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 June 30, 2017.

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.)
10026 West San Juan Way
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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes☐     No☒

Number of shares of Common Stock, $0.001 par value, outstanding as of July 24, 2017: 55,614,158

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	37
Signatures	38

2

Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

	June 30,		December 31,
	2017		2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	17,931	$	36,955
Accounts receivable, net of allowances of $50 and $126, respectively		37,269		31,492
Inventories		22,087		19,369
Prepaid expenses and other current assets		4,846		4,601
Income taxes receivable		3,697		—
Total current assets		85,830		92,417
Plant, equipment and leasehold improvements, net		53,190		53,419
Intangible assets, net		43,980		46,348
Goodwill		72,377		71,996
Other assets		157		240
Total assets	$	255,534	$	264,420
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	15,203	$	10,996
Accrued expenses		15,413		17,487
Income taxes payable		—		64
Deferred revenue and customer deposits		5,294		6,729
Total current liabilities		35,910		35,276
Long-term debt		302,897		301,922
Deferred income taxes		20,834		21,261
Other long-term liabilities		1,655		1,234
Total liabilities		361,296		359,693
Commitments and contingencies (Note 10)
Stockholders’ deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,614,158 and 55,359,251 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		56		55
Capital deficiency		(114,168)		(114,881)
Accumulated earnings		13,978		25,968
Accumulated other comprehensive loss		(5,628)		(6,415)
Total stockholders’ deficit		(105,762)		(95,273)
Total liabilities and stockholders’ deficit	$	255,534	$	264,420

See accompanying notes to condensed consolidated financial statements

3

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Net sales:
Products	$	33,825	$	40,095	$	63,588	$	95,053
Services		32,021		33,630		58,266		65,065
Total net sales		65,846		73,725		121,854		160,118
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		24,106		27,312		43,795		63,665
Services (exclusive of depreciation and amortization shown below)		19,612		21,063		37,053		38,827
Depreciation and amortization		2,842		2,643		5,627		5,227
Total cost of sales		46,560		51,018		86,475		107,719
Gross profit		19,286		22,707		35,379		52,399
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		15,556		16,633		31,712		31,131
Depreciation and amortization		1,761		1,544		3,509		3,073
Total operating expenses		17,317		18,177		35,221		34,204
Income from operations		1,969		4,530		158		18,195
Other expense, net:
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)
Foreign currency gain (loss)		181		34		255		(68)
Other income, net		5		15		5		13
Total other expense, net		(4,977)		(5,019)		(9,965)		(10,156)
(Loss) income before income taxes		(3,008)		(489)		(9,807)		8,039
Income tax benefit (expense)		847		161		3,139		(2,653)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386
Basic and diluted (loss) earnings per share:	$	(0.04)	$	(0.01)	$	(0.12)	$	0.10
Weighted-average shares outstanding:
Basic		55,612,366		56,201,811		55,518,462		56,371,964
Diluted		55,612,366		56,201,811		55,518,462		56,583,978
Dividends declared per common share	$	0.045	$	0.045	$	0.09	$	0.09
Comprehensive (loss) income
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386
Currency translation adjustment		586		(1,032)		787		(949)
Total comprehensive (loss) income	$	(1,575)	$	(1,360)	$	(5,881)	$	4,437

See accompanying notes to condensed consolidated financial statements

4

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

	Six Months Ended June 30,
	2017		2016
Operating activities
Net (loss) income	$	(6,668)	$	5,386
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization expense		9,136		8,300
Stock-based compensation expense		860		1,851
Amortization of debt issuance costs and debt discount		975		957
Excess tax benefits from stock-based compensation		—		(416)
Deferred income taxes		(540)		(28)
Other, net		94		68
Changes in operating assets and liabilities:
Accounts receivable		(5,457)		15,863
Inventories		(2,453)		2,049
Prepaid expenses and other assets		(139)		(543)
Income taxes		(3,753)		1,711
Accounts payable		3,320		(3,622)
Accrued expenses		(2,272)		1,819
Deferred revenue and customer deposits		(1,765)		(148)
Other liabilities		400		(80)
Cash (used in) provided by operating activities		(8,262)		33,167
Investing activities
Acquisitions of plant, equipment and leasehold improvements		(5,783)		(7,009)
Cash used in investing activities		(5,783)		(7,009)
Financing activities
Common stock repurchased		—		(6,008)
Dividends paid on common stock		(5,026)		(2,544)
Taxes withheld and paid on stock-based compensation awards		(339)		—
Excess tax benefits from stock-based compensation		—		416
Cash used in financing activities		(5,365)		(8,136)
Effect of exchange rates on cash		386		(133)
Net (decrease) increase in cash and cash equivalents:		(19,024)		17,889
Cash and cash equivalents, beginning of period		36,955		13,606
Cash and cash equivalents, end of period	$	17,931	$	31,495
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	9,096	$	6,256
Income taxes, net payments	$	1,156	$	958

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 the United States. 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 the United States and Canada 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 facilities in the United States and Canada, the Company has two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, and provide card personalization, packaging and fulfillment services for customers in the United Kingdom and continental Europe.  These facilities are not certified by the Payment Card Brands or to be in compliance with the Standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards.

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, 2016 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, 2016.

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.

Inventories

Inventories consist of raw materials, work-in-process and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out or specific identification basis) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory—Simplifying the Measurement of Inventory, which the Company adopted on January 1, 2017. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this standard did not impact the Company’s financial position, results of operations or cash flows during either the three or six months ended June 30, 2017.

Stock-based Compensation

The Company accounts for stock-based compensation pursuant to Accounting Standards Codification (“ASC”) Topic 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on

6

awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 11 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans.

As a result of the Company’s adoption of ASU 2016-09, Compensation–Stock Compensation:Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”)  as of January 1, 2017, the Company accounts for forfeitures when they occur.  In addition, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded in “Income tax benefit” in the Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income.

Recently Issued Accounting Pronouncements

The FASB issued 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 using the cumulative effect transition method, with the cumulative effect of initial adoption recognized at the date of initial application.  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. This assessment includes an evaluation of whether certain performance obligations will be recognized over time as opposed to a point in time, and the required changes to the Company’s business and accounting processes and its internal controls to support recognition and disclosures under the new standard.

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 condensed consolidated financial statements.

2. Inventories

Inventories are summarized below:

	June 30, 2017		December 31, 2016
Raw materials	$	7,045	$	8,206
Work-in-process		8,294		6,340
Finished goods		6,748		4,823
	$	22,087	$	19,369

7

3. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consist of the following:

	June 30, 2017		December 31, 2016
Buildings	$	2,264	$	2,077
Machinery and equipment		62,453		59,464
Furniture, fixtures and computer equipment		7,253		6,634
Leasehold improvements		19,466		18,655
Construction in progress		3,513		1,136
		94,949		87,966
Less accumulated depreciation and amortization		(41,759)		(34,547)
	$	53,190	$	53,419

Amounts recorded for the depreciation of plant, equipment and leasehold improvements was $3,375 and $3,053 for the three months ended June 30, 2017 and 2016, respectively, and $6,685 and $6,026 for the six months ended June 30, 2017 and 2016, respectively.

4. Goodwill and Other Intangible Assets

The Company’s goodwill by reportable segment at June 30, 2017 and December 31, 2016 is as follows:

	June 30, 2017		December 31, 2016
U.S. Debit and Credit	$	64,330	$	64,330
U.K. Limited		6,227		5,908
Other		1,820		1,758
	$	72,377	$	71,996

The change in goodwill from December 31, 2016 to June 30, 2017 was a result of foreign currency translation adjustments.

Intangible assets consist of customer relationships, technology and software, non-compete agreements and trademarks. The changes in the cost basis of the intangibles from December 31, 2016 to June 30, 2017 are related to foreign currency translation adjustments. Intangible amortization expense was $1,228 and $1,134 for the three months ended June 30, 2017 and 2016, respectively, and $2,451 and $2,274 for the six months ended June 30, 2017 and 2016, respectively. 

As of June 30, 2017 and December 31, 2016, intangible assets, excluding goodwill, were comprised of the following:

				June 30, 2017						December 31, 2016
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	59,180	$	(22,837)	$	36,343	$	58,994	$	(20,972)	$	38,022
Technology and software	7	to	10		7,100		(2,631)		4,469		7,101		(2,167)		4,934
Non-compete agreements	5	to	8		491		(360)		131		491		(331)		160
Trademarks	7.5	to	10		3,329		(292)		3,037		3,330		(98)		3,232
Intangible assets subject to amortization				$	70,100	$	(26,120)	$	43,980	$	69,916	$	(23,568)	$	46,348

8

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of June 30, 2017 is as follows:

2017 (remaining 6 months)	$	2,452
2018		4,905
2019		4,885
2020		4,845
2021		4,575
Thereafter		22,318
	$	43,980

5. 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 that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets are as follows:

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2017
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2017		2017		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	289,063	$	—	$	289,063	$	—

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2016
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2016		2016		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	290,625	$	—	$	290,625	$	—

The aggregate fair value of the Company’s First Lien Term Loan was based on bank quotes.

The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities.

9

6. Long-Term Debt and Credit Facility

As of June 30, 2017 and December 31, 2016, long-term debt and credit facilities consist of the following:

	Interest		June 30,		December 31,
	Rate (1)		2017		2016
First lien term loan facility (1)	5.83	%	$	312,500	$	312,500
Unamortized discount				(3,458)		(3,795)
Unamortized deferred financing costs				(6,145)		(6,783)
Long-term debt			$	302,897	$	301,922

(1)   Interest rate at June 30, 2017.  Interest rate at December 31, 2016 was 5.50%.

First Lien Credit Facility

On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (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%.

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. 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 trailing twelve month Adjusted EBITDA, as defined in the agreement. As of June 30, 2017, 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 annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements.  As of June 30, 2017, the Company does not expect to have a required excess cash flow payment related to 2017.

As of June 30, 2017, the Company did not have any outstanding amounts under the Revolving Credit Facility, and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.50% as of June 30, 2017 and December 31, 2016, in addition to a fronting fee of 0.125% per annum. 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.

Sellers Note

The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition, which was fully repaid on September 2, 2016. Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly.

10

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.

7. Income Taxes

During the three months ended June 30, 2017, the Company recognized an income tax benefit of $847 on a pre-tax loss of $3,008, representing an effective income tax rate of 28.2%, compared to an income tax benefit of $161 on a pre-tax loss of $489, representing an effective tax rate of 32.9% during the three months ended June 30, 2016.

During the six months ended June 30, 2017, the Company recognized an income tax benefit of $3,139 on a pre-tax loss of $9,807, representing an effective income tax rate of 32.0%, compared to an income tax expense of $2,653 on pre-tax income of $8,039, representing an effective tax rate of 33.0% during the six months ended June 30, 2016.

The effective tax rates 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.  In addition, as a result of the January 1, 2017 adoption of ASU 2016-09, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded to income tax benefit and impact the effective tax rate.

The Company’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities.  During March 2017, the Company was notified that the Internal Revenue Service ("IRS") wouldexamineits 2014 United States federal incometax return. The Company has provided information requested by the IRS with respect to such tax year, and has not been notified of any items that are being disputed by the IRS.

8. Stockholders’ Equity

During the three and six months ended June 30, 2017, the Company paid dividends of $2,499 and $5,026, respectively, representing $0.045 and $0.09 per share, respectively.  Additionally, on May 3, 2017, the Board of Directors approved a dividend of $0.045 per share, payable on July 7, 2017 to stockholders of record as of the close of business on June 16, 2017.  The accrued dividend of $2,505 is reflected in “Accrued expenses” in the Condensed Consolidated Balance Sheet as of June 30, 2017. 

On May 11, 2016, the Board of Directors approved a stock repurchase program that authorized repurchases of the Company’s common stock up to $20,000, limited to a maximum of 2,827,105 shares, prior to May 11, 2017.  During the three and six months ended June 30, 2017, there were no common shares repurchased, and the stock repurchase program expired by its terms.

11

9. (Loss) Earnings per Share

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

The following table sets forth the computation of basic and diluted (loss) earnings per share:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Numerator:
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386
Denominator:
Basic-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,371,964
Diluted-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,583,978
Basic and Diluted (Loss) earnings per share:	$	(0.04)	$	(0.01)	$	(0.12)	$	0.10

The Company reported a net loss for the three and six months ended June 30, 2017.  Accordingly, the potentially dilutive effect of 2,087,095 stock options and 273,051 restricted stock units has been excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive.

10. Commitments and Contingencies

Commitments

The Company incurred rent expense under non-cancellable operating leases of $952 and $819 for the three months ended June 30, 2017 and 2016, respectively, and $1,905 and $1,634 for the six months ended June 30, 2017 and 2016, respectively.

Contingencies

In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of litigation-related expense. The Company expenses professional fees associated with litigation claims and assessments as incurred.

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

On June 15, 2016, two purported CPI stockholders 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 theSouthern District of New York against CPI and certain of its officers and directors, along with the sponsors of and thefinancial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought onbehalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connectionwith the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, as amended (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, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price ofCPI 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 (the “PSLRA”). On October 17, 2016, lead

12

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.

On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of that motion.

The Company believes these claims are without merit and intends to defend the actions vigorously.  Given the current stage of these matters, the range of potential loss is not probable or estimable and no accrual has been recognized as of June 30, 2017 or December 31, 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 expired in March 2017.  The Company successfully moved to transfer the lawsuit to 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 ("IPR") petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), 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 PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016.  The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The district court litigation remains stayed.  The PTAB will hear oral argument on the IPR on August 4, 2017.

