lower overhead cost absorption attributed to reduced production volumes. 

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the nine months ended September 30, 2016 decreased 21.9% to $17.4 million compared to $22.3 million for the nine months ended September 30, 2015. The decrease in gross profit was primarily driven by the decrease in net sales. Gross profit margin for U.S. Prepaid Debit for the nine months ended September 30, 2016 decreased to 36.7% compared to 41.7% for the nine months ended September 30, 2015 due to the increase in material and labor costs as a percent of sales, partially due to lower prices.

U.K. Limited:

Gross profit for U.K. Limited for the nine months ended September 30, 2016 decreased 4.7% to $5.8 million compared to $6.1 million during the nine months ended September 30, 2015. Decreases related to foreign currency exchange rate fluctuations of $0.6 million were partially offset by higher gross profit from an increase in net sales activity related to our card personalization and fulfillment services. Gross profit margin for U.K. Limited for the nine months ended September 30, 2016 increased to 26.6% compared to 25.9% for the nine months ended September 30, 2015 due to a larger percentage of  higher margin, card personalization services.

Other:

Other gross profit during the nine months ended September 30, 2016 decreased 9.6% to $2.3 million compared to $2.5 million during the same period in 2015.  The decrease was primarily due to lower gross profit in Canada related to the decrease in net sales.

28

Operating Expenses

	Nine Months Ended  September 30,
	2016		2015		$ Change		% Change
	(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	18,957	$	18,799	$	158	0.8	%
U.S. Prepaid Debit		3,719		4,288		(569)	(13.3)	%
U.K. Limited		4,321		4,681		(360)	(7.7)	%
Other		24,574		18,859		5,715	30.3	%
Total	$	51,571	$	46,627	$	4,944	10.6	%

Operating expenses for the nine months ended September 30, 2016 increased $4.9 million, or 10.6%, to $51.6 million compared to $46.6 million for the nine months ended September 30, 2015. The increase in operating expenses was driven primarily by a 30.3% increase in Other expenses and a 0.8% increase in U.S. Debit and Credit, partially offset by a 13.3% decrease in U.S. Prepaid Debit, and a 7.7% decrease in U.K. Limited.

U.S. Debit and Credit increased $0.2 million, or 0.8%, primarily driven by increased salaries and benefits to support growth in the card personalization business.

U.S. Prepaid Debit decreased $0.6 million, or 13.3%, primarily due to cost reductions in sales and administrative salaries.

The $0.4 million, or 7.7%, decrease in U.K. Limited was primarily due to foreign currency exchange rate fluctuations.

The $5.7 million increase in Other was driven by public company costs of $4.0 million, patent and shareholder litigation and related charges of $2.6 million, a $0.6 million increase in stock-based compensation, and a $0.7 increase of other corporate expenses (primarily related to increases in consulting and contract labor, and information technology expenses).  These increases were partially offset by a $2.2 million reduction of expenses relating to the prior year shut-down of the Petersfield, U.K. operation. Public company costs included $1.1 million of legal and insurance costs, $1.2 million of accounting, reporting and public filing costs, and $1.7 million in salaries and benefits, board fees, contract labor and hiring expenses. 

Income from Operations and Operating Margin

	Nine Months Ended  September 30,
			% of				% of
	2016		net sales		2015		net sales		$ Change		% Change
	(dollars in thousands)
Income from operations by segment:
U.S. Debit and Credit	$	37,007	22.4	%	$	54,693	27.9	%	$	(17,686)	(32.3)	%
U.S. Prepaid Debit		13,682	28.9	%		17,988	33.6	%		(4,306)	(23.9)	%
U.K. Limited		1,496	6.8	%		1,421	6.0	%		75	5.3	%
Other		(22,294)	*	%		(16,337)	*	%		(5,957)	*	%
Total	$	29,891	12.4	%	$	57,765	20.6	%	$	(27,874)	(48.3)	%

* Not meaningful

Income from operations for the nine months ended September 30, 2016 decreased $27.9 million, or 48.3%, to $29.9 million compared to $57.8 million for the nine months ended September 30, 2015. Operating margins for the nine months ended September 30, 2016 decreased to 12.4% compared to 20.6% for the nine months ended September 30, 2015.

U.S. Debit and Credit:

29

Income from operations for U.S. Debit and Credit for the nine months ended September 30, 2016 decreased $17.7 million, or 32.3%, to $37.0 million compared to $54.7 million for the nine months ended September 30, 2015. Operating margins for the nine months ended September 30, 2016 decreased to 22.4% compared to 27.9% for the nine months ended September 30, 2015 due primarily to the lower sales volumes, and lower overhead cost absorption attributed to the reduced production volumes discussed above.

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the nine months ended September 30, 2016 decreased $4.3 million, or 23.9%, to $13.7 million compared to $18.0 million for the nine months ended September 30, 2015. Operating margins for the nine months ended September 30, 2016 decreased to 28.9% compared to 33.6% for the nine months ended September 30, 2015.  The decrease in income from operations and operating margins was due to lower sales, and higher materials and labor costs as a percent of sales, partially offset by the decrease in operating expenses, as discussed above.

U.K. Limited:

Income from operations for U.K. Limited for the nine months ended September 30, 2016 increased to $1.5 million, or 5.3%, from $1.4 million primarily due to the impact of foreign currency exchange rate fluctuations.

Other:

During the nine months ended September 30, 2016, the loss from operations in Other was $22.3 million, compared to a loss of $16.3 million in the nine months ended September 30, 2015.  The increased loss was primarily attributable to the higher corporate expenses, partially offset by reduced operating losses related to the shut-down of the Petersfield, U.K. operation discussed above.

Interest, net:  

Interest expense for the nine months ended September 30, 2016 increased to $15.1 million compared to $8.1 million for the nine months ended September 30, 2015. The increase in interest expense was driven by the $435.0 million First Lien Term Loan that the Company entered into in August 2015 in conjunction with the partial redemption of the Series A Preferred Stock.

Income tax expense:

Income tax expense for the nine months ended September 30, 2016 decreased $11.3 million to $5.2 million compared to $16.5 million for the nine months ended September 30, 2015, driven by the decrease in income before taxes. The effective tax rate was 35.6% and 33.5% for the nine months ended September 30, 2016 and 2015, respectively. Our effective tax rate was higher in the current year period primarily due to the impact of state income taxes. 

Liquidity and Capital Resources

As of September 30, 2016, we had $21.3 million of cash and cash equivalents. Of this amount, $3.8 million was held in accounts outside of the United States.

On August 17, 2015, we entered into a new First Lien Credit Facility with a syndicate of lenders, consisting of the $435.0 million First Lien Term Loan and the $40.0 million Revolving Credit Facility. The First Lien Term Loan and Revolving Credit Facility mature on August 17, 2022 and August 17, 2020, respectively.

At the Company's election, interest rates under the First Lien Credit Facility are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50% or a base rate plus a margin of 3.50%. Letters of credit are subject to a 0.125% fronting fee payable to the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, we are required to pay an unused commitment fee ranging from 0.50% per annum to 0.375% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as our total net leverage ratio declines.

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The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loans in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, beginning with the year ending December 31, 2016, with any payments due after the issuance of our annual financial statements in 2017.

As of September 30, 2016, the Company was in compliance with all covenants under the First Lien Credit Facility. At September 30, 2016, there were $312.5 million of outstanding borrowings under the First Lien Term Loan, and we had $40.0 million of availability under the Revolving Credit Facility. 

The Company had a subordinated, unsecured promissory note for $9.0 million with certain sellers of EFT Source.  Principal and unpaid interest due were fully repaid on September 2, 2016. 

During the second quarter of 2016, the Board of Directors approved a $20.0 million stock repurchase plan, up to a maximum of 2,827,105 shares, prior to May 11, 2017.  There were no shares repurchased under this plan during the three months ended September 30, 2016.  At September 30, 2016, $14.0 million remained available under the share repurchase authorization, up to a maximum of 1,387,683 shares.

On August 10, 2016, our Board of Directors approved a dividend of $0.045 per share.  This dividend was paid on October 7, 2016 to stockholders of record as of the close of business on September 16, 2016. The accrued dividend of $2.5 million is reflected in “Accrued expenses” in our condensed consolidated balance sheet as of September 30, 2016.  Our current quarterly cash dividend rate is $0.045 per share, or $0.18 per share on an annualized basis. The declaration and payment of any future dividends will be subject to the discretion of the Board of Directors, who will evaluate the Company’s dividend program from time to time based on factors it deems relevant.

We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, and working capital for at least the next 12 months.

Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2016 was $39.8 million compared to $44.4 million during the nine months ended September 30, 2015.  The decrease in cash provided by operating activities was driven by lower net income, partially offset by a net increase in cash flows from working capital, particularly from a decrease in accounts receivable.  

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2016 was $12.4 million, which related to capital expenditures.  During the nine months ended September 30, 2015, cash used in investing activities was $8.9 million, consisting of $13.9 million of capital expenditures, partially offset by $5.0 million of cash provided from the sale of our Nevada operation. 

Financing Activities

During the nine months ended September 30, 2016, cash used in financing activities was $19.5 million, related to the repayment of our subordinated, unsecured promissory note with certain sellers of EFT Source for $9.0 million, share repurchases of $6.0 million, and dividend payments of $5.0 million, partially offset by excess tax benefits associated with stock option exercises of $0.5 million. 

Cash used in financing activities during the nine months ended September 30, 2015 was $32.5 million, due to the redemption of Series A Preferred Stock and related dividends of $56.0 million and $220.7 million, respectively, the repayment of outstanding borrowings under our previous credit facility of $170.9 million, the payment of loan issuance costs in connection with our First Lien Term Loan of $17.8 million, and payment of IPO related costs of $2.1 million.  These cash payments were partially offset by proceeds from the First Lien Term Loan of $435.0 million.

