2018 ANNUAL REPORT
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A letter from Scott Scheirman
Dear Shareholders,
Inspired by our vision of being our customers’ partner of choice by providing market-leading quality products and customer
service with a market-competitive business model, 2018 was a transformational year for CPI in many ways. We made
solid progress towards getting fit for growth and achieving long term success with a steadfast commitment to our key
strategic priorities.
Our 2018 financial results are evidence of this progress. With four consecutive quarters of year-over-year net sales
growth, full year net sales totaled $256 million, up 14% from the prior year. We saw improvement in our SG&A
structure and year-over-year increases in gross margins as a direct result of our cost efficiency initiatives.
As a result of our customer-centric approach and crisp execution of our plan, we believe CPI gained or maintained
market share across all of our U.S. businesses.
I’d like to highlight a few of our accomplishments:
• Our customer-oriented and innovative solutions in EMV®, dual interface and CPI MetalsTM enabled us to win
more business with existing and new customers, contributing to a net sales increase of 10% in 2018 for our
U.S. Debit and Credit Segment. CPI was also recognized through a number of industry awards for innovative
cards produced.
• Card@Once®, our instant issuance solution that enhances the customer experience in-branch, broadened its
installation base with existing and new customers and grew net sales more than 30% in 2018. We continue
to experience a strong market position among small to mid-sized financial institutions and won Silver for
Product of the Year at the Best in Biz Awards with this solution.
• Our Prepaid Debit Segment grew net sales by 21% in 2018 with market-leading quality, robust design and
innovation, exceptional customer service and operational excellence.
• To adapt to evolving customer needs and new segments, our personalization team continued to leverage
our CPI On-DemandTM solution and expanded their offerings to include Buy Online.
• We divested our U.K. business in 2018 and our non-secure business in Canada in early 2019. This positioned us to
better serve our customers by concentrating on our core businesses including secure card manufacturing,
personalization, instant issuance and prepaid. Our footprint rationalization also included the transition from three to
two personalization facilities to create higher levels of efficiency and focus.
I want to express my gratitude to our employees who are vital to our success. They embrace a culture of collaboration,
accountability and unwavering focus on delivering superior solutions and customer service.
Heading into 2019, we believe we are well-positioned for continued success given our diversified business model,
history of innovation and ability to provide solutions that meet the needs and expectations of our customers. Looking
ahead, our key strategic priorities remain the same for 2019:
• Ensuring the customer is at the center of all that we do
• Providing market-leading quality products and customer service with a high bar for excellence, accountability,
and continuous improvement
Improving productivity while ensuring the highest quality and market-competitiveness
Investing in innovation to generate new opportunities and fuel future growth
•
•
We remain committed to our vision to be the partner of choice by providing market-leading quality products and
customer service with a market-competitive business model. We have a strategic plan that we believe will enable us
to grow through targeted initiatives, deepen our customer relationships and continue our rich history of innovation.
Scott Scheirman
President and Chief Executive Officer
EMV is a registered trademark or trademark of EMVCo LLC in the United States and other countries.
CPI Card Group® Strategy
About CPI
CPI Card Group is a payment technology company that provides end-to-end debit, credit and prepaid
payment solutions delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of
choice by providing market-leading quality products and customer service with a market-competitive
business model. We believe we are well-positioned for success given our diversified business model,
history of innovation and ability to provide solutions that meet the needs and expectations of our customers.
Our goal is to help our customers foster compelling connections and build their brands with traditional
and next generation solutions that enhance people’s everyday lives.
A Customer-Centric Culture
We are committed to keeping our customers at
the center of everything we do. By partnering
with our customers and allowing their needs to
inform our business, we enhance our ability to deliver
value and help their businesses thrive.
We aim to inspire and delight our customers by
redefining experiences that may have traditionally
seemed rigid and complex. With our full and
expanding suite of catalytic and competitively
differentiated products and services, we offer our
customers choice, convenience and control.
Innovation and Growth
At CPI, we strategically invest in innovation
to create a strong foundation for growth.
By making innovation a core competency,
we expand our opportunities to partner
strategically with our current and potential
customers to deliver differentiated products
and solutions that meet the demands of
the marketplace and help them achieve
top-of-wallet status.