            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 alleges that its patent will expire in 2019.  Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are presently engaged in claim construction and discovery-related activities, including the inspection of records relating to the alleged commercial embodiment of Gemalto’s patent, DEXXIS. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent.  The PTAB has not yet ruled on the Company’s petition.

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. 

Although the outcome of these matters is not determinable at this time, the Company has accrued a $1,000 loss contingency as of June 30, 2017, which does not include any potential indemnity or other third-party recoveries.  There can be no certainty about the timing or likelihood of a definitive resolution of either or both of these matters, and as additional information becomes available, the amount of this estimated loss contingency reserve could increase materially.

13

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.

11. 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 June 30, 2017, there were 1,542,958 shares available for grant under the Omnibus Plan.

The Company did not grant any non-qualified stock options under the Omnibus Plan during the three months ended June 30, 2017.  During the six months ended June 30, 2017, the Company granted awards of non-qualified stock options for 785,370 shares of common stock.  The stock option awards were granted at various times during the first quarter.  All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date. As of June 30, 2017, there are no exercisable options outstanding under the Omnibus Plan. Outstanding 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, 2016	1,437,508	$	8.62
Granted	785,370		4.31
Forfeited	(212,783)		9.86
Outstanding as of June 30, 2017	2,010,095	$	6.77	8.95

Unvested options as of June 30, 2017 will vest as follows:

2017	310,338
2018	675,857
2019	646,584
2020	365,179
2021	12,137
Total unvested options as of June 30, 2017	2,010,095

The fair value of the stock option awards granted during the six months ended June 30, 2017, was determined using a Black-Scholes option-pricing model with the following average assumptions:

	Three Months
	Ended
	June
	30, 2017
Expected term in years	6.0
Volatility	33.7	%
Risk-free interest rate	2.1	%
Dividend yield	4.1	%

During the three months and six months ended June 30, 2017, the Company granted awards of restricted stock units for 125,000 and 239,446 shares of common stock, respectively. The restricted stock units contain conditions associated with continued employment or service.  The majority of the restricted stock units granted will vest in one year or three years from the date of grant.  On the vesting date, shares of common stock will be issued to the award recipients.

14

The following table summarizes the changes in the number of outstanding restricted stock units for the six month period ended June 30, 2017:

		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Outstanding as of December 31, 2016	270,466	$	7.13
Granted	239,446		3.11
Vested	(236,047)		7.34
Forfeited	(814)		4.35
Outstanding as of June 30, 2017	273,051	$	3.44

During the six months ended June 30, 2017, the Company granted awards of 932,837 cash performance units with a grant date fair value of $663. There were no awards of cash performance units granted during the three months ended June 30, 2017.  These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant.  The cash performance units are based on the performance of the Company’s stock price, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant.  The cash performance units were valued using a Monte Carlo simulation.  The Monte Carlo model used the following valuation assumptions based on the 3-year term of the awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%.  The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period.  As of June 30, 2017, the Company recognized a liability of $60 in “Accrued expenses” and $50 in “Other long-term liabilities” in the Condensed Consolidated Balance Sheet for unsettled cash performance units.

The following table summarizes the changes in the number of outstanding cash performance units for the six month period ended June 30, 2017:

		Weighted-Average
	Units	Grant Date Fair Value
Outstanding as of December 31, 2016	—	$	—
Granted	932,837		0.71
Vested	—		—
Forfeited	(10,723)		0.71
Outstanding as of June 30, 2017	922,114	$	0.71

Compensation expense for the Omnibus Plan for the three months ended June 30, 2017 and 2016 was $542 and $783, respectively, and was $1,231 and $1,205, during the six months ended June 30, 2017 and 2016, respectively.  As of June 30, 2017, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $2,792, which the Company expects to recognize over an estimated weighted average period of 1.7 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 are non-qualified, have a 10-year life and are fully vested as of June 30, 2017. 

15

The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the six months ended June 30, 2017:

				Weighted-
				Average
				Remaining
		Weighted- Average		Contractual Term
	Options	Exercise Price		(in Years)
Outstanding and Exercisable as of December 31, 2016	216,334	$	0.0004
Granted	—		—
Exercised	(139,334)		0.0004
Forfeited	—		—
Outstanding and Exercisable as of June 30, 2017	77,000	$	0.0004	5.10

There was no compensation expense related to options previously granted under the Option Plan for the three and six months ended June 30, 2017, as all options were fully vested.  The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of June 30, 2017 was $219.

Other Stock-Based Compensation Awards

During June 2015, the Company issued 191,664 restricted shares of common stock to executives with a weighted-average grant date fair value of $9.48 per share.  There are no outstanding unvested shares of restricted common stock as of June 30, 2017. The terms of the unvested restricted shares of common stock provided voting and regular dividend rights to the holders, and accordingly are included in weighted-average shares outstanding in the Company’s basic (loss) earnings per share calculation.  See Note 9, “(Loss) Earnings per Share”. 

During the three and six months ended June 30, 2017, of the remaining 94,864 of unvested restricted stock awards that were outstanding, 47,432 shares vested, and the remaining 47,432 shares were forfeited.  The executive who held the remaining 94,864 unvested restricted shares changed employment status to a consultant during the first quarter of 2017, and accordingly, the Company remeasured the awards on the date of the change in employment status and reduced stock-based compensation expense by $143. Compensation expense related to these awards for the three months ended June 30, 2017 and 2016 was $(228) and $323, respectively, and was $(371) and $646 for the six months ended June 30, 2017 and 2016, respectively. 

12. 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 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 June 30, 2017, the Company’s reportable segments are as follows:

    U.S. Debit and Credit;

    U.S. Prepaid Debit; and

    U.K. Limited.

16

The “Other” category includes the Company’s corporate headquarters and a less significant operating segment that derives its revenue from the production of Financial Payment Cards and retail gift cards in Canada.

Performance Measures of Reportable Segments

Revenue and EBITDA of the Company’s reportable segments for the three and six months ended June 30, 2017 and 2016 were as follows:

	Revenue
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
U.S. Debit and Credit	$	42,204	$	50,808	$	81,712	$	115,899
U.S. Prepaid Debit		12,426		11,991		22,211		24,332
U.K. Limited		11,010		7,989		16,597		14,221
Other		3,226		3,678		5,729		6,820
Intersegment eliminations		(3,020)		(741)		(4,395)		(1,154)
Total:	$	65,846	$	73,725	$	121,854	$	160,118

	EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
U.S. Debit and Credit	$	8,275	$	11,403	$	15,903	$	30,325
U.S. Prepaid Debit		3,306		3,557		5,092		6,824
U.K. Limited		1,566		680		1,891		899
Other		(6,389)		(6,874)		(13,332)		(11,608)
Total:	$	6,758	$	8,766	$	9,554	$	26,440

The following table provides a reconciliation of total segment EBITDA to net (loss) income for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Total segment EBITDA from continuing operations	$	6,758	$	8,766	$	9,554	$	26,440
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)
Income tax benefit (expense)		847		161		3,139		(2,653)
Depreciation and amortization		(4,603)		(4,187)		(9,136)		(8,300)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments as of June 30, 2017 and December 31, 2016 were as follows:

	June 30, 2017		December 31, 2016
U.S. Debit and Credit	$	192,368	$	205,417
U.S. Prepaid Debit		28,095		23,509
U.K. Limited		23,060		26,060
Other		12,011		9,434
Total assets:	$	255,534	$	264,420

17

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 six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
U.S.	$	2,775	$	4,421	$	5,050	$	6,823
Canada		51		47		123		161
Total North America		2,826		4,468		5,173		6,984
U.K.		368		167		1,329		791
Total plant, equipment and leasehold improvement additions	$	3,194	$	4,635	$	6,502	$	7,775

Net Sales to Geographic Locations

Net sales to geographic locations for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
U.S.	$	52,339	$	61,018	$	100,150	$	135,454
Canada		2,755		3,430		4,783		7,429
Total North America		55,094		64,448		104,933		142,883
U.K.		9,937		8,182		13,892		14,787
Other (a)		815		1,095		3,029		2,448
Total net sales	$	65,846	$	73,725	$	121,854	$	160,118

(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 June 30, 2017 and December 31, 2016 were as follows:

	June 30, 2017		December 31, 2016
U.S.	$	154,011	$	157,773
Canada		2,941		2,899
Total North America:		156,952		160,672
U.K.		12,595		11,091
Total long-lived assets	$	169,547	$	171,763

Net Sales by Product and Services

Net sales from products and services sold by the Company for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Product net sales (a)	$	33,825	$	40,095	$	63,588	$	95,053
Services net sales (b)		32,021		33,630		58,266		65,065
Total net sales:	$	65,846	$	73,725	$	121,854	$	160,118

(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.

18

(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.

19

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, 2016, filed with the Securities and Exchange Commission (“SEC”).

Cautionary Statement Regarding Forward-Looking Information

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”, “project”, “plan”, “foresee”, and other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. 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, but are not limited to: system security risks, data protection breaches and cyber-attacks; market acceptance of developing technologies that make our existing technology solutions and products less relevant; a slower or less widespread continued adoption of contact 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 price erosion in the payment card industry; failure to accurately predict demand for our products and services; 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 production quality and process; 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; potential imposition of tariffs and/or trade restrictions on goods imported into the United States; economic conditions and regulatory changes leading up to and following the United Kingdom’s likely exit from the European Union; costs relating to product defects; 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; a competitive disadvantage resulting from chip operating systems developed by our competitors; continued viability of the Payment Card Brands; quarterly variation in our operating results; and other risks 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 “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 2, 2017. 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 the United States. 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). We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market.  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 issuers of debit and credit cards in the United States and Canada, and many of the largest U.S. prepaid debit card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors.

20

We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada 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 Standards Council.

In addition to our eight facilities in the United States and Canada, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, and provide personalization, packaging and fulfillment services. These facilities are not certified by the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. 

Results of Operations

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
	(dollars in thousands)
Net sales:
Products	$	33,825	$	40,095	$	63,588	$	95,053
Services		32,021		33,630		58,266		65,065
Total net sales		65,846		73,725		121,854		160,118
Cost of sales		46,560		51,018		86,475		107,719
Gross profit		19,286		22,707		35,379		52,399
Operating expenses		17,317		18,177		35,221		34,204
Income from operations		1,969		4,530		158		18,195
Other expense, net:
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)
Foreign exchange gain (loss)		181		34		255		(68)
Other income, net		5		15		5		13
(Loss) income before taxes		(3,008)		(489)		(9,807)		8,039
Income tax benefit (expense)		847		161		3,139		(2,653)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386

Segment Discussion

Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016

Net Sales

	Three Months Ended  June 30,
	2017		2016		$ Change		% Change
	(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	42,204	$	50,808	$	(8,604)	(16.9)	%
U.S. Prepaid Debit		12,426		11,991		435	3.6	%
U.K. Limited		11,010		7,989		3,021	37.8	%
Other		3,226		3,678		(452)	(12.3)	%
Eliminations		(3,020)		(741)		(2,279)	*	%
Total	$	65,846	$	73,725	$	(7,879)	(10.7)	%

* Not meaningful

21

Net sales for the three months ended June 30, 2017 decreased $7.9 million, or 10.7%, to $65.8 million compared to $73.7 million for the three months ended June 30, 2016.

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the three months ended June 30, 2017 decreased $8.6 million, or 16.9%, to $42.2 million compared to $50.8 million for the three months ended June 30, 2016. The decrease in net sales was primarily due to a $5.1 million decrease in EMV related revenue and a $1.7 million decrease in card personalization and fulfillment. 

The decrease in EMV revenue is the result of continued softness in demand for EMV cards, particularly with large issuer and processor customers.  For the three months ended June 30, 2017, we sold 18.8 million EMV cards at an average selling price (“ASP”) of $0.86, compared to 22.5 million EMV cards at an ASP of $0.94 for the three months ended June 30, 2016. The decrease in ASP during the three months ended June 30, 2017 compared to 2016 is primarily due to lower prices experienced in the large issuer market from increased competition, partially offset by favorable net pricing impacts of customer mix.  

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit for the three months ended June 30, 2017 increased $0.4 million, or 3.6%, to $12.4 million compared to $12.0 million for the three months ended June 30, 2016 resulting from net increased activity across our customer base, partially offset by lower prices attributed to product mix and, to a lesser extent, price compression.

U.K. Limited:  

U.K. Limited net sales for the three months ended June 30, 2017 increased $3.0 million, or 37.8%, to $11.0 million compared to $8.0 million for the three months ended June 30, 2016.  Increased sales were driven by an RFID loyalty card order produced for a large U.K. retail customer, partially offset by the impact of foreign currency exchange rate fluctuations and decreased sales activity of retail gift and other cards.   Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a $1.3 million reduction of net sales in the three months ended June 30, 2017 compared to the three months ended June 30, 2016.

Other:

Net sales in Other decreased $0.5 million, or 12.3%, to $3.2 million during the three months ended June 30, 2017 compared to $3.7 million in the three months ended June 30, 2016. Net sales in Canada were lower during the three months ended June 30, 2017 as a result of lower net sales activity across our customer base.

Cost of Sales

	Three Months Ended  June 30,
	2017		2016		$ Change		% Change
	(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	29,657	$	35,097	$	(5,440)	(15.5)	%
U.S. Prepaid Debit		8,872		7,834		1,038	13.2	%
U.K. Limited		8,390		5,950		2,440	41.0	%
Other		2,497		2,785		(288)	(10.3)	%
Eliminations		(2,856)		(648)		(2,208)	*	%
Total	$	46,560	$	51,018	$	(4,458)	(8.7)	%

* Not meaningful

Cost of sales for the three months ended June 30, 2017 decreased $4.5 million, or 8.7%, to $46.6 million compared to $51.0 million for the three months ended June 30, 2016.