31

Contractual Obligations

During the nine months ended September 30, 2016, there were no material changes in our contractual obligations from those reported in our Annual Report on Form 10-K for the year ended December 31, 2015, other than the repayment of the Company’s $9.0 million promissory note with certain sellers of EFT Source in September 2016.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at September 30, 2016.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2015, for which there were no material changes as of September 30, 2016, included:

· Revenue Recognition;

· Multiple-Element Arrangements;

· Impairment Assessments of Goodwill and Long-Lived Assets;

· Inventory Valuation;

· Stock-Based Compensation; and

· Income Taxes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   As of September 30, 2016, there have been no material changes in market risk for key input prices, labor and benefits costs, interest rate risk, foreign currency exchange rates, or pricing from those included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of September 30, 2016 due to the unremediated material weakness in our internal controls over financial reporting described below. Notwithstanding the identified material weakness, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Changes in Internal Control over Financial Reporting

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2015, we have identified a material weakness in our internal control over financial reporting related to a current lack of finance

32

expertise that could result in a failure to properly account for non-routine and complex transactions in accordance with GAAP. With the oversight of senior management, we have taken steps to remediate the underlying causes of these material weaknesses, primarily through the development and implementation of formal policies, improved processes, as well as the hiring of additional finance personnel, including the appointment of our current Chief Financial Officer in September 2015 and Chief Accounting Officer in March 2016, both of whom are certified public accountants, and are familiar with the rules and regulations applicable to public companies, including the requirements of the Sarbanes-Oxley Act, from their previous experience in substantive financial roles with other public companies. We will continue to monitor the effectiveness of these remediation efforts as we consider in future reporting periods whether such control deficiencies have been fully remediated.

Except for the continued remediation efforts described herein, there has been no change in our internal controls over financial reporting during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II – Other Information

Item 1. Legal Proceedings

In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)

On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO.  The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs.  In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, the remainder of the fiscal year ending December 31, 2015, and the fiscal year .  The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. 

On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”).  On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market.  

The Court has entered a briefing schedule on defendants' prospective motion(s) to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of such motions.  

The Company believes these claims are without merit and intends to defend the action vigorously.

Gemalto S.A. v. CPI Card Group Inc. (2 cases)

First case.  This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent will expire in 2017. The Company successfully moved to transfer the lawsuit to the United States District Court for the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors.

On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board, seeking re-examination of Gemalto’s asserted patent.  In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the Patent Trial & Appeal Board’s consideration of the Company’s challenge to the patentability of asserted claims. 

Second case.  On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering.  Gemalto’s patent will expire in 2018.  On May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on

34

September 2, 2016.  The Company’s motion to dismiss remains pending. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. 

With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. However, the Company may incur material legal expenses, and no assurance can be given that these matters will be resolved in our favor, and if determined adversely, whether indemnification will be received. Accordingly, it is not yet possible to reliably determine any potential liability that could result from these matters in the event of an adverse determination.

CPI Card Group Inc. v. Multi Packaging Solutions, Inc.

               On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado.  The complaint asserts that MPS ultrasecure gift card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages.  The Company’s patent will expire in 2028.  MPS has been served with the complaint but has not yet responded.  The Company intends to vigorously assert its intellectual property rights in connection with this litigation.

In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business.  The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors

The risk factors disclosed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, as supplemented by the disclosure in Part II, Item 1A “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Such risk factors continue to be relevant to an understanding of our business, financial condition and operating results. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with respect to such risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

In the second quarter of fiscal year 2016, the Company’s Board of Directors approved a stock repurchase program that authorizes repurchases of $20.0 million of the Company’s common stock, up to a maximum of 2,827,105 shares, prior to May 11, 2017. The Company’s repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions. 

There was no stock repurchase activity during the three months ended September 30, 2016.  As of September 30, 2016, the total number of shares purchased as part of the publicly announced program was 1,439,422 and the approximate dollar value of shares that may yet be purchased under the program was $14.0 million, limited to an additional repurchase of 1,387,683 common shares.

35

Item 6. Exhibits

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

36

SIGNATURES

Pursuant to the requirement 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.

	CPI CARD GROUP INC.
	/s/ David Brush
	David Brush
	Chief Financial Officer
November 10, 2016

37

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

38

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Steven Montross, certify that:

1.I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)[omitted pursuant to Exchange Act Rules 13a – 14(a) and 15d-15(a)]

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2016

/s/ Steven Montross

Steven Montross

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, David Brush, certify that:

1.I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)[omitted pursuant to Exchange Act Rules 13a – 14(a) and 15d-15(a)]

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2016

/s/ David Brush

David Brush

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Montross, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Steven Montross

Steven Montross

President and Chief Executive Officer

Date: November 10, 2016

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Brush, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David Brush

David Brush

Chief Financial Officer

Date: November 10, 2016

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 04, 2016
Document and Entity Information
Entity Registrant Name	CPI Card Group Inc.
Entity Central Index Key	0001641614
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		55,293,251
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 21,270	$ 13,606
Accounts receivable, net of allowances of $269 and $212, respectively	42,663	52,538
Inventories	23,384	25,640
Prepaid expenses and other current assets	4,203	4,260
Income taxes receivable	1,234	4,975
Total current assets	92,754	101,019
Plant, equipment and leasehold improvements, net	55,098	52,113
Intangible assets, net	50,355	53,988
Goodwill	72,339	73,123
Other assets	166	110
Total assets	270,712	280,353
Current liabilities:
Accounts payable	13,408	17,832
Accrued expenses	15,598	11,315
Deferred revenue and customer deposits	5,082	3,874
Current maturities of long-term debt		9,000
Total current liabilities	34,088	42,021
Long-term debt, net of current maturities	301,437	300,000
Deferred income taxes	23,112	24,073
Other long-term liabilities	1,030	869
Total liabilities	359,667	366,963
Commitments and contingencies (Note 12)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; no shares issued and outstanding
Stockholders' deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,293,251 and 56,542,116 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	55	56
Capital deficiency	(115,778)	(119,028)
Accumulated earnings (deficit)	32,481	36,661
Accumulated other comprehensive loss	(5,713)	(4,299)
Total stockholders' deficit	(88,955)	(86,610)
Total liabilities and stockholders' deficit	$ 270,712	$ 280,353

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Allowance on accounts receivable	$ 269	$ 212
Preferred shares, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred shares, authorized shares (in shares)	100,000	100,000
Preferred shares, issued shares (in shares)	0	0
Preferred shares, outstanding shares (in shares)	0	0
Common shares, par value (in dollars per share)	$ 0.001	$ 0.001
Common shares, authorized shares (in shares)	100,000,000	100,000,000
Common shares, issued shares (in shares)	55,293,251	56,542,116
Common shares, outstanding shares (in shares)	55,293,251	56,542,116

XML

Consolidated Statements of Operations and Comprehensive (Loss) Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Net sales:
Products	$ 37,482	$ 65,567	$ 132,535	$ 178,338
Services	43,720	42,130	108,785	102,205
Total net sales	81,202	107,697	241,320	280,543
Cost of sales:
Products (exclusive of depreciation and amortization shown below)	23,583	39,870	87,248	111,017
Services (exclusive of depreciation and amortization shown below)	25,855	22,463	64,682	58,047
Depreciation and amortization	2,701	2,315	7,928	7,087
Total cost of sales	52,139	64,648	159,858	176,151
Gross Profit	29,063	43,049	81,462	104,392
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)	15,838	14,485	46,969	41,175
Depreciation and amortization	1,529	1,503	4,602	4,771
Restructuring charges (Note 1)		681		681
Total operating expenses	17,367	16,669	51,571	46,627
Income from operations	11,696	26,380	29,891	57,765
Other income (expense):
Interest, net	(5,008)	(4,624)	(15,109)	(8,129)
Foreign currency gain (loss)	(124)	(34)	(192)	115
Loss on debt modification and early extinguishment		(703)		(703)
Other income, net	3	295	17	356
Total other expense, net	(5,129)	(5,066)	(15,284)	(8,361)
Income before income taxes	6,567	21,314	14,607	49,404
Income tax expense	(2,541)	(6,554)	(5,194)	(16,528)
Net income from continuing operations	4,026	14,760	9,413	32,876
Discontinued operations:
Loss from a discontinued operation, net of taxes (Note 2)				(606)
Gain on sale of a discontinued operation, net of taxes (Note 2)				887
Net Income	4,026	14,760	9,413	33,157
Preferred stock dividends		(7,096)		(32,454)
Income attributable to common stockholders	$ 4,026	$ 7,664	$ 9,413	$ 703
Basic and diluted earnings per share:
Continuing operations	$ 0.07	$ 0.19	$ 0.17	$ 0.01
Discontinued operation				0.01
Total basic and diluted earnings per share	0.07	$ 0.19	0.17	$ 0.02
Dividends declared per common share	$ 0.045		$ 0.135
Comprehensive Income
Net income	$ 4,026	$ 14,760	$ 9,413	$ 33,157
Currency translation adjustment	(465)	(878)	(1,414)	(1,224)
Total comprehensive income	$ 3,561	$ 13,882	$ 7,999	$ 31,933

