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~~June 30 ~~30, 2016~~, 2017.

☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from to

Commission File Number 001-37584

CPI Card Group Inc.

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


Delaware		26-0344657
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

~~10368~~10026 West ~~Centennial Road~~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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and ~~“smaller reporting~~“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 ~~November 4, 2016: 55,293,251~~July 24, 2017: 55,614,158

Table of Contents


		Page
Part I — Financial Information

Item 1 — Financial Statements (Unaudited)		3

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3 — Quantitative and Qualitative Disclosures About Market Risk		32

Item 4 — Controls and Procedures		32


Part II — Other Information

Item 1 — Legal Proceedings		34

Item 1A — Risk Factors		35

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		35

Item 6 — Exhibits		3637

Signatures		3738

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Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

		��
	September 30,		December 31,		June 30,		December 31,
	2016		2015		2017		2016
	(Unaudited)				(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	21,270	$	13,606	$	17,931	$	36,955
Accounts receivable, net of allowances of $269 and $212, respectively		42,663		52,538
Accounts receivable, net of allowances of $50 and $126, respectively						37,269		31,492
Inventories		23,384		25,640		22,087		19,369
Prepaid expenses and other current assets		4,203		4,260		4,846		4,601
Income taxes receivable		1,234		4,975		3,697		—
Total current assets		92,754		101,019		85,830		92,417
Plant, equipment and leasehold improvements, net		55,098		52,113		53,190		53,419
Intangible assets, net		50,355		53,988		43,980		46,348
Goodwill		72,339		73,123		72,377		71,996
Other assets		166		110		157		240
Total assets	$	270,712	$	280,353	$	255,534	$	264,420
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	13,408	$	17,832	$	15,203	$	10,996
Accrued expenses		15,598		11,315		15,413		17,487
Income taxes payable						—		64
Deferred revenue and customer deposits		5,082		3,874		5,294		6,729
Current maturities of long-term debt		—		9,000
Total current liabilities		34,088		42,021		35,910		35,276
Long-term debt, net of current maturities		301,437		300,000
Long-term debt						302,897		301,922
Deferred income taxes		23,112		24,073		20,834		21,261
Other long-term liabilities		1,030		869		1,655		1,234
Total liabilities		359,667		366,963		361,296		359,693
Commitments and contingencies (Note 12)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; no shares issued and outstanding		—		—
Commitments and contingencies (Note 10)
Stockholders’ deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,293,251 and 56,542,116 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		55		56
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,614,158 and 55,359,251 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively						56		55
Capital deficiency		(115,778)		(119,028)		(114,168)		(114,881)
Accumulated earnings		32,481		36,661		13,978		25,968
Accumulated other comprehensive loss		(5,713)		(4,299)		(5,628)		(6,415)
Total stockholders’ deficit		(88,955)		(86,610)		(105,762)		(95,273)
Total liabilities and stockholders’ deficit	$	270,712	$	280,353	$	255,534	$	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,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Net sales:
Products	$	37,482	$	65,567	$	132,535	$	178,338	$	33,825	$	40,095	$	63,588	$	95,053
Services		43,720		42,130		108,785		102,205		32,021		33,630		58,266		65,065
Total net sales		81,202		107,697		241,320		280,543		65,846		73,725		121,854		160,118
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		23,583		39,870		87,248		111,017		24,106		27,312		43,795		63,665
Services (exclusive of depreciation and amortization shown below)		25,855		22,463		64,682		58,047		19,612		21,063		37,053		38,827
Depreciation and amortization		2,701		2,315		7,928		7,087		2,842		2,643		5,627		5,227
Total cost of sales		52,139		64,648		159,858		176,151		46,560		51,018		86,475		107,719
Gross profit		29,063		43,049		81,462		104,392		19,286		22,707		35,379		52,399
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		15,838		14,485		46,969		41,175		15,556		16,633		31,712		31,131
Depreciation and amortization		1,529		1,503		4,602		4,771		1,761		1,544		3,509		3,073
Restructuring charges (Note 1)		—		681		—		681
Total operating expenses		17,367		16,669		51,571		46,627		17,317		18,177		35,221		34,204
Income from operations		11,696		26,380		29,891		57,765		1,969		4,530		158		18,195
Other expense, net:
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)		(5,163)		(5,068)		(10,225)		(10,101)
Foreign currency (loss) gain		(124)		(34)		(192)		115
Loss on debt modification and early extinguishment		—		(703)		—		(703)
Foreign currency gain (loss)										181		34		255		(68)
Other income, net		3		295		17		356		5		15		5		13
Total other expense, net		(5,129)		(5,066)		(15,284)		(8,361)		(4,977)		(5,019)		(9,965)		(10,156)
Income before income taxes		6,567		21,314		14,607		49,404
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Net income from continuing operations		4,026		14,760		9,413		32,876
Discontinued operations:
Loss from a discontinued operation, net of taxes (Note 2)		—		—		—		(606)
Gain on sale of a discontinued operation, net of taxes (Note 2)		—		—		—		887
Net income	$	4,026	$	14,760	$	9,413	$	33,157
Preferred stock dividends		—		(7,096)		—		(32,454)
Income attributable to common stockholders	$	4,026	$	7,664	$	9,413	$	703
(Loss) income before income taxes										(3,008)		(489)		(9,807)		8,039
Income tax benefit (expense)										847		161		3,139		(2,653)
Net (loss) income									$	(2,161)	$	(328)	$	(6,668)	$	5,386

Basic and diluted earnings per share:
Continuing operations	$	0.07	$	0.19	$	0.17	$	0.01
Discontinued operation		—		—		—		0.01
	$	0.07	$	0.19	$	0.17	$	0.02
Basic and diluted (loss) earnings per share:									$	(0.04)	$	(0.01)	$	(0.12)	$	0.10
Weighted-average shares outstanding:
Basic										55,612,366		56,201,811		55,518,462		56,371,964
Diluted										55,612,366		56,201,811		55,518,462		56,583,978

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

Comprehensive Income
Net income	$	4,026	$	14,760	$	9,413	$	33,157
Comprehensive (loss) income
Net (loss) income									$	(2,161)	$	(328)	$	(6,668)	$	5,386
Currency translation adjustment		(465)		(878)		(1,414)		(1,224)		586		(1,032)		787		(949)
Total comprehensive income	$	3,561	$	13,882	$	7,999	$	31,933
Total comprehensive (loss) income									$	(1,575)	$	(1,360)	$	(5,881)	$	4,437

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,				Six Months Ended June 30,
	2016		2015		2017		2016
Operating activities
Net income	$	9,413	$	33,157
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income					$	(6,668)	$	5,386
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization expense		12,530		11,858		9,136		8,300
Stock-based compensation expense		2,785		2,137		860		1,851
Amortization of debt issuance costs and debt discount		1,437		594		975		957
Loss on debt modification and early extinguishment		—		703
Loss on sale of a discontinued operation		—		1,039
Excess tax benefits from stock-based compensation		(526)		—		—		(416)
Deferred income taxes		(445)		11,304		(540)		(28)
Other, net		220		1,162		94		68
Changes in operating assets and liabilities:
Accounts receivable		9,053		(13,045)		(5,457)		15,863
Inventories		1,978		(5,719)		(2,453)		2,049
Prepaid expenses and other assets		(32)		(1,130)		(139)		(543)
Income taxes		4,522		(6,264)		(3,753)		1,711
Accounts payable		(4,352)		1,893		3,320		(3,622)
Accrued expenses		1,699		4,057		(2,272)		1,819
Deferred revenue and customer deposits		1,307		3,207		(1,765)		(148)
Other liabilities		183		(523)		400		(80)
Cash provided by operating activities		39,772		44,430
Cash (used in) provided by operating activities						(8,262)		33,167
Investing activities
Acquisitions of plant, equipment and leasehold improvements		(12,369)		(13,866)		(5,783)		(7,009)
Proceeds from sale of a discontinued operation		—		5,000
Cash used in investing activities		(12,369)		(8,866)		(5,783)		(7,009)
Financing activities
Payment of long-term debt		—		(170,929)
Payment of Sellers Note		(9,000)		—
Proceeds from First Lien Term Loan		—		435,000
Loan issuance costs		—		(17,773)
Dividend distribution on Series A Preferred Stock		—		(220,742)
Redemption of preferred and common stock		—		(55,992)
Common stock repurchased		(6,008)		—		—		(6,008)
Dividends paid on common stock		(5,031)		—		(5,026)		(2,544)
Proceeds from employee note receivable		—		108
Taxes withheld and paid on stock-based compensation awards						(339)		—
Excess tax benefits from stock-based compensation		526		—		—		416
Payment of deferred IPO cost		—		(2,138)
Cash used in financing activities		(19,513)		(32,466)		(5,365)		(8,136)
Effect of exchange rates on cash		(226)		(181)		386		(133)
Net increase in cash and cash equivalents:		7,664		2,917
Net (decrease) increase in cash and cash equivalents:						(19,024)		17,889
Cash and cash equivalents, beginning of period		13,606		12,941		36,955		13,606
Cash and cash equivalents, end of period	$	21,270	$	15,858	$	17,931	$	31,495
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	10,718	$	3,772	$	9,096	$	6,256
Income taxes paid, net of refunds	$	1,113	$	9,586
Income taxes, net payments					$	1,156	$	958

See accompanying notes to condensed consolidated financial statements

Table of Contents

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiaries, is referred to herein as “CPI” or the “Company”) is a leading provider of comprehensive Financial Payment Card solutions in ~~North America.~~the 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 ~~North America~~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 ~~North American~~ 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, ~~that~~and provide card personalization, packaging and fulfillment services for customers in the United Kingdom and continental Europe. These facilities are not ~~issued on the networks of~~certified by the Payment Card Brands ~~and personalization services.~~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, ~~2015~~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, ~~2015.~~

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

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

In August 2015, the Company completed its shut-down and closure of its operation in Petersfield, United Kingdom. Petersfield primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company accrued facility contract termination costs of $681 in the three and nine months ended September 30, 2015.2016.