CPI Elements™
Secure Card Solutions
A wide range of payment card
manufacturing options – including
complete end-to-end EMV,
dual interface, metal, and magnetic
stripe card solutions.
CPI Dynamic Solutions™
Personalization
Our personalization and fulfillment
offerings include central issuance as
well as CPI On-DemandTM.
Card@Once®
Instant Issuance
The first cloud-based instant issuance
solution that requires little-to-no IT
support. Truly Plug-and-Play.
Prepaid
Our prepaid solutions can adapt to a
variety of different types of programs
including General Purpose Reloadable
(GPR), retail, rebates, refunds, benefits,
transit, government, healthcare, and
more.
10-K
10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 001-37584
CPI Card Group Inc.
(Exact name of the registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or
organization)
10026 West San Juan Way
Littleton, CO
(Address of principal executive offices)
26-0344657
(I.R.S. employer identification no.)
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 Capital 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 No
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 No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the Registrant’s common stock held by non-affiliates was $8.1 million on June 30, 2018 computed based on the closing
sale price of the Registrant’s common stock of $2.00 on NASDAQ on that date.
As of February 22, 2019, the number of shares outstanding of the Registrant’s common stock was 11,160,537.
Portions of the registrant’s definitive Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Information
PART I
Business
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4 Mine Safety Disclosures
Properties
Legal Proceedings
Page
2
3
10
22
23
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24
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
24
25
25
40
F-1
42
42
43
43
43
43
43
43
44
44
47
Securities
Selected Financial Data
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11
Item 12
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Item 15
Index To Exhibits
Signatures
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.
These risks and uncertainties include, but are not limited to: our substantial indebtedness, including inability to
make debt service payments or refinance such indebtedness; the restrictive terms of our credit facility and covenants of
future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our
limited ability to raise capital in the future; system security risks, data protection breaches and cyber-attacks and possible
exposure to litigation and/or regulatory penalties under applicable data privacy and other laws for failure to prevent such
incidents; interruptions in our operations, including our IT systems, or in the operations of the third parties that operate
the data centers or computing infrastructure on which we rely; our failure to maintain our listing on the NASDAQ
Capital Market; our inability to adequately protect our trade secrets and intellectual property rights from
misappropriation or infringement, claims that our technology is infringing on the intellectual property of others, and
risks related to open source software; defects in our software; problems in production quality and process; our failure to
retain our existing customers or identify and attract new customers; a loss of market share or a decline in profitability
resulting from competition; our inability to recruit, retain and develop qualified personnel, including key personnel; our
inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; our
inability to develop, introduce and commercialize new products; the effect of legal and regulatory proceedings;
developing technologies that make our existing technology solutions and products less relevant or a failure to introduce
new products and services in a timely manner; quarterly variation in our operating results; infringement of our
intellectual property rights, or claims that our technology is infringing on third-party intellectual property; our inability
to realize the full value of our long-lived assets; our failure to operate our business in accordance with the PCI Security
Standards Council (“PCI”) security standards or other industry standards such as Payment Card Brand certification
standards; costs relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose
sales tax collection requirements on out-of-state retailers; disruption or delays in our manufacturing operations or supply
chain; a decline in U.S. and global market and economic conditions and resulting decreases in consumer and business
spending; costs relating to product defects and any related product liability and/or warranty claims; maintenance and
further imposition of tariffs and/or trade restrictions on goods imported into the United States; our dependence on
licensing arrangements; risks associated with international operations; non-compliance with, and changes in, laws in the
United States and in foreign jurisdictions in which we operate and sell our products; risks associated with the controlling
stockholders’ ownership of our stock; 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”).
We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the
date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that
could cause actual results to differ materially from the expectations and beliefs contained herein. 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
CPI Card Group Inc. qualifies as a Smaller Reporting Company in accordance with Rule 12b-2 of the Exchange Act, and
has elected to follow certain of the scaled back disclosure accommodations within this Form 10-K.
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.
Our customers include 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,
core banking operations and other financial services) and card processors. We serve a diverse set of over 2,000 direct
customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the
United States and Canada, and the largest U.S. Prepaid Debit Card program managers, as well as thousands of
independent community banks, credit unions, Group Service Providers and card processors.
