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~~September 30,~~, 2017~~. 2017.

☐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,~~October 26, 2017: ~~55,614,158~~55,673,755

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		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		3433

Item 1A — Risk Factors		3534

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		3534

Item 6 — Exhibits		3735

Signatures		3836

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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,		September 30,		December 31,
	2017		2016		2017		2016
	(Unaudited)				(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	17,931	$	36,955	$	14,815	$	36,955
Accounts receivable, net of allowances of $50 and $126, respectively		37,269		31,492
Accounts receivable, net of allowances of $53 and $126, respectively						42,712		31,492
Inventories		22,087		19,369		18,637		19,369
Prepaid expenses and other current assets		4,846		4,601		3,891		4,601
Income taxes receivable		3,697		—		4,415		—
Total current assets		85,830		92,417		84,470		92,417
Plant, equipment and leasehold improvements, net		53,190		53,419		51,320		53,419
Intangible assets, net		43,980		46,348		42,800		46,348
Goodwill		72,377		71,996		72,638		71,996
Other assets		157		240		280		240
Total assets	$	255,534	$	264,420	$	251,508	$	264,420
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	15,203	$	10,996	$	13,482	$	10,996
Accrued expenses		15,413		17,487		12,856		17,487
Income taxes payable		—		64		—		64
Deferred revenue and customer deposits		5,294		6,729		5,194		6,729
Total current liabilities		35,910		35,276		31,532		35,276
Long-term debt		302,897		301,922		303,383		301,922
Deferred income taxes		20,834		21,261		20,512		21,261
Other long-term liabilities		1,655		1,234		1,666		1,234
Total liabilities		361,296		359,693		357,093		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
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,661,337 and 55,359,251 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively						56		55
Capital deficiency		(114,168)		(114,881)		(113,689)		(114,881)
Accumulated earnings		13,978		25,968		13,242		25,968
Accumulated other comprehensive loss		(5,628)		(6,415)		(5,194)		(6,415)
Total stockholders’ deficit		(105,762)		(95,273)		(105,585)		(95,273)
Total liabilities and stockholders’ deficit	$	255,534	$	264,420	$	251,508	$	264,420

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(Dollars in Thousands, Except Per Share Amounts)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
Net sales:
Products	$	33,825	$	40,095	$	63,588	$	95,053	$	31,417		37,482		95,005		132,535
Services		32,021		33,630		58,266		65,065		36,627		43,720		94,893		108,785
Total net sales		65,846		73,725		121,854		160,118		68,044		81,202		189,898		241,320
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		24,106		27,312		43,795		63,665		22,366		23,583		66,161		87,248
Services (exclusive of depreciation and amortization shown below)		19,612		21,063		37,053		38,827		21,916		25,855		58,969		64,682
Depreciation and amortization		2,842		2,643		5,627		5,227		2,786		2,701		8,412		7,928
Total cost of sales		46,560		51,018		86,475		107,719		47,068		52,139		133,542		159,858
Gross profit		19,286		22,707		35,379		52,399		20,976		29,063		56,356		81,462
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		15,556		16,633		31,712		31,131		15,806		15,838		47,519		46,969
Depreciation and amortization		1,761		1,544		3,509		3,073		1,674		1,529		5,183		4,602
Total operating expenses		17,317		18,177		35,221		34,204		17,480		17,367		52,702		51,571
Income from operations		1,969		4,530		158		18,195		3,496		11,696		3,654		29,891
Other expense, net:
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)		(5,305)		(5,008)		(15,530)		(15,109)
Foreign currency gain (loss)		181		34		255		(68)		314		(124)		568		(192)
Other income, net		5		15		5		13		5		3		12		17
Total other expense, net		(4,977)		(5,019)		(9,965)		(10,156)		(4,986)		(5,129)		(14,950)		(15,284)
(Loss) income before income taxes		(3,008)		(489)		(9,807)		8,039		(1,490)		6,567		(11,296)		14,607
Income tax benefit (expense)		847		161		3,139		(2,653)		755		(2,541)		3,893		(5,194)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386	$	(735)	$	4,026	$	(7,403)	$	9,413

Basic and diluted (loss) earnings per share:	$	(0.04)	$	(0.01)	$	(0.12)	$	0.10	$	(0.01)	$	0.07	$	(0.13)	$	0.17
Weighted-average shares outstanding:
Basic		55,612,366		56,201,811		55,518,462		56,371,964		55,639,551		55,255,239		55,558,825		55,999,722
Diluted		55,612,366		56,201,811		55,518,462		56,583,978		55,639,551		55,508,684		55,558,825		56,232,195

Dividends declared per common share	$	0.045	$	0.045	$	0.09	$	0.09	$	—	$	0.045	$	0.09	$	0.135

Comprehensive (loss) income
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386	$	(735)	$	4,026	$	(7,403)	$	9,413
Currency translation adjustment		586		(1,032)		787		(949)		434		(465)		1,221		(1,414)
Total comprehensive (loss) income	$	(1,575)	$	(1,360)	$	(5,881)	$	4,437	$	(301)	$	3,561	$	(6,182)	$	7,999

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)


	Six Months Ended June 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Operating activities
Net (loss) income	$	(6,668)	$	5,386	$	(7,403)	$	9,413
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization expense		9,136		8,300		13,595		12,530
Stock-based compensation expense		860		1,851		1,367		2,785
Amortization of debt issuance costs and debt discount		975		957		1,461		1,437
Excess tax benefits from stock-based compensation		—		(416)		—		(526)
Deferred income taxes		(540)		(28)		(863)		(445)
Other, net		94		68		(209)		220
Changes in operating assets and liabilities:
Accounts receivable		(5,457)		15,863		(10,681)		9,053
Inventories		(2,453)		2,049		1,186		1,978
Prepaid expenses and other assets		(139)		(543)		709		(32)
Income taxes		(3,753)		1,711		(4,470)		4,522
Accounts payable		3,320		(3,622)		2,319		(4,352)
Accrued expenses		(2,272)		1,819		(2,384)		1,699
Deferred revenue and customer deposits		(1,765)		(148)		(1,957)		1,307
Other liabilities		400		(80)		402		183
Cash (used in) provided by operating activities		(8,262)		33,167		(6,928)		39,772
Investing activities
Acquisitions of plant, equipment and leasehold improvements		(5,783)		(7,009)		(7,808)		(12,369)
Cash used in investing activities		(5,783)		(7,009)		(7,808)		(12,369)
Financing activities
Payment of Sellers Note						—		(9,000)
Common stock repurchased		—		(6,008)		—		(6,008)
Dividends paid on common stock		(5,026)		(2,544)		(7,537)		(5,031)
Taxes withheld and paid on stock-based compensation awards		(339)		—		(341)		—
Excess tax benefits from stock-based compensation		—		416		—		526
Cash used in financing activities		(5,365)		(8,136)		(7,878)		(19,513)
Effect of exchange rates on cash		386		(133)		474		(226)
Net (decrease) increase in cash and cash equivalents:		(19,024)		17,889
Net (decrease) increase in cash and cash equivalents						(22,140)		7,664
Cash and cash equivalents, beginning of period		36,955		13,606		36,955		13,606
Cash and cash equivalents, end of period	$	17,931	$	31,495	$	14,815	$	21,270
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	9,096	$	6,256	$	13,719	$	10,718
Income taxes, net payments	$	1,156	$	958	$	1,437	$	1,113

See accompanying notes to condensed consolidated financial statements

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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~~nine months ended ~~June~~September 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

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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~~modified retrospective 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~~will 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~~statements. The Company believes it meets the ~~new guidance. This assessment includes an evaluation of whether~~criteria for recognizing certain performance obligations ~~will be recognized~~ over time, as ~~opposed~~much of its finished product provides value to only a ~~point in~~specified customer, has no alternative use, and the Company has the right to payment for work completed on such items. After the adoption of ASU 2014-09, the Company would plan to expense the costs of these performance obligations over time and apply a margin to estimate associated revenues. The Company is evaluating the required changes to ~~the Company’s~~its 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.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify the method of measuring a goodwill impairment charge in the event a reporting unit’s carrying amount exceeds its fair value. In those circumstances, the new standard requires the Company to recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. The Company cannot predict if or when such an impairment charge may occur, or the amount of any potential impairment, and is currently evaluating the potential impact that the adoption of ASU 2017-04 will have on its results of operations, financial position and condensed consolidated financial statements. The Company is required to adopt the new standard on January 1, 2020, with early adoption permitted.