22

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the three months ended June 30, 2017 decreased $5.4 million, or 15.5%, to $29.7 million compared to $35.1 million for the three months ended June 30, 2016.  The decrease was driven primarily by lower EMV chip card sales volumes and resulted in lower corresponding manufacturing costs.  Lower per unit EMV chip prices and decreases in card personalization and fulfillment sales also contributed to the decrease in cost of sales in the quarter. 

U.S. Prepaid Debit:

Cost of sales for U.S. Prepaid Debit for the three months ended June 30, 2017 increased $1.0 million, or 13.2%, to $8.9 million compared to $7.8 million for the three months ended June 30, 2016.  The increase was primarily a result of the increased costs to ramp up Print on Demand Services capabilities, and to a lesser extent, increased sales volumes.  

U.K. Limited:

Cost of sales for U.K. Limited for the three months ended June 30, 2017 increased $2.4 million, or 41.0%, to $8.4 million compared to $6.0 million for the three months ended June 30, 2016, due to higher manufacturing costs corresponding to the increased sales, partially offset by the impact of foreign currency exchange rate fluctuations.  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 June 30, 2017 compared to the three months ended June 30, 2016.

Other:

Cost of sales in Other decreased $0.3 million, or 10.3%, to $2.5 million during the three months ended June 30, 2017 compared to $2.8 million in the three months ended June 30, 2016, primarily due to lower manufacturing costs related to decreased net sales.

Gross Profit and Gross Profit Margin

	Three Months Ended  June 30,
			% of 2017				% of 2016
	2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	12,547	29.7	%	$	15,711	30.9	%	$	(3,164)	(20.1)	%
U.S. Prepaid Debit		3,554	28.6	%		4,157	34.7	%		(603)	(14.5)	%
U.K. Limited		2,620	23.8	%		2,039	25.5	%		581	28.5	%
Other		565	17.5	%		800	21.8	%		(235)	(29.4)	%
Total	$	19,286	29.3	%	$	22,707	30.8	%	$	(3,421)	(15.1)	%

Gross profit for the three months ended June 30, 2017 decreased $3.4 million, or 15.1%, to $19.3 million compared to $22.7 million for the three months ended June 30, 2016. Gross profit margin for the three months ended June 30, 2017 decreased to 29.3% compared to 30.8% for the three months ended June 30, 2016.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the three months ended June 30, 2017 decreased $3.2 million, or 20.1%, to $12.5 million compared to $15.7 million during the three months ended June 30, 2016. The decrease in gross profit for U.S. Debit and Credit was driven primarily by the reduction in net sales. Gross profit margin for U.S. Debit and Credit for the three months ended June 30, 2017 decreased to 29.7% compared to 30.9% for the same period in the prior year due to lower overhead cost absorption attributed to reduced volumes. 

23

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the three months ended June 30, 2017 decreased 14.5% to $3.6 million compared to $4.2 million for the three months ended June 30, 2016 attributed primarily to increased costs to ramp up Print on Demand Services capabilities and lower unit selling prices, as discussed above.  Gross profit margin for U.S. Prepaid Debit for the three months ended June 30, 2017 decreased to 28.6% compared to 34.7%, primarily due to increased costs to ramp up Print on Demand Services capabilities and lower unit selling prices.

U.K. Limited:

Gross profit for U.K. Limited increased 28.5% in the three months ended June 30, 2017 to $2.6 million compared to $2.0 million for the three months ended June 30, 2016, primarily due to the increased sales activity described above, partially offset by higher manufacturing costs and $0.3 million of foreign currency exchange rate fluctuations. Gross profit margin for U.K. Limited was 23.8% during the three months ended June 30, 2017, representing a 1.7% decrease compared to the gross profit margin of 25.5% during the three months ended June 30, 2016, primarily due to customer mix. 

Other:

Other gross profit during the three months ended June 30, 2017 was $0.6 million compared to $0.8 million during the same period in 2016.  The decrease is primarily due to decreased sales during the three months ended June 30, 2017 compared to the same period in 2016. 

Operating Expenses

	Three Months Ended  June 30,
	2017		2016		$ Change		% Change
	(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	6,488	$	6,537	$	(49)	(0.7)	%
U.S. Prepaid Debit		1,001		1,177		(176)	(15.0)	%
U.K. Limited		1,305		1,474		(169)	(11.5)	%
Other		8,523		8,989		(466)	(5.2)	%
Total	$	17,317	$	18,177	$	(860)	(4.7)	%

Operating expenses for the three months ended June 30, 2017 decreased $0.9 million, or 4.7%, to $17.3 million compared to $18.2 million for the three months ended June 30, 2016.

U.S. Debit and Credit operating expenses were $6.5 million in both the three months ended June 30, 2017 and 2016.

U.S. Prepaid Debit operating expenses decreased $0.2 million, or 15.0%, primarily driven by cost reductions in administrative salaries.

U.K. Limited operating expenses decreased $0.2 million, or 11.5%, primarily due to foreign currency exchange rate fluctuations.

Other operating expenses during the three months ended June 30, 2017 decreased $0.5 million compared to the three months ended June 30, 2016.  The net decrease primarily resulted from decreased stock-based compensation expense of $0.8 million and other compensation costs of $0.6 million, partially offset by increased software expenses of $0.7 million and increased legal costs of $0.3 million. 

24

Income from Operations and Operating Margin

	Three Months Ended  June 30,
			% of 2017				% of 2016
	2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)
Income from operations by segment:
U.S. Debit and Credit	$	6,059	14.4	%	$	9,174	18.1	%	$	(3,115)	(34.0)	%
U.S. Prepaid Debit		2,553	20.5	%		2,980	24.9	%		(427)	(14.3)	%
U.K. Limited		1,315	11.9	%		565	7.1	%		750	132.7	%
Other		(7,958)	*	%		(8,189)	*	%		231	*	%
Total	$	1,969	3.0	%	$	4,530	6.1	%	$	(2,561)	(56.5)	%

* Not meaningful

Income from operations for the three months ended June 30, 2017 decreased $2.6 million, or 56.5%, to $2.0 million compared to $4.5 million for the three months ended June 30, 2016. Operating profit margin for the three months ended June 30, 2017 decreased to 3.0% compared to 6.1% for the three months ended June 30, 2016.

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the three months ended June 30, 2017 decreased $3.1 million, or 34.0%, to $6.1 million compared to $9.2 million for the three months ended June 30, 2016. Operating margins for the three months ended June 30, 2017 decreased to 14.4% compared to 18.1% for the three months ended June 30, 2016 due primarily to the lower sales volumes, and the resulting lower overhead cost absorption discussed above.

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the three months ended June 30, 2017 decreased 14.3% to $2.6 million compared to $3.0 million for the three months ended June 30, 2016 due to the increased costs to ramp up Print on Demand Services capabilities, partially offset by increased sales and decreased administrative salaries, as discussed above. Operating income margins for the three months ended June 30, 2017 decreased to 20.5% compared to 24.9% for the three months ended June 30, 2016.

U.K. Limited:

Income from operations for U.K. Limited for the three months ended June 30, 2017 was $1.3 million during the three months ended June 30, 2017, representing an increase of $0.8 million compared to the three months ended June 30, 2016.  The increase was due to the increased sales and decreased operating costs resulting from foreign currency exchange rate fluctuations, as described above.  Operating margins increased to 11.9% during the three months ended June 30, 2017 compared to 6.3% during the three months ended June 30, 2016 through better leverage of operating expenses resulting from increased sales.

Other:

The loss from operations in Other was $8.0 million during the three months ended June 30, 2017 compared to $8.2 million in the three months ended June 30, 2016.  The decreased loss was primarily attributable to lower corporate expenses.

Interest, net:  

Interest expense for the three months ended June 30, 2017 increased to $5.2 million compared to $5.1 million for the three months ended June 30, 2016. The additional interest expense resulting from the higher average interest rate on the First Lien Term Loan during the three months ended June 30, 2017 was partially offset by no interest expense associated with the Sellers’ Note, which was repaid during September 2016.

25

Income tax (benefit) expense:

During the three months ended June 30, 2017, there was an income tax benefit of $0.8 million on pre-tax losses of $3.0 million, representing an effective income tax rate of 28.2%, compared with an income tax benefit of $0.2 million on pre-tax losses of $0.5 million for the three months ended June 30, 2016, representing an effective income tax rate of 32.9%.  Our effective tax rate differs in the current year period primarily due to the impact of state and foreign income taxes, and as a result of excess tax benefits and deficiencies recorded directly to income tax benefit since the adoption of ASU 2016-09 on January 1, 2017.

Net (loss) income:

During the three months ended June 30, 2017, net loss was $2.2 million, compared to a net loss of $0.3 million during the three months ended June 30, 2016 primarily due to the lower net sales, gross profit and higher operating expenses described above.

Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016

Net Sales

	Six Months Ended June 30,
	2017		2016		$ Change		% Change
	(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	81,712	$	115,899	$	(34,187)	(29.5)	%
U.S. Prepaid Debit		22,211		24,332		(2,121)	(8.7)	%
U.K. Limited		16,597		14,221		2,376	16.7	%
Other		5,729		6,820		(1,091)	(16.0)	%
Eliminations		(4,395)		(1,154)		(3,241)	*	%
Total	$	121,854	$	160,118	$	(38,264)	(23.9)	%

Net sales for the six months ended June 30, 2017 decreased $38.3 million, or 23.9%, to $121.9 million compared to $160.1 million for the six months ended June 30, 2016.

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the six months ended June 30, 2017 decreased $34.2 million, or 29.5%, to $81.7 million compared to $115.9 million for the six months ended June 30, 2016. The decrease in net sales was primarily driven by a $28.6 million decrease in EMV related revenue and a $3.7 million decrease in card personalization and fulfillment, and a decrease in non-EMV and other sales.

The decrease in EMV revenue is the result of continued softness in demand for EMV cards, particularly with large issuer and processor customers.  For the six months ended June 30, 2017, we sold 37.1 million EMV cards at an ASP of $0.85 compared to 63.9 million EMV cards at an ASP of $0.94 for the six months ended June 30, 2016. The decrease in ASP during the six months ended June 30, 2017 compared to 2016 is primarily due to lower prices experienced in the large issuer market from increased competition, partially offset by favorable net pricing impacts of customer mix.

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit for the six months ended June 30, 2017 decreased $2.1 million, or 8.7%, to $22.2 million compared to $24.3 million for the six months ended June 30, 2016. The decrease was driven primarily by decreased sales activity associated with a delay in the roll out of a packaging design refresh related to one of our larger customers.  Also contributing to the decrease were lower average prices attributed to product mix, and to a lesser extent, price compression.  The decrease was partially offset by net increased activity across our remaining customer base.

26

U.K. Limited:

Net sales for U.K. Limited for the six months ended June 30, 2017 increased $2.4 million, or 16.7%, to $16.6 million compared to $14.2 million for the six months ended June 30, 2016.  Increased sales were driven by an RFID loyalty card order produced for a large U.K. retail customer, partially offset by the impact of foreign currency exchange rate fluctuations and decreased sales activity of retail gift and other cards.   Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a $2.2 million reduction of net sales in the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

Other:

Net sales for Other decreased $1.1 million, or 16.0%, to $5.7 million during the six months ended June 30, 2017 compared to $6.8 million in the six months ended June 30, 2016, relating primarily to one of our largest customers refreshing its card designs during the prior year resulting in higher than usual net sales during the six months ended June 30, 2016 compared to the six months ended June 30, 3017.  

Cost of Sales

	Six Months Ended  June 30,
	2017		2016		$ Change		% Change
	(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	57,321	$	77,028	$	(19,707)	(25.6)	%
U.S. Prepaid Debit		16,448		16,099		349	2.2	%
U.K. Limited		12,529		10,573		1,956	18.5	%
Other		4,427		5,102		(675)	(13.2)	%
Eliminations		(4,250)		(1,083)		(3,167)	*	%
Total	$	86,475	$	107,719	$	(21,244)	(19.7)	%

Cost of sales for the six months ended June 30, 2017 decreased $21.2 million, or 19.7%, to $86.5 million compared to $107.7 million for the six months ended June 30, 2016.

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the six months ended June 30, 2017 decreased $19.7 million, or 25.6%, to $57.3 million compared to $77.0 million for the six months ended June 30, 2016.  The decrease was driven by lower EMV chip card sales volumes resulting in lower corresponding EMV manufacturing costs.  Lower per unit EMV chip prices and decreases in card personalization and fulfillment sales also contributed to the decrease in cost of sales.

U.S. Prepaid Debit:

Cost of sales for U.S. Prepaid Debit for the six months ended June 30, 2017 increased $0.3 million, or 2.2%, to $16.4 million compared to $16.1 million for the six months ended June 30, 2016. The increase was primarily a result of the increased costs to ramp up Print on Demand Services capabilities, partially offset by decreased sales volumes.

U.K. Limited:

Cost of sales for U.K. Limited was $12.5 million during the six months ended June 30, 2017, an increase of 18.5% from $10.6 million during the six months ended June 30, 2016. The increase in cost of sales related to increased net sales activity, partially offset by $1.6 million of foreign currency exchange rate fluctuations between the United States dollar and the British Pound.

27

Other:

Cost of sales in Other decreased $0.7 million, or 13.2%, to $4.4 million during the six months ended June 30, 2017 compared to $5.1 million in the six months ended June 30, 2016 due to lower manufacturing costs corresponding to the decreased net sales noted above.

