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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
 
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
 
For the Quarterly Period Ended September 30, 2017.
 
or
 
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from                            to
 
Commission File Number 001-37584
 
CPI Card Group Inc.
(Exact name of the registrant as specified in its charter)

Delaware	 	26-0344657	
(State or other jurisdiction of incorporation or organization)	 	(I.R.S. employer identification no.)	
 	 	 	
10026 West San Juan Way	 	 	
Littleton, CO	 	80127	
( Address of principal executive offices )	 	( Zip Code )	
(303) 973-9311
(Registrant’s telephone number, including area code)  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes☒     No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes☒     No☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒	
 	 	 	 	
Non-accelerated filer	☐	Smaller reporting company	☐	
(Do not check if a smaller reporting company)	 	 	 	
 	 	Emerging growth company	☒	
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐     No☒
 
Number of shares of Common Stock, $0.001 par value, outstanding as of October 26, 2017: 55,673,755

 

 
Table of Contents

Table of Content  s

 	    	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  	 	33	 	
 	 	 	 	
Item 1A — Risk Factors  	 	34	 	
 	 	 	 	
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds  	 	34	 	
 	 	 	 	
Item 6 — Exhibits  	 	35	 	
 	 	 	 	
Signatures  	 	36	 	

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Item 1. Financial Statement  s
 
CPI Card Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Amounts)

 	 	September 30, 	 	December 31, 	
 	 	2017	 	2016	
 	 	(Unaudited)	 	 	 	
Assets	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	
Cash and cash equivalents	 	$	14,815	 	$	36,955	
Accounts receivable, net of allowances of $53 and $126, respectively	 	 	42,712	 	 	31,492	
Inventories	 	 	18,637	 	 	19,369	
Prepaid expenses and other current assets	 	 	3,891	 	 	4,601	
Income taxes receivable	 	 	4,415	 	 	 —	
Total current assets	 	 	84,470	 	 	92,417	
Plant, equipment and leasehold improvements, net	 	 	51,320	 	 	53,419	
Intangible assets, net	 	 	42,800	 	 	46,348	
Goodwill	 	 	72,638	 	 	71,996	
Other assets	 	 	280	 	 	240	
Total assets	 	$	251,508	 	$	264,420	
Liabilities and stockholders’ deficit	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	
Accounts payable	 	$	13,482	 	$	10,996	
Accrued expenses	 	 	12,856	 	 	17,487	
Income taxes payable	 	 	 —	 	 	64	
Deferred revenue and customer deposits	 	 	5,194	 	 	6,729	
Total current liabilities	 	 	31,532	 	 	35,276	
Long-term debt	 	 	303,383	 	 	301,922	
Deferred income taxes	 	 	20,512	 	 	21,261	
Other long-term liabilities	 	 	1,666	 	 	1,234	
    Total liabilities	 	 	357,093	 	 	359,693	
Commitments and contingencies (Note 10)	 	 	 	 	 	 	
Stockholders’ deficit:	 	 	 	 	 	 	
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	 	 	(113,689)	 	 	(114,881)	
Accumulated earnings	 	 	13,242	 	 	25,968	
Accumulated other comprehensive loss	 	 	(5,194)	 	 	(6,415)	
    Total stockholders’ deficit	 	 	(105,585)	 	 	(95,273)	
    Total liabilities and stockholders’ deficit	 	$	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 September 30, 	 	Nine Months Ended September 30, 	
 	 	2017	    	2016	    	2017	    	2016	
Net sales:	 	 	 	 	 	 	 	 	 	 	 	 	
Products	 	$	31,417	 	 	37,482	 	 	95,005	 	 	132,535	
Services	 	 	36,627	 	 	43,720	 	 	94,893	 	 	108,785	
Total net sales	 	 	68,044	 	 	81,202	 	 	189,898	 	 	241,320	
Cost of sales:	 	 	 	 	 	 	 	 	 	 	 	 	
Products (exclusive of depreciation and amortization shown below)	 	 	22,366	 	 	23,583	 	 	66,161	 	 	87,248	
Services (exclusive of depreciation and amortization shown below)	 	 	21,916	 	 	25,855	 	 	58,969	 	 	64,682	
Depreciation and amortization	 	 	2,786	 	 	2,701	 	 	8,412	 	 	7,928	
Total cost of sales	 	 	47,068	 	 	52,139	 	 	133,542	 	 	159,858	
Gross profit	 	 	20,976	 	 	29,063	 	 	56,356	 	 	81,462	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative (exclusive of depreciation and amortization shown below)	 	 	15,806	 	 	15,838	 	 	47,519	 	 	46,969	
Depreciation and amortization	 	 	1,674	 	 	1,529	 	 	5,183	 	 	4,602	
Total operating expenses	 	 	17,480	 	 	17,367	 	 	52,702	 	 	51,571	
Income from operations	 	 	3,496	 	 	11,696	 	 	3,654	 	 	29,891	
Other expense, net:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest, net	 	 	(5,305)	 	 	(5,008)	 	 	(15,530)	 	 	(15,109)	
Foreign currency gain (loss)	 	 	314	 	 	(124)	 	 	568	 	 	(192)	
Other income, net	 	 	 5	 	 	 3	 	 	12	 	 	17	
Total other expense, net	 	 	(4,986)	 	 	(5,129)	 	 	(14,950)	 	 	(15,284)	
(Loss) income before income taxes	 	 	(1,490)	 	 	6,567	 	 	(11,296)	 	 	14,607	
Income tax benefit (expense)	 	 	755	 	 	(2,541)	 	 	3,893	 	 	(5,194)	
Net (loss) income	 	$	(735)	 	$	4,026	 	$	(7,403)	 	$	9,413	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic and diluted (loss) earnings per share:	 	$	(0.01)	 	$	0.07	 	$	(0.13)	 	$	0.17	
Weighted-average shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	55,639,551	 	 	55,255,239	 	 	55,558,825	 	 	55,999,722	
Diluted	 	 	55,639,551	 	 	55,508,684	 	 	55,558,825	 	 	56,232,195	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends declared per common share	 	$	 —	 	$	0.045	 	$	0.09	 	$	0.135	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive (loss) income	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	$	(735)	 	$	4,026	 	$	(7,403)	 	$	9,413	
Currency translation adjustment	 	 	434	 	 	(465)	 	 	1,221	 	 	(1,414)	
Total comprehensive (loss) income	 	$	(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)

 	 	Nine Months Ended September 30, 	
 	    	2017	    	2016	
Operating activities	 	 	 	 	 	 	
Net (loss) income	 	$	(7,403)	 	$	9,413	
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:	 	 	 	 	 	 	
Depreciation and amortization expense	 	 	13,595	 	 	12,530	
Stock-based compensation expense	 	 	1,367	 	 	2,785	
Amortization of debt issuance costs and debt discount	 	 	1,461	 	 	1,437	
Excess tax benefits from stock-based compensation	 	 	 —	 	 	(526)	
Deferred income taxes	 	 	(863)	 	 	(445)	
Other, net	 	 	(209)	 	 	220	
Changes in operating assets and liabilities:	 	 	 	 	 	 	
Accounts receivable	 	 	(10,681)	 	 	9,053	
Inventories	 	 	1,186	 	 	1,978	
Prepaid expenses and other assets	 	 	709	 	 	(32)	
Income taxes	 	 	(4,470)	 	 	4,522	
Accounts payable	 	 	2,319	 	 	(4,352)	
Accrued expenses	 	 	(2,384)	 	 	1,699	
Deferred revenue and customer deposits	 	 	(1,957)	 	 	1,307	
Other liabilities	 	 	402	 	 	183	
Cash (used in) provided by operating activities	 	 	(6,928)	 	 	39,772	
Investing activities	 	 	 	 	 	 	
Acquisitions of plant, equipment and leasehold improvements	 	 	(7,808)	 	 	(12,369)	
Cash used in investing activities	 	 	(7,808)	 	 	(12,369)	
Financing activities	 	 	 	 	 	 	
Payment of Sellers Note	 	 	 —	 	 	(9,000)	
Common stock repurchased	 	 	 —	 	 	(6,008)	
Dividends paid on common stock	 	 	(7,537)	 	 	(5,031)	
Taxes withheld and paid on stock-based compensation awards	 	 	(341)	 	 	 —	
Excess tax benefits from stock-based compensation	 	 	 —	 	 	526	
Cash used in financing activities	 	 	(7,878)	 	 	(19,513)	
Effect of exchange rates on cash	 	 	474	 	 	(226)	
Net (decrease) increase in cash and cash equivalents	 	 	(22,140)	 	 	7,664	
Cash and cash equivalents, beginning of period	 	 	36,955	 	 	13,606	
Cash and cash equivalents, end of period	 	$	14,815	 	$	21,270	
Supplemental disclosures of cash flow information	 	 	 	 	 	 	
Cash paid during the period for:	 	 	 	 	 	 	
Interest	 	$	13,719	 	$	10,718	
Income taxes, net payments	 	$	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 nine months ended 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 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, will have on its condensed consolidated financial statements. The Company believes it meets the criteria for recognizing certain performance obligations over time, as much of its finished product provides value to only a 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 its business and accounting processes, and 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:

 	    	September 30, 2017	    	December 31, 2016	 	
 	 	 	 	 	 	 	    	
Raw materials	 	$	6,239	 	$	8,206	 	
Work-in-process	 	 	8,516	 	 	6,340	 	
Finished goods	 	 	3,882	 	 	4,823	 	
 	 	$	18,637	 	$	19,369	 	

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3. Plant, Equipment and Leasehold Improvements
 
Plant, equipment and leasehold improvements consist of the following:

 	    	September 30, 2017	    	December 31, 2016	 	
 	 	 	 	 	 	 	    	
Buildings	 	$	2,298	 	$	2,077	 	
Machinery and equipment	 	 	62,277	 	 	59,464	 	
Furniture, fixtures and computer equipment	 	 	7,445	 	 	6,634	 	
Leasehold improvements	 	 	19,562	 	 	18,655	 	
Construction in progress	 	 	3,775	 	 	1,136	 	
 	 	 	95,357	 	 	87,966	 	
Less accumulated depreciation and amortization	 	 	(44,037)	 	 	(34,547)	 	
 	 	$	51,320	 	$	53,419	 	
 
Amounts recorded for the depreciation of plant, equipment and leasehold improvements was $3,233 and $3,098 for the three months ended September 30, 2017 and 2016, respectively, and $9,917 and $9,124 for the nine months ended September 30, 2017 and 2016, respectively.
 
4. Goodwill and Other Intangible Assets
 
The Company’s goodwill by reportable segment at September 30, 2017 and December 31, 2016 is as follows:

 	    	September 30, 2017	    	December 31, 2016	
U.S. Debit and Credit	 	$	64,330	 	$	64,330	
U.K. Limited	 	 	6,413	 	 	5,908	
Other	 	 	1,895	 	 	1,758	
 	 	$	72,638	 	$	71,996	
 
The change in goodwill from December 31, 2016 to 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 September 30, 2017 are related to foreign currency translation adjustments. Intangible amortization expense was $1,227 and $1,132 for the three months ended September 30, 2017 and 2016, respectively, and $3,678 and $3,406 for the nine months ended September 30, 2017 and 2016, respectively. 
 
As of September 30, 2017 and December 31, 2016, intangible assets, excluding goodwill, were comprised of the following:

 	 	 	 	 	 	September 30, 2017	 	December 31, 2016	 	
 	 	Average Life	 	 	 	 	Accumulated	 	Net Book	 	 	 	 	Accumulated	 	Net Book	 	
 	 	(Years)	 	Cost	 	Amortization	 	Value	 	Cost	 	Amortization	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Customer relationships	    	12	to	20	    	$	59,293	    	$	(23,787)	    	$	35,506	    	$	58,994	    	$	(20,972)	    	$	38,022	 	
Technology and software	 	 7	to	10	 	 	7,101	 	 	(2,863)	 	 	4,238	 	 	7,101	 	 	(2,167)	 	 	4,934	 	
Non-compete agreements	 	 5	to	 8	 	 	491	 	 	(375)	 	 	116	 	 	491	 	 	(331)	 	 	160	 	
Trademarks	 	7.5	to	10	 	 	3,330	 	 	(390)	 	 	2,940	 	 	3,330	 	 	(98)	 	 	3,232	 	
Intangible assets subject to amortization	 	 	 	 	 	$	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 September 30, 2017 is as follows:

2017 (remaining 3 months)	 	$	1,228	
2018	    	 	4,913	
2019	 	 	4,893	
2020	 	 	4,853	
2021	 	 	4,582	
Thereafter	 	 	22,331	
 	 	$	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	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Value as of 	 	Fair Value as of 	 	Fair Value Measurement at September 30, 2017	
 	 	September 30, 	 	September 30, 	 	 (Using Fair Value Hierarchy)	
 	 	2017	 	2017	 	Level 1	 	Level 2	 	Level 3	
Liabilities:	    	 	                 	    	 	                 	    	 	                 	    	 	                 	    	 	                 	
First Lien Term Loan	 	$	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 September 30, 2017 and December 31, 2016, long-term debt and credit facilities consist of the following:

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

(1 )    Interest rate at 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 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 September 30, 2017, the Company does not expect to have a required excess cash flow payment related to 2017.
 
As of 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 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 September 30, 2017, the Company recognized an income tax benefit of $755 on a pre-tax loss of $1,490, representing an effective income tax rate of 50.7%, compared to an income tax expense of $2,541 on pre-tax income of $6,567, representing an effective tax rate of 38.7% during the three months ended September 30, 2016.  During the nine months ended September 30, 2017, the Company recognized an income tax benefit of $3,893 on a pre-tax loss of $11,296, representing an effective income tax rate of 34.5%, compared to an income tax expense of $5,194 on pre-tax income of $14,607, representing an effective tax rate of 35.6% during the nine months ended 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   examine its 2014 United States federal income   tax return. During August 2017, the Company was notified that the IRS has completed the examination and made no adjustments to the Company’s reported tax.
 
8. Stockholders’ Equity
 
During the three and nine months ended September 30, 2017, the Company paid dividends of $2,511 and $7,537, respectively, representing $0.045 and $0.135 per share, respectively.  During August 2017, the Company discontinued its quarterly dividend of $0.045 per 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 nine months ended September 30, 2017, there were no common shares 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	 	Nine Months Ended	 	
 	 	September 30, 	 	September 30, 	 	
 	 	2017	 	2016	 	2017	 	2016	 	
Numerator:	 	 	    	    	 	    	    	 	    	    	 	    	 	
Net (loss) income	 	$	(735)	 	$	4,026	 	$	(7,403)	 	$	9,413	 	
Denominator: 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic-weighted-average common shares outstanding	 	 	55,639,551	 	 	55,255,239	 	 	55,558,825	 	 	55,999,722	 	
Diluted-weighted-average common shares outstanding	 	 	55,639,551	 	 	55,508,684	 	 	55,558,825	 	 	56,232,195	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic and Diluted (Loss) earnings per share:	 	$	(0.01)	 	$	0.07	 	$	(0.13)	 	$	0.17	 	
 
The Company reported a net loss for the three and nine months ended September 30, 2017.  Accordingly, the potentially dilutive effect of 4,765,224 stock options and 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 $970 and $907 for the three months ended September 30, 2017 and 2016, respectively, and $2,875 and $2,541 for the nine months ended 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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On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (the “PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market.
 