2. Inventories

Inventories are summarized below:


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016

Raw materials	$	7,045	$	8,206	$	6,239	$	8,206
Work-in-process		8,294		6,340		8,516		6,340
Finished goods		6,748		4,823		3,882		4,823
	$	22,087	$	19,369	$	18,637	$	19,369

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3. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consist of the following:


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016

Buildings	$	2,264	$	2,077	$	2,298	$	2,077
Machinery and equipment		62,453		59,464		62,277		59,464
Furniture, fixtures and computer equipment		7,253		6,634		7,445		6,634
Leasehold improvements		19,466		18,655		19,562		18,655
Construction in progress		3,513		1,136		3,775		1,136
		94,949		87,966		95,357		87,966
Less accumulated depreciation and amortization		(41,759)		(34,547)		(44,037)		(34,547)
	$	53,190	$	53,419	$	51,320	$	53,419

Amounts recorded for the depreciation of plant, equipment and leasehold improvements was ~~$3,375~~$3,233 and ~~$3,053~~$3,098 for the three months ended ~~June~~September 30, 2017 and 2016, respectively, and ~~$6,685~~$9,917 and ~~$6,026~~$9,124 for the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, respectively.

4. Goodwill and Other Intangible Assets

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


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
U.S. Debit and Credit	$	64,330	$	64,330	$	64,330	$	64,330
U.K. Limited		6,227		5,908		6,413		5,908
Other		1,820		1,758		1,895		1,758
	$	72,377	$	71,996	$	72,638	$	71,996

The change in goodwill from December 31, 2016 to ~~June~~September 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~~September 30, 2017 are related to foreign currency translation adjustments. Intangible amortization expense was ~~$1,228~~$1,227 and ~~$1,134~~$1,132 for the three months ended ~~June~~September 30, 2017 and 2016, respectively, and ~~$2,451~~$3,678 and ~~$2,274~~$3,406 for the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, respectively.

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


				June 30, 2017						December 31, 2016									September 30, 2017						December 31, 2016
	Average Life					Accumulated		Net Book				Accumulated		Net Book		Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value		(Years)			Cost		Amortization		Value		Cost		Amortization		Value

Customer relationships	12	to	20	$	59,180	$	(22,837)	$	36,343	$	58,994	$	(20,972)	$	38,022	12	to	20	$	59,293	$	(23,787)	$	35,506	$	58,994	$	(20,972)	$	38,022
Technology and software	7	to	10		7,100		(2,631)		4,469		7,101		(2,167)		4,934	7	to	10		7,101		(2,863)		4,238		7,101		(2,167)		4,934
Non-compete agreements	5	to	8		491		(360)		131		491		(331)		160	5	to	8		491		(375)		116		491		(331)		160
Trademarks	7.5	to	10		3,329		(292)		3,037		3,330		(98)		3,232	7.5	to	10		3,330		(390)		2,940		3,330		(98)		3,232
Intangible assets subject to amortization				$	70,100	$	(26,120)	$	43,980	$	69,916	$	(23,568)	$	46,348				$	70,215	$	(27,415)	$	42,800	$	69,916	$	(23,568)	$	46,348

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


2017 (remaining 6 months)	$	2,452
2017 (remaining 3 months)			$	1,228
2018		4,905		4,913
2019		4,885		4,893
2020		4,845		4,853
2021		4,575		4,582
Thereafter		22,318		22,331
	$	43,980	$	42,800

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										Carrying
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2017						Value as of		Fair Value as of		Fair Value Measurement at September 30, 2017
	June 30,		June 30,		(Using Fair Value Hierarchy)						September 30,		September 30,		(Using Fair Value Hierarchy)
	2017		2017		Level 1		Level 2		Level 3		2017		2017		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	289,063	$	—	$	289,063	$	—	$	312,500	$	223,438	$	—	$	223,438	$	—


	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, as defined in Note 6, “Long-Term Debt and Credit Facility,” was based on bank quotes.

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

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6. Long-Term Debt and Credit Facility

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


	Interest		June 30,		December 31,		Interest		September 30,		December 31,
	Rate (1)		2017		2016		Rate (1)		2017		2016
First lien term loan facility (1)	5.83	%	$	312,500	$	312,500	5.96	%	$	312,500	$	312,500
Unamortized discount				(3,458)		(3,795)				(3,290)		(3,795)
Unamortized deferred financing costs				(6,145)		(6,783)				(5,827)		(6,783)
Long-term debt			$	302,897	$	301,922			$	303,383	$	301,922

(1) Interest rate at ~~June~~September 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~~September 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~~September 30, 2017, the Company does not expect to have a required excess cash flow payment related to 2017.

As of ~~June~~September 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~~September 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. The Company has accrued interest of $4,192 and $3,858, recorded within “Accrued expenses” on the Condensed Consolidated Balance Sheets as of September 30, 2017, and December 31, 2016, respectively.

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.

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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~~September 30, 2017, the Company recognized an income tax benefit of ~~$847~~$755 on a pre-tax loss of ~~$3,008,~~$1,490, representing an effective income tax rate of ~~28.2%~~50.7%, compared to an income tax ~~benefit~~expense of ~~$161~~$2,541 on a pre-tax ~~loss~~income of ~~$489,~~$6,567, representing an effective tax rate of ~~32.9%~~38.7% during the three months ended ~~June~~September 30, 2016.

During the ~~six~~nine months ended ~~June~~September 30, 2017, the Company recognized an income tax benefit of ~~$3,139~~$3,893 on a pre-tax loss of ~~$9,807,~~$11,296, representing an effective income tax rate of ~~32.0%~~34.5%, compared to an income tax expense of ~~$2,653~~$5,194 on pre-tax income of ~~$8,039,~~$14,607, representing an effective tax rate of ~~33.0%~~35.6% during the ~~six~~nine months ended ~~June~~September 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") would examineits 2014 United States federal incometax return. ~~The~~During August 2017, the Company ~~has provided information requested by~~was notified that the IRS ~~with respect~~has completed the examination and made no adjustments to ~~such tax year, and has not been notified of any items that are being disputed by~~ the ~~IRS.~~Company’s reported tax.

8. Stockholders’ Equity

During the three and ~~six~~nine months ended ~~June~~September 30, 2017, the Company paid dividends of ~~$2,499~~$2,511 and ~~$5,026,~~$7,537, respectively, representing $0.045 and ~~$0.09~~$0.135 per share, respectively. ~~Additionally, on May 3,~~During August 2017, the ~~Board of Directors approved a~~Company discontinued its quarterly 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.share.

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. The stock repurchase program expired by its terms during May 2017. During the three and ~~six~~nine months ended ~~June~~September 30, 2017, there were no common shares ~~repurchased, and the stock repurchase program expired by its terms.~~repurchased.

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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				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
Numerator:
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386	$	(735)	$	4,026	$	(7,403)	$	9,413
Denominator:
Basic-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,371,964		55,639,551		55,255,239		55,558,825		55,999,722
Diluted-weighted-average common shares outstanding		55,612,366		56,201,811		55,518,462		56,583,978		55,639,551		55,508,684		55,558,825		56,232,195

Basic and Diluted (Loss) earnings per share:	$	(0.04)	$	(0.01)	$	(0.12)	$	0.10	$	(0.01)	$	0.07	$	(0.13)	$	0.17

The Company reported a net loss for the three and ~~six~~nine months ended ~~June~~September 30, 2017. Accordingly, the potentially dilutive effect of ~~2,087,095~~4,765,224 stock options and ~~273,051~~263,323 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~~$970 and ~~$819~~$907 for the three months ended ~~June~~September 30, 2017 and 2016, respectively, and ~~$1,905~~$2,875 and ~~$1,634~~$2,541 for the ~~six~~nine months ended ~~June~~September 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 the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, 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 of CPI common stock issued pursuant to the IPO.

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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~~complaint, which was denied by the ~~action are stayed under the PSLRA pending the resolution of that motion.~~

court on October 30, 2017. 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~~September 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~~alleged that the Company ~~infringes~~infringed a now-expired 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~~Colorado, answered the complaint, and filed counterclaims that the asserted patent iswas invalid and unenforceable, and that Gemalto’s lawsuit iswas a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims onin February 5, 2016. OnIn 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~~which 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~~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~~heard oral argument on the IPR on August 4, 2017. No decision has yet been rendered.