Use of Estimates

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

Inventories

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

Stock-based Compensation

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

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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 ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”)~~ASU 2014-09, Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty

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

~~The FASB issued ASU 2015-11,~~ ~~Inventory~~—~~Simplifying~~This assessment includes an evaluation of whether certain performance obligations will be recognized over time as opposed to a point in time, and the ~~Measurement of Inventory, in July 2015. ASU 2015-11 requires that inventory be measured at~~required changes to the ~~lower of cost or net realizable value. Net realizable value is~~Company’s business and accounting processes and its internal controls to support recognition and disclosures under the ~~estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The~~ new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements.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 ~~consolidated financial statements.~~

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

2. ~~Discontinued Operation and Disposition~~

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

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

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

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

3. Inventories

Inventories are summarized below:


	June 30, 2017		December 31, 2016

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

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September 30, 2016

December 31, 2015


Raw materials

$
9,923

$
10,549

Work-in-process

10,499

11,460

Finished goods

2,962

3,631

$
23,384

$
25,640

4.3. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consist of the following:


	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016

Buildings	$	2,242	$	2,565	$	2,264	$	2,077
Machinery and equipment		58,173		57,482		62,453		59,464
Furniture, fixtures and computer equipment		6,969		4,440		7,253		6,634
Leasehold improvements		17,047		15,856		19,466		18,655
Construction in progress		7,570		2,373		3,513		1,136
		92,001		82,716		94,949		87,966
Less accumulated depreciation and amortization		(36,903)		(30,603)		(41,759)		(34,547)
	$	55,098	$	52,113	$	53,190	$	53,419

~~For the Company’s continuing operations, amounts~~Amounts recorded for the depreciation of plant, equipment and leasehold improvements was ~~$3,098~~$3,375 and ~~$2,673~~$3,053 for the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$9,124~~$6,685 and ~~$8,424~~$6,026 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

5.4. Goodwill and Other Intangible Assets

~~Goodwill of $72,339~~The Company’s goodwill by reportable segment at ~~September~~June 30, 2017 and December 31, 2016 is ~~attributable to the Company’s segments~~ as follows: ~~U.S. Debit and Credit $64,330; U.K. Limited $6,211; and Other $1,798.~~


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

The change in goodwill from December 31, ~~2015~~2016 to ~~September~~June 30, ~~2016~~2017 was a result of foreign currency translation ~~adjustments, primarily in the U.K. Limited segment.~~adjustments.

Intangible assets consist of customer relationships, technology and software, non-compete agreements ~~favorable leases~~ and trademarks. ~~Total intangible assets are being amortized over a weighted-average useful life of 16 years.~~ The changes in the cost basis of the intangibles from December 31, ~~2015~~2016 to ~~September~~June 30, ~~2016~~2017 are related to foreign currency ~~translations.~~translation adjustments. Intangible amortization expense was ~~$1,132~~$1,228 and ~~$1,145~~$1,134 for the three months ended ~~September~~June 30, 2017 and 2016, respectively, and ~~2015, respectively. Intangible amortization expense was $3,406~~$2,451 and ~~$3,433~~$2,274 for the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016, ~~and 2015,~~ respectively.

As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, intangible assets, excluding goodwill, were comprised of the following:


				September 30, 2016						December 31, 2015									June 30, 2017						December 31, 2016
	Average Life					Accumulated		Net Book				Accumulated		Net Book		Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value		(Years)			Cost		Amortization		Value		Cost		Amortization		Value

Customer relationships	12	to	20	$	59,165	$	(20,183)	$	38,982	$	59,612	$	(17,747)	$	41,865	12	to	20	$	59,180	$	(22,837)	$	36,343	$	58,994	$	(20,972)	$	38,022
Technology and software	7	to	10		7,101		(1,935)		5,166		7,101		(1,238)		5,863	7	to	10		7,100		(2,631)		4,469		7,101		(2,167)		4,934
Non-compete agreements	5	to	8		491		(315)		176		491		(270)		221	5	to	8		491		(360)		131		491		(331)		160
Favorable leases		9.5			111		(109)		2		111		(101)		10
Trademarks																7.5	to	10		3,329		(292)		3,037		3,330		(98)		3,232
Intangible assets subject to amortization					66,868		(22,542)		44,326		67,315		(19,356)		47,959				$	70,100	$	(26,120)	$	43,980	$	69,916	$	(23,568)	$	46,348
Trademarks (indefinite-lived)					6,029		—		6,029		6,029		—		6,029
				$	72,897	$	(22,542)	$	50,355	$	73,344	$	(19,356)	$	53,988

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The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of ~~September~~June 30, ~~2016~~2017 is as follows:


2016 (remaining 3 months)	$	1,128
2017		4,514
2017 (remaining 6 months)			$	2,452
2018		4,514		4,905
2019		4,494		4,885
2020		4,454		4,845
2021				4,575
Thereafter		25,222		22,318
	$	44,326	$	43,980

6.5. 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 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 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.

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

The Company’s financial assets and liabilities ~~subject~~that are not required to be remeasured at fair value ~~measurements and~~in the ~~necessary disclosures~~Condensed Consolidated Balance Sheets are as follows:


	Fair Value as of		Fair Value Measurement at September 30, 2016						Carrying
	September 30,		(Using Fair Value Hierarchy)						Value as of		Fair Value as of		Fair Value Measurement at June 30, 2017
	2016		Level 1		Level 2		Level 3		June 30,		June 30,		(Using Fair Value Hierarchy)
									2017		2017		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	304,688	$	—	$	304,688	$	—	$	312,500	$	289,063	$	—	$	289,063	$	—


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

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

Fair Value as of

Fair Value Measurement at December 31, 2015

December 31,

(Using Fair Value Hierarchy)

2015

Level 1

Level 2

Level 3

Liabilities:













First Lien Term Loan

$
309,375

$
—

$
309,375

$
—

Sellers Note

$
9,000

$
—

$
—

$
9,000

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

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7.6. Long-Term Debt and Credit Facility

As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, long-term debt and credit facilities consist of the following:

Interest

September 30,

December 31,

Rate (1)

2016

2015

First lien term loan facility

5.5
%
$
312,500

$
312,500

Sellers note

5.0
%

—

9,000

Unamortized discount

(3,963)

(4,459)

Unamortized deferred financing costs

(7,100)

(8,041)

Total long-term debt

301,437

309,000

Less current maturities of long-term debt

—

(9,000)

Long-term debt, excluding current maturities

$
301,437

$
300,000


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

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

~~(1)~~

~~Interest rate at September 30, 2016~~

First Lien Credit Facility

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

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

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

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

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

The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage ratio not in excess of 7.0 times ~~EBITDA.~~trailing twelve month Adjusted EBITDA, as defined in the agreement. As of June 30, 2017, the Company was in compliance with all covenants under the First Lien Credit Facility.

The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. As of ~~September~~June 30, ~~2016,~~2017, the Company does not expect to have a required excess cash flow payment related to 2017.

As of June 30, 2017, the Company did not have any outstanding ~~borrowings~~amounts under the Revolving Credit ~~Facility.~~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. ~~This letter of credit totals $50, reducing availability under the Revolving Credit Facility to $39,950.~~ The Company pays a fee on ~~the~~ outstanding ~~letter~~letters of credit at the applicable margin, which was 4.50% as of ~~September~~June 30, 2017 and December 31, 2016, in addition to a fronting fee of 0.125% per annum.In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines.

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Sellers Note

The Company entered into a subordinated, unsecured promissory note for $9,000 ~~(“Sellers Note”)~~ with certain sellers of EFT Source ~~Inc. (“EFT Source”) in connection with its acquisition~~as part of the EFT Source ~~on September 2, 2014. All principal and unpaid interest under the Sellers Note~~acquisition, which was ~~due and paid to the sellers~~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.

8.7. Income Taxes

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

During the six months ended June 30, 2017, the Company recognized an income tax benefit of $3,139 on a pre-tax loss of $9,807, representing an effective income tax rate of 32.0%, compared to an income tax expense ~~from continuing operations~~ of ~~$6,554~~$2,653 on pre-tax income of ~~$21,314,~~$8,039, representing an effective tax rate of ~~30.7%~~33.0% during the ~~three~~six months ended ~~September~~June 30, ~~2015.~~

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

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

~~9. Series A Preferred Stock~~ 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.

~~There were no outstanding shares of Series A Preferred Stock as of September 30, 2016 or December 31, 2015. On August 17, 2015, t~~The Company’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities. ~~he Company redeemed 62,140 shares of Series A Preferred Stock for $276,688, at $4,446.70~~ ~~per share. Of the $276,688 redemption amount, $55,946 was treated as a return of capital and $220,742 was treated as a dividend.~~ During ~~the nine months ended September 30, 2015,~~March 2017, the Company ~~redeemed a total~~was notified that the Internal Revenue Service ("IRS") wouldexamineits 2014 United States federal incometax return. The Company has provided information requested by the IRS with respect to such tax year, and has not been notified of ~~62,233 shares of Series A Preferred Stock at prices ranging from $3,950.33 to $4,446.70~~ ~~per share. In addition, Series A Preferred Stock accrued dividends were $7,096 and $32,454 during~~any items that are being disputed by the ~~three and nine months ended September 30, 2015, respectively.~~IRS.

~~10.~~8. Stockholders’ Equity

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

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

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

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

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

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

~~11.~~9. (Loss) Earnings per Share

Basic and diluted (loss) earnings per share ~~(“EPS”)~~ 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 ~~EPS attributable to continuing and discontinued operations:~~(loss) earnings per share:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2016

2015

2016

2015

Numerator:












Net income from continuing operations

$
4,026

$
14,760

$
9,413

$
32,876

Preferred stock dividends

—

(7,096)

—

(32,454)

Earnings from continuing operations attributable to common stockholders

4,026

7,664

9,413

422

Income from a discontinued operation, net of taxes

—

—

—

281

Net earnings attributable to common stockholders

$
4,026

$
7,664

$
9,413

$
703

Denominator:

Basic EPS—weighted average common shares outstanding

55,255,239

41,476,116

55,999,722

41,374,188

Diluted EPS—weighted average common shares outstanding

55,508,684

41,819,422

56,232,195

41,717,494

Basic and Diluted EPS:

Earnings from continuing operations

$
0.07

$
0.19

$
0.17

$
0.01

Earnings from a discontinued operation, net of taxes

—

—

—

0.01

Earnings per share

$
0.07

$
0.19

$
0.17

$
0.02


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

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

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

~~12.~~10. Commitments and Contingencies

Commitments

The Company incurred rent expense under non-cancellable operating leases of ~~$907~~$952 and ~~$757~~$819 for the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$2,541~~$1,905 and ~~$2,576~~$1,634 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

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Contingencies

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

On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (the “PSLRA”). On October 17, 2016, lead

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plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The ~~Court has entered~~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 ~~briefing schedule on defendants' prospective motion(s)~~motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of ~~such motions.~~that motion.

The Company believes these claims are without merit and intends to defend the ~~action~~actions vigorously. Given the current stage of these matters, the range of ~~any~~ potential loss is not probable or estimable and no accrual has been recognized as of ~~September~~June 30, 2017 or December 31, 2016.

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

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

On May 31, 2016, the Company filed an Inter Partes Review ("IPR") petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the ~~Patent Trial & Appeal Board’s~~PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The district court litigation remains stayed. The PTAB will hear oral argument on the IPR on August 4, 2017.

Second ~~case~~case.. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. ~~Gemalto’s~~Gemalto alleges that its patent will expire in 2018. On May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on September 2, 2016. The Company’s motion to dismiss remains pending.2019. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016.