On November 16, 2016, the Company filed a motion to dismiss the amended complaint, which was denied by the 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 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 complaint alleged that the Company infringed a now-expired Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard.  The Company successfully moved to transfer the lawsuit to the District of Colorado, answered the complaint, and filed counterclaims that the asserted patent was invalid and unenforceable, and that Gemalto’s lawsuit was a “sham” intended to interfere with the Company’s IPO and business relationships.  Gemalto answered the Company’s counterclaims in February 2016.  In March 2016, Gemalto provided specific infringement contentions, 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. 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 PTAB 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 alleged that the Company infringed a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto provided initial infringement contentions to the Company in July 2016, and amended its contentions in October 2016. 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.
 
On September 28, 2017, the Company reached a settlement with Gemalto to resolve both lawsuits. Under the terms of the settlement, the Company has 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 previously had accrued a $1,000 loss contingency, which does not include any potential indemnity or other third-party recoveries.  As a result of the settlement, the Company has recorded a $250 reduction to its previously recorded loss contingency, 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.
 
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 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 September 30, 2017, there were 827,378 shares available for grant under the Omnibus Plan.
During the three months ended September 30, 2017, the Company granted awards of non-qualified stock options for 2,780,147 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.  The third quarter 2017 stock option awards were made in lieu of the regular cycle of Omnibus Plan awards that the Company would have otherwise made in the first 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 September 30, 2017, there are 28,125 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-	 	Average	 	
 	 	 	 	Average	 	Remaining	 	
 	 	 	 	Exercise	 	Contractual Term	 	
 	 	Options	 	Price	 	(in Years)	 	
Outstanding as of December 31, 2016	 	1,437,508	 	$	
8.62	 	 	 	
Granted	 	3,565,517	 	 	
1.77	 	 	 	
Forfeited	 	(270,801)	 	 	
9.20	 	 	 	
Outstanding as of September 30, 2017	 	4,732,224	 	$	
3.41	 	9.45	 	

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

2017	    	273,863	 	
2018	 	1,584,148	 	
2019	 	1,553,511	 	
2020	 	1,280,440	 	
2021	 	12,137	 	
Total unvested options as of September 30, 2017	 	4,704,099	 	
 
The fair value of the stock option awards granted during the nine months ended September 30, 2017, was determined using a Black-Scholes option-pricing model with the following weighted-average assumptions:

 	 	Nine Months	 	
 	 	Ended	 	
 	 	September	 	
 	 	30, 2017	 	
Expected term in years	 	6.0	 	
Volatility	 	31.9	%	
Risk-free interest rate	 	2.0	%	
Dividend yield (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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The Company did not grant any awards of restricted stock units during the three months ended September 30, 2017.  During the nine months ended September 30, 2017, the Company granted awards of restricted stock units for 239,446 shares of common 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.
 
The following table summarizes the changes in the number of outstanding restricted stock units for the nine month period ended September 30, 2017:

 	    	 	    	  Weighted-	  	
 	 	 	 	Average	 	
 	 	 	 	Grant Date	 	
 	 	Shares 	 	Fair Value	 	
Outstanding as of December 31, 2016	 	270,466	 	$	7.13	 	
Granted	 	239,446	 	 	3.11	 	
Vested	 	(240,688)	 	 	7.30	 	
Forfeited	 	(5,901)	 	 	4.35	 	
Outstanding as of September 30, 2017	 	263,323	 	$	3.38	 	
 
During the nine months ended 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 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, 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 September 30, 2017, the Company recognized a liability of $75 in “Accrued expenses” and $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 nine month period ended September 30, 2017:

 	 	 	 	Weighted-Average	
 	    	Units	    	Grant Date Fair Value	
 	 	 	 	 	 	
Outstanding as of December 31, 2016	 	 —	 	$	 —	
Granted	 	932,837	 	 	0.71	
Vested	 	 —	 	 	 —	
Forfeited	 	(77,746)	 	 	0.71	
Outstanding as of September 30, 2017	 	855,091	 	$	0.71	
Compensation expense for the Omnibus Plan for the three months ended September 30, 2017 and 2016 was $507 and $840, respectively, and was $1,738 and $2,045, during the nine months ended September 30, 2017 and 2016, respectively.  As of 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 $2,885, which the Company expects to recognize over an estimated weighted average period of 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 September 30, 2017. 
 
The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the nine months ended September 30, 2017:

 	    	 	    	 	 	    	Weighted-	 	
 	 	 	 	 	 	 	 Average 	 	
 	 	 	 	 	 	 	Remaining	 	
 	 	 	 	Weighted- Average	 	 Contractual Term	 	
 	 	Options	 	 Exercise Price	 	 (in Years)	 	
 	 	 	 	 	 	 	 	 	
Outstanding and Exercisable as of December 31, 2016	 	216,334	 	$	0.0004	 	 	 	
Granted	 	—	 	 	—	 	 	 	
Exercised	 	(183,334)	 	 	0.0004	 	 	 	
Forfeited	 	 —	 	 	 —	 	 	 	
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 nine months ended 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 September 30, 2017 was $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 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 nine months ended 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 September 30, 2016 was $94 and $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 September 30, 2017, the Company’s reportable segments are as follows:
 
     U.S. Debit and Credit;
     U.S. Prepaid Debit; and
     U.K. Limited.
 
The “Other” category includes the Company’s corporate headquarters and a less significant operating segment that derives its revenue from the production of Financial Payment Cards and retail gift cards in Canada.
 
Performance Measures of Reportable Segments
 
Revenue and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2017 and 2016 were as follows:

 	 	Revenue	 	
 	 	Three Months Ended September 30, 	 	Nine Months Ended September 30, 	 	
 	 	2017	 	2016	 	2017	 	2016	 	
U.S. Debit and Credit	    	$	39,304	    	$	49,156	    	$	121,017	    	$	165,055	 	
U.S. Prepaid Debit	 	 	19,935	 	 	23,087	 	 	42,146	 	 	47,419	 	
U.K. Limited	 	 	7,047	 	 	7,675	 	 	23,644	 	 	21,896	 	
Other	 	 	2,661	 	 	2,710	 	 	8,390	 	 	9,530	 	
Intersegment eliminations	 	 	(903)	 	 	(1,426)	 	 	(5,299)	 	 	(2,580)	 	
Total:	 	$	68,044	 	$	81,202	 	$	189,898	 	$	241,320	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	EBITDA	 	
 	 	Three Months Ended September 30, 	 	Nine Months Ended September 30, 	 	
 	 	2017	 	2016	 	2017	 	2016	 	
U.S. Debit and Credit	    	$	6,476	    	$	12,917	    	$	22,379	    	$	43,242	 	
U.S. Prepaid Debit	 	 	7,606	 	 	8,593	 	 	12,698	 	 	15,417	 	
U.K. Limited	 	 	403	 	 	942	 	 	2,295	 	 	1,841	 	
Other	 	 	(6,210)	 	 	(6,647)	 	 	(19,543)	 	 	(18,254)	 	
Total:	 	$	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 nine months ended September 30, 2017 and 2016:

 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	September 30, 	 	September 30, 	 	
 	    	2017	    	2016	    	2017	    	2016	 	
Total segment EBITDA	 	$	8,275	 	$	15,805	 	$	17,829	 	$	42,246	 	
Interest, net	 	 	(5,305)	 	 	(5,008)	 	 	(15,530)	 	 	(15,109)	 	
Income tax benefit (expense)	 	 	755	 	 	(2,541)	 	 	3,893	 	 	(5,194)	 	
Depreciation and amortization	 	 	(4,460)	 	 	(4,230)	 	 	(13,595)	 	 	(12,530)	 	
Net (loss) income	 	$	(735)	 	$	4,026	 	$	(7,403)	 	$	9,413	 	
 
Balance Sheet Data of Reportable Segments
 
Total assets of the Company’s reportable segments as of September 30, 2017 and December 31, 2016 were as follows:

 	    	September 30, 2017	    	December 31, 2016	 	
 	 	 	 	 	 	 	 	
U.S. Debit and Credit	 	$	182,454	 	$	205,417	 	
U.S. Prepaid Debit	 	 	33,124	 	 	23,509	 	
U.K. Limited	 	 	23,443	 	 	26,060	 	
Other	 	 	12,487	 	 	9,434	 	
Total assets:	 	$	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 nine months ended September 30, 2017 and 2016 were as follows:

 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	September 30, 	 	September 30, 	 	
 	    	2017	    	2016	    	2017	    	2016	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S.	 	$	1,081	 	$	4,757	 	$	6,131	 	$	11,580	 	
Canada	 	 	38	 	 	47	 	 	161	 	 	208	 	
Total North America	 	 	1,119	 	 	4,804	 	 	6,292	 	 	11,788	 	
U.K.	 	 	61	 	 	374	 	 	1,390	 	 	1,165	 	
Total plant, equipment and leasehold improvement additions	 	$	1,180	 	$	5,178	 	$	7,682	 	$	12,953	 	
 
Net Sales to Geographic Locations
 
Net sales to geographic locations for the three and nine months ended September 30, 2017 and 2016 were as follows:

 	 	Three Months Ended	 	Nine Months Ended	 	
 	 	September 30, 	 	September 30, 	 	
 	    	2017	    	2016	    	2017	    	2016	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S.	 	$	59,011	 	$	69,573	 	$	159,161	 	$	205,027	 	
Canada	 	 	2,048	 	 	2,792	 	 	6,831	 	 	10,221	 	
Total North America	 	 	61,059	 	 	72,365	 	 	165,992	 	 	215,248	 	
U.K.	 	 	6,155	 	 	7,910	 	 	20,047	 	 	22,697	 	
Other (a)	 	 	830	 	 	927	 	 	3,859	 	 	3,375	 	
Total net sales	 	$	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 September 30, 2017 and December 31, 2016 were as follows:

 	    	September 30, 2017	    	December 31, 2016	 	
 	 	 	 	 	 	 	 	
U.S.	 	$	151,015	 	$	157,773	 	
Canada	 	 	3,002	 	 	2,899	 	
Total North America:	 	 	154,017	 	 	160,672	 	
U.K.	 	 	12,741	 	 	11,091	 	
Total long-lived assets	 	$	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 nine months ended September 30, 2017 and 2016 were as follows:

 	 	Three Months Ended 	 	Nine Months Ended	 	
 	 	September 30, 	 	September 30, 	 	
 	    	2017	    	2016	    	2017	    	2016	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Product net sales (a)	 	$	31,417	 	$	37,482	 	$	95,005	 	$	132,535	 	
Services net sales (b)	 	 	36,627	 	 	43,720	 	 	94,893	 	 	108,785	 	
Total net sales:	 	$	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.
 
(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 Operation  s
 
References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”).
 
Cautionary Statement Regarding Forward-Looking Information
 
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding the Company’s financial position, business strategy and the plans, objectives, expectations, or assumptions of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue,” “project,” “plan,” “foresee,” and other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks and uncertainties include, but are not limited to: system security risks, data protection breaches and cyber-attacks; market acceptance of developing technologies that make our existing technology solutions and products less relevant; a slower or less widespread continued adoption of contact and dual-interface EMV technology than we anticipate; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers; competition and/or price erosion in the payment card industry; failure to accurately predict demand for our products and services; extension of card expiration cycles; our failure to operate our business in accordance with the PCI security standards or other industry standards such as Payment Card Brand certification standards; infringement on our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; difficulties in production quality and process; defects in our software;  a decline in U.S. and global market and economic conditions; our substantial indebtedness;  failure to meet our customers’ demands in a timely manner; potential imposition of tariffs and/or trade restrictions on goods imported into the United States; economic conditions and regulatory changes leading up to and following the United Kingdom’s likely exit from the European Union; costs relating to product defects; our dependence on licensing arrangements; inability to renew leases for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on specialized equipment from third party suppliers; a competitive disadvantage resulting from chip operating systems developed by our competitors; continued viability of the Payment Card Brands; quarterly variation in our operating results; and other risks and other risk factors or uncertainties identified from time to time in our filings with the SEC. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more complete discussion of forward-looking statements and applicable risks contained under the captions “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 2, 2017. CPI Card Group Inc. undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.
 
Overview
 
We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define Financial Payment Cards as credit, debit and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) and Interac (in Canada). We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market.  Our customers are primarily leading national and regional banks, independent community banks, credit unions, managers of prepaid debit card programs, Group Service Providers (organizations that assist small issuers with managing their credit and debit card programs) and card processors. We serve a diverse set of direct and indirect customers, including many of the largest issuers of debit and credit cards in the United States and Canada, and many of the largest U.S. prepaid debit card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors.

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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	 	Nine Months Ended	 	 	
 	 	September 30, 	 	September 30, 	 	 	 	
 	    	2017	    	2016	    	2017	    	2016	 	 	 	
 	 	(dollars in thousands)	 	 	
Net sales:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Products	    	$	31,417	    	$	37,482	    	$	95,005	 	$	132,535	 	 	    	
Services	 	 	36,627	 	 	43,720	 	 	94,893	 	 	108,785	 	 	 	
Total net sales	 	 	68,044	 	 	81,202	 	 	189,898	 	 	241,320	 	 	 	
Cost of sales	 	 	47,068	 	 	52,139	 	 	133,542	 	 	159,858	 	 	 	
Gross profit	 	 	20,976	 	 	29,063	 	 	56,356	 	 	81,462	 	 	 	
Operating expenses	 	 	17,480	 	 	17,367	 	 	52,702	 	 	51,571	 	 	 	
Income from operations	 	 	3,496	 	 	11,696	 	 	3,654	 	 	29,891	 	 	 	
Other expense, net:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest, net	 	 	(5,305)	 	 	(5,008)	 	 	(15,530)	 	 	(15,109)	 	 	 	
Foreign exchange gain (loss)  	 	 	314	 	 	(124)	 	 	568	 	 	(192)	 	 	 	
Other income, net	 	 	 5	 	 	 3	 	 	12	 	 	17	 	 	 	
(Loss) income before taxes	 	 	(1,490)	 	 	6,567	 	 	(11,296)	 	 	14,607	 	 	 	
Income tax benefit (expense)	 	 	755	 	 	(2,541)	 	 	3,893	 	 	(5,194)	 	 	 	
Net (loss) income	 	$	(735)	 	$	4,026	 	$	(7,403)	 	$	9,413	 	 	 	
 
Segment Discussion
 
Three Months Ended September 30, 2017 Compared With Three Months Ended September 30, 2016
 
Net Sales

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended  September 30, 	 	 	 	 	 	 	 	 	
 	 	2017	    	2016	    	$ Change	    	 	% Change	 	 	
 	 	(dollars in thousands)	 	 	
Net sales by segment:	 	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	39,304	 	$	49,156	 	$	(9,852)	 	 	(20.0)	%	 	
U.S. Prepaid Debit	 	 	19,935	 	 	23,087	 	 	(3,152)	 	 	(13.7)	%	 	
U.K. Limited	 	 	7,047	 	 	7,675	 	 	(628)	 	 	(8.2)	%	 	
Other	 	 	2,661	 	 	2,710	 	 	(49)	 	 	(1.8)	%	 	
Eliminations	 	 	(903)	 	 	(1,426)	 	 	523	 	 	*	 	 	
Total	 	$	68,044	 	$	81,202	 	$	(13,158)	 	 	(16.2)	%	 	
* Not meaningful

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Net sales for the three months ended September 30, 2017 decreased $13.2 million, or 16.2%, to $68.0 million compared to $81.2 million for the three months ended September 30, 2016.
 