Gross Profit and Gross Profit Margin

	Six Months Ended  June 30,
			% of				% of
	2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	24,391	29.8	%	$	38,871	33.5	%	$	(14,480)	(37.3)	%
U.S. Prepaid Debit		5,763	25.9	%		8,233	33.8	%		(2,470)	(30.0)	%
U.K. Limited		4,068	24.5	%		3,648	25.7	%		420	11.5	%
Other		1,157	20.2	%		1,647	24.1	%		(490)	(29.8)	%
Total	$	35,379	29.0	%	$	52,399	32.7	%	$	(17,020)	(32.5)	%

Gross profit for the six months ended June 30, 2017 decreased $17.0 million, or 32.5%, to $35.4 million compared to $52.4 million for the six months ended June 30, 2016. Gross profit margin for the six months ended June 30, 2017 decreased to 29.0% compared to 32.7% for the six months ended June 30, 2016.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the six months ended June 30, 2017 decreased $14.5 million, or 37.3%, to $24.4 million compared to $38.9 million during the six months ended June 30, 2016. The decrease in gross profit for U.S. Debit and Credit was primarily a result of decreased EMV revenues and decreased sales from our card personalization and fulfillment services. Gross profit margin for the U.S. Debit and Credit segment for the six months ended June 30, 2017 decreased to 29.8% compared to 33.5% for the six months ended June 30, 2016 due to lower overhead cost absorption attributed to reduced production volumes. 

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the six months ended June 30, 2017 decreased 30.0% to $5.8 million compared to $8.2 million for the six months ended June 30, 2016. The decrease in gross profit was primarily due to the decrease in net sales and increased costs to ramp up Print on Demand Services capabilities. Gross profit margin for U.S. Prepaid Debit for the six months ended June 30, 2017 decreased to 25.9% compared to 33.8% for the six months ended June 30, 2016 due to increased costs to ramp up Print on Demand Services capabilities and lower overhead cost absorption during the first quarter of 2017.

U.K. Limited:

Gross profit for U.K. Limited for the six months ended June 30, 2017 increased 11.5% to $4.1 million compared to $3.6 million during the six months ended June 30, 2016. The increase in gross profit was driven primarily by the increase in net sales described above, partially offset by $0.5 million of foreign currency exchange rate fluctuations. Gross profit margin for U.K. Limited for the six months ended June 30, 2017 decreased to 24.5% compared to 25.7% for the six months ended June 30, 2016, primarily due to customer mix.

Other:

Other gross profit during the six months ended June 30, 2017 decreased 29.8% to $1.2 million compared to $1.6 million during the six months ended June 30, 2016.  The decrease was primarily due to decreased net sales in Canada.

28

Operating Expenses

	Six Months Ended  June 30,
	2017		2016		$ Change		% Change
	(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	12,925	$	12,633	$	292	2.3	%
U.S. Prepaid Debit		2,162		2,565		(403)	(15.7)	%
U.K. Limited		2,639		2,993		(354)	(11.8)	%
Other		17,495		16,013		1,482	9.3	%
Total	$	35,221	$	34,204	$	1,017	3.0	%

Operating expenses for the six months ended June 30, 2017 increased $1.0 million, or 3.0%, to $35.2 million compared to $34.2 million for the six months ended June 30, 2016.

The $0.3 million increase in U.S. Debit and Credit was primarily driven by increased salaries and benefits to support the card personalization business.

The $0.4 million decrease in U.S. Prepaid Debit was primarily driven by cost reductions in administrative salaries.

U.K. Limited operating expenses decreased by $0.4 million, or 11.8%, due to foreign currency exchange rate fluctuations.

The $1.5 million increase in Other operating expenses was primarily due to increased legal costs of $1.1 million, increased software expenses of $0.7 million, increased facilities and insurance expense of $0.3 million, and increased salaries and other compensation costs of $0.2 million, partially offset by a decrease of $1.0 million in stock based compensation expense during the six months ended June 30, 2017. 

Income from Operations and Operating Margin

	Six Months Ended  June 30,
			% of				% of
	2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)
Income from operations by segment:
U.S. Debit and Credit	$	11,466	14.0	%	$	26,238	22.6	%	$	(14,772)	(56.3)	%
U.S. Prepaid Debit		3,601	16.2	%		5,668	23.3	%		(2,067)	(36.5)	%
U.K. Limited		1,429	8.6	%		655	4.6	%		774	118.2	%
Other		(16,338)	*	%		(14,366)	*	%		(1,972)	*	%
Total	$	158	0.1	%	$	18,195	11.4	%	$	(18,037)	(99.1)	%

Income from operations for the six months ended June 30, 2017 decreased $18.0 million, or 99.1%, to $0.2 million compared to $18.2 million for the six months ended June 30, 2016. Operating profit margin for the six months ended June 30, 2017 decreased to 0.1% compared to 11.4% for the six months ended June 30, 2016.

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the six months ended June 30, 2017 decreased $14.8 million, or 56.3%, to $11.5 million compared to $26.2 million for the six months ended June 30, 2016 due primarily to lower sales. Operating margins for the six months ended June 30, 2017 decreased to 14.0% compared to 22.6% for the six months ended June 30, 2016, due primarily to lower sales, lower overhead cost absorption attributed to reduced sales volumes, and the increased operating expenses discussed above.

29

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the six months ended June 30, 2017 decreased $2.1 million, or 36.5%, to $3.6 million compared to $5.7 million for the six months ended June 30, 2016 primarily due to the decrease in net sales and increased costs to ramp up Print on Demand Services capabilities, partially offset by lower operating expenses. Operating margins for the six months ended June 30, 2017 decreased to 16.2% compared to 23.3% for the six months ended June 30, 2016 due to increased costs to ramp up Print on Demand Services capabilities and lower overhead cost absorption in the first quarter of 2017, partially offset by lower operating expenses.

U.K. Limited:

Income from operations for U.K. Limited for the six months ended June 30, 2017 increased to $1.4 million from $0.7 million during the six months ended June 30, 2016 as a result of the increased sales activity, partially offset by foreign currency exchange rate fluctuations.  Operating margins increased to 8.6% during the six months ended June 30, 2017 compared to 4.6% during the six months ended June 30, 2016 as a result of lower operating expenses and better leverage of operating expenses from our increased sales.

Other:

The loss from operations in Other during the six months ended June 30, 2017 was $16.3 million compared to $14.4 million in the six months ended June 30, 2016.  The increased loss was primarily attributable to the higher corporate expenses, and the lower sales activity in Canada, as discussed above.

Interest, net:  

Interest expense for the six months ended June 30, 2017 increased to $10.2 million compared to $10.1 million for the six months ended June 30, 2016. The additional interest expense resulting from the higher average interest rate on the First Lien Term Loan during the six months ended June 30, 2017 was partially offset by no interest expense associated with the Sellers’ Note, which was repaid during September 2016.

Income tax benefit (expense):

Income tax benefit for the six months ended June 30, 2017 was $3.1 million, compared to income tax expense of $2.7 million for the six months ended June 30, 2016, due primarily to the decrease in income before taxes. The effective tax rate was 32.0% and 33.0% for the six months ended June 30, 2017 and 2016, respectively. Our effective tax rate was lower in the current year period primarily due to the impact of foreign and state income taxes, and as a result of excess tax benefits and deficiencies recorded directly to income tax benefit since the adoption of ASU 2016-09 on January 1, 2017.

Net (loss) income:

During the six months ended June 30, 2017, net loss was $6.7 million, compared to a net income of $5.4 million during the six months ended June 30, 2016 primarily due to the lower net sales, gross profit and higher operating expenses described above.

Liquidity and Capital Resources

As of June 30, 2017, we had $17.9 million of cash and cash equivalents. Of this amount, $3.8 million was held in accounts outside of the United States.

Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity will depend upon our ability to generate excess operating cash flows through our operating subsidiaries.  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 needs.

30

At June 30, 2017, there was $312.5 million outstanding under the First Lien Term Loan, and we had an undrawn $40.0 million Revolving Credit Facility, of which $20.0 million is available for borrowing.  Additional amounts may be available for borrowing during the term of the Revolving Credit Facility, up to the full $40.0 million, to the extent our net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement.  The First Lien Term Loan and Revolving Credit Facility (collectively, “First Lien Credit Facility”) mature on August 17, 2022 and August 17, 2020, respectively.

Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%.  As of June 30, 2017, the interest rate on our First Lien Term Loan was 5.83%, and increased to 5.96% as the interest rate was reset on the First Lien Term Loan during July 2017.

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 Loan in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements.  As of June 30, 2017, we do not expect to have a required excess cash flow payment related to 2017, and we were in compliance with all covenants under the First Lien Credit Facility.

During the year ended December 31, 2016, the Board of Directors approved a stock repurchase program authorizing repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares, prior to May 11, 2017.  There were no shares repurchased under this plan during the six months ended June 30, 2017 and the stock repurchase plan expired by its terms during May 2017. 

On May 3, 2017, our Board of Directors approved a dividend of $0.045 per share, payable on July 7, 2017 to stockholders of record as of the close of business on June 16, 2017.  The accrued dividend of $2.5 million is reflected in “Accrued expenses” in our Condensed Consolidated Balance Sheet as of June 30, 2017.

The Company discontinued its quarterly dividend of $0.045 per share. The dividend discontinuation is part of our plan to utilize a greater portion of the Company’s free cash to reinvest back into the business to fund our growth initiatives and to reduce debt. We remain focused on creating long-term shareholder value by making the strategic investments necessary to position the Company to return to sustainable profitable growth, while also strengthening our balance sheet and maintaining financial flexibility. By discontinuing the dividend, the Company will save approximately $10 million annually providing us with additional liquidity and financial flexibility.

Operating Activities

Cash used in operating activities for the six months ended June 30, 2017 was $8.3 million compared to $33.2 million of cash provided by operating activities during the six months ended June 30, 2016.  The year over year fluctuation was due to net losses incurred during the current year period compared to net income in the prior year period, and net working capital fluctuations, primarily accounts receivable.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2017 of $5.8 million, decreased compared to $7.0 million during the six months ended June 30, 2016. Cash used in investing activities during both periods was related to capital expenditures and decreased during the current period due to decreased capital requirements.

Financing Activities

During the six months ended June 30, 2017, cash used in financing activities was $5.4 million, and primarily related to dividend payments of $5.0 million. 

31

Cash used in financing activities during the six months ended June 30, 2016 was $8.1 million, and related primarily to stock repurchases and dividend payments of $6.0 million and $2.5 million, respectively.

Contractual Obligations

During the six months ended June 30, 2017, 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, 2016.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 30, 2017.

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, 2016, for which there were no material changes as of June 30, 2017, 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 June 30, 2017, 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, 2016.

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.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2017.  

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

32

Limitations on Effectiveness of Controls

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.

33

PART II – Other Information

Item 1. Legal Proceedings

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

On June 15, 2016, two purported CPI stockholders 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 theSouthern District of New York against CPI and certain of its officers and directors, along with the sponsors of and thefinancial institutions who served as underwriters for CPI’s October 2015 IPO. The complaints, purportedly brought onbehalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connectionwith the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, as amended (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, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price ofCPI 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 (the “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.

On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of that motion.

The Company believes these claims are without merit and intends to defend the actions 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 expired in March 2017.  The Company successfully moved to transfer the lawsuit to 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 ("IPR") petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), 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 PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016.  The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The district court litigation remains stayed.  The PTAB will hear oral argument on the IPR on August 4, 2017.

            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 alleges that its patent will expire in 2019.  Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its

34

contentions on October 13, 2016. The parties are presently engaged in claim construction and discovery-related activities, including the inspection of records relating to the alleged commercial embodiment of Gemalto’s patent, DEXXIS. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent.  The PTAB has not yet ruled on the Company’s petition.

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. 

Although the outcome of these matters is not determinable at this time, the Company has accrued a $1.0 million loss contingency as of June 30, 2017, which does not include any potential indemnity or other third-party recoveries.  There can be no certainty about the timing or likelihood of a definitive resolution of either or both of these matters, and as additional information becomes available, the amount of this estimated loss contingency reserve could increase materially. In addition, 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. 

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 answered the complaint and counterclaimed for invalidity and noninfringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts. 

In June 2017, MPS filed an early motion for summary judgment, claiming that its accused process does not infringe CPI's patent.  MPS also sought to stay discovery pending the outcome of its summary judgment motion.  CPI opposed both motions and made a motion for expedited discovery.  All of these motions are still being briefed, and no decision has been rendered on any of them.  Also in June 2017, MPS filed an IPR petition with the PTAB.  CPI will timely oppose institution of an IPR in this matter.  The PTAB has not yet ruled on MPS's petition.  Despite MPS's motion to stay, discovery is ongoing.  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, 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.

35

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 authorized repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares. There was no stock repurchase activity during the three and six months ended June 30, 2017, and the stock repurchase program expired by its terms during May 2017.

36

Item 6. Exhibits

Exhibit Number	Description
10.1	CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines
10.2	First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, by and between CPI Card Group Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017).
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.

37

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/ Lillian Etzkorn
	Lillian Etzkorn
	Chief Financial Officer
August 3, 2017

38

EXHIBIT INDEX

Exhibit Number	Description
10.1	CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines
10.2	First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, by and between CPI Card Group Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017).
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.

39

EX-10.1

Exhibit 10.1

U.S. Executive Severance and Change in Control Guidelines

v. June 22, 2017

Purpose

The purpose of this guideline is to outline generally the severance benefits of CPI Card Group (“Company”) as used in conjunction with the Company’s Separation and Release document.  As noted below, additional terms will apply if the triggering event follows a Change in Control of the Company.

Eligibility

This policy applies to U.S. based Section 16(b) Officers of the Company.

An officer must sign the Separation and Release document in order to be eligible for severance payments and COBRA related payments.

