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LETTER FROM THE CEO
EXECUTIVE OFFICERS
To Our Valued Shareholders:
While our 2016 results reflect the challenging market environment for financial card manufacturing, I am pleased with our
accomplishments over the past year which served to strengthen our business. During the year, we continued to grow our services
business, and we expanded our end-to-end product and solution set through the introduction of new offerings. We implemented
significant cost reduction and efficiency improvement initiatives. We delivered $60.0 million in cash flow from operating activities,
enabling us to invest in our business for profitable growth. At the same time, we were able to reduce our debt by $9.0 million and return
cash to our shareholders by paying $7.5 million of dividends and repurchasing $6.0 million of common shares. We strengthened our
management team with the addition of experienced key senior executives with distinguished records of accomplishment. We also
strengthened our Board of Directors with the addition of Silvio Tavares and Scott Scheirman, who have brought important additional
knowledge and insight to the Board with their significant executive experience in the payments industry.
Looking ahead, we continue to focus on driving profitable growth by leveraging our strong position in the core financial card market,
providing innovative products and solutions and delivering the highest quality products and services to our valued customers, while
also reducing costs through our continued efforts to drive efficiencies in our business.
We expect that our services business will continue to be an area of growth, driven in part by solid demand from small and
mid-sized institutions for our personalization and fulfillment solutions and ongoing penetration of our Card@Once® offering. Our
Card@Once® instant issuance solution grew to 5,600 installations at over 1,200 banks and credit unions at the end of 2016, up from
4,100 installations at the end of 2015. We are also continuing to develop new digital services which we expect will enhance our
product offerings, broaden our EMV®-related services, and provide new payment forms such as digital payments for certain prepaid
applications.
We expect that our prepaid business will be another area of growth in 2017, with volume growth in the retail prepaid vertical, as
well as growth in the B2B and B2C prepaid market verticals, including payroll, corporate incentives and benefits. Our recently
launched Print-on-Demand solution, which provides our customers with a highly customizable solution for on-demand production
and fulfillment of personalized payment cards and related collateral, positions us well to further penetrate the fast-growing B2B and
B2C prepaid markets.
In the U.S. financial card manufacturing area, we expect the conversion of magnetic stripe cards to EMV chip cards will continue in
2017. We believe that EMV card penetration in the U.S. Debit and Credit markets will increase to approximately 80% by year-end
2017, up from approximately 65% at the end of 2016, with the conversion activity concentrated in the small and mid-sized issuers.
We anticipate that the continuing EMV migration will be balanced by a lower level of card replacement activity in 2017 with large
issuers, and as a result, we expect modest growth in our EMV card manufacturing in 2017. Longer term, we remain encouraged
by our discussions with prospects regarding dual-interface technology and the overall level of activity by issuers in setting up their
dual-interface product roadmaps. We continue to view dual-interface as an opportunity in the future, when adoption by issuers takes
hold in a meaningful way.
We continue to carry out our cost reduction initiatives, including supply chain cost reductions and operational efficiencies, to ensure
that the quality of earnings can be maintained and improved going forward. We are on track to deliver $10 million of cost savings in
2017, and we will continue to look for additional areas of opportunity for cost efficiencies.
Lastly, I would like to take this opportunity to thank our shareholders for their ongoing support and our employees for their continued
dedication in providing our customers with industry leading and high quality card solutions. I believe that we have entered 2017
stronger and well-positioned to capitalize on our significant long-term growth opportunities in the markets we serve.
Steven Montross
President and Chief Executive Officer
EMV is a registered trademark or trademark of EMVCo LLC in the United States and other countries.
Steven Montross
President and Chief Executive Officer
Jason Bohrer
Senior Vice President of Operations
Lillian Etzkorn
Chief Financial Officer
Jay Arbabha
Chief Technology Officer
Chris Bakke
Chief Accounting Officer
Nick Cahn
Managing Director of CPI Europe
Lisa Jacoba
Chief Human Resources Officer
Lane R. Dubin
Senior Vice President,
Sales and Marketing
Anna Rossetti
President of CPI Card Group - Canada
BOARD OF DIRECTORS
Bradley Seaman (2)
Non-Executive Chairman
Douglas Pearce (1)(3)*
David Rowntree (2)(3)
Diane Fulton (1)
Robert Pearce (1)(2)*
Scott Scheirman (1)*
Steven Montross
Nicholas Peters (3)
Silvio Tavares (3)
(1) Audit Committee (2) Compensation Committee (3) Corporate Governance Committee * Committee Chair
SHAREHOLDER INFORMATION
Corporate Headquarters
CPI Card Group Inc.
10026 W San Juan Way - Suite 200
Littleton, Colorado 80127
(303) 973-9311
Auditor
KPMG LLP
1225 17th Street #800
Denver, Colorado 80202
Common Stock
PMTS (NASDAQ and Toronto
Stock Exchange)
Transfer Agent and Registrar
Wells Fargo Shareowner Services
1110 Centre Point Curve
Suite 101
Mendota Heights, Minnesota 55120
(800) 468-9716
www.shareowneronline.com
Canadian Transfer Agent
Acting as Co-Agent
TMX Equity Transfer Services
650 West Georgia Street
Suite 2700
Vancouver, British Columbia V6B4N9
Canada
Annual Meeting
The annual meeting of CPI Card Group shareholders
will be held at 9:00am Mountain Time on Thursday,
May 25, 2017 at the Hyatt Regency Denver Tech Center,
7800 East Tufts Avenue, Denver, Colorado 80237.
Investor Relations
Will Maina
(877) 369-9016
InvestorRelations@cpicardgroup.com
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10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:59)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
Or
(cid:134)
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
(State or other jurisdiction of incorporation or organization)
26-0344657
(I.R.S. employer identification no.)
10026 West San Juan Way
Littleton, CO
(Address of principal executive offices)
80127
(Zip Code)
Registrant’s telephone number, including area code (303) 973-9311
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:134) No (cid:59)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:134) No (cid:59)
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 (cid:59) No (cid:134)
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 during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes (cid:59) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:134)
Accelerated filer (cid:59)
Non-accelerated filer (cid:134)
Smaller reporting Company (cid:134)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:59)
The aggregate market value of the Registrant’s common stock held by non-affiliates was $97.2 million on June 30, 2016 computed based on the closing
sale price of the Registrant’s common stock of $5.01 on Nasdaq on that date.
As of February 20, 2017, the number of shares outstanding of the Registrant’s common stock was 55,359,251.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
Page
Cautionary Statement Regarding Forward-Looking Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Item 3
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
11
30
31
31
32
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
Item 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . .
60
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Item 8
61
Item 9
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . .
61
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index To Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
63
63
63
63
64
65
67
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the
“1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The words
“believe,” “estimate”, “project”, “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other
similar expressions are intended to identify forward-looking statements, which are generally not historical in nature.
These forward-looking statements are based on our current expectations and beliefs concerning future developments and
their potential effect on us, and other information currently available. Such statements reflect our current views with
respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that
such forward-looking statements, because they relate to future events, are by their very nature subject to many important
factors that could cause actual results to differ materially from those contemplated. Such factors include, but are not
limited to: material breaches in the security of our systems; market acceptance of developing technologies that make
Financial Payment Cards less relevant; a slower or less widespread adoption of EMV® and dual-interface EMV
technology than we anticipate; difficulties in production quality and process; defects in our software; our failure to
operate our business in accordance with the PCI security standards or other industry standards such as Payment Card
Brand certification standards; extension of card expiration cycles; a decline in U.S. and global market and economic
conditions; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major
customers; our substantial indebtedness; infringement on our intellectual property rights, or claims that our technology is
infringing on third-party intellectual property; failure to meet our customers’ demands in a timely manner; competition
and/or price erosion in the payment card industry; our dependence on licensing arrangements; inability to renew leases
for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and
covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign
jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on
specialized equipment from third party suppliers; and other risks that are described in Part I, Item 1A – Risk Factors and
our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”).
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof.
We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made,
whether as a result of new information, future events or otherwise.
EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries.
2
Item 1.
Business
PART I
As used herein, “CPI”, “we”, “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless the
context indicates otherwise.
Overview
We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define
“Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card
Brands” (Visa, MasterCard, American Express and Discover) and Interac (in Canada). We define “Prepaid Debit Cards”
as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. 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 programs, “Group
Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and
debit card programs, including managing the Financial Payment Card issuance process) and card processors. We serve a
diverse set of over 4,000 direct and indirect customers, including many of the largest issuers of debit and credit cards in
the United States and Canada, and largest U.S. Prepaid Debit Card program managers, as well as thousands of
independent community banks, credit unions, Group Service Providers and card processors.
We serve our customers through a network of ten production and card services facilities, including eight high-
security facilities in the United States and Canada, each of which is 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 standards of the
Payment Card Industry Security Standards Council (the “PCI Security Standards Council”). We have a leading network
of high-security production facilities in the United States and Canada, allowing us to optimize our solutions offerings to
serve the needs of our diverse and long-term customer base.
We believe we have a leading position in:
•
•
•
the U.S. prepaid debit market (which represents the fastest growing subset of the Financial Payment Card
market in the United States), serving several of the top U.S. Prepaid Debit Card program managers;
the U.S. large issuer market, serving many of the largest U.S. debit and credit card issuers; and
the U.S. small issuer market, which includes independent community banks and credit unions, driven by
our strong relationships, capabilities and technologies.
In addition to our eight facilities in the United States and Canada, we have two facilities in the United Kingdom
that produce retail cards, such as gift and loyalty cards, that are not issued on the networks of the Payment Card Brands,
as well as provide personalization, packaging and fulfillment services.
We have grown our business significantly over the past decade, both organically and through acquisitions.
Since 2008, we have completed six acquisitions, significantly increasing our geographic and market coverage, solutions
offerings and capacity. Our most significant acquisitions occurred in March 2010 and September 2014. On March 9,
2010, we purchased certain assets of Premier Card Solutions, a leading provider of Financial Payment Cards, data
personalization services and tamper-evident security packaging for Prepaid Debit Cards that utilize the payment
networks of the Payment Card Brands. The Premier Card Solutions transaction significantly enhanced our offering to
Prepaid Debit Card customers. On September 2, 2014, we acquired EFT Source, a recognized leader in the financial
technology industry. The acquisition of EFT Source significantly enhanced our card services offering, added
Card@Once® to our instant issuance card offering and expanded our end-to-end Financial Payment Card solutions. We
intend to continue to explore strategic acquisition opportunities.
In 2016, we generated:
• Net sales of $308.7 million, which represented a decrease of 17.5% compared to the prior year,
3
• Net income from continuing operations of $5.4 million, which represented a decrease of 82.7%
compared to the prior year, and
• Adjusted EBITDA of $57.2 million, which represented a decrease of 40.6% compared to the prior
year.
Adjusted EBITDA is a financial measure not presented in accordance with generally accepted accounting
principles (“GAAP”). For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income
from continuing operations, the most comparable GAAP measure, see Part II, Item 6, Selected Financial Data.
Our business consists of the following reportable segments: U.S. Debit and Credit, which primarily produces
Financial Payment Cards and provides integrated card services to card-issuing banks in the United States; U.S. Prepaid
Debit, which primarily provides integrated card services to Prepaid Debit Card issuers in the United States; and U.K.
Limited, which primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and
continental Europe, and which are not certified by any of the Payment Card Brands or to be in compliance with the
standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization
for Standardization (“ISO”) 27001 standards. Businesses not considered part of these segments are categorized as
"Other" and include our operations in Ontario, Canada and Petersfield, United Kingdom. In August 2015, we completed
the shut-down and closure of our operations at our Petersfield, United Kingdom facility. The Petersfield, United
Kingdom facility is not material to our business. Also included in “Other” are corporate activities.
For information regarding our net sales by geographic location and additional details regarding our segments,
see Part II, Item 8, Financial Statements and Supplementary Data, Note 18 "Segment Reporting," and Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on
Form 10-K.
Our Competitive Strengths
• Leading Market Position with Long-Term Customer Relationships. As a market leader, we have long-
standing trust-based relationships with our key customers, many of whom we have served for decades. Our
customer relationships often involve deep process and technology integration, particularly in the case of
customers who utilize our card services and instant issuance systems and services. The solutions that we
provide require strict data integrity, and generally card issuers are reluctant to switch away from trusted
providers due to the requirements for high-security and access to highly-sensitive cardholder information.
As a result, our customers are selective about the partners with which they work and typically seek out
partners who have a well-established reputation for trust and quality and are able to meet their service
requirements. We take pride in our efforts to provide a differentiated level of service to our customer base.
Our strong net promoter score, a customer satisfaction metric developed through surveys conducted by an
independent market research firm, is evidence of our ability to provide this differentiated level of service.
We also maintain important relationships with the Payment Card Brands to ensure our facilities and
processes consistently meet their standards.
• Well Positioned to Capitalize on Growth in Financial Payment Card Market and Remaining EMV
Conversion in the United States. With the significant past investments made to our physical infrastructure
and equipment platform in preparation for the EMV conversion, including information technology, human
capital and equipment upgrades across our network of facilities, we believe that we continue to be well-
positioned to capitalize on the continued growth in the Financial Payment Card market, and the U.S.
market conversion to the Europay, Mastercard and Visa (“EMV”) chip technology, which began in earnest
in the second half of 2014 and is expected to continue over the next several years. EMV is a global,
technical standard, maintained by EMVCo for smart payment cards, and for payment terminals and
automated teller machines that accept them. EMV cards are smart cards (also called chip cards) which
store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic
stripes. EMV cards can be contact cards that must be physically inserted (or “dipped”) into a reader,
contactless cards that can be read over a short distance using radio-frequency identification (“RFID”)
technology, or cards with both contact and contactless functionality (“dual-interface EMV cards”). We
serve our customers through a network of ten production and card services facilities, including eight high-
security facilities in the United States and Canada that are each certified by one or more of the Payment
4
Card Brands, Interac (in Canada) and, where required by our customers, certified to be in compliance with
the standards of the PCI Security Standards Council.
• Comprehensive End-to-End Card Solutions Drive Deep Customer Integration. The foundation of our
strong market position is our comprehensive end-to-end Financial Payment Card solutions. Our solutions
provide a full suite of products and card services required to produce, personalize and fulfill Financial
Payment Cards, while maintaining the stringent security requirements of the Payment Card Brands. We are
integral to many of our customers’ card programs, pairing card production with an end-to-end offering of
card data personalization and card services that are deeply integrated within our customers’ operations. We
provide card data personalization services for financial institutions and managers of Prepaid Debit Card
programs that require extensive technology integration, such as secure data links to transfer highly sensitive
cardholder information. Similarly, our installed base of instant issuance systems at bank and credit union
branches across the United States require comparable levels of customer integration, as our Card@Once®
instant issuance system utilizes only our secure technology to instantly personalize cards. Certain
customers have also integrated our proprietary software into their customer-facing websites to offer card
design and customization to their cardholders. We believe that our comprehensive solution allows our
customers to choose a single trusted partner to address their card program needs in a cost-effective manner
instead of managing multiple suppliers across a complex value chain. We believe our customers choose
and retain us for these critical functions, which typically require integrations that are costly and complex,
due to our reputation as a trusted partner, our high levels of service and proven execution.
• Certified Network of High-Security Facilities. Our eight high-security facilities are each certified by one or
more of the Payment Card Brands and Interac (in Canada), forming a leading network of certified
production facilities in in the United States and Canada. The Payment Card Brand certifications allow us to
produce cards bearing these brands and provide relevant card services for our issuer customers.
Additionally, many of our facilities are also certified to be in compliance with the standards of the PCI
Security Standards Council. These certification processes are long, complex and costly, and our facilities
must comply with strict standards of security in order to obtain and retain this designation, which are
regularly verified by both the Payment Card Brands and our customers.
•
Industry Experience and Proprietary and Patented Solutions. Over the course of our long operating
history, we have developed extensive technological, engineering and operational expertise that we believe
has made us a leader in our industry for product and process know-how. We believe that our technological
and operational know-how, combined with our specific focus on the Financial Payment Card market, gives
us a competitive advantage and fosters a culture of innovation. We have developed and acquired significant
intellectual property over our operating history and hold 18 U.S. patents, 14 foreign patents, as well as 13
pending U.S. and foreign patent applications, on our Financial Payment Card solutions, including patents
on our instant issuance offering, and patents on our tamper-evident security packaging used by our
customers that have Prepaid Debit Card offerings. We also hold exclusive production rights to certain
products the Company has developed, as well as patented software solutions such as our MYCA™
offering, which is integrated into the websites of over 300 card issuing banks and other customers.
• Experienced Management Team. We have built an experienced management team, and have strengthened
the team during 2016 with the addition of key executives with distinguished records of accomplishments.
The leadership, depth of experience and relevant market knowledge the management team brings will be
invaluable as we execute on our plans moving forward.
Our Strategy
The key components of our strategy include:
Drive Growth in the Core Financial Markets:
• Continue to Capitalize on Growth in Financial Payment Card Market and the U.S. EMV Conversion,
Including Dual-Interface EMV Cards. We expect future growth in the U.S. Financial Payment Card
market as card-based payments continue to replace payments made with cash and checks, along with the
recurring nature of demand for Financial Payment Cards in the United States, including the regular renewal
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of cards every three to five years, replacing lost or stolen cards due to fraudulent usage, and portfolio churn
as cardholders move from one program to another. In addition, the conversion of Financial Payment Cards
in the United States from magnetic stripe technology to the EMV standard began in earnest in the second
half of 2014 and is expected to continue over the next several years. In anticipation of the EMV
conversion, and subsequently the expected further adoption of the more complex and higher priced dual-
interface EMV cards, we invested significantly in our network of facilities, technological infrastructure and
human capital resources. We believe our comprehensive solutions offering and proven track record ideally
positions us to be our customers’ partner of choice for their ongoing Financial Payment Card needs, and to
successfully complete their EMV conversions.
• Capitalize on Growth in Prepaid Debit Market. We believe we are well positioned to capitalize on the
expected growth of the Prepaid Debit Card market due to our market leading position, supported by our
industry expertise, comprehensive end-to-end card solutions and patents. We have a leading market
position and have been doing business with the largest U.S. Prepaid Debit Card program managers.
Additionally, we have further developed proprietary production techniques which provide us additional
flexibility to meet customer demands.
• Cross-Sell Expanded Services Offering Across Customer Base. We believe our leading market position in
Financial Payment Card production and our card services capabilities in the United States and Canada,
presents an opportunity to cross-sell services across our customer base by offering comprehensive end-to-
end card solutions. We believe that providing our existing customers this complete end-to-end solution
creates a revenue opportunity and means to further deepen our existing customer relationships. Through
our strong track record in card services, we believe we have established a reputation as a trusted partner
and advisor to our customers with the ability to securely manage sensitive and confidential customer data
throughout our network. Due to the high costs of failure, such as a data breach, we believe that that we are
well positioned to meet the needs of our customers, who expect their vendors to provide high levels of
security, service and certainty to manage these critical functions.
• Continued Exploration of Strategic Acquisitions. We have a strong track record of acquiring and
integrating complementary businesses, completing six acquisitions since 2008, which have enhanced our
market share, capabilities and capacity. We expect to continue to explore strategic acquisitions that give us
access to new markets and capabilities.
Provide New and Innovative Products and Services in the Markets We Serve:
• Capitalize on Growth in Instant Issuance Systems and Services Market. We acquired our instant card
issuance system, Card@Once®, through the acquisition of EFT Source in 2014 and have continued to drive
growth in sales of our instant issuance systems and related services revenue. We plan to continue to grow
our installed base of instant issuance systems in bank branches across the United States to increase our
opportunity for continued recurring revenue streams from card personalization which is delivered through
our software as a service offering.
• Develop New Products and Services to Deepen Existing Customer Relationships and Attract New
Customers. In addition, through our recently added Print on Demand capabilities, we are able to produce
images, personalized payment cards and related collateral on a one-by-one, on demand, basis for our U.S.
Prepaid Debit customers, enabling individualized offerings and reducing waste. We believe this will enable
us to further penetrate new, fast growing, verticals of the prepaid market including payroll, corporate
incentives and benefits. In addition, we recently announced new products, including a metal card offering
for the credit card markets, and dual-interface or “tap-and-go” EMV cards, both of which represent
important opportunities to add to the growth of the business.
• Capitalize on the Emerging Digital Services Market. We have continued to expand our digital services
capabilities, focusing on enabling payments for the growing e-commerce and mobile market place,
including online card design and card re-orders, order status, inventory management, EMV key
management, and fulfillment of plastic and virtual payment cards, including our patented card design
software, known as MYCA™, which provides our customers and their cardholders the ability to design
cards on the internet and customize cards with individualized digital images. While not currently
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significant to our financial results, we also offer other innovative mobile services, such as CPI Mobile™,
where we, through technology partners, are able to provide solutions to digitize, encrypt and deliver
payment credentials to mobile devices.
Execute Quality, Process Excellence & Efficiency Initiatives:
• Drive Quality, Process Excellence and Cost Efficiencies. We are focused on driving high quality products
and services for our customers through our process excellence initiatives, and on reducing costs through
our continued efforts to drive efficiencies in our business. For example, CPI has developed a successful
continuous improvement framework that drives tangible cost savings and enables re-investment in critical
areas of the business.
Our Products and Services
EMV Financial Payment Cards (Contact and Dual-Interface)
We produce contact EMV cards, which feature an integrated circuit that interfaces with an EMV payment
terminal over a contact plate on the surface of the card when inserted into an EMV-enabled payment terminal. We also
produce dual-interface EMV cards, which feature both the contact EMV technology and an RFID antenna that utilizes
near field communications (“NFC”) technology to allow transactions to also be processed on a contactless basis when
the card is brought within the requisite proximity to a NFC-enabled payment terminal.
Non-EMV Financial Payment Cards and Retail Gift Cards
We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology and
cards that include both magnetic stripes and NFC technology. In addition, we produce retail gift cards (which are not
issued on the network of the Payment Card Brands) primarily in the U.K. and Canada.
Card Data Personalization and Fulfillment
We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in
EMV and non-EMV card formats. Our personalization services are technology-driven and provide a wide range of card
customization options, using advanced processes to personalize (encode, program and emboss with data such as
cardholder name and account number) and fulfill cards to individual cardholders. In addition, we provide EMV data
script development services for our customers and in certain cases generate PIN numbers and mailers on their behalf. We
offer patented card design software, known as MYCA™, which provides our customers and their cardholders the ability
to design cards on the internet and customize cards with individualized digital images. We also provide consultation and
card design services to further assist customers in card customization. Finally, we have the capabilities to provide
Trusted Service Manager services, leveraging our existing data connectivity with processors and other customers to offer
a trusted, high-security solution for facilitating mobile payments.
Tamper-Evident Security Packaging Solutions
We offer specialized and innovative tamper-evident security packaging products and services to customers with
a Prepaid Debit Card offering that reduce fraud for Prepaid Debit Cards sold through the retail channel. The majority of
the tamper-evident security packaging we produce is protected by our patents. In certain cases, we also manage the
fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this
solution.
Instant Card Issuance Systems and Services
We offer Card@Once®, our proprietary and patented instant card issuance system and services, which provide
our card issuing bank customers the ability to issue a completely personalized permanent debit or credit card within the
bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-based software that
securely transfers data from our servers to the card branch to encode either a magnetic stripe or an EMV card, and
personalize the card on a desktop output terminal in a process which is certified by MasterCard and Visa. Our instant
issuance system generates both system sales and recurring revenue from software as a service, card personalization and
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sales of cards and consumables. In addition, we provide instant issuance of debit cards to large financial institutions
whereby we provide fully-personalized temporary debit cards which are issued to card holders upon opening a new
account, and we manage the fulfillment and replenishment of these fully personalized cards directly to thousands of
individual bank branches.
Print on Demand Prepaid Solutions
We recently launched our new Print on Demand solution, which can deliver significant flexibility to prepaid
program managers and financial institutions. Through our Print on Demand services, we are able to produce images,
personalized payment cards and related collateral on a one-by-one, on demand, basis for our customers, enabling
individualized offerings and reducing waste. While not significant to our 2016 financial results, the Print on Demand
solution enables us to further penetrate new, fast growing, business-to-business and business-to-consumer verticals of
the prepaid market including payroll, corporate incentives and benefits.
Suppliers
One of the most important components of our products is the EMV microchip, which we expect to become even
more significant as EMV cards comprise an increasing percentage of the cards we produce. While we have developed
constructive relationships with our suppliers and, in general, receive a high level of cooperation and support from them,
the objective of our procurement strategy is not to depend on any single supplier. We obtain our components from
multiple suppliers located in South Korea, France, the United States and Singapore, primarily on a purchase order basis.
Our main suppliers of EMV microchips are four leading international manufacturers, including one supplier that is also
owned by a competitor. Over 90% of our purchased EMV microchips for the year ended December 31, 2016 came from
these four main suppliers. The other key components for our products are substrates (such as PVC), antennas and inlays
which we also source from multiple suppliers. We continuously monitor supply chain risks and evaluate alternative
suppliers based on numerous attributes including quality, performance, service, scalability, features, innovation and
price.
Customers
In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid
debit issuers and program managers. Our diverse customer base includes many of the largest issuers of credit and debit
cards in the United States and the largest U.S. Prepaid Debit Card program managers. Our top five customers
represented approximately 29.4% of our net sales for the year ended December 31, 2016, and we have been serving
these customers for an average of greater than 10 years.
We generally enter into master purchase or service agreements that govern the general terms and conditions of
our commercial relationships. We then enter into purchase order or other short-term arrangements that define the prices
and the quantities of products to be delivered and services rendered. Usually, our contractual arrangements include
neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a medium
or long-term basis.
Production and Services
Our production and services strategy has several key facets. We have a large network of integrated high-
security facilities that we leverage to balance customer orders, expand the array of products and services available to our
customers, provide consistent supply and execute short lead times. Our facilities and operating processes are designed to
provide a differentiated level of service to each of our key customer sets. For example, we have the processes and
capabilities to:
•
•
execute high-volume production runs that allow us to meet the competitive price points of large orders;
execute lower-volume, highly personalized customized runs that allow us to meet the high-service and
quick-turn needs of smaller orders; and
• meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure
card packaging, and our significant expertise and capabilities specifically designed for this retail prepaid
8
market, as well as on demand solutions for the business-to-business and business-to-consumer prepaid
markets.
Our digital services are designed to scale quickly to efficiently support a growing number of issuers and end
users. These services encompass a variety of secure hosted solutions, which enable improved customer service and
efficiencies for our customers.
We operate approximately 500,000 square feet of facilities in the United States, Canada and the United
Kingdom, where we focus on Financial Payment Card production and personalization services. See Part I, Item 2,
“Properties” of this Annual Report on Form 10-K for information on the operations of each facility.
We rely on secure ground and secure air freight to deliver products to our banking customers. Due to the high-
security nature of the products we provide to our banking customers, product must be shipped to these customers via a
secure method, such as armored vehicle. With respect to customers for whom we fulfill individual and personalized debit
and credit cards, we utilize the U.S., Canadian and U.K. postal services to deliver these cards directly to individual
cardholders. For other customers, we predominately deliver our products via regular ground and air freight.
Sales and Marketing
We market our products and services to large issuers, small to mid-sized issuers, prepaid debit issuers and
program managers. We have approximately 30 field-based sales representatives that give us a wide geographic reach
across the United States, Western Europe and Canada. Our sales representatives offer a complete end-to-end solution
that incorporates the full spectrum of our products and services from concept to delivery. Our sales and marketing
strategy focuses on strengthening our relationships with existing customers, providing a differentiated offer that includes
cross-selling expanded services. We leverage the strength of our full-service offerings to attract new customers. Our
marketing efforts focus on the needs of our specific types of customers. By tailoring our marketing strategy to different
customer groups, we are able to provide relevant targeted solutions to meet their individual needs. We utilize an array of
different marketing communications focused on thought leadership that include industry publications, editorial white
papers, conferences and trade shows, print and digital advertisements and educational webinars designed to introduce
our existing customers and new customers to innovations in the payments market. Through these efforts, we drive
customer retention and satisfaction, and have been able to attract new customers.
Competition
The market for products and services in the payment card industry is highly competitive. Some of our
competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have
substantial flexibility in competing with us, including through the use of integrated product offerings and competitive
pricing. Competitive factors for our business include product quality, security, service reliability, product line
comprehensiveness and integration, timely introduction of new products and features and price. We believe that we
compete favorably in each of these categories.
Our products and services compete with other card manufacturers and card solutions providers. We believe our
primary competitors are Oberthur Technologies S.A., Giesecke & Devrient GmbH, Valid S.A., Gemalto NV and Multi
Packaging Solutions, Inc. Certain existing and potential customers also have the ability to personalize Financial Payment
Cards in-house. In addition, we compete with customers that offer transaction processing products and services to
financial institutions.
Intellectual Property
We own and control various intellectual property rights, such as patents, trade secrets, confidential information,
trademarks, service marks, tradenames, copyrights and applications. We are also a party to certain patent cross-license
arrangements with industry participants and may, from time to time, enter into similar commercial agreements should we
consider it necessary or beneficial for our business.