U.S. Debit and Credit:
 
Net sales for U.S. Debit and Credit for the three months ended September 30, 2017 decreased $9.9 million, or 20.0%, to $39.3 million compared to $49.2 million for the three months ended September 30, 2016. The decrease in net sales was primarily due to a $4.9 million decrease in EMV related revenue and a $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 September 30, 2017, we sold 19.5 million EMV cards at an average selling price (“ASP”) of $0.86, compared to 22.6 million EMV cards at an ASP of $0.96 for the three months ended September 30, 2016.   The decrease in ASP during the three months ended September 30, 2017 compared to 2016 is 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 September 30, 2017 decreased $3.2 million, or 13.7%, to $19.9 million compared to $23.1 million for the three months ended September 30, 2016 resulting from net decreased volumes across our customer base, partially offset by higher net sales related to CPI on Demand (formerly “Print on Demand”) services.
 
U.K. Limited :  
 
U.K. Limited net sales for the three months ended September 30, 2017 decreased $0.6 million, or 8.2%, to $7.0 million compared to $7.7 million for the three months ended September 30, 2016.  The lower net sales resulted from a prior year loyalty card project which did not recur during the three months ended September 30, 2017, partially offset by higher retail gift card net sales.
 
Other:
 
Other Net Sales were $2.7 million in both the three months ended September 30, 2017 and 2016.
 
Cost of Sales

 	 	Three Months Ended  September 30, 	 	 	 	 	 	 	 	
 	 	2017	    	2016	    	$ Change	    	% Change	 	 	
 	 	(dollars in thousands)	 	 	
Cost of sales by segment:	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. Debit and Credit	 	$	28,565	    	$	32,063	    	$	(3,498)	 	(10.9)	%	    	
U.S. Prepaid Debit	 	 	12,228	 	 	13,919	 	 	(1,691)	 	(12.1)	%	 	
U.K. Limited	 	 	5,513	 	 	5,506	 	 	 7	 	0.1	%	 	
Other	 	 	1,931	 	 	2,021	 	 	(90)	 	(4.5)	%	 	
Eliminations	 	 	(1,169)	 	 	(1,370)	 	 	201	 	*	 	 	
Total	 	$	47,068	 	$	52,139	 	$	(5,071)	 	(9.7)	%	 	
* Not meaningful
 
Cost of sales for the three months ended September 30, 2017 decreased $5.1 million, or 9.7%, to $47.1 million compared to $52.1 million for the three months ended September 30, 2016. 
 
U.S. Debit and Credit:
 
Cost of sales for U.S. Debit and Credit for the three months ended September 30, 2017 decreased $3.5 million, or 10.9%, to $28.6 million compared to $32.1 million for the three months ended September 30, 2016.  The decrease was

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primarily due to lower EMV chip card sales volumes, resulting in lower corresponding manufacturing costs.  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 September 30, 2017 decreased $1.7 million, or 12.1%, to $12.2 million compared to $13.9 million for the three months ended September 30, 2016.  The decrease was a result of decreased sales volumes, partially offset by increased costs related to the continued ramp-up of our CPI on Demand services.  
 
U.K. Limited :
 
U.K. Limited cost of sales were $5.5 million in both the three months ended September 30, 2017 and 2016. Lower cost of sales resulting from lower sales volumes during the three months ended September 30, 2017 were offset by higher overhead and per unit materials costs compared to the three months ended September 30, 2016.  
 
Other:
 
Cost of sales in Other decreased $0.1 million, or 4.5%, to $1.9 million during the three months ended September 30, 2017 compared to $2.0 million in the three months ended September 30, 2016.
 
Gross Profit and Gross Profit Margin

 	 	Three Months Ended  September 30, 	 	 	 	 	 	 	 	
 	 	 	 	 	% of 2017	 	 	 	 	% of 2016	 	 	 	 	 	  	 	
 	 	2017	 	net sales	 	2016	 	net sales	 	$ Change	 	% Change	 	 	
 	 	(dollars in thousands)	 	 	
Gross profit by segment:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	10,739	 	
27.3	%	$	17,093	 	34.8	%	$	(6,354)	 	(37.2)	%	 	
U.S. Prepaid Debit	 	 	7,707	 	
38.7	%	 	9,168	 	39.7	%	 	(1,461)	 	(15.9)	%	 	
U.K. Limited	 	 	1,534	 	
21.8	%	 	2,169	 	28.3	%	 	(635)	 	(29.3)	%	 	
Other	 	 	996	 	*	 	 	633	 	*	 	 	363	 	*	 	 	
Total	 	$	20,976	 	
30.8	%	$	29,063	 	35.8	%	$	(8,087)	 	(27.8)	%	 	
 
Gross profit for the three months ended September 30, 2017 decreased $8.1 million, or 27.8%, to $21.0 million compared to $29.1 million for the three months ended September 30, 2016. Gross profit margin for the three months ended September 30, 2017 decreased to 30.8% compared to 35.8% for the three months ended September 30, 2016.
 
U.S. Debit and Credit:
 
Gross profit for U.S. Debit and Credit for the three months ended September 30, 2017 decreased $6.4 million, or 37.2%, to $10.7 million compared to $17.1 million during the three months ended 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 September 30, 2017 decreased to 27.3% compared to 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.

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U.K. Limited :
 
Gross profit for U.K. Limited decreased 29.3% in the three months ended September 30, 2017 to $1.5 million compared to $2.2 million for the three months ended September 30, 2016, primarily due to the decreased sales activity described above. Gross profit margin for U.K. Limited was 21.8% during the three months ended September 30, 2017 compared to the gross profit margin of 28.3% during the three months ended September 30, 2016 as a result of decreased leverage of operating expenses from decreased sales. 
 
Other:
 
Other gross profit during the three months ended September 30, 2017 was $1.0 million compared to $0.6 million during the same period in 2016. 
 
Operating Expenses

 	 	Three Months Ended  September 30, 	 	 	 	 	 	 	 	
 	 	2017	    	2016	    	$ Change	    	% Change	 	 	
 	 	(dollars in thousands)	 	 	
Operating expenses by segment:	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	6,407	 	$	6,324	 	$	83	 	1.3	%	 	
U.S. Prepaid Debit	 	 	797	 	 	1,154	 	 	(357)	 	(30.9)	%	 	
U.K. Limited	 	 	1,333	 	 	1,328	 	 	 5	 	0.4	%	 	
Other	 	 	8,943	 	 	8,561	 	 	382	 	4.5	%	 	
Total	 	$	17,480	 	$	17,367	 	$	113	 	0.7	%	 	
 
Operating expenses for the three months ended September 30, 2017 increased $0.1 million, or 0.7%, to $17.5 million compared to $17.4 million for the three months ended September 30, 2016.
 
U.S. Debit and Credit operating expenses were $6.4 million in the three months ended September 30, 2017 compared to $6.3 million in the three months ended September 30, 2016 due to increased salaries and benefits to support the card personalization business.
 
U.S. Prepaid Debit operating expenses decreased $0.4 million, or 30.9%, primarily driven by lower administrative headcount.
 
U.K. Limited operating expenses were $1.3 million in both the three months ended September 30, 2017 and 2016.
 
Other operating expenses during the three months ended September 30, 2017 increased $0.4 million compared to the three months ended September 30, 2016.  The net 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 $0.4 million and other compensation costs of $0.4 million.   
 
Income from Operations and 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 for the three months ended September 30, 2017 decreased $8.2 million, or 70.1%, to $3.5 million compared to $11.7 million for the three months ended September 30, 2016. Operating profit margin for the three months ended September 30, 2017 decreased to 5.1% compared to 14.4% for the three months ended September 30, 2016.
 
U.S. Debit and Credit:
 
Income from operations for U.S. Debit and Credit for the three months ended September 30, 2017 decreased $6.4 million, or 59.8%, to $4.3 million compared to $10.8 million for the three months ended September 30, 2016 due primarily to the lower sales volumes. Operating margins for the three months ended September 30, 2017 decreased to 11.0% compared to 21.9% for the three months ended 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 September 30, 2017 decreased 13.8% to $6.9 million compared to $8.0 million for the three months ended September 30, 2016 due to decreased sales volumes and increased costs to ramp up CPI on Demand services, partially offset by the decreased administrative salaries discussed above. U.S. Prepaid Debit operating income margins were 34.7% in both the three months ended September 30, 2017 and 2016.
 
U.K. Limited :
 
Income from operations for U.K. Limited for the three months ended September 30, 2017 was $0.2 million during the three months ended September 30, 2017, representing a $0.6 million decrease compared to the three months ended September 30, 2016.  The decrease was due to the decreased sales described above.  Operating margins decreased to 2.9% during the three months ended September 30, 2017 compared to 11.0% during the three months ended September 30, 2016 as a result of decreased leverage of operating expenses from decreased sales.
 
Other :
 
The loss from operations in Other was $7.9 million in both the three months ended September 30, 2017 and 2016.
 
Interest, net :  
 
Interest expense for the three months ended September 30, 2017 increased to $5.3 million compared to $5.0 million for the three months ended 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 September 30, 2017 was partially offset by the reduction of interest expense associated with the Sellers’ Note, which was repaid during September 2016.
 
Income tax (benefit) expense:  
 
During the three months ended September 30, 2017, there was an income tax benefit of $0.8 million on pre-tax losses of $1.5 million, compared with income tax expense of $2.5 million on pre-tax income of $6.6 million for the three months ended September 30, 2016.  Our effective tax rate differs in the current year period primarily due to the impact of state income taxes and 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 September 30, 2017, net loss was $0.7 million, compared to net income of $4.0 million during the three months ended September 30, 2016 primarily due to the lower sales volumes and higher operating expenses described above.

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Nine Months Ended September 30, 2017 Compared With Nine Months Ended September 30, 2016
 
Net Sales

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended September 30, 	 	 	 	 	 	 	 	 	
 	    	2017	    	2016	    	$ Change	    	 	% Change	 	 	
 	 	(dollars in thousands)	 	 	 	
Net sales by segment:	 	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	121,017	 	$	165,055	 	$	(44,038)	 	 	(26.7)	%	 	
U.S. Prepaid Debit	 	 	42,146	 	 	47,419	 	 	(5,273)	 	 	(11.1)	%	 	
U.K. Limited	 	 	23,644	 	 	21,896	 	 	1,748	 	 	8.0	%	 	
Other	 	 	8,390	 	 	9,530	 	 	(1,140)	 	 	(12.0)	%	 	
Eliminations	 	 	(5,299)	 	 	(2,580)	 	 	(2,719)	 	 	*	 	 	
Total	 	$	189,898	 	$	241,320	 	$	(51,422)	 	 	(21.3)	%	 	
 
Net sales for the nine months ended September 30, 2017 decreased $51.4 million, or 21.3%, to $189.9 million compared to $241.3 million for the nine months ended September 30, 2016.
 
U.S. Debit and Credit:
 
Net sales for U.S. Debit and Credit for the nine months ended September 30, 2017 decreased $44.0 million, or 26.7%, to $121.0 million compared to $165.1 million for the nine months ended September 30, 2016. The decrease in net sales was primarily driven by a $33.4 million decrease in EMV related revenue and a $7.3 million decrease in card personalization and fulfillment, 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 nine months ended September 30, 2017, we sold 56.6 million EMV cards at an ASP of $0.85 compared to 86.5 million EMV cards at an ASP of $0.94 for the nine months ended September 30, 2016.   The decrease in ASP during the nine months ended September 30, 2017 compared to 2016 is 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 nine months ended September 30, 2017 decreased $5.3 million, or 11.1%, to $42.1 million compared to $47.4 million for the nine months ended 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 across our customer base.
 
U.K. Limited :
 
Net sales for U.K. Limited for the nine months ended September 30, 2017 increased $1.7 million, or 8.0%, to $23.6 million compared to $21.9 million for the nine months ended 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 nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
 
Other:
 
Net sales for Other decreased $1.1 million, or 12.0%, to $8.4 million during the nine months ended September 30, 2017 compared to $9.5 million in the nine months ended September 30, 2016, relating primarily to one of our largest customers refreshing its card designs during the prior year resulting in higher net sales during the nine months ended September 30, 2016 compared to the nine months ended September 30, 3017.  

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Cost of Sales

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended  September 30, 	 	 	 	 	 	 	 	
 	 	2017	    	2016	    	$ Change	    	% Change	 	 	
 	 	(dollars in thousands)	 	 	
Cost of sales by segment:	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	85,886	    	$	109,091	    	$	(23,205)	 	(21.3)	%	 	
U.S. Prepaid Debit	 	 	28,676	 	 	30,018	 	 	(1,342)	 	(4.5)	%	 	
U.K. Limited	 	 	18,042	 	 	16,079	 	 	1,963	 	12.2	%	 	
Other	 	 	6,357	 	 	7,123	 	 	(766)	 	(10.8)	%	 	
Eliminations	 	 	(5,419)	 	 	(2,453)	 	 	(2,966)	 	*	 	 	
Total	 	$	133,542	 	$	159,858	 	$	(26,316)	 	(16.5)	%	 	
 
Cost of sales for the nine months ended September 30, 2017 decreased $26.3 million, or 16.5%, to $133.5 million compared to $159.9 million for the nine months ended September 30, 2016.
 
U.S. Debit and Credit:
 
Cost of sales for U.S. Debit and Credit for the nine months ended September 30, 2017 decreased $23.2 million, or 21.3%, to $85.9 million compared to $109.1 million for the nine months ended 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 nine months ended September 30, 2017 decreased $1.3 million, 4.5%, to $28.7 million compared to $30.0 million for the nine months ended September 30, 2016. The decrease was primarily a result of decreased sales volumes, partially offset by increased costs to ramp up CPI on Demand services.
 