Triggering Events

In the event of an involuntary termination for any reason other than for Cause or voluntary termination following Good Reason, CPI Card Group may provide a severance benefit for the affected officer(s), provided the officer signs a Separation and Release document.  This does not apply to terminations for cause.

In order to be eligible for severance benefits following a Change in Control, the involuntary termination must occur within twenty-four months of the Change in Control.

A Change in Control is defined in the CPI Card Group Inc. Omnibus Incentive Plan, as amended.

Good Reason is defined as:

· Refusal to relocate a distance greater than 50 miles as required by the Company;

· Significant reduction in duties, title or authority; and/or

· Material reduction in base salary.

Note that if the Company and officer agree to any or all of the changes above, Good Reason will not apply.  An officer must notify the Board in writing of the occurrence of any of the above within 30 days of the occurrence, and give the Company an opportunity to remedy the situation, within 30 days of receiving notice, in order to claim Good Reason.

Cause is defined in the CPI Card Group Inc. Omnibus Incentive Plan, as amended

Payment Amount

The rate of severance is based on the officer’s role and type of termination event as outlined below:

Role	Standard Severance	Change in Control (CIC) Severance	Restrictive Covenants
CEO	1.5 times (base + bonus target)	2 times (base + bonus target)	Severance = 18 months; CIC = 24 months
Other Section 16(b) Officers	1 times (base + bonus target)	1.5 times (base + bonus target)	Severance = 12 months; CIC = 18 months

Severance payments will be made through standard payroll schedules in effect at the time of separation and beginning after the officer’s execution of the Separation and Release document.  In some cases, payment may be delayed due to the requirements of Internal Revenue Code

Section 409A.  For purposes of the bonus target portion of the severance payments, the bonus target will be annual bonus target for the officer(s) at the time of separation.  The total bonus amount for the entire severance period (i.e., bonus target x applicable severance multiplier) will be allocated and paid over the same regular payroll schedule.

Example

An officer with a base salary of $200,000 and a bonus target of 50% ($100,000) separates under standard severance terms and receives 1 times (base + bonus target) = $200,000 + $100,000 = $300,000.  Under the current payroll schedule, the $300,000 is spread over 26 pay periods, thus each pay period the officer will receive $300,000 ÷ 26 = $11,538.46.

Long-Term Incentive Plan

Any outstanding long-term incentive awards will be governed by the terms of the respective award agreement and the CPI Card Group Inc. Omnibus Incentive Plan.

Vacation

Accrued but unused vacation will be paid out to the officer.  Vacation accrual is paid out independent of the Severance and Release document being signed.  Vacation will stop accruing as of the effective date of termination.

Insurance Benefits

Medical, dental and vision coverage (“Health Coverage”), if applicable, end on the last day of the month in which the officer terminates employment.  Upon termination of coverage, COBRA notification will be forwarded.  Provided the officer elects COBRA continuation coverage and signs the Severance and Release document, CPI Card Group will reimburse the officer for the Company’s portion of the premium of the Health Coverage in effect at the time of separation on the same terms as prior to separation.  This continuation of Health Coverage will run concurrent to COBRA eligibility and serve to satisfy the COBRA eligibility period.  The maximum time period for this Insurance Benefit will be the greater of the severance period or the COBRA eligibility and enrollment period.  This Health Coverage may change from time to time as options and costs for similarly situated active employees change.  For avoidance of doubt, “on the same terms” requires that the officer pay the appropriate active officer payroll contribution to the Health Coverage.

Outplacement

The Company may provide outplacement services for up to 6 months at management’s discretion.

The Company’s Board will make all decisions and interpretations as to eligibility, reason for termination, amount of severance and other terms under these guidelines.

-2-

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

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: August 3, 2017

/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, Lillian Etzkorn, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

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: August 3, 2017

/s/ Lillian Etzkorn

Lillian Etzkorn

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 June 30, 2017, 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: August 3, 2017

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 June 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lillian Etzkorn, 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/ Lillian Etzkorn

Lillian Etzkorn

Chief Financial Officer

Date: August 3, 2017

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Jul. 24, 2017
Document and Entity Information
Entity Registrant Name	CPI Card Group Inc.
Entity Central Index Key	0001641614
Document Type	10-Q
Document Period End Date	Jun. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		55,614,158
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 17,931	$ 36,955
Accounts receivable, net of allowances of $50 and $126, respectively	37,269	31,492
Inventories	22,087	19,369
Prepaid expenses and other current assets	4,846	4,601
Income taxes receivable	3,697
Total current assets	85,830	92,417
Plant, equipment and leasehold improvements, net	53,190	53,419
Intangible assets, net	43,980	46,348
Goodwill	72,377	71,996
Other assets	157	240
Total assets	255,534	264,420
Current liabilities:
Accounts payable	15,203	10,996
Accrued expenses	15,413	17,487
Income taxes payable		64
Deferred revenue and customer deposits	5,294	6,729
Total current liabilities	35,910	35,276
Long-term debt	302,897	301,922
Deferred income taxes	20,834	21,261
Other long-term liabilities	1,655	1,234
Total liabilities	361,296	359,693
Commitments and contingencies (Note 10)
Stockholders' deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,614,158 and 55,359,251 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively	56	55
Capital deficiency	(114,168)	(114,881)
Accumulated earnings	13,978	25,968
Accumulated other comprehensive loss	(5,628)	(6,415)
Total stockholders' deficit	(105,762)	(95,273)
Total liabilities and stockholders' deficit	$ 255,534	$ 264,420

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Condensed Consolidated Balance Sheets
Allowance on accounts receivable	$ 50	$ 126
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)	55,614,158	55,359,251
Common shares, outstanding shares (in shares)	55,614,158	55,359,251

XML

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Net sales:
Products	$ 33,825	$ 40,095	$ 63,588	$ 95,053
Services	32,021	33,630	58,266	65,065
Total net sales	65,846	73,725	121,854	160,118
Cost of sales:
Products (exclusive of depreciation and amortization shown below)	24,106	27,312	43,795	63,665
Services (exclusive of depreciation and amortization shown below)	19,612	21,063	37,053	38,827
Depreciation and amortization	2,842	2,643	5,627	5,227
Total cost of sales	46,560	51,018	86,475	107,719
Gross Profit	19,286	22,707	35,379	52,399
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)	15,556	16,633	31,712	31,131
Depreciation and amortization	1,761	1,544	3,509	3,073
Total operating expenses	17,317	18,177	35,221	34,204
Income from operations	1,969	4,530	158	18,195
Other expense, net
Interest, net	(5,163)	(5,068)	(10,225)	(10,101)
Foreign currency gain (loss)	181	34	255	(68)
Other income, net	5	15	5	13
Total other expense, net	(4,977)	(5,019)	(9,965)	(10,156)
(Loss) income before income taxes	(3,008)	(489)	(9,807)	8,039
Income tax benefit (expense)	847	161	3,139	(2,653)
Net (loss) income	$ (2,161)	$ (328)	$ (6,668)	$ 5,386
Basic and diluted (loss) earnings per share:
Basic and diluted (loss) earnings per share:	$ (0.04)	$ (0.01)	$ (0.12)	$ 0.10
Weighted-average shares outstanding
Basic (in shares)	55,612,366	56,201,811	55,518,462	56,371,964
Diluted (in shares)	55,612,366	56,201,811	55,518,462	56,583,978
Dividends declared per common share	$ 0.045	$ 0.045	$ 0.09	$ 0.09
Comprehensive (loss) income
Net (loss) income	$ (2,161)	$ (328)	$ (6,668)	$ 5,386
Currency translation adjustment	586	(1,032)	787	(949)
Total comprehensive (loss) income	$ (1,575)	$ (1,360)	$ (5,881)	$ 4,437

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Operating activities
Net (loss) income	$ (6,668)	$ 5,386
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities
Depreciation and amortization expense	9,136	8,300
Stock-based compensation expense	860	1,851
Amortization of debt issuance costs and debt discount	975	957
Excess tax benefits from stock-based compensation		(416)
Deferred income taxes	(540)	(28)
Other, net	94	68
Changes in operating assets and liabilities:
Accounts receivable	(5,457)	15,863
Inventories	(2,453)	2,049
Prepaid expenses and other assets	(139)	(543)
Income taxes	(3,753)	1,711
Accounts payable	3,320	(3,622)
Accrued expenses	(2,272)	1,819
Deferred revenue and customer deposits	(1,765)	(148)
Other liabilities	400	(80)
Cash (used in) provided by operating activities	(8,262)	33,167
Investing activities
Acquisitions of plant, equipment and leasehold improvements	(5,783)	(7,009)
Cash used in investing activities	(5,783)	(7,009)
Financing activities
Common stock repurchased		(6,008)
Dividends paid on common stock	(5,026)	(2,544)
Taxes withheld and paid on stock-based compensation awards	(339)
Excess tax benefits from stock-based compensation		416
Cash used in financing activities	(5,365)	(8,136)
Effect of exchange rates on cash	386	(133)
Net (decrease) increase in cash and cash equivalents:	(19,024)	17,889
Cash and cash equivalents, beginning of period	36,955	13,606
Cash and cash equivalents, end of period	17,931	31,495
Supplemental disclosures of cash flow information
Cash paid during the period for: Interest	9,096	6,256
Cash paid during the period for: Income taxes, net payments	$ 1,156	$ 958

XML

Business Overview and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2017

Business Overview and 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 the United States. 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 the United States and Canada 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 facilities in the United States and Canada, the Company has two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, and provide card personalization, packaging and fulfillment services for customers in the United Kingdom and continental Europe.  These facilities are not certified by the Payment Card Brands or to be in compliance with the Standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards.

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, 2016 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, 2016.

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.

Inventories

Inventories consist of raw materials, work-in-process and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out or specific identification basis) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory—Simplifying the Measurement of Inventory, which the Company adopted on January 1, 2017. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this standard did not impact the Company’s financial position, results of operations or cash flows during either the three or six months ended June  30, 2017.

Stock-based Compensation

The Company accounts for stock-based compensation pursuant to Accounting Standards Codification (“ASC”) Topic 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 11 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans.

As a result of the Company’s adoption of ASU 2016-09, Compensation–Stock Compensation:Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”)  as of January 1, 2017, the Company accounts for forfeitures when they occur.  In addition, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded in “Income tax benefit” in the Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income.

Recently Issued Accounting Pronouncements

The FASB issued 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 using the cumulative effect transition method, with the cumulative effect of initial adoption recognized at the date of initial application.  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. This assessment includes an evaluation of whether certain performance obligations will be recognized over time as opposed to a point in time, and the required changes to the Company’s business and accounting processes and its internal controls to support recognition and disclosures under the new standard.

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 condensed consolidated financial statements.

XML

Inventories

6 Months Ended

Jun. 30, 2017

Inventories

Inventories

2. Inventories

Inventories are summarized below:

	June 30, 2017		December 31, 2016
Raw materials	$	7,045	$	8,206
Work-in-process		8,294		6,340
Finished goods		6,748		4,823
	$	22,087	$	19,369

XML

Plant, Equipment and Leasehold Improvements

6 Months Ended

Jun. 30, 2017

Plant, Equipment and Leasehold Improvements

Plant, Equipment and Leasehold Improvements

3. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consist of the following:

	June 30, 2017		December 31, 2016
Buildings	$	2,264	$	2,077
Machinery and equipment		62,453		59,464
Furniture, fixtures and computer equipment		7,253		6,634
Leasehold improvements		19,466		18,655
Construction in progress		3,513		1,136
		94,949		87,966
Less accumulated depreciation and amortization		(41,759)		(34,547)
	$	53,190	$	53,419

Amounts recorded for the depreciation of plant, equipment and leasehold improvements was $3,375 and $3,053 for the three months ended June 30, 2017 and 2016, respectively, and $6,685 and $6,026 for the six months ended June 30, 2017 and 2016, respectively.

XML

Goodwill and Other Intangible Assets

6 Months Ended

Jun. 30, 2017

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

4. Goodwill and Other Intangible Assets

The Company’s goodwill by reportable segment at June 30, 2017 and December 31, 2016 is as follows:

	June 30, 2017		December 31, 2016
U.S. Debit and Credit	$	64,330	$	64,330
U.K. Limited		6,227		5,908
Other		1,820		1,758
	$	72,377	$	71,996

The change in goodwill from December 31, 2016 to June 30, 2017 was a result of foreign currency translation adjustments.

Intangible assets consist of customer relationships, technology and software, non-compete agreements and trademarks. The changes in the cost basis of the intangibles from December 31, 2016 to June 30, 2017 are related to foreign currency translation adjustments. Intangible amortization expense was $1,228 and $1,134 for the three months ended June 30, 2017 and 2016, respectively, and $2,451 and $2,274 for the six months ended June 30, 2017 and 2016, respectively. 

As of June 30, 2017 and December 31, 2016, intangible assets, excluding goodwill, were comprised of the following:

				June 30, 2017						December 31, 2016
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	59,180	$	(22,837)	$	36,343	$	58,994	$	(20,972)	$	38,022
Technology and software	7	to	10		7,100		(2,631)		4,469		7,101		(2,167)		4,934
Non-compete agreements	5	to	8		491		(360)		131		491		(331)		160
Trademarks	7.5	to	10		3,329		(292)		3,037		3,330		(98)		3,232
Intangible assets subject to amortization				$	70,100	$	(26,120)	$	43,980	$	69,916	$	(23,568)	$	46,348

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of June 30, 2017 is as follows:

2017 (remaining 6 months)	$	2,452
2018		4,905
2019		4,885
2020		4,845
2021		4,575
Thereafter		22,318
	$	43,980

XML

Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2017

Fair Value of Financial Instruments

Fair Value of Financial Instruments

5. 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 that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets are as follows:

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2017
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2017		2017		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	289,063	$	—	$	289,063	$	—

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2016
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2016		2016		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	290,625	$	—	$	290,625	$	—

The aggregate fair value of the Company’s First Lien Term Loan was based on bank quotes.