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~~alleged that the Company ~~infringes~~infringed 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 onin July ~~29,~~ 2016, and amended its contentions onin 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,~~On September 28, 2017, the Company ~~believes Gemalto’s claims are without merit and that~~reached a settlement with Gemalto to resolve both lawsuits. Under the terms of the settlement, the Company has ~~strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights.~~agreed to make a one-time payment of $750 in the fourth quarter of 2017. The settlement will result in the dismissal of both lawsuits with prejudice. The settlement also includes a mutual covenant not to sue for a period of 18 months. The Company ~~intends to defend these suits vigorously.~~

~~Although the outcome of these matters is not determinable at this time, the Company has~~previously had 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~~As a result of the ~~timing or likelihood of~~settlement, the Company has recorded a ~~definitive resolution of either or both of these matters, and as additional information becomes available, the amount of this estimated~~$250 reduction to its previously recorded loss contingency, ~~reserve could increase materially.~~which is recorded in “Selling, General and Administrative” expenses in the Condensed Consolidated Statement of Operations during the three months ended September 30, 2017. The net expense recognized for this contingency during the nine months ended September 30, 2017 was $750.

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

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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~~had reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan. Effective September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 2,000,000, subject to the effectiveness of stockholder approval under the applicable law, after which the Company will have reserved 6,000,000 shares of common stock for issuance. As of ~~June~~September 30, 2017, there were ~~1,542,958~~827,378 shares available for grant under the Omnibus Plan.

~~The Company did not grant any non-qualified stock options under the Omnibus Plan during~~During the three months ended ~~June 30, 2017. During the six months ended June~~September 30, 2017, the Company granted awards of non-qualified stock options for ~~785,370~~2,780,147 shares of common ~~stock.~~stock, of which 1,230,173 are contingent upon the effectiveness of stockholder approval of the Omnibus Plan amendment, as described above. The third quarter 2017 stock option awards were ~~granted at various times during~~made in lieu of the regular cycle of Omnibus Plan awards that the Company would have otherwise made in the first ~~quarter.~~quarter of 2018, and also in conjunction with the appointment of the Company’s President and Chief Executive Officer. During the nine months ended September 30, 2017, the Company granted awards of non-qualified stock options for 3,565,517 shares of common stock, of which 1,230,173 are contingent upon the effectiveness of stockholder approval of the Omnibus Plan amendment, as described above. 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~~September 30, 2017, there are no28,125 exercisable options outstanding under the Omnibus Plan. Outstanding stock options under the Omnibus Plan, including the contingent option awards discussed above, are as follows:


				Weighted-				Weighted-
		Weighted-		Average		Weighted-		Average
		Average		Remaining		Average		Remaining
		Exercise		Contractual Term		Exercise		Contractual Term
	Options	Price		(in Years)	Options	Price		(in Years)
Outstanding as of December 31, 2016	1,437,508	$	8.62		1,437,508	$	8.62
Granted	785,370		4.31		3,565,517		1.77
Forfeited	(212,783)		9.86		(270,801)		9.20
Outstanding as of June 30, 2017	2,010,095	$	6.77	8.95
Outstanding as of September 30, 2017					4,732,224	$	3.41	9.45

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


2017	310,338	273,863
2018	675,857	1,584,148
2019	646,584	1,553,511
2020	365,179	1,280,440
2021	12,137	12,137
Total unvested options as of June 30, 2017	2,010,095
Total unvested options as of September 30, 2017		4,704,099

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


	~~Three~~Nine Months
	Ended
	~~June~~September
	30, 2017
Expected term in years	6.0
Volatility	~~33.7~~31.9	%
Risk-free interest rate	~~2.1~~2.0	%
Dividend yield (1)	~~4.1~~0.9	%

(1)

Represents the weighted-average dividend yield for grants made during the nine month period ended September 30, 2017. The Company discontinued its quarterly dividend program during August 2017.

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~~During~~The Company did not grant any awards of restricted stock units during the three months ~~and six~~ended September 30, 2017. During the nine months ended ~~June~~September 30, 2017, the Company granted awards of restricted stock units for ~~125,000 and~~ 239,446 shares of common ~~stock, respectively.~~stock. 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.

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


		Weighted-			Weighted-
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding as of December 31, 2016	270,466	$	7.13	270,466	$	7.13
Granted	239,446		3.11	239,446		3.11
Vested	(236,047)		7.34	(240,688)		7.30
Forfeited	(814)		4.35	(5,901)		4.35
Outstanding as of June 30, 2017	273,051	$	3.44
Outstanding as of September 30, 2017				263,323	$	3.38

During the ~~six~~nine months ended ~~June~~September 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~~September 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~~September 30, 2017, the Company recognized a liability of ~~$60~~$75 in “Accrued expenses” and ~~$50~~$62 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~~nine month period ended ~~June~~September 30, 2017:


		Weighted-Average				Weighted-Average
	Units	Grant Date Fair Value		Units		Grant Date Fair Value

Outstanding as of December 31, 2016	—	$	—		—		$	—
Granted	932,837		0.71		932,837			0.71
Vested	—		—		—			—
Forfeited	(10,723)		0.71		(77,746)			0.71
Outstanding as of June 30, 2017	922,114	$	0.71
Outstanding as of September 30, 2017					855,091		$	0.71

Compensation expense for the Omnibus Plan for the three months ended ~~June~~September 30, 2017 and 2016 was ~~$542~~$507 and ~~$783,~~$840, respectively, and was ~~$1,231~~$1,738 and ~~$1,205,~~$2,045, during the ~~six~~nine months ended ~~June~~September 30, 2017 and 2016, respectively. As of ~~June~~September 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,~~$2,885, which the Company expects to recognize over an estimated weighted average period of ~~1.7~~1.8 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.

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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~~September 30, 2017.

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


				Weighted-				Weighted-
				Average				Average
				Remaining				Remaining
		Weighted- Average		Contractual Term		Weighted- Average		Contractual Term
	Options	Exercise Price		(in Years)	Options	Exercise Price		(in Years)

Outstanding and Exercisable as of December 31, 2016	216,334	$	0.0004		216,334	$	0.0004
Granted	—		—		—		—
Exercised	(139,334)		0.0004		(183,334)		0.0004
Forfeited	—		—		—		—
Outstanding and Exercisable as of June 30, 2017	77,000	$	0.0004	5.10
Outstanding and Exercisable as of September 30, 2017					33,000	$	0.0005	5.66

There was no compensation expense related to options previously granted under the Option Plan for the three and ~~six~~nine months ended ~~June~~September 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~~September 30, 2017 was ~~$219.~~$39.

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 was no activity relating to restricted common stock for the three months ended September 30, 2017, and there are no outstanding unvested shares of restricted common stock as of ~~June~~September 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~~nine months ended ~~June~~September 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. There was no compensation expense recorded for these awards during the three months ended September 30, 2017, and compensation expense related to these awards for the nine months ended September 30, 2017 was $(371). Compensation expense related to these awards for the three and nine months ended ~~June~~September 30, ~~2017 and~~ 2016 was ~~$(228)~~$94 and ~~$323, respectively, and was $(371) and $646 for the six months ended June 30, 2017 and 2016,~~$740, 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.

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As of ~~June~~September 30, 2017, the Company’s reportable segments are as follows:

 U.S. Debit and Credit;

 U.S. Prepaid Debit; and

 U.K. Limited.