We serve our customers through a network of production and card services facilities, including high-security
facilities in the United States which are certified by one or more of the Payment Card Brands 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”). This leading network of high-security production facilities allows us to serve the
needs of our diverse customer base.
Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have
strong positions in the following markets:
•
•
•
the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers;
the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions;
and
the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers.
On August 3, 2018, we completed the sale of the U.K. Limited segment. The historical financial position,
results of operations, and cash flows for the U.K. segment have been restated for all periods to conform with
discontinued operations presentation. Unless otherwise indicated, financial information within this document relates to
continuing operations.
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, and U.S.
Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers in the United
States. Business not considered part of these segments are considered “Other” and include our operations in Canada and
corporate expenses.
In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary to Allcard
Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include customers for
which we only manufacture and personalize Financial Payment Cards. The transaction is expected to close in the first
half of 2019. The agreement to sell our Canadian subsidiary does not meet the criteria to be reported as a discontinued
operation. The Financial Payment Card business customers of our Canada operations will either migrate to our
3
operations in the U.S. or migrate to other service providers before the transaction closes. The divestiture allows us to
further optimize our footprint and is consistent with our previously announced plan to better position ourselves to serve
customers by focusing on our core businesses.
During February 2018, we made the decision to consolidate our three personalization operations in the United
States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a
market-competitive business model. This consolidation was completed in 2018.
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 16 "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
•
Strong Market Position with Long-Term Customer Relationships. We are focused on becoming the partner
of choice for our customers by providing market-leading quality products and customer service with a
market-competitive business model. We have long-standing trust-based relationships with customers, many
of whom we have served for decades. Our customer relationships, particularly with those who utilize our
card services and instant issuance systems and services, may involve process and technology
integration. As a result, our customers are selective about working with partners they can trust to deliver
the highest quality products and customer service. We strive to put our customers at the center of
everything we do, and to provide responsive and high quality customer care. We also maintain important
relationships with the Payment Card Brands to ensure our facilities and processes meet their standards. We
believe we have established a leading market position in the U.S. prepaid debit market, built on high
quality services and reliable delivery to our customers. Our installed base of instant issuance systems at
bank and credit union branches across the United States may include customer integration, and our
Card@Once ® instant issuance system utilizes our secure technology to instantly personalize cards. Certain
customers have integrated our proprietary software into their systems to improve the quality of the overall
process and to offer card design and customization to their cardholders.
• Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small
to mid-sized issuer customers 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 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 integrated within our customers’ operations. We
provide card data personalization services for financial institutions and managers of Prepaid Debit Card
programs that require technology integration, such as secure data links to transfer highly sensitive
cardholder information. 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.
• Certified Network of High-Security Facilities. Our 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 the United States. 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 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 these designations, which are regularly verified by both the Payment
Card Brands and our customers.
• Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over
the course of our long operating history, we have developed technological, engineering and operational
expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“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
4
store data on integrated circuits rather than magnetic stripes, although EMV cards may have magnetic
stripes. We also produce dual-interface EMV cards that have both contact and contactless functionality.
We continuously work to enhance our offerings and to create and deliver next generation products and
solutions that meet the demands of the marketplace and our customers. We have invested in CPI Metals
TM, a premium product capability, in response to the market. We believe that our technological and
operational capabilities, combined with our specific focus on the Financial Payment Card market, gives us
a competitive advantage. We have developed and acquired intellectual property over our operating history
and hold 25 U.S. patents, including five patents related to our CPI Metals TM card solution, 18 foreign
patents, as well as 21 pending U.S. and foreign patent applications.
• Experienced Management Team. We have built an experienced management team, and strengthened the
team with additions of certain key executives during 2018. The leadership team has energized the
organization to focus on customers, accountability, and delivering results.
Our Strategy
We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions
delivered physically, digitally and on-demand. Our goal is to be our customers’ partner of choice by providing market-
leading quality products and customer service with a market-competitive business model. We believe we are well-
positioned for success given our diversified business model, history of innovation and ability to evolve with the needs
and expectations of our customers. By helping our customers elevate the customer experience, we foster compelling
connections between people and technology through traditional and next generation solutions that build brands and
enhance people’s everyday lives.