The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities.

XML

Long-Term Debt and Credit Facility

6 Months Ended

Jun. 30, 2017

Long-Term Debt and Credit Facility

Long-Term Debt and Credit Facility

6. Long-Term Debt and Credit Facility

As of June 30, 2017 and December 31, 2016, long-term debt and credit facilities consist of the following:

	Interest		June 30,		December 31,
	Rate (1)		2017		2016
First lien term loan facility (1)	5.83	%	$	312,500	$	312,500
Unamortized discount				(3,458)		(3,795)
Unamortized deferred financing costs				(6,145)		(6,783)
Long-term debt			$	302,897	$	301,922

(1)   Interest rate at June 30, 2017.  Interest rate at December 31, 2016 was 5.50%.

First Lien Credit Facility

On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (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%.  

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. 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 trailing twelve month Adjusted EBITDA, as defined in the agreement. As of June 30, 2017, 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 annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements.  As of June 30, 2017, the Company does not expect to have a required excess cash flow payment related to 2017.

As of June 30, 2017, the Company did not have any outstanding amounts under the Revolving Credit Facility, and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.50% as of June 30, 2017 and December 31, 2016, in addition to a fronting fee of 0.125% per annum. 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.

Sellers Note

The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition, which was fully repaid 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.

XML

Income Taxes

6 Months Ended

Jun. 30, 2017

Income Taxes

Income Taxes

7. Income Taxes

During the three months ended June 30, 2017, the Company recognized an income tax benefit of $847 on a pre-tax loss of $3,008, representing an effective income tax rate of 28.2%, compared to an income tax benefit of $161 on a pre-tax loss of $489, representing an effective tax rate of 32.9% during the three months ended June 30, 2016.

During the six months ended June 30, 2017, the Company recognized an income tax benefit of $3,139 on a pre-tax loss of $9,807, representing an effective income tax rate of 32.0%, compared to an income tax expense of $2,653 on pre-tax income of $8,039, representing an effective tax rate of 33.0% during the six months ended June 30, 2016.

The effective tax rates 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.  In addition, as a result of the January 1, 2017 adoption of ASU 2016-09, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded to income tax benefit and impact the effective tax rate.

The Company’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities.  During March 2017, the Company was notified that the Internal Revenue Service ("IRS") wouldexamineits 2014 United States federal incometax return. The Company has provided information requested by the IRS with respect to such tax year, and has not been notified of any items that are being disputed by the IRS.

XML

Stockholders' Equity

6 Months Ended

Jun. 30, 2017

Stockholders’ Equity

Stockholders’ Equity

8. Stockholders’ Equity

During the three and six months ended June 30, 2017, the Company paid dividends of $2,499 and $5,026, respectively, representing $0.045 and $0.09 per share, respectively.  Additionally, on May 3, 2017, the Board of Directors approved a dividend of $0.045 per share, payable on July 7, 2017 to stockholders of record as of the close of business on June 16, 2017.  The accrued dividend of $2,505 is reflected in “Accrued expenses” in the Condensed Consolidated Balance Sheet as of June 30, 2017. 

On May 11, 2016, the Board of Directors approved a stock repurchase program that authorized repurchases of the Company’s common stock up to $20,000, limited to a maximum of 2,827,105 shares, prior to May 11, 2017.  During the three and six months ended June 30, 2017, there were no common shares repurchased, and the stock repurchase program expired by its terms.

XML

(Loss) Earnings per Share

6 Months Ended

Jun. 30, 2017

(Loss) Earnings per Share

(Loss) Earnings per Share

9. (Loss) Earnings per Share

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

The following table sets forth the computation of basic and diluted (loss) earnings per share:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Numerator:
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386
Denominator:
Basic-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,371,964
Diluted-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,583,978
Basic and Diluted (Loss) earnings per share:	$	(0.04)	$	(0.01)	$	(0.12)	$	0.10

The Company reported a net loss for the three and six months ended June 30, 2017.  Accordingly, the potentially dilutive effect of 2,087,095 stock options and 273,051 restricted stock units has been excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive.

XML

Commitments and Contingencies

6 Months Ended

Jun. 30, 2017

Commitments and Contingencies.

Commitments and Contingencies

10. Commitments and Contingencies

Commitments

The Company incurred rent expense under non-cancellable operating leases of $952 and $819 for the three months ended June 30, 2017 and 2016, respectively, and $1,905 and $1,634 for the six months ended June 30, 2017 and 2016, respectively.

Contingencies

In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of litigation-related expense. The Company expenses professional fees associated with litigation claims and assessments as incurred.

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

On June 15, 2016, two purported CPI stockholders 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 theSouthern District of New York against CPI and certain of its officers and directors, along with the sponsors of and thefinancial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought onbehalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connectionwith the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, as amended (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, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price ofCPI 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 (the “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.

On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of that motion.

The Company believes these claims are without merit and intends to defend the actions vigorously.  Given the current stage of these matters, the range of potential loss is not probable or estimable and no accrual has been recognized as of June 30, 2017 or December 31, 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 expired in March 2017.  The Company successfully moved to transfer the lawsuit to 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 ("IPR") petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), 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 PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016.  The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The district court litigation remains stayed.  The PTAB will hear oral argument on the IPR on August 4, 2017.

            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 alleges that its patent will expire in 2019.  Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are presently engaged in claim construction and discovery-related activities, including the inspection of records relating to the alleged commercial embodiment of Gemalto’s patent, DEXXIS. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent.  The PTAB has not yet ruled on the Company’s petition.

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. 

Although the outcome of these matters is not determinable at this time, the Company has accrued a $1,000 loss contingency as of June 30, 2017, which does not include any potential indemnity or other third-party recoveries.  There can be no certainty about the timing or likelihood of a definitive resolution of either or both of these matters, and as additional information becomes available, the amount of this estimated loss contingency reserve could increase materially.

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.

XML

Stock-Based Compensation

6 Months Ended

Jun. 30, 2017

Stock-Based Compensation

Stock-Based Compensation

11. 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 June 30, 2017, there were 1,542,958 shares available for grant under the Omnibus Plan.

The Company did not grant any non-qualified stock options under the Omnibus Plan during the three months ended June 30, 2017.  During the six months ended June 30, 2017, the Company granted awards of non-qualified stock options for 785,370 shares of common stock.  The stock option awards were granted at various times during the first quarter.  All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date. As of June 30, 2017, there are no exercisable options outstanding under the Omnibus Plan. Outstanding 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, 2016	1,437,508	$	8.62
Granted	785,370		4.31
Forfeited	(212,783)		9.86
Outstanding as of June 30, 2017	2,010,095	$	6.77	8.95

Unvested options as of June 30, 2017 will vest as follows:

2017	310,338
2018	675,857
2019	646,584
2020	365,179
2021	12,137
Total unvested options as of June 30, 2017	2,010,095

The fair value of the stock option awards granted during the six months ended June 30, 2017, was determined using a Black-Scholes option-pricing model with the following average assumptions:

	Three Months
	Ended
	June
	30, 2017
Expected term in years	6.0
Volatility	33.7	%
Risk-free interest rate	2.1	%
Dividend yield	4.1	%

During the three months and six months ended June 30, 2017, the Company granted awards of restricted stock units for 125,000 and 239,446 shares of common stock, respectively. The restricted stock units contain conditions associated with continued employment or service.  The majority of the restricted stock units granted will vest in one year or three years from the date of grant.  On the vesting date, 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 six month period ended June 30, 2017:

		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Outstanding as of December 31, 2016	270,466	$	7.13
Granted	239,446		3.11
Vested	(236,047)		7.34
Forfeited	(814)		4.35
Outstanding as of June 30, 2017	273,051	$	3.44

During the six months ended June 30, 2017, the Company granted awards of 932,837 cash performance units with a grant date fair value of $663. There were no awards of cash performance units granted during the three months ended June 30, 2017.  These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant.  The cash performance units are based on the performance of the Company’s stock price, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant.  The cash performance units were valued using a Monte Carlo simulation.  The Monte Carlo model used the following valuation assumptions based on the 3-year term of the awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%.  The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period.  As of June 30, 2017, the Company recognized a liability of $60 in “Accrued expenses” and $50 in “Other long-term liabilities” in the Condensed Consolidated Balance Sheet for unsettled cash performance units.

The following table summarizes the changes in the number of outstanding cash performance units for the six month period ended June 30, 2017:

		Weighted-Average
	Units	Grant Date Fair Value
Outstanding as of December 31, 2016	—	$	—
Granted	932,837		0.71
Vested	—		—
Forfeited	(10,723)		0.71
Outstanding as of June 30, 2017	922,114	$	0.71

Compensation expense for the Omnibus Plan for the three months ended June 30, 2017 and 2016 was $542 and $783, respectively, and was $1,231 and $1,205, during the six months ended June 30, 2017 and 2016, respectively.  As of June 30, 2017, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $2,792, which the Company expects to recognize over an estimated weighted average period of 1.7 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 are non-qualified, have a 10-year life and are fully vested as of June 30, 2017. 

The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the six months ended June 30, 2017:

				Weighted-
				Average
				Remaining
		Weighted- Average		Contractual Term
	Options	Exercise Price		(in Years)
Outstanding and Exercisable as of December 31, 2016	216,334	$	0.0004
Granted	—		—
Exercised	(139,334)		0.0004
Forfeited	—		—
Outstanding and Exercisable as of June 30, 2017	77,000	$	0.0004	5.10

There was no compensation expense related to options previously granted under the Option Plan for the three and six months ended June 30, 2017, as all options were fully vested.  The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of June 30, 2017 was $219.

Other Stock-Based Compensation Awards

During June 2015, the Company issued 191,664 restricted shares of common stock to executives with a weighted-average grant date fair value of $9.48 per share.  There are no outstanding unvested shares of restricted common stock as of June 30, 2017. The terms of the unvested restricted shares of common stock provided voting and regular dividend rights to the holders, and accordingly are included in weighted-average shares outstanding in the Company’s basic (loss) earnings per share calculation.  See Note 9, “(Loss) Earnings per Share”. 

During the three and six months ended June 30, 2017, of the remaining 94,864 of unvested restricted stock awards that were outstanding, 47,432 shares vested, and the remaining 47,432 shares were forfeited.  The executive who held the remaining 94,864 unvested restricted shares changed employment status to a consultant during the first quarter of 2017, and accordingly, the Company remeasured the awards on the date of the change in employment status and reduced stock-based compensation expense by $143. Compensation expense related to these awards for the three months ended June 30, 2017 and 2016 was $(228) and $323, respectively, and was $(371) and $646 for the six months ended June 30, 2017 and 2016, respectively. 

XML

Segment Reporting

6 Months Ended

Jun. 30, 2017

Segment Reporting

Segment Reporting

12. 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 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 June 30, 2017, 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 a less significant operating segment that derives its revenue from the production of Financial Payment Cards and retail gift cards in Canada.

Performance Measures of Reportable Segments

Revenue and EBITDA of the Company’s reportable segments for the three and six months ended June 30, 2017 and 2016 were as follows:

	Revenue
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
U.S. Debit and Credit	$	42,204	$	50,808	$	81,712	$	115,899
U.S. Prepaid Debit		12,426		11,991		22,211		24,332
U.K. Limited		11,010		7,989		16,597		14,221
Other		3,226		3,678		5,729		6,820
Intersegment eliminations		(3,020)		(741)		(4,395)		(1,154)
Total:	$	65,846	$	73,725	$	121,854	$	160,118

	EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
U.S. Debit and Credit	$	8,275	$	11,403	$	15,903	$	30,325
U.S. Prepaid Debit		3,306		3,557		5,092		6,824
U.K. Limited		1,566		680		1,891		899
Other		(6,389)		(6,874)		(13,332)		(11,608)
Total:	$	6,758	$	8,766	$	9,554	$	26,440

The following table provides a reconciliation of total segment EBITDA to net (loss) income for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Total segment EBITDA from continuing operations	$	6,758	$	8,766	$	9,554	$	26,440
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)
Income tax benefit (expense)		847		161		3,139		(2,653)
Depreciation and amortization		(4,603)		(4,187)		(9,136)		(8,300)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments as of June 30, 2017 and December 31, 2016 were as follows:

	June 30, 2017		December 31, 2016
U.S. Debit and Credit	$	192,368	$	205,417
U.S. Prepaid Debit		28,095		23,509
U.K. Limited		23,060		26,060
Other		12,011		9,434
Total assets:	$	255,534	$	264,420

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 six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
U.S.	$	2,775	$	4,421	$	5,050	$	6,823
Canada		51		47		123		161
Total North America		2,826		4,468		5,173		6,984
U.K.		368		167		1,329		791
Total plant, equipment and leasehold improvement additions	$	3,194	$	4,635	$	6,502	$	7,775

Net Sales to Geographic Locations

Net sales to geographic locations for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
U.S.	$	52,339	$	61,018	$	100,150	$	135,454
Canada		2,755		3,430		4,783		7,429
Total North America		55,094		64,448		104,933		142,883
U.K.		9,937		8,182		13,892		14,787
Other (a)		815		1,095		3,029		2,448
Total net sales	$	65,846	$	73,725	$	121,854	$	160,118

(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 June 30, 2017 and December 31, 2016 were as follows:

	June 30, 2017		December 31, 2016
U.S.	$	154,011	$	157,773
Canada		2,941		2,899
Total North America:		156,952		160,672
U.K.		12,595		11,091
Total long-lived assets	$	169,547	$	171,763

Net Sales by Product and Services

Net sales from products and services sold by the Company for the three and six months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Product net sales (a)	$	33,825	$	40,095	$	63,588	$	95,053
Services net sales (b)		32,021		33,630		58,266		65,065
Total net sales:	$	65,846	$	73,725	$	121,854	$	160,118

(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.