We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards for
intellectual property protection throughout the world. As of December 31, 2016, we had 30 U.S. and foreign trademark
registrations and applications, 18 existing U.S. patents, 14 foreign patents, as well as 13 pending U.S. and foreign patent
9
applications. Our patents have an average remaining maturity of 12.5 years, and our trademarks will be due for renewal
for additional ten or fifteen-year periods on an ongoing basis.
Environmental Protection
Our manufacturing operations are subject to environmental protection regulations, including those governing
the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste
disposal, the investigation and remediation of soil and groundwater contamination. We are also required to obtain
environmental permits from governmental authorities for certain of our operations. We believe that we are in compliance
with environmental requirements, however, the unfavorable resolution of any environmental matter could have a
material adverse effect on our business, financial condition and result of operations.
Regulation
Privacy and Data Security
In the course of our business, we receive personally identifiable information of cardholders from our customers,
either from a financial institution or through a card processor on behalf of a financial institution. Such information
includes names, addresses, card account numbers and expiration dates. In some cases, we receive a cardholder’s PIN
number. As a service provider to financial institutions in the United States, we comply with the privacy provisions of
Gramm-Leach-Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with various other federal,
state and foreign privacy statutes and regulations, and the PCI Security Standards Council’s Data Security Standards,
each of which is subject to change at any time. We may only use and disclose the personal information we receive on
behalf of our customers for the purposes for which it was provided to us and in a manner that is consistent with each
financial institution’s and processor’s own data privacy and security obligations.
In order to comply with our obligations under the GLBA, applicable state laws and our contractual agreements
with our customers, we are required to safeguard and protect the privacy of personally identifiable information we
receive. As part of their compliance with these requirements, each of our U.S. customers is expected to have a program
in place for responding to unauthorized access to, or use of, consumer information that could result in substantial harm
or inconvenience to consumers. A majority of U.S. states have enacted security breach legislation, requiring varying
levels of consumer notification in the event of a security breach, which could result in significant costs to us and
significant damage to our reputation.
The interpretation of pending and existing laws and regulations is evolving and, therefore, these laws and
regulations may be applied inconsistently. It is possible that our current data protection policies and practices may be
deemed inconsistent with new legal requirements or interpretations thereof, and breaches in the security of our systems
and technology could result in a violation of these laws and regulations.
We are also subject to requirements from the Payment Card Brands, which require us to meet certain security
standards in order to achieve certification that allows us to produce and personalize Financial Payment Cards issued on
their networks. These standards include extensive requirements with respect to the physical characteristics of our
facilities, as well as our electronic treatment and storage of cardholder data. We believe that we have developed
significant expertise in acquiring and maintaining these certifications, and have invested significant capital to obtain and
retain these designations, which are regularly verified by both the Payment Card Brands and our customers. We believe
the long, complex and costly certification process serves as a significant barrier to new entrants to our market.
Financial Services
We are generally not directly subject to federal or state regulations specifically applicable to financial
institutions such as banks, thrifts and credit unions. However, as a provider of products and services to these financial
institutions, our operations may be examined by various state and federal regulatory authorities and representatives of
the Federal Financial Institutions Examination Council, which is a formal inter-agency body empowered to prescribe
uniform principles, standards and report forms for the federal examination of financial institutions and to make
recommendations to promote uniformity in the supervision of financial institutions. Also, state and federal regulations
require our financial institution clients to include certain provisions in their contracts with service providers like us and
10
to conduct ongoing monitoring and risk management for third party relationships. In addition, independent auditors
annually review many of our operations to provide internal control evaluations for our clients’ auditors.
In conducting certain of our card services, we are directly subject to various federal and state laws and
regulations including those relating to the movement of money. In order to comply with our obligations under applicable
laws, we are required, among other things, to comply with licensing and reporting requirements, to implement operating
policies and procedures to comply with anti-money laundering laws, to protect the privacy and security of our clients’
information and to undergo periodic audits and examinations.
In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the
supervision and operation of the financial services industry, including introducing changes that: affect the oversight and
supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce
more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation
practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have
imposed compliance costs and, in some cases, limited revenue sources for us and our clients. The Dodd-Frank Act
established the Consumer Financial Protection Bureau (“CFPB”) which is empowered to conduct rule-making and
supervision related to, and enforcement of, federal consumer financial protection laws. The CFPB has issued guidance
that applies to “supervised service providers” which the CFPB has defined to include service providers, like us, to CFPB
supervised banks and nonbanks. The CFPB has in the past and may in the future issue regulations that may require us to
make compliance investments and/or limit our fees or other revenue sources. We do not currently anticipate a materially
adverse impact on our business, results of operations or financial condition due to these regulations, but it is difficult to
predict with certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our
business or the businesses of our current and potential clients.
Employees and Labor
As of December 31, 2016, our businesses employed 1,308 employees, all of whom are full time employees. We
have never experienced any work stoppages or strikes as a result of labor disputes. We consider our relations with
employees to be good.
Available Information
CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007
and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10026 W.
San Juan Way – Suite 200, Littleton, CO 80127, telephone (303) 973-9311. The Company's Annual Report on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of
charge through the "Investor Relations" portion of the Company's website, as soon as reasonably practical after they are
filed with the SEC. The SEC maintains a web site, www.sec.gov, which contains reports and information statements, and
other information filed electronically with the SEC by the Company.
Item 1A. Risk Factors
Risks Related to Our Business
System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information,
disrupt our internal operations and harm public perception of our products, which could significantly adversely affect
our business.
The reliability and security of our information technology (IT) infrastructure and our ability to protect sensitive
and confidential information for our customers, which include many financial institutions, is critical to our business. Our
handling of personally identifiable information of cardholders, including cardholder names, account numbers and similar
information, makes us a potential target of cyber-attacks and threats to our secure IT systems. We face attempts by
others to penetrate our computer systems and networks to misappropriate this information or interrupt our business. Any
system or network disruption could result in a loss of our intellectual property, the release of sensitive cardholder
information, customer or employee personal data, or the loss of production capabilities at one or more of our production
11
facilities. The protective measures we have implemented may not prevent system or network disruptions and may be
insufficient to prevent or limit the damage from any future security breaches.
In addition, our encryption systems are at risk of being breached or decoded. Smart cards are equipped with
keys that encrypt and decode messages in order to secure transactions and maintain the confidentiality of data. The
security afforded by this technology depends on the integrity of the encryption keys and the complexity of the algorithms
used to encrypt and decode information. Any significant advances in technology that enable the breach of cryptographic
systems, malicious software infiltration or that allow for the exploitation of weaknesses in such systems could result in a
decline in the security we are able to provide through this technology. Any material breach of our secured systems could
harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to
remedy the damages caused by system or network disruptions, whether caused by cyber attacks, security breaches or
otherwise, which could ultimately have an adverse effect on our business, financial condition and results of operations.
In addition, as these threats continue to evolve, we may be required to invest significant additional resources to modify
and enhance our information security and controls or to investigate and remediate any security vulnerabilities.
New and developing technology solutions and products could make our existing technology solutions and products
obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business
could be adversely affected.
The markets for our products and services are subject to technological changes, frequent introductions of new
products and services and evolving industry standards. In particular, the rise in the adoption in wireless payment systems
or mobile payments may make physical cards less attractive as a method of payment. Although to date we have not seen
a meaningful reduction in card-based payments resulting from the emergence of mobile payment applications, mobile
payments offer consumers an alternative method to make purchases without the need to carry a physical card and could,
if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In addition, other new and
developing technology solutions and products could make our existing technology solutions and products obsolete or
irrelevant.
Our ability to enhance our current products and services and to develop and introduce innovative products and
services that address the increasingly sophisticated needs of our customers will significantly affect our future success.
We may not be successful in developing, marketing or selling new products and services that meet these changing
demands. In addition, we may experience difficulties that could delay or prevent the successful development,
introduction or marketing of these services, or our new services and enhancements may not adequately meet the
demands of the marketplace or achieve market acceptance. We continually engage in significant efforts to innovate and
upgrade our products and services. If we are unsuccessful in completing or gaining market acceptance of new products,
services and technologies, it would likely have a material adverse effect on our ability to retain existing customers or
attract new ones.
Our ability to develop and deliver new products and services successfully will depend on various factors,
including our ability to:
•
•
•
•
•
•
effectively identify and capitalize upon opportunities in new and emerging product markets;
invest resources in innovation and research and development;
complete and introduce new products and integrated services solutions in a timely manner;
license any required third-party technology or intellectual property rights;
qualify for and obtain required industry certification for our products; and
comply with applicable data protection regulations.
Opportunities to combine or package products and service offerings and the ability to cross-sell products and
services are critical to remaining competitive in our industry. As a result, part of our business strategy is to develop new
products and services that may be used in conjunction with or in addition to our existing offerings. If we are unable to
identify adequate opportunities to cross-sell our products and services, our financial condition could be negatively
12
impacted. Furthermore, if we are unable to develop and introduce new and innovative products in a cost-effective and
timely manner, our product and service offerings could be rendered obsolete, which could have an adverse effect on our
business, financial condition and results of operations.
The continued adoption of contact and dual-interface EMV technology and capability in the United States may not be
as rapid or widespread as we anticipate, which could adversely affect our growth.
We have made significant investments in our EMV card production and personalization capabilities in the
United States and Canada. Our ability to grow depends significantly on U.S. card issuing banks’ continued adoption of
EMV technology as part of their new technological standards and, in the future, whether such banks issue dual-interface
EMV cards. The conversion of Financial Payment Cards in the United States from magnetic stripe technology to the
EMV standard began in earnest in the second half of 2014 and is expected to continue over the next several years.
Banks may be delayed in transitioning to the issuance of EMV cards or dual-interface EMV cards due to increased costs
and other factors. If these entities do not continue to deploy EMV and dual-interface EMV technology or deploy such
technology less quickly and/or completely than we expect, the consequence could have an adverse effect on our
business, financial condition and results of operations.
Failure to identify, attract and retain new customers or a failure to maintain our relationships with our major
customers could adversely affect our business.
Our business is dependent upon our ability to identify, attract and retain new customers and to maintain our
relationships with our existing customers. A decline in the business of our large customers or a failure to retain such
customers may adversely affect our business, financial condition and results of operations.
A substantial portion of our net sales is derived from several large customers. Our top five customers as of
December 31, 2016 accounted for approximately 29.4% of our net sales for the year ended December 31, 2016. Our
continued business relationship with these customers, and the renewal of key contracts by major customers, may be
impacted by several factors beyond our control, including more attractive product offerings from our competitors,
pricing pressures or the financial health of these customers. Many of our key customers operate in competitive
businesses, and their demand and market positions may vary considerably. These customers depend on favorable
macroeconomic conditions and are impacted by the availability of affordable credit and capital, the level and volatility of
interest rates, inflation, employment levels and consumer confidence, among other factors.
We generally enter into master agreements that govern the general terms and conditions of our commercial
relationships. We then enter into purchase order or other short-term agreements that define the prices and the quantities
of products to be delivered. Usually, our contractual arrangements include neither exclusivity clauses nor commitments
from our customers to order any given quantities of products on a medium or long-term basis.
Therefore, we may not be able to maintain our market share with our key customers, which could have an
adverse effect on our business, financial condition and results of operations. Furthermore, there is no guarantee that we
will be able to renew or win significant contracts in a given year. If we were to lose important programs for our products
with any of our key customers, or if any key customer were to reduce or change its contract, seek alternate suppliers,
increase its product returns or become unable or otherwise fail to meet its payment obligations, our business, financial
condition and results of operations could be materially adversely affected.
We face competition that may result in a loss of our market share and/or a decline in our profitability.
We expect our marketplace to continue to be highly competitive as new product markets develop, industry
standards become well known and other competitors attempt to enter the markets in which we operate. In addition, we
expect to encounter further consolidation in the markets in which we operate.
Some of our competitors have longer operating histories, and, when viewed globally, larger customer bases and
significantly greater financial, sales and marketing, manufacturing, distribution, technical and other capabilities than we
do. These competitors may be able to adapt more quickly to new or emerging technological requirements and changes in
customer and/or regulatory requirements. They may also be able to devote greater resources to the promotion and sale of
their products and services. We also face competition from newly established competitors, suppliers of products and
customers who choose to develop their own products and services.
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Existing or new competitors may develop products, technologies or services that more effectively address our
markets with enhanced features and functionality, greater levels of integration and/or lower cost. Additionally, mobile
payment technology could develop to replace the products and services we offer, which could render our offerings dated
or obsolete, or existing alternative standards of secured mobile payment technology could gain widespread market
acceptance, which could have an adverse impact on our business. As the technological sophistication of our competitors
and the size of the market increase, competing low-cost producers could emerge and grow stronger. If our customers
prefer low-cost alternatives to our products, our revenue and profitability could be adversely affected. Increased
competition has historically resulted in, and is likely to continue to result in, declining average selling prices and reduced
gross margins in certain of our businesses and the loss of market share in certain markets. We may not be able to
continue to compete successfully against current or new competitors. If we fail to compete successfully, we may lose
market share in our existing markets, which could have an adverse effect on our business, financial condition and results
of operations.
The financial payment card industry may be subject to price erosion, which could have an adverse effect on our
business.
One of the results of the rapid innovation in the financial payment card industry is that pricing pressure can be
intense, in particular for large credit and debit card issuers and large card processors. Our large credit and debit card
issuer customers face continued competitive pressure. As these issuers seek to reduce their expenses, we, in turn, may
experience a decline in the prices at which our products can be sold and at which such services can be offered. In such
instances, in order to continue to supply these products and services at competitive prices, we must reduce our
production costs. Typically, we are able to accomplish this through leveraging our scale and production efficiencies.
However, if we cannot continue to improve our efficiencies to a degree sufficient for maintaining the required margins,
we may no longer be able to generate a profit from the sale of these products and services. Moreover, we may not be
able to cease production of such products, either due to our ongoing contractual obligations or the risk of losing our
existing customer relationships, and as a result may be required to bear a loss on such products. Further competition in
our core product and service markets may lead to price erosion, lower revenue growth rates and lower margins in the
future. Should reductions in our production costs fail to keep pace with reductions in market prices for the products we
sell, there could be an adverse effect on our business, financial condition and results of operations.
If we fail to accurately project demand for our products and services, we may encounter problems of inadequate
supply or oversupply, which would materially and adversely affect our financial condition and results of operations,
as well as damage our reputation and brand.
Our customers typically order our products and services on a purchase-order basis. We project product demand
based on, among other things, addressable market size, estimated anticipated conversion to EMV technology, pricing
pressure and competition. However, the emerging nature of our industry, our lack of significant order backlog and the
varying sales and purchasing cycles of our customers make it difficult for us to accurately forecast demand.
If we overestimate demand, we may have higher raw material or product component inventory levels than required.
If we underestimate demand, our third-party suppliers may have inadequate raw material or product component
inventories, which could interrupt our manufacturing and delay shipments, and could result in lost sales. In particular, we
are seeking to manage our procurement and inventory costs by matching our inventories closely with our projected
manufacturing needs and by, from time to time, deferring our purchase of raw materials and components in anticipation
of supplier price reductions. As we seek to balance inventory costs and production flexibility, we may fail to accurately
forecast demand to predict and maintain appropriate levels of inventory reserve, which could cause uneven and
unpredictable flow or could affect our ability to coordinate our procurement and production to meet demand on a timely
basis. Our inability to accurately predict or timely meet demand could materially and adversely affect our financial
conditions and results of operations as well as damage our reputation and brand.
The continued adoption of EMV technology may cause our customers to extend their expiration cycles, which could
reduce the volume of cards they purchase from us.
We estimate that, on average, bank debit cards and general purpose credit cards have historically been renewed
every three years due to fixed expiration dates, and this regular renewal cycle is a significant driver of demand for
Financial Payment Cards. Issuers of bank debit cards and general purpose credit cards could extend the length of time
that each card may be active prior to expiration to four or five years in order to reduce the costs associated with issuing
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more expensive EMV cards. While some of our Financial Payment Card issuer customers have extended the expiration
cycles on their EMV cards during 2016, we believe this continues to be the exception rather than the norm, and the
majority of our Financial Payment Card issuer customers have maintained three-year expiration cycles. If however,
Financial Payment Card issuers do extend the reissuance cycle in the future, we may experience a decreased demand for
bank debit cards and general purpose credit cards. If the reissuance cycle is significantly extended beyond historical
averages, demand from our customers for our products may decrease significantly and our business, financial condition
and results of operations could be materially and adversely affected.
Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other
industry standards applicable to our customers, such as Payment Card Brand certification standards, could have a
material adverse effect on our business.
Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the
standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and
manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to
supply products and services to such customers. Most of our contractual arrangements with our customers may be
terminated if we fail to comply with these standards and criteria.
We make significant investments to our network of high-security facilities in the United States and Canada in
order to meet these standards and criteria, including investments required to satisfy changes adopted from time to time in
their respective standards and criteria. Further investments may be costly, and if we are unable to continue to meet these
standards and criteria, we may become ineligible to provide products and services that have constituted in the past an
important part of our revenue and profitability. For the year ended December 31, 2016, the vast majority of the products
we produced and services we provided were subject to certification with one or more of the Payment Card Brands. If we
were to lose our certification from one or more of the Payment Card Brands, Interac (in Canada) or PCI certification for
one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or
debit cards on the networks of the Payment Card Brands. If we are not able to produce cards for or provide services to
any or all of the issuers issuing debit or credit cards on such networks, we could lose a substantial number of our
customers and our financial condition and results of operations would be adversely affected.
We may be required to defend against alleged infringement of the intellectual property rights of others and/or may be
unable to adequately protect or enforce our own intellectual property rights.
Companies in our industry aggressively protect and pursue their intellectual property rights. Our products may
contain technology provided to us by other parties such as suppliers or customers. We may have little or no ability to
determine in advance whether such technology infringes the intellectual property rights of a third party. From time to
time, we receive notices or are named in litigation, and are currently subject to various actions that claim we have
infringed upon, misappropriated or misused other parties’ proprietary rights. Additionally, we receive notices that
challenge the validity of our patents. Intellectual property litigation can be expensive, time consuming and distracting to
management. An adverse determination in any of these types of disputes could prevent us from producing or offering
some of our products and services or could prevent us from enforcing our intellectual property rights. Furthermore,
settlements can involve royalty or other payments that could reduce our profit margins and adversely affect our financial
results. Our suppliers, customers and licensors may not be required to indemnify us in the event that a claim of
infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which
we would be responsible for any further costs or damages. Any of these claims or litigation may materially and
adversely affect our business, financial condition and results of operations.
We may also be required to indemnify some customers and strategic partners under our agreements if a third
party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another
party’s proprietary rights. Indemnification provisions may, in some circumstances, extend our liability beyond the
products we provide and may include consequential damages and/or lost profits. Even if claims or litigation against us
are not valid or successfully asserted, these claims could, and often do, result in significant costs and the diversion of the
attention of management and other key employees to defend.
Furthermore, our success and future revenue growth will depend, in part, on our ability to protect our
intellectual property. We depend on patents and other intellectual property rights to protect our products, proprietary
designs and technological processes against misappropriation by others. We may in the future have difficulty obtaining
patents and other intellectual property protection, and the patents and intellectual property rights that we receive may be
insufficient to provide us with meaningful protection or commercial advantage. Effective patent, trademark, service
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mark, copyright and trade secret protection may not be available in every country in which our services are made
available. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our
technologies and processes, or confidential employee, customer or supplier data. Any of our existing or future patents
may be challenged, invalidated or circumvented. We engage, and are currently engaged, in litigation to enforce or defend
our intellectual property rights, protect our trade secrets and determine the validity and scope of the proprietary rights of
others, including our customers. We also enter into confidentiality agreements with our consultants and strategic partners
and control access to and distribution of our technologies, documentation and other proprietary information; however,
such agreements may not be enforceable or provide us with an adequate remedy. Despite these efforts, internal or
external parties may attempt to copy, disclose, obtain or use our products, services or technology without our
authorization. If we cannot adequately protect our technology, our competitors may be able to offer certain products
and/or services similar to ours.
Our software may be derived from open source software, which is generally made available to the public by its
authors and/or other third parties. Open source software is often made available under licenses, which impose certain
obligations in the event we distribute derivative works of the open source software. These obligations may require us to
make source code for the derivative works available to the public and/or license such derivative works on terms different
from those customarily used to protect our intellectual property. With respect to our proprietary software, we generally
license such software under terms that prohibit combining it with open source software. Despite these restrictions,
parties may combine our proprietary software with open source software without our authorization, in which case we
might nonetheless be required to release the source code of our proprietary software. In addition to risks related to
license requirements, usage of open source software can lead to greater risks than the use of third-party commercial
software, as open source licensors generally do not provide warranties, controls on the origin or development of the
software, or remedies against the licensors. Many of the risks associated with usage of open source software cannot be
eliminated and could adversely affect our business.
Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual
property of our customers may not succeed. Although we actively seek to protect our proprietary rights, nevertheless,
unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use information that
we regard as proprietary. Identifying unauthorized use of our products and technologies is difficult and time consuming.
The initiation of litigation as a result of the misappropriation or infringement of our intellectual property may adversely
affect our relationships and agreements with certain customers that have a stake in the outcome of the litigation
proceedings. Litigation is very expensive and may divert the attention of management and other key employees from the
operation of our business, all of which could have an adverse effect on our business, financial condition and results of
operations.
Our business could suffer from problems in production quality and process.
We produce our products using processes that are highly complex, require advanced and costly equipment and
must continually be modified to improve yields and performance. Difficulties in the production process can reduce
product yields, reduce product quality or interrupt production altogether. As a result of such problems, we may not be
able to deliver products, or may be able to deliver products, but in a less timely or cost-effective manner or at a lower
than expected quality level, or we may be required to rework or replace products. As the complexity of both our products
and our technological processes has become more advanced, production tolerances have been reduced and requirements
for precision have become more demanding. If we do not advance our production processes at the market rate, we may
experience a lower production quality than the market standard. We may suffer disruptions in our production, either due
to production difficulties, such as machinery or technology failures, or as a result of external factors beyond our control,
such as interruption of our electrical service or a natural disaster. Any such event could have an adverse effect on our
business, financial condition and results of operations.
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We may experience software defects, which could harm our business and reputation and expose us to potential
liability.
Our services are based on sophisticated software and computing systems, and the software underlying our
services may contain undetected errors or defects when first introduced or when new versions are released. In addition,
we may experience difficulties in installing or integrating our technology on systems used by our clients. Defects in our
software, errors or delays in the processing of electronic transactions or other difficulties could result in the interruption
of business operations, delays in market acceptance, additional development and remediation costs, diversion of
technical and other resources, loss of clients, negative publicity or exposure to liability claims. Although we attempt to
limit our potential liability through disclaimers and limitation of liability provisions in our license and client agreements,
we cannot be certain that these measures will successfully limit our liability.
Demand for Financial Payment Cards may be adversely impacted by U.S. and global market and economic
conditions.
For the foreseeable future, we expect to continue to derive most of our revenue from products and services we
provide to the financial services industry. Given this concentration, we are exposed to the economic conditions affecting
the financial services industry in the United States and Canada. For example, prolonged economic downturns typically
have resulted in significant reductions in the demand for general purpose credit cards due to tightening credit conditions.
A prolonged poor economic environment could result in significant decreases in demand by current and potential
customers for our products and services, which could have a material adverse effect on our business, results of
operations and financial condition.
Our outstanding indebtedness may impact our business and may restrict our growth and results of operations, and
future EBITDA declines, should they occur, could make it difficult or impossible to refinance our debt when it comes
due.
As of December 31, 2016, we had $301.9 million of total indebtedness outstanding, net of unamortized
discount and deferred financing costs of $10.6 million under our First Lien Term Loan Facility. See Part II, Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources”.
We may incur additional indebtedness in the future to help fund the growth of our business, subject to market
and other conditions. Our substantial indebtedness and interest expense could have important consequences to us,
including:
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limiting our ability to use a substantial portion of our cash flow from operations in other areas of our
business, including for working capital, capital expenditures and other general business activities, because
we must dedicate a substantial portion of these funds to service our debt;
our First Lien Credit Facility is entirely floating rate debt, and rising interest rates could have a material
impact on our cash flows, results of operations and financial condition;
requiring us to seek to incur further indebtedness in order to make the capital expenditures and other
expenses or investments planned by us to the extent our future cash flows are insufficient;
limiting our ability to obtain additional financing in the future for working capital, capital expenditures,
debt service requirements, acquisitions and the execution of our growth strategy, and other expenses or
investments planned by us;
limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive
pressures and adverse changes in government regulation, our business and our industry;
limiting our ability to satisfy our obligations under our indebtedness (which could result in an event of
default and acceleration if we fail to comply with the requirements of our indebtedness);
increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions
generally;
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•
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placing us at a competitive disadvantage as compared to our competitors that are less leveraged; and
limiting our ability, or increasing the costs, to refinance indebtedness, when our First Lien Term Loan
matures on August 17, 2022, and our Revolving Credit Facility matures on August 17, 2020.
The limitations described above could have a material adverse effect on our business, financial condition,
results of operations, prospects, and ability to satisfy our obligations under our indebtedness.
If we fail to meet customer demands in a timely manner, we could lose certain critical business relationships.
Our ability to provide products and services and meet very high quality standards in a timely manner is critical
to our business success. For example, one of the key services that we offer our customers is the prompt and timely
production and delivery of replacement debit or credit cards. Orders for replacement debit or credit cards are often
placed on short notice and may require personalization. If we are unable to offer these and our other products and
services in a timely manner or due to software malfunction, logistical impediments at any of our facilities, or economic,
social, political or other challenges impacting the industry as a whole, our relationships with our customers may be
adversely affected and we may lose major contracts, all of which could have an adverse effect on our business, financial
condition and results of operations.
If the recently elected United States government puts significant tariffs or other restrictions on goods imported into
the United States, our revenue and results of operations may be materially harmed.
The United States government may restrict trade with certain countries and/or impose tariffs on imports from
certain countries. Most of our chips are imported from companies located outside of the United States. If any such
restrictions or tariffs are imposed on products that we import from our overseas suppliers, we may be required to raise
our prices or find alternative suppliers, which may not be possible at the same cost or quality, which could adversely
impact our business, financial condition and results of operations.
Economic conditions and regulatory changes leading up to and following the United Kingdom’s likely exit from the
European Union could have a material adverse effect on our business and results of operations.
On June 23, 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved an exit from
the European Union (the “E.U.”), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the
British government will begin negotiating the terms of the U.K.’s withdrawal from the E.U. in 2017. Brexit could
adversely affect European or worldwide economic or market conditions and could contribute to instability in global
financial markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and
regulations as the U.K. determines which E.U. laws to replace or replicate. There is also uncertainty on the type of trade
agreement that will exist with the E.U. after the U.K.’s withdrawal. Any of the foregoing could adversely impact our
U.K. operations, which accounted for 9.6% and 9.2% of our net sales for the years ended December 31, 2016 and 2015,
respectively.
The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate
fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business,
including the British Pound. Brexit has also caused other members of the E.U. to consider exit as well, which could lead
to further disruptions and uncertainty with respect to our business operations. The strengthening of the U.S. dollar
relative to other currencies may adversely affect our operating results.
Our business may be adversely affected by costs relating to product defects, and we could be faced with product
liability and warranty claims.
We offer highly complex services and products and, accordingly, there is a risk that defects may occur in any of
our services or products. Such defects can give rise to significant costs, including expenses relating to recalling products,
replacing defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In
addition, the occurrence of such defects may give rise to product liability and warranty claims, including liability for
damages caused by such defects. If we release defective products in the market, our reputation could suffer and we may
lose sales opportunities and incur liability for damages, including damage claims from customers in excess of the
amounts they pay us for our products, including consequential damages. In addition, our customers may recall their
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products if they prove to be defective or make compensatory payments in accordance with industry or business practice
or in order to maintain good customer relationships. If such a recall or payment is caused by a defect in one of our
products, our customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our
reputation would be harmed and there could be an adverse effect to our business, financial condition and results of
operations.
We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners
could adversely affect our business.
Many of our products integrate third-party technologies that we license or otherwise obtain the right to use,
including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy,
we have entered into licensing agreements with other leading industry participants that provide us with, among other
benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and
Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products,
including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart
cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements
with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not
continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have
also entered into cross-licensing agreements with certain of our competitors that provide for an exchange of intellectual
property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to
successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain
of our products, which could adversely affect our operations.
Most of our facilities are leased, in whole or in part, and our inability to renew our leases on commercially acceptable
terms or at all may adversely affect our results of operations.
Most of our facilities are located, in whole or in part, on leased property. We may be unable to renew such
leases on commercially acceptable terms or at all. Our inability to renew our leases, or a renewal of our leases with a
rental rate higher than the prevailing rate under the applicable lease prior to expiration, may have an adverse impact on
our operations, including disrupting our operations or increasing our cost of operations. In addition, in the event of
non-renewal of any of our leases, we may be unable to locate suitable replacement properties for our facilities or we may
experience delays in relocation that could lead to a disruption in our operations. Any disruption in our operations could
have an adverse effect on our financial condition and results of operation.