U.K. Limited :
 
Cost of sales for U.K. Limited was $18.0 million during the nine months ended September 30, 2017, an increase of 12.2% from $16.1 million during the nine months ended September 30, 2016. The increase in cost of sales related to increased net sales activity, partially offset by $1.7 million of foreign currency exchange rate fluctuations between the United States dollar and the British Pound.
 
Other:
 
Cost of sales in Other decreased $0.8 million, or 10.8%, to $6.4 million during the nine months ended September 30, 2017 compared to $7.1 million in the nine months ended September 30, 2016 due to lower manufacturing costs corresponding to the decreased net sales noted above.
 
Gross Profit and Gross Profit Margin

 	 	Nine Months Ended  September 30, 	 	 	 	 	 	 	 	
 	 	 	 	 	% of	 	 	 	 	% of	 	 	 	 	 	 	 	
 	 	2017	    	net sales	      	2016	    	net sales	      	$ Change	    	% Change	  	 	
 	 	(dollars in thousands)	 	 	
Gross profit by segment:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	35,131	 	29.0	%	$	55,964	 	33.9	%	$	(20,833)	 	(37.2)	%	 	
U.S. Prepaid Debit	 	 	13,470	 	32.0	%	 	17,401	 	36.7	%	 	(3,931)	 	(22.6)	%	 	
U.K. Limited	 	 	5,602	 	23.7	%	 	5,817	 	26.6	%	 	(215)	 	(3.7)	%	 	
Other	 	 	2,153	 	*	 	 	2,280	 	*	 	 	(127)	 	*	 	 	
Total	 	$	56,356	 	29.7	%	$	81,462	 	33.8	%	$	(25,106)	 	(30.8)	%	 	

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Gross profit for the nine months ended September 30, 2017 decreased $25.1 million, or 30.8%, to $56.4 million compared to $81.5 million for the nine months ended September 30, 2016. Gross profit margin for the nine months ended September 30, 2017 decreased to 29.7% compared to 33.8% for the nine months ended September 30, 2016.
 
U.S. Debit and Credit:
 
Gross profit for U.S. Debit and Credit for the nine months ended September 30, 2017 decreased $20.8 million, or 37.2%, to $35.1 million compared to $56.0 million during the nine months ended 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 nine months ended September 30, 2017 decreased to 29.0% compared to 33.9% for the nine months ended 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 nine months ended September 30, 2017 decreased 22.6% to $13.5 million compared to $17.4 million for the nine months ended September 30, 2016. The decrease in gross profit was primarily due to the decrease in net sales and increased costs to ramp up CPI on Demand services. Gross profit margin for U.S. Prepaid Debit for the nine months ended September 30, 2017 decreased to 32.0% compared to 36.7% for the nine months ended September 30, 2016 due to increased costs to ramp up CPI on Demand services and lower overhead cost absorption during the first quarter of 2017.
 
U.K. Limited :
 
Gross profit for U.K. Limited for the nine months ended September 30, 2017 decreased 3.7% to $5.6 million compared to $5.8 million during the nine months ended September 30, 2016. The decrease in gross profit was driven by $0.5 million of foreign currency exchange rate fluctuations, partially offset by the increase in net sales described above. Gross profit margin for U.K. Limited for the nine months ended September 30, 2017 decreased to 23.7% compared to 26.6% for the nine months ended September 30, 2016, primarily due to customer mix.
 
Other:
 
Other gross profit during the nine months ended September 30, 2017 decreased to $2.2 million compared to $2.3 million during the nine months ended September 30, 2016.  The decrease was primarily due to decreased net sales in Canada.
 
Operating Expenses

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended  September 30, 	 	 	 	 	 	 	 	
 	 	2017	    	2016	    	$ Change	    	% Change	 	 	
 	 	(dollars in thousands)	 	 	
Operating expenses by segment:	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	19,333	 	$	18,957	 	$	376	 	2.0	%	 	
U.S. Prepaid Debit	 	 	2,959	 	 	3,719	 	 	(760)	 	(20.4)	%	 	
U.K. Limited	 	 	3,972	 	 	4,321	 	 	(349)	 	(8.1)	%	 	
Other	 	 	26,438	 	 	24,574	 	 	1,864	 	7.6	%	 	
Total	 	$	52,702	 	$	51,571	 	$	1,131	 	2.2	%	 	
 
Operating expenses for the nine months ended September 30, 2017 increased $1.1 million, or 2.2%, to $52.7 million compared to $51.6 million for the nine months ended September 30, 2016.
 
The $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 $0.8 million decrease in U.S. Prepaid Debit operating expenses was primarily driven by lower administrative headcount.
 
U.K. Limited operating expenses decreased by $0.3 million, or 8.1%, due to foreign currency exchange rate fluctuations.
 
The $1.9 million increase in Other operating expenses was primarily due to increased legal costs of $2.3 million, primarily due to increased litigation expenses, and increased software and other expenses of $1.0 million, partially offset by a decrease of $1.4 million in stock-based compensation expense during the nine months ended September 30, 2017. 
 
Income from Operations and Operating Margin

 	 	Nine Months Ended  September 30, 	 	 	 	 	 	 	 	
 	 	 	 	 	% of	 	 	 	 	% of	 	 	 	 	 	 	 	
 	   	2017	   	net sales	       	2016	    	net sales	       	$ Change	    	% Change	  	 	
 	 	(dollars in thousands)	 	 	
Income from operations by segment:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	    	
U.S. Debit and Credit	 	$	15,798	 	13.1	%	$	37,007	 	
22.4	%	$	(21,209)	 	(57.3)	%	 	
U.S. Prepaid Debit	 	 	10,511	 	24.9	%	 	13,682	 	
28.9	%	 	(3,171)	 	(23.2)	%	 	
U.K. Limited	 	 	1,630	 	6.9	%	 	1,496	 	
6.8	%	 	134	 	9.0	%	 	
Other	 	 	(24,285)	 	*	 	 	(22,294)	 	*	 	 	(1,991)	 	*	 	 	
Total	 	$	3,654	 	1.9	%	$	29,891	 	
12.4	%	$	(26,237)	 	(87.8)	%	 	
 
Income from operations for the nine months ended September 30, 2017 decreased $26.2 million, or 87.8%, to $3.7 million compared to $29.9 million for the nine months ended September 30, 2016. Operating profit margin for the nine months ended September 30, 2017 decreased to 1.9% compared to 12.4% for the nine months ended September 30, 2016.
 
U.S. Debit and Credit:
 
Income from operations for U.S. Debit and Credit for the nine months ended September 30, 2017 decreased $21.2 million, or 57.3%, to $15.8 million compared to $37.0 million for the nine months ended September 30, 2016 due primarily to lower sales. Operating margins for the nine months ended September 30, 2017 decreased to 13.1% compared to 22.4% for the nine months ended September 30, 2016, due primarily to lower sales, lower overhead cost absorption attributed to reduced sales volumes, and the increased operating expenses discussed above.
 
U.S. Prepaid Debit:
 
Income from operations for U.S. Prepaid Debit for the nine months ended September 30, 2017 decreased $3.2 million, or 23.2%, to $10.5 million compared to $13.7 million for the nine months ended September 30, 2016 primarily due to the decrease in net sales and increased costs to ramp up CPI on Demand services, partially offset by lower operating expenses. Operating margins for the nine months ended September 30, 2017 decreased to 24.9% compared to 28.9% for the nine months ended September 30, 2016 due to increased costs to ramp up CPI on Demand 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 nine months ended September 30, 2017 increased to $1.6 million from $1.5 million during the nine months ended September 30, 2016 as a result of the increased sales activity, partially offset by foreign currency exchange rate fluctuations.  Operating margins increased to 6.9% during the nine months ended September 30, 2017 compared to 6.8% during the nine months ended 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 nine months ended September 30, 2017 was $24.3 million compared to $22.3 million in the nine months ended 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 discussed above.
 
Interest, net :  
 
Interest expense for the nine months ended September 30, 2017 increased to $15.5 million compared to $15.1 million for the nine months ended September 30, 2016. The additional interest expense resulting from the higher average interest rate on the First Lien Term Loan during the nine months ended 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 nine months ended September 30, 2017 was $3.9 million, compared to income tax expense of $5.2 million for the nine months ended September 30, 2016. The effective tax rate was 34.5% and 35.6% for the nine months ended September 30, 2017 and 2016, respectively. Our effective tax rate was lower in the current year period primarily due to the impact of state income taxes and 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 nine months ended September 30, 2017, net loss was $7.4 million, compared to a net income of $9.4 million during the nine months ended September 30, 2016 primarily due to the lower net sales volumes and higher operating expenses described above.
 
Liquidity and Capital Resources
 
As of September 30, 2017, we had $14.8 million of cash and cash equivalents. Of this amount, $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.  Although 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 for at least the next twelve months.
 
At 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 September 30, 2017, the interest rate on our First Lien Term Loan was 5.96%.
 
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 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 nine months ended September 30, 2017 and the stock repurchase plan expired by its terms during May 2017. 
 
During August 2017, the Company discontinued its quarterly dividend of $0.045 per share. The dividend discontinuation was part of the Company’s plan to utilize a greater portion of its free cash to reinvest back into the business to fund 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 additional liquidity and financial flexibility.
 
Operating Activities
 
Cash used in operating activities for the nine months ended September 30, 2017 was $6.9 million compared to $39.8 million of cash provided by operating activities during the nine months ended 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 and income taxes.
 
Investing Activities
 
Cash used in investing activities for the nine months ended September 30, 2017 of $7.8 million decreased compared to $12.4 million during the nine months ended 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 nine months ended September 30, 2017, cash used in financing activities was $7.9 million, and primarily related to dividend payments of $7.5 million. 
 
Cash used in financing activities during the nine months ended September 30, 2016 was $19.5 million, related primarily to the repayment of our subordinated unsecured promissory note with certain sellers of EFT Source for $9.0 million, share repurchases of $6.0 million, and dividend payments of $5.0 million.
 
Contractual Obligations
 
During the nine months ended 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 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 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 Ris  k
 
As of 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 Procedure  s
 
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 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.
 
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.
 
On November 16, 2016, the Company filed a motion to dismiss the amended complaint, which was denied by the 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)
 
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 complaint alleged that the Company infringed a now-expired Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard.  The Company successfully moved to transfer the lawsuit to the District of Colorado, answered the complaint, and filed counterclaims that the asserted patent was invalid and unenforceable, and that Gemalto’s lawsuit was a “sham” intended to interfere with the Company’s IPO and business relationships.  Gemalto answered the Company’s counterclaims in February 2016.  In March 2016, Gemalto provided specific infringement contentions, 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. 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 PTAB 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 alleged that the Company infringed a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto provided initial infringement contentions to the Company in July 2016, and amended its contentions in October 2016. 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.

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On September 28, 2017, the Company reached a settlement with Gemalto to resolve both lawsuits. Under the terms of the settlement, the Company has 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 previously had accrued a $1.0 million loss contingency, which does not include any potential indemnity or other third-party recoveries.  As a result of the settlement, the Company has recorded a $250,000 reduction to its previously recorded loss contingency, 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 $750,000.
 
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 and sought to stay discovery pending the outcome of that motion.  Both motions 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.  Discovery is ongoing and the parties are awaiting the Court’s claim construction order.  In September 2017, the Company filed a motion to 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 20 17, 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.
 
In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations.

 
Item 1A. Risk Factor  s
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
 
None.

Item 6. Exhibit  s

Exhibit
Number	    	Description	
10.1	 	Employment and Non-Competition Agreement, 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).	
10.2
 
 	 	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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SIGNATURE  S
 
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	
 	 	
November 8, 2017	 	

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Exhibit  10.4
 
CPI CARD GROUP INC.
 OMNIBUS INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
This NONQUALIFIED STOCK OPTION AGREEMENT (this “ Agreement ”) is made effective as of September 25, 2017 (the “ Grant Date ”) by and between CPI Card Group Inc., a Delaware corporation (the “ Company ”), and                                               (the “ Participant ”), pursuant to the CPI Card Group Inc. Omnibus Incentive Plan, as in effect and as amended from time to time (the “ Plan ”).  Capitalized terms that are not defined herein shall have the meanings given to such terms in the Plan.
WHEREAS, the Company desires from time to time to grant options to purchase Shares  to certain key Employees, Directors and Consultants of the Company and its Subsidiaries or Affiliates;
WHEREAS, the Company has adopted the Plan in order to effect such grants; and
WHEREAS, the Participant is an Eligible Recipient as contemplated by the Plan, and the Committee has determined that it is in the interest of the Company to make this grant to the Participant; and
WHEREAS, the Company shall promptly seek stockholder approval to amend the Plan to, among other provisions, increase the amount of Shares that may be awarded thereunder to include an amount not less than the Contingent Portion.
NOW, THEREFORE, in consideration of the premises and subject to the terms and conditions set forth herein and in the Plan, the parties hereto agree as follows:
1.          Shares Subject to Option; Exercise Price .
(a)         Shares Subject to Option; Stockholder Approval .  The Company shall grant to the Participant, effective as of the Grant Date, an option to purchase                   Shares from the Company, which shall become exercisable, if at all, as provided in Section 2(a) (the “ Option ”). The grant of 44.247653% of the Option, rounded up to the nearest whole Share (the “ Contingent Portion ”), is contingent upon the stockholders of the Company approving an increase in the number of Shares available for issuance under the Plan, which approval the Company will use reasonable best efforts to promptly seek and obtain. If the stockholders do not approve an increase in the number of Shares available for issuance under the Plan at or by the date of the Company’s 2018 annual meeting of stockholders, then the Contingent Portion shall become null and void on such date.
(b)         Exercise Price .  The Option shall have an Exercise Price of $1.05 per Share, which is not less than the Fair Market Value per Share on the Grant Date.
(c)         Option Subject to Plan .  By signing this Agreement, the Participant acknowledges that he or she has been provided a copy of the Plan and has had the opportunity to review such Plan.