~~Table~~The parties are presently engaged in claim construction and discovery-related activities, including the inspection of ~~Contents~~

records relating to the alleged commercial embodiment of Gemalto’s patent, DEXXIS. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent. The PTAB has not yet ruled on the Company’s petition.

With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. ~~While a risk of loss is reasonably possible, given~~

Although the ~~current stage~~outcome of these matters ~~as well as the aforementioned defenses, counterclaims and indemnity rights, the range of potential loss~~ is not ~~estimable and no accrual~~determinable at this time, the Company has ~~been recognized~~accrued a $1,000 loss contingency as of ~~September~~June 30, ~~2016~~2017, which does not include any potential indemnity or other third-party recoveries. There can be no certainty about the timing or likelihood of a definitive resolution of either or both of these matters, and ~~December 31, 2015.~~as additional information becomes available, the amount of this estimated loss contingency reserve could increase materially.

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

~~13.~~11. Stock-Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan. As of ~~September~~June 30, ~~2016,~~2017, there were ~~2,266,481~~1,542,958 shares available for grant under the Omnibus Plan.

~~During~~The Company did not grant any non-qualified stock options under the Omnibus Plan during the three months ended ~~September~~June 30, ~~2016,~~2017. During the six months ended June 30, 2017, the Company granted awards of non-qualified stock options ~~under the Omnibus Plan~~ for ~~112,500~~785,370 shares of common stock. The stock option awards were granted at various times during the first quarter. All stock option grants have ~~an exercise price of $5.52 per share,~~ a ~~10 year~~10-year term, and will generally vest ~~25%~~ratably over a three-year period beginning on ~~each~~the first anniversary ~~date~~ of the ~~awards over a four year period.~~ grant date. As of June 30, 2017, there are no exercisable options outstanding under the Omnibus Plan. Outstanding stock options under the Omnibus Plan are as follows:


				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2016	1,437,508	$	8.62
Granted	785,370		4.31
Forfeited	(212,783)		9.86
Outstanding as of June 30, 2017	2,010,095	$	6.77	8.95

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


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

The fair value of the stock option awards granted during the six months ended June 30, 2017, was determined using a Black-Scholes option-pricing model with the following average assumptions: ~~volatility of 35.3%, risk-free interest rate of 1.4%, dividend yield of 3.3% and an expected term of approximately 6 years.~~

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

Weighted-


Weighted-

Average

Average

Remaining

Exercise

Contractual Term

Options

Price

(in Years)

Outstanding as of December 31, 2015

795,450

$
10.00

Granted

765,190

7.43

Forfeited

(104,000)

10.00

Outstanding as of September 30, 2016

1,456,640

$
8.65

9.21


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

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

2016

—

2017

392,669

2018

475,978

2019

475,723

2020

112,270

Total unvested options as of September 30, 2016

1,456,640

During the three months and six months ended ~~September~~June 30, ~~2016,~~2017, the Company granted awards of restricted stock units for ~~18,562~~125,000 and 239,446 shares of common ~~stock.~~stock, respectively. The restricted stock ~~unit awards~~units contain conditions associated with continued employment or ~~service, and~~service. The majority of the restricted stock units granted will vest ~~25% on each anniversary~~in one year or three years from the date of ~~the awards over a four year period.~~grant. On the vesting ~~dates,~~date, shares of common stock will be issued to the award recipients.

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The following table summarizes the changes in the number of outstanding restricted stock units for the ~~nine~~six month period ended ~~September~~June 30, ~~2016:~~2017:


		Weighted-			Weighted-
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Outstanding as of December 31, 2015	—	$	—
Outstanding as of December 31, 2016				270,466	$	7.13
Granted	289,377		7.29	239,446		3.11
Vested	(15,803)		7.91	(236,047)		7.34
Forfeited	(7,586)		7.91	(814)		4.35
Outstanding as of September 30, 2016	265,988	$	7.24
Outstanding as of June 30, 2017				273,051	$	3.44

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

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


		Weighted-Average
	Units	Grant Date Fair Value

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

Compensation expense for the Omnibus Plan for the three ~~and nine~~ months ended ~~September~~June 30, 2017 and 2016 was ~~$840~~$542 and ~~$2,045,~~$783, respectively, and was $1,231 and $1,205, during the six months ended June 30, 2017 and 2016, respectively. As of ~~September~~June 30, ~~2016,~~2017, the total unrecognized compensation expense related to unvested options, ~~and~~ restricted stock units, and cash performance unit awards under the Omnibus Plan was ~~$3,368,~~$2,792, which the Company expects to recognize over an estimated weighted average period of ~~1.6~~1.7 years.

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

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

As a result of the Company’s adoption of the Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and ~~vest~~are fully vested as ~~noted in each respective grant letter. All stock options are non-qualified. No stock options were granted during the three and nine month period ended September~~of June 30, ~~2015.~~2017.

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The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the ~~nine month period~~six months ended ~~September~~June 30, ~~2016:~~2017:


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

Outstanding as of December 31, 2015	462,000	$	0.0003
Outstanding and Exercisable as of December 31, 2016					216,334	$	0.0004
Granted	—		—		—		—
Exercised	(179,667)		0.0004		(139,334)		0.0004
Forfeited	—		—		—		—
Outstanding as of September 30, 2016	282,333	$	0.0004	5.50

Exercisable as of September 30, 2016	275,000	$	0.0004	5.50
Outstanding and Exercisable as of June 30, 2017					77,000	$	0.0004	5.10

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

2016

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

7,333

~~Compensation~~There was no compensation expense related to options previously granted under the Option Plan for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016 and 2015, and unrecorded compensation expense at September 30, 2016,~~2017, as all options were ~~de minimis.~~fully vested. The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of ~~September~~June 30, ~~2016~~2017 was ~~$1,705 and $1,661, respectively.~~

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$219.

Other Stock-Based Compensation Awards

During June 2015, the Company issued 191,664 restricted shares of common stock to executives ~~of the Company~~ with a weighted-average grant date fair value of $9.48 per share. ~~The awards contain conditions associated with continued employment or service.~~There are no outstanding unvested shares of restricted common stock as of June 30, 2017. The terms of the unvested restricted shares of common stock ~~provide~~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 ~~11, “Earnings~~9, “(Loss) Earnings per Share”. As

During the three and six months ended June 30, 2017, of ~~September 30, 2016,~~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 ~~common stock were outstanding, which vest over a three-year period from~~2017, and accordingly, the ~~grant date.~~

~~Total~~Company remeasured the awards on the date of the change in employment status and reduced stock-based compensation expense by $143. Compensation expense related to these ~~restricted shares of common stock~~ awards ~~was $94 and $740~~ for the three months ended June 30, 2017 and ~~nine month periods~~2016 was $(228) and $323, respectively, and was $(371) and $646 for the six months ended ~~September~~June 30, 2017 and 2016, respectively. Compensation expense for the three and nine month periods ended September 30, 2015 was $323. As of September 30, 2016, there was $431 of total remaining unrecognized compensation expense related to these unvested restricted shares of common stock that will be recognized over a weighted average period of 1.34 years.

~~Phantom Stock Plan~~

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

~~14.~~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 ~~from continuing operations~~ before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments.

As of ~~September~~June 30, ~~2016,~~2017, the Company’s reportable segments are as follows:

~~U.S. Debit and Credit;~~

~~U.S. Prepaid Debit; and~~

~~U.K. Limited.~~

 U.S. Debit and Credit;

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

 U.K. ~~(CPI—Petersfield).~~

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

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

Performance Measures of Reportable Segments

Revenue and EBITDA of the Company’s reportable segments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 were as follows:


	Revenue								Revenue
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
U.S. Debit and Credit	$	49,156	$	72,785	$	165,055	$	196,190	$	42,204	$	50,808	$	81,712	$	115,899
U.S. Prepaid Debit		23,087		23,659		47,419		53,482		12,426		11,991		22,211		24,332
U.K. Limited		7,675		9,668		21,896		23,586		11,010		7,989		16,597		14,221
Other		2,710		3,995		9,530		13,917		3,226		3,678		5,729		6,820
Intersegment eliminations		(1,426)		(2,410)		(2,580)		(6,632)		(3,020)		(741)		(4,395)		(1,154)
Total:	$	81,202	$	107,697	$	241,320	$	280,543	$	65,846	$	73,725	$	121,854	$	160,118


	EBITDA								EBITDA
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
U.S. Debit and Credit	$	12,917	$	23,368	$	43,242	$	59,961	$	8,275	$	11,403	$	15,903	$	30,325
U.S. Prepaid Debit		8,593		9,973		15,417		19,733		3,306		3,557		5,092		6,824
U.K. Limited		942		1,235		1,841		2,076		1,566		680		1,891		899
Other		(6,647)		(4,820)		(18,254)		(12,379)		(6,389)		(6,874)		(13,332)		(11,608)
Total:	$	15,805	$	29,756	$	42,246	$	69,391	$	6,758	$	8,766	$	9,554	$	26,440

The following table provides a reconciliation of total segment EBITDA to net (loss) income ~~from continuing operations~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015:~~2016:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Total segment EBITDA from continuing operations	$	15,805	$	29,756	$	42,246	$	69,391	$	6,758	$	8,766	$	9,554	$	26,440
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)		(5,163)		(5,068)		(10,225)		(10,101)
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Income tax benefit (expense)										847		161		3,139		(2,653)
Depreciation and amortization		(4,230)		(3,818)		(12,530)		(11,858)		(4,603)		(4,187)		(9,136)		(8,300)
Net income from continuing operations	$	4,026	$	14,760	$	9,413	$	32,876
Net (loss) income									$	(2,161)	$	(328)	$	(6,668)	$	5,386

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016

U.S. Debit and Credit	$	205,481	$	221,274	$	192,368	$	205,417
U.S. Prepaid Debit		30,971		20,960		28,095		23,509
U.K. Limited		24,368		25,897		23,060		26,060
Other		9,892		12,222		12,011		9,434
Total assets:	$	270,712	$	280,353	$	255,534	$	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~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016

U.S.	$	4,757	$	3,625	$	11,580	$	13,598	$	2,775	$	4,421	$	5,050	$	6,823
Canada		47		136		208		417		51		47		123		161
Total North America		4,804		3,761		11,788		14,015		2,826		4,468		5,173		6,984
U.K.		374		437		1,165		573		368		167		1,329		791
Total plant, equipment and leasehold improvement additions	$	5,178	$	4,198	$	12,953	$	14,588	$	3,194	$	4,635	$	6,502	$	7,775

Net Sales ofto Geographic Locations

Net sales ~~of the Company’s~~to geographic locations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016

U.S.	$	69,573	$	94,125	$	205,027	$	244,636	$	52,339	$	61,018	$	100,150	$	135,454
Canada		2,792		3,084		10,221		7,209		2,755		3,430		4,783		7,429
Total North America		72,365		97,209		215,248		251,845		55,094		64,448		104,933		142,883
U.K.		7,910		8,236		22,697		22,089		9,937		8,182		13,892		14,787
Other (a)		927		2,252		3,375		6,609		815		1,095		3,029		2,448
Total net sales	$	81,202	$	107,697	$	241,320	$	280,543	$	65,846	$	73,725	$	121,854	$	160,118

~~(a)~~

(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~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:


	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016

U.S.	$	163,271	$	164,377	$	154,011	$	157,773
Canada		3,024		2,254		2,941		2,899
Total North America:		166,295		166,631		156,952		160,672
U.K.		11,497		12,593		12,595		11,091
Total long-lived assets	$	177,792	$	179,224	$	169,547	$	171,763

Net Sales by Product and Services

Net sales from products and services sold by the Company for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016

Product net sales (a)	$	37,482	$	65,567	$	132,535	$	178,338	$	33,825	$	40,095	$	63,588	$	95,053
Services net sales (b)		43,720		42,130		108,785		102,205		32,021		33,630		58,266		65,065
Total net sales:	$	81,202	$	107,697	$	241,320	$	280,543	$	65,846	$	73,725	$	121,854	$	160,118

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

~~(a)~~

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

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

~~(b)~~

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

~~15. Subsequent Events~~

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

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

References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, filed with the Securities and Exchange Commission (“SEC”).