Interruptions in our IT systems could adversely affect our business.
We rely on the efficient and uninterrupted operation of complex IT applications, systems and networks to
operate our business. The reliability of our IT infrastructure and software, and our ability to expand and continually
update technologies in response to our changing needs, are critical to our business. Any significant interruption in our
business applications, systems or networks, including, but not limited to, new system implementations, facility issues or
energy blackouts, could have a material adverse impact on our operations, sales and operating results.
Not only would we suffer damage to our reputation in the event of a system outage or data loss or interruption,
but we may also be liable to third parties. Some of our contractual agreements with financial institutions require the
payment of penalties if our systems do not meet certain operating standards. In addition, to successfully operate our
business, we must be able to protect our processing and other systems from interruption, including from events that may
be beyond our control. The protective measures we have adopted to avoid system or network disruptions may be
insufficient to prevent or limit the damage from any future disruptions, and any such disruption could have an adverse
effect on our business, financial condition and results of operations.
The terms of our First Lien Credit Facility restrict, and covenants contained in agreements governing indebtedness in
the future may restrict, our ability to operate our business and to pursue our business strategies.
Our First Lien Credit Facility contains, and any future indebtedness of ours may contain, a number of restrictive
covenants that impose customary operating and financial restrictions on us. Our First Lien Credit Facility places certain
restrictions or limitations on our ability and the ability of our restricted subsidiaries, among other things, to:
•
incur additional debt or contingent liabilities;
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•
declare or pay dividends, redeem stock, or make other distributions to stockholders;
• make loans, advances, guarantees or other investments;
•
create liens or use assets as security in other transactions;
• merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;
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enter into transactions with affiliates; and
enter into certain asset sale transactions or other dispositions of assets.
In addition, as of the last day of any fiscal quarter, if the amount we have drawn under the First Lien Revolving
Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, we
are required to maintain a first lien net leverage ratio not in excess of 7.0x. Our failure to comply with any of these
covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our
indebtedness under the First Lien Credit Facility.
We are required to comply with laws and regulations in other countries and are exposed to business risks associated
with our international operations.
For the years ended December 31, 2016, 2015 and 2014, we derived 15.0%, 15.5%, and 24.7%, respectively, of
our net sales from outside the United States, primarily in Canada and the United Kingdom. As a result, we are subject to
numerous evolving and complex laws and regulations which apply, among other things, to financial reporting standards,
corporate governance, data privacy, tax, trade regulations, export controls, competitive practices, and labor and health
and safety laws and regulations in each jurisdiction in which we operate. We are also required to obtain environmental
permits and other authorizations or licenses from governmental authorities for certain of our operations and must protect
our intellectual property worldwide. In the jurisdictions in which we operate, we need to comply with various standards
and practices of different regulatory, tax, judicial and administrative bodies.
There are a number of risks associated with international business operations, including political instability
(e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions, unanticipated
changes in the regulatory environment, and import and export restrictions. Any of these events may affect our
employees, reputation, business or financial results as well as our ability to meet our objectives, including the following
international business risks:
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negative economic developments in economies around the world and the instability of governments, or the
downgrades in the debt ratings of certain major economies;
social and political instability;
complex regulations governing certain of our products;
potential terrorist attacks;
adverse changes in governmental policies, especially those affecting trade and investment;
foreign currency exchange, particularly with respect to the Canadian Dollar and British Pound Sterling; and
threats that our operations or property could be subject to nationalization and expropriation.
We may not be in full compliance at all times with the laws and regulations to which we are subject. Likewise,
we may not have obtained or may not be able to obtain the permits and other authorizations or licenses that we need. If
we violate or fail to comply with laws, regulations, permits, health and safety regulations or other authorizations or
licenses, we could be fined or otherwise sanctioned by regulators. In such a case, or if any of these international business
risks were to materialize, our business, financial condition and results of operations could be adversely affected.
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We face risks associated with our acquisition strategy.
Our future success may depend on acquiring businesses and technologies, making investments or forming joint
ventures that complement, enhance or expand our current portfolio or otherwise offer us growth opportunities. The
expansion of our business through acquisitions allows us to complement our existing product offerings and enhance our
technological capabilities.
We face a number of challenges associated with our acquisition strategy that could disrupt our ongoing business
and distract our management team, including:
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lower gross margins, revenue and operating income than originally anticipated at the time of acquisition
and other financial challenges;
delays in the timing and successful integration of an acquired company’s technologies;
the loss of key personnel; and
becoming subject to intellectual property, antitrust or other litigation.
Acquisitions can result in increased debt or contingent liabilities. Acquisitions can also result in adverse tax
consequences, warranty or product liability exposure related to acquired assets, additional stock-based compensation
expense, the write-up of acquired inventory to fair value, and the recording and later amortization of amounts related to
certain purchased intangible assets, all of which can adversely affect our reported results. In addition, we have in the past
and may in the future record goodwill and other purchased intangible assets in connection with an acquisition and incur
impairment charges.
A failure to implement our acquisition strategy, obtain sufficient financing or integrate acquired businesses
successfully could adversely affect our business, financial condition and results of operations.
Our business depends upon our ability to obtain specialized equipment from third-party suppliers, and we may be
subject to delayed deliveries and future price increases.
Our production processes depend on specialized equipment that we purchase and/or lease from third party
suppliers. At times during the business cycle, there may be high demand for such equipment, with extended lead times to
obtain such equipment. Further, there are a limited number of suppliers that manufacture and service the equipment we
use. Should our current suppliers be unable or unwilling to provide the necessary equipment or otherwise fail to deliver
or service such equipment in a timely manner, any resulting delays in our production processes could have an adverse
effect on our business, financial condition, results of operations. In addition, the prices of the equipment we use may rise
in the future, and any future price increases for this type of equipment could negatively impact our ability to purchase
new equipment or to service existing equipment.
The chip operating systems developed by our competitors may put us at a competitive disadvantage.
Certain of our competitors have internally developed their own chip operating systems, including for use in
EMV cards. Ownership of these internal operating systems may give our competitors a cost advantage over us, as we
utilize the chip operating systems designed by our chip suppliers for use on their respective chips. If our competitors are
able to reduce the prices of their products and services as a result of the cost savings they might realize from using their
own internally developed operating system, our profitability may be adversely affected. Additionally, customers may
prefer the operating systems of our competitors over the operating systems that we utilize in our EMV cards. If
customers are more attracted to our competitors’ internally developed operating systems, demand for our products and
services may be reduced, thereby adversely affecting our results of operations.
Our business depends on the continued viability of the card networks of the Payment Card Brands.
The vast majority of cards we produce and the services we provide are associated with one of the Payment Card
Brands. As a result, we depend on the continued viability of the card networks of the Payment Card Brands, including
their authorization, clearing and settlement systems. If one or more of the Payment Card Brands were to discontinue
their services or otherwise experience a decline in the volume of cards bearing their brands, our results of operations
could be adversely affected.
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We are dependent on key executives, the loss of whom could adversely affect our business.
Our future success depends to a significant extent on the efforts of our senior management. We believe there are
only a limited number of available and qualified executives with substantial experience in our industry. Accordingly, the
loss of the services of one or more of the members of our senior management could delay or prevent us from fully
implementing our business strategy and, consequently, significantly and negatively affect our business.
If any member of senior management dies or becomes incapacitated, or leaves the Company to pursue
employment opportunities elsewhere, we would need to locate an adequate replacement. To the extent that we are unable
to locate an adequate replacement, or are unable to do so within a reasonable period of time, our business may be
significantly and negatively affected.
We rely on the timely supply of materials and products and our business could suffer if our suppliers fail to meet their
delivery obligations or raise their prices.
Our production operations depend on deliveries of microchips and other materials in a timely manner and, in
some cases, on a just-in-time basis. From time to time, suppliers may extend lead times, limit the amounts supplied to us
or increase prices due to capacity constraints or other factors. We may not be able to meet the demands of our customers
in a timely manner, or at all, due to shortages in the supply of critical materials. The supplies we purchase could also
have latent quality issues, causing quality problems with the products we produce, increased costs due to scrap or
rework, or delays to our delivery timelines. Additionally, certain product materials required in our production operations
are only available from a limited number of suppliers, and we may not be able to find an adequate replacement for such
materials if our suppliers are unable to meet their delivery obligations to us. In particular, we rely on a small group of
suppliers for the provision of EMV microchips that we use in our Financial Payment Cards. For the year ended
December 31, 2016, we obtained over 90% of our total purchased EMV microchips from four main suppliers. If any one
of these EMV microchip suppliers, or any supplier of our other raw materials, fails to deliver our requirements, our
production could be disrupted. In addition, as a result of a shortage, we may be compelled to delay shipments of our
products, or devote additional resources to maintaining higher levels of inventory. Consequently, we may experience
substantial period-to-period fluctuations in our cost of sales and, therefore, in our future results of operations. If we are
unable to obtain adequate supplies of quality materials in a timely manner or if there are significant increases in the cost
of these materials, our business, financial condition and results of operations could be adversely affected.
Changes in laws, regulations and enforcement activities relating to the financial services industry may adversely
affect the products, services and markets in which we operate.
We and our customers are subject to laws and regulations that affect the financial services industry in the many
countries in which our products and services are used. In particular, our customers are subject to numerous laws and
regulations applicable to banks, financial institutions and card issuers in the United States, Europe and other regions. The
U.S. Government, for instance, has increased its scrutiny of a number of credit and debit card practices, from which
some of our customers derive significant revenue. Regulation of the payments industry, including the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), privacy and data security regulations such as the
GLBA, and other regulations applicable to us and our customers, has increased significantly in recent years. Our failure
to comply with the laws and regulations applicable to our business may result in the suspension or revocation of our
licenses or registrations, the limitation, suspension or termination of our services, and/or the imposition of consent orders
or civil and criminal penalties, including fines, which could have an adverse effect on our business, financial condition
and results of operations.
Environmental, health and safety laws and regulations expose us to liability and any such liability may adversely
affect our business.
We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we
operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste
disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our
employees. For example, our products and the raw materials we use in our production processes are subject to numerous
environmental laws and regulations. We are also required to obtain environmental permits from governmental authorities
for certain of our operations. We may not be able to be at all times, in full compliance with such laws, regulations and
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permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise
sanctioned by regulators.
As with other companies engaged in similar activities or that own or operate real property, we face inherent
risks of environmental liability at our current and historical production facilities. Certain environmental laws impose
strict and, in certain circumstances, joint and several liability on current or previous owners or operators of real property
for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages
to natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced
with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of
complying with current and future environmental and health and safety laws, or our liabilities arising from past or future
releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition
and results of operations.
The scientific examination of, political attention to, and rules and regulations on issues surrounding the
existence and extent of climate change may result in an increase in our cost of production due to increases in the price of
energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced
that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. Companies
such as ours may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These
developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in
environmental regulations could increase our production costs, which could adversely affect our business, financial
condition and results of operations.
Certain natural disasters, such as flooding, earthquakes, nuclear disasters, certain weather conditions and other
catastrophic events, such as fire, may negatively impact our business.
The occurrence of severe weather events, such as rain, snow, wind, storms, hurricanes or other natural disasters,
such as flooding, earthquakes, nuclear disasters, fire or a combination thereof, may negatively impact our business. If
certain natural disasters, extreme weather conditions or other events such as fire were to directly damage, destroy or
disrupt our production facilities, it could disrupt our operations, delay new production and shipments of existing
inventory or result in costly repairs, replacements or other costs, all of which would negatively impact our business.
Even if our production facilities are not directly damaged, a large natural disaster or fire may result in disruptions in
distribution channels or supply chains and significantly increase the prices of the raw materials we use in our production
processes. The impact of any such natural disasters, weather changes or other disasters such as fire depends on the
specific geographic circumstances but could be significant, and we cannot predict the economic impact, if any, of natural
disasters or climate change. Any such disruptions could have an adverse effect on our business, financial condition and
results of operations.
Our insurance may be inadequate to cover future liabilities and our insurance premiums may increase substantially.
We may be subject to significant losses from claims, liabilities, hazards and disasters. While we currently
maintain insurance which we believe is adequate and consistent with industry practice, we may experience losses in
excess of our insurance coverage or claims not covered by our insurance. Furthermore, we may not be able to obtain
insurance coverage in the future on acceptable terms, or at all. Any such losses not covered by insurance may have a
material adverse effect on our business, financial condition and results of operations.
Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value.
Our long-lived assets recorded as of December 31, 2016 were $171.8 million, representing 64% of our total
assets, of which we have recorded plant, equipment and leasehold improvements of $53.4 million as our operation
requires significant investments in machinery and equipment.
We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived
assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for
impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may
not be recoverable. If we were to conclude that an additional future write-down of our long-lived assets is necessary, we
would have to record the appropriate charge, which could result in a material adverse effect on our results of operations.
A write-down of our long-lived assets may result from, among other things, deterioration in our performance and a
23
decline in expected future cash flows and could have an adverse effect on our business, financial condition and results of
operations.
During the fourth quarter of 2016, based on the goodwill and other indefinite-lived intangible assets impairment
test performed annually as of October 1, we recorded an impairment charge of $2.7 million related to a trademark
acquired in the EFT Source acquisition. The impairment was a result of the Company’s plans to discontinue its use of the
trademark in its sales, marketing and other business practices. See Part II, Item 8, Financial Statements and
Supplementary Data, Note 7 “Goodwill and Other Intangible Assets,” in this Annual Report on Form 10-K for more
information.
The ability to recruit, retain and develop qualified personnel is critical to our success and growth.
Our business functions are complex and require wide-ranging expertise and intellectual capital. For us to
successfully compete and grow, we must retain, recruit and develop personnel who can provide the needed expertise
across the entire spectrum of our intellectual capital needs. In addition, we must develop our personnel to provide
succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital.
However, the market for qualified personnel is competitive and we may not succeed in recruiting additional personnel or
may fail to effectively replace current personnel who depart with qualified or effective successors. Our efforts to retain
and develop personnel may also result in significant additional expenses, which could adversely affect our profitability.
Our key personnel may not continue to be employed or we may be unable to attract and retain qualified personnel in the
future. Such a failure to retain or attract key personnel could have an adverse effect on our business, financial condition
and results of operations.
Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may
differ significantly from our expectations or guidance.
Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue
and profitability or lead to significant variability in our operating results. These factors include, among others, the
cyclicality of the financial card and electronic payment industries, capital requirements, inventory management, the
availability of funding, competition, new product developments, technological changes and production problems. For
example, if anticipated sales or shipments do not occur when expected, expenses and inventory levels in a given quarter
can be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, may be
adversely affected. In addition, our effective tax rate currently takes into consideration certain favorable tax rates and
incentives which, in the future, may not be available to us.
A number of other factors could lead to fluctuations in quarterly and annual operating results, including:
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order cancellations or rescheduling by customers;
unpredictable ordering patterns by customers;
the adoption of EMV technology by customers may be more uneven or unpredictable than we anticipate;
restructuring and impairment charges;
fluctuations in currency exchange rates, particularly between the U.S. dollar and the Canadian Dollar and
British Pound Sterling;
intellectual property developments;
changes in distribution and sales arrangements;
the failure to win new projects;
production performance and yields;
product liability or warranty claims;
litigation;
taxation;
acquisitions or divestitures;
24
•
•
•
•
obtaining adequate raw materials or production equipment on a timely basis;
changing raw material prices;
property loss or damage or interruptions to our business, including as a result of fire, natural disasters or
other disturbances at our facilities or those of our customers and suppliers that may exceed the amounts
recoverable under our insurance policies; and
changes in the market value or yield of the financial instruments in which we invest our liquidity.
Unfavorable changes related to certain of the above factors have in the past and any of the above factors may in
the future adversely affect our operating results. Furthermore, in periods of industry overcapacity or when our key
customers encounter difficulties in their end-markets, orders are more exposed to cancellations, reductions, price
renegotiations or postponements, which in turn reduce our management’s ability to forecast the next quarter or full-year
production levels, net sales and margins. For these reasons, our net sales and operating results may differ materially from
our expectations or guidance as visibility is reduced and have an adverse effect on our business, financial condition and
results of operations.
Consolidations in the banking, financial services and card processing industry could eliminate existing or potential
clients.
Failures, mergers and consolidations of financial institutions and card processors may reduce the number of our
clients and potential clients, which could adversely affect our net sales. Further, if our clients fail, merge with or are
acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce their
use of our services. It is also possible that the larger financial institutions and card processors that result from mergers or
consolidations would have greater leverage in negotiating terms with us or could decide to perform in-house some or all
of the services which we currently provide or could provide. Any of these developments could have an adverse effect on
our business, results of operations and financial condition.
We are subject to the credit risk that our customers may be unable to satisfy their obligations to us.
A significant portion of our net sales are on an open credit basis, with typical payment terms of 30 days, and up
to 60 days in some cases, and we are subject to the credit risk of our customers being unable to make payments to us. If
any of our customers experience a bankruptcy or are otherwise unable to satisfy their payment obligations to us, any
related losses, if incurred, could harm our business and have an adverse effect on our operating results and financial
condition if they significantly exceed our reserve for losses on our balance sheet.
If we are unable to implement and maintain effective internal controls over financial reporting, investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our common stock may
be negatively affected.
As a public company, we are required to maintain internal controls over financial reporting and to report any
material weaknesses in such internal controls. A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a
company’s annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires that we evaluate and determine the effectiveness of
our internal controls over financial reporting and, beginning with this Annual Report on Form 10-K, provide a
management report on the internal controls over financial reporting. As an “emerging growth company” (as defined by
the JOBS Act) we are not currently required to obtain an attestation from our independent public accounting firm on our
management report on internal controls over financial reporting. However, we will be required to obtain such an
attestation when we are no longer an emerging growth company.
We previously identified and disclosed a material weakness in our internal controls over financial reporting
related to the lack of finance expertise that we believed could have resulted in a failure to properly account for non-
routine and complex transactions in accordance with GAAP. We believe we have since remediated the previously
disclosed material weakness, and that we are in compliance with the Sarbanes-Oxley Act requirements. However, from
time to time, we may discover areas of our internal controls that need improvement. If we or our independent registered
public accounting firm discover a material weakness in the future, the disclosure of that fact, even if quickly remediated,
could reduce the market’s confidence in our financial statements and harm our stock price. We may not be able to
25
effectively and timely implement necessary control changes and employee training to ensure continued compliance with
the Sarbanes-Oxley Act and other regulatory and reporting requirements. If we fail to maintain effective internal
controls, we could be subject to regulatory scrutiny and sanctions and investors could lose confidence in the accuracy
and completeness of our financial reports.
Changes in accounting standards could materially affect how we report our financial condition and results of
operations.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the
interpretation of such standards that govern the preparation of our external financial statements. These changes are
beyond our control, can be difficult to predict, may require extraordinary efforts or additional costs to implement and
could materially impact how we report our financial condition and results of operations. It is possible that we may not be
prepared to implement a new accounting standard when it is required to be implemented, which may lead to our
financial statements being materially misstated, or to our identifying a material weakness in our internal controls over
financial reporting. Additionally, the adoption of new standards could require changes to our business and accounting
processes, systems and controls to support recognition and disclosure under the new guidance. This could also lead to
investors losing confidence in the accuracy and completeness of our financial reports, and the market price of our
common stock being negatively affected, and we could become the subject to investigations by the stock exchange on
which our common stock is listed, the SEC, or other regulatory authorities, which could require additional financial and
management resources.
The requirements of being a public company have increased certain of our costs and require significant management
focus.
As a public company, our legal, accounting and other expenses associated with compliance related and other
activities have increased significantly, and therefore, since our initial public offering, our management and other
personnel have diverted attention from operational and other business matters to devote substantial time to implementing
public company compliance requirements. In particular, we have incurred significant expenses and devoted substantial
management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which
will increase when we are no longer an emerging growth company. We have hired additional accounting and financial
staff with appropriate public company experience and technical accounting knowledge and may establish an internal
audit function. Costs to obtain director and officer liability insurance also contribute to our increased costs. As a result of
the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of
directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more
changes in governance and reporting requirements, which could further increase our compliance costs.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure and other requirements
applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act with respect to our internal control over financial reporting, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. We may take advantage of these provisions for up to five years or such
earlier time that we are no longer an “emerging growth company.” We would cease to be an emerging growth company
upon the earliest to occur of (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of our
initial public offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we become
a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual
report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of
our then most recently completed second fiscal quarter and (ii) the date on which we have issued more than $1.0 billion
in non-convertible debt during the prior three-year period. We may choose to take advantage of some but not all of these
reduced reporting and other burdens. To the extent we take advantage of any of the reduced reporting burdens in our
periodic filings, the information that we provide our security holders may be different than the information such holders
might get from other public companies in which they hold equity interests. We cannot predict if investors will find our
common stock less attractive because we may rely on these exemptions. If some investors find our common stock less
26
attractive as a result, there may be a less active trading market for our common stock and our stock price may be more
volatile.
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of
the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised
accounting standards. Stated another way, an “emerging growth company” can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. We have chosen to “opt out” of such
extended transition period, however, and, as a result, we will comply with new or revised accounting standards on the
relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the
JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised
accounting standards is irrevocable.
Risks Related to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or
above the price you paid for them. The market price for our common stock could fluctuate significantly for various
reasons, including:
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our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our
common stock or the stock of other companies in our industry;
the failure of research analysts to cover our common stock;
general economic, industry and market conditions;
strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles;
• material litigation or government investigations;
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changes in general conditions in the U.S. and global economies or financial markets, including those
resulting from war, incidents of terrorism or responses to such events;
changes in key personnel;
sales of common stock by us, our principal stockholders or members of our management team;
termination of lock-up agreements with our management team and principal stockholders;
the granting or exercise of employee stock options;
volume of trading in our common stock; and
impact of the facts described elsewhere in “Risk Factors.”
27
In addition, in recent years, the stock market has regularly experienced significant price and volume
fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies,
including companies in our industry. The changes frequently appear to occur without regard to the operating
performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that
have little or nothing to do with us and these fluctuations could materially reduce our share price.
Our majority stockholders have the ability to control significant corporate activities
Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV)
US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as Tricor
Pacific Capital), own approximately 37.3% and 22.0% of our common stock, respectively, as of December 31, 2016. As
a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our outstanding shares, will
have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors,
the ability to control decision-making with respect to our business direction and policies.
Matters over which the Tricor Funds, directly or indirectly, exercise control include:
•
election of directors;
• mergers and other business combination transactions, including proposed transactions that would result in
our stockholders receiving a premium price for their shares;
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•
•
•
other acquisitions or dispositions of businesses or assets;
incurrence of indebtedness and the issuance of equity securities;
repurchases of stock and payment of dividends; and
the issuance of shares to management under our incentive plans.
Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial
portion of our board of directors.
Messrs. Bradley Seaman, Nicholas Peters and David Rowntree, who are officers or affiliates of Parallel49
Equity (and its predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds
controlled by Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold
equity interests in entities that directly or indirectly compete with us, and companies in which it currently invests may
begin directly or indirectly competing with us. As a result of these relationships, when conflicts between the interests of
Parallel49 Equity, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be
disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of
incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally
permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the
transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction,
(2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our
stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise
fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee of
Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other than
any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to
offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves
or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their
capacities as our directors.
There can be no assurances that we will pay ongoing regular dividends to our stockholders or effect stock
repurchases under our stock repurchase program.
Since the first quarter of 2016, our Board of Directors has declared a quarterly dividend of $0.045 per share,
including with respect to the most recent completed quarter when our Board of Directors approved a dividend on March
28
1, 2017, payable on April 7, 2017 to stockholders of record at the close of business on March 17, 2017. In addition, in
the second quarter of fiscal year 2016, our board of directors approved a stock repurchase program that authorizes
repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares, prior to
May 11, 2017. However, our board of directors may, in its sole discretion, change the amount or frequency of dividends
and stock repurchases, or discontinue the payment of dividends and stock repurchases entirely. In addition, because we
are a holding company with no material direct operations, we are dependent on dividends and other payments from our
operating subsidiaries to generate the funds necessary to pay dividends on our common stock. We expect to cause our
subsidiaries to make distributions to us in an amount sufficient for us to pay dividends and/or make stock repurchases.
However, their ability to make such distributions will be subject to their operating results, cash requirements and
financial condition, the applicable provisions of Delaware law that may limit the amount of funds available for
distribution and our ability to pay cash dividends, and compliance with covenants and financial ratios related to existing
or future indebtedness and other agreements with third parties. In addition, each of the companies in our corporate chain
must manage its assets, liabilities and working capital in order to meet all of its cash obligations, including the payment
of dividends or distributions. As a consequence of these various limitations and restrictions, we may not be able to make,
or may have to reduce or eliminate, the payment of dividends on our common stock and/or stock repurchases. Any
change in the level of our dividends or the suspension of the payment thereof or change in the level of our stock
repurchases or the suspension of the ability to make stock repurchases could adversely affect the market price of our
common stock.
Certain provisions of our organizational documents and other contractual provisions may make it difficult for
stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that
some of our stockholders may consider to be beneficial.
Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of
delaying or preventing changes in control if our board of directors determines that such changes in control are not in the
best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and
bylaws include, among other things, the following:
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•
the ability of our board of directors to issue shares of preferred stock and to determine the price and other
terms, including preferences and voting rights, of those shares without stockholder approval;
following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our
common stock, stockholder action may only be taken at a special or regular meeting and not by written
consent, and special meetings may only be called by a majority of the total number of directors that we
would have if there were no vacancies on our board of directors;
advance notice procedures for nominating candidates to our board of directors or presenting matters at
stockholder meetings;
following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our
common stock, removal of directors only for cause, and only upon the affirmative vote of 75% of our
outstanding voting stock at a meeting of our stockholders called for that purpose;
allowing only our board of directors to fill vacancies on our board of directors; and
following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our
common stock, super-majority voting requirements to amend our bylaws and certain provisions of our
certificate of incorporation.
We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor
Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as
the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then
outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination
Agreement bears the same proportion to the total number of members of our board of directors as the number of shares
of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock
outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the
replacement for any of its board designees whose board service terminates prior to the end of such designee’s term
29
regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their
designees participate on committees of our board of directors, subject to compliance with applicable law and stock
exchange rules. The Director Nomination Agreement will terminate at such time as the Tricor Funds collectively own
less than 5% of our outstanding common stock.
We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General
Corporation Law (the “DGCL”), an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of
the corporation’s voting stock for a period of three years following the date the person became an interested stockholder,
unless (with certain exceptions) the business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects of
Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203,
except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and
any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the
forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of
incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203.
While these provisions have the effect of encouraging persons seeking to acquire control of our company to
negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that
some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or
discourage attempts to remove and replace incumbent directors.
In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our
current management by making it more difficult for stockholders to replace members of our board of directors, which is
responsible for appointing the members of our management.
Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise
adversely affect holders of our common stock, which could depress the price of our common stock.
Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations
and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation
of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred
stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the
market price, and adversely affect the market price and the voting and other rights of the holders of our common stock.
Our business and stock price may suffer while our public company processes continue to mature. In addition, if
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
We are a newly public company. While our public company processes continue to mature, we may face
difficulty in forecasting and evaluating our future prospects. If we are unable to execute our business strategy, either as a
result of our inability to effectively manage our business in a public company environment or for any other reason, our
business, prospects, financial condition and results of operations may be harmed. In addition, as a new public company
we have begun to obtain research coverage by securities and industry analysts. If one or more of the analysts who covers
us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely
decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our
stock could decrease, which could cause our stock price and trading volume to decline.
Item 1B. Unresolved Staff Comments
None.
30
Operations
Square Footage
Owned/Leased
Item 2.
Properties
Information regarding each of our facilities is set forth below.
Location
Littleton, Colorado (Corporate)
Littleton, Colorado (Centennial)
Littleton, Colorado (Midway)
Roseville, Minnesota (3 facilities)
Fort Wayne, Indiana
Nashville, Tennessee
Toronto, Ontario
Corporate headquarters facility
Financial Payment Card production
Financial Payment Card production and card
personalization services
Financial Payment Card production, card
personalization, card packaging services and
secure fulfillment center
Financial Payment Card production
Financial Payment Card personalization
services and fulfillment
Financial Payment Card and retail gift card
production and card personalization services
and fulfillment
Colchester, United Kingdom
Liverpool, United Kingdom
Derby, United Kingdom
Retail gift card production
Retail gift card personalization services
Design and innovation office
Item 3.
Legal Proceedings
CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)
12,000 Leased
65,000 Leased
50,000 Leased
164,000 Leased
36,000 Leased
66,000 Leased
67,000 Leased
37,000 Owned and Leased
30,000 Owned
300 Leased
On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v.
CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the
Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the
financial institutions who served as underwriters for CPI’s October 2015 IPO. The complaints, purportedly brought on
behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection
with the IPO, assert claims under (cid:105)(cid:105)11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among
other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or
misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip
cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and
(ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal
year ending December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common
stock issued pursuant to the IPO.
On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and
lead counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”). On October 17, 2016, lead plaintiff
filed a consolidated amended complaint, asserting the same claims for violations of (cid:105)(cid:105)11 and 15 of the Securities Act.