 

(d)         Character of Option .  The Option granted hereunder is not intended to be an “incentive stock option” within the meaning of Code Section 422.
2.          Vesting and Exercisability; Expiration .
(a)         Vesting and Exercisability .  The Option shall vest and become exercisable in installments as follows:

Vest Date	Vest Quantity	
1 st anniversary of Grant Date	[NUMBER OF SHARES]	
2 nd anniversary of Grant Date	[NUMBER OF SHARES]	
3 rd anniversary of Grant Date	[NUMBER OF SHARES]	
 	[ TOTAL NUMBER OF SHARES ]	
Each vesting period is subject to the Participant’s continuous service with the Company or a Subsidiary or Affiliate thereof, as applicable, whether as an Employee, Director, or Consultant (“ Service ”), from the Grant Date through such anniversary.  Notwithstanding the foregoing, all or a portion of the Option shall vest and become exercisable at the times and under the circumstances described in Section 4 and 5.
(b)         Normal Expiration Date .  Unless the Option earlier terminates in accordance with Sections 2 or 4, the Option shall terminate on the tenth anniversary of the Grant Date (the “ Normal Expiration Date ”).  Once a portion of the Option has become exercisable pursuant to this Section 2, such portion of the Option may be exercised, subject to the provisions hereof, at any time and from time to time until the Normal Expiration Date.
3.          Method of Exercise and Payment . 
All or part of the exercisable portion of the Option may be exercised by the Participant upon (a) the Participant’s written notice to the Company of exercise and (b) the Participant’s payment of the Exercise Price in full at the time of exercise (i) in cash or cash equivalents, (ii) in Shares, valued at the Fair Market Value on the date of exercise, or (if permitted by the Committee and subject to such terms and conditions as it may determine) by surrender of outstanding Awards under the Plan, or (iii) by net exercise or broker’s cashless exercise procedure, or any other procedures approved by the Committee from time to time. As soon as practicable after receipt of a written exercise notice and payment in full of the Exercise Price of any exercisable portion of the Option in accordance with this Section 3, but subject to Section 8 below, the Company shall deliver to the Participant (or such other person or entity) a certificate, certificates or electronic book-entry notation representing the Shares acquired upon the exercise thereof, registered in the name of the Participant (or such other person or entity), provided that , if the Company, in its sole discretion, shall determine that, under applicable securities laws, any certificates issued under this Section 3 must bear a legend restricting the transfer of such Shares, such certificates shall bear the appropriate legend.
4.          Termination of Service .
(a)         Termination due to Death or Disability .  In the event that the Participant’s Service terminates by reason of the Participant’s death or Disability, then any unvested portion of the Option held by the Participant shall immediately vest in full, and the Option may be exercised by the Participant or the Participant’s beneficiary as designated in accordance with Section 10, or if no such beneficiary is named, by the Participant’s estate, at any time prior to one (1) year following the Participant’s termination of Service or the Normal Expiration Date of the Option, whichever period is shorter.  The Option shall terminate immediately thereafter.
(b)         Termination due to Retirement .  In the event that the Participant’s Service terminates by reason of the Participant’s Retirement, any then vested portion of the Option may be exercised by the Participant at any

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time prior to one (1) year following the Participant’s termination of Service or the Normal Expiration Date of the Option, whichever period is shorter.  The Option shall terminate immediately thereafter.
(c)         Termination due to Approved Retirement . In the event that the Participant’s Service terminates by reason of the Participant’s Retirement and the Participant has satisfactorily completed various requirements as set forth by the Committee (an “ Approved Retirement ”), then the Option shall continue to vest and become exercisable in accordance with this Agreement. The Option shall be exercisable until the Normal Expiration Date of the Option.
(d)         Termination for Cause .  In the event that the Participant’s Service terminates for Cause, the entire Option held by the Participant, whether or not then vested and exercisable, shall terminate and be cancelled immediately upon such termination of Service.
(e)         Other Termination of Service .  In the event that the Participant’s Service terminates for any reason other than (i) death, (ii) Disability, (iii) Retirement, (iv) Approved Retirement or (v) for Cause, then the portion of the Option held by the Participant that is vested and exercisable as of the date of the Participant’s termination of Service shall be exercisable at any time up until the ninetieth (90 th ) day following the Participant’s termination of Service (or, in the event that the Participant dies or becomes Disabled after the termination of Service, but within the period during which the Option would otherwise be exercisable hereunder, such ninety (90) day period shall be extended to the date that is one (1) year after such termination) or the Normal Expiration Date of the Option, whichever period is shorter. The Option shall terminate immediately thereafter.  Any portion of the Option held by the Participant that is not then exercisable shall terminate and be cancelled immediately upon such termination of Service.
5.          Qualifying Terminations Following a Change in Control .  
(a)         Qualifying Termination .  Notwithstanding any language in the Plan or the Participant’s employment or other services agreement with the Company to the contrary, the Option will not vest solely upon a Change in Control unless such Option is not assumed by the Company’s successor or converted to an equivalent value award upon substantially the same terms effective immediately following the Change in Control.  However, the Participant will be immediately entitled to exercise the entire Option, whether vested or unvested, if the Participant experiences a Qualifying Termination.  A “ Qualifying Termination ” occurs if, within two (2) years following a Change in Control, the Participant’s Service is terminated (i) by the Company without Cause or (ii) by the Participant for Good Reason.
(b)         Good Reason .  For purposes of this Agreement, “Good Reason” shall have the same meaning set forth in the Participant’s employment or other services agreement with the Company.

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If the Participant is not party to such an agreement that defines such term, “ Good Reason ” shall mean the occurrence of any of the following circumstances or events:
(i)         a material reduction by the Company of the Participant’s base compensation (other than pursuant to an across-the-board reduction in base compensation applicable to similarly situated service providers of the Company);
(ii)        the transfer of the Participant’s principal place of Service to a location fifty (50) or more miles from its location immediately preceding the transfer; or
(iii)       the material diminution by the Company of the Participant’s duties or responsibilities with respect to his or her Service. 
The Participant will provide the Company with written notice describing which of the circumstances above is cause for the Good Reason termination within thirty (30) calendar days after the occurrence of the event giving rise to the notice.  The Company will have thirty (30) calendar days from the receipt of such notice to cure the event prior to the Participant exercising his or her right to terminate for Good Reason and, if not cured, the Participant’s termination will be effective upon the expiration of such cure period.
6.          Tax Withholding .  
Whenever Shares are to be issued pursuant to the exercise of any portion of the Option or any cash payment is to be made hereunder, the Company or any Affiliate thereof shall have the power to withhold, or require the Participant to remit to the Company or such Affiliate thereof, an amount sufficient to satisfy federal, state, and local withholding tax requirements, both domestic and foreign, relating to such transaction, and the Company or such Affiliate thereof may defer payment of cash or issuance of Shares until such requirements are satisfied; provided, however, that such amount may not exceed the maximum statutory withholding rate.  The Participant shall be entitled to satisfy the amount of any such required tax withholding by having the Company withhold from the Shares otherwise issuable upon exercise of the Option a number of Shares having a Fair Market Value equal to the amount of such required tax withholdings.
7.          Non-Competition, Non-Solicitation and Non-Disparagement .  
(a)         Restrictive Covenants .  In exchange for good and valuable consideration, including the Option granted herein, the sufficiency of which is acknowledged, the Participant agrees as follows (the “ Restrictive Covenants ”):
(i)           Non-Competition and Non-Solicitation .  During the period of the Participant’s Service and for one (1) year following the termination thereof, the  Participant shall not and shall cause each of his or her  Affiliates not to:
(A)        enter into or engage in any business  that competes with the   Business within the Restricted Territory;
(B)        solicit customers, active prospects, business or patronage for any business, wherever located,  that competes with the  Business within the Restricted Territory or sell any products or services for any business, wherever located, that

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competes with the  Business or could then be provided by the  Business within the Restricted Territory;
(C)         solicit, divert, entice or otherwise take away any employees, customers, former customers, active prospects, business, patronage or orders of the  Company or any  Subsidiary within the Restricted Territory or attempt to do so; or
(D)         counsel, promote or assist, financially or otherwise, any person engaged in any business  that competes with the  Business within the Restricted Territory .
(ii)         Non-Disparagement .  The  Participant shall not, during the period of his or her  Service or at any time thereafter, disparage, denigrate or harass  the Company, any of its Affiliates or any of their respective agents, employees, managers, shareholders, directors, officers, or partners.
(iii)        Other Covenants .  For the avoidance of doubt, the Restrictive Covenants are in addition to, and not in lieu of, any restrictive covenants to which the Participant may otherwise be subject, whether under the terms of his or her employment or services agreement or otherwise.
(iv)        Acknowledgement .  The Participant acknowledges that these Restrictive Covenants are reasonably necessary to protect the Company’s and its clients’ and business partners’ legitimate business interests.  The Participant also acknowledges that by serving in the position of ____________________, he/she is in an executive/management level position and has been entrusted with access to trade secrets and confidential information that, if made available to non-Company employees, would cause irreparable harm to the Company because of the significant time, effort, and expense the Company expended in developing such trade secrets and confidential information.
(b)         Definitions .  For purposes of this Agreement:
(i)         “   Business ”  means manufacturing, personalizing, designing, fulfilling, packaging, distributing, selling and marketing plastic cards, including, without limitation, credit cards, debit cards, ATM cards, loyalty cards, gift cards, membership cards, gaming cards, player tracking cards, casino cards, hotel key cards, access cards, ID cards, contactless cards, prepaid cards, chip cards, EMV cards, dual interface cards, and blank cards; and   
(ii)        “ Restricted Territory ”  means (A) the United States, Canada, Mexico, Europe and the United Kingdom; and (B) the geographic area, whether within or outside of the geographic area described in clause (A), in which reside any customers with which the Participant had any contact or for which the Participant had any responsibility (whether indirect, direct or advisory) at the time of the Participant’s termination of Service or at any time during the two (2) year period prior to such termination.
(c)         Reasonableness of Restrictions .  The Participant agrees that the scope and duration of the Restrictive Covenants are reasonable and necessary to protect the legitimate business

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interests of the Company.  The Participant also agrees that these Restrictive Covenants will not preclude the Participant from obtaining other gainful employment in his or her profession.
(d)         Remedies for Breach .
(i)          Forfeiture of Option .  In the event of the Participant’s breach of any of the Restrictive Covenants, the Option (whether vested or unvested) shall immediately be forfeited.
(ii)         Recovery of Shares .  In the event of the Participant’s breach of any of the Restrictive Covenants, the Company shall be entitled to recover any Shares acquired upon the exercise of the Option and, if the Participant has previously sold any Shares derived from the Option, the Company shall also have the right to recover from the Participant the economic value thereof.
(iii)        Other Relief .  In the event of the Participant’s actual or threatened breach of this Agreement, the Participant agrees that the Company will be entitled to provisional and injunctive relief in addition to any other available remedies at law or equity.
8.          Nontransferability of Awards . 
The Option granted hereunder may not be sold, transferred, pledged, assigned, encumbered or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution or, on such terms and conditions as the Committee shall establish, to a permitted transferee.  All rights with respect to the Option granted to the Participant hereunder shall be exercisable during his or her lifetime only by such Participant or, if permitted by the Committee, a permitted transferee.  Following the Participant’s death, all rights with respect to the Option that were exercisable at the time of the Participant’s death and have not terminated shall be exercised by his or her designated beneficiary, his or her estate or, if designated by the Committee, a permitted transferee.
9.          Buyout and Settlement for Shares .  
Upon the purported exercise of any portion of the Option, in lieu of accepting payment of the Exercise Price therefor and delivering the number of Shares for which the Option is being exercised, the Committee may cause the Company either (a) to pay the Participant an amount in cash equal to the amount, if any, by which the aggregate Fair Market Value of the Shares as to which the Option is being exercised exceeds the aggregate Exercise Price, or (b) to deliver to the Participant a lesser number of Shares, having a Fair Market Value on the date of exercise, equal to the amount, if any, by which the aggregate Fair Market Value of the Shares as to which the Option is being exercised exceeds the aggregate Exercise Price for such Shares. Upon payment of cash or distribution of Shares pursuant to this Section 9, the Participant’s rights as to the portion of the Option which is the subject of such payment or distribution shall be deemed satisfied in full.
10.        Beneficiary Designation . 
The Participant may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) by whom any right under the Plan and this Agreement is to be exercised in case of his or her death.  Each designation will revoke all prior designations by the

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Participant, shall be in a form reasonably prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his or her lifetime.
11.        Transfer of Data .
The Participant consents to the Company or any Affiliate thereof processing data relating to the Participant for legal, personnel, administrative and management purposes and in particular to the processing of any sensitive personal data relating to the Participant.  The Company may make such information available to any Affiliate thereof, those who provide products or services to the Company or any Affiliate thereof (such as advisers and payroll administrators), regulatory authorities, potential purchasers of the Company or the business in which the Participant works, and as may be required by law.
12.        Adjustment in Capitalization .  
The aggregate number of Shares subject to outstanding Option grants and the respective prices and/or vesting criteria applicable to outstanding Options, shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, any stock dividend, stock split or share combination of, or extraordinary cash dividend on, the Common Stock, or any recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares affecting the Common Stock, or any issuance of any warrants or rights offering (other than any such offering under the Plan) to purchase Common Stock at a price materially below Fair Market Value, or any other similar event affecting the Common Stock. All determinations and calculations required under this Section 12 shall be made in the sole discretion of the Committee.
13.        Requirements of Law .  
The issuance of Shares pursuant to the Option shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.  No Shares shall be issued upon exercise of any portion of the Option granted hereunder, if such exercise would result in a violation of applicable law, including the U.S. federal securities laws and any applicable state or foreign securities laws.
14.        No Guarantee of Continued Service .  
Nothing in this Agreement shall interfere with or limit in any way the right of the Company or an Affiliate thereof to terminate the Participant’s Service at any time or confer upon the Participant any right to continued Service.
15.        No Rights as Stockholder .  
Except as otherwise required by law, the Participant shall not have any rights as a stockholder with respect to any Shares covered by the Option granted hereunder until such time as the Shares issuable upon exercise of such Option have been so issued.
16.        Interpretation; Construction .  
Any determination or interpretation by the Committee under or pursuant to this Agreement shall be final and conclusive on all persons affected hereby.  Except as otherwise expressly

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provided in the Plan, in the event of a conflict between any term of this Agreement and the terms of the Plan, the terms of the Plan shall control.
17.        Amendments .  
The Committee may, in its sole discretion, at any time and from time to time, alter or amend this Agreement and the terms and conditions of the unvested portion of any Option (but not any previously granted vested Options) in whole or in part, including without limitation, amending the criteria for vesting and exercisability set forth in Section 2 hereof, substituting alternative vesting and exercisability criteria and imposing certain blackout periods on Options; provided that such alteration, amendment, suspension or termination shall not adversely alter or impair the rights of the Participant under the Option without the Participant’s consent. The Company shall give written notice to the Participant of any such alteration or amendment of this Agreement as promptly as practicable after the adoption thereof.  This Agreement may also be amended by a writing signed by both the Company and the Participant.
18.        Miscellaneous .
(a)         Notices .  All notices, requests, demands, letters, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (A) delivered personally, (B) mailed, certified or registered mail with postage prepaid, (C) sent by next-day or overnight mail or delivery, or (D) sent by fax, as follows:
(i)        If to the Company:
CPI Card Group Inc.
10026 West San Juan Way
Littleton, CO 80127
Attention:  Chief Human Resources Officer
Phone:  303-345-2424
(ii)       If to the Participant, to the Participant’s last known home address,
or to such other person or address as any party shall specify by notice in writing to the Company.  All such notices, requests, demands, letters, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the fifth business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, or (z) if by fax, on the day delivered, provided that such delivery is confirmed.
(b)         Binding Effect; Benefits .  This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns.  Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein.
(c)         No Guarantee of Future Awards .  This Agreement does not guarantee the Participant the right to or expectation of future Awards under the Plan or any future plan adopted by the Company.