~~Special Note~~Cautionary Statement Regarding Forward-Looking ~~Statements~~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.~~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, ~~among others: material~~but are not limited to: system security risks, data protection breaches ~~in the security of our systems;~~and cyber-attacks; market acceptance of developing technologies that make ~~Financial Payment Cards~~our existing technology solutions and products less relevant; a slower or less widespread continued adoption of ~~EMV~~contact and ~~Dual-Interface~~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; ~~unpredictability in the ordering patterns of~~failure to accurately predict demand for our ~~customers~~products and ~~the resulting impact on production volumes;~~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 ~~our~~ production ~~processes;~~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 ~~resulting~~leading up to and following the United Kingdom’s likely exit from ~~Brexit, including volatility in foreign currency exchange rates;~~the European Union; costs relating to product ~~defects and product liability and warranty claims;~~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 ~~“Forward-Looking Statements”~~“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, ~~2015~~2016 filed with the SEC on March ~~24, 2016, and Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 11, 2016.~~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 ~~North America.~~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~~Group Service Providers (organizations that assist small issuers with managing their credit and debit card programs) and card processors. We serve a diverse set of direct and indirect customers, including many of the largest ~~North American~~ issuers of debit and credit cards in the United States and Canada, and many of the largest ~~global managers of~~U.S. prepaid debit ~~and credit~~ card ~~programs,~~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 ~~North America~~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.

~~Table of Contents~~

~~Standards Council. We have the largest such network of high-security production~~In addition to our eight facilities in ~~North America, allowing us~~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 ~~optimize our solutions offerings~~be in compliance with the standards of the PCI Security Standards Council, but are certified to ~~serve the needs of our diverse and long-term customer base.~~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 ~~and comprehensive income~~ for each of the periods presented:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2016		2015		2016			2015	2017		2016		2017		2016
	(dollars in thousands)								(dollars in thousands)
Net sales:
Products	$	37,482	$	65,567	$	132,535	$	178,338	$	33,825	$	40,095	$	63,588	$	95,053
Services		43,720		42,130		108,785		102,205		32,021		33,630		58,266		65,065
Total net sales		81,202		107,697		241,320		280,543		65,846		73,725		121,854		160,118
Cost of sales		52,139		64,648		159,858		176,151		46,560		51,018		86,475		107,719
Gross profit		29,063		43,049		81,462		104,392		19,286		22,707		35,379		52,399
Operating expenses		17,367		16,669		51,571		46,627		17,317		18,177		35,221		34,204
Income from operations		11,696		26,380		29,891		57,765		1,969		4,530		158		18,195
Other expense, net:
Interest, net		(5,008)		(4,624)		(15,109)		(8,129)		(5,163)		(5,068)		(10,225)		(10,101)
Foreign exchange (loss) gain		(124)		(34)		(192)		115
Loss on debt modification and early extinguishment		—		(703)		—		(703)
Foreign exchange gain (loss)										181		34		255		(68)
Other income, net		3		295		17		356		5		15		5		13
Income before taxes		6,567		21,314		14,607		49,404
Income tax expense		(2,541)		(6,554)		(5,194)		(16,528)
Net income from continuing operations		4,026		14,760		9,413		32,876
Income from a discontinued operation		—		—		—		281
Net income	$	4,026	$	14,760	$	9,413	$	33,157
(Loss) income before taxes										(3,008)		(489)		(9,807)		8,039
Income tax benefit (expense)										847		161		3,139		(2,653)
Net (loss) income									$	(2,161)	$	(328)	$	(6,668)	$	5,386

Segment Discussion

Three Months Ended ~~September~~June 30, ~~2016~~2017 Compared With Three Months Ended ~~September~~June 30, ~~2015~~2016

Net Sales



	Three Months Ended September 30,								Three Months Ended June 30,
	2016		2015		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	49,156	$	72,785	$	(23,629)	(32.5)	%	$	42,204	$	50,808	$	(8,604)	(16.9)	%
U.S. Prepaid Debit		23,087		23,659		(572)	(2.4)	%		12,426		11,991		435	3.6	%
U.K. Limited		7,675		9,668		(1,993)	(20.6)	%		11,010		7,989		3,021	37.8	%
Other		2,710		3,995		(1,285)	(32.2)	%		3,226		3,678		(452)	(12.3)	%
Eliminations		(1,426)		(2,410)		984	*	%		(3,020)		(741)		(2,279)	*	%
Total	$	81,202	$	107,697	$	(26,495)	(24.6)	%	$	65,846	$	73,725	$	(7,879)	(10.7)	%

* Not meaningful

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

Table of Contents

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

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$23.6~~$8.6 million, or ~~32.5%~~16.9%, to ~~$49.2~~$42.2 million compared to ~~$72.8~~$50.8 million for the three months ended ~~September~~June 30, ~~2015.~~2016. The decrease in net sales was primarily due to a ~~$17.0~~$5.1 million decrease in EMV related revenue and a ~~$10.9~~$1.7 million decrease ~~in magnetic stripe card and other sales due to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by an increase of $4.3 million from growth~~ in card personalization and fulfillment.

The decrease in EMV revenue is ~~due to a reduction~~the result of continued softness in demand for EMV ~~card purchases from~~cards, particularly with large ~~issuers~~issuer and ~~processors, reflecting the carryover impact of overstocked EMV card inventories purchased in 2015.~~processor customers. For the three months ended ~~September~~June 30, ~~2016,~~2017, we sold ~~22.6~~18.8 million EMV cards at an average selling price (“ASP”) of ~~$0.96~~$0.86, compared to ~~41.2~~22.5 million EMV cards at an ASP of $0.94 for the three months ended ~~September~~June 30, ~~2015.~~2016. The ~~increase~~decrease in ASP ~~for EMV cards~~ during the three months ended ~~September~~June 30, ~~2016~~2017 compared to ~~September 30, 2015~~2016 is primarily due to lower prices experienced in the large issuer market from increased competition, partially offset by favorable net pricing impacts of customer mix.

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit for the three months ended ~~September~~June 30, ~~2016 decreased $0.6~~2017 increased $0.4 million, or ~~2.4%~~3.6%, to ~~$23.1~~$12.4 million compared to ~~$23.7~~$12.0 million for the three months ended ~~September~~June 30, ~~2015. The decrease was driven primarily~~2016 resulting from net increased activity across our customer base, partially offset by lower prices ~~partially offset by increased sales activity.~~ attributed to product mix and, to a lesser extent, price compression.

U.K. Limited:

~~Net sales for~~ U.K. Limited net sales for the three months ended ~~September~~June 30, ~~2016 decreased $2.0~~2017 increased $3.0 million, or ~~20.6%~~37.8%, to ~~$7.7~~$11.0 million compared to ~~$9.7~~$8.0 million for the three months ended ~~September~~June 30, ~~2015.~~2016. Increased sales were driven by an RFID loyalty card order produced for a large U.K. retail customer, partially offset by the impact of foreign currency exchange rate fluctuations and decreased sales activity of retail gift and other cards. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a ~~$1.4~~$1.3 million reduction of net sales in the three months ended ~~September~~June 30, ~~2016~~2017 compared to the three months ended ~~September~~June 30, ~~2015. A further decrease of $0.6 million in net sales was related to softening volumes within our retail gift card customer base.~~ 2016.

Other:

Net sales in Other decreased ~~$1.3~~$0.5 million, or ~~32.2%~~12.3%, to ~~$2.7~~$3.2 million during the three months ended ~~September~~June 30, ~~2016~~2017 compared to ~~$4.0~~$3.7 million in the three months ended ~~September~~June 30, ~~2015. The decrease was primarily due to a $1.1 million decrease in net~~2016. Net sales in Canada ~~related to timing~~were lower during the three months ended June 30, 2017 as a result of ~~orders from one of~~lower net sales activity across our larger customers in Canada, and to the shut-down of the Petersfield, U.K. operation in August 2015. See Note 1, “Business Overview and Summary of Significant Accounting Policies” to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for further discussion of the Petersfield, U.K. shut-down. customer base.

Cost of Sales



	Three Months Ended September 30,								Three Months Ended June 30,
	2016		2015		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	32,063	$	44,600	$	(12,537)	(28.1)	%	$	29,657	$	35,097	$	(5,440)	(15.5)	%
U.S. Prepaid Debit		13,919		12,680		1,239	9.8	%		8,872		7,834		1,038	13.2	%
U.K. Limited		5,506		6,934		(1,428)	(20.6)	%		8,390		5,950		2,440	41.0	%
Other		2,021		3,729		(1,708)	(45.8)	%		2,497		2,785		(288)	(10.3)	%
Eliminations		(1,370)		(3,295)		1,925	*	%		(2,856)		(648)		(2,208)	*	%
Total	$	52,139	$	64,648	$	(12,509)	(19.3)	%	$	46,560	$	51,018	$	(4,458)	(8.7)	%

* Not meaningful

Cost of sales for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$12.5~~$4.5 million, or ~~19.3%~~8.7%, to ~~$52.1~~$46.6 million compared to ~~$64.6~~$51.0 million for the three months ended ~~September~~June 30, 2015. The decrease in cost of sales was driven primarily by a 28.1% decrease in U.S. Debit and Credit, a 20.6% decrease in U.K. Limited and a 45.8% decrease in Other, partially offset by a 9.8% increase in U.S. Prepaid Debit.2016.