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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~~nine months ended ~~June~~September 30, 2017 and 2016 were as follows:


	Revenue								Revenue
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
U.S. Debit and Credit	$	42,204	$	50,808	$	81,712	$	115,899	$	39,304	$	49,156	$	121,017	$	165,055
U.S. Prepaid Debit		12,426		11,991		22,211		24,332		19,935		23,087		42,146		47,419
U.K. Limited		11,010		7,989		16,597		14,221		7,047		7,675		23,644		21,896
Other		3,226		3,678		5,729		6,820		2,661		2,710		8,390		9,530
Intersegment eliminations		(3,020)		(741)		(4,395)		(1,154)		(903)		(1,426)		(5,299)		(2,580)
Total:	$	65,846	$	73,725	$	121,854	$	160,118	$	68,044	$	81,202	$	189,898	$	241,320


	EBITDA								EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
U.S. Debit and Credit	$	8,275	$	11,403	$	15,903	$	30,325	$	6,476	$	12,917	$	22,379	$	43,242
U.S. Prepaid Debit		3,306		3,557		5,092		6,824		7,606		8,593		12,698		15,417
U.K. Limited		1,566		680		1,891		899		403		942		2,295		1,841
Other		(6,389)		(6,874)		(13,332)		(11,608)		(6,210)		(6,647)		(19,543)		(18,254)
Total:	$	6,758	$	8,766	$	9,554	$	26,440	$	8,275	$	15,805	$	17,829	$	42,246

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
Total segment EBITDA from continuing operations	$	6,758	$	8,766	$	9,554	$	26,440
Total segment EBITDA									$	8,275	$	15,805	$	17,829	$	42,246
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)		(5,305)		(5,008)		(15,530)		(15,109)
Income tax benefit (expense)		847		161		3,139		(2,653)		755		(2,541)		3,893		(5,194)
Depreciation and amortization		(4,603)		(4,187)		(9,136)		(8,300)		(4,460)		(4,230)		(13,595)		(12,530)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386	$	(735)	$	4,026	$	(7,403)	$	9,413

Balance Sheet Data of Reportable Segments

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


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016

U.S. Debit and Credit	$	192,368	$	205,417	$	182,454	$	205,417
U.S. Prepaid Debit		28,095		23,509		33,124		23,509
U.K. Limited		23,060		26,060		23,443		26,060
Other		12,011		9,434		12,487		9,434
Total assets:	$	255,534	$	264,420	$	251,508	$	264,420

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Plant, Equipment and Leasehold Improvement Additions of Geographic Locations

Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the three and ~~six~~nine months ended ~~June~~September 30, 2017 and 2016 were as follows:


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2017		2016		2017		2016		2017		2016		2017		2016

U.S.	$	2,775	$	4,421	$	5,050	$	6,823	$	1,081	$	4,757	$	6,131	$	11,580
Canada		51		47		123		161		38		47		161		208
Total North America		2,826		4,468		5,173		6,984		1,119		4,804		6,292		11,788
U.K.		368		167		1,329		791		61		374		1,390		1,165
Total plant, equipment and leasehold improvement additions	$	3,194	$	4,635	$	6,502	$	7,775	$	1,180	$	5,178	$	7,682	$	12,953

Net Sales to Geographic Locations

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2017		2016		2017		2016		2017		2016		2017		2016

U.S.	$	52,339	$	61,018	$	100,150	$	135,454	$	59,011	$	69,573	$	159,161	$	205,027
Canada		2,755		3,430		4,783		7,429		2,048		2,792		6,831		10,221
Total North America		55,094		64,448		104,933		142,883		61,059		72,365		165,992		215,248
U.K.		9,937		8,182		13,892		14,787		6,155		7,910		20,047		22,697
Other (a)		815		1,095		3,029		2,448		830		927		3,859		3,375
Total net sales	$	65,846	$	73,725	$	121,854	$	160,118	$	68,044	$	81,202	$	189,898	$	241,320

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


	June 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016

U.S.	$	154,011	$	157,773	$	151,015	$	157,773
Canada		2,941		2,899		3,002		2,899
Total North America:		156,952		160,672		154,017		160,672
U.K.		12,595		11,091		12,741		11,091
Total long-lived assets	$	169,547	$	171,763	$	166,758	$	171,763

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Net Sales by Product and Services

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


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2017		2016		2017		2016		2017		2016		2017		2016

Product net sales (a)	$	33,825	$	40,095	$	63,588	$	95,053	$	31,417	$	37,482	$	95,005	$	132,535
Services net sales (b)		32,021		33,630		58,266		65,065		36,627		43,720		94,893		108,785
Total net sales:	$	65,846	$	73,725	$	121,854	$	160,118	$	68,044	$	81,202	$	189,898	$	241,320

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

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

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

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

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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				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2017		2016		2017		2016		2017		2016		2017		2016
	(dollars in thousands)								(dollars in thousands)
Net sales:
Products	$	33,825	$	40,095	$	63,588	$	95,053	$	31,417	$	37,482	$	95,005	$	132,535
Services		32,021		33,630		58,266		65,065		36,627		43,720		94,893		108,785
Total net sales		65,846		73,725		121,854		160,118		68,044		81,202		189,898		241,320
Cost of sales		46,560		51,018		86,475		107,719		47,068		52,139		133,542		159,858
Gross profit		19,286		22,707		35,379		52,399		20,976		29,063		56,356		81,462
Operating expenses		17,317		18,177		35,221		34,204		17,480		17,367		52,702		51,571
Income from operations		1,969		4,530		158		18,195		3,496		11,696		3,654		29,891
Other expense, net:
Interest, net		(5,163)		(5,068)		(10,225)		(10,101)		(5,305)		(5,008)		(15,530)		(15,109)
Foreign exchange gain (loss)		181		34		255		(68)		314		(124)		568		(192)
Other income, net		5		15		5		13		5		3		12		17
(Loss) income before taxes		(3,008)		(489)		(9,807)		8,039		(1,490)		6,567		(11,296)		14,607
Income tax benefit (expense)		847		161		3,139		(2,653)		755		(2,541)		3,893		(5,194)
Net (loss) income	$	(2,161)	$	(328)	$	(6,668)	$	5,386	$	(735)	$	4,026	$	(7,403)	$	9,413

Segment Discussion

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

Net Sales



	Three Months Ended June 30,								Three Months Ended September 30,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	42,204	$	50,808	$	(8,604)	(16.9)	%	$	39,304	$	49,156	$	(9,852)	(20.0)	%
U.S. Prepaid Debit		12,426		11,991		435	3.6	%		19,935		23,087		(3,152)	(13.7)	%
U.K. Limited		11,010		7,989		3,021	37.8	%		7,047		7,675		(628)	(8.2)	%
Other		3,226		3,678		(452)	(12.3)	%		2,661		2,710		(49)	(1.8)	%
Eliminations		(3,020)		(741)		(2,279)	*	%		(903)		(1,426)		523	*
Total	$	65,846	$	73,725	$	(7,879)	(10.7)	%	$	68,044	$	81,202	$	(13,158)	(16.2)	%

* Not meaningful

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Net sales for the three months ended ~~June~~September 30, 2017 decreased ~~$7.9~~$13.2 million, or ~~10.7%~~16.2%, to ~~$65.8~~$68.0 million compared to ~~$73.7~~$81.2 million for the three months ended ~~June~~September 30, 2016.

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the three months ended ~~June~~September 30, 2017 decreased ~~$8.6~~$9.9 million, or ~~16.9%~~20.0%, to ~~$42.2~~$39.3 million compared to ~~$50.8~~$49.2 million for the three months ended ~~June~~September 30, 2016. The decrease in net sales was primarily due to a ~~$5.1~~$4.9 million decrease in EMV related revenue and a ~~$1.7~~$3.6 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~~September 30, 2017, we sold ~~18.8~~19.5 million EMV cards at an average selling price (“ASP”) of $0.86, compared to ~~22.5~~22.6 million EMV cards at an ASP of ~~$0.94~~$0.96 for the three months ended ~~June~~September 30, 2016. The decrease in ASP during the three months ended ~~June~~September 30, 2017 compared to 2016 is ~~primarily~~ due to lower prices, primarily 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~~September 30, 2017 ~~increased $0.4~~decreased $3.2 million, or ~~3.6%~~13.7%, to ~~$12.4~~$19.9 million compared to ~~$12.0~~$23.1 million for the three months ended ~~June~~September 30, 2016 resulting from net ~~increased activity~~decreased volumes across our customer base, partially offset by ~~lower prices attributed~~higher net sales related to ~~product mix and, to a lesser extent, price compression.~~CPI on Demand (formerly “Print on Demand”) services.

U.K. Limited:

U.K. Limited net sales for the three months ended ~~June~~September 30, 2017 ~~increased $3.0~~decreased $0.6 million, or ~~37.8%~~8.2%, to ~~$11.0~~$7.0 million compared to ~~$8.0~~$7.7 million for the three months ended ~~June~~September 30, 2016. ~~Increased~~The lower net sales ~~were driven by an RFID~~resulted from a prior year 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 inproject which did not recur during the three months ended ~~June~~September 30, 2017, ~~compared to the three months ended June 30, 2016.~~partially offset by higher retail gift card net sales.