The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the
Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’
slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in
the EMV market.
On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and
other proceedings in the action are stayed under the PSLRA pending the resolution of that motion.
The Company believes these claims are without merit and intends to defend the action vigorously.
31
Gemalto S.A. v. CPI Card Group Inc. (2 cases)
First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States
District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company
infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV
standard. Gemalto’s patent will expire in March 2017. The Company successfully moved to transfer the lawsuit to the
District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the
asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the
Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On
March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all
EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips
supplied by two specific vendors.
On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent &
Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. In
light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted
the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the
patentability of asserted claims. The PTAB granted the Company’s petition 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 Company has asked the PTAB to institute
reexamination on the remaining dependent claims by way of a reconsideration petition. The district court litigation
remains stayed.
Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United
States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on
networked smartcard printing by way of the Company’s Card@Once offering. Gemalto’s patent will expire in 2018. On
May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35
U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on
September 2, 2016. The Company’s motion to dismiss remains pending. Gemalto provided initial infringement
contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are
presently engaged in claim construction activities and are attempting to schedule the deposition of the patent-in-suit’s
named inventor.
With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company
has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to
defend these suits vigorously. However, the Company may incur material legal expenses, and no assurance can be given
that these matters will be resolved in our favor, and if determined adversely, whether indemnification will be
received. Accordingly, it is not yet possible to reliably determine any potential liability that could result from these
matters in the event of an adverse determination.
CPI Card Group Inc. v. Multi Packaging Solutions, Inc.
On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc.
(“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultrasecure gift
card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages. The Company’s
patent will expire in 2028. MPS has 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. Discovery is ongoing. The Company intends
to vigorously assert its intellectual property rights in connection with this litigation(cid:17)
(cid:3)
In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary
course of business. The Company believes that the ultimate resolution of these matters will not have a material adverse
effect on our business, financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
32
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
PART II
Securities
Market Information for Common Stock
Our common stock has been listed on the NASDAQ and the TSX under the symbol “PMTS”. Prior to our
initial public offering on October 9, 2015, there was no public market for our common stock.
The following table sets forth for the indicated periods dividends declared and the high and low prices of our
common stock as reported on the NASDAQ and TSX.
2016
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash Dividends
Declared
0.045
0.045
0.045
0.045
NASDAQ ($)
Toronto Stock Exchange (CAD$)
Low
High
$ 11.10 $ 7.34 $
$ 9.25 $ 3.38 $
$ 6.15 $ 4.16 $
$ 6.41 $ 3.25 $
High
15.60
11.90
8.05
8.18
$
$
$
$
Low
9.90
4.51
5.54
4.40
2015
Fourth Quarter (from October 9, 2015) . . . . . . . . . . $
—
$ 13.50 $ 8.42 $
17.23
$
11.50
Holders
There were 12 stockholders of record as of February 20, 2017. This figure does not include an estimate of the
indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing
agencies.
Dividend
On March 1, 2017, the Board of Directors approved a quarterly dividend of $0.045 per share. This dividend is
payable on April 7, 2017, to shareholders of record as of the close of business on March 17, 2017. The amount,
declaration and payment of any future dividends will be subject to the discretion of the Company’s Board of Directors
who will evaluate the Company’s dividend program from time to time based on factors it deems relevant.
Issuer Purchases of Equity Securities
In the second quarter of fiscal year 2016, the Company’s Board of Directors approved a stock repurchase
program that authorizes repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of
2,827,105 shares. The Company’s repurchases may be executed using open market purchases, privately negotiated
transactions, accelerated share repurchase programs or other transactions. Our board of directors may, in its sole
discretion, change the amount or frequency of stock repurchases or discontinue stock repurchases entirely.
During the year ended December 31, 2016, we repurchased 1,439,422 shares for $6.0 million. Up to an
additional $14.0 million remained available for repurchase under the publicly announced program prior to May 11, 2017,
limited to 1,387,683 common shares.
Item 6.
Selected Financial Data
The financial information in this Annual Report on Form 10-K is presented on a consolidated basis and includes
the accounts of the Company and our majority-owned subsidiaries. The consolidated statement of income data for the
years ended December 31, 2016, 2015, and 2014 and the consolidated balance sheet data as of December 31, 2016 and
2015 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form
10-K. The consolidated statement of income data for the years ended December 31, 2013 and 2012, and the consolidated
33
balance sheet data as of December 31, 2014 and 2013 are derived from our audited consolidated financial statements not
included in this Annual Report on Form 10-K. Our selected historical financial data are not necessarily indicative of our
future financial condition, future results of operations or future cash flows.
You should read the information set forth below in conjunction with our historical consolidated financial
statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K.
Statement of Income Data(1):
2016
Year Ended December 31,
2014
(in thousands except share and per share data)
2013
2015
Net sales
Products . . . . . . . . . . . . . . . . . . . . . . . $
Services . . . . . . . . . . . . . . . . . . . . . . .
Total net sales . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . .
Other expense, net
Interest, net(2) . . . . . . . . . . . . . . . . . . .
Foreign currency (loss) gain . . . . . . . .
Loss on debt modification and early
extinguishment . . . . . . . . . . . . . . . . . .
Gain on purchase of ID Data . . . . . . . .
Other income (expense), net . . . . . . . .
Income before income taxes . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . .
Net income from continuing operations. .
Loss from discontinued operations,
net of taxes(3) . . . . . . . . . . . . . . . . . . . . .
Gain on sale of discontinued
operation, net of taxes(3) . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . $
Basic and Diluted earnings (loss) per
share(4):
Continuing Operations . . . . . . . . . . . . . . $
Discontinued Operations . . . . . . . . . . . .
$
Weighted average shares outstanding:
168,510 $
140,190
308,700
206,802
101,898
72,916
28,982
241,609 $
132,501
374,110
238,289
135,821
68,101
67,720
159,220 $
101,786
261,006
179,279
81,727
47,255
34,472
101,360 $
95,010
196,370
136,874
59,496
33,347
26,149
(20,044)
(417)
—
—
20
8,541
(3,142)
5,399
(18,328)
59
(703)
—
359
49,107
(17,846)
31,261
(7,508)
(124)
(476)
—
(101)
26,263
(10,291)
15,972
(7,838)
(142)
—
—
18
18,187
(6,988)
11,199
2012
98,969
84,817
183,786
130,897
52,889
32,985
19,904
(5,765)
(279)
—
604
171
14,635
(5,909)
8,726
—
(606)
(2,670)
(2,612)
(3,796)
—
5,399 $
208
30,863 $
—
13,302 $
—
8,587 $
—
4,930
0.10 $
—
0.10 $
(0.03) $
(0.01)
(0.04) $
(0.69) $
(0.07)
(0.76) $
(0.59)
(0.06)
(0.65) $
(0.67)
(0.09)
(0.76)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . .
55,827,409
56,203,789
45,816,263
45,816,263
41,199,246
41,199,246
41,072,350
41,072,350
41,264,828
41,264,828
Other Financial Data:
Depreciation and amortization . . . . . . . . $
Cash flow provided by operating
activities . . . . . . . . . . . . . . . . . . . . . . . .
16,927 $
15,995 $
14,198 $
11,595 $
59,958
43,922
26,627
23,622
Capital expenditures . . . . . . . . . . . . . . . . $
14,294 $
18,670 $
16,956 $
10,628 $
10,514
21,325
9,113
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . $
Total current assets . . . . . . . . . . . . . . . . . . .
Plant, equipment and leasehold
improvements, net . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ deficit . . . . . . . . . . . . . . $
December 31,
2016
2015
2014
2013
36,955 $
13,606 $
12,941 $
9,702
92,417
101,019
88,719
65,958
53,419
264,420
301,922
52,113
280,353
309,000
44,772
266,010
178,810
36,650
171,867
122,306
(95,273) $
(86,610) $
(21,694) $
(36,896)
(1) Statement of income data includes results from our acquisition of EFT Source from September 2, 2014.
34
(2)
Interest expense in 2015 includes $4.7 million of amortization of debt issuance cost and discount related to the early
debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of
$10.0 million.
(3) We sold our operating segment located in Nevada in January 2015. This operating segment primarily produced
retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, our consolidated
balance sheets, statements of operations and comprehensive income, and statements of cash flows have been
reclassified to present this operating segment as a discontinued operation as of and for the years ended
December 31, 2015, 2014, 2013 and 2012. See Note 4 “Discontinued Operation and Disposition” in Part II, Item 8.
“Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
(4) For a computation of historical basic and diluted earnings per share attributable to continuing and discontinued
operations, see Note 14 “Earnings per Share” in Part II, Item 8. “Financial Statements and Supplementary Data” in
this Annual Report on Form 10-K.
Key Performance Indicators
To evaluate the performance of our business, in addition to our results of operations, we utilize a variety of
financial and performance measures that we refer to as key performance indicators. These key performance indicators
include EMV Financial Payment Card Sales, EBITDA and Adjusted EBITDA.
U.S. Debit and Credit EMV Financial Payment Card Sales
U.S. Debit and Credit EMV Financial Payment Card Sales represent the total number of EMV Financial
Payment Cards we sold during the period through our U.S. Debit and Credit Segment. We continue to expect EMV
Financial Payment Card Sales to increase due to the growth in the market for Financial Payment Cards and the continued
conversion from non-EMV cards to be upgraded to EMV cards in the United States.
Free Cash Flow
We define Free Cash Flow as cash flow from operations less capital expenditures, and we use this metric in
analyzing our ability to service and repay our debt. Free Cash Flow is also used as a basis for financial performance
under our executive compensation programs. However, this measure does not represent funds available for investment or
other discretionary uses since it does not deduct cash used to service our debt.
EBITDA and Adjusted EBITDA
We use EBITDA and Adjusted EBITDA as supplemental measures of our performance. Adjusted EBITDA and
Cash Flow Provided by Operating Activities is also a basis for financial performance evaluation under our executive
compensation programs. EBITDA is defined as income from continuing operations before interest expense, income
taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for stock-based compensation
expense, litigation and related charges, impairments of intangible assets, performance bonus charges in connection with
the EFT Source acquisition, restructuring and other charges including severance for employee terminations, foreign
currency gain or loss, and other items that are unusual in nature, infrequently occurring or not considered part of our core
operations. EBITDA and Adjusted EBITDA are Non-GAAP Financial Measures. The Non-GAAP Financial Measures
as presented in this Annual Report on Form 10-K are supplemental measures of our performance that are neither
required by, nor presented in accordance with, GAAP. The Non-GAAP Financial Measures should not be considered as
a substitute for GAAP metrics such as net income or any other performance measures derived in accordance with
GAAP. Also, in the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA.
Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected
by unusual or nonrecurring items. EBITDA and Adjusted EBITDA (collectively, the “Non-GAAP Financial Measures”)
are the primary measures used by our management to evaluate operating performance. We believe the Non-GAAP
Financial Measures are useful to investors because they provide a means to evaluate our operating performance on an
ongoing basis using criteria that are used by our internal decision makers and because they are frequently used by
investors and other interested parties when comparing companies in our industry that have different financing and capital
structures and/or tax rates. We believe the Non-GAAP Financial Measures are meaningful measures because they
present a transparent view of our recurring operating performance and allow management to readily view operating
35
trends, perform analytical comparisons and identify strategies to improve operating performance. The Non-GAAP
Financial Measures, however, are not measures of our liquidity or financial performance under GAAP and should not be
considered as an alternative to net income (loss), income from operations, or any other performance measure derived in
accordance with GAAP or as an alternative to cash provided by operating activities as a measure of our liquidity. The
use of the Non-GAAP Financial Measures instead of net income (loss) has limitations as an analytical tool, including:
they do not reflect our capital expenditures, or future requirements for capital expenditures or contractual commitments;
they do not reflect changes in, or cash requirements for our working capital needs; they do not reflect the significant
interest expense, or the cash requirements necessary to service interest or principal payments on our debt; although
depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and the non-
GAAP Financial Measures do not reflect any cash requirements for such replacements; they are not adjusted for all non-
cash income or expense items that are reflected in our statements of cash flows; and other companies in our industry may
calculate these measures differently than we do, limiting their usefulness as comparative measures. The Non-GAAP
Financial Measures are not necessarily comparable to other similarly titled captions of other companies due to potential
inconsistencies in the methods of calculation.
The following table presents our key performance indicators, and a reconciliation of net income from
continuing operations to EBITDA and Adjusted EBITDA:
Financial Payment Card Sales
U.S. Debit and Credit EMV card sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104,488
154,735
63,777
5,588
2016
Year Ended December 31,
2015
2013
2014
(in thousands)
2016
Year Ended December 31,
2015
2013
2014
(in thousands)
2012
8,726
Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,399 $ 31,261 $ 15,972
10,514
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,252
15,966
16,927
5,765
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,508
18,328
20,044
5,909
10,291
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,846
3,142
$ 37,620 $ 30,914
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,512 $ 83,401 $ 47,023
Stock-based compensation expense (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
4,534
Litigation and related charges (b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Impairment of intangible asset (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
EFT Source performance bonuses (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Restructuring and other charges (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
279
124
Foreign currency (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on debt modification and early extinguishment (f) . . . . . . . . . . . . . . . . . . . . .
—
476
Professional fees (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2,062
Gain on purchase of ID Data (h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(604)
—
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,179 $ 96,218 $ 54,219 $ 38,372 $ 30,589
9,633
—
—
1,000
1,131
(59)
703
409
—
3,579
3,543
2,700
1,000
428
417
—
—
—
$ 11,199 $
11,595
7,838
6,988
610
—
—
—
—
142
—
—
—
Cash Flow Information
Cash flow provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,958 $ 43,922 $ 26,627 $ 23,622 $ 21,325
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,113
10,628
Free cash flow(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,664 $ 25,252 $
9,671 $ 12,994 $ 12,212
18,670
14,294
16,956
(a) Represents compensation expense incurred in connection with the Company’s phantom stock plan and other stock-
based compensation plans. See Note 17 “Stock Option Plans” in Part II, Item 8 “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.
(b) Represents legal costs incurred in connection with certain patent and shareholder litigation.
(c) Represents an impairment of a trademark, as a result of the Company’s plans to discontinue its use of the trademark
in its sales, marketing and other business practices.
(d) Represents performance bonuses earned by Company employees in connection with the acquisition of EFT Source.
(e)
In 2016, represents employee termination costs incurred primarily in connection with the elimination of a
production shift at one of our facilities. In 2015, represents facility contract termination costs in connection with the
shut-down and closure of our Petersfield, United Kingdom operation.
36
(f) Represents loss on the modification of the Company’s Senior Term Loan dated September 2, 2014 in connection
with the acquisition of EFT Source. In 2015, an additional loss on debt modification and early extinguishment was
incurred when the Senior Term Loan was repaid in full using a portion of the proceeds from the $435.0 million First
Lien Term Loan on August 17, 2015.
(g)
Includes investment banking, advisory and related professional fees and expenses incurred in connection with the
EFT Source acquisition and our consideration of liquidity alternatives.
(h) Represents gain on our purchase of certain assets of ID Data, Limited.
(i)
In 2015, amount is net of a $13.9 million payment related to the settlement of the Company’s Phantom Stock Plan.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and the
notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to,
those which are not within our control. See "Risk Factors" and “Forward-Looking Statements.” Our 2014 reported
results include four months of results from EFT Source.
Company Overview
We are a leading provider of comprehensive Financial Payment Card solutions in the United States. 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, Prepaid Debit Card program managers, Group
Service Providers and card transaction processors. We serve a diverse set of over 4,000 direct and indirect customers,
including many of the largest issuers of debit and credit cards in the United States and Canada, the largest U.S. Prepaid
Debit Card program managers, as well as thousands of independent community banks, credit unions, Group Service
Providers and card transaction processors.
We serve our customers through a network of ten production and card services facilities, including eight high-
security facilities in the United States and Canada that are each certified by one or more of the Payment Card Brands and
Interac (in Canada) and, where required by our customers, certified to be in compliance with the standards of the PCI
Security Standards Council. We have a leading network of high-security production facilities in the United States and
Canada, allowing us to optimize our solutions offerings to serve the needs of our diverse and long-term customer base.
In addition to our eight facilities in the United States and Canada, we have two facilities in the United Kingdom
that produce retail cards, such as gift and loyalty cards that are not issued on the networks of the Payment Card Brands,
as well as provide personalization, packaging and fulfillment services.
2016 Summary of Financial Performance
During the year ended December 31, 2016, net sales decreased 17.5% from 2015, to $308.7 million, and
income from operations decreased 57.2% from 2015, to $29.0 million. The operating profit margin for the year ended
December 31, 2016 was 9.4%, a decrease from 18.1% in 2015.
For the year ended December 31, 2016, we generated net income from continuing operations of $5.4 million,
which represented a decrease of 82.7% from 2015, and $57.2 million of Adjusted EBITDA, a decrease of 40.6%
compared to the prior year. Adjusted EBITDA is a Non-GAAP Financial Measure. For a definition of Adjusted EBITDA
and a reconciliation of Adjusted EBITDA to net income from continuing operations, the most comparable GAAP
measure, see “Key Performance Indicators—EBITDA and Adjusted EBITDA.”
37
Segment Overview
Our business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K.
Limited.
U.S. Debit and Credit Segment
Our U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card
services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and
non-EMV credit cards, debit cards and Prepaid Debit Cards issued on the networks of the Payment Card Brands and
Private Label Credit Cards that are not issued on the networks of the Payment Cards Brands (including general purpose
reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). This segment also
provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance
services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and,
where required by our customers, certified to be in compliance with the standards of the PCI Security Standards Council.
U.S. Prepaid Debit Segment
Our U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card issuers in the
United States. Services provided include tamper-evident security packaging services, card personalization and
fulfillment services and our recently launched Print on Demand services, where we are able to produce all images,
personalized payment cards and related collateral on a one-by-one, on demand, basis for our customers, enabling
individualized offerings and reducing waste. This segment also produces Financial Payment Cards issued on the
networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The
U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in
compliance with the standards of the PCI Security Standards Council.
U.K. Limited Segment
Our U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the
United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment
services. Neither of our operations in this segment are certified by the Payment Card Brands or to be in compliance with
the standards of the PCI Security Standards Council, but are certified to be in compliance with International
Organization for Standardization (“ISO”) 27001 standards.
Other
Our operations in Ontario, Canada and Petersfield, United Kingdom, and our corporate activities are reflected in
“Other”. In August 2015, we completed the shut-down of the operations at our Petersfield facility. The Petersfield
facility is not material to our business. See Note 18 “Segment Reporting” in Part II, Item 8, “Financial Statements and
Supplementary Data” in this Annual Report on Form 10-K for certain additional information regarding our reporting
segments.
Key Components of Results of Operations
Set forth below is a brief description of key line items of our consolidated statements of operations and
comprehensive income.
Net Sales
Net sales reflect our revenue generated from the sale of products and services. Product net sales include the
design and production of Financial Payment Cards in contact EMV, dual-interface EMV, contactless and magnetic stripe
formats. We also generate product revenue from the sale of our Card@Once® instant issuance systems, Private Label
Credit Cards and retail gift cards. Services net sales include revenue from the personalization and fulfillment of
Financial Payment Cards, the provision of tamper-evident security packaging, fulfillment services and Print on Demand
services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance Financial
38
Payment cards. We also generate services revenue from personalizing retail gift cards (primarily in Canada and the
United Kingdom) and from click-fees generated from our patented MYCA™ software.
Generally, we recognize net sales related to products upon shipment and services upon the provision of the
service, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured. See “Critical Accounting Policies and Estimates—Revenue Recognition.”
Cost of Sales
Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide.
Product costs include the cost of raw materials, including microchips in the case of EMV cards and, additionally, RFID
assemblies in the case of dual-interface EMV cards, labor costs, material costs, equipment and facilities costs, operation
overhead, depreciation and amortization, leases and rental charges and transport costs. Product costs also include
desktop card personalization terminals in the case of Card@Once® instant issuance system sales. Services costs include
the cost of labor, raw materials in the case of tamper-evident security packaging, and equipment and facilities costs,
operation overhead, depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be
impacted by many factors, including volume, operational efficiencies, promotional activity and employee relations.
Gross Profit and Gross Margin
Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net
sales.
Operating Expenses
Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which
generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service,
human resources and administrative personnel, including payroll, benefits and stock-based compensation expense, and
outside legal and other advisory fees, including audit, tax advisory and consulting fees. Operating expense also includes
depreciation and amortization expense, and impairment charges on tangible and intangible assets.
Income from Operations and Operating Margin
Income from operations consists of our gross profit less our operating expenses. Operating margin is income
from operations as a percentage of net sales.
Other Expense, net
Other expense, net consists primarily of interest expense and foreign currency gains and losses.
Net Income from Continuing Operations
Net income from continuing operations consists of our income from operations, less other expense, net and
income tax expense.
39
Results of Operations
Year Ended December 31, 2016 Compared With Year Ended December 31, 2015
The table below presents our results of operations for the years ended December 31, 2016 and 2015:
Net sales:
Year Ended December 31,
2016
2015
$ Change % Change
(dollars in thousands)
Products . . . . . . . . . . . . . . . . . . . . . . . . $ 168,510 $ 241,609 $ (73,099)
Services . . . . . . . . . . . . . . . . . . . . . . . .
Total net sales . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . .
Other expense, net:
7,689
(65,410)
(31,487)
(33,923)
4,815
(38,738)
132,501
374,110
238,289
135,821
68,101
67,720
140,190
308,700
206,802
101,898
72,916
28,982
(1,716)
(476)
(20,044)
(417)
(18,328)
59
Interest, net . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . . . . . . .
Loss on debt modification and early
703
extinguishment . . . . . . . . . . . . . . . . . . . .
(339)
Other income (expense) . . . . . . . . . . . . .
(40,566)
Income before income taxes . . . . . . . . . . . .
14,704
Income tax expense . . . . . . . . . . . . . . . . . .
(25,862)
Net income from continuing operations . .
398
Loss from a discontinued operation . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,399 $ 30,863 $ (25,464)
* Not meaningful
(703)
359
49,107
(17,846)
31,261
(398)
—
20
8,541
(3,142)
5,399
—
(30.3)%
5.8 %
(17.5)%
(13.2)%
(25.0)%
7.1 %
(57.2)%
9.4 %
*
(100.0)%
(94.4)%
(82.6)%
*
(82.7)%
(100.0)%
(82.5)%
Net Sales
Net sales by segment:
Year Ended December 31,
2016
2015
$ Change % Change
(dollars in thousands)
U.S. Debit and Credit—Products . . . . . $ 146,333 $ 217,863 $ (71,530)
U.S. Debit and Credit—Services . . . . .
16,657
(54,873)
U.S. Debit and Credit—Total . . . . . . . .
—
U.S. Prepaid Debit—Products . . . . . . . .
(5,813)
U.S. Prepaid Debit—Services . . . . . . . .
(5,813)
U.S. Prepaid Debit—Total . . . . . . . . . .
(4,743)
U.K. Limited—Products . . . . . . . . . . . .
71
U.K. Limited—Services . . . . . . . . . . . .
(4,672)
U.K. Limited—Total . . . . . . . . . . . . . . .
(2,371)
Other—Products . . . . . . . . . . . . . . . . . . .
(1,939)
Other—Services . . . . . . . . . . . . . . . . . . .
(4,310)
Other—Total . . . . . . . . . . . . . . . . . . . . .
4,258
Eliminations . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308,700 $ 374,110 $ (65,410)
45,805
263,668
—
65,878
65,878
22,211
12,150
34,361
9,321
8,099
17,420
(7,217)
62,462
208,795
—
60,065
60,065
17,468
12,221
29,689
6,950
6,160
13,110
(2,959)
(32.8)%
36.4 %
(20.8)%
—
(8.8)%
(8.8)%
(21.4)%
0.6 %
(13.6)%
(25.4)%
(23.9)%
(24.7)%
*
(17.5)%
* Not meaningful
40
Net sales for the year ended December 31, 2016 decreased $65.4 million, or 17.5%, to $308.7 million compared
to $374.1 million for the year ended December 31, 2015. The decrease in net sales during 2016 was due to a 20.8%
decrease in U.S. Debit and Credit, an 8.8% decrease in U.S. Prepaid Debit, a 13.6% decrease in U.K. Limited and a
24.7% decrease in Other.
U.S. Debit and Credit
Net sales for U.S. Debit and Credit for the year ended December 31, 2016 decreased $54.9 million, or 20.8%, to
$208.8 million compared to $263.7 million for the year ended December 31, 2015. The decrease in net sales was driven
by a $46.1 million decrease in EMV related revenue, a $24.9 million decrease in magnetic stripe card and other sales due
to the ongoing shift of card issuing bank customers from magnetic stripe cards to EMV cards, partially offset by a $16.1
million net sales increase in card personalization, fulfillment and other services.
The decrease in EMV revenue is the result of continued softness in demand for EMV cards, particularly with
large issuer and processor customers. For the year ended December 31, 2016, we sold 104.5 million EMV cards at an
average selling price of $0.95 per card compared to 154.7 million EMV cards at an average selling price of $0.94 per
card for the year ended December 31, 2015. The increase in ASP for EMV cards during the year ended December 31,
2016 compared to 2015 is primarily due to customer mix.
U.S. Prepaid Debit
Net sales for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $5.8 million, or 8.8%, to
$60.1 million compared to $65.9 million for the year ended December 31, 2015. The decrease was due to net reductions
in volumes, and lower average prices on our tamper-evident secured packaging services. The decrease in volumes
included the impact of a large customer shifting some of its business to a competitor, who we believe was infringing on a
Company patent, as further described in Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K.
U.K. Limited
Net sales for U.K. Limited for the year ended December 31, 2016 decreased $4.7 million, or 13.6%, to
$29.7 million compared to $34.4 million for the year ended December 31, 2015. The decrease was primarily attributable
to fluctuations in the exchange rate between the United States dollar and the British Pound, which resulted in a reduction
to net sales for the year ended December 31, 2016 of $4.0 million compared to the previous year. A decrease in card
sales also contributed to the decline.
Other
Net sales in Other decreased $4.3 million, or 24.7%, from the year ended 2016 to 2015. The decrease related
primarily to the shut-down of the Petersfield, U.K. operation in August 2015, which contributed $4.1 million in net sales
during the year ended December 31, 2015. Net sales in Canada decreased $0.2 million during the year ended December
31, 2016 compared 2015, as the impact of foreign currency exchange rates during the year more than offset an increase
in sales of manufactured EMV cards and card personalization in Canada.
41
Cost of Sales
Cost of sales by segment:
Year Ended December 31,
2016
2015
$ Change % Change
(dollars in thousands)
U.S. Debit and Credit . . . . . . . . . . . . . . $ 138,939 $ 166,551 $ (27,612)
U.S. Prepaid Debit . . . . . . . . . . . . . . . . .
U.K. Limited . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eliminations . . . . . . . . . . . . . . . . . . . . . .
(481)
(3,521)
(4,420)
4,547
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 206,802 $ 238,289 $ (31,487)
39,498
25,234
14,427
(7,421)
39,017
21,713
10,007
(2,874)
(16.6)%
(1.2)%
(14.0)%
(30.6)%
*
(13.2)%
* Not meaningful
Cost of sales for the year ended December 31, 2016 decreased $31.5 million, or 13.2%, to $206.8 million
compared to $238.3 million for the year ended December 31, 2015. The decrease in cost of sales was due to a 16.6%
decrease in U.S. Debit and Credit, a 1.2% decrease in U.S. Prepaid Debit, a 14.0% decrease in U.K. Limited and a
30.6% decrease in Other.
U.S. Debit and Credit
Cost of sales for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.6 million, or
16.6%, to $138.9 million compared to $166.6 million for the year ended December 31, 2015. The decrease was driven
by lower EMV chip and magnetic stripe card sales volumes resulting in lower corresponding manufacturing costs.
Lower per unit EMV chip prices also contributed to the decreased cost of sales. Higher costs 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 year ended December 31, 2016 decreased $0.5 million, or 1.2%, to
$39.0 million compared to $39.5 million for the year ended December 31, 2015. The decrease was primarily due to a
decrease in materials, corresponding to the decrease in net sales described above, partially offset by increased labor and
overhead costs incurred during the three months ended December 31, 2016, including costs to ramp up Print on Demand
services capabilities.
U.K. Limited
Cost of sales for U.K. Limited for the year ended December 31, 2016 decreased $3.5 million, or 14.0%, to
$21.7 million compared to $25.2 million for the year ended December 31, 2015. The decrease in cost of sales was
primarily due to foreign currency exchange rate fluctuations of $2.9 million and a decrease in cards sold, as discussed
above.
Other
Other cost of sales decreased by $4.4 million, or 30.6%, to $10.0 million compared to $14.4 million in 2015.
The decrease was primarily related to our Petersfield, U.K. operation, shut-down in August 2015, which incurred
$4.1 million in cost of sales during the year ended December 31, 2015. Increased cost of sales related increased sales of
manufactured EMV cards and card personalization in Canada, was offset by the impact of foreign currency exchange
rate fluctuations.