Table of Contents

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$12.5~~$5.4 million, or ~~28.1%~~15.5%, to ~~$32.1~~$29.7 million compared to ~~$44.6~~$35.1 million for the three months ended ~~September~~June 30, ~~2015.~~2016. The decrease was driven primarily by lower EMV chip ~~and magnetic stripe~~ card sales volumes ~~resulting~~and resulted in lower corresponding manufacturing costs. Lower per unit EMV chip prices and decreases in card personalization and fulfillment sales also contributed to the ~~decreased~~decrease in cost of sales ~~during~~in the quarter. ~~Higher cost of sales from growth in card personalization, fulfillment and other services partially offset the above decreases.~~

U.S. Prepaid Debit:

Cost of sales for U.S. Prepaid Debit for the three months ended ~~September~~June 30, ~~2016~~2017 increased ~~$1.2~~$1.0 million, or ~~9.8%~~13.2%, to ~~$13.9~~$8.9 million compared to ~~$12.7~~$7.8 million for the three months ended ~~September~~June 30, ~~2015.~~2016. The increase was primarily ~~due to increased materials and labor costs of $0.7 and $0.4 million, respectively, as~~ a result of the increased ~~production volumes during the three months ended September 30, 2016 compared~~costs to ~~the three months ended September 30, 2015.~~ramp up Print on Demand Services capabilities, and to a lesser extent, increased sales volumes.

U.K. Limited:

Cost of sales for U.K. Limited for the three months ended ~~September~~June 30, ~~2016 decreased $1.4~~2017 increased $2.4 million, or ~~20.6%~~41.0%, to ~~$5.5~~$8.4 million compared to ~~$6.9~~$6.0 million for the three months ended ~~September~~June 30, ~~2015, primarily~~2016, due to higher manufacturing costs corresponding to the increased sales, partially offset by the impact of foreign currency exchange rate ~~fluctuations and lower overhead costs, partially offset by higher labor costs.~~fluctuations. Fluctuations in exchange rates between the United States dollar and the British Pound resulted in a $1.0 million reduction of cost of sales in the three months ended ~~September~~June 30, ~~2016~~2017 compared to the three months ended ~~September~~June 30, ~~2015.~~2016.

Other:

Cost of sales in Other decreased ~~$1.7~~$0.3 million, or ~~45.8%~~10.3%, to ~~$2.0~~$2.5 million during the three months ended ~~September~~June 30, ~~2016~~2017 compared to ~~$3.7~~$2.8 million in the three months ended ~~September~~June 30, ~~2015,~~2016, primarily ~~related~~due to ~~our Petersfield, U.K. operation, which was shut-down in August 2015, and to a lesser extent,~~ lower ~~materials~~manufacturing costs related to ~~the~~ decreased net ~~sales in Canada.~~

sales.

Gross Profit and Gross Profit Margin


	Three Months Ended September 30,												Three Months Ended June 30,
			% of				% of								% of 2017				% of 2016
	2016		net sales		2015		net sales		$ Change		% Change		2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)												(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	17,093	34.8	%	$	28,185	38.7	%	$	(11,092)	(39.4)	%	$	12,547	29.7	%	$	15,711	30.9	%	$	(3,164)	(20.1)	%
U.S. Prepaid Debit		9,168	39.7	%		10,979	46.4	%		(1,811)	(16.5)	%		3,554	28.6	%		4,157	34.7	%		(603)	(14.5)	%
U.K. Limited		2,169	28.3	%		2,734	28.3	%		(565)	(20.7)	%		2,620	23.8	%		2,039	25.5	%		581	28.5	%
Other		633	23.4	%		1,151	28.8	%		(518)	(45.0)	%		565	17.5	%		800	21.8	%		(235)	(29.4)	%
Total	$	29,063	35.8	%	$	43,049	40.0	%	$	(13,986)	(32.5)	%	$	19,286	29.3	%	$	22,707	30.8	%	$	(3,421)	(15.1)	%

Gross profit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$14.0~~$3.4 million, or ~~32.5%~~15.1%, to ~~$29.1~~$19.3 million compared to ~~$43.0~~$22.7 million for the three months ended ~~September~~June 30, ~~2015.~~2016. Gross profit margin for the three months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~35.8%~~29.3% compared to ~~40.0%~~30.8% for the three months ended ~~September~~June 30, ~~2015.~~2016.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$11.1~~$3.2 million, or ~~39.4%~~20.1%, to ~~$17.1~~$12.5 million compared to ~~$28.2~~$15.7 million during the three months ended ~~September~~June 30, ~~2015.~~2016. The decrease in gross profit for U.S. Debit and Credit was driven primarily ~~driven~~ by the reduction in net ~~sales discussed above.~~sales. Gross profit margin for U.S. Debit and Credit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~34.8%~~29.7% compared to ~~38.7%~~30.9% for the same period in the prior year due to lower overhead cost absorption attributed to reduced ~~production~~ volumes.

Table of Contents

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~16.5%~~14.5% to ~~$9.2~~$3.6 million compared to ~~$11.0~~$4.2 million for the three months ended ~~September~~June 30, ~~2015.~~2016 attributed primarily to increased costs to ramp up Print on Demand Services capabilities and lower unit selling prices, as discussed above. Gross profit margin for U.S. Prepaid Debit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~39.7%~~28.6% compared to ~~46.4% for the three months ended September 30, 2015. The decrease in gross profit and gross profit margin was~~34.7%, primarily due to increased costs to ramp up Print on Demand Services capabilities and lower ~~sales prices and higher materials and labor costs attributed to the higher sales activity discussed above.~~unit selling prices.

U.K. Limited:

Gross profit for U.K. Limited ~~decreased 20.7%~~increased 28.5% in the three months ended ~~September~~June 30, ~~2016~~2017 to ~~$2.2~~$2.6 million compared to ~~$2.7~~$2.0 million for the three months ended ~~September~~June 30, ~~2015,~~2016, primarily due to the increased sales activity described above, partially offset by higher manufacturing costs and $0.3 million of foreign currency exchange rate ~~fluctuations of $0.4 million.~~fluctuations. Gross profit margin for U.K. Limited was ~~28.3%~~23.8% during ~~both~~ the three months ended ~~September~~June 30, 2017, representing a 1.7% decrease compared to the gross profit margin of 25.5% during the three months ended June 30, 2016, ~~and 2015.~~primarily due to customer mix.

Other:

Other gross profit during the three months ended ~~September~~June 30, ~~2016~~2017 was $0.6 million compared to ~~$1.2~~$0.8 million during the same period in ~~2015.~~2016. The decrease is primarily due to decreased sales during the three months ended ~~September~~June 30, ~~2016~~2017 compared to the same period in ~~2015.~~2016.

Operating Expenses



	Three Months Ended September 30,								Three Months Ended June 30,
	2016		2015		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	6,324	$	6,608	$	(284)	(4.3)	%	$	6,488	$	6,537	$	(49)	(0.7)	%
U.S. Prepaid Debit		1,154		1,514		(360)	(23.8)	%		1,001		1,177		(176)	(15.0)	%
U.K. Limited		1,328		1,749		(421)	(24.1)	%		1,305		1,474		(169)	(11.5)	%
Other		8,561		6,798		1,763	25.9	%		8,523		8,989		(466)	(5.2)	%
Total	$	17,367	$	16,669	$	698	4.2	%	$	17,317	$	18,177	$	(860)	(4.7)	%

Operating expenses for the three months ended ~~September~~June 30, ~~2016 increased $0.7~~2017 decreased $0.9 million, or ~~4.2%~~4.7%, to ~~$17.4~~$17.3 million compared to ~~$16.7~~$18.2 million for the three months ended ~~September~~June 30, 2015. The increase in operating expenses was driven primarily by a 25.9% increase in Other expenses, partially offset by a 4.3% decrease in U.S. Debit and Credit, a 23.8% decrease in U.S. Prepaid Debit, and a 24.1% decrease in U.K. Limited.2016.

U.S. Debit and Credit operating expenses ~~decreased $0.3~~were $6.5 million ~~or 4.3%, primarily due to general cost reductions~~ in ~~sales~~both the three months ended June 30, 2017 and ~~administrative expenses.~~2016.

~~Operating expenses in~~ U.S. Prepaid Debit operating expenses decreased ~~$0.4~~$0.2 million, or ~~23.8%~~15.0%, primarily driven by cost reductions in ~~sales and~~ administrative salaries.

~~The $0.4 million decrease in~~ U.K. Limited ~~representing a 24.1% decrease, was~~operating expenses decreased $0.2 million, or 11.5%, primarily due to foreign currency exchange rate ~~fluctuations of $0.2 million, and a $0.2 million decrease in administrative salaries and other salary related expenses.~~fluctuations.

~~The $1.8 million increase in~~ Other operating expenses ~~was primarily due to $1.4 million in public company costs, $0.6 million in patent and shareholder litigation and related charges, and a $0.3 million increase in stock-based compensation incurred~~ during the three months ended ~~September~~June 30, ~~2016, partially offset by a~~2017 decreased $0.5 million ~~reduction relating~~compared to ~~the prior year shut-down of the Petersfield U.K. operation. Public company costs during~~ the three months ended ~~September~~June 30, ~~2016 included $0.4~~2016. The net decrease primarily resulted from decreased stock-based compensation expense of $0.8 million ~~of legal~~ and ~~insurance~~other compensation costs ~~$0.4 million~~ of ~~accounting, reporting and public filing expenses, and~~ $0.6 million, ~~in salaries~~partially offset by increased software expenses of $0.7 million and ~~benefits, board fees, contract labor and hiring expenses.~~increased legal costs of $0.3 million.

Table of Contents

Income from Operations and Operating Margin


	Three Months Ended September 30,												Three Months Ended June 30,
			% of				% of								% of 2017				% of 2016
	2016		net sales		2015		net sales		$ Change		% Change		2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)												(dollars in thousands)
Income from operations by segment:
U.S. Debit and Credit	$	10,769	21.9	%	$	21,577	29.6	%	$	(10,808)	(50.1)	%	$	6,059	14.4	%	$	9,174	18.1	%	$	(3,115)	(34.0)	%
U.S. Prepaid Debit		8,014	34.7	%		9,465	40.0	%		(1,451)	(15.3)	%		2,553	20.5	%		2,980	24.9	%		(427)	(14.3)	%
U.K. Limited		841	11.0	%		985	10.2	%		(144)	(14.6)	%		1,315	11.9	%		565	7.1	%		750	132.7	%
Other		(7,928)	*	%		(5,647)	*	%		(2,281)	*	%		(7,958)	*	%		(8,189)	*	%		231	*	%
Total	$	11,696	14.4	%	$	26,380	24.5	%	$	(14,684)	(55.7)	%	$	1,969	3.0	%	$	4,530	6.1	%	$	(2,561)	(56.5)	%

* Not meaningful

Income from operations for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$14.7~~$2.6 million, or ~~55.7%~~56.5%, to ~~$11.7~~$2.0 million compared to ~~$26.4~~$4.5 million for the three months ended ~~September~~June 30, ~~2015.~~2016. Operating ~~margins~~profit margin for the three months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~14.4%~~3.0% compared to ~~24.5%~~6.1% for the three months ended ~~September~~June 30, ~~2015.~~2016.