Other:

Other Net ~~sales~~Sales were $2.7 million in ~~Other decreased $0.5 million, or 12.3%, to $3.2 million during~~both the three months ended ~~June~~September 30, 2017 ~~compared to $3.7 million in the three months ended June 30,~~and 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,								Three Months Ended September 30,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	29,657	$	35,097	$	(5,440)	(15.5)	%	$	28,565	$	32,063	$	(3,498)	(10.9)	%
U.S. Prepaid Debit		8,872		7,834		1,038	13.2	%		12,228		13,919		(1,691)	(12.1)	%
U.K. Limited		8,390		5,950		2,440	41.0	%		5,513		5,506		7	0.1	%
Other		2,497		2,785		(288)	(10.3)	%		1,931		2,021		(90)	(4.5)	%
Eliminations		(2,856)		(648)		(2,208)	*	%		(1,169)		(1,370)		201	*
Total	$	46,560	$	51,018	$	(4,458)	(8.7)	%	$	47,068	$	52,139	$	(5,071)	(9.7)	%

* Not meaningful

Cost of sales for the three months ended ~~June~~September 30, 2017 decreased ~~$4.5~~$5.1 million, or ~~8.7%~~9.7%, to ~~$46.6~~$47.1 million compared to ~~$51.0~~$52.1 million for the three months ended ~~June~~September 30, 2016.

~~Table of Contents~~

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the three months ended ~~June~~September 30, 2017 decreased ~~$5.4~~$3.5 million, or ~~15.5%~~10.9%, to ~~$29.7~~$28.6 million compared to ~~$35.1~~$32.1 million for the three months ended ~~June~~September 30, 2016. The decrease was ~~driven~~

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primarily bydue to lower EMV chip card sales volumes, ~~and resulted~~resulting in lower corresponding manufacturing costs. ~~Lower per unit EMV chip prices and decreases~~Decreases in card personalization and fulfillment sales and lower per unit EMV chip prices 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~~September 30, 2017 ~~increased $1.0~~decreased $1.7 million, or ~~13.2%~~12.1%, to ~~$8.9~~$12.2 million compared to ~~$7.8~~$13.9 million for the three months ended ~~June~~September 30, 2016. The ~~increase~~decrease was ~~primarily~~ a result of ~~the~~decreased sales volumes, partially offset by increased costs related to ~~ramp up Print~~the continued ramp-up of our CPI on Demand ~~Services capabilities, and to a lesser extent, increased sales volumes.~~services.

U.K. Limited:

~~Cost~~U.K. Limited cost of sales ~~for U.K. Limited for~~were $5.5 million in both the three months ended ~~June~~September 30, 2017 ~~increased $2.4 million, or 41.0%, to $8.4 million compared to $6.0 million for~~and 2016. Lower cost of sales resulting from lower sales volumes during the three months ended ~~June~~September 30, ~~2016, due to higher manufacturing costs corresponding to the increased sales, partially~~2017 were offset by ~~the impact of foreign currency exchange rate fluctuations. Fluctuations in exchange rates between the United States dollar~~higher overhead and ~~the British Pound resulted in a $1.0 million reduction of cost of sales in the three months ended June 30, 2017~~per unit materials costs compared to the three months ended ~~June~~September 30, 2016.

Other:

Cost of sales in Other decreased ~~$0.3~~$0.1 million, or ~~10.3%~~4.5%, to ~~$2.5~~$1.9 million during the three months ended ~~June~~September 30, 2017 compared to ~~$2.8~~$2.0 million in the three months ended ~~June~~September 30, ~~2016, primarily due to lower manufacturing costs related to decreased net sales.~~2016.

Gross Profit and Gross Profit Margin


	Three Months Ended June 30,												Three Months Ended September 30,
			% of 2017				% of 2016								% of 2017				% of 2016
	2017		net sales		2016		net sales		$ Change		% Change		2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)												(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	12,547	29.7	%	$	15,711	30.9	%	$	(3,164)	(20.1)	%	$	10,739	27.3	%	$	17,093	34.8	%	$	(6,354)	(37.2)	%
U.S. Prepaid Debit		3,554	28.6	%		4,157	34.7	%		(603)	(14.5)	%		7,707	38.7	%		9,168	39.7	%		(1,461)	(15.9)	%
U.K. Limited		2,620	23.8	%		2,039	25.5	%		581	28.5	%		1,534	21.8	%		2,169	28.3	%		(635)	(29.3)	%
Other		565	17.5	%		800	21.8	%		(235)	(29.4)	%		996	*			633	*			363	*
Total	$	19,286	29.3	%	$	22,707	30.8	%	$	(3,421)	(15.1)	%	$	20,976	30.8	%	$	29,063	35.8	%	$	(8,087)	(27.8)	%

Gross profit for the three months ended ~~June~~September 30, 2017 decreased ~~$3.4~~$8.1 million, or ~~15.1%~~27.8%, to ~~$19.3~~$21.0 million compared to ~~$22.7~~$29.1 million for the three months ended ~~June~~September 30, 2016. Gross profit margin for the three months ended ~~June~~September 30, 2017 decreased to ~~29.3%~~30.8% compared to ~~30.8%~~35.8% for the three months ended ~~June~~September 30, 2016.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the three months ended ~~June~~September 30, 2017 decreased ~~$3.2~~$6.4 million, or ~~20.1%~~37.2%, to ~~$12.5~~$10.7 million compared to ~~$15.7~~$17.1 million during the three months ended ~~June~~September 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~~September 30, 2017 decreased to ~~29.7%~~27.3% compared to ~~30.9%~~34.8% for the same period in the prior year due to lower overhead cost absorption attributed to reduced volumes.

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the three months ended September 30, 2017 decreased 15.9% to $7.7 million compared to $9.2 million for the three months ended September 30, 2016 attributed primarily to decreased sales volumes, and to a lesser extent, the increased costs to ramp up CPI on Demand services discussed above. Gross profit margin for U.S. Prepaid Debit for the three months ended September 30, 2017 decreased to 38.7% compared to 39.7% for the three months ended September 30, 2016, primarily due to increased costs to ramp up CPI on Demand services.

Table of Contents

~~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%~~decreased 29.3% in the three months ended ~~June~~September 30, 2017 to ~~$2.6~~$1.5 million compared to ~~$2.0~~$2.2 million for the three months ended ~~June~~September 30, 2016, primarily due to the ~~increased~~decreased sales activity described ~~above, partially offset by higher manufacturing costs and $0.3 million of foreign currency exchange rate fluctuations.~~above. Gross profit margin for U.K. Limited was ~~23.8%~~21.8% during the three months ended ~~June~~September 30, 2017 ~~representing a 1.7% decrease~~ compared to the gross profit margin of ~~25.5%~~28.3% during the three months ended ~~June~~September 30, 2016 ~~primarily due to customer mix.~~as a result of decreased leverage of operating expenses from decreased sales.

Other:

Other gross profit during the three months ended ~~June~~September 30, 2017 was ~~$0.6~~$1.0 million compared to ~~$0.8~~$0.6 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,								Three Months Ended September 30,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	6,488	$	6,537	$	(49)	(0.7)	%	$	6,407	$	6,324	$	83	1.3	%
U.S. Prepaid Debit		1,001		1,177		(176)	(15.0)	%		797		1,154		(357)	(30.9)	%
U.K. Limited		1,305		1,474		(169)	(11.5)	%		1,333		1,328		5	0.4	%
Other		8,523		8,989		(466)	(5.2)	%		8,943		8,561		382	4.5	%
Total	$	17,317	$	18,177	$	(860)	(4.7)	%	$	17,480	$	17,367	$	113	0.7	%

Operating expenses for the three months ended ~~June~~September 30, 2017 ~~decreased $0.9~~increased $0.1 million, or ~~4.7%~~0.7%, to ~~$17.3~~$17.5 million compared to ~~$18.2~~$17.4 million for the three months ended ~~June~~September 30, 2016.

U.S. Debit and Credit operating expenses were ~~$6.5~~$6.4 million in ~~both~~ the three months ended ~~June~~September 30, 2017 compared to $6.3 million in the three months ended September 30, 2016 due to increased salaries and ~~2016.~~benefits to support the card personalization business.

U.S. Prepaid Debit operating expenses decreased ~~$0.2~~$0.4 million, or ~~15.0%~~30.9%, primarily driven by ~~cost reductions in~~lower administrative ~~salaries.~~headcount.

U.K. Limited operating expenses ~~decreased $0.2~~were $1.3 million ~~or 11.5%, primarily due to foreign currency exchange rate fluctuations.~~in both the three months ended September 30, 2017 and 2016.