42
Gross Profit and Gross Profit Margin
2016
Year Ended December 31,
% of
net sales
2015
% of
net sales
(dollars in thousands)
$ Change % Change
Gross profit by segment:
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . $ 69,856
21,048
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . . .
7,976
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . .
3,018
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101,898
33.5 % $ 97,117
35.0 % 26,380
9,127
26.9 %
3,197
23.0 %
33.0 % $ 135,821
36.8 % $ (27,261)
(5,332)
40.0 %
(1,151)
26.6 %
(179)
18.4 %
36.3 % $ (33,923)
(28.1)%
(20.2)%
(12.6)%
(5.6)%
(25.0)%
Gross profit for the year ended December 31, 2016 decreased $33.9 million, or 25.0%, to $101.9 million
compared to $135.8 million for the year ended December 31, 2015. Gross profit margin for the year ended December 31,
2016 decreased to 33.0% compared to 36.3% for the year ended December 31, 2015.
U.S. Debit and Credit
Gross profit for U.S. Debit and Credit for the year ended December 31, 2016 decreased $27.3 million, or
28.1%, to $69.9 million compared to $97.1 million for the year ended December 31, 2015. The decrease in gross profit
was primarily a result of decreased EMV net sales offset by growth in our card personalization and fulfillment services.
Gross profit margin for U.S. Debit and Credit for the year ended December 31, 2016 decreased to 33.5% compared to
36.8% for the year ended December 31, 2015 due to lower overhead cost absorption attributed to reduced sales volumes.
U.S. Prepaid Debit
Gross profit for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $5.3 million, or 20.2%, to
$21.0 million compared to $26.4 million for the year ended December 31, 2015. Gross profit margin for U.S. Prepaid
Debit for the year ended December 31, 2016 decreased to 35.0% compared to 40.0% for the year ended December 31,
2015. The decreases in gross profit and gross profit margin were primarily due to decreased net sales, from net
reductions in volumes, lower average prices on our tamper-evident secured packaging services, and increased fourth
quarter labor and overhead costs, including costs to ramp up Print on Demand capabilities.
U.K. Limited
Gross profit for U.K. Limited for the year ended December 31, 2016 decreased $1.2 million, or 12.6%, to
$8.0 million compared to $9.1 million for the year ended December 31, 2015, primarily due to foreign currency
exchange rate fluctuations of $1.1 million. Gross profit margin for the U.K. Limited segment for the year ended
December 31, 2016 increased to 26.9% compared to 26.6% for the year ended December 31, 2015.
Other
Gross profit in Other decreased 5.6% in 2016 to $3.0 million from $3.2 million in 2015. The decrease was
primarily related to the impact of foreign currency exchange rate fluctuations.
43
Operating Expenses
Operating expenses by segment:
Year Ended December 31,
2016
2015
$ Change % Change
(dollars in thousands)
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . . $ 26,100 $ 25,562 $ 538
(842)
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . . .
(845)
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . .
5,964
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,916 $ 68,101 $ 4,815
5,679
6,417
30,443
4,837
5,572
36,407
2.1 %
(14.8)%
(13.2)%
19.6 %
7.1 %
Operating expenses for the year ended December 31, 2016 increased $4.8 million, or 7.1%, to $72.9 million
compared to $68.1 million for the year ended December 31, 2015. The increase in operating expenses was due to a
19.6% increase in Other and a 2.1% increase in U.S. Debit and Credit, partially offset by a 14.8% decrease in U.S.
Prepaid Debit and a 13.2% decrease in U.K. Limited.
U.S. Debit and Credit increased $0.5 million, primarily due to increased salaries and benefits to support growth
in the card personalization business.
U.S. Prepaid Debit decreased $0.8 million, primarily due to cost reductions in sales and administrative salaries.
U.K. Limited decreased $0.8 million, primarily due to the impact of foreign currency exchange rate fluctuations
of $0.7 million.
The $6.0 million increase in Other was primarily due to public company costs of $5.5 million, patent and
shareholder litigation and related charges of $3.5 million, a $2.7 million intangible asset impairment charge related to the
Company’s plans to discontinue the use of a trademark in its sales, marketing and other business practices, and a
$1.5 million increase of other corporate expenses (primarily related to increases in insurance and information technology
expenses). These cost increases were partially offset by a $6.1 million decrease in stock-based compensation expense, a
$0.7 million reduction of expenses relating to the prior year restructuring charge due to shut-down of the Petersfield,
U.K. operation, and a reduction of $0.4 million related to IPO transaction expenses. Stock-based compensation expense
during the year ended December 31, 2015 included an $8.7 million charge in connection with the settlement of our
obligation under the phantom stock plan in conjunction with our IPO.
Public company costs included $1.6 million of legal and insurance costs, $1.5 million of accounting, reporting
and public filing costs, and $2.4 million in salaries and benefits, board fees, contract labor and hiring expenses.
Income from Operations and Operating Margin
2016
Year Ended December 31,
% of
net sales
% of
net sales
(dollars in thousands)
2015
$ Change % Change
Income from operations by segment:
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . . $ 43,756
16,211
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . . . .
2,404
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . .
(33,389)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,982
* Not meaningful
21.0 % $ 71,555
27.0 % 20,701
8.1 %
2,710
*
(27,246)
9.4 % $ 67,720
27.1 % $ (27,799)
(4,490)
31.4 %
(306)
7.9 %
(6,143)
*
18.1 % $ (38,738)
(38.8)%
(21.7)%
(11.3)%
*
(57.2)%
44
Income from operations for the year ended December 31, 2016 decreased $38.7 million, or 57.2%, to
$29.0 million compared to $67.7 million for the year ended December 31, 2015. Operating margins for the year ended
December 31, 2016 decreased to 9.4% compared to 18.1% for the year ended December 31, 2015.
U.S. Debit and Credit
Income from operations for U.S. Debit and Credit for the year ended December 31, 2016 decreased
$27.8 million, or 38.8%, to $43.8 million compared to $71.6 million for the year ended December 31, 2015. Operating
margins for the year ended December 31, 2016 decreased to 21.0% compared to 27.1% for the year ended December 31,
2015 due primarily to the lower sales, lower overhead cost absorption attributed to the reduced sales volumes and
increased salaries and benefits to support growth in the card personalization business, as discussed above.
U.S. Prepaid Debit
Income from operations for U.S. Prepaid Debit for the year ended December 31, 2016 decreased $4.5 million,
or 21.7%, to $16.2 million compared to $20.7 million for the year ended December 31, 2015. Operating margins for the
year ended December 31, 2016 decreased to 27.0% compared to 31.4% in 2015. The decrease in income from
operations and operating margins was due to decreased net sales, and increased fourth quarter labor and overhead costs,
partially offset by the decreased operating expenses, as discussed above.
U.K. Limited
Income from operations for the U.K. Limited segment for the year ended December 31, 2016 decreased
$0.3 million, or 11.3%, to $2.4 million compared to $2.7 million for the year ended December 31, 2015 due primarily to
the impact of foreign currency exchange rate fluctuations.
Other
Loss from operations in Other of $33.4 million represented an increase of $6.1 million for the year ended
December 31, 2016 compared to the year ended December 31, 2015. The additional loss was driven primarily by the
higher operating expenses discussed above.
Interest, net
Interest expense for the year ended December 31, 2016 increased $1.7 million, or 9.4%, to $20.0 million
compared to $18.3 million for the year ended December 31, 2015. The increase in interest expense was driven by higher
average debt balances outstanding relating to the $435.0 million First Lien Term Loan that we put in place in August
2015 in conjunction with the partial redemption of the Series A Preferred Stock. Interest expense in 2015 also includes
$4.7 million of amortization of debt issuance cost and discount related to the early debt repayment of $112.5 million
using proceeds from our IPO, and an additional fourth quarter debt repayment of $10.0 million.
Loss on debt modification and early extinguishment
Loss on debt modification and early extinguishment for the year ended December 31, 2015 was $0.7 million
related to unamortized deferred financing costs and discount on our Senior Term Loan dated September 2, 2014, which
was repaid with proceeds from our $435.0 million First Lien Term Loan. Refer to Note 10 “Long-Term Debt and Credit
Facility”, in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Income tax expense
Income tax expense for the year ended December 31, 2016 decreased $14.7 million, to $3.1 million, compared
to $17.8 million for the year ended December 31, 2015 driven by the decrease in income before taxes of $40.6 million.
The effective tax rate increased to 36.8% during the year ended December 31, 2016 from 36.3% for the year ended
December 31, 2015 due primarily to the impact of state income taxes.
45
Net income
Net income for the year ended December 31, 2016 decreased $25.5 million, to $5.4 million, compared to $30.9
million for the year ended December 31, 2015. The decrease in net income was driven by several factors, including
lower net sales and gross profit, and higher operating expenses and interest cost, as described above.
Fourth Quarter
Our net sales decreased 28.0% in the fourth quarter 2016 compared to the fourth quarter of 2015. Net sales for
our U.S. Debit and Credit segment decreased 35.2% in the fourth quarter of 2016 compared to fourth quarter of 2015 due
to the continued decline in demand of EMV chip cards.
Net sales for our U.S. Prepaid Debit segment increased 2.0% in the fourth quarter of 2016 compared to the
fourth quarter of 2015 as a result of net sales volume increases across our retail prepaid customer base, partially offset by
a large customer shifting some of its business to a competitor, as previously discussed.
Net sales for our U.K. Limited segment decreased 27.7% in the fourth quarter of 2016 compared to the fourth
quarter of 2015, due primarily to foreign currency exchange rates. Fluctuations in the exchange rate between the United
States dollar and the British Pound resulted in a reduction to net sales for the three months ended December 31, 2016 of
$1.7 million compared to the same period in the previous year. Also contributing to the decrease was a decline in cards
sold.
During the fourth quarter of 2016 there was a loss from operations of $0.9 million compared to income from
operations of $10.0 million in the fourth quarter of 2015. The decrease in income from operations during the three
months ended December 31, 2016 compared to 2015 is primarily due to decreased net sales in U.S. Debit and Credit.
The decrease in net sales has been primarily due to continued softness in demand for EMV cards, particularly with large
issuer customers. Additionally, included in the loss from operations during the three months ended December 31, 2016
was a $2.7 million impairment charge for a Company trademark resulting from the Company’s plans to discontinue its
use of the trademark in its sales, marketing and other business practices.
46
Year Ended December 31, 2015 Compared With Year Ended December 31, 2014
The table below presents our results of operations for the years ended December 31, 2015 and 2014:
Net sales:
Year Ended December 31,
2015
2014
$ Change % Change
(dollars in thousands)
Products . . . . . . . . . . . . . . . . . . . . . . . . $ 241,609 $ 159,220 $ 82,389
30,715
Services . . . . . . . . . . . . . . . . . . . . . . . .
113,104
Total net sales . . . . . . . . . . . . . . . . . .
59,010
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . .
54,094
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .
20,846
Operating expenses . . . . . . . . . . . . . . . . . . .
33,248
Income from operations . . . . . . . . . . . . . . .
Other expense, net:
132,501
374,110
238,289
135,821
68,101
67,720
101,786
261,006
179,279
81,727
47,255
34,472
(7,508)
(124)
(18,328)
59
(10,820)
183
Interest, net . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . . . .
Loss on debt modification and early
(227)
extinguishment . . . . . . . . . . . . . . . . . . . .
460
Other income (expense) . . . . . . . . . . . . .
22,844
Income before income taxes . . . . . . . . . . . .
(7,555)
Income tax expense . . . . . . . . . . . . . . . . . .
15,289
Net income from continuing operations . .
Loss from discontinued operations . . . . . .
2,272
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,863 $ 13,302 $ 17,561
* Not meaningful
(476)
(101)
26,263
(10,291)
15,972
(2,670)
(703)
359
49,107
(17,846)
31,261
(398)
51.7 %
30.2 %
43.3 %
32.9 %
66.2 %
44.1 %
96.4 %
144.1 %
*
*
*
87.0 %
73.4 %
95.7 %
(85.1)%
132.0 %
Net Sales
Net sales by segment:
Year Ended December 31,
2015
2014
$ Change % Change
(dollars in thousands)
U.S. Debit and Credit—Products . . . . . $ 217,863 $ 132,975 $ 84,888
25,765
U.S. Debit and Credit—Services . . . . .
110,653
U.S. Debit and Credit—Total . . . . . . . .
—
U.S. Prepaid Debit—Products . . . . . . . .
6,607
U.S. Prepaid Debit—Services . . . . . . . .
6,607
U.S. Prepaid Debit—Total . . . . . . . . . .
(2,412)
U.K. Limited—Products . . . . . . . . . . . .
1,610
U.K. Limited—Services . . . . . . . . . . . .
(802)
U.K. Limited—Total . . . . . . . . . . . . . . .
(2,361)
Other—Products . . . . . . . . . . . . . . . . . . .
(4,127)
Other—Services . . . . . . . . . . . . . . . . . . .
(6,488)
Other—Total . . . . . . . . . . . . . . . . . . . . .
3,134
Eliminations . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 374,110 $ 261,006 $ 113,104
45,805
263,668
—
65,878
65,878
22,211
12,150
34,361
9,321
8,099
17,420
(7,217)
20,040
153,015
—
59,271
59,271
24,623
10,540
35,163
11,682
12,226
23,908
(10,351)
63.8 %
128.6 %
72.3 %
—
11.1 %
11.1 %
(9.8)%
15.3 %
(2.3)%
(20.2)%
(33.8)%
(27.1)%
(30.3)%
43.3 %
Net sales for the year ended December 31, 2015 increased $113.1 million, or 43.3%, to $374.1 million
compared to $261.0 million for the year ended December 31, 2014. The increase in net sales during 2015 was due to
47
growth in our U.S. Debit and Credit segment and U.S. Prepaid Debit segment net sales of 72.3% and 11.1%,
respectively, offset by a 2.3% decline in our U.K. Limited segment net sales compared to 2014.
U.S. Debit and Credit
Net sales for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased
$110.7 million, or 72.3%, to $263.7 million compared to $153.0 million for the year ended December 31, 2014. The
increase in net sales was driven by an increase in EMV related revenue of $79.0 million, and an increase in net sales of
$57.2 million from the EFT Source business acquired in September 2014, partially offset by a decrease in magnetic
stripe card sales of $25.5 million.
The increase in EMV revenue of $79.0 million was driven by our card issuing bank customers or end-users
adopting EMV technology for debit and credit cards as the conversion of the United States market from magnetic stripe
Financial Payment Cards to EMV cards continues. For the year ended December 31, 2015, we sold 154.7 million EMV
cards at an average selling price of $0.94 per card compared to 63.8 million EMV cards at an average selling price of
$1.04 per card for the year ended December 31, 2014.
Of the $57.2 million increase in revenue related to our EFT Source business, $45.6 million was attributed to a
full year of sales being reflected in our 2015 results, while in 2014, sales were included from the September 2, 2014
acquisition date through December 31, 2014. The remaining growth of $11.6 million was driven by increased customer
activity in our card personalization and fulfillment services, including continued growth of Card@Once® in 2015. The
$25.5 million decline in magnetic stripe revenue was driven by the ongoing shift of our card issuing bank customers
from magnetic stripe cards to EMV cards.
U.S. Prepaid Debit
Net sales for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $6.6 million, or
11.1%, to $65.9 million compared to $59.3 million for the year ended December 31, 2014. The increase was driven by
our largest customer for this segment refreshing its packaging designs in the first quarter of 2015. This customer activity
produced a significant increase in net sales in the first quarter of 2015, with buying patterns returning to normal levels
for the remainder of the year ended December 31, 2015.
U.K. Limited
Net sales for the U.K. Limited segment for the year ended December 31, 2015 decreased $0.8 million, or 2.3%,
to $34.4 million compared to $35.2 million for the year ended December 31, 2014. Fluctuations in the exchange rate
between the United States dollar and the British Pound resulted in a reduction to net sales for the year ended December
31, 2015 of $2.5 million over the previous year.
Other
Net sales in Other decreased $6.5 million, or 27.1%, from 2014 to 2015.
Net sales for our Canada operations decreased $2.4 million for the year ended December 31, 2015 compared to
2014, driven by fluctuations in foreign currency exchange rates. Fluctuations in the exchange rate between the United
States dollar and the Canadian Dollar resulted in a reduction to net sales for the year ended December 31, 2015 of
$2.1 million over the previous year. Our Petersfield, U.K. operation was shut-down in August 2015 which primarily
drove the remaining $4.1 million decrease in Other net sales year over year.
48
Cost of Sales
Cost of sales by segment:
Year Ended December 31,
2015
2014
$ Change % Change
(dollars in thousands)
U.S. Debit and Credit . . . . . . . . . . . . . . . $ 166,551 $ 103,555 $ 62,996
1,249
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . .
(1,758)
U.K. Limited . . . . . . . . . . . . . . . . . . . . . .
(6,499)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,022
Eliminations . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 238,289 $ 179,279 $ 59,010
39,498
25,234
14,427
(7,421)
38,249
26,992
20,926
(10,443)
60.8 %
3.3 %
(6.5)%
(31.1)%
*
32.9 %
* Not meaningful
Cost of sales for the year ended December 31, 2015 increased $59.0 million, or 32.9%, to $238.3 million
compared to $179.3 million for the year ended December 31, 2014.
U.S. Debit and Credit
Cost of sales for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased
$63.0 million, or 60.8%, to $166.6 million compared to $103.6 million for the year ended December 31, 2014. The
increase in cost of sales was primarily attributable to a $26.9 million increase in technology materials (primarily EMV
microchips), a $12.1 million increase in other materials, a $12.7 million increase in overhead, an $8.6 million increase in
labor and benefits costs and a $3.0 million increase in depreciation and amortization.
The $26.9 million increase in technology materials was driven by the increased number of EMV cards sold, as
noted above, and is a direct result of U.S. card issuing banks upgrading debit and credit cards to EMV which include an
integrated circuit chip assembly and in certain cases may also include an RFID inlay assembly. The $12.1 million
increase in other materials and the $12.7 million increase in overhead expenses were driven primarily by the continued
integration of the EFT Source business and, to a lesser extent, by our new secure EMV production and card services
facility that became operational in 2014. The $8.6 million increase in labor costs was driven by the additional employees
we added from the acquisition of EFT Source and additional labor costs associated with the production of EMV cards,
which are more complex than non-EMV cards and therefore have a higher labor component. Finally, increases in
depreciation and amortization expense were driven by the EFT Source acquisition and the new secure EMV production
and card services facility noted above.
U.S. Prepaid Debit
Cost of sales for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $1.2 million,
or 3.3%, to $39.5 million compared to $38.2 million for the year ended December 31, 2014. The increase in cost of sales
was related to the increased level of net sales referenced above, partially offset by more efficient operations.
U.K. Limited
Cost of sales for the U.K. Limited segment for the year ended December 31, 2015 decreased $1.8 million, or
6.5%, to $25.2 million compared to $27.0 million for the year ended December 31, 2014. The decrease in cost of sales
was driven by foreign currency exchange rate fluctuations, as discussed above.
Other
Other cost of sales decreased by $6.5 million, or 31.1%, to $14.4 million compared to $20.9 million in 2014.
The decrease was primarily related to a decrease of $4.1 million in cost of sales related to our Petersfield, U.K.
operation, shut-down in August 2015, as discussed above and decreases related to our Canada operation of $2.2 million.
The decrease in cost of sales in Canada was driven by foreign currency exchange rate fluctuations, discussed above.
49
Gross Profit and Gross Profit Margin
Year Ended December 31,
% of
% of
2015
net sales
2014
(dollars in thousands)
net sales
$ Change % Change
Gross profit by segment:
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . $ 97,117
26,380
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . . .
9,127
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . .
3,197
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135,821
36.8 % $ 49,460
40.0 % 21,022
26.6 % 8,171
18.4 % 3,074
36.3 % $ 81,727
32.3 % $ 47,657
35.5 % 5,358
956
23.2 %
123
12.9 %
31.3 % $ 54,094
96.4 %
25.5 %
11.7 %
4.0 %
66.2 %
Gross profit for the year ended December 31, 2015 increased $54.1 million, or 66.2%, to $135.8 million
compared to $81.7 million for the year ended December 31, 2014. Gross profit margin for the year ended December 31,
2015 increased to 36.3% compared to 31.3% for the year ended December 31, 2014.
U.S. Debit and Credit
Gross profit for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased
$47.7 million, or 96.4%, to $97.1 million compared to $49.5 million for the year ended December 31, 2014. Increases in
gross profit were driven by a $30.3 million contribution from increased EMV volumes (net of reduced gross profit from
non-EMV cards) and a $17.4 million increase in personalization and fulfillment services, of which $16.2 million
increased due to EFT Source results being reflected for the full year in 2015 and from September 2, 2014 through
December 31, 2014 during the prior year, with the remaining increase of $1.2 million due to year over year growth.
Gross profit margin for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased to 36.8%
compared to 32.3% for the year ended December 31, 2014 due to the continued conversion of the United States market
to EMV cards, discussed above.
U.S. Prepaid Debit
Gross profit for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased $5.4 million,
or 25.5%, to $26.4 million compared to $21.0 million for the year ended December 31, 2014. Gross profit margin for the
U.S. Prepaid Debit segment for the year ended December 31, 2015 increased to 40.0% compared to 35.5% for the year
ended December 31, 2014. The increase in gross profit and gross profit margin were primarily driven by increased net
sales referenced above and the improved operating efficiencies in this segment.
U.K. Limited
Gross profit for the U.K. Limited segment for the year ended December 31, 2015 increased $1.0 million, or
11.7%, to $9.1 million compared to $8.2 million for the year ended December 31, 2014. Gross profit margin for the U.K.
Limited segment for the year ended December 31, 2015 increased to 26.6% compared to 23.2% for the year ended
December 31, 2014. The increase was driven by the effect of foreign currency exchange rate fluctuations discussed
above, and to a lesser extent, more efficient production.
Other
Gross profit in Other increased 4.0% in 2015 to $3.2 million from $3.1 million in 2014, and was primarily
related to the Canada operation.
50
Operating Expenses
Operating expenses by segment:
Year Ended December 31,
2015
2014
$ Change % Change
(dollars in thousands)
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . $ 25,562 $ 15,053 $ 10,509
413
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . .
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . .
21
9,903
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,101 $ 47,255 $ 20,846
5,266
6,396
20,540
5,679
6,417
30,443
69.8 %
7.8 %
0.3 %
48.2 %
44.1 %
Operating expenses for the year ended December 31, 2015 increased $20.8 million, or 44.1%, to $68.1 million
compared to $47.3 million for the year ended December 31, 2014. The increase in operating expenses was driven
primarily by a $10.5 million increase in the U.S. Debit and Credit segment and a $9.9 million increase in our corporate
expenses.
The $10.5 million increase in the U.S. Debit and Credit segment was driven by an $8.7 million increase related
to the EFT Source acquisition, and the remaining increase was primarily attributable to additional SG&A expenses
related to the elevated levels of segment net sales discussed above.
Other operating expenses includes an increase of $4.2 million in connection with the settlement of our
obligation under the phantom stock plan in conjunction with our IPO, $1.8 million in increased depreciation and
amortization expense, $1.0 million related to accrued performance bonuses in connection with the EFT Source
acquisition, a restructuring charge of $0.7 million related to the closure of our Petersfield, U.K. facility, $0.4 million of
transaction costs, and a $1.8 million increase in corporate salaries, consulting fees, legal, and other SG&A expense.
Excluding charges of $8.7 million and $4.5 million for the years ended December 31, 2015 and 2014,
respectively, related to our phantom stock plan, $0.4 million of transaction costs for the year ended December 31, 2015
and $1.0 million of accrued performance bonus charges in connection with the EFT Source acquisition in the year ended
December 31, 2015, operating expenses for the year ended December 31, 2015 increased $15.2 million, or 35.6%,
compared to the year ended December 31, 2014.
Income from Operations and Operating Margin
Year Ended December 31,
2015
% of
net sales
% of
net sales
(dollars in thousands)
2014
$ Change % Change
Income from operations by segment:
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . . $ 71,555
20,701
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . . . .
2,710
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . .
(27,246)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,720
* Not meaningful
27.1 % $ 34,407
31.4 % 15,756
1,775
7.9 %
(17,466)
*
18.1 % $ 34,472
22.5 % $ 37,148
4,945
26.6 %
5.0 %
935
(9,780)
*
13.2 % $ 33,248
108.0 %
31.4 %
52.7 %
56.0 %
96.4 %
Income from operations for the year ended December 31, 2015 increased $33.2 million, or 96.4%, to
$67.7 million compared to $34.5 million for the year ended December 31, 2014. Operating margins for the year ended
December 31, 2015 increased to 18.1% compared to 13.2% for the year ended December 31, 2014.
51
U.S. Debit and Credit
Income from operations for the U.S. Debit and Credit segment for the year ended December 31, 2015 increased
$37.1 million, or 108.0%, to $71.6 million compared to $34.4 million for the year ended December 31, 2014. Operating
income benefited by $7.7 million from the inclusion of the EFT Source acquisition for a full year in 2015 (results from
EFT Source were included from September 2, 2014 through December 31, 2014). Operating margins for the year ended
December 31, 2015 increased to 27.1% compared to 22.5% for the year ended December 31, 2014 due primarily to the
higher sales volumes of EMV cards, as discussed above.
U.S. Prepaid Debit
Income from operations for the U.S. Prepaid Debit segment for the year ended December 31, 2015 increased
$4.9 million, or 31.4%, to $20.7 million compared to $15.8 million for the year ended December 31, 2014 due primarily
to the higher sales levels and more efficient operations, as discussed above.
U.K. Limited
Income from operations for the U.K. Limited segment for the year ended December 31, 2015 increased
$0.9 million, or 52.7%, to $2.7 million compared to $1.8 million for the year ended December 31, 2014 due to more
efficient production. Operating margins for the year ended December 31, 2015 increased to 7.9% compared to 5.0% for
the year ended December 31, 2014 for the reasons discussed above.
Interest, net
Interest expense for the year ended December 31, 2015 increased $10.8 million, or 144.1%, to $18.3 million
compared to $7.5 million for the year ended December 31, 2014. The increase in interest expense was driven by higher
average debt balances outstanding relating to the $435.0 million First Lien Term Loan that we put in place in August
2015. Interest expense also includes $4.7 million of amortization of debt issuance cost and discount related to the early
debt repayment of $112.5 million using proceeds from our IPO, and an additional fourth quarter debt repayment of
$10.0 million.
Loss on debt modification and early extinguishment
Loss on debt modification and early extinguishment for the year ended December 31, 2015 was $0.7 million
related to unamortized deferred financing costs and discount on our Senior Term Loan dated September 2, 2014, which
was repaid with proceeds from our $435.0 million First Lien Term Loan. Refer to Note 10 “Long-Term Debt and Credit
Facility”, in Part III, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Income tax expense
Income tax expense for the year ended December 31, 2015 increased $7.5 million, to $17.8 million, compared
to $10.3 million for the year ended December 31, 2014 driven by the increase in income before taxes of $22.8 million.
The effective tax rate was 36.3% and 39.1% for the years ended December 31, 2015 and 2014, respectively. The tax rate
was lower in 2015 compared to 2014 as a result of discrete adjustments.
Fourth Quarter
Our net sales grew by 6.5% in the fourth quarter 2015 compared to same quarter in 2014. Net sales for our U.S.
Debit and Credit segment grew by 11.2% in the fourth quarter of 2015 compared to fourth quarter of 2014 due to the
continued conversion of Financial Payment Cards from magnetic stripe to EMV chip technology.
Net sales for our U.S. Prepaid Debit segment increased by 1.4% in the fourth quarter of 2015 compared to the
fourth quarter of 2014 as growth in our retail prepaid sales across the customer base was offset by significant fourth
quarter 2014 product launches and refreshes for two large customers, which were not replicated in the fourth quarter of
2015.
52
Net sales for our U.K. Limited segment decreased 2.3% in the fourth quarter of 2015 compared to the fourth
quarter of 2014, due primarily to foreign currency exchange rates. Fluctuations in the exchange rate between the United
States dollar and the British Pound resulted in a reduction to net sales for the three months ended December 31, 2015 of
$0.5 million compared to the same period in the previous year.
Income from operations and operating income margins in the fourth quarter of 2015 continued to improve over
the fourth quarter of 2014 due to increased operating leverage driven by increased net sales. The increases in net sales
have been primarily driven by an increase in the shipment of EMV Financial Payment Cards, which generally have
higher selling prices and gross profits than the non-EMV Financial Payment Cards that they are replacing.
Liquidity and Capital Resources
As of December 31, 2016, we had $37.0 million of cash and cash equivalents. Of this amount, $6.8 million was
held in accounts outside of the United States.
Our ability to make investments in and grow our business, service our debt and improve our debt leverage
ratios, and return capital to shareholders through dividends and share repurchases, while maintaining strong liquidity will
depend on our ability to continue to generate excess operating cash flows through our operating subsidiaries. We believe
that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be
adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital
expenditures, dividend payments and share repurchases, lease obligations, and working capital needs.
At December 31, 2016, there was $312.5 million outstanding under the First Lien Term Loan, and we had
$40.0 million of availability under the Revolving Credit Facility. The First Lien Term Loan and Revolving Credit
Facility (collectively, “First Lien Credit Facility”) mature on August 17, 2022 and August 17, 2020, respectively.