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$10.8~~$3.1 million, or ~~50.1%~~34.0%, to ~~$10.8~~$6.1 million compared to ~~$21.6~~$9.2 million for the three months ended ~~September~~June 30, ~~2015.~~2016. Operating margins for the three months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~21.9%~~14.4% compared to ~~29.6%~~18.1% for the three months ended ~~September~~June 30, ~~2015~~2016 due primarily to the lower sales volumes, and the resulting lower overhead cost absorption ~~from the decline in EMV production volumes~~ discussed above.

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the three months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$1.5 million, or 15.3%,~~14.3% to ~~$8.0~~$2.6 million compared to ~~$9.5~~$3.0 million for the three months ended ~~September~~June 30, ~~2015.~~2016 due to the increased costs to ramp up Print on Demand Services capabilities, partially offset by increased sales and decreased administrative salaries, as discussed above. Operating income margins for the three months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~34.7%~~20.5% compared to ~~40.0%~~24.9% for the three months ended ~~September~~June 30, ~~2015 due to the increased materials and labor costs and decreased sales, partially offset by the lower operating expenses discussed above.~~2016.

U.K. Limited:

Income from operations for U.K. Limited for the three months ended ~~September~~June 30, ~~2016 decreased to~~2017 was $1.3 million during the three months ended June 30, 2017, representing an increase of $0.8 million ~~from $1.0 million~~compared to the three months ended June 30, 2016. The increase was due to ~~$0.2 million of~~the increased sales and decreased operating costs resulting from foreign currency exchange rate fluctuations, as ~~noted~~described above. Operating margins increased to 11.9% during the three months ended June 30, 2017 compared to 6.3% during the three months ended June 30, 2016 through better leverage of operating expenses resulting from increased sales.

Other:

The loss from operations in Other was ~~$7.9~~$8.0 million during the three months ended June 30, 2017 compared to $8.2 million in the three months ended ~~September~~June 30, ~~2016 compared to $5.6 million in the three months ended September 30, 2015.~~2016. The ~~increased~~decreased loss was primarily attributable to ~~the higher~~lower corporate ~~expenses partially offset by the reduction in operating losses related to the prior year shut-down of the Petersfield, U.K. operation discussed above.~~expenses.

Interest, net:

Interest expense for the three months ended ~~September~~June 30, ~~2016~~2017 increased to ~~$5.0~~$5.2 million compared to ~~$4.6~~$5.1 million for the three months ended ~~September~~June 30, ~~2015.~~2016. The ~~increase in~~additional interest expense ~~was driven by~~resulting from the ~~$435.0 million~~higher average interest rate on the First Lien Term Loan ~~that the Company entered into in August 2015 in conjunction with the partial redemption of the Series A Preferred Stock.~~

~~Income tax expense:~~

~~During~~during the three months ended June 30, 2017 was partially offset by no interest expense associated with the Sellers’ Note, which was repaid during September ~~30, 2016, there was income tax expense of $2.5 million compared to $6.6 million for the three months ended September 30, 2015. The decrease in income tax expense was driven by the~~2016.

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~~decrease in~~

Income tax (benefit) expense:

During the three months ended June 30, 2017, there was an income ~~before taxes. The~~tax benefit of $0.8 million on pre-tax losses of $3.0 million, representing an effective income tax rate ~~was 38.7% and 30.7%~~of 28.2%, compared with an income tax benefit of $0.2 million on pre-tax losses of $0.5 million for the three months ended ~~September~~June 30, 2016, ~~and 2015, respectively.~~representing an effective income tax rate of 32.9%. Our effective tax rate ~~was higher~~differs in the current year period primarily due to the impact of state and foreign income ~~taxes.~~taxes, and as a result of excess tax benefits and deficiencies recorded directly to income tax benefit since the adoption of ASU 2016-09 on January 1, 2017.

~~Nine~~Net (loss) income:

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

Six Months Ended ~~September~~June 30, ~~2016~~2017 Compared With ~~Nine~~Six Months Ended ~~September~~June 30, ~~2015~~2016

Net Sales



	Nine Months Ended September 30,								Six Months Ended June 30,
	2016		2015		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	165,055	$	196,190	$	(31,135)	(15.9)	%	$	81,712	$	115,899	$	(34,187)	(29.5)	%
U.S. Prepaid Debit		47,419		53,482		(6,063)	(11.3)	%		22,211		24,332		(2,121)	(8.7)	%
U.K. Limited		21,896		23,586		(1,690)	(7.2)	%		16,597		14,221		2,376	16.7	%
Other		9,530		13,917		(4,387)	(31.5)	%		5,729		6,820		(1,091)	(16.0)	%
Eliminations		(2,580)		(6,632)		4,052	*	%		(4,395)		(1,154)		(3,241)	*	%
Total	$	241,320	$	280,543	$	(39,223)	(14.0)	%	$	121,854	$	160,118	$	(38,264)	(23.9)	%

* Not meaningful

Net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$39.2~~$38.3 million, or ~~14.0%~~23.9%, to ~~$241.3~~$121.9 million compared to ~~$280.5~~$160.1 million for the ~~nine~~six months ended ~~September~~June 30, 2015. The decrease in net sales was due to a 15.9% decrease in U.S. Debit and Credit, an 11.3% decrease in U.S. Prepaid Debit, a 7.2% decrease in U.K. Limited, and a 31.5% decrease in Other, compared to the same period in the prior year.2016.

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$31.1~~$34.2 million, or ~~15.9%~~29.5%, to ~~$165.1~~$81.7 million compared to ~~$196.2~~$115.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The decrease in net sales was primarily driven by a ~~$26.5~~$28.6 million decrease in EMV related revenue and ~~an $18.0~~a $3.7 million decrease in net sales from non-EMV cards, including magnetic stripe cards due to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by a $13.4 million net sales increase from growth in card personalization and fulfillment, and a decrease in non-EMV and other ~~services.~~sales.

The decrease in EMV revenue is the result of ~~reduced~~continued softness in demand for EMV ~~card purchases from~~cards, particularly with large ~~issuers~~issuer and ~~processors, reflecting the carryover impact of overstocked EMV card inventories purchased in 2015.~~processor customers. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we sold ~~86.5~~37.1 million EMV cards at an ASP of $0.85 compared to 63.9 million EMV cards at an ASP of $0.94 for the six months ended June 30, 2016. The decrease in ASP during the six months ended June 30, 2017 compared to ~~115.9 million EMV cards at an ASP of $0.93 for the nine months ended September 30, 2015. The increase in ASP for EMV cards during the nine months ended September 30,~~ 2016 ~~compared to 2015~~ is primarily due to lower prices experienced in the large issuer market from increased competition, partially offset by favorable net pricing impacts of customer mix.

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit ~~during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$6.1~~$2.1 million, or ~~11.3%~~8.7%, to ~~$47.4~~$22.2 million compared to ~~$53.5~~$24.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The decrease was driven primarily ~~driven~~ by ~~net reductions~~decreased sales activity associated with a delay in ~~volumes,~~the roll out of a packaging design refresh related to one of our larger customers. Also contributing to the decrease were lower average prices attributed to product mix, and to a lesser extent, ~~lower prices.~~price compression. The decrease in volumes related to a large customer shifting some of its business to a competitor, who we believe is infringing on a company patent, as further described in Part II, Item 1, “Legal Proceedings”, of this Quarterly Report on Form 10-Q.

~~U.K. Limited~~:

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

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U.K. Limited:

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

Other:

Net sales for Other decreased ~~$4.4~~$1.1 million, or ~~31.5%~~16.0%, to ~~$9.5~~$5.7 million during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 compared to ~~$13.9~~$6.8 million in the ~~nine~~six months ended ~~September~~June 30, ~~2015. The decrease related~~2016, relating primarily to one of our largest customers refreshing its card designs during the ~~shut-down of the Petersfield, U.K. operation~~prior year resulting in ~~August 2015, which contributed $4.1 million in~~higher than usual net sales during the ~~nine~~six months ended September 30, 2015, and to a lesser extent, a $0.3 million decrease to net sales in Canada, driven primarily by foreign currency exchange rate fluctuations between the United States dollar and the Canadian dollar, which resulted in a $0.4 million reduction of net sales during the nine months ended SeptemberJune 30, 2016 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~3017.

Cost of Sales



	Nine Months Ended September 30,								Six Months Ended June 30,
	2016		2015		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Cost of sales by segment:
U.S. Debit and Credit	$	109,091	$	122,698	$	(13,607)	(11.1)	%	$	57,321	$	77,028	$	(19,707)	(25.6)	%
U.S. Prepaid Debit		30,018		31,206		(1,188)	(3.8)	%		16,448		16,099		349	2.2	%
U.K. Limited		16,079		17,484		(1,405)	(8.0)	%		12,529		10,573		1,956	18.5	%
Other		7,123		11,686		(4,563)	(39.0)	%		4,427		5,102		(675)	(13.2)	%
Eliminations		(2,453)		(6,923)		4,470	*	%		(4,250)		(1,083)		(3,167)	*	%
Total	$	159,858	$	176,151	$	(16,293)	(9.2)	%	$	86,475	$	107,719	$	(21,244)	(19.7)	%

* Not meaningful

Cost of sales for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$16.3~~$21.2 million, or ~~9.2%~~19.7%, to ~~$159.9~~$86.5 million compared to ~~$176.2~~$107.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015. The decrease in cost of sales was due to an 11.1% decrease in U.S. Debit and Credit, a 3.8% decrease in U.S. Prepaid Debit, an 8.0% decrease in U.K. Limited and a 39.0% decrease in Other.~~ 2016.

U.S. Debit and Credit:

Cost of sales for U.S. Debit and Credit for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$13.6~~$19.7 million, or ~~11.1%~~25.6%, to ~~$109.1~~$57.3 million compared to ~~$122.7~~$77.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The decrease was driven by lower EMV chip ~~and magnetic stripe~~ 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 ~~decreased~~decrease in cost of sales. ~~Higher cost of sales from growth in card personalization, fulfillment and other services partially offset the above decreases.~~

U.S. Prepaid Debit:

Cost of sales for U.S. Prepaid Debit for the ~~nine~~six months ended ~~September~~June 30, ~~2016 decreased $1.2~~2017 increased $0.3 million, or ~~3.8%~~2.2%, to ~~$30.0~~$16.4 million compared to ~~$31.2~~$16.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The ~~decrease~~increase was primarily ~~due~~a result of the increased costs to ~~a decrease in materials, and to a lesser extent lower labor costs, corresponding to the decrease in net~~ramp up Print on Demand Services capabilities, partially offset by decreased sales ~~described above.~~volumes.