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Operating activities
Net income	$ 9,413	$ 33,157
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization expense	12,530	11,858
Stock-based compensation expense	2,785	2,137
Amortization of debt issuance costs and debt discount	1,437	594
Loss on debt modification and extinguishment		703
Loss on sale of a discontinued operation		1,039
Excess tax benefits from stock-based compensation	(526)
Deferred income taxes	(445)	11,304
Other, net	220	1,162
Changes in operating assets and liabilities:
Accounts receivable	9,053	(13,045)
Inventories	1,978	(5,719)
Prepaid expenses and other assets	(32)	(1,130)
Income taxes	4,522	(6,264)
Accounts payable	(4,352)	1,893
Accrued expenses	1,699	4,057
Deferred revenue and customer deposits	1,307	3,207
Other liabilities	183	(523)
Cash provided by operating activities	39,772	44,430
Investing activities
Acquisitions of plant, equipment and leasehold improvements	(12,369)	(13,866)
Proceeds from sale of a discontinued operation		5,000
Cash used in investing activities	(12,369)	(8,866)
Financing activities
Payment of long-term debt		(170,929)
Payments of Sellers Note	(9,000)
Proceeds from First Lien Term Loan		435,000
Loan issuance costs		(17,773)
Dividend distribution on Series A Preferred Stock		(220,742)
Redemption of preferred and common stock		(55,992)
Common stock repurchased	(6,008)
Dividends paid on common stock	(5,031)
Proceeds from employee note receivable		108
Excess tax benefits from stock-based compensation	526
Payment of deferred IPO cost		(2,138)
Cash used in financing activities	(19,513)	(32,466)
Effect of exchange rates on cash	(226)	(181)
Net increase in cash and cash equivalents:	7,664	2,917
Cash and cash equivalents, beginning of period	13,606	12,941
Cash and cash equivalents, end of period	21,270	15,858
Supplemental disclosures of cash flow information
Interest	10,718	3,772
Income taxes paid, net of refunds	$ 1,113	$ 9,586

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Business Overview and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2016

Summary of Significant Accounting Policies

Business Overview and Summary of Significant Accounting Policies

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiaries, is referred to herein as “CPI” or the “Company”) is a leading provider of comprehensive Financial Payment Card solutions in North America. The Company defines Financial Payment Cards as credit, debit and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) and Interac (in Canada). The Company serves its customers through a network of ten production and card services facilities, including eight high-security facilities in North America that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by the Company’s customers, certified to be in compliance with the standards of the Payment Card Industry (“PCI”) Security Standards Council. In addition to its eight North American facilities, the Company has two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards that are not issued on the networks of the Payment Card Brands, and personalization services.

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2015 is derived from the audited financial statements as of that date.  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Certain prior year amounts were reclassified to conform to the current year presentation.

The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) pursuant to an asset purchase agreement for $5,000 in cash. The Nevada operations primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  See Note 2, “Discontinued Operation and Disposition.”

In August 2015, the Company completed its shut-down and closure of its operation in Petersfield, United Kingdom.  Petersfield primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  Accordingly, the Company accrued facility contract termination costs of $681 in the three and nine months ended September 30, 2015.

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets; valuation allowances for inventories and deferred tax assets; debt; and stock-based compensation expense. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to 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. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018. Upon adoption, the Company must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.  The Company has not determined what transition method it will use.  The Company is currently assessing the impact that the future adoption of ASU 2014-09, as amended, may have on its condensed consolidated financial statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the new guidance. 

The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July 2015.  ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016.  The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets.  ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation:Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share based payment transactions, including the accounting for forfeitures, statutory withholding requirements, and classification in the statement of cash flows.  In addition, excess tax benefits recorded to equity under existing accounting guidance will be recognized in income tax expense under the new standard. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 (the Company’s fiscal year 2017), with early adoption permitted. The Company is in the process of assessing the impact of ASU 2016-09 on its results of operations, financial position and consolidated financial statements. 

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Discontinued Operation and Disposition

9 Months Ended

Sep. 30, 2016

Discontinued Operation and Disposition

Discontinued Operation and Disposition

2. Discontinued Operation and Disposition

On January 12, 2015, the Company sold its Nevada non-secure operations pursuant to an asset purchase agreement for $5,000 in cash. The net carrying values of the assets sold as part of the discontinued operation included inventory and plant, equipment and leasehold improvements of $3,129 and $2,910, respectively. During the nine months ended September 30, 2015, the Company recognized a gain on the sale of a discontinued operation of $887, which is included in the gain from a discontinued operation, net of an income tax benefit of $1,926 in the Company’s Condensed Consolidated Statement of Operations.

The Nevada operations recognized a loss of $606 for the nine months ended September 30, 2015, net of an income tax benefit of $404.

After the Nevada sale, CPI retained no significant continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. The Nevada operations had $32,128 of tax deductible goodwill and intangible assets, of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the nine months ended September 30, 2015.

There was no recorded activity related to this transaction during the three months ended September 30, 2015.

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Inventories

9 Months Ended

Sep. 30, 2016

Inventories

Inventories

3. Inventories

Inventories are summarized below:

	September 30, 2016		December 31, 2015
Raw materials	$	9,923	$	10,549
Work-in-process		10,499		11,460
Finished goods		2,962		3,631
	$	23,384	$	25,640

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Plant, Equipment and Leasehold Improvements

9 Months Ended

Sep. 30, 2016

Plant, Equipment and Leasehold Improvements

Plant, Equipment and Leasehold Improvements

4. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consist of the following:

	September 30, 2016		December 31, 2015
Buildings	$	2,242	$	2,565
Machinery and equipment		58,173		57,482
Furniture, fixtures and computer equipment		6,969		4,440
Leasehold improvements		17,047		15,856
Construction in progress		7,570		2,373
		92,001		82,716
Less accumulated depreciation and amortization		(36,903)		(30,603)
	$	55,098	$	52,113

For the Company’s continuing operations, amounts recorded for the depreciation of plant, equipment and leasehold improvements was $3,098 and $2,673 for the three months ended September 30, 2016 and 2015, respectively, and $9,124 and $8,424 for the nine months ended September 30, 2016 and 2015, respectively.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2016

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

5. Goodwill and Other Intangible Assets

Goodwill of $72,339 at September 30, 2016 is attributable to the Company’s segments as follows: U.S. Debit and Credit $64,330; U.K. Limited $6,211; and Other $1,798. The change in goodwill from December 31, 2015 to September 30, 2016 was a result of foreign currency translation adjustments, primarily in the U.K. Limited segment.

Intangible assets consist of customer relationships, technology and software, non-compete agreements, favorable leases and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 16 years. The changes in the cost basis of the intangibles from December 31, 2015 to September 30, 2016 are related to foreign currency translations. Intangible amortization expense was $1,132 and $1,145 for the three months ended September 30, 2016 and 2015, respectively.  Intangible amortization expense was $3,406 and $3,433 for the nine months ended September 30, 2016 and 2015, respectively.

As of September 30, 2016 and December 31, 2015, intangible assets, excluding goodwill, were comprised of the following:

				September 30, 2016						December 31, 2015
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	59,165	$	(20,183)	$	38,982	$	59,612	$	(17,747)	$	41,865
Technology and software	7	to	10		7,101		(1,935)		5,166		7,101		(1,238)		5,863
Non-compete agreements	5	to	8		491		(315)		176		491		(270)		221
Favorable leases		9.5			111		(109)		2		111		(101)		10
Intangible assets subject to amortization					66,868		(22,542)		44,326		67,315		(19,356)		47,959
Trademarks (indefinite-lived)					6,029		—		6,029		6,029		—		6,029
				$	72,897	$	(22,542)	$	50,355	$	73,344	$	(19,356)	$	53,988

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2016 is as follows:

2016 (remaining 3 months)	$	1,128
2017		4,514
2018		4,514
2019		4,494
2020		4,454
Thereafter		25,222
	$	44,326

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2016

Fair Value of Financial Instruments

Fair Value of Financial Instruments

6. Fair Value of Financial Instruments

Fair value is defined as 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 (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

· Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

· Level 2— Observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities.

· Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The Company’s financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

	Fair Value as of		Fair Value Measurement at September 30, 2016
	September 30,		(Using Fair Value Hierarchy)
	2016		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	304,688	$	—	$	304,688	$	—

	Fair Value as of		Fair Value Measurement at December 31, 2015
	December 31,		(Using Fair Value Hierarchy)
	2015		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	309,375	$	—	$	309,375	$	—
Sellers Note	$	9,000	$	—	$	—	$	9,000

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Long-Term Debt and Credit Facility

9 Months Ended

Sep. 30, 2016

Long-Term Debt and Credit Facility

Long-Term Debt and Credit Facility

7. Long-Term Debt and Credit Facility

As of September 30, 2016 and December 31, 2015, long-term debt and credit facilities consist of the following:

	Interest		September 30,		December 31,
	Rate (1)		2016		2015
First lien term loan facility	5.5	%	$	312,500	$	312,500
Sellers note	5.0	%		—		9,000
Unamortized discount				(3,963)		(4,459)
Unamortized deferred financing costs				(7,100)		(8,041)
Total long-term debt				301,437		309,000
Less current maturities of long-term debt				—		(9,000)
Long-term debt, excluding current maturities			$	301,437	$	300,000

(1) Interest rate at September 30, 2016

First Lien Credit Facility

On August 17, 2015, the Company entered into a first lien credit agreement (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan facility (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.

The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.

Interest rates under the First Lien Credit Facility are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50%, or a base rate plus a margin of 3.50%. Letters of credit are subject to a 0.125% fronting fee payable to the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines.

The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets and affiliate transactions.  As of September 30, 2016, the Company was in compliance with all covenants under the First Lien Credit Facility.

The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an excess cash flow calculation, beginning as of the year ending December 31, 2016.   

The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage ratio not in excess of 7.0 times EBITDA.

As of September 30, 2016, the Company did not have any outstanding borrowings under the Revolving Credit Facility. The Company has one outstanding letter of credit for the security deposit on a real property lease agreement. This letter of credit totals $50, reducing availability under the Revolving Credit Facility to $39,950. The Company pays a fee on the outstanding letter of credit at the applicable margin, which was 4.50% as of September 30, 2016, in addition to a fronting fee of 0.125% per annum.