Interest rates under the First Lien Term Loan, at the Company's election, are based on either a Eurodollar rate
plus a margin of 4.50% or a base rate plus a margin of 3.50%. As of December 31, 2016, the interest rate on our First
Lien Term Loan was 5.50%, and increased to 5.83% as the interest rate was reset on the First Lien Term Loan during
January 2017.
The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions
or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity
holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our
assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loan in advance
of the maturity date based on a calculation of excess cash flows, as defined in the agreement. As of December 31, 2016,
we were in compliance with all covenants under the First Lien Credit Facility.
We had a $9.0 million subordinated, unsecured promissory note with certain sellers of EFT Source which we
fully repaid when it became due on September 2, 2016.
During the year ended December 31, 2016, the Board of Directors approved a stock repurchase program that
authorizes repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares,
prior to May 11, 2017. At December 31, 2016, up to $14.0 million remained available under the share repurchase
authorization, limited to 1,387,683 shares. Our board of directors may, in its sole discretion, change the amount or
frequency of stock repurchases, or discontinue stock repurchases entirely.
On March 1, 2017, our Board of Directors approved a dividend of $0.045 per share. This dividend is payable on
April 7, 2017, to stockholders of record as of the close of business on March 17, 2017. On November 4, 2016, our
Board of Directors declared a dividend of $0.045 per common share. The dividend was paid on January 12, 2017. The
accrued dividend of $2.5 million is reflected in “Accrued expenses” in our consolidated balance sheet as of December
31, 2016. Our current quarterly cash dividend rate is $0.045 per share, or $0.18 per share on an annualized basis. The
declaration and payment of any future dividends will be subject to the discretion of our Board of Directors, who will
evaluate our dividend program from time to time given factors it deems relevant.
53
Operating Activities
Cash provided by operating activities for the year ended December 31, 2016 was $60.0 million compared to
$43.9 million during the year ended December 31, 2015. The increase in cash provided by operating activities was due
to a net increase in cash flows from working capital, particularly from decreases to accounts receivable and inventories,
partially offset by lower net income during the year ended December 31, 2016 compared to 2015.
Cash provided by operating activities for the year ended December 31, 2015 was $43.9 million, compared to
$26.6 million for the year ended December 31, 2014. The increase in cash provided by operating activities was driven by
an increase in net income of $17.6 million, partially offset by increased working capital investments during the year.
Investing Activities
Cash used in investing activities for the year ended December 31, 2016 was $14.3 million, all relating to capital
expenditures. Capital expenditures during the year ended December 31, 2016 were lower than during the year ended
December 31, 2015 ($18.7 million) as we had elevated capital spending in 2015 in conjunction with the U.S. EMV
conversion and increased investment in our services business. We also received $5.0 million in cash from investing
activities during the year ended December 31, 2015 from the sale of our Nevada operation.
Cash used in investing activities for the year ended December 31, 2015 was $13.7 million, which included
capital expenditures of $18.7 million, partially offset by $5.0 million of cash provided from the sale of our Nevada
operation during the year ended December 31, 2015. In 2014, net cash used in investing activities was $71.8 million,
driven primarily by the cash used to purchase EFT Source of $54.9 million. Capital expenditures were $1.7 million
higher in the year ended December 31, 2015 compared to 2014 because of elevated capital spending in conjunction with
the U.S. EMV conversion and increased investment in our services business.
Financing Activities
Cash used in financing activities for the year ended December 31, 2016 was $21.9 million, which primarily
included the repayment of the $9.0 million subordinated, unsecured promissory note with certain sellers of EFT Source,
$6.0 million of common stock repurchased under our stock repurchase program, and $7.5 million of dividends paid on
our common stock.
Cash used in financing activities for the year ended December 31, 2015 was $29.4 million, due to the
redemption of Series A Preferred Stock and related dividends of $58.3 million and $230.3 million, respectively, the
repayment of outstanding borrowings under our previous credit facility of $170.9 million, the payment of $17.8 million
in loan issuance costs in connection with our First Lien Credit Facility, and the repayment of First Lien Term Loan
borrowings of $122.5 million. The payments on the First Lien Term Loan were made with $112.5 million of cash
proceeds from our IPO and an additional $10.0 million in the fourth quarter with available cash on hand. Partially
offsetting the above disbursements were proceeds from our IPO totaling $135.3 million, net of $7.2 million of offering
costs, and $435.0 million generated in connection with borrowings under our First Lien Credit Facility.
Cash provided from financing activities for the year ended December 31, 2014 was $48.5 million. Cash
provided from financing activities was driven by proceeds of $60.0 million under our Senior Term Loan dated
September 2, 2014, offset by repayments of $11.0 million and loan issuance costs of $0.4 million on the same Senior
Term Loans.
Working Capital
Our working capital as of December 31, 2016 was $57.1 million compared to $59.0 million as of December 31,
2015. During the year ended December 31, 2016, our cash balance increased $23.3 million. Offsetting the increased
cash were the $9.0 million principal payment made to certain sellers of EFT Source, and net decreases in other working
capital accounts, primarily accounts receivable and inventories, reflecting the decline in the net sales from the prior year.
Our working capital as of December 31, 2015 was $59.0 million compared to $52.1 million as of December 31,
2014. The $6.9 million increase in working capital during the year ended December 31, 2015 was the result of
recognizing a $5.0 million income tax receivable related to the write-off of tax deductible goodwill and intangible assets
54
associated with our Nevada operation. Additionally, the net balance of accounts receivable, inventories, accounts
payable and accrued expenses increased $10.8 million during the year, reflecting an increase in the growth in the net
sales of the Company. Primarily offsetting these increases were a $5.9 million decrease in the current assets of
discontinued operation, resulting from the sale of our Nevada operation during the period, and a $2.7 million increase in
current maturities on our long–term debt driven by our Sellers’ Note of $9.0 million which matures in September
2016. Current maturities of long-term debt as of December 31, 2014 were $6.3 million, related to current maturities of
our Senior Term Loans dated September 2, 2014.
Contractual Obligations
The following table summarizes our material contractual obligations as of December 31, 2016:
Payments due by period—December 31, 2016
(in thousands)
Total
Less than
1 year
1 - 3 Years 3 - 5 Years
More than
5 Years
Long-term debts (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,500 $
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payments (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cancellable purchase obligations . . . . . . . . . . . . . . . . . .
— $ — $ — $ 312,500
2,110
10,933
—
Total contractual obligations . . . . . . . . . . . . . . . . . . . . . . . $ 433,710 $ 28,818 $ 40,654 $ 38,695 $ 325,543
(1) Principal payments only.
(2) Amounts are based on the applicable interest rate as of
December 31, 2016, in the case of variable interest rate
debt.
4,350
17,426
7,042
3,843
34,852
—
5,802
34,852
—
16,105
98,063
7,042
Cyclical and Seasonal Nature of Business
Financial Payment Cards and Private Label Credit Cards are generally influenced by broader cyclical changes
in the economy, with economic downturns resulting in decreases in the demand for our products and services. In
particular, prolonged economic downturns typically have resulted in significant reductions in the demand for general
purpose credit cards due to tightening credit conditions. Additionally, we generate higher net sales in the third and fourth
quarters of the year, as our sales of Prepaid Debit Card solutions and retail gift cards are more heavily weighted toward
the second half of the year when consumers tend to purchase more of these products and services in anticipation of the
holiday season.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements at December 31, 2016 and 2015.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our
consolidated financial statements which have been prepared in accordance with accounting principles generally accepted
in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments
that can have a significant impact on our reported revenue, results of operations and net income, as well as on the value
of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions
and judgments are necessary because future events and their effects on our results and the value of our assets cannot be
determined with certainty, and are made based on our historical experience and on other assumptions that we believe to
be reasonable under the circumstances. These estimates may change as new events occur or additional information is
obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may
not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process,
actual results could differ from those estimates.
Revenue Recognition
Generally, we recognize revenue related to sales of our products upon shipment, when persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and
55
collectability is reasonably assured. A provision for payment discounts, product return allowances and uncollectable
accounts, which is estimated based upon our historical performance, management’s experience and current economic
trends, is recorded as a reduction of sales in the same period that the revenue is recognized.
In certain cases, at the customer’s request, we enter into bill-and-hold transactions whereby title transfers to the
customer, but the product does not ship until a specified later date. We recognize revenue associated with bill-and-hold
arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the
customer is fixed, and collectability of the related receivable is reasonably assured. All of the foregoing requires us to
apply our judgment. Bill-and-hold arrangements most often occur when customers request that we ship complete
tamper-evident security packages containing a Prepaid Debit Card to our secure fulfillment center until they provide us
further instructions at a later date to ship those packages to numerous individual retail locations or distribution centers.
Multiple-Element Arrangements
We enter into warehouse, fulfillment and distribution service agreements with several customers, where we are
engaged to store and handle completed cards and tamper-evident security packages on their behalf. For the sales
arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting and
individually delivered elements have value to the customer on a standalone basis. When separate units of accounting
exist, revenue is allocated to each element based on our best estimate of competitive market prices. At the point in which
completed cards and packages are shipped to our warehouse, the product is billed and the revenue is recognized in
accordance with our revenue recognition policy. Warehousing services are recognized monthly based on volume and
handling requirements; fulfillment services are recognized when the product is handled in the manner specified by the
customer for a unit or handling fee. All of the foregoing requires us to apply our judgment. Multiple-element
arrangements most often occur when customers request that we ship complete tamper-evident security packages
containing a Prepaid Debit Card to our secure fulfillment center until they provide us further instructions at a later date
to ship those packages to numerous individual retail locations or distribution centers.
Impairment Assessments of Goodwill and Long-Lived Assets
A component of our growth strategy has been to acquire and integrate businesses that complement our existing
operations. We account for business combinations using the acquisition method and allocate the acquisition price of
acquired companies to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair
values at the acquisition date. The difference between the acquisition price and the fair value of the net assets acquired is
recorded as goodwill.
In determining the fair value of assets acquired and liabilities assumed in business combinations and for
determining fair values in impairment tests, we use one of the following recognized valuation methods: the income
approach (including discounted cash flows), the market approach or the cost approach. Our significant estimates in those
fair value measurements include identifying business factors such as size, growth, profitability, risk and return on
investment and assessing comparable revenue and earnings multiples. Further, when measuring fair value based on
discounted cash flows, we make assumptions about future price levels, rates of increase in revenue, cost of revenue and
operating expenses, weighted average cost of capital, rates of long term growth and income tax rates. We also consider
our market capitalization, adjusted for unallocated monetary assets such as cash, debt, a control premium and other
factors determined by management. Valuations are performed by management or third party valuation specialists under
management’s supervision, where appropriate. We believe that the estimated fair values assigned to the assets acquired
and liabilities assumed and for determining fair value in business combinations and impairment tests are based on
reasonable assumptions that marketplace participants would use. However, such assumptions are inherently uncertain
and actual results could differ from those estimates. Changes to or a failure to achieve our projected business
assumptions, including growth and profitability, could result in a valuation that would trigger an impairment of goodwill.
Goodwill is allocated to our reporting units at the date the goodwill is initially recorded. Once goodwill has
been allocated to the reporting units, it no longer retains its identification with a particular acquisition and becomes
identified with the reporting unit in its entirety. Accordingly, the fair value of the reporting unit as a whole is available to
support the recoverability of its goodwill. Goodwill of $72.0 million as of December 31, 2016 is attributable to the
Company’s reportable segments as follows: U.S. Debit and Credit $64.3 million, U.K. Limited $5.9 million, and Other
$1.8 million.
56
We evaluate goodwill and our indefinite-lived intangible assets for impairment annually on October 1st or more
frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. We
have the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is
more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not
more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill
impairment test is not required to be performed. If we determine that it is more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative
assessment, we perform the two-step goodwill impairment test. In the first step, the fair value of the reporting unit is
compared to its book value including goodwill. If the fair value of the reporting unit is in excess of its book value, the
related goodwill is not impaired and no further analysis is necessary. If the fair value of the reporting unit is less than its
book value, there is an indication of potential impairment and a second step is performed. When required, the second
step of testing involves calculating the implied fair value of goodwill for the reporting unit. The implied fair value of
goodwill is determined in the same manner as goodwill recognized in a business combination, which is the excess of the
fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible
assets as if the reporting unit had been acquired. If the carrying value of the reporting unit’s goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For reporting
units with a negative book value (i.e., excess of liabilities over assets), we evaluate qualitative factors to determine
whether it is necessary to perform the second step of the goodwill impairment test.
Certain trademark intangible assets are expected to have indefinite lives and are tested for impairment by
comparing the book values of each asset to the estimated fair value. We determine the fair value based on an income
approach model, where the present value of future cash flows associated with the trademark are discounted at a risk
adjusted rate. Management judgment is necessary to estimate future cash flows used to measure fair value and to
evaluate our plans with respect to supporting trademarks. The Company completed its evaluation of the carrying values
of its indefinite lived intangible assets as of October 1, 2016, and identified an impairment of $2.7 million related to a
trademark acquired in the EFT Source acquisition based on the Company’s plans to discontinue the use of the trademark
in its sales, marketing and other business practices. During 2016, the Company evaluated the future utilization of its
trademarks and updated its estimate to amortize these assets over lives ranging from 7.5 to 10 years.
Long-lived assets, such as property, equipment and software, and amortizable intangible assets, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group
may not be recoverable. Plant, equipment, and leasehold improvements are recorded at cost. Accumulated depreciation
is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to
10 years for equipment, furniture, and leasehold improvements) or, when applicable, the lease term. Maintenance and
repairs that do not extend the useful life of the respective assets are charged to expense as incurred. If circumstances
require that a long-lived asset or asset group be tested for possible impairment, we first compare the undiscounted cash
flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of
the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to
the extent that the carrying amount exceeds its fair value.
Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future
valuations. In future measurements of fair value, adverse changes in assumptions could result in an impairment of
goodwill or long-lived assets that would require a non-cash charge to the consolidated statements of operations and may
have a material effect on our financial condition and operating results.
Inventory Valuation
Raw materials, work-in-process and finished goods inventories are valued at the lower of cost or market, with
cost determined using a weighted-average method. Cost is calculated based upon the price paid for an item at the time it
is received by us, and also includes the capitalization of labor, overhead and other expenses in the case of work-in-
process and finished goods inventory. This net inventory cost is recognized through cost of sales when the inventory is
sold. It is impractical for us to assign specific allocated overhead costs to individual units of inventory. As such, to match
net inventory costs against the related revenue, we estimate the net inventory costs to be deferred and recognized each
period as the inventory is sold. Also, we must exercise significant judgment in the case of work-in-process inventory to
allocate the appropriate costs to this unfinished product.
57
Stock-Based Compensation
In connection with the IPO, we adopted the CPI Card Group Inc. Omnibus Incentive Plan (“Omnibus Plan”)
and granted stock options to certain employees during the years ended December 31, 2016 and 2015. We estimate the
fair value of option awards using a Black-Scholes option pricing model or other option pricing models, as we deem
appropriate. Option-pricing models require us to estimate a number of key valuation inputs including expected
volatility, expected dividend yield, expected term and risk-free interest rate. The most subjective estimate is the expected
volatility of the underlying stock when determining the fair market value of an option granted. Based on the limited
amount of trading history of our common stock, we utilized a peer group to estimate the volatility assumption when
calculating the fair value of stock options granted during 2016 and 2015. As we obtain more trading history on our own
common stock, our specific trading history, and associated volatility will gradually replace the peer group volatility
assumption. As such, our volatility assumption in the future could be significantly different going forward than what we
have estimated for our 2016 and 2015 grants, which could impact our stock-based compensation expense in future
periods.
Prior to the adoption of the Omnibus Plan, we maintained the 2007 Stock Option Plan under which stock
options and restricted stock awards were granted to employees. We recognize compensation expense for option and
restricted stock awards based on the fair value of the award on a straight-line basis over the vesting period of the award
based on the estimated portion of the award that is expected to vest. The fair value of the award is based on the valuation
of our common stock on the date of grant. Because there was no public market for our common stock prior to our IPO,
we were required to exercise significant judgment in valuing the fair value of the awards under this plan. The fair value
of our equity was historically estimated by our management and approved by our board. In estimating the fair value of
our common stock, management and the board considered factors it believed were material to the valuation process
including the process, rights, preferences and privileges of our preferred stock relative to the common stock, our actual
and projected financial results, current business conditions and projections, the principal amount of our indebtedness, net
of cash and the trading multiples of comparable companies.
A 10% change in our stock-based compensation expense for the year ended December 31, 2016, would have
affected pre-tax income by approximately $0.4 million. We include stock-based compensation expense in selling,
general and administrative expenses in our consolidated statement of operations and comprehensive income.
Income Taxes
We record income tax expense using the liability method for taxes and are subject to income tax in many
jurisdictions, including the United States, various states and localities, the United Kingdom, and Canada. A current tax
asset or liability is recognized for the estimated taxes refundable or payable on the tax returns for the current year and a
deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and
carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a
change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such
assets will be realized. In evaluating our ability to realize our deferred tax asset, we considered the following sources of
future taxable income:
•
•
•
•
future reversals of existing taxable temporary differences;
future taxable income, exclusive of reversing temporary differences and carryforwards;
taxable income in prior carryback years; and
tax-planning strategies.
Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among
other things, the nature, frequency and severity of recent losses, forecasts of future profitability and the duration of
statutory carryforward periods. Our forecast of future profitability represents our best estimate of these future events.
After conducting this assessment, the valuation allowance recorded, net of federal benefit, against our deferred tax assets
58
was $4.9 and $3.7 million as of December 31, 2016 and December 31, 2015, respectively. If actual results differ from
estimated results, or if we adjust these assumptions in the future, we may need to adjust our deferred tax assets or
liabilities, which could impact our effective tax rate.
The amount of income taxes we pay could be subject to possible audits in the taxing jurisdictions in which we
operate. In the event of these possible audits, the taxing authorities might challenge items on our tax returns. Because the
tax matters challenged by tax authorities are typically complex, the ultimate outcome of these challenges is uncertain.
We recognize tax benefits for uncertain positions only to the extent that we believe it is more likely than not that the tax
position will be sustained. Our future results may include favorable or unfavorable adjustments to our unrecognized tax
benefits due to closure of income tax audits, new regulatory or judicial pronouncements, or other relevant events. As a
result, our effective tax rate may fluctuate significantly on a quarterly and annual basis.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and
Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and
qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to
annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The
Company plans to implement the provisions of ASU 2014-09 as of January 1, 2018, but has not determined what
transition method it will use. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated
financial statements. The Company is currently analyzing its customer contracts and the nature of these arrangements,
has documented its draft accounting policies in accordance with the new guidance, and assessing associated
implementation considerations. This assessment includes an evaluation of whether certain performance obligations will
be recognized over time as opposed to a point in time. As the Company finalizes its conclusions, it may need to make
changes to its business and accounting processes, systems and controls to support recognition and disclosures under the
new standard.
The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July
2015. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The new standard is effective for public entities’ annual reporting periods beginning after
December 15, 2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The
Company does not expect ASU 2015-11 to have a material effect on its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for accounting for leases.
The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by
leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 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 consolidated financial
statements, including the determination of the method of adoption and an accounting policy election regarding
forfeitures.
59
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Key Input Price Risks
Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs
of key operating resources, including EMV microchips, polyvinyl chloride (“PVC”), energy and other commodities. We
have been able to offset cost increases, which have historically not been significant, by making operational adjustments
that increase productivity. However, substantial increases in costs and expenses could impact our operating results to the
extent that such increases cannot be offset by selling price increases.
Labor and Benefits Costs
We are exposed to inflation in wage and benefits costs which represented 31.4% of net sales for the year ended
December 31, 2016. Due to the high-security nature of our business, the availability of potential applicants is limited by
the security and other requirements of the Payment Card Brands, and applicants are required to undergo a rigorous
background screening process. Due to these factors, we have historically provided a starting wage that is above the
minimum wage in place for the particular states or provinces in which we do business to attract qualified applicants. We
further believe that this enables us to attract a higher caliber employee, which translates directly to higher quality and
productivity. There can be no assurance that we will generate sales growth in an amount sufficient to offset increases in
minimum wage or other inflationary pressures.
Interest Rate Risk
We are exposed to interest rate risk through fluctuations in interest rates on our term loan obligations. Our
Revolving Credit Facility and our First Lien Term Loan carry interest at a floating rate. We seek to manage exposure to
adverse interest rate changes through our normal operating and financing activities. As of December 31, 2016, we had
$312.5 million in outstanding floating rate debt obligations under our First Lien Term Loan. Net of unamortized debt
and unamortized deferred financing costs of $10.6 million, our recorded debt balance was $301.9 million at December
31, 2016. Each quarter point increase or decrease in the interest rate on our First Lien Term Loan would change our
annual interest expense by approximately $0.8 million. If our Revolving Credit Facility was fully-drawn, each quarter
point increase or decrease in the interest rate on our Revolving Credit Facility would change our annual interest expense
by approximately $0.1 million.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other
than the U.S. dollar, primarily the British Pound Sterling and the Canadian Dollar. Risk can be estimated by measuring
the impact of a near-term adverse movement of 10% in foreign currency rates against the U.S. Dollar. A hypothetical ten
percent change in the British Pound Sterling and Canadian Dollar would have impacted our 2016 net sales by
approximately $4.3 million, with the impact to income from operations being immaterial. Approximately 85.0% of net
sales for the year ended December 31, 2016 were in U.S. dollar functional currency subsidiaries, not subject to such
foreign currency risk.
Pricing Risk
While we have been able to partially offset historical pricing pressure and other changes in the price of our
products and services by offering higher-value added products and services, cross-selling additional products and
services, selectively implementing pricing increases, coupled with more efficient purchasing practices, productivity
improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the
future. From time to time, competitive conditions could limit our pricing flexibility and macroeconomic conditions could
increase pricing pressure. There can be no assurance that future pricing pressure can be offset by our ability to reduce
our costs. In addition, there can be no assurance that we will generate sales growth in an amount sufficient to offset
pricing pressures.
60
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CPI Card Group Inc.
As of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015, and 2014
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CPI Card Group Inc.:
We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries as of
December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income,
stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2016. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of CPI Card Group Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S.
generally accepted accounting principles.
Denver, Colorado
March 1, 2017
/s/ KPMG LLP
F-2
CPI Card Group Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands, Except Shares and Per Share Amounts)
December 31,
2016
2015
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net of allowances of $126 and $212, respectively . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant, equipment and leasehold improvements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,606
52,538
25,640
4,260
4,975
101,019
52,113
53,988
73,123
110
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 264,420 $ 280,353
36,955 $
31,492
19,369
4,601
—
92,417
53,419
46,348
71,996
240
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 15)
Stockholders’ deficit:
10,996 $
17,487
64
6,729
—
35,276
301,922
21,261
1,234
359,693
17,832
11,315
—
3,874
9,000
42,021
300,000
24,073
869
366,963
Common Stock; $0.001 par value—100,000,000 shares authorized; 55,359,251 shares
issued and outstanding and 56,542,116 shares issued and outstanding at December 31,
56
2016 and 2015, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(119,028)
Capital deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,661
Accumulated earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,299)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(86,610)
Total liabilities and stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 264,420 $ 280,353
55
(114,881)
25,968
(6,415)
(95,273)
See accompanying notes to consolidated financial statements
F-3
CPI Card Group Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Dollars in Thousands, Except Per Share Amounts)
Net sales:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,510 $ 241,609 $ 159,220
101,786
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
261,006
Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132,501
374,110
140,190
308,700
Year Ended December 31,
2015
2014
2016
Cost of sales:
Products (exclusive of depreciation and amortization shown below) . . . . . . . . . . .
Services (exclusive of depreciation and amortization shown below) . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization
shown below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net:
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on debt modification and early extinguishment . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations:
Loss from a discontinued operation, net of taxes (Note 4) . . . . . . . . . . . . . . . . . . . . .
Gain on sale of a discontinued operation, net of taxes . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . $
111,627
84,453
10,722
206,802
101,898
155,516
73,111
9,662
238,289
135,821
113,399
57,233
8,647
179,279
81,727
66,711
6,205
—
72,916
28,982
61,116
6,304
681
68,101
67,720
42,650
4,605
—
47,255
34,472
(20,044)
(417)
—
20
(20,441)
8,541
(3,142)
5,399
(18,328)
59
(703)
359
(18,613)
49,107
(17,846)
31,261
(7,508)
(124)
(476)
(101)
(8,209)
26,263
(10,291)
15,972
—
—
(606)
(2,670)
—
208
5,399 $ 30,863 $ 13,302
(44,477)
5,399 $ (1,685) $ (31,175)
(32,548)
—
Basic and diluted earnings (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.10 $
—
0.10 $
(0.03) $
(0.01)
(0.04) $
(0.69)
(0.07)
(0.76)
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.18 $
— $
—
Comprehensive Income
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,302
30,863
5,399
(2,116)
(1,064)
(1,715)
3,283 $ 29,148 $ 12,238
See accompanying notes to consolidated financial statements
F-4
CPI Card Group Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
(Dollars in Thousands, Except Share Amounts)
Common Shares
Shares
Amount deficiency
Capital
Accumulated
earnings
(deficit)
Accumulated
other
comprehensive
loss
Employee
notes
receivable
Total
January 1, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,113,952 $
Issuance of common stock, net of issuance costs . .
Repayment of employee note . . . . . . . . . . . . . . . .
Components of comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . .
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock upon public offering, net
of offering costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued under stock-based compensation plans
Stock-based compensation . . . . . . . . . . . . . . . . . .
Redemption of common stock . . . . . . . . . . . . . . . .
Dividend distribution on Series A Preferred Stock .
Repayment of employee note . . . . . . . . . . . . . . . .
Components of comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock dividends . . . . . . . . . . . . . . . . . . .
Common stock repurchased . . . . . . . . . . . . . . . . .
Shares issued under stock-based compensation plans
Stock-based compensation . . . . . . . . . . . . . . . . . .
Tax benefit attributable to stock-based
compensation and other . . . . . . . . . . . . . . . . . . . .
Components of comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . .
41 $ (27,786) $
2,945
—
—
—
257,268
—
—
—
—
—
—
—
41 $ (24,841) $
41,371,220 $
(7,504) $
—
—
(1,520) $
—
—
(127) $ (36,896)
2,945
19
—
19
13,302
—
5,798 $
—
(1,064)
(2,584) $
—
—
13,302
(1,064)
(108) $ (21,694)
15,000,000
257,664
—
(86,768)
—
—
15
—
—
—
—
—
135,289
—
885
(46)
(230,315)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
108
135,304
—
885
(46)
(230,315)
108
—
—
—
—
—
—
56 $ (119,028) $
—
—
—
3,579
—
(1)
—
—
30,863
—
36,661 $
(10,049)
(6,007)
(36)
—
—
(1,715)
(4,299) $
—
—
—
—
30,863
—
(1,715)
—
— $ (86,610)
(10,049)
—
(6,008)
—
(36)
—
3,579
—
56,542,116 $
—
(1,439,422)
256,557
—
—
—
568
—
—
—
568
—
—
—
—
—
—
55 $ (114,881) $
55,359,251 $
5,399
—
25,968 $
—
(2,116)
(6,415) $
5,399
—
—
(2,116)
— $ (95,273)
See accompanying notes to consolidated financial statements
F-5
CPI Card Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities,
net of effects of acquisitions:
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs and debt discount . . . . . . . . . . . . . . . . . . . .
Loss on debt modification and extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of a discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities
Year Ended December 31,
2015
2014
2016
5,399 $
30,863 $ 13,302
16,927
3,579
2,700
1,922
—
—
(611)
(1,829)
448
19,847
5,793
(527)
5,429
(6,394)
3,841
3,037
397
59,958
15,995
9,633
—
5,648
703
1,039
—
10,914
(45)
(9,556)
(4,416)
(714)
(4,975)
1,663
915
699
(14,444)
43,922
14,198
4,534
—
591
476
—
—
(1,433)
(124)
(7,003)
(5,763)
(8,473)
3,061
1,466
12,665
(772)
(98)
26,627
Acquisitions of plant, equipment and leasehold improvements . . . . . . . . . . . . . . .
Proceeds from sale of a discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of EFT Source, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,294)
—
—
(14,294)
(18,670)
5,000
—
(13,670)
(16,956)
—
(54,859)
(71,815)
Financing activities
Payment of Sellers Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from an initial public offering of common stock . . . . . . . . . . . . . . .
Proceeds from First Lien Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on First Lien Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend distribution on Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of preferred and common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from employee note receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . .
Cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rates on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,955 $
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
(9,000)
(7,519)
(6,008)
—
—
—
—
—
—
—
—
—
611
(21,916)
(399)
23,349
13,606
—
—
—
—
—
—
—
135,304
—
435,000
—
(122,500)
60,000
—
(11,045)
(170,929)
(440)
(17,773)
—
(230,315)
—
(58,296)
19
108
—
—
48,534
(29,401)
(107)
(186)
3,239
665
12,941
9,702
13,606 $ 12,941
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,071 $
(468) $
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
11,986 $
10,136 $
6,793
3,219
See accompanying notes to consolidated financial statements
F-6
CPI Card Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)
1. Business
CPI Card Group Inc., formerly known as CPI Holdings I, Inc. (which, together with its subsidiary companies, is
referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and
fulfillment of Financial Payment Cards which the Company defines as credit cards, debit cards and prepaid debit cards
issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express, Discover and Interac (in
Canada)) in the United States and Canada. The Company also is engaged in the design, production, data personalization,
packaging and fulfillment of retail gift and loyalty cards (primarily in Europe and Canada).
As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities
must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and
conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from
producing Financial Payment Cards for these entities’ payment card issuers.
The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid
Debit and U.K. Limited.
• U.S. Debit and Credit Segment. The U.S. Debit and Credit segment primarily produces Financial Payment
Cards and provides integrated card services to card-issuing banks in the United States. Products
manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and prepaid
debit cards issued on the networks of the Payment Card Brands, Private Label Credit Cards, defined as
credit cards that an individual merchant issues for exclusive use in its own stores, and that are not issued on
the networks of the Payment Cards Brands, and instant issuance systems. This segment also provides a
variety of integrated card services, including card personalization and fulfillment services and instant
issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global
Payment Card Brands, and where required by the Company’s customers, certified to be in compliance with
the standards of the PCI Security Standards Council.
• U.S. Prepaid Debit Segment. The U.S. Prepaid Debit segment primarily provides integrated card services
to prepaid debit card issuers in the United States. Services provided include tamper-evident security
packaging services and card personalization and fulfillment services. This segment also produces Financial
Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident
security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple
global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security
Standards Council.
• U.K. Limited Segment. The U.K. Limited segment primarily produces retail cards, such as gift and loyalty
cards for customers in the United Kingdom and continental Europe. This segment also provides card
personalization, packaging and fulfillment services. Neither of the Company’s operations in this segment is
certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security
Standards Council, but are certified to be in compliance with International Organization for Standardization
(“ISO”) 27001 standards.
The Company also has an operation in Ontario, Canada that provides EMV and Prepaid Debit Cards and card
services in Canada, which is reflected in “Other”. See Note 18 “Segment Reporting”.
The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) under
an asset purchase agreement for $5,000 in cash. The Nevada operation primarily produced retail gift cards that are not
issued on the networks of the Payment Card Brands. Accordingly, the Company’s Consolidated Balance Sheet as of
December 31, 2015, and Statements of Operations and Comprehensive Income for the years ended December 31, 2015
and 2014 have been reclassified to present the Nevada operation as a discontinued operation. See Note 4 “Discontinued
Operation and Disposition”.
F-7
In August 2015, the Company completed the shut-down and closure of its operation in Petersfield, United
Kingdom. Petersfield primarily produced retail gift cards that are not issued on networks of the Payment Card Brands.
In connection with the shut-down and closure of the Petersfield, United Kingdom operation, the Company accrued
facility contract termination costs of $681 during the year ended December 31, 2015.
On August 17, 2015, the Company entered into a first lien credit agreement ("First Lien Credit Facility") with a
syndicate of lenders providing for a $435,000 first lien term loan facility ("First Lien Term Loan") and a $40,000
revolving credit facility ("Revolving Credit Facility"). The Company used proceeds from the First Lien Credit Facility to
pay off the outstanding balance on our previous credit facility of $158,420, and to redeem 62,140 shares of Series A
Preferred Stock for an aggregate price of $276,688. See Note 10 “Long-Term Debt and Credit Facility” and Note 12
“Series A Preferred Stock”.
On October 15, 2015, the Company completed its initial public offering (“IPO”) issuing 15,000,000 shares of
common stock at a price of $10.00 per share. The net proceeds from the IPO, after issuance costs, were utilized to
(i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11,877, (ii) repay $112,500 of
the amount outstanding under the First Lien Term Loan (as defined herein), and (iii) terminate and settle all outstanding
obligations due under the Phantom Stock Plan (as defined herein) of $13,268. The proceeds of the IPO were net of
deferred offering expenses of $7,196 and are reflected in “Capital deficiency” in the Company’s Consolidated Balance
Sheet and Consolidated Statement of Stockholders’ Deficit.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
Generally, the Company recognizes revenue related to sales of its products upon shipment, when persuasive
evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable
and collectability is reasonably assured.
In certain cases, at the customer’s request, the Company enters into bill-and-hold transactions whereby title
transfers to the customer, but the product does not ship until a specified later date. The Company recognizes revenue
associated with bill-and-hold arrangements when the product is complete and ready to ship, hold criteria have been met,
the amount due from the customer is fixed and collectability of the related receivable is reasonably assured.
Freight revenue totaling $4,651, $3,882, $4,249 is included in net sales during the years ended December 31,
2016, 2015, and 2014, respectively. The related freight costs are included in cost of sales.
Multiple-Element Arrangements
The Company enters into warehouse, fulfillment and distribution service agreements where customers engage
the Company to store and handle completed cards and packages on their behalf. For the sales arrangements that contain
multiple deliverables, the arrangement is split into separate units of accounting, and individually delivered elements have
value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each
element based on the Company’s best estimate of competitive market prices. At the point in which completed cards and
packages are shipped to the Company’s warehouses or secure vaults, the product is billed and the revenue is recognized
in accordance with the Company’s revenue recognition policy. Warehousing services revenue is recognized monthly
based on volume and handling requirements; fulfillment services revenue is recognized when the product is handled in
the manner specified by the customer for a unit or handling fee.
F-8
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash
equivalents and they are stated at cost, which approximates fair value.
Trade Accounts Receivable and Concentration of Credit Risk
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The
Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts
receivable. The Company maintains an allowance for potentially uncollectible accounts receivable based upon its
assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it becomes
probable collection will not occur. The allowance for bad debt and credit activity for the years ended December 31, 2016
and 2015 is summarized as follows:
Balance as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
272
28
(81)
(7)
212
12
(90)
(8)
126
For the years ended December 31, 2016 and 2015, the Company did not have sales to a single customer that
exceeded 10% of consolidated net sales. For the year ended December 31, 2014, the Company had sales to a single
customer of $29,523 (11.3% of consolidated net sales).
Inventories
Inventories consist of raw materials, work-in-process and finished goods and are valued at the lower-of-cost
(determined on the first-in, first-out or specific identification basis) or market.
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed
using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for
machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease
term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as
incurred. For the Company’s continuing operations, amounts charged to expense for the depreciation of plant, equipment
and leasehold improvements were $12,295, $11,389, and $10,359 for the years ended December 31, 2016, 2015 and
2014, respectively.
Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying
amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such
reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their
carrying value to determine if a write-down to fair value is required. Based upon the Company’s analysis, it concluded
that there was no impairment of its long-lived assets for the years ended December 31, 2016, 2015, and 2014.
Goodwill and Intangible Assets
Goodwill and other indefinite-lived intangible assets are not amortized, but instead are tested for impairment at
least annually on October 1. Testing is done in accordance with ASC 350, Intangibles—Goodwill and Other and ASC
820, Fair Value Measurements and Disclosures. For impairment evaluations, the Company first makes a qualitative
assessment with respect to both goodwill and other indefinite-lived intangibles. In the case of goodwill, if it is more
likely than not that a reporting unit’s fair value is less than its carrying value, the fair value of the reporting unit is
compared to its respective carrying amount. If the carrying value of a reporting unit were to exceed its fair value, any
F-9
excess of the carrying amount over the fair value would be charged to operations as an impairment loss. For the years
ended December 31, 2016, 2015 and 2014 the Company determined there were no impairments to goodwill. As of
December 31, 2016 and 2015, $5,450 and $6,352 of goodwill was tax-deductible, respectively.
With respect to indefinite-lived intangible assets, if it is more-likely-than-not that the fair value of an indefinite-
lived intangible asset is less than its carrying value, any excess of the carrying value over the fair value of the indefinite-
lived intangible asset is charged to operations as an impairment loss.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of
the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be
recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with
their carrying value to determine if a write-down to fair value is required. Based upon the Company’s analysis, it
concluded that there was no impairment of its acquired finite-lived intangible assets for the years ended December 31,
2016, 2015, and 2014.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable
income.
The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely
than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will
not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the
Company’s income tax expense in the period in which this determination is made.
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not,
based on the technical merits of the position, that the tax position will be sustained upon examination, including the
resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from
such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component
of income tax expense.
Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-
based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the
requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the
vesting period for each tranche of an award. Refer to Note 17 “Stock Based Compensation” for additional discussion
regarding details of the Company's stock-based compensation plans.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2016, 2015
and 2014 were $801, $764, and $392, respectively.
Use of Estimates
Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation
of the 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 taxes, debt and stock-based compensation expense. Actual results could differ from those estimates.
F-10
Foreign Currency Translation
Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average
exchange rate for each reporting period for revenue, expenses, gains and losses. Translation adjustments are recorded as
a component of Accumulated Other Comprehensive Loss in the accompanying financial statements.
Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in
“Foreign currency gain (loss)” in the accompanying Consolidated Statements of Operations and Comprehensive Income.
For the years ended December 31, 2016, 2015 and 2014 there were $(417), $59, and $(124) of such foreign currency
gains (losses), respectively.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and
Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and
qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to
annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The
Company plans to implement the provisions of ASU 2014-09 as of January 1, 2018, but has not determined what
transition method it will use. The Company is in the process of assessing the impact of ASU 2014-09 on its consolidated
financial statements. The Company is currently analyzing its customer contracts and the nature of these arrangements,
has documented its draft accounting policies in accordance with the new guidance, and assessing associated
implementation considerations. This assessment includes an evaluation of whether certain performance obligations will
be recognized over time as opposed to a point in time. As the Company finalizes its conclusions, it may need to make
changes to its business and accounting processes, systems and controls to support recognition and disclosures under the
new standard.
The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July 2015. ASU
2015-11 requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the
estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. The new standard is effective for public entities’ annual reporting periods beginning after December 15,
2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company does not
expect ASU 2015-11 to have a material effect on its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which provides guidance for accounting for leases.
The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by
leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 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 consolidated financial
statements, including the determination of the method of adoption and an accounting policy election regarding
forfeitures.
F-11
3. EFT Source Acquisition
On September 2, 2014, CPI Card Group Inc., through its wholly-owned subsidiary, CPI Acquisition, Inc.,
purchased EFT Source, Inc. (“EFT Source”) headquartered in Nashville, Tennessee for $68,859, of which $54,859 was
paid in cash, $9,000 was paid in the form of a note payable to the previous owners of EFT Source, and $5,000 was paid
through the issuance of CPI Card Group Inc. preferred and common stock. The note payable was fully repaid on
September 2, 2016 in accordance with the terms of the purchase agreement.
EFT Source, subsequently renamed CPI Card Group Tennessee, is a provider of Financial Payment Card
services such as data personalization and fulfillment in the U.S. market. The results of EFT Source operations were
included in the Company’s Consolidated Financial Statements as of September 2, 2014.
Pro Forma Information
The following unaudited pro forma consolidated operating results give effect to the EFT Source acquisition as
if it had been completed on January 1, 2014. These pro forma amounts are not necessarily indicative of the operating
results that would have occurred if these transactions had occurred on such date. The pro forma adjustments are based on
certain assumptions that the Company considers to be reasonable.
Revenue—Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 291,302
16,916
Net Income—Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.67)
Basic and Diluted Loss Per Share from Continuing Operations . . . . . . . . . . . . . $
December 31,
2014
The Company’s Consolidated Statement of Operations and Comprehensive Income for the year ended
December 31, 2014 includes revenue and net income from operations of $21,999 and $4,446 respectively, attributable to
EFT Source.
4. Discontinued Operation and Disposition
On January 12, 2015, the Company sold its Nevada non-secure operation under an asset purchase agreement for
$5,000 in cash. The Nevada operation was primarily engaged in the design, production, data personalization, packaging
and daily fulfillment of retail gift and loyalty cards for customers in the United States and was not certified by any of the
Payment Card Brands. At the date of sale, the net carrying values of the assets classified as a discontinued operation
included inventory and plant, equipment and leasehold improvements of $3,129 and $2,910, respectively. For the year
ended December 31, 2015, the Company recognized a gain on the sale of the discontinued operation of $208, which is
included in “Gain on sale of a discontinued operation”, net of an income tax benefit of $1,247, in the Company’s
Consolidated Statement of Operations and Comprehensive Income.
During the years ended December 31, 2015, and 2014, the Nevada operation recognized losses of $606, and
$2,670, respectively, as included in “Loss from a discontinued operation, net of taxes” in the Company’s Consolidated
Statements of Operations and Comprehensive Income. These amounts are net of income tax benefits of $404, and
$1,421, for the years ended December 31, 2015, and 2014, respectively. There was no financial impact related to Nevada
for the year ended December 31, 2016.
After the Nevada Sale, CPI retained no continuing involvement in the Nevada operations other than a 180 day
transition of services agreement, which expired on July 11, 2015. As a result of the Nevada Sale, the Company made a
tax deduction of $32,128 related to the tax deductible goodwill and intangible assets of the Nevada operations, of which
$4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the year
ended December 31, 2015.
F-12
5. Inventories
Inventories are summarized below:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,206 $ 10,549
11,460
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,631
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,369 $ 25,640
6,340
4,823
December 31,
2016
2015
6. Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements consist of the following:
December 31,
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and computer equipment . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
2015
2016
2,077 $ 2,565
57,482
59,464
4,440
6,634
15,856
18,655
1,136
2,373
82,716
87,966
(30,603)
(34,547)
$ 53,419 $ 52,113
7. Goodwill and Other Intangible Assets
The Company’s goodwill by reportable segment at December 31, 2016 and 2015 is as follows:
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,330 $ 64,330
7,089
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,704
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 71,996 $ 73,123
5,908
1,758
December 31,
2016
2015
Goodwill activity is summarized as follows:
Balance as of January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
73,801
(678)
73,123
(1,127)
71,996
The Company completed its evaluation of the carrying value of goodwill as of October 1, 2016 and 2015 and
determined there was no impairment to goodwill. In order to identify potential impairments, CPI compared the fair value
of its reporting units with their carrying amounts, including goodwill. As the fair value of the reporting units exceeded
their carrying amounts, the Company was not required to complete the second step of the process which would measure
the amount of any impairment.
The Company completed its evaluation of the carrying values of its indefinite lived intangible assets as of
October 1, 2016 and identified a $2,700 impairment related to a trademark acquired in the EFT Source acquisition. The
impairment was a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other
business practices. Accordingly, the trademark was written down to its fair value of zero. Refer to Note 8 “Fair Value of
Financial Instruments” for further definition of valuation inputs. The impaired asset is included in the U.S. Debit and
Credit reportable segment, and the impairment charge is recorded in “Selling, general and administrative” expenses
F-13
within the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2016.
There was no impairment of indefinite-lived intangible assets for the years ended December 31, 2015, and 2014.
During 2016, the Company evaluated the future utilization of its trademarks and updated its estimate to
amortize these assets over lives ranging from 7.5 to 10 years.
CPI’s other amortizable intangible assets consist of customer relationships, technology and software, non-
compete agreements, and favorable leases. Total intangible assets are being amortized over a weighted-average useful
life of 15.6 years. Intangible amortization expense totaled $4,632, $4,577 and $2,893, for the years ended December 31,
2016, 2015 and 2014, respectively.
Intangible assets consist of the following:
Average
Life (Years)
Cost
December 31, 2016
Accumulated Net Book
Amortization
Value
December 31, 2015
Accumulated Net Book
Amortization
Value
Cost
Customer relationships . . . . . . . . . 12 to 20 $ 58,994 $ (20,972) $ 38,022 $ 59,612 $ (17,747) $ 41,865
5,863
Technology and software . . . . . . . 7 to 10
221
Noncompete agreements . . . . . . . .
10
Favorable leases . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . 7.5 to 10
6,029
Intangible assets subject to
amortization . . . . . . . . . . . . . . . . . .
$ 70,027 $ (23,679) $ 46,348 $ 73,344 $ (19,356) $ 53,988
7,101
491
111
6,029
7,101
491
111
3,330
(1,238)
(270)
(101)
—
(2,167)
(331)
(111)
(98)
4,934
160
—
3,232
5 to 8
9.5
The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as
of December 31, 2016 is as follows:
$
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,893
4,893
4,873
4,833
4,579
22,277
46,348
8. 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—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the
reporting entity at the measurement date.
• Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the asset or liability.
• Level 3—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 the measurement date.
F-14
The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the
Consolidated Balance Sheets are as follows:
Liabilities:
2016
2016
Carrying
Value as of Fair Value as of
December 31, December 31,
Fair Value Measurement at
December 31, 2016
(Using Fair Value Hierarchy)
Level 3
Level 1 Level 2
First Lien Term Loan . . . . . . . . . . $ 312,500 $
290,625 $ — $ 290,625 $ —
Carrying
Value as of Fair Value as of
December 31, December 31,
Fair Value Measurement at
December 31, 2015
(Using Fair Value Hierarchy)
2015
2015
Level 1 Level 2
Level 3
Liabilities:
First Lien Term Loan . . . . . . . . . $ 312,500 $
9,000 $
Sellers' Note . . . . . . . . . . . . . . . . $
309,375 $ — $ 307,375 $ —
— $ 9,000
9,000 $ — $
The aggregate fair value of the Company's First Lien Term Loan was based on bank quotes.
The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities.
Nonrecurring fair value measurements include the trademark intangible asset impairment assessment completed
as of October 1, 2016 as determined based on unobservable Level 3 inputs. Refer to Note 7, “Goodwill and Other
Intangible Assets”.
9. Related-Party Transactions
In conjunction with certain officer and non-officer Company employees acquiring Series A Preferred and
Common Stock during 2013 and 2012, the Company obtained notes receivable from the employees that were paid in full
on August 17, 2015 and were no longer outstanding as of December 31, 2015.
10. Long-Term Debt and Credit Facility
Long-term debt consists of the following:
Interest December 31, December 31,
2016
Rate
2015
First Lien Term Loan (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.50% $ 312,500 $ 312,500
9,000
Sellers' Note (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,459)
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,041)
Unamortized deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
309,000
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,000)
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 301,922 $ 300,000
Long-term debt, net of current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(3,795)
(6,783)
301,922
—
5.00%
(a)
(b)
Interest rate on December 31, 2016
Interest rate on December 31, 2015
First Lien Credit Facility
On August 17, 2015, the Company entered into the First Lien Credit Facility with a syndicate of lenders
providing for the $435,000 First Lien Term Loan and the $40,000 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.
F-15
The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company's
assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.
Interest rates under the First Lien Credit Facility are based, at the Company's election, on a Eurodollar rate,
subject to an interest rate floor of 1.0%, plus a margin of 4.50% or a base rate plus a margin of 3.50%.
The First Lien Credit Facility contains customary nonfinancial covenants, including among other things,
restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity
holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the
Company's assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last
day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50%
of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net
leverage not in excess of 7.0 times Adjusted EBITDA, as defined in the agreement. As of December 31, 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 the completion of a qualified initial public offering, and based on an annual Excess
Cash Flow calculation, pursuant to the terms of the agreement, beginning as of the year ended December 31, 2016.
In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien
Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering, and an additional
$10,000 during the fourth quarter of 2015. See Note 1 “Business”. The Company recognized additional interest expense
of $4,687 during the year ended December 31, 2015 related to accelerated amortization of deferred financing costs and
discount in connection with these repayments.
As of December 31, 2016, the Company did not have any outstanding amounts under the Revolving Credit
Facility, and has $39,950 of borrowing capacity under the Revolving Credit Facility. The Company has one outstanding
letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on
outstanding letters of credit at the applicable margin, which was 4.50% as of December 31, 2016 and 2015, 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.
Senior Term Loan dated September 2, 2014
At December 31, 2015, there were no amounts outstanding on the Senior Term Loan dated November 8, 2012,
and amended September 2, 2014, and the related revolver that had a maturity of September 30, 2016. The outstanding
balance of $158,420 on the Senior Term Loan was repaid in full on August 17, 2015 using a portion of the proceeds
from the new $435,000 First Lien Term Loan. In conjunction with the repayment of the Senior Term Loan, the Company
recognized a $703 loss on early extinguishment related to the unamortized deferred financing costs and discount on the
Senior Term Loan in “Loss on debt modification and early extinguishment” in the Consolidated Statement of Operations
and Comprehensive Income for the year ended December 31, 2015. The Company accounted for the debt refinancing in
accordance with ASC 470-50-40-6, Modifications and Exchanges.
In conjunction with the Company’s initial refinancing of Senior Term Loan on September 2, 2014, the
Company recognized a $476 loss on extinguishment reflected in “Loss on debt modification and early extinguishment”
in the Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2014. The
primary purpose of this refinancing was to finance the cash portion of the acquisition consideration of EFT Source.
Refer to Note 3 “EFT Source Acquisition” for additional information.
Sellers Note
The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT
Source as part of the EFT Source acquisition, which was fully repaid on September 2, 2016. Interest on the Sellers Note
accrued at 5.0% per annum and was paid quarterly. The Sellers Note is included in “Current maturities of long-term
debt” at December 31, 2015.
F-16
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.
As of December 31, 2016, long-term debt of $312,500 matures in 2022.
11. Income Taxes
Income tax expense from continuing operations and effective income tax rates consist of the following:
Current taxes:
2016
December 31,
2015
2014
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,944 $ 16,036 $ 8,424
—
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,424
254
16,290
27
4,971
Deferred taxes:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,238
(371)
1,867
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,142 $ 17,846 $ 10,291
Income before income taxes
1,656
(100)
1,556
(1,830)
1
(1,829)
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,437 $ 50,692 $ 27,984
(1,721)
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,541 $ 49,107 $ 26,263
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,585)
36.3 %
36.8 %
1,104
39.1 %
The effective income tax rate differs from the U.S. federal statutory income tax rate as follows:
Tax at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2016 2015 2014
35.0 % 35.0 % 35.0 %
(1.6)
(2.9)
2.0
6.3
0.3
(1.9)
0.3
0.6
36.8 % 36.3 % 39.1 %
(2.9)
3.1
2.5
1.4
F-17
The components of the deferred tax assets and liabilities are as follows:
December 31,
2016
2015
Deferred tax assets:
Accrued expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
1,089 $
1,426
3,066
1,355
1,166
555
8,657
(4,930)
3,727
927
652
1,999
1,564
322
486
5,950
(3,717)
2,233
(5,881)
Plant, equipment and leasehold improvements . . . . . . . . . . . . . . . . . .
(18,962)
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,463)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,306)
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,261) $ (24,073)
(6,393)
(17,159)
(1,436)
(24,988)
The net deferred tax liabilities are reflected in the consolidated balance sheets as follows:
Long-term deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,261) $ (24,073)
December 31,
2016
2015
The net change in the valuation allowance was an increase of $1,213 and a decrease $403 for the years ended
December 31, 2016 and 2015, respectively. The change in the year ended December 31, 2016 related to foreign
currency exchange rate fluctuations and changes in net operating losses of foreign locations.
The Company has potential tax benefits associated with $3,066 of foreign operating loss carryforwards, which
expire at various dates from 2024 through 2032. Due to the uncertainty of being able to recognize these loss
carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit.
At December 31, 2016, no provision has been made for U.S. federal and state taxes on cumulative foreign
earnings from CPI Card Group-Europe Limited operations of approximately $3,810, which are expected to be
indefinitely reinvested outside of the U.S. The U.S. deferred tax liability associated with indefinitely reinvested earnings
and profits is not material.
The Company has analyzed its filing positions in all of the jurisdictions where it is required to file income tax
returns, as well as all open tax years in these jurisdictions, and based upon its review, determined there are no uncertain
tax positions as of December 31, 2016 and 2015.
The Company is generally subject to potential federal and state examinations for the tax years after
December 31, 2013 for federal purposes and December 31, 2012 for state purposes.
12. Series A Preferred Stock
There were no outstanding shares of Series A Preferred Stock as of December 31, 2016 or December 31, 2015.
During the year ended December 31, 2015, the Company redeemed a total of 64,809 shares of Series A
Preferred Stock at prices ranging between $3,950.33 and $4,610.68 per share, including the redemption of 62,140 shares
of the Series A Preferred Stock for $276,688, or $4,446.70 per share, on August 17, 2015 with proceeds from the
Company’s First Lien Credit Facility (see Note 10 “Long-Term Debt and Credit Facility”), and the redemption of 2,576
shares of the Series A Preferred Stock for $11,877, or $4,610.68 per share, using proceeds from the Company’s IPO (see
F-18
Note 1 “Business”). Of the $288,565 redemption amount during the year ended December 31, 2015, $58,250 was treated
as a return of capital and $230,315 was treated as a dividend.
During the year ended December 31, 2014, the Company issued 549 shares of Series A Preferred Stock at an
estimated value of $3,733.88 per share as part of the payment consideration for the EFT Acquisition. The Company did
not redeem any shares of Series A Preferred Stock during the year ended December 31, 2014.
13. Stockholders’ Equity
Common Stock
Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends
and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such
holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation,
dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock,
any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common
Stock are entitled to one vote per share.
During the year ended December 31, 2016, the Company paid dividends of $7,519, representing $0.135 per
share. Additionally, on November 9, 2016, the Board of Directors approved a dividend of $0.045 per share, payable on
January 12, 2017 to stockholders of record as of the close of business on December 16, 2016. The accrued dividend of
$2,491 is reflected in “Accrued expenses” in the Consolidated Balance Sheet as of December 31, 2016. For the year
ended December 31, 2016, the Company declared aggregate dividends of $0.18 per share.
On May 11, 2016, the Board of Directors approved a stock repurchase program that authorizes repurchases of
the Company’s common stock up to $20,000, limited to a maximum of 2,827,105 shares, prior to May 11,
2017. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share
repurchase programs or other transactions. During the year ended December 31, 2016, there were 1,439,422 common
shares repurchased for $6,008, at an average cost of $4.17 per share. The repurchases have been accounted for as a share
retirement. At December 31, 2016, up to $13,992 remained available under the share repurchase authorization, limited to
1,387,683 shares.
On September 3, 2015, the Company's Board of Directors approved a 22-for-1 stock split of its common stock
and increased the number of authorized shares of common stock to 100,000,000. 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 Annual Report on Form 10-K, including the accompanying
Consolidated Financial Statements and these notes.
14. Earnings per Share
Basic or diluted earnings (loss) per share is computed by dividing net earnings or loss by the weighted-average
number of ordinary shares outstanding during the period.
F-19
The following table sets forth the computation of basic and diluted earnings per share attributable to continuing
and discontinued operations:
Numerator:
2016
December 31,
2015
2014
Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . $
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations attributable to common
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from a discontinued operation, net of taxes . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common stockholders . . . . . . . . . . . . $
5,399 $
—
31,261 $
(32,548)
15,972
(44,477)
5,399
—
5,399 $
(1,287)
(398)
(1,685) $
(28,505)
(2,670)
(31,175)
Denominator:
Basic EPS—weighted average common shares outstanding . . . . . . . . .
Diluted EPS—weighted average common shares outstanding . . . . . . .
55,827,409
56,203,789
44,816,263
44,816,263
41,199,246
41,199,246
Basic and Diluted EPS:
Earnings (loss) per share from continuing operations . . . . . . . . . . . . . . $
Loss from a discontinued operation, net of taxes . . . . . . . . . . . . . . . . . .
Earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.10 $
—
0.10 $
(0.03) $
(0.01)
(0.04) $
(0.69)
(0.07)
(0.76)
The potentially dilutive effect of 1,327,818, 1,257,450, and 627,000 stock options as of December 31, 2016,
2015, and 2014, respectively, have been excluded from the computation of diluted earnings per share as their inclusion
would be anti-dilutive. The cumulative dividends in arrears related to Series A Preferred Stock were paid in conjunction
with the Company’s IPO.
15. Commitments and Contingencies
Commitments
The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and
facility leases expire at various dates between 2017 and 2024 and contain various provisions for rental adjustments and
renewals. All of these leases require the Company to pay property taxes, insurance and normal maintenance costs.
During the normal course of business, the Company also enters into non-cancellable agreements to purchase
goods and services, including production equipment and information technology systems.
Future cash payments with respect to operating leases and purchase obligations as of December 31, 2016 are as
follows:
Operating Purchase
Obligations
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,350 $ 7,042
—
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,105 $ 7,042
3,352
2,450
2,074
1,769
2,110
Leases
The Company incurred rent expense under non-cancellable operating leases during the years ended
December 31, 2016, 2015 and 2014, totaling $3,467, $3,518 and $3,320, respectively.
Asset retirement obligations relate to legal obligations associated with the removal of all leasehold
improvements at the end of the lease term. The Company records all asset retirement obligations, which primarily relate
to “make-good” clauses in operating leases, for its leased property containing leasehold improvements. The liability is
accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the
carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company’s accretion expense
F-20
incurred during the years ended December 31, 2016, 2015 and 2014 was immaterial. As of December 31, 2016 and
2015, the Company’s asset retirement obligations included in “Other long-term liabilities” in the Consolidated Balance
Sheets were $602 and $613, respectively.