U.K. Limited:

Cost of sales for U.K. Limited was $12.5 million during the ~~nine~~six months ended ~~September~~June 30, ~~2016 was $16.1~~2017, an increase of 18.5% from $10.6 million ~~representing a decrease of $1.4 million, or 8.0%, compared to~~during the ~~nine~~six months ended ~~September~~June 30, ~~2015. Foreign~~2016. The increase in cost of sales related to increased net sales activity, partially offset by $1.6 million of foreign currency exchange rate fluctuations between the United States dollar and the British ~~Pound of $1.7 million, and lower overhead costs, were partially offset by higher labor and material costs related to increased net sales activity in card personalization and fulfillment services.~~Pound.

~~Other:~~

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

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~~U.K. operation, which was shut-down~~

Other:

Cost of sales in ~~August 2015, and~~Other decreased $0.7 million, or 13.2%, to $4.4 million during the six months ended June 30, 2017 compared to $5.1 million in the six months ended June 30, 2016 due to lower manufacturing costs ~~related~~corresponding to ~~foreign currency exchange rate fluctuations between~~ the ~~United States dollar and the Canadian dollar of $0.3 million, partially offset by increased material costs from a higher percentage of Canada~~decreased net sales ~~relating to EMV card sales.~~

noted above.

Gross Profit and Gross Profit Margin


	Nine Months Ended September 30,												Six Months Ended June 30,
			% of				% of								% of				% of
	2016		net sales		2015		net sales		$ Change		% Change		2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)												(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	55,964	33.9	%	$	73,492	37.5	%	$	(17,528)	(23.9)	%	$	24,391	29.8	%	$	38,871	33.5	%	$	(14,480)	(37.3)	%
U.S. Prepaid Debit		17,401	36.7	%		22,276	41.7	%		(4,875)	(21.9)	%		5,763	25.9	%		8,233	33.8	%		(2,470)	(30.0)	%
U.K. Limited		5,817	26.6	%		6,102	25.9	%		(285)	(4.7)	%		4,068	24.5	%		3,648	25.7	%		420	11.5	%
Other		2,280	23.9	%		2,522	18.1	%		(242)	(9.6)	%		1,157	20.2	%		1,647	24.1	%		(490)	(29.8)	%
Total	$	81,462	33.8	%	$	104,392	37.2	%	$	(22,930)	(22.0)	%	$	35,379	29.0	%	$	52,399	32.7	%	$	(17,020)	(32.5)	%

Gross profit for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$22.9~~$17.0 million, or ~~22.0%~~32.5%, to ~~$81.5~~$35.4 million compared to ~~$104.4~~$52.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. Gross profit margin for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~33.8%~~29.0% compared to ~~37.2%~~32.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$17.5~~$14.5 million, or ~~23.9%~~37.3%, to ~~$56.0~~$24.4 million compared to ~~$73.5~~$38.9 million during the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The decrease in gross profit for U.S. Debit and Credit was primarily a result of decreased EMV revenues ~~offset by growth in~~and decreased sales from our card personalization and fulfillment services. Gross profit margin for the U.S. Debit and Credit segment for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~33.9%~~29.8% compared to ~~37.5%~~33.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2015~~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~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~21.9%~~30.0% to ~~$17.4~~$5.8 million compared to ~~$22.3~~$8.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The decrease in gross profit was primarily ~~driven by~~due to the decrease in net ~~sales.~~sales and increased costs to ramp up Print on Demand Services capabilities. Gross profit margin for U.S. Prepaid Debit for the ~~nine~~six months ended ~~September~~June 30, 2017 decreased to 25.9% compared to 33.8% for the six months ended June 30, 2016 ~~decreased to 36.7% compared to 41.7% for the nine months ended September 30, 2015~~ due to increased costs to ramp up Print on Demand Services capabilities and lower overhead cost absorption during the ~~increase in material and labor costs as a percent~~first quarter of ~~sales, partially due to lower prices.~~2017.

U.K. Limited:

Gross profit for U.K. Limited for the ~~nine~~six months ended ~~September~~June 30, ~~2016 decreased 4.7%~~2017 increased 11.5% to ~~$5.8~~$4.1 million compared to ~~$6.1~~$3.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2015. Decreases related to~~2016. The increase in gross profit was driven primarily by the increase in net sales described above, partially offset by $0.5 million of foreign currency exchange rate ~~fluctuations of $0.6 million were partially offset by higher gross profit from an increase in net sales activity related to our card personalization and fulfillment services.~~fluctuations. Gross profit margin for U.K. Limited for the ~~nine~~six months ended ~~September~~June 30, 2017 decreased to 24.5% compared to 25.7% for the six months ended June 30, 2016, ~~increased to 26.6% compared to 25.9% for the nine months ended September 30, 2015~~primarily due to ~~a larger percentage of higher margin, card personalization services.~~customer mix.

Other:

Other gross profit during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~9.6%~~29.8% to ~~$2.3~~$1.2 million compared to ~~$2.5~~$1.6 million during the ~~same period in 2015.~~six months ended June 30, 2016. The decrease was primarily due to ~~lower gross profit~~decreased net sales in ~~Canada related to the decrease in net sales.~~

Canada.

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Operating Expenses



	Nine Months Ended September 30,								Six Months Ended June 30,
	2016		2015		$ Change		% Change		2017		2016		$ Change		% Change
	(dollars in thousands)								(dollars in thousands)
Operating expenses by segment:
U.S. Debit and Credit	$	18,957	$	18,799	$	158	0.8	%	$	12,925	$	12,633	$	292	2.3	%
U.S. Prepaid Debit		3,719		4,288		(569)	(13.3)	%		2,162		2,565		(403)	(15.7)	%
U.K. Limited		4,321		4,681		(360)	(7.7)	%		2,639		2,993		(354)	(11.8)	%
Other		24,574		18,859		5,715	30.3	%		17,495		16,013		1,482	9.3	%
Total	$	51,571	$	46,627	$	4,944	10.6	%	$	35,221	$	34,204	$	1,017	3.0	%

Operating expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 increased ~~$4.9~~$1.0 million, or ~~10.6%~~3.0%, to ~~$51.6~~$35.2 million compared to ~~$46.6~~$34.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~ 2016.

The ~~increase in operating expenses was driven primarily by a 30.3% increase in Other expenses and a 0.8%~~$0.3 million increase in U.S. Debit and Credit ~~partially offset by a 13.3% decrease in U.S. Prepaid Debit, and a 7.7% decrease in U.K. Limited.~~

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

The $0.4 million decrease in U.S. Prepaid Debit ~~decreased $0.6 million, or 13.3%,~~was primarily ~~due to~~driven by cost reductions in ~~sales and~~ administrative salaries.

~~The~~U.K. Limited operating expenses decreased by $0.4 million, or ~~7.7%~~11.8%, ~~decrease in U.K. Limited was primarily~~ due to foreign currency exchange rate fluctuations.

The ~~$5.7~~$1.5 million increase in Other operating expenses was ~~driven by public company~~primarily due to increased legal costs of ~~$4.0~~$1.1 million, ~~patent~~increased software expenses of $0.7 million, increased facilities and ~~shareholder litigation~~insurance expense of $0.3 million, and ~~related charges~~increased salaries and other compensation costs of ~~$2.6~~$0.2 million, a $0.6 million increase in stock-based compensation, and a $0.7 increase of other corporate expenses (primarily related to increases in consulting and contract labor, and information technology expenses). These increases were partially offset by a ~~$2.2 million reduction~~decrease of expenses relating to the prior year shut-down of the Petersfield, U.K. operation. Public company costs included $1.1 million of legal and insurance costs, $1.2 million of accounting, reporting and public filing costs, and $1.7$1.0 million in ~~salaries and benefits, board fees, contract labor and hiring expenses.~~stock based compensation expense during the six months ended June 30, 2017.

Income from Operations and Operating Margin


	Nine Months Ended September 30,												Six Months Ended June 30,
			% of				% of								% of				% of
	2016		net sales		2015		net sales		$ Change		% Change		2017		net sales		2016		net sales		$ Change		% Change
	(dollars in thousands)												(dollars in thousands)
Income from operations by segment:
U.S. Debit and Credit	$	37,007	22.4	%	$	54,693	27.9	%	$	(17,686)	(32.3)	%	$	11,466	14.0	%	$	26,238	22.6	%	$	(14,772)	(56.3)	%
U.S. Prepaid Debit		13,682	28.9	%		17,988	33.6	%		(4,306)	(23.9)	%		3,601	16.2	%		5,668	23.3	%		(2,067)	(36.5)	%
U.K. Limited		1,496	6.8	%		1,421	6.0	%		75	5.3	%		1,429	8.6	%		655	4.6	%		774	118.2	%
Other		(22,294)	*	%		(16,337)	*	%		(5,957)	*	%		(16,338)	*	%		(14,366)	*	%		(1,972)	*	%
Total	$	29,891	12.4	%	$	57,765	20.6	%	$	(27,874)	(48.3)	%	$	158	0.1	%	$	18,195	11.4	%	$	(18,037)	(99.1)	%

* Not meaningful

Income from operations for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$27.9~~$18.0 million, or ~~48.3%~~99.1%, to ~~$29.9~~$0.2 million compared to ~~$57.8~~$18.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. Operating ~~margins~~profit margin for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased to ~~12.4%~~0.1% compared to ~~20.6%~~11.4% for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016.

U.S. Debit and Credit:

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

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

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 decreased ~~$4.3~~$2.1 million, or ~~23.9%~~36.5%, to ~~$13.7~~$3.6 million compared to ~~$18.0~~$5.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016 primarily due to the decrease in net sales and increased costs to ramp up Print on Demand Services capabilities, partially offset by lower operating expenses. Operating margins for the ~~nine~~six months ended ~~September~~June 30, 2017 decreased to 16.2% compared to 23.3% for the six months ended June 30, 2016 ~~decreased to 28.9% compared to 33.6% for the nine months ended September 30, 2015. The decrease in income from operations and operating margins was~~ due to increased costs to ramp up Print on Demand Services capabilities and lower ~~sales, and higher materials and labor costs as a percent~~overhead cost absorption in the first quarter of ~~sales,~~2017, partially offset by ~~the decrease in~~lower operating ~~expenses, as discussed above.~~expenses.

U.K. Limited:

Income from operations for U.K. Limited for the ~~nine~~six months ended ~~September~~June 30, 2017 increased to $1.4 million from $0.7 million during the six months ended June 30, 2016 as a result of the increased ~~to $1.5 million, or 5.3%, from $1.4 million primarily due to the impact of~~sales activity, partially offset by foreign currency exchange rate fluctuations. Operating margins increased to 8.6% during the six months ended June 30, 2017 compared to 4.6% during the six months ended June 30, 2016 as a result of lower operating expenses and better leverage of operating expenses from our increased sales.