Other operating expenses during the three months ended ~~June~~September 30, 2017 ~~decreased $0.5~~increased $0.4 million compared to the three months ended ~~June~~September 30, 2016. The net ~~decrease~~increase primarily resulted from increased legal costs of $1.2 million, primarily due to increased litigation expenses, partially offset by decreased stock-based compensation expense of ~~$0.8~~$0.4 million and other compensation costs of ~~$0.6 million, partially offset by increased software expenses of $0.7 million~~$0.4 million.

Income from Operations and ~~increased legal costs of $0.3 million.~~ Operating Margin


	Three Months Ended September 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	$	4,332	11.0	%	$	10,769	21.9	%	$	(6,437)	(59.8)	%
U.S. Prepaid Debit		6,910	34.7	%		8,014	34.7	%		(1,104)	(13.8)	%
U.K. Limited		201	2.9	%		841	11.0	%		(640)	(76.1)	%
Other		(7,947)	*			(7,928)	*			(19)	*
Total	$	3,496	5.1	%	$	11,696	14.4	%	$	(8,200)	(70.1)	%

* Not meaningful

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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~~September 30, 2017 decreased ~~$2.6~~$8.2 million, or ~~56.5%~~70.1%, to ~~$2.0~~$3.5 million compared to ~~$4.5~~$11.7 million for the three months ended ~~June~~September 30, 2016. Operating profit margin for the three months ended ~~June~~September 30, 2017 decreased to ~~3.0%~~5.1% compared to ~~6.1%~~14.4% for the three months ended ~~June~~September 30, 2016.

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the three months ended ~~June~~September 30, 2017 decreased ~~$3.1~~$6.4 million, or ~~34.0%~~59.8%, to ~~$6.1~~$4.3 million compared to ~~$9.2~~$10.8 million for the three months ended ~~June~~September 30, ~~2016.~~2016 due primarily to the lower sales volumes. Operating margins for the three months ended ~~June~~September 30, 2017 decreased to ~~14.4%~~11.0% compared to ~~18.1%~~21.9% for the three months ended ~~June~~September 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~~September 30, 2017 decreased ~~14.3%~~13.8% to ~~$2.6~~$6.9 million compared to ~~$3.0~~$8.0 million for the three months ended ~~June~~September 30, 2016 due to ~~the~~decreased sales volumes and increased costs to ramp up ~~Print~~CPI on Demand ~~Services capabilities,~~services, partially offset by ~~increased sales and~~the decreased administrative salaries as discussed above. ~~Operating~~U.S. Prepaid Debit operating income margins ~~for~~were 34.7% in both the three months ended ~~June~~September 30, 2017 ~~decreased to 20.5% compared to 24.9% for the three months ended June 30,~~and 2016.

U.K. Limited:

Income from operations for U.K. Limited for the three months ended ~~June~~September 30, 2017 was ~~$1.3~~$0.2 million during the three months ended ~~June~~September 30, 2017, representing ~~an increase of $0.8~~a $0.6 million decrease compared to the three months ended ~~June~~September 30, 2016. The ~~increase~~decrease was due to the ~~increased~~decreased sales ~~and decreased operating costs resulting from foreign currency exchange rate fluctuations, as~~ described above. Operating margins ~~increased~~decreased to ~~11.9%~~2.9% during the three months ended ~~June~~September 30, 2017 compared to ~~6.3%~~11.0% during the three months ended ~~June~~September 30, 2016 ~~through better~~as a result of decreased leverage of operating expenses ~~resulting~~ from ~~increased~~decreased sales.

Other:

The loss from operations in Other was ~~$8.0~~$7.9 million ~~during~~in both the three months ended ~~June~~September 30, 2017 ~~compared to $8.2 million in the three months ended June 30,~~and 2016. ~~The decreased loss was primarily attributable to lower corporate expenses.~~

Interest, net:

Interest expense for the three months ended ~~June~~September 30, 2017 increased to ~~$5.2~~$5.3 million compared to ~~$5.1~~$5.0 million for the three months ended ~~June~~September 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~~September 30, 2017 was partially offset by nothe reduction of interest expense associated with the Sellers’ Note, which was repaid during September 2016.

~~Table of Contents~~

Income tax (benefit) expense:

During the three months ended ~~June~~September 30, 2017, there was an income tax benefit of $0.8 million on pre-tax losses of ~~$3.0~~$1.5 million, ~~representing an effective~~compared with income tax ~~rate~~expense of ~~28.2%, compared with an income tax benefit of $0.2~~$2.5 million on pre-tax ~~losses~~income of ~~$0.5~~$6.6 million for the three months ended ~~June~~September 30, ~~2016, representing an effective income tax rate of 32.9%.~~2016. 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~~September 30, 2017, net loss was ~~$2.2~~$0.7 million, compared to a net ~~loss~~income of ~~$0.3~~$4.0 million during the three months ended ~~June~~September 30, 2016 primarily due to the lower ~~net~~ sales ~~gross profit~~volumes and higher operating expenses described above.

~~Six~~

Table of Contents

Nine Months Ended ~~June~~September 30, 2017 Compared With ~~Six~~Nine Months Ended ~~June~~September 30, 2016

Net Sales



	Six Months Ended June 30,								Nine Months Ended September 30,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	81,712	$	115,899	$	(34,187)	(29.5)	%	$	121,017	$	165,055	$	(44,038)	(26.7)	%
U.S. Prepaid Debit		22,211		24,332		(2,121)	(8.7)	%		42,146		47,419		(5,273)	(11.1)	%
U.K. Limited		16,597		14,221		2,376	16.7	%		23,644		21,896		1,748	8.0	%
Other		5,729		6,820		(1,091)	(16.0)	%		8,390		9,530		(1,140)	(12.0)	%
Eliminations		(4,395)		(1,154)		(3,241)	*	%		(5,299)		(2,580)		(2,719)	*
Total	$	121,854	$	160,118	$	(38,264)	(23.9)	%	$	189,898	$	241,320	$	(51,422)	(21.3)	%

Net sales for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$38.3~~$51.4 million, or ~~23.9%~~21.3%, to ~~$121.9~~$189.9 million compared to ~~$160.1~~$241.3 million for the ~~six~~nine months ended ~~June~~September 30, 2016.

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$34.2~~$44.0 million, or ~~29.5%~~26.7%, to ~~$81.7~~$121.0 million compared to ~~$115.9~~$165.1 million for the ~~six~~nine months ended ~~June~~September 30, 2016. The decrease in net sales was primarily driven by a ~~$28.6~~$33.4 million decrease in EMV related revenue and a ~~$3.7~~$7.3 million decrease in card personalization and fulfillment, ~~and~~as well as 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~~nine months ended ~~June~~September 30, 2017, we sold ~~37.1~~56.6 million EMV cards at an ASP of $0.85 compared to ~~63.9~~86.5 million EMV cards at an ASP of $0.94 for the ~~six~~nine months ended ~~June~~September 30, 2016. The decrease in ASP during the ~~six~~nine months ended ~~June~~September 30, 2017 compared to 2016 is ~~primarily~~ due to lower prices, primarily 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~~nine months ended ~~June~~September 30, 2017 decreased ~~$2.1~~$5.3 million, or ~~8.7%~~11.1%, to ~~$22.2~~$42.1 million compared to ~~$24.3~~$47.4 million for the ~~six~~nine months ended ~~June~~September 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 selling 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.

~~Table of Contents~~

U.K. Limited:

Net sales for U.K. Limited for the ~~six~~nine months ended ~~June~~September 30, 2017 increased ~~$2.4~~$1.7 million, or ~~16.7%~~8.0%, to ~~$16.6~~$23.6 million compared to ~~$14.2~~$21.9 million for the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2017 compared to the ~~six~~nine months ended ~~June~~September 30, 2016.

Other:

Net sales for Other decreased $1.1 million, or ~~16.0%~~12.0%, to ~~$5.7~~$8.4 million during the ~~six~~nine months ended ~~June~~September 30, 2017 compared to ~~$6.8~~$9.5 million in the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2016 compared to the ~~six~~nine months ended ~~June~~September 30, 3017.