A Customer-Centric Culture
We aim to inspire and satisfy our customers by redefining experiences that may have traditionally seemed rigid
and complex, and offering market-leading quality and service. Based on our core values of customer first, accountability,
teamwork, excellence, integrity and results, our strong team of dedicated, passionate employees has helped build CPI
into a leading provider of high quality products with a laser-focus on service. With our full and expanding suite of
catalytic and competitively differentiated products and services, we offer our customers choice, convenience and control
by providing flexibility in timing, design, product options, and overall utility.
Innovation and Growth
We strategically invest in innovation and quality to create a strong foundation for growth. We continuously
work to enhance our offerings and to create and deliver next generation products and solutions that meet the demands of
the marketplace and exceed customers’ expectations.
Our Products and Services
EMV® Financial Payment Cards (Contact, Contactless, and Dual-Interface)
We produce both plastic and metal 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 contactless EMV cards, and dual-interface EMV cards, which feature an RFID antenna that
utilizes near field communications (“NFC”) technology to allow transactions to process on a contactless basis when the
card is brought within the requisite proximity to an NFC-enabled payment terminal. The dual-interface EMV cards
additionally include the contact EMV technology.
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 non-EMV cards that are issued on
the networks of the Payment Card Brands, as well as retail gift cards (which are not issued on the network of the
Payment Card Brands).
5
Card Data Personalization and Fulfillment
We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in
contact EMV, dual-interface 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. Our services
provide customers with visibility to manage card stock inventory and fulfillment materials. 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.
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. 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
provides 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 a magnetic stripe, an EMV card, or a
dual-interface EMV card, and personalizes 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 sales of cards and consumables.
CPI On-Demand TM Solutions
Through our CPI 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 and
inventory. Our service offering includes online ordering of a customized payment card through a program manager,
with direct fulfillment to a consumer. While not significant to our 2018 financial results, we believe the CPI On-
Demand solution will further differentiate us with our financial institution customers, and we believe it will enable us to
further penetrate new, business-to-business and business-to-consumer verticals such as healthcare, transit, payroll,
corporate incentives, benefits and insurance.
Digital Services
While not currently significant to our financial results, we are focusing on enabling digital services and
payments, including self-service card customization, on demand fulfillment, order lifecycle management, customer
inventory management, EMV® key management, and other innovative solutions, such as digitizing and securely
delivering payment credentials as a virtual payment method.
Suppliers
One of the most important components of our products is the EMV microchip. 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, Germany, and Singapore, primarily on a purchase order basis. Our
main suppliers of EMV microchips are four leading international manufacturers. Approximately 88% of our purchased
EMV microchips for the year ended December 31, 2018 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.
6
Customers
In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers, prepaid
debit issuers, program managers, Group Service Providers, and card processors. Our diverse customer base includes
some 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 customer represented approximately 19% of our net sales for the year ended December 31, 2018. Our
top five customers represented approximately 39% of our net sales for the year ended December 31, 2018, 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 a purchase order or other short-term arrangements that define the
quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. 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 customized runs that allow us to meet the high-service and quick-turn needs
of smaller orders, as well as on-demand solutions; and
• meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure
card packaging, and through our expertise and capabilities specifically designed for this retail prepaid
market.
As of December 31, 2018, we operate approximately 446,000 square feet of facilities in the United States and
Canada 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 finished products to our banking customers. Due to
the high-security nature of the Financial Payment Card products we provide to our banking customers, certain products
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. and Canadian 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 ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our
customers through high quality and meaningful, innovative products at competitive prices. We work to strategize and
collaborate with our customers to bring them valuable and innovative solutions. We have approximately 30 sales
representatives that give us a wide geographic reach across the United States 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 through a
consultative approach 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 segments, we are able to provide relevant targeted solutions to
meet their individual needs. We utilize an array of different marketing communications and thought leadership across
various industry publications, editorial white papers, case studies, conferences and trade shows, print and digital
advertisements, educational webinars, podcasts, and blogs to introduce our existing customers and new customers to
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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.