Contingencies
CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)
On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al.
v.CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the
Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the
financial institutions who served as underwriters for CPI’s October 2015 IPO. The complaints, purportedly brought on
behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection
with the IPO, assert claims under (cid:105)(cid:105)11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among
other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or
misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip
cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and
(ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal
year ending December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common
stock issued pursuant to the IPO.
On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and
lead counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”). On October 17, 2016, lead plaintiff
filed a consolidated amended complaint, asserting the same claims for violations of (cid:105)(cid:105)11 and 15 of the Securities Act.
The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the
Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’
slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in
the EMV market.
On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and
other proceedings in the action are stayed under the PSLRA pending the resolution of that motion.
The Company believes these claims are without merit and intends to defend the actions vigorously. Given the
current stage of these matters, the range of any potential loss is not probable or estimable and no accrual has been
recognized as of December 31, 2016.
Gemalto S.A. v. CPI Card Group Inc. (2 cases)
First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States
District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company
infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV
standard. Gemalto’s patent will expire in March 2017. The Company successfully moved to transfer the lawsuit to the
District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the
asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the
Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On
March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all
EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips
supplied by two specific vendors.
On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent &
Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. In
light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted
the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the
patentability of asserted claims. The PTAB granted the Company’s petition 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 Company has asked the PTAB to institute
F-21
reexamination on the remaining dependent claims by way of a reconsideration petition. The district court litigation
remains stayed.
Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United
States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on
networked smartcard printing by way of the Company’s Card@Once offering. Gemalto’s patent will expire in 2018. On
May 25, 2016, the Company moved to dismiss Gemalto's case because the patent's claims are not patentable under 35
U.S.C. section 101. The Company’s motion to stay the litigation in light of its pending motion to dismiss was denied on
September 2, 2016. The Company’s motion to dismiss remains pending. Gemalto provided initial infringement
contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are
presently engaged in claim construction activities and are attempting to schedule the deposition of the patent-in-suit’s
named inventor.
With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company
has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to
defend these suits vigorously. While a risk of loss is reasonably possible, given the current stage of these matters, as
well as the aforementioned defenses, counterclaims and indemnity rights, the range of potential loss is not estimable and
no accrual has been recognized as of December 31, 2016 and 2015.
In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary
course of business. The Company believes that the ultimate resolution of such matters will not have a material adverse
effect on our business, financial condition or results of operations.
16. Employee Benefit Plan
The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue
Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility
requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the
contributions among various investment accounts. The Company matches 100% of the participant’s first 3% of deferrals
and 50% of the next 2% deferral percentage. The Company’s portion is 100% vested at the time of the match.
The aggregate amounts charged to expense in connection with the plan were $1,382, $1,049 and $824 for the
years ended December 31, 2016, 2015 and 2014, respectively.
F-22
17. 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
December 31, 2016, there were 2,281,135 shares available for grant under the Omnibus Plan.
During the year ended December 31, 2016, the Company granted awards of non-qualified stock options under
the Omnibus Plan for 785,058 shares of common stock. The options have a 10 year term and will generally vest ratably
over either a three year period beginning on the first anniversary of the grant date, or a four year period beginning on the
second anniversary of the grant date.
Outstanding and exercisable stock options under the Omnibus Plan are as follows:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Term
(in Years)
Options
Outstanding as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
795,450
10.00
795,450 $ 10.00
7.38
785,058
(143,000)
10.00
1,437,508 $ 8.62
8.98
Unvested options as of December 31, 2016, vest as follows:
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unvested options as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
379,643
469,627
469,352
118,886
1,437,508
Stock options were granted under the Omnibus Plan at various times during the year ended December 31, 2016.
The fair value of stock option awards was determined at the date of grant using either a Monte Carlo simulation, or a
Black-Scholes option-pricing model with the following average assumptions:
Year ended
December 31, 2016
Expected term in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3
35.4 %
1.5 %
3.3 %
Expected term – For option grants valued using a Black-Scholes option-pricing model, the Company estimated
the expected term based on the average of the weighted-average vesting period and the contractual term of the stock
option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to
estimate the expected term of these stock option awards. Certain other stock options were granted with an exercise price
of $10 per share, and were valued using a Monte Carlo simulation. The Monte Carlo model simulates many future stock
price paths, and assumes the exercise of vested options will occur uniformly once the options are projected to be in-the
money.
F-23
Volatility – The expected volatility percentage was based on a peer group average historical volatility over the
expected option term. The peer group was based on financial technology companies that completed an initial public
offering of common stock within the last 10 years.
Risk-free interest rate – The risk-free interest rate was determined by using the United States Treasury rate for
the period that coincided with the expected option term.
Dividend yield – The estimated dividend yield is based on the Company’s recent historical dividend practice
and the market value of its common stock.
During the year ended December 31, 2016, the Company granted awards of restricted stock units for 305,234
shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or
service, and generally vest one year from the date of grant. On the vesting dates, shares of common stock will be issued
to the award recipients.
The following table summarizes the changes in the number of outstanding restricted stock units for the year
ended December 31, 2016:
Outstanding as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
— $
305,234
(15,803)
(18,965)
270,466 $
Weighted-
Average
Grant Date
Fair Value
—
7.22
7.91
7.91
7.13
Compensation expense for the Omnibus Plan for the years ended December 31, 2016 and December 31, 2015
was $2,770 and $239, respectively. As of December 31, 2016, the total unrecognized compensation expense related to
unvested options and restricted stock units under the Omnibus Plan was $2,467, which the Company expects to
recognize over an estimated weighted average period of 1.6 years. There was no aggregate intrinsic value of stock
option awards outstanding under the Omnibus Plan as of December 31, 2016.
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 its Omnibus Plan, as further described above, no further awards will
be made under the Option Plan. The outstanding stock options have a 10-year life and vest as noted in each respective
grant letter. All stock options are nonqualified. No stock options were granted during the years ended December 31,
2016, 2015 and 2014.
Outstanding and exercisable stock options under the Option Plan are as follows:
F-24
Weighted-
Average
Exercise
Weighted-
Average
Remaining
Contractual Term
(in Years)
Options
Price
Outstanding as of January 1, 2014 . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2014 . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2015 . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (245,666)
Outstanding as of December 31, 2016 . . . . . . . . . . . . .
649,000 $ 0.0004
0.0001
(22,000)
627,000 $ 0.0004
0.0005
(66,000)
(99,000)
0.0003
462,000 $ 0.0003
0.0003
216,334 $ 0.0004
Exercisable as of December 31, 2016 . . . . . . . . . . . . .
216,334 $ 0.0004
5.34
5.34
Compensation expense and unrecorded compensation expense related to options previously granted under the
Option Plan, for the years ended December 31, 2016, 2015 and 2014, were de minimis. The aggregate intrinsic value of
stock option awards outstanding and exercisable under the Option Plan as of December 31, 2016 was $898.
Other Stock-Based Compensation Awards
During June 2015, the Company issued 191,664 restricted shares of common stock to executives of the
Company. The awards contain conditions associated with continued employment or service. The terms of the unvested
restricted shares of common stock provide voting and regular dividend rights to the holders of the restricted shares of
common stock, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings
per share calculation. See Note 14 “Earnings per Share”. The remaining unvested restricted shares vest over a three
year period from the original grant date.
The following table summarizes the changes in the number of outstanding restricted shares of common stock:
Outstanding as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average
Grant Date
Fair Value
—
9.48
9.48
9.48
9.48
Shares
— $
191,664
191,664 $
(96,800)
94,864 $
Total compensation expense related to the restricted shares of common stock awards was $809 and $646 for the
years ended December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016, there was $326 of
total remaining unrecognized compensation expense related to the unvested restricted shares of common stock that will
be recognized over a weighted average period of 1.15 years.
Phantom Stock Plan
Effective January 1, 2012, the Company’s Board of Directors adopted the CPI Acquisition, Inc. Phantom Stock
Plan (“Phantom Stock Plan”) to provide incentive compensation to certain key employees. In conjunction with the
Company’s IPO, the Phantom Stock Plan was terminated and all outstanding liabilities under the plan were settled.
During the year ended December 31, 2015, payments of $13,892 were made under the plan, and no liability existed as of
December 31, 2015.
Under the terms of the Phantom Stock Plan, holders of an award were entitled to a cash payment equal to the
difference between the fair market value of the award, as defined in the agreement, at the time of exercise and the
F-25
award’s exercise price. The Company measured the liability at intrinsic value, with changes in the intrinsic value of the
liability recognized as expense each year in the Consolidated Statements of Operations and Comprehensive Income.
During the years ended December 31, 2015 and 2014, the Company recognized compensation expense of
$8,748 and $4,534 respectively, related to this plan.
18. 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 subsidiaries which the Company believes information
about the segment would be useful to the readers of the financial statements from a qualitative perspective. 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 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 December 31, 2016, the Company’s reportable segments are as follows:
• U.S. Debit and Credit
• U.S. Prepaid Debit
• U.K. Limited
The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card
services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and
non-EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, private
label credit cards that are not issued on the networks of the Payment Cards Brands (including general purpose
reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards), and instant
issuance systems. This segment also provides a variety of integrated card services, including card personalization and
fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by
multiple global Payment Card Brands and, where required by the Company’s customers, certified to be in compliance
with the standards of the PCI Security Standards Council. These operating segments have been aggregated into a single
reportable segment due to similarities in the nature of the products and services sold by these subsidiaries, a common
customer base, the substantial degree of integration and redundancy across the segments, and utilization of centrally
shared sales, marketing, quality and planning departments. Separate information about these segments would not be
useful to the readers of the financial statements.
The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the
United States. Services provided include tamper-evident security packaging services and card personalization and
fulfillment services. This segment also produces Financial Payment Cards issued on the networks of the Payment Card
Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment
operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of
the PCI Security Standards Council.
The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the
United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment
services. The U.K. Limited segment operations are not certified by the Payment Card Brands, nor are they PCI certified,
but are certified to be in compliance with ISO 27001 standards.
F-26
The “Other” category includes the Company’s corporate activities 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). For additional information regarding the Company’s decision to shut-down the CPI—
Petersfield facility during the third quarter of 2015, see Note 1 “Business”.
Performance Measures of Reportable Segments
Revenue and EBITDA of the Company’s reportable segments for the years ended December 31, 2016, 2015
and 2014 were as follows:
Revenue
December 31,
2015
2016
2014
2016
EBITDA
December 31,
2015
2014
U.S. Debit and Credit(a) . . . . . . . . . . . . . . . . . $ 208,795 $ 263,668 $ 153,015 $ 52,090 $ 78,981 $ 37,547
18,654
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . . . .
2,943
U.K Limited . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,121)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment eliminations(b) . . . . . . . . . . . . .
—
Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308,700 $ 374,110 $ 261,006 $ 45,512 $ 83,401 $ 47,023
59,271
35,163
23,908
(10,351)
65,878
34,361
17,420
(7,217)
22,993
3,572
(22,145)
—
18,646
2,839
(28,063)
—
60,065
29,689
13,110
(2,959)
(a) Amounts for 2014 include the post-acquisition revenue and EBITDA of EFT Source from September 2, 2014
through December 31, 2014.
(b) Amounts include the revenue from sales between segments and are eliminated upon consolidation.
The following table provides a reconciliation of total segment EBITDA to “Net income from continuing
operations” for the years ended December 31, 2016, 2015 and 2014:
2016
December 31,
2015
2014
Total segment EBITDA from continuing operations . . . . . $ 45,512 $ 83,401 $ 47,023
(7,508)
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,291)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
(13,252)
Net Income from continuing operations . . . . . . . . . . . . . . . $ 5,399 $ 31,261 $ 15,972
(18,328)
(17,846)
(15,966)
(20,044)
(3,142)
(16,927)
Balance Sheet Data of Reportable Segments
Total assets of the Company’s reportable segments as of December 31, 2016 and 2015 were as follows:
December 31,
2016
2015
U.S. Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 205,417 $ 221,274
20,960
25,897
12,222
Total assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 264,420 $ 280,353
U.S. Prepaid Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.K. Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,509
26,060
9,434
F-27
Plant, Equipment and Leasehold Improvement Additions of Geographic Locations
Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the years
ended December 31, 2016, 2015 and 2014 were as follows:
2016
December 31,
2015
2014
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,169 $ 19,129 $ 15,082
32
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,114
Total North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
454
U.K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total plant, equipment and leasehold improvement
275
19,404
659
263
13,432
1,447
additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,879 $ 20,063 $ 15,568
Net Sales of Geographic Locations
Net sales of the Company’s geographic locations for the years ended December 31, 2016, 2015 and 2014 were
as follows:
2016
December 31,
2015
2014
U.S.(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 262,544 $ 316,111 $ 196,418
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,133
212,551
Total North America . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,682
U.K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,773
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308,700 $ 374,110 $ 261,006
12,541
328,652
36,954
8,504
11,998
274,542
25,705
8,453
(a) Amounts for 2014 include the post-acquisition net sales of EFT Source from September 2, 2014 through
December 31, 2014.
(b) 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 December 31, 2016 and 2015 were as follows:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,773 $ 164,377
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,254
166,631
Total North America: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,593
U.K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,763 $ 179,224
2,899
160,672
11,091
December 31,
2016
2015
Net Sales by Product and Services
Net sales from products and services sold by the Company for the years ended December 31, 2016, 2015 and
2014 were as follows:
2016
December 31,
2015
2014
Product net sales(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,510 $ 241,609 $ 159,220
Services net sales(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101,786
Total net sales: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308,700 $ 374,110 $ 261,006
132,501
140,190
F-28
(a) Product net sales include the design and production of Financial Payment Cards, in contact EMV, dual-interface
EMV, contactless and magnetic stripe formats. The Company also generates product revenue from the sale of
Card@Once® instant issuance systems, Private Label Credit Cards, and retail gift cards. It is impracticable to split
the products described into dollar amounts in the table above.
(b) Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the
provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program
managers and software as a service personalization of instant issuance debit cards. The Company also generates
services 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. It is
impracticable to split the services described into dollar amounts in the table above.
19. Quarterly Financial Information (Unaudited)
Summarized quarterly results for the years ended December 31, 2016 and 2015 were as follows:
2016 by Quarter:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,393 $ 73,725 $ 81,202 $ 67,380 $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common stockholders . . . $ 5,714 $ (328) $ 4,026 $ (4,013) $
20,436
(4,013)
(4,013)
29,692
5,714
5,714
29,063
4,026
4,026
22,707
(328)
(328)
Q1
Q3
Q4
Q2
Year Ended
December 31,
2016
308,700
101,898
5,399
5,399
5,399
Basic and diluted earnings (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
0.10 $ (0.01) $ 0.07 $ (0.07) $
0.10 $ (0.01) $ 0.07 $ (0.07) $
0.10
0.10
2015 by Quarter:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,310 $ 95,536 $ 107,697 $ 93,567 $ 374,110
135,821
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,261
Income (loss) from continuing operations . . . . . . . . . . . . .
(398)
Income (Loss) from discontinued operation, net of taxes
30,863
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(32,548)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,685)
Net (loss) income attributable to common stockholders . $ (6,370) $
31,429
(1,615)
(679)
14,760 (2,294)
(7,096)
(94)
7,664 $ (2,388) $
25,508
5,960
281
6,241
(12,611)
35,835
12,155
—
12,155
(12,747)
43,049
14,760
—
(592) $
Q1
Q2
Q3
Q4
Year Ended
December 31,
2015
Basic and diluted (loss) earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(0.16) $
0.01
(0.15) $
(0.02) $
—
(0.02) $
0.19 $ (0.03) $
—
(0.01)
0.19 $ (0.04) $
(0.03)
(0.01)
(0.04)
20. Subsequent Events
On March 1, 2017, the Board of Directors approved a dividend of $0.045 per share. This dividend is payable on April 7,
2017, to stockholders of record as of the close of business on March 17, 2017.
F-29
[This page has been left blank intentionally.]
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2016.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our
disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a
control system must reflect the fact that there are resource constraints, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people,
or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting
is a process designed under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States(cid:17)(cid:3)
(cid:3)
As of December 31, 2016, our management assessed the effectiveness of our internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that,
as of December 31, 2016, our internal control over financial reporting was effective based on those criteria. This Annual
Report does not include an attestation report of our independent registered public accounting firm due to a transition
period established by the rules of the SEC for newly public companies.
61
Changes in Internal Control Over Financial Reporting
The Company took steps to address and remediate the previously disclosed material weakness in our internal
control over financial reporting, which included the hiring of additional finance personnel familiar with the rules and
regulations applicable to public companies (including the requirements of the Sarbanes-Oxley Act), and the development
and implementation of improved policies and processes. Other than these remediation actions, there has been no change
in the Company’s internal control over financial reporting during our most recent quarter that has materially affected, or
is reasonably likely to materially affect, the Company’s internal control over financial reporting.
For additional information regarding the Company’s previously disclosed material weakness identified by
management, see “Item 4. Controls and Procedures” in the Company’s Quarterly Report on Form 10-Q for the nine
months ended September 30, 2016, filed on November 10, 2016 with the Securities and Exchange Commission.
Item 9B. Other Information
None.
62
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is expected to be in our definitive Proxy Statement for the 2017 Annual Meeting
of Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended
December 31, 2016 and is incorporated herein by reference.
Item 11. Executive Compensation
Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to security ownership of certain beneficial owners of our common stock and information relating to
the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to certain relationships and related transactions and director independence is incorporated herein by
reference to the Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement.
63
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Form 10-K.
1. Financial Statements filed as a part of this document under Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Stockholders’ Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
All financial statement schedules have been omitted because they are not required, not applicable, or the required
information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K.
3. Exhibits
The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed
with this report, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
64
Pursuant to the requirements of Section 13 or 15(d) of the 1934 Act, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CPI CARD GROUP INC.
/s/ Lillian Etzkorn
Lillian Etzkorn
Chief Financial Officer
March 2, 2017
KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below
hereby constitute and appoint Steve Montross and Lillian Etzkorn and each of them severally, as his or her true and
lawful attorneys-in-fact and agents with full power of substitution and resubsitution for him or her and in his or her
name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every
act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or
of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof.
Pursuant to the requirements of the 1934 Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
65
Name
Title
Date
/s/ Steven Montross
Steven Montross
/s/ Lillian Etzkorn
Lillian Etzkorn
/s/ Chris Bakke
Chris Bakke
/s/ Bradley Seaman
Bradley Seaman
/s/ Diane Fulton
Diane Fulton
/s/ Douglas Pearce
Douglas Pearce
/s/ Nicholas Peters
Nicholas Peters
/s/ Robert Pearce
Robert Pearce
/s/ David Rowntree
David Rowntree
/s/ Scott Scheirman
Scott Scheirman
/s/ Silvio Tavares
Silvio Tavares
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
March 2, 2017
March 2, 2017
March 2, 2017
Chairman of the Board
March 2, 2017
Director
March 2, 2017
Director
March 2, 2017
Director
March 2, 2017
Director
March 2, 2017
Director
March 2, 2017
Director
March 2, 2017
Director
March 2, 2017
66
Exhibit No.
Exhibit Description
INDEX TO EXHIBITS
2.1
3.1
3.2
4.1
10.1**
10.2**
10.3**
10.4**
10.5**
10.6**
10.7**
10.8**
10.9
10.10*
10.11
Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker,
Katherine S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward
McCullough Dinker, William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker
2012 Trust for William S. Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker,
as Sellers' Representative (incorporated by reference to the Company’s Registration Statement on
Form S-1 (File No. 333-206218)).
Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by reference
to the Company’s Registration Statement on Form S-8 (File No. 333-207350)).
Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s
Registration Statement on Form S-8 (File No. 333-207350)).
Form of Stock Certificate (incorporated by reference to the Company’s Registration Statement on
Form S-1 (File No. 333-206218)).
Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc.
and Steven Montross (incorporated by reference to the Company’s Registration Statement on Form S-1
(File No. 333-206218)).
Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation
and Anna Rossetti (incorporated by reference to the Company’s Registration Statement on Form S-1
(File No. 333-206218)).
Termination Letter, dated May 5, 2015 between CPI Acquisition, Inc. and Marvin Press (incorporated
by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)).
CPI Card Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File No. 333-206218)).
Form of Stock Option Award Agreement under the CPI Card Group Inc. Omnibus Incentive Plan
(incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-
206218)).
CPI Acquisition, Inc. Phantom Stock Plan (incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-206218)).
CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File No. 333-206218)).
Employment and Non-Competition Agreement, effective June 22, 2015, between CPI Acquisition, Inc.
and David Brush (incorporated by reference to the Company’s Registration Statement on Form S-1
(File No. 333-206218)).
First Amendment to Employment and Non-Competition Agreement, dated as of December 8, 2016, by
and between David Brush and CPI Card Group-Colorado, Inc. (incorporated by reference to the
Company’s Current Report on Form 8-K filed on December 13, 2016).
Offer of Employment, dated as of December 5, 2016, by and between Lillian Etzkorn and CPI Card
Group-Colorado, Inc.
Form of Indemnification Agreement (incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-206218)).
67
10.12
10.13
10.14
First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI
Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as
Administrative Agent and Collateral Agent (incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-206218)).
Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds
(incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015).
Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds
(incorporated by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015).
21.1*
List of Subsidiaries of the Company.
23.1*
Consent of Independent Registered Accounting Firm, KPMG LLP.
24.1*
Power of Attorney (included on the signature pages hereto).
31.1*
Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certificate of Chief Executive Officer and Chief Financial Officer Required Under 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.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
** Management contract or compensatory plan or arrangement.
68
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Steven Montross, certify that:
1. I have reviewed this Annual Report on Form 10-K of CPI Card Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading, with respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly represent in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal controls over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 2, 2017
/s/ Steven Montross
Steven Montross
Chief Executive Officer (Principal
Executive Officer)
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Lillian Etzkorn, certify that:
1. I have reviewed this Annual Report on Form 10-K of CPI Card Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading, with respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly represent in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 2, 2017
/s/ Lillian Etzkorn
Lillian Etzkorn
Chief Financial Officer (Principal
Financial Officer)
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of CPI Card Group Inc. (the “Company”) on Form 10-
K for the period ended December 31, 2016, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), we Steven Montross, Chief Executive Officer of the Company,
and Lillian Etzkorn, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to our knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
By: /s/ Steven Montross
Steven Montross
Chief Executive Officer (Principal Executive Officer)
By: /s/ Lillian Etzkorn
Lillian Etzkorn
Chief Financial Officer (Principal Financial Officer)
Date: March 2, 2017
This written statement accompanies the Report pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002,
be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.
A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
[This page has been left blank intentionally.]
7483_Insert.indd 107
4/4/17 7:33 PM
AWARDS
PYMNTS.com®
Card@Once® “Best Debit Innovation”
2016 Innovator Awards
All rights reserved. Card@Once is a registered trademark of
CPI Card Group, Inc. US Patent No.: 8429075.
A Collaboration of American Banker® and BAI®
#75 CPI Card Group
2016 Fintech Forward Top 100
INDEXED PRICE PERFORMANCE
17.5 %
9.8 %
7.5 %
(61.1)%
140%
120%
100%
80%
60%
40%
20%
e
c
i
r
P
d
e
x
e
d
n
I
0%
1-Jan-2016
1-Mar-2016
30-Apr-2016
29-Jun-2016
28-Aug-2016
27-Oct-2016
26-Dec-2016
CPI Card Group
U.S. Financial Technology Peers¹
Nasdaq
TSX
Source: Bloomberg
1 U.S. Financial Technology peers include: Green Dot, FIS, Fiserv, Jack Henry, DH Corp., Total System Services, Vantiv, and Blackhawk.
7483_Insert.indd 108
4/4/17 7:33 PM
LETTER FROM THE CEO
EXECUTIVE OFFICERS
To Our Valued Shareholders:
While our 2016 results reflect the challenging market environment for financial card manufacturing, I am pleased with our
accomplishments over the past year which served to strengthen our business. During the year, we continued to grow our services
business, and we expanded our end-to-end product and solution set through the introduction of new offerings. We implemented
significant cost reduction and efficiency improvement initiatives. We delivered $60.0 million in cash flow from operating activities,
enabling us to invest in our business for profitable growth. At the same time, we were able to reduce our debt by $9.0 million and return
cash to our shareholders by paying $7.5 million of dividends and repurchasing $6.0 million of common shares. We strengthened our
management team with the addition of experienced key senior executives with distinguished records of accomplishment. We also
strengthened our Board of Directors with the addition of Silvio Tavares and Scott Scheirman, who have brought important additional
knowledge and insight to the Board with their significant executive experience in the payments industry.
Looking ahead, we continue to focus on driving profitable growth by leveraging our strong position in the core financial card market,
providing innovative products and solutions and delivering the highest quality products and services to our valued customers, while
also reducing costs through our continued efforts to drive efficiencies in our business.
We expect that our services business will continue to be an area of growth, driven in part by solid demand from small and
mid-sized institutions for our personalization and fulfillment solutions and ongoing penetration of our Card@Once® offering. Our
Card@Once® instant issuance solution grew to 5,600 installations at over 1,200 banks and credit unions at the end of 2016, up from
4,100 installations at the end of 2015. We are also continuing to develop new digital services which we expect will enhance our
product offerings, broaden our EMV®-related services, and provide new payment forms such as digital payments for certain prepaid
applications.
We expect that our prepaid business will be another area of growth in 2017, with volume growth in the retail prepaid vertical, as
well as growth in the B2B and B2C prepaid market verticals, including payroll, corporate incentives and benefits. Our recently
launched Print-on-Demand solution, which provides our customers with a highly customizable solution for on-demand production
and fulfillment of personalized payment cards and related collateral, positions us well to further penetrate the fast-growing B2B and
B2C prepaid markets.
In the U.S. financial card manufacturing area, we expect the conversion of magnetic stripe cards to EMV chip cards will continue in
2017. We believe that EMV card penetration in the U.S. Debit and Credit markets will increase to approximately 80% by year-end
2017, up from approximately 65% at the end of 2016, with the conversion activity concentrated in the small and mid-sized issuers.
We anticipate that the continuing EMV migration will be balanced by a lower level of card replacement activity in 2017 with large
issuers, and as a result, we expect modest growth in our EMV card manufacturing in 2017. Longer term, we remain encouraged
by our discussions with prospects regarding dual-interface technology and the overall level of activity by issuers in setting up their
dual-interface product roadmaps. We continue to view dual-interface as an opportunity in the future, when adoption by issuers takes
hold in a meaningful way.
We continue to carry out our cost reduction initiatives, including supply chain cost reductions and operational efficiencies, to ensure
that the quality of earnings can be maintained and improved going forward. We are on track to deliver $10 million of cost savings in
2017, and we will continue to look for additional areas of opportunity for cost efficiencies.
Lastly, I would like to take this opportunity to thank our shareholders for their ongoing support and our employees for their continued
dedication in providing our customers with industry leading and high quality card solutions. I believe that we have entered 2017
stronger and well-positioned to capitalize on our significant long-term growth opportunities in the markets we serve.
Steven Montross
President and Chief Executive Officer
EMV is a registered trademark or trademark of EMVCo LLC in the United States and other countries.
Steven Montross
President and Chief Executive Officer
Jason Bohrer
Senior Vice President of Operations
Lillian Etzkorn
Chief Financial Officer
Jay Arbabha
Chief Technology Officer
Chris Bakke
Chief Accounting Officer
Nick Cahn
Managing Director of CPI Europe
Lisa Jacoba
Chief Human Resources Officer
Lane R. Dubin
Senior Vice President,
Sales and Marketing
Anna Rossetti
President of CPI Card Group - Canada
BOARD OF DIRECTORS
Bradley Seaman (2)
Non-Executive Chairman
Douglas Pearce (1)(3)*
David Rowntree (2)(3)
Diane Fulton (1)
Robert Pearce (1)(2)*
Scott Scheirman (1)*
Steven Montross
Nicholas Peters (3)
Silvio Tavares (3)
(1) Audit Committee (2) Compensation Committee (3) Corporate Governance Committee * Committee Chair
SHAREHOLDER INFORMATION
Corporate Headquarters
CPI Card Group Inc.
10026 W San Juan Way - Suite 200
Littleton, Colorado 80127
(303) 973-9311
Auditor
KPMG LLP
1225 17th Street #800
Denver, Colorado 80202
Common Stock
PMTS (NASDAQ and Toronto
Stock Exchange)
Transfer Agent and Registrar
Wells Fargo Shareowner Services
1110 Centre Point Curve
Suite 101
Mendota Heights, Minnesota 55120
(800) 468-9716
www.shareowneronline.com
Canadian Transfer Agent
Acting as Co-Agent
TMX Equity Transfer Services
650 West Georgia Street
Suite 2700
Vancouver, British Columbia V6B4N9
Canada
Annual Meeting
The annual meeting of CPI Card Group shareholders
will be held at 9:00am Mountain Time on Thursday,
May 25, 2017 at the Hyatt Regency Denver Tech Center,
7800 East Tufts Avenue, Denver, Colorado 80237.
Investor Relations
Will Maina
(877) 369-9016
InvestorRelations@cpicardgroup.com
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