Table of Contents

Cost of Sales



	Six Months Ended June 30,								Nine Months Ended September 30,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	57,321	$	77,028	$	(19,707)	(25.6)	%	$	85,886	$	109,091	$	(23,205)	(21.3)	%
U.S. Prepaid Debit		16,448		16,099		349	2.2	%		28,676		30,018		(1,342)	(4.5)	%
U.K. Limited		12,529		10,573		1,956	18.5	%		18,042		16,079		1,963	12.2	%
Other		4,427		5,102		(675)	(13.2)	%		6,357		7,123		(766)	(10.8)	%
Eliminations		(4,250)		(1,083)		(3,167)	*	%		(5,419)		(2,453)		(2,966)	*
Total	$	86,475	$	107,719	$	(21,244)	(19.7)	%	$	133,542	$	159,858	$	(26,316)	(16.5)	%

Cost of sales for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$21.2~~$26.3 million, or ~~19.7%~~16.5%, to ~~$86.5~~$133.5 million compared to ~~$107.7~~$159.9 million for the ~~six~~nine months ended ~~June~~September 30, 2016.

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$19.7~~$23.2 million, or ~~25.6%~~21.3%, to ~~$57.3~~$85.9 million compared to ~~$77.0~~$109.1 million for the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2017 ~~increased $0.3~~decreased $1.3 million, ~~or 2.2%~~4.5%, to ~~$16.4~~$28.7 million compared to ~~$16.1~~$30.0 million for the ~~six~~nine months ended ~~June~~September 30, 2016. The ~~increase~~decrease was primarily a result of ~~the~~decreased sales volumes, partially offset by increased costs to ramp up ~~Print~~CPI on Demand ~~Services capabilities, partially offset by decreased sales volumes.~~services.

U.K. Limited:

Cost of sales for U.K. Limited was ~~$12.5~~$18.0 million during the ~~six~~nine months ended ~~June~~September 30, 2017, an increase of ~~18.5%~~12.2% from ~~$10.6~~$16.1 million during the ~~six~~nine months ended ~~June~~September 30, 2016. The increase in cost of sales related to increased net sales activity, partially offset by ~~$1.6~~$1.7 million of foreign currency exchange rate fluctuations between the United States dollar and the British Pound.

~~Table of Contents~~

Other:

Cost of sales in Other decreased ~~$0.7~~$0.8 million, or ~~13.2%~~10.8%, to ~~$4.4~~$6.4 million during the ~~six~~nine months ended ~~June~~September 30, 2017 compared to ~~$5.1~~$7.1 million in the ~~six~~nine months ended ~~June~~September 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,												Nine Months Ended September 30,
			% of				% of								% of				% of
	2017		net sales		2016		net sales		$ Change		% Change		2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)												(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	24,391	29.8	%	$	38,871	33.5	%	$	(14,480)	(37.3)	%	$	35,131	29.0	%	$	55,964	33.9	%	$	(20,833)	(37.2)	%
U.S. Prepaid Debit		5,763	25.9	%		8,233	33.8	%		(2,470)	(30.0)	%		13,470	32.0	%		17,401	36.7	%		(3,931)	(22.6)	%
U.K. Limited		4,068	24.5	%		3,648	25.7	%		420	11.5	%		5,602	23.7	%		5,817	26.6	%		(215)	(3.7)	%
Other		1,157	20.2	%		1,647	24.1	%		(490)	(29.8)	%		2,153	*			2,280	*			(127)	*
Total	$	35,379	29.0	%	$	52,399	32.7	%	$	(17,020)	(32.5)	%	$	56,356	29.7	%	$	81,462	33.8	%	$	(25,106)	(30.8)	%

Table of Contents

Gross profit for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$17.0~~$25.1 million, or ~~32.5%~~30.8%, to ~~$35.4~~$56.4 million compared to ~~$52.4~~$81.5 million for the ~~six~~nine months ended ~~June~~September 30, 2016. Gross profit margin for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased to ~~29.0%~~29.7% compared to ~~32.7%~~33.8% for the ~~six~~nine months ended ~~June~~September 30, 2016.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$14.5~~$20.8 million, or ~~37.3%~~37.2%, to ~~$24.4~~$35.1 million compared to ~~$38.9~~$56.0 million during the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2017 decreased to ~~29.8%~~29.0% compared to ~~33.5%~~33.9% for the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2017 decreased ~~30.0%~~22.6% to ~~$5.8~~$13.5 million compared to ~~$8.2~~$17.4 million for the ~~six~~nine months ended ~~June~~September 30, 2016. The decrease in gross profit was primarily due to the decrease in net sales and increased costs to ramp up ~~Print~~CPI on Demand ~~Services capabilities.~~services. Gross profit margin for U.S. Prepaid Debit for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased to ~~25.9%~~32.0% compared to ~~33.8%~~36.7% for the ~~six~~nine months ended ~~June~~September 30, 2016 due to increased costs to ramp up ~~Print~~CPI on Demand ~~Services capabilities~~services and lower overhead cost absorption during the first quarter of 2017.

U.K. Limited:

Gross profit for U.K. Limited for the ~~six~~nine months ended ~~June~~September 30, 2017 ~~increased 11.5%~~decreased 3.7% to ~~$4.1~~$5.6 million compared to ~~$3.6~~$5.8 million during the ~~six~~nine months ended ~~June~~September 30, 2016. The ~~increase~~decrease 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.~~fluctuations, partially offset by the increase in net sales described above. Gross profit margin for U.K. Limited for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased to ~~24.5%~~23.7% compared to ~~25.7%~~26.6% for the ~~six~~nine months ended ~~June~~September 30, 2016, primarily due to customer mix.

Other:

Other gross profit during the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~29.8%~~ to ~~$1.2~~$2.2 million compared to ~~$1.6~~$2.3 million during the ~~six~~nine months ended ~~June~~September 30, 2016. The decrease was primarily due to decreased net sales in Canada.

~~Table of Contents~~

Operating Expenses



	Six Months Ended June 30,								Nine Months Ended September 30,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	12,925	$	12,633	$	292	2.3	%	$	19,333	$	18,957	$	376	2.0	%
U.S. Prepaid Debit		2,162		2,565		(403)	(15.7)	%		2,959		3,719		(760)	(20.4)	%
U.K. Limited		2,639		2,993		(354)	(11.8)	%		3,972		4,321		(349)	(8.1)	%
Other		17,495		16,013		1,482	9.3	%		26,438		24,574		1,864	7.6	%
Total	$	35,221	$	34,204	$	1,017	3.0	%	$	52,702	$	51,571	$	1,131	2.2	%

Operating expenses for the ~~six~~nine months ended ~~June~~September 30, 2017 increased ~~$1.0~~$1.1 million, or ~~3.0%~~2.2%, to ~~$35.2~~$52.7 million compared to ~~$34.2~~$51.6 million for the ~~six~~nine months ended ~~June~~September 30, 2016.

The ~~$0.3~~$0.4 million increase in U.S. Debit and Credit was primarily driven by increased salaries and benefits to support the card personalization business.

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The ~~$0.4~~$0.8 million decrease in U.S. Prepaid Debit operating expenses was primarily driven by ~~cost reductions in~~lower administrative ~~salaries.~~headcount.

U.K. Limited operating expenses decreased by ~~$0.4~~$0.3 million, or ~~11.8%~~8.1%, due to foreign currency exchange rate fluctuations.

The ~~$1.5~~$1.9 million increase in Other operating expenses was primarily due to increased legal costs of ~~$1.1~~$2.3 million, primarily due to increased litigation expenses, and increased software and other expenses of ~~$0.7 million, increased facilities and insurance expense of $0.3 million, and increased salaries and other compensation costs of $0.2~~$1.0 million, partially offset by a decrease of ~~$1.0~~$1.4 million in ~~stock based~~stock-based compensation expense during the ~~six~~nine months ended ~~June~~September 30, 2017.

Income from Operations and Operating Margin


	Six Months Ended June 30,												Nine Months Ended September 30,
			% of				% of								% of				% of
	2017		net sales		2016		net sales		$ Change		% Change		2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)												(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)	%	$	15,798	13.1	%	$	37,007	22.4	%	$	(21,209)	(57.3)	%
U.S. Prepaid Debit		3,601	16.2	%		5,668	23.3	%		(2,067)	(36.5)	%		10,511	24.9	%		13,682	28.9	%		(3,171)	(23.2)	%
U.K. Limited		1,429	8.6	%		655	4.6	%		774	118.2	%		1,630	6.9	%		1,496	6.8	%		134	9.0	%
Other		(16,338)	*	%		(14,366)	*	%		(1,972)	*	%		(24,285)	*			(22,294)	*			(1,991)	*
Total	$	158	0.1	%	$	18,195	11.4	%	$	(18,037)	(99.1)	%	$	3,654	1.9	%	$	29,891	12.4	%	$	(26,237)	(87.8)	%

Income from operations for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$18.0~~$26.2 million, or ~~99.1%~~87.8%, to ~~$0.2~~$3.7 million compared to ~~$18.2~~$29.9 million for the ~~six~~nine months ended ~~June~~September 30, 2016. Operating profit margin for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased to ~~0.1%~~1.9% compared to ~~11.4%~~12.4% for the ~~six~~nine months ended ~~June~~September 30, 2016.