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(d)         Waiver .  Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this.  Agreement, (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement and (iii) waive or modify performance of any of the obligations of the other under this Agreement.  Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of either party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein.  The waiver by either party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of such party’s rights to exercise the same at any subsequent time or times hereunder.
(e)         Code Section 409A Compliance .  This Option is intended to be exempt from the requirements of Code Section 409A and this Agreement shall be interpreted accordingly.  Notwithstanding any provision of this Agreement, to the extent that the Committee determines that any portion of the Option granted under this Agreement is subject to Code Section 409A and fails to comply with the requirements of Code Section 409A, notwithstanding anything to the contrary contained in the Plan or in this Agreement, the Committee reserves the right to amend, restructure, terminate or replace such portion of the Option in order to cause such portion of the Option to either not be subject to Code Section 409A or to comply with the applicable provisions of such section.
(f)          Applicable Law .  This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, regardless of the law that might be applied under principles of conflict of laws.  The Company and the Participant agree that the jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), this Agreement shall be exclusively in the courts in the State of Colorado, County of Arapahoe or Denver, including the Federal Courts located therein (should Federal jurisdiction exist), and the Company and the Participant hereby submit and consent to said jurisdiction and venue.
(g)         Section and Other Headings .  The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
(h)         Counterparts .  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.
(i)          Erroneously Awarded Compensation . Notwithstanding any provision in the Plan or in this Agreement to the contrary, this Award shall be subject to any compensation recovery and/or recoupment policy adopted and amended from time to time by the Company to comply with applicable law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or to comport with good corporate governance practices.
—   Signature page follows  —

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Notwithstanding anything in this Agreement or in the Plan to the contrary, the Committee hereby reserves the right, in its sole discretion, to terminate and cancel this Award if the Participant fails to accept this Agreement on or prior to October 31, 2017 .
IN WITNESS WHEREOF, the Company and the Participant have duly executed this Agreement as of the date first above written.

 	CPI CARD GROUP INC.	

 	By: CPI Card Group Inc.	

 	PARTICIPANT	
 	 	
 	Agreed via electronic acceptance	
 	 	
 	Name:	 	

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Exhibit 10.5
 
CPI CARD GROUP INC.
OMNIBUS INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
FOR UNITED KINGDOM PARTICIPANTS
This NONQUALIFIED STOCK OPTION AGREEMENT (this “ Agreement ”) is made effective as of September 25, 2017 (the “ Grant Date ”) by and between CPI Card Group Inc., a Delaware corporation (the “ Company ”), and                                     (the “ Participant ”), pursuant to the CPI Card Group Inc. Omnibus Incentive Plan, as in effect and as amended from time to time (the “ Plan ”). Capitalized terms that are not defined herein shall have the meanings given to such terms in the Plan.
WHEREAS, the Company desires from time to time to grant options to purchase Shares to certain key Employees, Directors and Consultants of the Company and its Subsidiaries or Affiliates (together referred to as the “ Group ” and each as a “ Group Company ”);
WHEREAS, the Company has adopted the Plan in order to effect such grants; and
WHEREAS, the Participant is an Eligible Recipient as contemplated by the Plan, and the Committee has determined that it is in the interest of the Company to make this grant to the Participant; and
WHEREAS, the Company shall promptly seek stockholder approval to amend the Plan to, among other provisions, increase the amount of Shares that may be awarded thereunder to include an amount not less than the Contingent Portion.
NOW, THEREFORE, in consideration of the premises and subject to the terms and conditions set forth herein and in the Plan, the parties hereto agree as follows:
1.          Shares Subject to Option; Exercise Price .
(a)         Shares Subject to Option; Stockholder Approval .  The Company shall grant to the Participant, effective as of the Grant Date, an option to purchase                     Shares from the Company, which shall become exercisable, if at all, as provided in Section 2(a) (the “ Option ”). The grant of 44.247653% of the Option, rounded up to the nearest whole Share (the “ Contingent Portion ”), is contingent upon the stockholders of the Company approving an increase in the number of Shares available for issuance under the Plan, which approval the Company will use reasonable best efforts to promptly seek and obtain. If the stockholders do not approve an increase in the number of Shares available for issuance under the Plan at or by the date of the Company’s 2018 annual meeting of stockholders, then the Contingent Portion shall become null and void on such date.
(b)         Exercise Price .  The Option shall have an Exercise Price of $1.05 per Share, which is not less than the Fair Market Value per Share on the Grant Date.

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(c)         Option Subject to Plan .  By signing this Agreement, the Participant acknowledges that he or she has been provided a copy of the Plan and has had the opportunity to review such Plan.
 
(d)         Character of Option .  The Option granted hereunder is not intended to be an “incentive stock option” within the meaning of Code Section 422.
2.          Vesting and Exercisability; Expiration .
(a)         Vesting and Exercisability .  The Option shall vest and become exercisable in installments as follows:

Vest Date	Vest Quantity	
1 st anniversary of Grant Date	[NUMBER OF SHARES]	
2 nd anniversary of Grant Date	[NUMBER OF SHARES]	
3 rd anniversary of Grant Date	[NUMBER OF SHARES]	
 	[TOTAL NUMBER OF SHARES]	
 
Each vesting period is subject to the Participant’s continuous service with the Company or a Group Company, whether as an Employee, Director or Consultant (“ Service ”), from the Grant Date through such anniversary. Notwithstanding the foregoing, all or a portion of the Option shall vest and become exercisable at the times and under the circumstances described in Sections 4 and 5.
(b)         Normal Expiration Date .  Unless the Option earlier terminates in accordance with Sections 2 or 4, the Option shall terminate on the tenth anniversary of the Grant Date (the “ Normal Expiration Date ”). Once a portion of the Option has become exercisable pursuant to this Section 2, such portion of the Option may be exercised, subject to the provisions hereof, at any time and from time to time until the Normal Expiration Date.
3.          Method of Exercise and Payment . 
All or part of the exercisable portion of the Option may be exercised by the Participant upon (a) the Participant’s written notice to the Company of exercise, (b) the Participant’s payment of the Exercise Price in full at the time of exercise (i) in cash or cash equivalents, (ii) in Shares, valued at the Fair Market Value on the date of exercise, or (if permitted by the Committee and subject to such terms and conditions as it may determine) by surrender of outstanding Awards under the Plan, or (iii) by net exercise or broker’s cashless exercise procedure, or any other procedures approved by the Committee from time to time, and (c) the Participant entering into either or both elections required by the Company pursuant to Section 6(e). As soon as practicable after receipt of a written exercise notice, payment in full of the Exercise Price of any exercisable portion of the Option in accordance with this Section 3 and receipt of executed elections (if required by the Company) pursuant to Section 6(e), but subject to Section 7 below, the Company shall deliver to the Participant (or such other person or entity) a certificate, certificates or electronic book-entry notation representing the Shares acquired upon the exercise thereof, registered in the name of the Participant (or such other person or entity), provided that , if the Company, in its sole discretion, shall determine that, under applicable

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securities laws, any certificates issued under this Section 3 must bear a legend restricting the transfer of such Shares, such certificates shall bear the appropriate legend.
4.          Termination of Service .
(a)         Termination due to Death or Disability .  In the event that the Participant’s Service terminates by reason of the Participant’s death or Disability, then any unvested portion of the Option held by the Participant shall immediately vest in full, and the Option may be exercised by the Participant or the Participant’s beneficiary as designated in accordance with Section 9, or if no such beneficiary is named, by the Participant’s estate, at any time prior to one (1) year following the Participant’s termination of Service or the Normal Expiration Date of the Option, whichever period is shorter. The Option shall terminate immediately thereafter.
(b)         Termination due to Retirement .  In the event that the Participant’s Service terminates by reason of the Participant’s Retirement, any then vested portion of the Option may be exercised by the Participant at any time prior to one (1) year following the Participant’s termination of Service or the Normal Expiration Date of the Option, whichever period is shorter. The Option shall terminate immediately thereafter.
(c)         Termination due to Approved Retirement . In the event that the Participant’s Service terminates by reason of the Participant’s Retirement and the Participant has satisfactorily completed various requirements as set forth by the Committee (an “ Approved Retirement ”), then the Option shall continue to vest and become exercisable in accordance with this Agreement.  The Option shall be exercisable until the Normal Expiration Date of the Option.
(d)         Termination for Cause .  In the event that the Participant’s Service terminates for Cause, the entire Option held by the Participant, whether or not then vested and exercisable, shall terminate and be cancelled immediately upon such termination of Service.
(e)         Other Termination of Service .  In the event that the Participant’s Service terminates for any reason other than (i) death, (ii) Disability, (iii) Retirement, (iv) Approved Retirement or (v) for Cause, then the portion of the Option held by the Participant that is vested and exercisable as of the date of the Participant’s termination of Service shall be exercisable at any time up until the ninetieth (90 th ) day following the Participant’s termination of Service (or, in the event that the Participant dies or becomes Disabled after the termination of Service, but within the period during which the Option would otherwise be exercisable hereunder, such ninety (90) day period shall be extended to the date that is one (1) year after such termination) or the Normal Expiration Date of the Option, whichever period is shorter. The Option shall terminate immediately thereafter. Any portion of the Option held by the Participant that is not then exercisable shall terminate and be cancelled immediately upon such termination of Service.
5.          Qualifying Terminations Following a Change in Control .    
(a)         Qualifying Termination . Notwithstanding any language in the Plan or the Participant’s employment or other services agreement with the Company to the contrary, the Option will not vest solely upon a Change in Control unless such Option is not assumed by the Company’s successor or converted to an equivalent value award upon substantially the same terms effective immediately following the Change in Control. However, the Participant will be

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immediately entitled to exercise the entire Option, whether vested or unvested, if the Participant experiences a Qualifying Termination. A “ Qualifying Termination ” occurs if, within two (2) years following a Change in Control, the Participant’s Service is terminated (i) by the Company without Cause or (ii) by the Participant for Good Reason.
(b)         Good Reason .  For purposes of this Agreement, “Good Reason” shall have the same meaning set forth in the Participant’s employment or other services agreement with the Company.  If the Participant is not party to such an agreement that defines such term, “ Good Reason ” shall mean the occurrence of any of the following circumstances or events:
(i)          a material reduction by the Company of the Participant’s base compensation (other than pursuant to an across-the-board reduction in base compensation applicable to similarly situated service providers of the Company);
(ii)         the transfer of the Participant’s principal place of Service to a location fifty (50) or more miles from its location immediately preceding the transfer; or
(iii)        the material diminution by the Company of the Participant’s duties or responsibilities with respect to his or her Service. 
The Participant will provide the Company with written notice describing which of the circumstances above is cause for the Good Reason termination within thirty (30) calendar days after the occurrence of the event giving rise to the notice. The Company will have thirty (30) calendar days from the receipt of such notice to cure the event prior to the Participant exercising his or her right to terminate for Good Reason and, if not cured, the Participant’s termination will be effective upon the expiration of such cure period.
 
6.          Tax Withholding .  
(a)         Whenever Shares are to be issued pursuant to the exercise of any portion of the Option or any cash payment is to be made hereunder, the Company or any Affiliate thereof shall have the power to withhold, or require the Participant to remit to the Company or such Affiliate thereof, an amount sufficient to satisfy federal, state, and local withholding tax and social security contributions requirements, both domestic and foreign, relating to such transaction, and the Company or such Affiliate thereof may defer payment of cash or issuance of Shares until such requirements are satisfied; provided, however, that such amount may not exceed the maximum statutory withholding rate.
(b)         Notwithstanding the foregoing, the Participant hereby indemnifies the Company and any Affiliate that is the employer of the Participant, for an amount equal to any amounts for which the Company or Affiliate is obliged to account for: (a) under the United Kingdom’s Pay As You Earn system (or analogous system in any other jurisdiction); and (b) in respect of employee national insurance or social security contributions, in each case arising from the grant, vesting, exercise or any other dealing in any Option held by the Participant or any cash payment to be made hereunder (together, the “ Tax Liability ”). Pursuant to the foregoing indemnity the Participant will enter into such arrangements with the Company or the Affiliate for the

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recovery  of the Tax Liability which may include, but will not be limited to: (i) within seven days of being notified by the Company or Affiliate of the Tax Liability (or best estimate of the Tax Liability) making such payment to the Company or Affiliate, or (ii) agreeing that an amount equal to the Tax Liability (or the Company`s best estimate of the Tax Liability) be withheld from the Participant’s salary, either from a single payment of salary or in equal instalments from two or more payments of salary.
(c)         If payment or withholding of the income tax due in connection with the Option and/or Tax Liability is not made within ninety (90) days of the end of the United Kingdom (“ UK ”)  tax year in which the income tax liability arises (or such other period specified in Section 222 of the UK Income Tax (Earnings and Pensions) Act 2003 (“ ITEPA ”)) (the “ Due Date ”), the amount of any such uncollected income tax shall constitute a loan owed by the Participant to the employer of the Participant, effective as of the Due Date.  The Participant agrees that the loan will bear interest at the then current official rate of Her Majesty`s Revenue & Customs (“ HMRC ”), it shall be immediately due and repayable, and the Company or the employer of the Participant may recover it at any time thereafter by any of the means referred to above in this Section 6. 
(d)         For the avoidance of doubt, if the Participant is a director or executive officer of the Company or employer Affiliate, he or she shall not be eligible for a loan from the from the Company or employer Affiliate to cover the uncollected income tax liability pursuant to paragraph (c) above, and any such uncollected income tax liability may constitute a benefit to the Participant on which additional income tax and National Insurance Contributions (“ NIC`s ”) may be payable. The Participant will be responsible for reporting any income tax due on this additional benefit to HMRC under the self-assessment regime and for paying the Company or the Participant`s employer (as appropriate) an amount equal to any employee NIC`s due on this additional benefit which may be collected from the Participant by any of the means referred to in paragraph (a) or (b) of this Section 6.
(e)         If so required by the Company, the Participant will as a condition of exercise of an Option enter into either or both: (x) an election whereby the Participant’s employer’s liability for secondary national insurance contributions ( “Employers Liability” ) is transferred to the Participant on terms set out in that election and approved by HMRC; (y) an election in a form approved by the Company in respect of the Shares held  under the Option under section 431(1) or section 431(2) of the Income Tax (Earnings and Pensions) Act 2003. The Participant agrees that the Company or the employer of the Participant may (without limitation) collect the Employers Liability from the Participant by any of the means set forth in this Section 6.
7.          Nontransferability of Awards . 
The Option granted hereunder may not be sold, transferred, pledged, assigned, encumbered or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution or, on such terms and conditions as the Committee shall establish, to a permitted transferee. All rights with respect to the Option granted to the Participant hereunder shall be exercisable during his or her lifetime only by such Participant or, if permitted by the Committee, a permitted transferee. Following the Participant’s death, all rights with respect to the Option that were exercisable at the time of the Participant’s death and have not terminated shall be exercised