Sellers Note

The Company entered into a subordinated, unsecured promissory note for $9,000 (“Sellers Note”) with certain sellers of EFT Source, Inc. (“EFT Source”) in connection with its acquisition of EFT Source on September 2, 2014. All principal and unpaid interest under the Sellers Note was due and paid to the sellers on September 2, 2016.  Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly.

Deferred Financing Costs

Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance.  These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method.

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Income Taxes

9 Months Ended

Sep. 30, 2016

Income Tax Disclosure [Abstract]

Income Taxes

8. Income Taxes

During the three months ended September 30, 2016, the Company recognized an income tax expense of $2,541 on pre-tax income of $6,567, representing an effective income tax rate of 38.7%, compared to an income tax expense from continuing operations of $6,554 on pre-tax income of $21,314, representing an effective tax rate of 30.7% during the three months ended September 30, 2015.

During the nine months ended September 30, 2016, the Company recognized an income tax expense of $5,194 on pre-tax income of $14,607, representing an effective income tax rate of 35.6%, compared to an income tax expense from continuing operations of $16,528 on pre-tax income of $49,404, representing an effective tax rate of 33.5% during the nine months ended September 30, 2015.  The increase in the effective tax rate for the nine months ended September 30, 2016 compared to the same period in the prior year was primarily due to the impact of state taxes.

The effective tax rates for all periods presented also differ from the federal U.S. statutory rate primarily due to a benefit from permanent deductions related to credits for domestic production activities and the impact of state and foreign income taxes.

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Series A Preferred Stock

9 Months Ended

Sep. 30, 2016

Series A Preferred Stock.

Series A Preferred Stock

9. Series A Preferred Stock

There were no outstanding shares of Series A Preferred Stock as of September 30, 2016 or December 31, 2015.  On August 17, 2015, the Company redeemed 62,140 shares of Series A Preferred Stock for $276,688, at $4,446.70 per share. Of the $276,688 redemption amount, $55,946 was treated as a return of capital and $220,742 was treated as a dividend. During the nine months ended September 30, 2015, the Company redeemed a total of 62,233 shares of Series A Preferred Stock at prices ranging from $3,950.33 to $4,446.70 per share.  In addition, Series A Preferred Stock accrued dividends were $7,096 and $32,454 during the three and nine months ended September 30, 2015, respectively.

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Stockholders' Equity

9 Months Ended

Sep. 30, 2016

Stockholders’ Equity

Stockholders’ Equity

10. Stockholders’ Equity

Common Stock

On May 11, 2016, the Board of Directors approved a stock repurchase program that authorizes repurchases of up to $20,000 of the Company’s common stock, limited to a maximum of 2,827,105 common shares, prior to May 11, 2017.  Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions.  During the three months ended September 30, 2016, there were no common shares repurchased.  During the nine months ended September 30, 2016, there were 1,439,422 common shares repurchased for $6,008, at an average cost of $4.17 per share.  The repurchase has been accounted for as a share retirement. At September 30, 2016, $13,992 remained available under the share repurchase authorization, up to a maximum of 1,387,683 shares.   

During the three and nine months ended September 30, 2016, there were 65,891 and 190,557 shares of common stock issued in connection with stock option exercises and the vesting of restricted stock units, respectively (Note 13, “Stock-Based Compensation”).  During the nine months ended September 30, 2015, the Company issued no common stock and redeemed 86,768 shares of common stock at values of $0.32 and $0.91 per share.  During the three months ended September 30, 2015, there was no common stock issued or redeemed.  The redeemed common stock share values were calculated in accordance with the terms of the applicable award agreements.

During the three and nine months ended September 30, 2016, the Company paid dividends of $2,487 and $5,031, representing $0.045 and $0.09 per share, respectively.  Additionally, on August 10, 2016, the Board of Directors approved a dividend of $0.045 per share, payable on October 7, 2016 to stockholders of record as of the close of business on September 16, 2016. The accrued dividend of $2,488 is reflected in “Accrued expenses” in the Condensed Consolidated Balance Sheet as of September 30, 2016.  For the nine months ended September 30, 2016, the Company has declared aggregate dividends of $0.135 per share.

On September 3, 2015, the Company’s Board of Directors approved a 22-for-1 stock split of its common stock. Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the Option Plan (as hereinafter defined) were increased accordingly. All of the share numbers, share prices and exercise prices have been retroactively adjusted to reflect the stock split in this Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and these notes.

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Earnings per Share

9 Months Ended

Sep. 30, 2016

Earnings per Share

Earnings per Share

11. Earnings per Share

Basic and diluted earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period.

The following table sets forth the computation of basic and diluted EPS attributable to continuing and discontinued operations:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Numerator:
Net income from continuing operations	$	4,026	$	14,760	$	9,413	$	32,876
Preferred stock dividends		—		(7,096)		—		(32,454)
Earnings from continuing operations attributable to common stockholders		4,026		7,664		9,413		422
Income from a discontinued operation, net of taxes		—		—		—		281
Net earnings attributable to common stockholders	$	4,026	$	7,664	$	9,413	$	703
Denominator:
Basic EPS—weighted average common shares outstanding		55,255,239		41,476,116		55,999,722		41,374,188
Diluted EPS—weighted average common shares outstanding		55,508,684		41,819,422		56,232,195		41,717,494
Basic and Diluted EPS:
Earnings from continuing operations	$	0.07	$	0.19	$	0.17	$	0.01
Earnings from a discontinued operation, net of taxes		—		—		—		0.01
Earnings per share	$	0.07	$	0.19	$	0.17	$	0.02

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

12. Commitments and Contingencies

Commitments

The Company incurred rent expense under non-cancellable operating leases of $907 and $757 for the three months ended September 30, 2016 and 2015, respectively, and $2,541 and $2,576 for the nine months ended September 30, 2016 and 2015, respectively.

Contingencies

In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)

On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO.  The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs.  In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, the remainder of the fiscal year ending December 31, 2015, and the fiscal year .  The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO. 

The Court has entered a briefing schedule on defendants' prospective motion(s) to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of such motions.  

The Company believes these claims are without merit and intends to defend the action vigorously. Given the current stage of these matters, the range of any potential loss is not estimable and no accrual has been recognized as of September 30, 2016.

Gemalto S.A. v. CPI Card Group Inc. (2 cases)

First case.  This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent will expire in 2017. The Company successfully moved to transfer the lawsuit to the United States District Court for the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors.

On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board, seeking re-examination of Gemalto’s asserted patent.  In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the Patent Trial & Appeal Board’s consideration of the Company’s challenge to the patentability of asserted claims. 

Second case.  On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering.  Gemalto’s patent will expire in 2018.  On May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on September 2, 2016.  The Company’s motion to dismiss remains pending. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. 

  With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. While a risk of loss is reasonably possible, given the current stage of these matters, as well as the aforementioned defenses, counterclaims and indemnity rights, the range of potential loss is not estimable and no accrual has been recognized as of September 30, 2016 and December 31, 2015.

In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business.  The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2016

Stock-Based Compensation

Stock Option Plan

13. Stock-Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

 During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan.  As of September 30, 2016, there were 2,266,481 shares available for grant under the Omnibus Plan.

During the three months ended September 30, 2016, the Company granted awards of non-qualified stock options under the Omnibus Plan for 112,500 shares of common stock.  The stock option awards have an exercise price of $5.52 per share, a 10 year term, and vest 25% on each anniversary date of the awards over a four year period.  The fair value of the stock option awards was determined using a Black-Scholes option-pricing model with the following assumptions: volatility of 35.3%, risk-free interest rate of 1.4%, dividend yield of 3.3% and an expected term of approximately 6 years.

Outstanding and exercisable stock options under the Omnibus Plan are as follows:

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2015	795,450	$	10.00
Granted	765,190		7.43
Forfeited	(104,000)		10.00
Outstanding as of September 30, 2016	1,456,640	$	8.65	9.21

Unvested options as of September 30, 2016 will vest as follows:

2016	—
2017	392,669
2018	475,978
2019	475,723
2020	112,270
Total unvested options as of September 30, 2016	1,456,640

During the three months ended September 30, 2016, the Company granted awards of restricted stock units for 18,562 shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or service, and vest 25% on each anniversary date of the awards over a four year period.  On the vesting dates, shares of common stock will be issued to the award recipients. 

The following table summarizes the changes in the number of outstanding restricted stock units for the nine month period ended September 30, 2016:

		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Outstanding as of December 31, 2015	—	$	—
Granted	289,377		7.29
Vested	(15,803)		7.91
Forfeited	(7,586)		7.91
Outstanding as of September 30, 2016	265,988	$	7.24

Compensation expense for the Omnibus Plan for the three and nine months ended September 30, 2016 was $840 and $2,045, respectively.  As of September 30, 2016, the total unrecognized compensation expense related to unvested options and restricted stock units under the Omnibus Plan was $3,368, which the Company expects to recognize over an estimated weighted average period of 1.6 years.

CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan

In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted.

As a result of the Company’s adoption of the Omnibus Plan, as further described above, no further awards will be made under the Option Plan.  The outstanding stock options under the Option Plan have a 10-year life and vest as noted in each respective grant letter.  All stock options are non-qualified.  No stock options were granted during the three and nine month period ended September 30, 2015.