XML

Business Overview and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2017

Business Overview and 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, 2016 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, 2016.

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.

Inventories

Inventories

Inventories consist of raw materials, work-in-process and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out or specific identification basis) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory—Simplifying the Measurement of Inventory, which the Company adopted on January 1, 2017. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this standard did not impact the Company’s financial position, results of operations or cash flows during either the three or six months ended June  30, 2017.

Stock-Based Compensation

Stock-based Compensation

The Company accounts for stock-based compensation pursuant to Accounting Standards Codification (“ASC”) Topic 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 11 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans.

As a result of the Company’s adoption of ASU 2016-09, Compensation–Stock Compensation:Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”)  as of January 1, 2017, the Company accounts for forfeitures when they occur.  In addition, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded in “Income tax benefit” in the Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

The FASB issued 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 using the cumulative effect transition method, with the cumulative effect of initial adoption recognized at the date of initial application.  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. This assessment includes an evaluation of whether certain performance obligations will be recognized over time as opposed to a point in time, and the required changes to the Company’s business and accounting processes and its internal controls to support recognition and disclosures under the new standard.

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 condensed consolidated financial statements.

XML

Inventories (Tables)

6 Months Ended

Jun. 30, 2017

Inventories

Schedule of inventories

	June 30, 2017		December 31, 2016
Raw materials	$	7,045	$	8,206
Work-in-process		8,294		6,340
Finished goods		6,748		4,823
	$	22,087	$	19,369

XML

Plant, Equipment and Leasehold Improvements (Tables)

6 Months Ended

Jun. 30, 2017

Plant, Equipment and Leasehold Improvements

Schedule of plant, equipment and leasehold improvements

	June 30, 2017		December 31, 2016
Buildings	$	2,264	$	2,077
Machinery and equipment		62,453		59,464
Furniture, fixtures and computer equipment		7,253		6,634
Leasehold improvements		19,466		18,655
Construction in progress		3,513		1,136
		94,949		87,966
Less accumulated depreciation and amortization		(41,759)		(34,547)
	$	53,190	$	53,419

XML

Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2017

Goodwill and Other Intangible Assets

Schedule of goodwill by reportable segment

	June 30, 2017		December 31, 2016
U.S. Debit and Credit	$	64,330	$	64,330
U.K. Limited		6,227		5,908
Other		1,820		1,758
	$	72,377	$	71,996

Schedule of intangible assets excluding goodwill

				June 30, 2017						December 31, 2016
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	59,180	$	(22,837)	$	36,343	$	58,994	$	(20,972)	$	38,022
Technology and software	7	to	10		7,100		(2,631)		4,469		7,101		(2,167)		4,934
Non-compete agreements	5	to	8		491		(360)		131		491		(331)		160
Trademarks	7.5	to	10		3,329		(292)		3,037		3,330		(98)		3,232
Intangible assets subject to amortization				$	70,100	$	(26,120)	$	43,980	$	69,916	$	(23,568)	$	46,348

Schedule of future aggregate amortization expense for identified amortizable intangibles

2017 (remaining 6 months)	$	2,452
2018		4,905
2019		4,885
2020		4,845
2021		4,575
Thereafter		22,318
	$	43,980

XML

Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2017

Fair Value of Financial Instruments

Schedule of financial assets and liabilities subject to fair value measurements

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2017
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2017		2017		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	289,063	$	—	$	289,063	$	—

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2016
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2016		2016		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	290,625	$	—	$	290,625	$	—

XML

Long-Term Debt and Credit Facility (Tables)

6 Months Ended

Jun. 30, 2017

Long-Term Debt and Credit Facility

Schedule of long-term debt

	Interest		June 30,		December 31,
	Rate (1)		2017		2016
First lien term loan facility (1)	5.83	%	$	312,500	$	312,500
Unamortized discount				(3,458)		(3,795)
Unamortized deferred financing costs				(6,145)		(6,783)
Long-term debt			$	302,897	$	301,922

(1)   Interest rate at June 30, 2017.  Interest rate at December 31, 2016 was 5.50%.

XML

(Loss) Earnings per Share (Tables)

6 Months Ended

Jun. 30, 2017

(Loss) Earnings per Share

Computation of basic and diluted EPS

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Numerator:
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386
Denominator:
Basic-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,371,964
Diluted-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,583,978
Basic and Diluted (Loss) earnings per share:	$	(0.04)	$	(0.01)	$	(0.12)	$	0.10

XML

Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2017

Summary of changes in outstanding restricted stock units

		Weighted-
		Average
		Grant Date
	Shares	Fair Value
Outstanding as of December 31, 2016	270,466	$	7.13
Granted	239,446		3.11
Vested	(236,047)		7.34
Forfeited	(814)		4.35
Outstanding as of June 30, 2017	273,051	$	3.44

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

		Weighted-Average
	Units	Grant Date Fair Value
Outstanding as of December 31, 2016	—	$	—
Granted	932,837		0.71
Vested	—		—
Forfeited	(10,723)		0.71
Outstanding as of June 30, 2017	922,114	$	0.71

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, 2016	1,437,508	$	8.62
Granted	785,370		4.31
Forfeited	(212,783)		9.86
Outstanding as of June 30, 2017	2,010,095	$	6.77	8.95

Schedule of vesting for unvested options

2017	310,338
2018	675,857
2019	646,584
2020	365,179
2021	12,137
Total unvested options as of June 30, 2017	2,010,095

Schedule of valuation assumptions

	Three Months
	Ended
	June
	30, 2017
Expected term in years	6.0
Volatility	33.7	%
Risk-free interest rate	2.1	%
Dividend yield	4.1	%

Option Plan

Summary of outstanding and exercisable stock options

				Weighted-
				Average
				Remaining
		Weighted- Average		Contractual Term
	Options	Exercise Price		(in Years)
Outstanding and Exercisable as of December 31, 2016	216,334	$	0.0004
Granted	—		—
Exercised	(139,334)		0.0004
Forfeited	—		—
Outstanding and Exercisable as of June 30, 2017	77,000	$	0.0004	5.10

XML

Segment Reporting (Tables)

6 Months Ended

Jun. 30, 2017

Segment Reporting

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

	Revenue
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
U.S. Debit and Credit	$	42,204	$	50,808	$	81,712	$	115,899
U.S. Prepaid Debit		12,426		11,991		22,211		24,332
U.K. Limited		11,010		7,989		16,597		14,221
Other		3,226		3,678		5,729		6,820
Intersegment eliminations		(3,020)		(741)		(4,395)		(1,154)
Total:	$	65,846	$	73,725	$	121,854	$	160,118

	EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
U.S. Debit and Credit	$	8,275	$	11,403	$	15,903	$	30,325
U.S. Prepaid Debit		3,306		3,557		5,092		6,824
U.K. Limited		1,566		680		1,891		899
Other		(6,389)		(6,874)		(13,332)		(11,608)
Total:	$	6,758	$	8,766	$	9,554	$	26,440

Schedule of reconciliation of total segment EBITDA to income before taxes

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Total segment EBITDA from continuing operations	$	6,758	$	8,766	$	9,554	$	26,440
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)
Income tax benefit (expense)		847		161		3,139		(2,653)
Depreciation and amortization		(4,603)		(4,187)		(9,136)		(8,300)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386

Schedule of total assets of the company's reportable segments

	June 30, 2017		December 31, 2016
U.S. Debit and Credit	$	192,368	$	205,417
U.S. Prepaid Debit		28,095		23,509
U.K. Limited		23,060		26,060
Other		12,011		9,434
Total assets:	$	255,534	$	264,420

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
U.S.	$	2,775	$	4,421	$	5,050	$	6,823
Canada		51		47		123		161
Total North America		2,826		4,468		5,173		6,984
U.K.		368		167		1,329		791
Total plant, equipment and leasehold improvement additions	$	3,194	$	4,635	$	6,502	$	7,775

Schedule of net sales of company's geographic locations

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
U.S.	$	52,339	$	61,018	$	100,150	$	135,454
Canada		2,755		3,430		4,783		7,429
Total North America		55,094		64,448		104,933		142,883
U.K.		9,937		8,182		13,892		14,787
Other (a)		815		1,095		3,029		2,448
Total net sales	$	65,846	$	73,725	$	121,854	$	160,118

(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

	June 30, 2017		December 31, 2016
U.S.	$	154,011	$	157,773
Canada		2,941		2,899
Total North America:		156,952		160,672
U.K.		12,595		11,091
Total long-lived assets	$	169,547	$	171,763

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Product net sales (a)	$	33,825	$	40,095	$	63,588	$	95,053
Services net sales (b)		32,021		33,630		58,266		65,065
Total net sales:	$	65,846	$	73,725	$	121,854	$	160,118

(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.

XML

Business Overview and Summary of Significant Accounting Policies - Business Overview and Basis of Presentation (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2017 USD ($) item
Business Overview and Summary of Significant Accounting Policies
Total number of production and card services facilities	10
Payment to tax authorities for shares withheld to satisfy employer income tax obligations | $	$ 339
United States and Canada
Business Overview and Summary of Significant Accounting Policies
Number of high-security production and card services facilities	8
Number of payment card brands which certify card services	1
U.K.
Business Overview and Summary of Significant Accounting Policies
Total number of production and card services facilities	2

XML

Inventories (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Inventories
Raw materials	$ 7,045	$ 8,206
Work-in-process	8,294	6,340
Finished goods	6,748	4,823
Inventory	$ 22,087	$ 19,369

XML

Plant, Equipment and Leasehold Improvements (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	$ 94,949		$ 94,949		$ 87,966
Less accumulated depreciation and amortization	(41,759)		(41,759)		(34,547)
Plant, equipment and leasehold improvements, net	53,190		53,190		53,419
Depreciation	3,375	$ 3,053	6,685	$ 6,026
Buildings
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	2,264		2,264		2,077
Machinery and equipment
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	62,453		62,453		59,464
Furniture, fixtures and computer equipment
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	7,253		7,253		6,634
Leasehold improvements
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	19,466		19,466		18,655
Construction in progress
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	$ 3,513		$ 3,513		$ 1,136

XML

Goodwill and Other Intangible Assets - Goodwill by Reporting Segment (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Goodwill	$ 72,377	$ 71,996
U.S. Debit and Credit
Goodwill	64,330	64,330
U.K. Limited
Goodwill	6,227	5,908
Other
Goodwill	$ 1,820	$ 1,758

XML

Goodwill and Other Intangible Assets - Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Intangible Assets [Line Items]
Intangible amortization expense	$ 1,228	$ 1,134	$ 2,451	$ 2,274
Intangible assets subject to amortization, Cost	70,100		70,100		$ 69,916
Intangible assets subject to amortization, Accumulated Amortization	(26,120)		(26,120)		(23,568)
Intangible assets subject to amortization, Net Book Value	43,980		43,980		46,348
Customer relationships
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	59,180		59,180		58,994
Intangible assets subject to amortization, Accumulated Amortization	(22,837)		(22,837)		(20,972)
Intangible assets subject to amortization, Net Book Value	36,343		$ 36,343		$ 38,022
Customer relationships | Minimum
Intangible Assets [Line Items]
Weighted-average useful life			12 years		12 years
Customer relationships | Maximum
Intangible Assets [Line Items]
Weighted-average useful life			20 years		20 years
Technology and software
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	7,100		$ 7,100		$ 7,101
Intangible assets subject to amortization, Accumulated Amortization	(2,631)		(2,631)		(2,167)
Intangible assets subject to amortization, Net Book Value	4,469		$ 4,469		$ 4,934
Technology and software | Minimum
Intangible Assets [Line Items]
Weighted-average useful life			7 years		7 years
Technology and software | Maximum
Intangible Assets [Line Items]
Weighted-average useful life			10 years		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	(360)		(360)		(331)
Intangible assets subject to amortization, Net Book Value	131		$ 131		$ 160
Non-compete agreements | Minimum
Intangible Assets [Line Items]
Weighted-average useful life			5 years		5 years
Non-compete agreements | Maximum
Intangible Assets [Line Items]
Weighted-average useful life			8 years		8 years
Trademarks
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	3,329		$ 3,329		$ 3,330
Intangible assets subject to amortization, Accumulated Amortization	(292)		(292)		(98)
Intangible assets subject to amortization, Net Book Value	$ 3,037		$ 3,037		$ 3,232
Trademarks | Minimum
Intangible Assets [Line Items]
Weighted-average useful life			7 years 6 months		7 years 6 months
Trademarks | Maximum
Intangible Assets [Line Items]
Weighted-average useful life			10 years		10 years

XML

Goodwill and Other Intangible Assets - Future Aggregate Amortization Expense (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Estimated future aggregate amortization expense
2017 (remaining 6 months)	$ 2,452
2018	4,905
2019	4,885
2020	4,845
2021	4,575
Thereafter	22,318
Intangible assets subject to amortization, Net Book Value	$ 43,980	$ 46,348

XML

Fair Value of Financial Instruments (Details) - First Lien Credit Facility - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Liabilities:
Carrying amount	$ 312,500	$ 312,500
Term Loan
Liabilities:
Carrying amount	312,500	312,500
Long-term debt	289,063	290,625
Level 2 | Term Loan
Liabilities:
Long-term debt	$ 289,063	$ 290,625