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by his or her designated beneficiary, his or her estate or, if designated by the Committee, a permitted transferee.
8.          Buyout and Settlement for Shares .  
Upon the purported exercise of any portion of the Option, in lieu of accepting payment of the Exercise Price therefor and delivering the number of Shares for which the Option is being exercised, the Committee may cause the Company either (a) to pay the Participant an amount in cash equal to the amount, if any, by which the aggregate Fair Market Value of the Shares as to which the Option is being exercised exceeds the aggregate Exercise Price, or (b) to deliver to the Participant a lesser number of Shares, having a Fair Market Value on the date of exercise, equal to the amount, if any, by which the aggregate Fair Market Value of the Shares as to which the Option is being exercised exceeds the aggregate Exercise Price for such Shares. Upon payment of cash or distribution of Shares pursuant to this Section 8, the Participant’s rights as to the portion of the Option which is the subject of such payment or distribution shall be deemed satisfied in full.
9.          Beneficiary Designation . 
The Participant may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) by whom any right under the Plan and this Agreement is to be exercised in case of his or her death. Each designation will revoke all prior designations by the Participant, shall be in a form reasonably prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his or her lifetime.
10.        Adjustment in Capitalization .  
The aggregate number of Shares subject to outstanding Option grants and the respective prices and/or vesting criteria applicable to outstanding Options, shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, any stock dividend, stock split or share combination of, or extraordinary cash dividend on, the Common Stock, or any recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares affecting the Common Stock, or any issuance of any warrants or rights offering (other than any such offering under the Plan) to purchase Common Stock at a price materially below Fair Market Value, or any other similar event affecting the Common Stock. All determinations and calculations required under this Section 10 shall be made in the sole discretion of the Committee.
11.        Transfer of Data .
The Participant consents to the Company or any Group Company processing data relating to the Participant for legal, personnel, administrative and management purposes and in particular to the processing of any sensitive personal data (including within the meaning of the United Kingdom Data Protection Act 1998) relating to the Participant. The Company may make such information available to any Group Company, those who provide products or services to the Company or any Group Company (such as advisers and payroll administrators), regulatory authorities, potential purchasers of the Company or the business in which the Participant works, and as may be required by law. The Participant consents to the transfer of such information to

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any Group Company and any Group Company’s business contacts outside the European Economic Area in order to further their business interests even where the country or territory in question does not maintain adequate data protection standards.
 
12.        Requirements of Law .  
The issuance of Shares pursuant to the Option shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. No Shares shall be issued upon exercise of any portion of the Option granted hereunder, if such exercise would result in a violation of applicable law, including the U.S. federal securities laws and any applicable state or foreign securities laws.
13.        No Guarantee of Continued Service .  
Nothing in this Agreement shall interfere with or limit in any way the right of the Company or an Affiliate thereof to terminate the Participant’s Service at any time (or, if applicable, in accordance with the Participant’s contract of employment) or confer upon the Participant any right to continued Service or to the right to compensation or damages on account of any loss in respect of Options.  The value of any benefit realised under the Plan by a Participant shall not be taken into account in determining any pension or similar entitlements.
14.        No Rights as Stockholder .  
Except as otherwise required by law, the Participant shall not have any rights as a stockholder with respect to any Shares covered by the Option granted hereunder until such time as the Shares issuable upon exercise of such Option have been so issued.
15.        Interpretation; Construction .  
Any determination or interpretation by the Committee under or pursuant to this Agreement shall be final and conclusive on all persons affected hereby. Except as otherwise expressly provided in the Plan, in the event of a conflict between any term of this Agreement and the terms of the Plan, the terms of the Plan shall control.
16.        Amendments .  
The Committee may, in its sole discretion, at any time and from time to time, alter or amend this Agreement and the terms and conditions of the unvested portion of any Option (but not any previously granted vested Options) in whole or in part, including without limitation, amending the criteria for vesting and exercisability set forth in Section 2 hereof, substituting alternative vesting and exercisability criteria and imposing certain blackout periods on Options; provided that such alteration, amendment, suspension or termination shall not adversely alter or impair the rights of the Participant under the Option without the Participant’s consent. The Company shall give written notice to the Participant of any such alteration or amendment of this Agreement as promptly as practicable after the adoption thereof. This Agreement may also be amended by a writing signed by both the Company and the Participant.

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17.        Miscellaneous .
(a)         Notices .  All notices, requests, demands, letters, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (A) delivered personally, (B) mailed, certified or registered mail with postage prepaid, (C) sent by next-day or overnight mail or delivery, or (D) sent by fax, as follows:
(i)     If to the Company:
 
CPI Card Group Inc.
10026 West San Juan Way
Littleton, CO 80127
Attention:  Chief Human Resources Officer
Phone:  303-345-2424
 
(ii)    If to the Participant, to the Participant’s last known home address,
 
or to such other person or address as any party shall specify by notice in writing to the Company. All such notices, requests, demands, letters, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the fifth business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, or (z) if by fax, on the day delivered, provided that such delivery is confirmed.
(b)         Binding Effect; Benefits .  This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein.
(c)         No Guarantee of Future Awards . This Agreement does not guarantee the Participant the right to or expectation of future Awards under the Plan or any future plan adopted by the Company.
(d)         Waiver .  Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this. Agreement, (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement and (iii) waive or modify performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of either party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by either party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of such party’s rights to exercise the same at any subsequent time or times hereunder.

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(e)         Code Section 409A Compliance .  This Option is intended to be exempt from the requirements of Code Section 409A, to the extent applicable, and this Agreement shall be interpreted accordingly. Notwithstanding any provision of this Agreement, to the extent that the Committee determines that any portion of the Option granted under this Agreement is subject to Code Section 409A and fails to comply with the requirements of Code Section 409A, notwithstanding anything to the contrary contained in the Plan or in this Agreement, the Committee reserves the right to amend, restructure, terminate or replace such portion of the Option in order to cause such portion of the Option to either not be subject to Code Section 409A or to comply with the applicable provisions of such section.
(f)          Applicable Law .  This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, regardless of the law that might be applied under principles of conflict of laws. The Company and the Participant agree that the jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), this Agreement shall be exclusively in the courts in the State of Colorado, County of Arapahoe or Denver, including the Federal Courts located therein (should Federal jurisdiction exist), and the Company and the Participant hereby submit and consent to said jurisdiction and venue.
(g)         Section and Other Headings .  The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
(h)         Counterparts .  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.
(i)          Erroneously Awarded Compensation . Notwithstanding any provision in the Plan or in this Agreement to the contrary, this Award shall be subject to any compensation recovery and/or recoupment policy adopted and amended from time to time by the Company to comply with applicable law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or to comport with good corporate governance practices.
—   Signature page follows  —

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Notwithstanding anything in this Agreement or in the Plan to the contrary, the Committee hereby reserves the right, in its sole discretion, to terminate and cancel this Award if the Participant fails to accept this Agreement on or prior to October 31, 2017 .
IN WITNESS WHEREOF, the Company and the Participant have duly executed this Agreement as of the date first above written.

 	CPI CARD GROUP INC.	
 	 	
 	By: CPI Card Group Inc.	

 	PARTICIPANT	
 	 	
 	Agreed via electronic acceptance	
 	 	
 	Name:	 	

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Exhibit 10.6
 
CPI CARD GROUP INC.
OMNIBUS INCENTIVE PLAN
STOCK OPTION AGREEMENT
FOR
CANADIAN ELIGIBLE RECIPIENTS
This STOCK OPTION AGREEMENT (this “ Agreement ”) is made effective as of September 25, 2017 (the “ Grant Date ”) by and between CPI Card Group Inc., a Delaware corporation (the “ Company ”), and ______________________ (the “ Participant ”), pursuant to the CPI Card Group Inc. Omnibus Incentive Plan, as in effect and as amended from time to time (the “ Plan ”). Capitalized terms that are not defined herein shall have the meanings given to such terms in the Plan.
WHEREAS, the Company desires from time to time to grant options to purchase Shares to certain key Employees, Directors and Consultants of the Company and its Subsidiaries or Affiliates;
WHEREAS, the Company has adopted the Plan in order to effect such grants; and
WHEREAS, the Participant is (i) an Eligible Recipient as contemplated by the Plan, and (ii) a resident of and employed, or provides services, in Canada, and the Committee has determined that it is in the interest of the Company to make this grant to the Participant; and
WHEREAS, the Company shall promptly seek stockholder approval to amend the Plan to, among other provisions, increase the amount of Shares that may be awarded thereunder to include an amount not less than the Contingent Portion.
NOW, THEREFORE, in consideration of the premises and subject to the terms and conditions set forth herein and in the Plan, the parties hereto agree as follows:
1.          Shares Subject to Option; Exercise Price .
(a) Shares Subject to Option; Stockholder Approval .  The Company shall grant to the Participant, effective as of the Grant Date, an option to purchase _____________ Shares from the Company, which shall become exercisable, if at all, as provided in Section 2(a) (the “ Option ”). The grant of 44.247653% of the Option, rounded up to the nearest whole Share (the “ Contingent Portion ”), is contingent upon the stockholders of the Company approving an increase in the number of Shares available for issuance under the Plan, which approval the Company will use reasonable best efforts to promptly seek and obtain. If the stockholders do not approve an increase in the number of Shares available for issuance under the Plan at or by the date of the Company’s 2018 annual meeting of stockholders, then the Contingent Portion shall become null and void on such date.

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(b) Exercise Price .  The Option shall have an Exercise Price of $1.05 per Share, which is not less than the Fair Market Value per Share on the Grant Date.

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(c) Option Subject to Plan .  By signing this Agreement, the Participant acknowledges that he or she has been provided a copy of the Plan and has had the opportunity to review such Plan.
2.          Vesting and Exercisability; Expiration .
(a) Vesting and Exercisability .  The Option shall vest and become exercisable in installments as follows:

Vest Date	Vest Quantity	
1 st anniversary of Grant Date	[NUMBER OF SHARES]	
2 nd anniversary of Grant Date	[NUMBER OF SHARES]	
3 rd anniversary of Grant Date	[NUMBER OF SHARES]	
 	[ TOTAL NUMBER OF SHARES ]	
 
Each vesting period is subject to the Participant’s continuous service with the Company or a Subsidiary or Affiliate thereof, as applicable, whether as an Employee, Director or Consultant (“ Service ”), from the Grant Date through such anniversary. Notwithstanding the foregoing, all or a portion of the Option shall vest and become exercisable at the times and under the circumstances described in Sections 4 and 5.
(b) Normal Expiration Date .  Unless the Option earlier terminates in accordance with Sections 2 or 4, the Option shall terminate on the tenth anniversary of the Grant Date (the “ Normal Expiration Date ”). Once a portion of the Option has become exercisable pursuant to this Section 2, such portion of the Option may be exercised, subject to the provisions hereof, at any time and from time to time until the Normal Expiration Date.
3.          Method of Exercise and Payment . 
All or part of the exercisable portion of the Option may be exercised by the Participant upon (a) the Participant’s written notice to the Company of exercise and (b) the Participant’s payment of the Exercise Price in full at the time of exercise in cash, cash equivalents or broker-assisted cashless exercise.
For greater certainty, “broker-assisted cashless exercise” means the Participant electing to arrange for a Company-approved broker to sell on the Participant’s behalf a portion of the Common Stock acquired by the Participant on exercise of an Option, and to pay the Company from the proceeds of such sale an amount equal to the Exercise Price and any applicable withholding taxes pursuant to Section 15 of the Plan.  Any amount in excess of the Exercise Price and applicable withholding taxes will be paid to the Participant.
As soon as practicable after receipt of a written exercise notice and payment in full of the Exercise Price of any exercisable portion of the Option in accordance with this Section 3, but subject to Section 8 below, the Company shall deliver to the Participant (or such other person or entity) a certificate, certificates or electronic book-entry notation representing the Shares acquired upon the exercise thereof, registered in the name of the Participant (or such other person or entity), provided that , if the Company, in its sole discretion, shall determine that, under

3

applicable securities laws, any certificates issued under this Section 3 must bear a legend restricting the transfer of such Shares, such certificates shall bear the appropriate legend.
4.          Termination of Service .
(a) Termination due to Death or Disability .  In the event that the Participant’s Service terminates by reason of the Participant’s death or Disability, then any unvested portion of the Option held by the Participant shall immediately vest in full, and the Option may be exercised by the Participant or the Participant’s beneficiary as designated in accordance with Section 10, or if no such beneficiary is named, by the Participant’s estate, at any time prior to one (1) year following the Participant’s termination of Service or the Normal Expiration Date of the Option, whichever period is shorter. The Option shall terminate immediately thereafter.
(b) Termination due to Retirement .  In the event that the Participant’s Service terminates by reason of the Participant’s Retirement, any then vested portion of the Option may be exercised by the Participant at any time prior to one (1) year following the Participant’s termination of Service or the Normal Expiration Date of the Option, whichever period is shorter. The Option shall terminate immediately thereafter.
(c) Termination due to Approved Retirement . In the event that the Participant’s Service terminates by reason of the Participant’s Retirement and the Participant has satisfactorily completed various requirements as set forth by the Committee (an “ Approved Retirement ”), then the Option shall continue to vest and become exercisable in accordance with this Agreement.  The Option shall be exercisable until the Normal Expiration Date of the Option.
(d) Termination for Cause .  In the event that the Participant’s Service terminates for Cause, the entire Option held by the Participant, whether or not then vested and exercisable, shall terminate and be cancelled immediately upon such termination of Service.
(e) Other Termination of Service .  In the event that the Participant’s Service terminates for any reason other than (i) death, (ii) Disability, (iii) Retirement, (iv) Approved Retirement or (v) for Cause, then the portion of the Option held by the Participant that is vested and exercisable as of the date of the Participant’s termination of Service shall be exercisable at any time up until the ninetieth (90 th ) day following the Participant’s termination of Service (or, in the event that the Participant dies or becomes Disabled after the termination of Service, but within the period during which the Option would otherwise be exercisable hereunder, such ninety (90) day period shall be extended to the date that is one (1) year after such termination) or the Normal Expiration Date of the Option, whichever period is shorter. The Option shall terminate immediately thereafter. Any portion of the Option held by the Participant that is not then exercisable shall terminate and be cancelled immediately upon such termination of Service. The date that a termination of Service occurs is the effective date of termination in any written notice of termination of employment.  For greater certainty, it specifically does not mean the date on which any period of contractual notice or reasonable notice that the Company, Subsidiary or Affiliate, as the case may be, may be required at law to provide to Participant would expire.