The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the nine month period ended September 30, 2016:

				Weighted-
				Average
				Remaining
		Weighted- Average		Contractual Term
	Options	Exercise Price		(in Years)
Outstanding as of December 31, 2015	462,000	$	0.0003
Granted	—		—
Exercised	(179,667)		0.0004
Forfeited	—		—
Outstanding as of September 30, 2016	282,333	$	0.0004	5.50
Exercisable as of September 30, 2016	275,000	$	0.0004	5.50

Unvested options as of September 30, 2016 will vest as follows:

2016	7,333
Total unvested options as of September 30, 2016	7,333

Compensation expense related to options previously granted under the Option Plan for the three and nine months ended September 30, 2016 and 2015, and unrecorded compensation expense at September 30, 2016, were de minimis.  The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of September 30, 2016 was $1,705 and $1,661, respectively.

Other Stock-Based Compensation Awards

During June 2015, the Company issued 191,664 restricted shares of common stock to executives of the Company with a weighted-average grant date fair value of $9.48 per share.  The awards contain conditions associated with continued employment or service.  The terms of the unvested restricted shares of common stock provide voting and regular dividend rights to the holders, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings per share calculation.  See Note 11, “Earnings per Share”.  As of September 30, 2016, 94,864 restricted shares of common stock were outstanding, which vest over a three-year period from the grant date.

Total compensation expense related to these restricted shares of common stock awards was $94 and $740 for the three and nine month periods ended September 30, 2016, respectively.  Compensation expense for the three and nine month periods ended September 30, 2015 was $323.  As of September 30, 2016, there was $431 of total remaining unrecognized compensation expense related to these unvested restricted shares of common stock that will be recognized over a weighted average period of 1.34 years.

Phantom Stock Plan

The Company recognized $311 and $1,813 of compensation expense during the three and nine month periods ended September 30, 2015, respectively, related to the phantom stock plan. The phantom stock plan was terminated, and all outstanding obligations thereunder were settled, during October 2015 in conjunction with the Company’s IPO. 

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Segment Reporting

9 Months Ended

Sep. 30, 2016

Segment Reporting

Segment Reporting

14. Segment Reporting

The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA.

EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments.

As of September 30, 2016, the Company’s reportable segments are as follows:

· U.S. Debit and Credit;

· U.S. Prepaid Debit; and

· U.K. Limited.

The “Other” category includes the Company’s corporate headquarters and less significant operating segments that derive their revenue from the production of Financial Payment Cards and retail gift cards in Canada (CPI—Canada) and the U.K. (CPI—Petersfield).

In August 2015, the Company completed its shut-down and closure of its operation in Petersfield, United Kingdom. 

Performance Measures of Reportable Segments

Revenue and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Revenue
	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
U.S. Debit and Credit	$	49,156	$	72,785	$	165,055	$	196,190
U.S. Prepaid Debit		23,087		23,659		47,419		53,482
U.K. Limited		7,675		9,668		21,896		23,586
Other		2,710		3,995		9,530		13,917
Intersegment eliminations		(1,426)		(2,410)		(2,580)		(6,632)
Total:	$	81,202	$	107,697	$	241,320	$	280,543

	EBITDA
	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
U.S. Debit and Credit	$	12,917	$	23,368	$	43,242	$	59,961
U.S. Prepaid Debit		8,593		9,973		15,417		19,733
U.K. Limited		942		1,235		1,841		2,076
Other		(6,647)		(4,820)		(18,254)		(12,379)
Total:	$	15,805	$	29,756	$	42,246	$	69,391

The following table provides a reconciliation of total segment EBITDA to net income from continuing operations for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Total segment EBITDA from continuing operations	$	15,805	$	29,756	$	42,246	$	69,391
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Depreciation and amortization		(4,230)		(3,818)		(12,530)		(11,858)
Net income from continuing operations	$	4,026	$	14,760	$	9,413	$	32,876

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments as of September 30, 2016 and December 31, 2015 were as follows:

	September 30, 2016		December 31, 2015
U.S. Debit and Credit	$	205,481	$	221,274
U.S. Prepaid Debit		30,971		20,960
U.K. Limited		24,368		25,897
Other		9,892		12,222
Total assets:	$	270,712	$	280,353

Plant, Equipment and Leasehold Improvement Additions of Geographic Locations

Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
U.S.	$	4,757	$	3,625	$	11,580	$	13,598
Canada		47		136		208		417
Total North America		4,804		3,761		11,788		14,015
U.K.		374		437		1,165		573
Total plant, equipment and leasehold improvement additions	$	5,178	$	4,198	$	12,953	$	14,588

Net Sales of Geographic Locations

Net sales of the Company’s geographic locations for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
U.S.	$	69,573	$	94,125	$	205,027	$	244,636
Canada		2,792		3,084		10,221		7,209
Total North America		72,365		97,209		215,248		251,845
U.K.		7,910		8,236		22,697		22,089
Other (a)		927		2,252		3,375		6,609
Total net sales	$	81,202	$	107,697	$	241,320	$	280,543

(a) Amounts in Other include sales to various countries that individually are not material.

Long-Lived Assets of Geographic Segments

Long-lived assets of the Company’s geographic segments as of September 30, 2016 and December 31, 2015 were as follows:

	September 30, 2016		December 31, 2015
U.S.	$	163,271	$	164,377
Canada		3,024		2,254
Total North America:		166,295		166,631
U.K.		11,497		12,593
Total long-lived assets	$	177,792	$	179,224

Net Sales by Product and Services

Net sales from products and services sold by the Company for the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Product net sales (a)	$	37,482	$	65,567	$	132,535	$	178,338
Services net sales (b)		43,720		42,130		108,785		102,205
Total net sales:	$	81,202	$	107,697	$	241,320	$	280,543

(a) Product net sales include the design and production of Financial Payment Cards in contact-EMV, Dual-Interface EMV, contactless and magnetic stripe card formats.  The Company also generates product revenue from the sale of Card@Once® instant issuance systems, private label credit cards and retail gift cards.

(b) Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards.  The Company also generates service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images.

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Subsequent Event

9 Months Ended

Sep. 30, 2016

Subsequent Event

Subsequent Event

15.  Subsequent Events

On November 9, 2016, the Board of Directors approved a dividend of $0.045 per share. This dividend is payable on January 12, 2017, to stockholders of record as of the close of business on December 16, 2016.

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Business Overview and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2016

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2015 is derived from the audited financial statements as of that date.  The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Certain prior year amounts were reclassified to conform to the current year presentation.

The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) pursuant to an asset purchase agreement for $5,000 in cash. The Nevada operations primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  See Note 2, “Discontinued Operation and Disposition.”

In August 2015, the Company completed its shut-down and closure of its operation in Petersfield, United Kingdom.  Petersfield primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands.  Accordingly, the Company accrued facility contract termination costs of $681 in the three and nine months ended September 30, 2015.

Use of Estimates

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets; valuation allowances for inventories and deferred tax assets; debt; and stock-based compensation expense. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to 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. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018. Upon adoption, the Company must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.  The Company has not determined what transition method it will use.  The Company is currently assessing the impact that the future adoption of ASU 2014-09, as amended, may have on its condensed consolidated financial statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the new guidance. 

The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July 2015.  ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016.  The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets.  ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation:Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share based payment transactions, including the accounting for forfeitures, statutory withholding requirements, and classification in the statement of cash flows.  In addition, excess tax benefits recorded to equity under existing accounting guidance will be recognized in income tax expense under the new standard. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 (the Company’s fiscal year 2017), with early adoption permitted. The Company is in the process of assessing the impact of ASU 2016-09 on its results of operations, financial position and consolidated financial statements.

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Inventories (Tables)

9 Months Ended

Sep. 30, 2016

Inventories

Schedule of inventories

	September 30, 2016		December 31, 2015
Raw materials	$	9,923	$	10,549
Work-in-process		10,499		11,460
Finished goods		2,962		3,631
	$	23,384	$	25,640

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Plant, Equipment and Leasehold Improvements (Tables)

9 Months Ended

Sep. 30, 2016

Plant, Equipment and Leasehold Improvements

Schedule of plant, equipment and leasehold improvements

	September 30, 2016		December 31, 2015
Buildings	$	2,242	$	2,565
Machinery and equipment		58,173		57,482
Furniture, fixtures and computer equipment		6,969		4,440
Leasehold improvements		17,047		15,856
Construction in progress		7,570		2,373
		92,001		82,716
Less accumulated depreciation and amortization		(36,903)		(30,603)
	$	55,098	$	52,113

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2016

Goodwill and Other Intangible Assets

Schedule of intangible assets excluding goodwill

				September 30, 2016						December 31, 2015
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	59,165	$	(20,183)	$	38,982	$	59,612	$	(17,747)	$	41,865
Technology and software	7	to	10		7,101		(1,935)		5,166		7,101		(1,238)		5,863
Non-compete agreements	5	to	8		491		(315)		176		491		(270)		221
Favorable leases		9.5			111		(109)		2		111		(101)		10
Intangible assets subject to amortization					66,868		(22,542)		44,326		67,315		(19,356)		47,959
Trademarks (indefinite-lived)					6,029		—		6,029		6,029		—		6,029
				$	72,897	$	(22,542)	$	50,355	$	73,344	$	(19,356)	$	53,988

Schedule of future aggregate amortization expense for identified amortizable intangibles

2016 (remaining 3 months)	$	1,128
2017		4,514
2018		4,514
2019		4,494
2020		4,454
Thereafter		25,222
	$	44,326

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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2016

Fair Value of Financial Instruments

Schedule of financial assets and liabilities subject to fair value measurements

	Fair Value as of		Fair Value Measurement at September 30, 2016
	September 30,		(Using Fair Value Hierarchy)
	2016		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	304,688	$	—	$	304,688	$	—

	Fair Value as of		Fair Value Measurement at December 31, 2015
	December 31,		(Using Fair Value Hierarchy)
	2015		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	309,375	$	—	$	309,375	$	—
Sellers Note	$	9,000	$	—	$	—	$	9,000