Other:

~~During the nine months ended September 30, 2016, the~~The loss from operations in Other during the six months ended June 30, 2017 was ~~$22.3~~$16.3 million compared to ~~a loss of $16.3~~$14.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The increased loss was primarily attributable to the higher corporate expenses, ~~partially offset by reduced operating losses related to~~and the ~~shut-down of the Petersfield, U.K. operation~~lower sales activity in Canada, as discussed above.

Interest, net:

Interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 increased to ~~$15.1~~$10.2 million compared to ~~$8.1~~$10.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. The ~~increase in~~additional interest expense ~~was driven by~~resulting from the ~~$435.0 million~~higher average interest rate on the First Lien Term Loan ~~that~~during the ~~Company entered into in August 2015 in conjunction~~six months ended June 30, 2017 was partially offset by no interest expense associated with the ~~partial redemption of the Series A Preferred Stock.~~Sellers’ Note, which was repaid during September 2016.

Income tax ~~expense:~~benefit (expense):

Income tax ~~expense~~benefit for the ~~nine~~six months ended ~~September~~June 30, ~~2016 decreased $11.3 million to $5.2~~2017 was $3.1 million, compared to ~~$16.5~~income tax expense of $2.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2015, driven by~~2016, due primarily to the decrease in income before taxes. The effective tax rate was ~~35.6%~~32.0% and ~~33.5%~~33.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Our effective tax rate was ~~higher~~lower in the current year period primarily due to the impact of foreign and state income ~~taxes.~~ taxes, and as a result of excess tax benefits and deficiencies recorded directly to income tax benefit since the adoption of ASU 2016-09 on January 1, 2017.

Net (loss) income:

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

Liquidity and Capital Resources

As of ~~September~~June 30, ~~2016,~~2017, we had ~~$21.3~~$17.9 million of cash and cash equivalents. Of this amount, $3.8 million was held in accounts outside of the United States.

~~On August 17, 2015, we entered into a new First Lien Credit Facility~~Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. We believe that our cash flows from operations, combined with ~~a syndicate~~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.

Table of ~~lenders, consisting of~~Contents

At June 30, 2017, there was $312.5 million outstanding under the ~~$435.0 million~~ First Lien Term Loan, and ~~the~~we had an undrawn $40.0 million Revolving Credit ~~Facility.~~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.

~~At the Company's election, interest~~Interest rates under the First Lien ~~Credit Facility~~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 ~~4.50%~~4.5%, or a base rate plus a margin of ~~3.50%~~3.5%. ~~Letters~~As of ~~credit are subject~~June 30, 2017, the interest rate on our First Lien Term Loan was 5.83%, and increased to ~~a 0.125% fronting fee payable to~~5.96% as the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, we are required to pay an unused commitment fee ranging from 0.50% per annum to 0.375% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determinedinterest rate was reset on the ~~basis of a grid that results in a lower unused commitment fee as our total net leverage ratio declines.~~First Lien Term Loan during July 2017.

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

statements. As of ~~September~~June 30, ~~2016, the Company was~~2017, we do not expect to have a required excess cash flow payment related to 2017, and we were in compliance with all covenants under the First Lien Credit Facility. ~~At September 30, 2016, there were $312.5 million of outstanding borrowings under the First Lien Term Loan, and we had $40.0 million of availability under the Revolving Credit Facility.~~

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

During the ~~second quarter of~~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, ~~stock repurchase plan, up~~limited to a maximum of 2,827,105 shares, prior to May 11, 2017. There were no shares repurchased under this plan during the ~~three~~six months ended ~~September~~June 30, ~~2016. At September 30, 2016, $14.0 million remained available under~~2017 and the ~~share~~stock repurchase ~~authorization, up to a maximum of 1,387,683 shares.~~plan expired by its terms during May 2017.

On ~~August 10, 2016,~~May 3, 2017, our Board of Directors approved a dividend of $0.045 per ~~share. This dividend was paid~~share, payable on ~~October~~July 7, ~~2016~~2017 to stockholders of record as of the close of business on ~~September~~June 16, ~~2016.~~2017. The accrued dividend of $2.5 million is reflected in “Accrued expenses” in our ~~condensed consolidated~~Condensed Consolidated Balance Sheet as of June 30, 2017.

The Company discontinued its quarterly dividend of $0.045 per share. The dividend discontinuation is part of our plan to utilize a greater portion of the Company’s free cash to reinvest back into the business to fund our growth initiatives and to reduce debt. We remain focused on creating long-term shareholder value by making the strategic investments necessary to position the Company to return to sustainable profitable growth, while also strengthening our balance sheet ~~as of September 30, 2016. Our current quarterly cash~~and maintaining financial flexibility. By discontinuing the dividend, ~~rate is $0.045 per share, or $0.18 per share on an annualized basis. The declaration~~the Company will save approximately $10 million annually providing us with additional liquidity and ~~payment of any future dividends will be subject to the discretion of the Board of Directors, who will evaluate the Company’s dividend program from time to time based on factors it deems relevant.~~

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

Operating Activities

Cash ~~provided by~~used in operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~$39.8~~$8.3 million compared to ~~$44.4~~$33.2 million ~~during the nine months ended September 30, 2015. The decrease in~~of cash provided by operating activities during the six months ended June 30, 2016. The year over year fluctuation was ~~driven by lower~~due to net losses incurred during the current year period compared to net income ~~partially offset by a~~in the prior year period, and net ~~increase in cash flows from~~ working capital ~~particularly from a decrease in~~fluctuations, primarily accounts receivable.

Investing Activities

Cash used in investing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016 was $12.4~~2017 of $5.8 million, ~~which related~~decreased compared to ~~capital expenditures. During~~$7.0 million during the ~~nine~~six months ended ~~September~~June 30, ~~2015, cash~~2016. Cash used in investing activities during both periods was ~~$8.9 million, consisting of $13.9 million of~~related to capital expenditures ~~partially offset by $5.0 million of cash provided from~~and decreased during the ~~sale of our Nevada operation.~~ current period due to decreased capital requirements.

Financing Activities

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, cash used in financing activities was ~~$19.5~~$5.4 million, and primarily related to ~~the repayment of our subordinated, unsecured promissory note with certain sellers of EFT Source for $9.0 million, share repurchases of $6.0 million, and~~ dividend payments of $5.0 ~~million, partially offset by excess tax benefits associated with stock option exercises of $0.5~~ million.

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

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

Contractual Obligations

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~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, ~~2015, other than the repayment of the Company’s $9.0 million promissory note with certain sellers of EFT Source in September~~ 2016.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at ~~September~~June 30, ~~2016.~~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, ~~2015,~~2016, for which there were no material changes as of ~~September~~June 30, ~~2016,~~2017, included:

 Revenue Recognition;

 Multiple-Element Arrangements;

 Impairment Assessments of Goodwill and Long-Lived Assets;

 Inventory Valuation;

 Stock-Based Compensation; and

 Income Taxes.

~~Revenue Recognition;~~

~~Multiple-Element Arrangements;~~

~~Impairment Assessments of Goodwill and Long-Lived Assets;~~

~~Inventory Valuation;~~

~~Stock-Based Compensation; and~~

~~Income Taxes.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of ~~September~~June 30, ~~2016,~~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, ~~2015.~~2016.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the ~~“Exchange Act”~~"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~~SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. ~~As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and~~

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and ~~procedures.~~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 ~~ineffective~~effective as of ~~September~~June 30, 2016 due to the unremediated material weakness in our internal controls over financial reporting described below. Notwithstanding the identified material weakness, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.2017.

Changes in Internal Control ~~over~~Over Financial Reporting

~~As previously reported~~There has been no change in ~~our Annual Report on Form 10-K for~~ the ~~year ended December 31, 2015, we have identified a material weakness in our~~Company’s internal control over financial reporting ~~related~~during our most recent quarter that has materially affected, or is reasonably likely to ~~a current lack of finance~~materially affect, the Company’s internal control over financial reporting.

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

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

Limitations on Effectiveness of Controls ~~and Procedures~~

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II – Other Information

Item 1. Legal Proceedings

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

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

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

~~The Court has entered~~

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

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

Second ~~case~~case.. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. ~~Gemalto’s~~Gemalto alleges that its patent will expire in ~~2018. On May 25, 2016,~~2019. Gemalto provided initial infringement contentions to the Company ~~moved to dismiss Gemalto's case because the patent's claims are not patentable under 35 U.S.C. section 101. The Company’s motion to stay the litigation in light of~~on July 29, 2016, and amended its ~~pending motion to dismiss was denied on~~

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~~September 2, 2016. The Company’s motion to dismiss remains pending. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its~~ contentions on October 13, 2016. The parties are presently engaged in claim construction and discovery-related activities, including the inspection of records relating to the alleged commercial embodiment of Gemalto’s patent, DEXXIS. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent. The PTAB has not yet ruled on the Company’s petition.

Although the outcome of these matters is not determinable at this time, the Company has accrued a $1.0 million loss contingency as of June 30, 2017, which does not include any potential indemnity or other third-party recoveries. There can be no certainty about the timing or likelihood of a definitive resolution of either or both of these matters, and as additional information becomes available, the amount of this estimated loss contingency reserve could increase materially. In addition, the Company may incur material legal expenses, and no assurance can be given that these matters will be resolved in our favor, and if determined adversely, whether indemnification will be received. ~~Accordingly, it is not yet possible to reliably determine any potential liability that could result from these matters in the event of an adverse determination.~~

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

On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultrasecure gift card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages. The Company’s patent will expire in 2028. MPS has answered the complaint and counterclaimed for invalidity and noninfringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts.

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

Item 1A. Risk Factors

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

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

Unregistered Sales of Equity Securities

None.

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Issuer Purchases of Equity Securities

In the second quarter of fiscal year 2016, the Company’s Board of Directors approved a stock repurchase program that ~~authorizes~~authorized repurchases ~~of $20.0 million~~ 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. The Company’s repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions.~~

shares. There was no stock repurchase activity during the three and six months ended ~~September~~June 30, ~~2016. As of September 30, 2016, the total number of shares purchased as part of the publicly announced program was 1,439,422~~2017, and the ~~approximate dollar value of shares that may yet be purchased under the~~stock repurchase program ~~was $14.0 million, limited to an additional repurchase of 1,387,683 common shares.~~

expired by its terms during May 2017.

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Item 6. Exhibits


Exhibit Number		Description
10.1		CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines
10.2		First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, by and between CPI Card Group Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CPI CARD GROUP INC.


	/s/ ~~David Brush~~Lillian Etzkorn
	~~David Brush~~Lillian Etzkorn
	Chief Financial Officer

~~November 10, 2016~~August 3, 2017

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EXHIBIT INDEX


Exhibit Number		Description
10.1		CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines
10.2		First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017, by and between CPI Card Group Inc. and Steven Montross (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2017).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

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


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