XML

Long-Term Debt and Credit Facility - Long-Term Debt (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Debt Instrument [Line Items]
Total long-term debt	$ 302,897	$ 301,922
First Lien Credit Facility
Debt Instrument [Line Items]
Interest rate (as a percent)	5.83%	5.50%
Long-term debt	$ 312,500	$ 312,500
Unamortized discount	(3,458)	(3,795)
Unamortized deferred financing costs	$ (6,145)	$ (6,783)

XML

Long-Term Debt and Credit Facility - First Lien Credit Facility (Details) - First Lien Credit Facility $ in Thousands		6 Months Ended
	Aug. 17, 2015 USD ($)	Jun. 30, 2017 USD ($)
Long-term Debt
Maximum net leverage ratio	7.00
Term Loan
Long-term Debt
Maximum borrowing capacity	$ 435,000
Term Loan | Eurodollar rate
Long-term Debt
Applicable margin over reference rate (as a percent)	4.50%
Term Loan | Eurodollar rate | Minimum
Long-term Debt
Interest rate (as a percent)	1.00%
Term Loan | Base rate
Long-term Debt
Applicable margin over reference rate (as a percent)	3.50%
Revolving Credit Facility
Long-term Debt
Maximum borrowing capacity	$ 40,000
Fee on outstanding letters of credit (as a percent)		4.50%
Fronting fee for letters of credit (as a percent)		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 | Minimum
Long-term Debt
Unused commitment fee (as a percent)	0.375%
Revolving Credit Facility | Maximum
Long-term Debt
Unused commitment fee (as a percent)	0.50%

XML

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

XML

Long-Term Debt and Credit Facility - Letters of Credit (Details) - First Lien Credit Facility $ in Thousands	6 Months Ended
	Jun. 30, 2017 USD ($) item	Dec. 31, 2016 USD ($)	Aug. 17, 2015 USD ($)
Long-term Debt
Long-term debt	$ 312,500	$ 312,500
Term Loan
Long-term Debt
Maximum borrowing capacity			$ 435,000
Long-term debt	$ 312,500	$ 312,500
Revolving Credit Facility
Long-term Debt
Number of outstanding letters of credit | item	1
Letters of credit outstanding	$ 50
Remaining borrowing capacity	$ 19,950
Fee on outstanding letters of credit (as a percent)	4.50%
Fronting fee for letters of credit (as a percent)	0.125%
Maximum borrowing capacity			$ 40,000

XML

Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Income Taxes
Income tax expense (benefit)	$ (847)	$ (161)	$ (3,139)	$ 2,653
Income before income taxes
(Loss) income before income taxes	$ (3,008)	$ (489)	$ (9,807)	$ 8,039
Effective income tax rate (as a percent)	28.20%	32.90%	32.00%	33.00%

XML

Stockholders' Equity - Common Stock (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended		6 Months Ended
	May 03, 2017	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	May 11, 2016
Dividends, Common Stock [Abstract]
Dividends paid on common stock		$ 2,499		$ 5,026	$ 2,544
Cash dividend paid per common share		$ 0.045		$ 0.09
Cash dividends declared per common share	$ 0.045	$ 0.045	$ 0.045	$ 0.09	$ 0.09
Repurchase Program
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		0
Accrued expenses
Dividends, Common Stock [Abstract]
Accrued dividend		$ 2,505		$ 2,505

XML

Stockholders' Equity - Repurchase Program (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2017	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	0

XML

(Loss) Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Numerator:
Net (loss) income	$ (2,161)	$ (328)	$ (6,668)	$ 5,386
Denominator:
Basic - weighted average common shares outstanding	55,612,366	56,201,811	55,518,462	56,371,964
Dilutive - weighted average common shares outstanding	55,612,366	56,201,811	55,518,462	56,583,978
(Loss) earnings per share:
Earnings Per Share, Basic and Diluted	$ (0.04)	$ (0.01)	$ (0.12)	$ 0.10
Stock Options
Potentially dilutive effect of outstanding stock options
Potential dilutive effect of share-based compensation excluded (in shares)			2,087,095
Restricted stock units
Potentially dilutive effect of outstanding stock options
Potential dilutive effect of share-based compensation excluded (in shares)			273,051

XML

Commitments and Contingencies - Rental Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Commitments and Contingencies.
Operating leases, rent expense	$ 952	$ 819	$ 1,905	$ 1,634

XML

Commitments and Contingencies - Contingencies (Details) $ in Thousands	Jun. 15, 2016 plaintiff	Jun. 30, 2017 USD ($)	Dec. 31, 2016 USD ($)
Loss Contingencies [Line Items]
Number of purported shareholders that have filed lawsuits | plaintiff	2
Securities Litigation Case | Pending Litigation
Loss Contingencies [Line Items]
Loss contingency accrual		$ 0	$ 0
Gemalto Suit | Pending Litigation
Loss Contingencies [Line Items]
Loss contingency accrual		$ 1,000

XML

Stock-Based Compensation - Omnibus Incentive Plan (Details) - Omnibus Plan - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Oct. 09, 2015
Valuation Assumptions:
Compensation expense	$ 542	$ 783	$ 1,231	$ 1,205
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	1,542,958		1,542,958
Stock options granted (in shares)	0		785,370
Stock option life (in years)				10 years
Vesting period				3 years
Number of exercisable options outstanding	0		0
Number of shares
Balance at beginning of year (in shares)			1,437,508
Granted (in shares)	0		785,370
Forfeited (in shares)			(212,783)
Balance at end of year (in shares)	2,010,095		2,010,095
Weighted-Average Exercise Price
Balance at beginning of year (in dollars per share)			$ 8.62
Granted (in dollars per share)			4.31
Forfeited (in dollars per share)			9.86
Balance at end of year (in dollars per share)	$ 6.77		$ 6.77
Weighted- Average Remaining Contractual Term (in Years)
Balance (in years)			8 years 11 months 12 days
Number of unvested options scheduled to vest
Unvested options (in shares)	2,010,095		2,010,095
Valuation Assumptions:
Expected term in years			6 years
Volatility (as a percent)			33.70%
Risk-free interest rate			2.10%
Dividend yield (as a percent)			4.10%
2017 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	310,338		310,338
2018 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	675,857		675,857
2019 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	646,584		646,584
2020 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	365,179		365,179
2021 | Stock Options
Number of unvested options scheduled to vest
Unvested options (in shares)	12,137		12,137

XML

Stock-Based Compensation - Restricted Stock Units (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Restricted stock units
Number of Restricted Stock Units
Units outstanding at the beginning of the period (in shares)			270,466
Granted (in shares)			239,446
Vested (in shares)			(236,047)
Forfeited (in shares)			(814)
Units outstanding at the end of the period (in shares)	273,051		273,051
Weighted Average Grant Date Fair Value
Units outstanding at the beginning of the period (in dollars per shares)			$ 7.13
Granted (in dollars per share)			3.11
Vested (in dollars per share)			7.34
Forfeited (in dollars per share)			4.35
Units outstanding at the end of the period (in dollars per shares)	$ 3.44		$ 3.44
Omnibus Plan
Weighted Average Grant Date Fair Value
Compensation expense	$ 542	$ 783	$ 1,231	$ 1,205
Omnibus Plan | Restricted stock units
Number of Restricted Stock Units
Granted (in shares)	125,000		239,446
Weighted Average Grant Date Fair Value
Unrecognized compensation expense	$ 2,792		$ 2,792
Period over which compensation expense expected to recognize			1 year 8 months 12 days
Omnibus Plan | Restricted stock units | Minimum
Weighted Average Grant Date Fair Value
Vesting period			1 year
Omnibus Plan | Restricted stock units | Maximum
Weighted Average Grant Date Fair Value
Vesting period			3 years

XML

Stock-Based Compensation - Cash Performance Units (Details) - Cash Performance $ / shares in Units, $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2017 USD ($) $ / shares shares	Jun. 30, 2017 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grant date fair value | $	$ 663	$ 663
Period over which compensation expense expected to recognize		3 years
Valuation Assumptions:
Expected term in years		3 years
Volatility (as a percent)		48.00%
Risk-free interest rate		1.50%
Dividend yield (as a percent)		4.00%
Number of Cash Performance Units
Granted (in shares) | shares	0	932,837
Forfeited (in shares) | shares		(10,723)
Units outstanding at the end of the period (in shares) | shares	922,114	922,114
Weighted Average Grant Date Fair Value
Granted (in dollars per share) | $ / shares		$ 0.71
Forfeited (in dollars per share) | $ / shares		(0.71)
Units outstanding at the end of the period (in dollars per shares) | $ / shares	$ 0.71	$ 0.71
Accrued expenses
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Cash performance liability | $	$ 60	$ 60
Other Long Term Liabilities
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Cash performance liability | $	$ 50	$ 50

XML

Stock-Based Compensation - Option Plan (Details) - Option Plan $ / shares in Units, $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2017 USD ($) $ / shares shares	Jun. 30, 2017 USD ($) $ / shares shares
Number of shares
Balance at beginning of year (in shares) | shares		216,334
Exercised (in shares) | shares		(139,334)
Balance at end of year (in shares) | shares	77,000	77,000
Weighted-Average Exercise Price
Balance at beginning of year (in dollars per share) | $ / shares		$ 0.0004
Exercised (in dollars per share) | $ / shares		0.0004
Balance at end of year (in dollars per share) | $ / shares	$ 0.0004	$ 0.0004
Weighted- Average Remaining Contractual Term (in Years)
Balance (in years)		5 years 1 month 6 days
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock option life (in years)		10 years
Compensation expense | $	$ 0	$ 0
Weighted- Average Remaining Contractual Term (in Years)
Aggregate intrinsic value of stock option awards outstanding | $	$ 219	$ 219

XML

Stock-Based Compensation - Restricted Shares (Details) - Restricted shares - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended			6 Months Ended
	Jun. 30, 2015	Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Number of Restricted Stock Units
Units outstanding at the beginning of the period (in shares)		94,864	94,864		94,864
Granted (in shares)	191,664
Vested (in shares)		(47,432)			(47,432)
Forfeited (in shares)		(47,432)			(47,432)
Units outstanding at the end of the period (in shares)		0	94,864		0
Weighted Average Grant Date Fair Value
Granted (in dollars per share)	$ 9.48
Compensation expense		$ (228)	$ (143)	$ 323	$ (371)	$ 646

XML

Segment Reporting - Revenue and EBITDA (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Segment Reporting
Revenues	$ 65,846	$ 73,725	$ 121,854	$ 160,118
EBITDA	6,758	8,766	9,554	26,440
U.S. Debit and Credit
Segment Reporting
EBITDA	8,275	11,403	15,903	30,325
U.S. Prepaid Debit
Segment Reporting
EBITDA	3,306	3,557	5,092	6,824
U.K. Limited
Segment Reporting
EBITDA	1,566	680	1,891	899
Other
Segment Reporting
EBITDA	(6,389)	(6,874)	(13,332)	(11,608)
Operating Segments | U.S. Debit and Credit
Segment Reporting
Revenues	42,204	50,808	81,712	115,899
Operating Segments | U.S. Prepaid Debit
Segment Reporting
Revenues	12,426	11,991	22,211	24,332
Operating Segments | U.K. Limited
Segment Reporting
Revenues	11,010	7,989	16,597	14,221
Operating Segments | Other
Segment Reporting
Revenues	3,226	3,678	5,729	6,820
Intersegment eliminations
Segment Reporting
Revenues	$ (3,020)	$ (741)	$ (4,395)	$ (1,154)

XML

Segment Reporting - Reconciliation of EBITDA to Income Before Taxes (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Reconciliation of total segment EBITDA to income before taxes
Total segment EBITDA from continuing operations	$ 6,758	$ 8,766	$ 9,554	$ 26,440
Interest, net	(5,163)	(5,068)	(10,225)	(10,101)
Income tax benefit (expense)	847	161	3,139	(2,653)
Depreciation and amortization	(4,603)	(4,187)	(9,136)	(8,300)
Net (loss) income	$ (2,161)	$ (328)	$ (6,668)	$ 5,386

XML

Segment Reporting - Balance Sheet Data (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	$ 255,534	$ 264,420
Operating Segments | U.S. Debit and Credit
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	192,368	205,417
Operating Segments | U.S. Prepaid Debit
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	28,095	23,509
Operating Segments | U.K. Limited
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	23,060	26,060
Operating Segments | Other
Segment Reporting, Asset Reconciling Item [Line Items]
Total assets	$ 12,011	$ 9,434

XML

Segment Reporting - Geographic Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	$ 3,194	$ 4,635	$ 6,502	$ 7,775
Revenues	65,846	73,725	121,854	160,118
Total long-lived assets	169,547		169,547		$ 171,763
Total North America
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	2,826	4,468	5,173	6,984
Revenues	55,094	64,448	104,933	142,883
Total long-lived assets	156,952		156,952		160,672
U.S.
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	2,775	4,421	5,050	6,823
Revenues	52,339	61,018	100,150	135,454
Total long-lived assets	154,011		154,011		157,773
Canada
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	51	47	123	161
Revenues	2,755	3,430	4,783	7,429
Total long-lived assets	2,941		2,941		2,899
U.K.
Segment Reporting Information [Line Items]
Total plant, equipment and leasehold improvement additions	368	167	1,329	791
Revenues	9,937	8,182	13,892	14,787
Total long-lived assets	12,595		12,595		$ 11,091
Other
Segment Reporting Information [Line Items]
Revenues	$ 815	$ 1,095	$ 3,029	$ 2,448

XML

Segment Reporting - Net Sales by Product and Services (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Segment Reporting
Product net sales	$ 33,825	$ 40,095	$ 63,588	$ 95,053
Services net sales	32,021	33,630	58,266	65,065
Total net sales	$ 65,846	$ 73,725	$ 121,854	$ 160,118