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Long-Term Debt and Credit Facility (Tables)

9 Months Ended

Sep. 30, 2016

Long-Term Debt and Credit Facility

Schedule of long-term debt

	Interest		September 30,		December 31,
	Rate (1)		2016		2015
First lien term loan facility	5.5	%	$	312,500	$	312,500
Sellers note	5.0	%		—		9,000
Unamortized discount				(3,963)		(4,459)
Unamortized deferred financing costs				(7,100)		(8,041)
Total long-term debt				301,437		309,000
Less current maturities of long-term debt				—		(9,000)
Long-term debt, excluding current maturities			$	301,437	$	300,000

(1) Interest rate at September 30, 2016

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Earnings per Share (Tables)

9 Months Ended

Sep. 30, 2016

Earnings per Share

Computation of basic and diluted EPS

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Numerator:
Net income from continuing operations	$	4,026	$	14,760	$	9,413	$	32,876
Preferred stock dividends		—		(7,096)		—		(32,454)
Earnings from continuing operations attributable to common stockholders		4,026		7,664		9,413		422
Income from a discontinued operation, net of taxes		—		—		—		281
Net earnings attributable to common stockholders	$	4,026	$	7,664	$	9,413	$	703
Denominator:
Basic EPS—weighted average common shares outstanding		55,255,239		41,476,116		55,999,722		41,374,188
Diluted EPS—weighted average common shares outstanding		55,508,684		41,819,422		56,232,195		41,717,494
Basic and Diluted EPS:
Earnings from continuing operations	$	0.07	$	0.19	$	0.17	$	0.01
Earnings from a discontinued operation, net of taxes		—		—		—		0.01
Earnings per share	$	0.07	$	0.19	$	0.17	$	0.02

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2016

Omnibus Plan

Summary of outstanding and exercisable stock options

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2015	795,450	$	10.00
Granted	765,190		7.43
Forfeited	(104,000)		10.00
Outstanding as of September 30, 2016	1,456,640	$	8.65	9.21

Schedule of vesting for unvested options

2016	—
2017	392,669
2018	475,978
2019	475,723
2020	112,270
Total unvested options as of September 30, 2016	1,456,640

Summary of changes in number of outstanding restricted shares of common stock

		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Outstanding as of December 31, 2015	—	$	—
Granted	289,377		7.29
Vested	(15,803)		7.91
Forfeited	(7,586)		7.91
Outstanding as of September 30, 2016	265,988	$	7.24

Option Plan

Summary of outstanding and exercisable stock options

				Weighted-
				Average
				Remaining
		Weighted- Average		Contractual Term
	Options	Exercise Price		(in Years)
Outstanding as of December 31, 2015	462,000	$	0.0003
Granted	—		—
Exercised	(179,667)		0.0004
Forfeited	—		—
Outstanding as of September 30, 2016	282,333	$	0.0004	5.50
Exercisable as of September 30, 2016	275,000	$	0.0004	5.50

Schedule of vesting for unvested options

2016	7,333
Total unvested options as of September 30, 2016	7,333

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Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2016

Segment Reporting

Schedule of revenue and EBITDA of the company's reportable segments

	Revenue
	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
U.S. Debit and Credit	$	49,156	$	72,785	$	165,055	$	196,190
U.S. Prepaid Debit		23,087		23,659		47,419		53,482
U.K. Limited		7,675		9,668		21,896		23,586
Other		2,710		3,995		9,530		13,917
Intersegment eliminations		(1,426)		(2,410)		(2,580)		(6,632)
Total:	$	81,202	$	107,697	$	241,320	$	280,543

	EBITDA
	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
U.S. Debit and Credit	$	12,917	$	23,368	$	43,242	$	59,961
U.S. Prepaid Debit		8,593		9,973		15,417		19,733
U.K. Limited		942		1,235		1,841		2,076
Other		(6,647)		(4,820)		(18,254)		(12,379)
Total:	$	15,805	$	29,756	$	42,246	$	69,391

Schedule of reconciliation of total segment EBITDA to income before taxes

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Total segment EBITDA from continuing operations	$	15,805	$	29,756	$	42,246	$	69,391
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Depreciation and amortization		(4,230)		(3,818)		(12,530)		(11,858)
Net income from continuing operations	$	4,026	$	14,760	$	9,413	$	32,876

Schedule of total assets of the company's reportable segments

	September 30, 2016		December 31, 2015
U.S. Debit and Credit	$	205,481	$	221,274
U.S. Prepaid Debit		30,971		20,960
U.K. Limited		24,368		25,897
Other		9,892		12,222
Total assets:	$	270,712	$	280,353

Schedule of plant, equipment and leasehold improvement additions of geographic locations

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
U.S.	$	4,757	$	3,625	$	11,580	$	13,598
Canada		47		136		208		417
Total North America		4,804		3,761		11,788		14,015
U.K.		374		437		1,165		573
Total plant, equipment and leasehold improvement additions	$	5,178	$	4,198	$	12,953	$	14,588

Schedule of net sales of company's geographic locations

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
U.S.	$	69,573	$	94,125	$	205,027	$	244,636
Canada		2,792		3,084		10,221		7,209
Total North America		72,365		97,209		215,248		251,845
U.K.		7,910		8,236		22,697		22,089
Other (a)		927		2,252		3,375		6,609
Total net sales	$	81,202	$	107,697	$	241,320	$	280,543

(a) Amounts in Other include sales to various countries that individually are not material.

Schedule of Long lived assets of the company's geographic segments

	September 30, 2016		December 31, 2015
U.S.	$	163,271	$	164,377
Canada		3,024		2,254
Total North America:		166,295		166,631
U.K.		11,497		12,593
Total long-lived assets	$	177,792	$	179,224

Schedule of net sales from product and services sold by the company

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Product net sales (a)	$	37,482	$	65,567	$	132,535	$	178,338
Services net sales (b)		43,720		42,130		108,785		102,205
Total net sales:	$	81,202	$	107,697	$	241,320	$	280,543

(a) Product net sales include the design and production of Financial Payment Cards in contact-EMV, Dual-Interface EMV, contactless and magnetic stripe card formats.  The Company also generates product revenue from the sale of Card@Once® instant issuance systems, private label credit cards and retail gift cards.

(b) Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards.  The Company also generates service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images.

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Business Overview and Summary of Significant Accounting Policies - Business Overview and Basis of Presentation (Details) $ in Thousands		3 Months Ended	9 Months Ended
	Jan. 12, 2015 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2016 item	Sep. 30, 2015 USD ($)
Nature of Operations and Basis of Presentation [Line Items]
Total number of production and card services facilities | item			10
Proceeds from sale of asset | $				$ 5,000
Facility contract termination costs | $		$ 681		681
Sold | Nevada
Nature of Operations and Basis of Presentation [Line Items]
Proceeds from sale of asset | $	$ 5,000
Total North America
Nature of Operations and Basis of Presentation [Line Items]
Number of high-security production and card services facilities | item			8
Number of payment card brands which certify card services | item			1
U.K.
Nature of Operations and Basis of Presentation [Line Items]
Total number of production and card services facilities | item			2
Petersfield, United Kingdom
Nature of Operations and Basis of Presentation [Line Items]
Facility contract termination costs | $		$ 681		$ 681

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Discontinued Operation and Disposition (Details) - USD ($) $ in Thousands		9 Months Ended
	Jan. 12, 2015	Sep. 30, 2015	Dec. 31, 2015
Discontinued Operation and Disposition
Proceeds from sale of asset		$ 5,000
Gain on sale of a discontinued operation		887
Loss from a discontinued operation, net of taxes		606
Nevada
Discontinued Operation and Disposition
Term of transition service agreement	180 days
Tax deductible goodwill and intangible assets		32,128
Tax deductible goodwill resulting in income tax benefit during the period		4,190
Income tax benefit recognized on tax deductible goodwill		1,510
Nevada | Sold
Discontinued Operation and Disposition
Proceeds from sale of asset	$ 5,000
Gain on sale of a discontinued operation		887
Income tax benefit from gain on discontinued operation		1,926
Loss from a discontinued operation, net of taxes		606
Income tax benefit from discontinued operations		$ 404
Nevada | Held-for-sale
Discontinued Operation and Disposition
Carrying value of inventory			$ 3,129
Carrying value of plant, equipment and leasehold improvements			$ 2,910

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Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Inventories
Raw materials	$ 9,923	$ 10,549
Work-in-process	10,499	11,460
Finished goods	2,962	3,631
Inventory	$ 23,384	$ 25,640

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Plant, Equipment and Leasehold Improvements (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	$ 92,001		$ 92,001		$ 82,716
Less accumulated depreciation and amortization	(36,903)		(36,903)		(30,603)
Plant, equipment and leasehold improvements, net	55,098		55,098		52,113
Depreciation	3,098	$ 2,673	9,124	$ 8,424
Buildings
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	2,242		2,242		2,565
Machinery and equipment
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	58,173		58,173		57,482
Furniture, fixtures and computer equipment
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	6,969		6,969		4,440
Leasehold improvements
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	17,047		17,047		15,856
Construction in progress
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	$ 7,570		$ 7,570		$ 2,373

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Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Goodwill Activity
Goodwill	$ 72,339	$ 73,123
Operating Segments | U.S. Debit and Credit
Goodwill Activity
Goodwill	64,330
Operating Segments | U.K. Limited
Goodwill Activity
Goodwill	6,211
Operating Segments | Other
Goodwill Activity
Goodwill	$ 1,798