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5.          Qualifying Terminations Following a Change in Control .    
(a) Qualifying Termination . Notwithstanding any language in the Plan or the Participant’s employment or other services agreement with the Company to the contrary, the Option will not vest solely upon a Change in Control unless such Option is not assumed by the Company’s successor or converted to an equivalent value award upon substantially the same terms effective immediately following the Change in Control. However, the Participant will be immediately entitled to exercise the entire Option, whether vested or unvested, if the Participant experiences a Qualifying Termination. A “ Qualifying Termination ” occurs if, within two (2) years following a Change in Control, the Participant’s Service is terminated (i) by the Company without Cause or (ii) by the Participant for Good Reason.
(b) Good Reason .   For purposes of this Agreement, “Good Reason” shall have the same meaning set forth in the Participant’s employment or other services agreement with the Company.  If the Participant is not party to such an agreement that defines such term, “ Good Reason ” shall mean the occurrence of any of the following circumstances or events:
(i) a material reduction by the Company of the Participant’s base compensation (other than pursuant to an across-the-board reduction in base compensation applicable to similarly situated service providers of the Company);
(ii) the transfer of the Participant’s principal place of Service to a location fifty (50) or more miles from its location immediately preceding the transfer; or
(iii) the material diminution by the Company of the Participant’s duties or responsibilities with respect to his or her Service. 
The Participant will provide the Company with written notice describing which of the circumstances above is cause for the Good Reason termination within thirty (30) calendar days after the occurrence of the event giving rise to the notice. The Company will have thirty (30) calendar days from the receipt of such notice to cure the event prior to the Participant exercising his or her right to terminate for Good Reason and, if not cured, the Participant’s termination will be effective upon the expiration of such cure period.
6.          Tax Withholding .  
Whenever Shares are to be issued pursuant to the exercise of any portion of the Option or any cash payment is to be made hereunder, the Company or any Affiliate thereof shall have the power to withhold, or require the Participant to remit to the Company or such Affiliate thereof, a cash amount sufficient to satisfy federal, provincial, state and local withholding tax requirements, both domestic and foreign, relating to such transaction, and the Company or such Affiliate thereof may defer payment of cash or issuance of Shares until such requirements are satisfied; provided, however, that such amount may not exceed the maximum statutory withholding rate.  The Company shall have the right to require the Participant to remit to the Company cash to satisfy any federal, provincial, state and local tax to be withheld.  For the avoidance of doubt, any applicable tax

5

withholdings may be paid through the broker-assisted cashless exercise method described in Section 3 of this Agreement.

6

7.          Non-Competition, Non-Solicitation and Non-Disparagement .  
(a) Restrictive Covenants . In exchange for good and valuable consideration, including the Option granted herein, the sufficiency of which is acknowledged, the Participant agrees as follows (the “ Restrictive Covenants ”):
(i) Non-Competition and Non-Solicitation . During the period of the Participant’s Service and for one (1) year following the termination thereof, the Participant shall not and shall cause each of his or her Affiliates not to:
(A) enter into or engage in any business that competes with the Business within the Restricted Territory;
(B) solicit customers, active prospects, business or patronage for any business, wherever located, that competes with the Business within the Restricted Territory or sell any products or services for any business, wherever located, that competes with the Business or could then be provided by the Business within the Restricted Territory;
(C) solicit, divert, entice or otherwise take away any employees, customers, former customers, active prospects, business, patronage or orders of the Company or any Subsidiary within the Restricted Territory or attempt to do so; or
(D) counsel, promote or assist, financially or otherwise, any person engaged in any business that competes with the Business within the Restricted Territory .
(ii) Non-Disparagement . The Participant shall not, during the period of his or her Service or at any time thereafter, disparage, denigrate or harass the Company, any of its Affiliates or any of their respective agents, employees, managers, shareholders, directors, officers, or partners.
(iii) Other Covenants . For the avoidance of doubt, the Restrictive Covenants are in addition to, and not in lieu of, any restrictive covenants to which the Participant may otherwise be subject, whether under the terms of his or her employment or services agreement or otherwise.
(iv) Acknowledgement . The Participant acknowledges that these Restrictive Covenants are reasonably necessary to protect the Company’s and its clients’ and business partners’ legitimate business interests.  The Participant also acknowledges that by serving in the position of ____________________, he/she is in an executive/management level position and has been entrusted with access to trade secrets and confidential information that, if made available to non-Company employees, would cause irreparable harm to the Company because of the significant time, effort, and expense the Company expended in developing such trade secrets and confidential information.

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(b) Definitions . For purposes of this Agreement:
(i) “ Business ” means manufacturing, personalizing, designing, fulfilling, packaging, distributing, selling and marketing plastic cards, including, without limitation, credit cards, debit cards, ATM cards, loyalty cards, gift cards, membership cards, gaming cards, player tracking cards, casino cards, hotel key cards, access cards, ID cards, contactless cards, prepaid cards, chip cards, EMV cards, dual interface cards, and blank cards; and
(ii) “ Restricted Territory ” means (A) the United States, Canada, Mexico, Europe and the United Kingdom; and (B) the geographic area, whether within or outside of the geographic area described in clause (A), in which reside any customers with which the Participant had any contact or for which the Participant had any responsibility (whether indirect, direct or advisory) at the time of the Participant’s termination of Service or at any time during the two (2) year period prior to such termination.
(c) Reasonableness of Restrictions . The Participant agrees that the scope and duration of the Restrictive Covenants are reasonable and necessary to protect the legitimate business interests of the Company. The Participant also agrees that these Restrictive Covenants will not preclude the Participant from obtaining other gainful employment in his or her profession.
(d) Remedies for Breach .
(i) Forfeiture of Option . In the event of the Participant’s breach of any of the Restrictive Covenants, the Option (whether vested or unvested) shall immediately be forfeited.
(ii) Other Relief . In the event of the Participant’s actual or threatened breach of this Agreement, the Participant agrees that the Company will be entitled to provisional and injunctive relief in addition to any other available remedies at law or equity.
8.          Nontransferability of Awards . 
The Option granted hereunder may not be sold, transferred, pledged, assigned, encumbered or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution or, on such terms and conditions as the Committee shall establish, to a permitted transferee. All rights with respect to the Option granted to the Participant hereunder shall be exercisable during his or her lifetime only by such Participant or, if permitted by the Committee, a permitted transferee. Following the Participant’s death, all rights with respect to the Option that were exercisable at the time of the Participant’s death and have not terminated shall be exercised by his or her designated beneficiary, his or her estate or, if designated by the Committee, a permitted transferee.
9.          Buyout and Settlement for Shares .  
Upon the purported exercise of any portion of the Option, in lieu of accepting payment of the Exercise Price therefor and delivering the number of Shares for which the Option is being exercised, the Participant may choose to transfer and dispose of the Option to the Company in

8

exchange for payment by the Company of (a) an amount in cash equal to the amount, if any, by which the aggregate Fair Market Value of the Shares as to which the Option is being exercised exceeds the aggregate Exercise Price, or (b) Shares having a Fair Market Value on the date of exercise, equal to the amount, if any, by which the aggregate Fair Market Value of the Shares as to which the Option is being exercised exceeds the aggregate Exercise Price for such Shares. Upon payment of cash or distribution of Shares pursuant to this Section 9, the Participant’s rights as to the portion of the Option which is the subject of such payment or distribution shall be deemed satisfied in full.  The Company will elect to forgo any deduction related to the payment hereunder for purposes of the Income Tax Act (Canada).  In this regard, the Company will ensure the requirements described in subsection 110(1.1) of the Income Tax Act (Canada) are complied with.
10.        Beneficiary Designation . 
The Participant may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) by whom any right under the Plan and this Agreement is to be exercised in case of his or her death. Each designation will revoke all prior designations by the Participant, shall be in a form reasonably prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his or her lifetime.
11.        Transfer of Data .
The Participant consents to the Company or any Affiliate thereof processing data relating to the Participant for legal, personnel, administrative and management purposes and in particular to the processing of any sensitive personal data relating to the Participant. The Company may make such information available to any Affiliate thereof, those who provide products or services to the Company or any Affiliate thereof (such as advisers and payroll administrators), regulatory authorities, potential purchasers of the Company or the business in which the Participant works, and as may be required by law.
12.        Adjustment in Capitalization .  
The aggregate number of Shares subject to outstanding Option grants and the respective prices and/or vesting criteria applicable to outstanding Options, shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, any stock dividend, stock split or share combination of, or extraordinary cash dividend on, the Common Stock, or any recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares affecting the Common Stock, or any issuance of any warrants or rights offering (other than any such offering under the Plan) to purchase Common Stock at a price materially below Fair Market Value, or any other similar event affecting the Common Stock. All determinations and calculations required under this Section 12 shall be made in the sole discretion of the Committee.
13.        Requirements of Law .  
The issuance of Shares pursuant to the Option shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. No Shares shall be issued upon exercise of any portion of the

9

Option granted hereunder, if such exercise would result in a violation of applicable law, including the U.S. federal securities laws and any applicable state or foreign securities laws.
14.        No Guarantee of Continued Service .  
Nothing in this Agreement shall interfere with or limit in any way the right of the Company or an Affiliate thereof to terminate the Participant’s Service at any time or confer upon the Participant any right to continued Service. The value of any benefit realized under the Plan by a Participant shall not be taken into account in determining any severance, retirement, pension, welfare, insurance or other similar employee benefit.
15.        No Rights as Stockholder .  
Except as otherwise required by law, the Participant shall not have any rights as a stockholder with respect to any Shares covered by the Option granted hereunder until such time as the Shares issuable upon exercise of such Option have been so issued.
16.        Interpretation; Construction .  
Any determination or interpretation by the Committee under or pursuant to this Agreement shall be final and conclusive on all persons affected hereby. Except as otherwise expressly provided in the Plan, in the event of a conflict between any term of this Agreement and the terms of the Plan, the terms of the Plan shall control.
17.        Amendments .  
The Committee may, in its sole discretion, at any time and from time to time, alter or amend this Agreement and the terms and conditions of the unvested portion of any Option (but not any previously granted vested Options) in whole or in part, including without limitation, amending the criteria for vesting and exercisability set forth in Section 2 hereof, substituting alternative vesting and exercisability criteria and imposing certain blackout periods on Options; provided that such alteration, amendment, suspension or termination shall not adversely alter or impair the rights of the Participant under the Option without the Participant’s consent. The Company shall give written notice to the Participant of any such alteration or amendment of this Agreement as promptly as practicable after the adoption thereof. This Agreement may also be amended by a writing signed by both the Company and the Participant.
18.        Miscellaneous .
(a) Notices .  All notices, requests, demands, letters, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (A) delivered personally, (B) mailed, certified or registered mail with postage prepaid, (C) sent by next-day or overnight mail or delivery, or (D) sent by fax, as follows:
(i) If to the Company:

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CPI Card Group Inc.
10026 West San Juan Way
Littleton, CO 80127
Attention:  Chief Human Resources Officer
Phone:  303-345-2424
 
(ii) If to the Participant, to the Participant’s last known home address,
or to such other person or address as any party shall specify by notice in writing to the Company. All such notices, requests, demands, letters, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the fifth business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, or (z) if by fax, on the day delivered, provided that such delivery is confirmed.
(b) Binding Effect; Benefits .  This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein.
(c) No Guarantee of Future Awards . This Agreement does not guarantee the Participant the right to or expectation of future Awards under the Plan or any future plan adopted by the Company.
(d) Waiver .  Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this. Agreement, (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement and (iii) waive or modify performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of either party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by either party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of such party’s rights to exercise the same at any subsequent time or times hereunder.
(e) Section 16 of the Plan .  Pursuant to Section 16 of the Plan, to the extent that any of the terms of this Agreement modify or amend the terms of the Plan, the terms of this Agreement shall govern the terms of the Option granted hereunder.
(f) Code Section 409A Compliance .  This Option is intended to be exempt from the requirements of Code Section 409A, to the extent applicable, and this Agreement shall be interpreted accordingly. Notwithstanding any provision of this Agreement, to the extent that the Committee determines that any portion of the Option granted under this Agreement is subject to

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Code Section 409A and fails to comply with the requirements of Code Section 409A, notwithstanding anything to the contrary contained in the Plan or in this Agreement, the Committee reserves the right to amend, restructure, terminate or replace such portion of the Option in order to cause such portion of the Option to either not be subject to Code Section 409A or to comply with the applicable provisions of such section.
(g) Applicable Law .  This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, regardless of the law that might be applied under principles of conflict of laws.
(h) Consent to Jurisdiction . The Company and the Participant agree that the jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), this Agreement shall be exclusively in the courts in the State of Colorado, County of Arapahoe or Denver, including the Federal Courts located therein (should Federal jurisdiction exist), and the Company and the Participant hereby submit and consent to said jurisdiction and venue.
(i) Section and Other Headings .  The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
(j) Counterparts .  This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.
(k) Erroneously Awarded Compensation . Notwithstanding any provision in the Plan or in this Agreement to the contrary, this Award shall be subject to any compensation recovery and/or recoupment policy adopted and amended from time to time by the Company to comply with applicable law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or to comport with good corporate governance practices.
—   Signature page follows  —

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Notwithstanding anything in this Agreement or in the Plan to the contrary, the Committee hereby reserves the right, in its sole discretion, to terminate and cancel this Award if the Participant fails to accept this Agreement on or prior to October 31, 2017 .
IN WITNESS WHEREOF, the Company and the Participant have duly executed this Agreement as of the date first above written.

 	 	
 	CPI CARD GROUP INC.	
 	 	
 	By:  CPI Card Group Inc.	
 	 	
 	PARTICIPANT	
 	 	
 	Agreed via electronic acceptance	
 	 	
 	Name:	 	

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Exhibit 31.1
 
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
 
I, Scott Scheirman, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 8, 2017

 	/s/ Scott Scheirman	 	
 	Scott Scheirman	 	
 	President and Chief Executive Officer	 	

Exhibit 31.2
 
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
 
I, Lillian Etzkorn, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 8, 2017
 
 	/s/ Lillian Etzkorn	
 	Lillian Etzkorn	
 	Chief Financial Officer	

Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott Scheirman, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 	/s/ Scott Scheirman	
 	Scott Scheirman	
 	President and Chief Executive Officer	
 
Date: November 8, 2017

Exhibit 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lillian Etzkorn, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 	/s/ Lillian Etzkorn	
 	Lillian Etzkorn	
 	Chief Financial Officer	
 
Date: November 8, 2017