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$14.8~~$21.2 million, or ~~56.3%~~57.3%, to ~~$11.5~~$15.8 million compared to ~~$26.2~~$37.0 million for the ~~six~~nine months ended ~~June~~September 30, 2016 due primarily to lower sales. Operating margins for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased to ~~14.0%~~13.1% compared to ~~22.6%~~22.4% for the ~~six~~nine months ended ~~June~~September 30, 2016, due primarily to lower sales, lower overhead cost absorption attributed to reduced sales volumes, and the increased operating expenses discussed above.

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U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased ~~$2.1~~$3.2 million, or ~~36.5%~~23.2%, to ~~$3.6~~$10.5 million compared to ~~$5.7~~$13.7 million for the ~~six~~nine months ended ~~June~~September 30, 2016 primarily due to the decrease in net sales and increased costs to ramp up ~~Print~~CPI on Demand ~~Services capabilities,~~services, partially offset by lower operating expenses. Operating margins for the ~~six~~nine months ended ~~June~~September 30, 2017 decreased to ~~16.2%~~24.9% compared to ~~23.3%~~28.9% for the ~~six~~nine months ended ~~June~~September 30, 2016 due to increased costs to ramp up ~~Print~~CPI on Demand ~~Services capabilities~~services 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~~nine months ended ~~June~~September 30, 2017 increased to ~~$1.4~~$1.6 million from ~~$0.7~~$1.5 million during the ~~six~~nine months ended ~~June~~September 30, 2016 as a result of the increased sales activity, partially offset by foreign currency exchange rate fluctuations. Operating margins increased to ~~8.6%~~6.9% during the ~~six~~nine months ended ~~June~~September 30, 2017 compared to ~~4.6%~~6.8% during the ~~six~~nine months ended ~~June~~September 30, 2016 as a result of lower operating expenses and better leverage of operating expenses from our increased sales.

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Other:

The loss from operations in Other during the ~~six~~nine months ended ~~June~~September 30, 2017 was ~~$16.3~~$24.3 million compared to ~~$14.4~~$22.3 million in the ~~six~~nine months ended ~~June~~September 30, 2016. The increased loss was primarily attributable to the higher corporate expenses, and to a lesser extent, the lower sales activity in Canada as discussed above.

Interest, net:

Interest expense for the ~~six~~nine months ended ~~June~~September 30, 2017 increased to ~~$10.2~~$15.5 million compared to ~~$10.1~~$15.1 million for the ~~six~~nine months ended ~~June~~September 30, 2016. The additional interest expense resulting from the higher average interest rate on the First Lien Term Loan during the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2017 was ~~$3.1~~$3.9 million, compared to income tax expense of ~~$2.7~~$5.2 million for the ~~six~~nine months ended ~~June~~September 30, ~~2016, due primarily to the decrease in income before taxes.~~2016. The effective tax rate was ~~32.0%~~34.5% and ~~33.0%~~35.6% for the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2017, net loss was ~~$6.7~~$7.4 million, compared to a net income of ~~$5.4~~$9.4 million during the ~~six~~nine months ended ~~June~~September 30, 2016 primarily due to the lower net sales ~~gross profit~~volumes and higher operating expenses described above.

Liquidity and Capital Resources

As of ~~June~~September 30, 2017, we had ~~$17.9~~$14.8 million of cash and cash equivalents. Of this amount, ~~$3.8~~$1.8 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. WeAlthough we can provide no assurances, 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.~~needs for at least the next twelve months.

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At ~~June~~September 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~~September 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~~September 30, 2017, we do

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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~~nine months ended ~~June~~September 30, 2017 and the stock repurchase plan expired by its terms during May 2017.

~~On May 3,~~During August 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 iswas part of ~~our~~the Company’s plan to utilize a greater portion of ~~the Company’s~~its 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~~nine months ended ~~June~~September 30, 2017 was ~~$8.3~~$6.9 million compared to ~~$33.2~~$39.8 million of cash provided by operating activities during the ~~six~~nine months ended ~~June~~September 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.~~receivable and income taxes.

Investing Activities

Cash used in investing activities for the ~~six~~nine months ended ~~June~~September 30, 2017 of ~~$5.8~~$7.8 million decreased compared to ~~$7.0~~$12.4 million during the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2017, cash used in financing activities was ~~$5.4~~$7.9 million, and primarily related to dividend payments of ~~$5.0~~$7.5 million.

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Cash used in financing activities during the ~~six~~nine months ended ~~June~~September 30, 2016 was ~~$8.1~~$19.5 million, ~~and~~ related primarily to ~~stock~~the repayment of our subordinated unsecured promissory note with certain sellers of EFT Source for $9.0 million, share repurchases of $6.0 million, and dividend payments of ~~$6.0 million and $2.5 million, respectively.~~$5.0 million.

Contractual Obligations

During the ~~six~~nine months ended ~~June~~September 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~~September 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~~September 30, 2017, included:

 Revenue Recognition;

 Multiple-Element Arrangements;

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 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~~September 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.

On September 27, 2017, we announced that Scott Scheirman had been appointed as the Company’s Chief Executive Officer, effective October 5, 2017, succeeding Steven Montross, who resigned effective October 4, 2017 in connection with his previously appointed retirement. Our management, with the participation of our new 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~~September 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.

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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.

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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 the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO. The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, 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 of CPI common stock issued pursuant to the IPO.

On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (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.

court on October 30, 2017. 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)

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contentions onin 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,~~

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On September 28, 2017, the Company ~~believes Gemalto’s claims are without merit and that~~reached a settlement with Gemalto to resolve both lawsuits. Under the terms of the settlement, the Company has ~~strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights.~~agreed to make a one-time payment of $750,000 in the fourth quarter of 2017. The settlement will result in the dismissal of both lawsuits with prejudice. The settlement also includes a mutual covenant not to sue for a period of 18 months. The Company ~~intends to defend these suits vigorously.~~

~~Although the outcome of these matters is not determinable at this time, the Company has~~previously had 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~~As a result of the ~~timing or likelihood of~~settlement, the Company has recorded a ~~definitive resolution of either or both of these matters, and as additional information becomes available, the amount of this estimated~~$250,000 reduction to its previously recorded loss contingency, ~~reserve could increase materially.~~ ~~In addition,~~which is recorded in “Selling, General and Administrative” expenses in 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.~~ Condensed Consolidated Statement of Operations during the three months ended September 30, 2017. The net expense recognized for this contingency during the nine months ended September 30, 2017 was $750,000.

CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. (2 cases)

First case. 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~~and sought to stay discovery pending the outcome of ~~its summary judgment~~that motion. ~~CPI opposed both~~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.~~were denied in August 2017. 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~~Discovery is ongoing and the parties are awaiting the Court’s claim construction order. In September 2017, the Company filed a motion to ~~stay, discovery is ongoing.~~replace the named plaintiff in the litigation with the Company’s wholly owned subsidiary, CPI Card Group-Minnesota, Inc. The Company intends to vigorously assert its intellectual property rights in connection with this litigation.

Second case.In July 2017, the Company uncovered evidence that one of its former sales executives, who had subsequently joined MPS, had collected Company confidential and trade secret information and was using this information for the benefit of MPS. The Company sued MPS, the former employee, and two MPS executives for trade secret misappropriation, breaches of fiduciary duties, and related business torts. The Company has moved for a preliminary injunction, which will be heard in the United States District Court for the District of Minnesota on November 27, 2017. The Company intends to vigorously assert its intellectual property rights in connection with this litigation.

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.

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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.None.

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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,~~dated September 25, 2017, by and between CPI Card Group Inc. and ~~Steven Montross~~Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed on ~~April 20,~~September 29, 2017).
10.2		Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on Form 8-K filed on September 29, 2017).
10.3		CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective September 25, 2017 (incorporated by reference to the Company’s Current Report on Form 8-K filed on September 29, 2017).
10.4		Form of U.S. Retention Option Award Agreement
10.5		Form of U.K. Retention Option Award Agreement
10.6		Form of Canadian Retention Option Award Agreement
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.

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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,~~November 8, 2017

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~~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.~~

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