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Goodwill and Other Intangible Assets - Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Intangible Assets [Line Items]
Weighted-average useful life			16 years
Intangible amortization expense	$ 1,132	$ 1,145	$ 3,406	$ 3,433
Intangible assets subject to amortization, Cost	66,868		66,868		$ 67,315
Intangible assets subject to amortization, Accumulated Amortization	(22,542)		(22,542)		(19,356)
Intangible assets subject to amortization, Net Book Value	44,326		44,326		47,959
Intangible assets, Cost	72,897		72,897		73,344
Intangible assets, Net Book Value	50,355		50,355		53,988
Trademarks
Intangible Assets [Line Items]
Indefinite-lived intangible assets	6,029		6,029		6,029
Customer relationships
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	59,165		59,165		59,612
Intangible assets subject to amortization, Accumulated Amortization	(20,183)		(20,183)		(17,747)
Intangible assets subject to amortization, Net Book Value	38,982		$ 38,982		41,865
Customer relationships | Minimum
Intangible Assets [Line Items]
Weighted-average useful life			12 years
Customer relationships | Maximum
Intangible Assets [Line Items]
Weighted-average useful life			20 years
Technology and software
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	7,101		$ 7,101		7,101
Intangible assets subject to amortization, Accumulated Amortization	(1,935)		(1,935)		(1,238)
Intangible assets subject to amortization, Net Book Value	5,166		$ 5,166		5,863
Technology and software | Minimum
Intangible Assets [Line Items]
Weighted-average useful life			7 years
Technology and software | Maximum
Intangible Assets [Line Items]
Weighted-average useful life			10 years
Non-compete agreements
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	491		$ 491		491
Intangible assets subject to amortization, Accumulated Amortization	(315)		(315)		(270)
Intangible assets subject to amortization, Net Book Value	176		$ 176		221
Non-compete agreements | Minimum
Intangible Assets [Line Items]
Weighted-average useful life			5 years
Non-compete agreements | Maximum
Intangible Assets [Line Items]
Weighted-average useful life			8 years
Favorable leases
Intangible Assets [Line Items]
Weighted-average useful life			9 years 6 months
Intangible assets subject to amortization, Cost	111		$ 111		111
Intangible assets subject to amortization, Accumulated Amortization	(109)		(109)		(101)
Intangible assets subject to amortization, Net Book Value	$ 2		$ 2		$ 10

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Goodwill and Other Intangible Assets - Future Aggregate Amortization Expense (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Estimated future aggregate amortization expense
2016 (remaining 3 months)	$ 1,128
2017	4,514
2018	4,514
2019	4,494
2020	4,454
Thereafter	25,222
Total	$ 44,326	$ 47,959

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Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Sellers Note
Liabilities:
Long-term debt		$ 9,000
Level 3 | Sellers Note
Liabilities:
Long-term debt		9,000
First Lien Credit Facility | Term Loan
Liabilities:
Long-term debt	$ 304,688	309,375
First Lien Credit Facility | Level 2 | Term Loan
Liabilities:
Long-term debt	$ 304,688	$ 309,375

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Long-Term Debt and Credit Facility - Long-Term Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Sep. 02, 2016	Dec. 31, 2015
Debt Instrument [Line Items]
Total long-term debt	$ 301,437		$ 309,000
Less current maturities of long-term debt			(9,000)
Long-term debt, excluding current maturities	$ 301,437		300,000
Sellers Note
Debt Instrument [Line Items]
Interest rate (as a percent)	5.00%	5.00%
Long-term debt			9,000
First Lien Credit Facility
Debt Instrument [Line Items]
Interest rate (as a percent)	5.50%
Long-term debt	$ 312,500		312,500
Unamortized discount	(3,963)		(4,459)
Unamortized deferred financing costs	$ (7,100)		$ (8,041)

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Long-Term Debt and Credit Facility - First Lien Credit Facility (Details) - USD ($) $ in Thousands		9 Months Ended
	Aug. 17, 2015	Sep. 30, 2016	Sep. 30, 2015
Long-term Debt
Interest expense related to amortization of deferred financing costs and discount		$ 1,437	$ 594
First Lien Credit Facility
Long-term Debt
Maximum net leverage ratio	7.00
Term Loan | First Lien Credit Facility
Long-term Debt
Maximum borrowing capacity	$ 435,000
Term Loan | Eurodollar rate | First Lien Credit Facility
Long-term Debt
Interest rate floor (as a percent)	1.00%
Applicable margin over reference rate (as a percent)	4.50%
Term Loan | Base rate | First Lien Credit Facility
Long-term Debt
Applicable margin over reference rate (as a percent)	3.50%
Revolving Credit Facility | First Lien Credit Facility
Long-term Debt
Maximum borrowing capacity	$ 40,000
Fronting fee for letters of credit (as a percent)	0.125%	0.125%
Amount drawn to trigger net leverage requirement (as a percent)	50.00%
Letters of credit outstanding		$ 50
Amount outstanding		$ 0
Revolving Credit Facility | First Lien Credit Facility | Minimum
Long-term Debt
Unused commitment fee (as a percent)	0.375%
Revolving Credit Facility | First Lien Credit Facility | Maximum
Long-term Debt
Unused commitment fee (as a percent)	0.50%

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Long-Term Debt and Credit Facility - Sellers Note (Details) - Sellers Note - USD ($) $ in Thousands	Sep. 30, 2016	Sep. 02, 2016
Long-term Debt
Promissory note		$ 9,000
Interest rate (as a percent)	5.00%	5.00%

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Long-Term Debt and Credit Facility - Letters of Credit (Details) $ in Thousands		3 Months Ended	9 Months Ended
	Aug. 17, 2015 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) item	Sep. 30, 2015 USD ($)
Long-term Debt
Loss on early extinguishment of debt		$ (703)		$ (703)
Term Loan | First Lien Credit Facility
Long-term Debt
Maximum borrowing capacity	$ 435,000
Revolving Credit Facility | First Lien Credit Facility
Long-term Debt
Number of outstanding letters of credit | item			1
Letters of credit outstanding			$ 50
Remaining borrowing capacity			$ 39,950
Fee on outstanding letters of credit (as a percent)			4.50%
Fronting fee for letters of credit (as a percent)	0.125%		0.125%
Maximum borrowing capacity	$ 40,000

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Income Taxes - Income Tax Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Tax Disclosure [Abstract]
Income tax expense	$ 2,541	$ 6,554	$ 5,194	$ 16,528
Income before income taxes
Income before income taxes	$ 6,567	$ 21,314	$ 14,607	$ 49,404
Effective income tax rate (as a percent)	38.70%	30.70%	35.60%	33.50%

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Series A Preferred Stock - Additional Share Activity (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended	9 Months Ended
	Aug. 17, 2015	Sep. 30, 2015	Sep. 30, 2015	Sep. 30, 2016	Dec. 31, 2015
Temporary Equity [Line Items]
Redemption value treated as dividend			$ 220,742
Shares outstanding				0	0
Series A Preferred Stock
Temporary Equity [Line Items]
Shares redeemed	62,140		62,233
Total redemption value	$ 276,688
Redemption value treated as return of capital	55,946
Redemption value treated as dividend	$ 220,742
Shares outstanding				0	0
Dividends accrued		$ 7,096	$ 32,454
Series A Preferred Stock | Minimum
Temporary Equity [Line Items]
Redemption Price (per share)	$ 4,446.70	$ 3,950.33	$ 3,950.33
Series A Preferred Stock | Maximum
Temporary Equity [Line Items]
Redemption Price (per share)		$ 4,446.70	$ 4,446.70

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Stockholders' Equity - Repurchase Program (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	May 11, 2016
Stockholders’ Equity
Maximum value of shares authorized for repurchase under repurchase plan			$ 20,000
Maximum number of shares authorized for repurchase under repurchase program			2,827,105
Shares repurchased and retired (in shares)	0	1,439,422
Value of shares repurchased and retired		$ 6,008
Average cost of shares repurchased (in dollars per share)		$ 4.17
Value of remaining shares available under repurchase authorization	$ 13,992	$ 13,992
Maximum remaining number of shares available under repurchase authorization	1,387,683	1,387,683

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Stockholders' Equity - Common Stock (Details) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended	9 Months Ended
	Aug. 10, 2016	Aug. 17, 2015	Sep. 30, 2016	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Class of Stock [Line Items]
Common shares, outstanding shares (in shares)			55,293,251	55,293,251		56,542,116
Common shares, authorized shares (in shares)			100,000,000	100,000,000		100,000,000
Common shares, par value (in dollars per share)			$ 0.001	$ 0.001		$ 0.001
Cash dividend paid per common share			$ 0.045	$ 0.09
Dividends paid on common stock			$ 2,487	$ 5,031
Cash dividends declared per common share	$ 0.045		$ 0.045	$ 0.135
Series A Preferred Stock
Class of Stock [Line Items]
Total redemption value		$ 276,688
Shares redeemed		62,140			62,233
Common Stock
Class of Stock [Line Items]
Shares issued under stock-based compensation plans (in shares)			65,891	190,557
Shares issued (in shares)					0
Shares redeemed					86,768
Common Stock | Minimum
Class of Stock [Line Items]
Common stock redemption value per share					$ 0.32
Common Stock | Maximum
Class of Stock [Line Items]
Common stock redemption value per share					$ 0.91
Accrued expenses
Class of Stock [Line Items]
Accrued dividend			$ 2,488	$ 2,488

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Stockholders' Equity - Stock Split and Employee Notes Receivable (Details) $ in Thousands		9 Months Ended
	Sep. 03, 2015	Sep. 30, 2015 USD ($)	Sep. 30, 2016 shares	Dec. 31, 2015 shares
Class of Stock [Line Items]
Common shares, authorized shares (in shares) | shares			100,000,000	100,000,000
Employee Notes Receivable
Proceeds from employee note receivable | $		$ 108
Common Stock
Class of Stock [Line Items]
Stock split	22

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Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Numerator:
Net income from continuing operations	$ 4,026	$ 14,760	$ 9,413	$ 32,876
Preferred stock dividends		(7,096)		(32,454)
Earnings from continuing operations attributable to common stockholders	4,026	7,664	9,413	422
Income income from a discontinued operation, net of taxes				281
Income attributable to common stockholders	$ 4,026	$ 7,664	$ 9,413	$ 703
Denominator:
Basic EPS - weighted average common shares outstanding	55,255,239	41,476,116	55,999,722	41,374,188
Dilutive EPS - weighted average common shares outstanding	55,508,684	41,819,422	56,232,195	41,717,494
Basic and Diluted EPS:
Earnings from continuing operations	$ 0.07	$ 0.19	$ 0.17	$ 0.01
Earnings from a discontinued operation, net of taxes				0.01
Total basic and diluted earnings per share	$ 0.07	$ 0.19	$ 0.17	$ 0.02

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Commitments and Contingencies - Rental Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Commitments and Contingencies Disclosure [Abstract]
Operating leases, rent expense	$ 907	$ 757	$ 2,541	$ 2,576

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Commitments and Contingencies - Contingencies (Details) $ in Thousands	Jun. 15, 2016 plaintiff	Sep. 30, 2016 USD ($)	Dec. 31, 2015 USD ($)
Loss Contingencies [Line Items]
Number of purported shareholders that have filed lawsuits | plaintiff	2
Gemalto Suit | Pending Litigation [Member]
Loss Contingencies [Line Items]
Loss Contingency Accrual | $		$ 0	$ 0

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Stock-Based Compensation - Omnibus Plan (Details) - Omnibus Plan - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	Oct. 09, 2015
Number of unvested options scheduled to vest
Compensation expense	$ 840	$ 2,045
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized			4,000,000
Number of shares available for grant	2,266,481	2,266,481
Stock options granted (in shares)	112,500	765,190
Exercise price of options granted (in dollars per share)	$ 5.52	$ 7.43
Stock option life (in years)	10 years
Stock options vesting percent	25.00%
Vesting period	4 years
Valuation Assumptions:
Volatility	35.30%
Risk-free interest rate	1.40%
Dividend yield	3.30%
Expected term in years	6 years
Number of shares
Balance at beginning of year (in shares)		795,450
Granted (in shares)	112,500	765,190
Forfeited (in shares)		(104,000)
Balance at end of year (in shares)	1,456,640	1,456,640
Weighted-Average Exercise Price
Balance at beginning of year (in dollars per share)		$ 10.00
Granted (in dollars per share)	$ 5.52	7.43
Forfeited (in dollars per share)		10.00
Balance at end of year (in dollars per share)	$ 8.65	$ 8.65
Weighted- Average Remaining Contractual Term (in Years)
Balance (in years)		9 years 2 months 16 days
Number of unvested options scheduled to vest
Unvested options (in shares)	1,456,640	1,456,640
2017 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	392,669	392,669
2018 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	475,978	475,978
2019 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	475,723	475,723
2020 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	112,270	112,270

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Stock-Based Compensation - Restricted Stock Units (Details) - Omnibus Plan $ / shares in Units, $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2016 USD ($) $ / shares shares	Sep. 30, 2016 USD ($) $ / shares shares
Weighted Average Grant Date Fair Value
Compensation expense | $	$ 840	$ 2,045
Restricted stock units
Number of Restricted Stock Units
Granted (in shares) | shares	18,562	289,377
Vested (in shares) | shares		(15,803)
Forfeited (in shares) | shares		(7,586)
Restricted stock units outstanding at the end of the period (in shares) | shares	265,988	265,988
Weighted Average Grant Date Fair Value
Granted (in dollars per share) | $ / shares		$ 7.29
Vested (in dollars per share) | $ / shares		7.91
Forfeited (in dollars per share) | $ / shares		7.91
Restricted stock units outstanding at the end of the period (in dollars per shares) | $ / shares	$ 7.24	$ 7.24
Unrecognized compensation expense | $	$ 3,368	$ 3,368
Period over which compensation expense expected to recognize		1 year 7 months 6 days

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Stock-Based Compensation - Option Plan (Details) - Option Plan - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Number of shares
Balance at beginning of year (in shares)		462,000
Exercised (in shares)		(179,667)
Balance at end of year (in shares)		282,333
Exercisable (in shares)		275,000
Weighted-Average Exercise Price
Balance at beginning of year (in dollars per share)		$ 0.0003
Exercised (in dollars per share)		0.0004
Balance at end of year (in dollars per share)		0.0004
Exercisable at end of year (in dollars per share)		$ 0.0004
Weighted- Average Remaining Contractual Term (in Years)
Balance (in years)		5 years 6 months
Exercisable		5 years 6 months
Number of unvested options scheduled to vest
Unvested options (in shares)		7,333
2016
Number of unvested options scheduled to vest
Unvested options (in shares)		7,333
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option life (in years)		10 years
Number of shares
Granted (in shares)	0		0
Weighted- Average Remaining Contractual Term (in Years)
Aggregate intrinsic value of stock option awards outstanding		$ 1,705
Aggregate intrinsic value of stock option awards exercisable		$ 1,661

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Stock-Based Compensation - Restricted Shares (Details) - Restricted shares - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended	9 Months Ended
	Jun. 30, 2015	Sep. 30, 2016	Sep. 30, 2016
Number of Restricted Stock Units
Granted (in shares)	191,664
Restricted stock units outstanding at the end of the period (in shares)		94,864	94,864
Weighted Average Grant Date Fair Value
Granted (in dollars per share)	$ 9.48
Vesting period			3 years
Compensation expense		$ 94	$ 740
Unrecognized compensation expense		$ 431	$ 431
Period over which compensation expense expected to recognize			1 year 4 months 2 days

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Stock-Based Compensation - Phantom Stock Plan (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2015
Phantom Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Compensation expense	$ 311	$ 1,813

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Segment Reporting - Revenue and EBITDA (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Segment Reporting
Revenues	$ 81,202	$ 107,697	$ 241,320	$ 280,543
EBITDA	15,805	29,756	42,246	69,391
U.S. Debit and Credit
Segment Reporting
EBITDA	12,917	23,368	43,242	59,961
U.S. Prepaid Debit
Segment Reporting
EBITDA	8,593	9,973	15,417	19,733
U.K. Limited
Segment Reporting
EBITDA	942	1,235	1,841	2,076
Other
Segment Reporting
EBITDA	(6,647)	(4,820)	(18,254)	(12,379)
Operating Segments | U.S. Debit and Credit
Segment Reporting
Revenues	49,156	72,785	165,055	196,190
Operating Segments | U.S. Prepaid Debit
Segment Reporting
Revenues	23,087	23,659	47,419	53,482
Operating Segments | U.K. Limited
Segment Reporting
Revenues	7,675	9,668	21,896	23,586
Operating Segments | Other
Segment Reporting
Revenues	2,710	3,995	9,530	13,917
Intersegment eliminations
Segment Reporting
Revenues	$ (1,426)	$ (2,410)	$ (2,580)	$ (6,632)

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Segment Reporting - Reconciliation of EBITDA to Income Before Taxes (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Reconciliation of total segment EBITDA to income before taxes
Total segment EBITDA from continuing operations	$ 15,805	$ 29,756	$ 42,246	$ 69,391
Interest, net	(5,008)	(4,624)	(15,109)	(8,129)
Income tax expense	(2,541)	(6,554)	(5,194)	(16,528)
Depreciation and amortization	(4,230)	(3,818)	(12,530)	(11,858)
Net income from continuing operations	$ 4,026	$ 14,760	$ 9,413	$ 32,876

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Segment Reporting - Balance Sheet Data (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	$ 270,712	$ 280,353
Operating Segments | U.S. Debit and Credit
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	205,481	221,274
Operating Segments | U.S. Prepaid Debit
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	30,971	20,960
Operating Segments | U.K. Limited
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	24,368	25,897
Operating Segments | Other
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	$ 9,892	$ 12,222

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Segment Reporting - Geographic Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	$ 5,178	$ 4,198	$ 12,953	$ 14,588
Revenues	81,202	107,697	241,320	280,543
Total long-lived assets	177,792		177,792		$ 179,224
Total North America
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	4,804	3,761	11,788	14,015
Revenues	72,365	97,209	215,248	251,845
Total long-lived assets	166,295		166,295		166,631
U.S.
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	4,757	3,625	11,580	13,598
Revenues	69,573	94,125	205,027	244,636
Total long-lived assets	163,271		163,271		164,377
Canada
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	47	136	208	417
Revenues	2,792	3,084	10,221	7,209
Total long-lived assets	3,024		3,024		2,254
U.K.
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	374	437	1,165	573
Revenues	7,910	8,236	22,697	22,089
Total long-lived assets	11,497		11,497		$ 12,593
Other
Segment Reporting Information [Line Items]
Revenues	$ 927	$ 2,252	$ 3,375	$ 6,609

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Segment Reporting - Net Sales by Product and Services (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Segment Reporting
Product net sales	$ 37,482	$ 65,567	$ 132,535	$ 178,338
Services net sales	43,720	42,130	108,785	102,205
Total net sales	$ 81,202	$ 107,697	$ 241,320	$ 280,543

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Subsequent Event (Details) - $ / shares			3 Months Ended	9 Months Ended
	Nov. 09, 2016	Aug. 10, 2016	Sep. 30, 2016	Sep. 30, 2016
Subsequent Event [Line Items]
Cash dividends declared per common share		$ 0.045	$ 0.045	$ 0.135
Subsequent Event [Member]
Subsequent Event [Line Items]
Cash dividends declared per common share	$ 0.045