Our products and services compete with other card manufacturers and card solutions providers. We believe we
are in competition with IDEMIA (formerly known as Oberthur Technologies S.A.), Giesecke & Devrient GmbH,
Valid S.A., Gemalto NV, CompoSecure L.L.C., Multi Packaging Solutions, Inc., and Arroweye. 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 have been 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, 2018, we had 35 U.S. and foreign trademark
registrations and applications, 25 existing U.S. patents, 18 foreign patents, as well as 21 pending U.S. and foreign patent
applications. Our patents have an average remaining maturity of 12 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.
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, email and physical addresses, card account numbers and expiration dates. As a service provider to
financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, the privacy
provisions of the Gramm-Leach-Bliley Act (the “GLBA”) and its implementing regulations and, as applicable, with
various other federal and state privacy statutes and regulations, and the PCI Security Standards Council’s Data Security
Standards, each of which is subject to change at any time. Outside of the United States, we are subject to privacy laws
and regulations of numerous countries and jurisdictions. The interpretation and application of these privacy and data
protection laws are often uncertain and in a state of flux.
In order to comply with our obligations under applicable privacy laws and regulations and our contractual
agreements with our customers, we are required to implement adequate policies and safeguards to 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 protecting personally identifiable information and responding to
unauthorized access to, or use of, personally identifiable information that could result in substantial harm or
inconvenience to consumers, as required by law. A majority of U.S. states have enacted security breach legislation,
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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.
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 may serve as a significant barrier to new entrants to our market.
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. Changes to these laws and regulations, as well
as any associated inquiries or investigations or any other government actions, may be costly to comply with and may
delay or impede the development of new products, result in negative publicity, increase our operating costs, require
significant management time and attention, and subject us to remedies that may harm our business, including fines or
demands or orders that we modify or cease existing business practices.
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
to conduct ongoing monitoring and risk management for third party relationships. In addition, we engage independent
auditors annually to review certain of our operations to provide internal control evaluations for our customers’ 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. 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. 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, 2018, our businesses employed approximately 1,100 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.
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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
Our outstanding indebtedness may impact our business and our results of operations and may restrict our ability to
grow; the covenants and restrictions of our credit facility and other loans could make it difficult or impossible to
timely make our debt service payments or refinance our debt when it comes due.
We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our
business. 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, expanding our infrastructure, capital expenditures and other
general business activities and investment opportunities in our company, because we must dedicate a
substantial portion of these funds to pay interest and/or service our debt;
impacting our cash flows, results of operations and financial condition as interest rates rise, as our First
Lien Credit Facility is entirely floating rate debt;
requiring us to seek to incur further indebtedness in order to make the capital expenditures and other
expenses or investments necessary to operate the business to the extent our future cash flows are
insufficient;
limiting our ability to retain existing customers and/or attract new customers due to the significant amount
of debt and the related implications of such debt;
limiting our ability to obtain additional financing in the future for working capital, capital expenditures,
debt service requirements, acquisitions and the execution of our 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;
placing us at a competitive disadvantage as compared to our competitors that are less leveraged;
limiting our ability to timely make our debt service payments;
limiting our ability, or increasing the costs, to refinance indebtedness, when our Revolving Credit Facility
matures on August 17, 2020 and our First Lien Term Loan matures on August 17, 2022;
limiting access to supply chain and vendor terms, and
increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions
generally.
In addition, 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. Among other things, our First Lien Credit Facility restricts our ability to:
incur additional debt or contingent liabilities;
declare or pay dividends, redeem stock, or make other distributions to stockholders;
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• merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;
create liens or use assets as security in other transactions;
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enter into transactions with affiliates; and
enter into certain asset sale transactions or other dispositions of assets.
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. Moreover, these
restrictions, as well as the limitations described above, could have a material adverse effect on our business, financial
condition, results of operations and prospects. If we are unable to satisfy our obligations under our indebtedness as they
become due, or if we are unable to pay our interest obligations we would be rendered insolvent.
Our ability to raise capital in the future may be limited.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to
raise additional funds through the issuance of new equity securities, debt or a combination of both. As a result of our
financial condition, additional financing may not be available on favorable terms, or at all. If adequate funds are not
available on acceptable terms, we may be unable to fund our capital requirements. Any failure to achieve adequate
funding will delay our product and services innovation and development and could lead to abandonment of one or more
of our strategic initiatives. Any of these events could materially harm our business, financial condition and prospects.
System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information,
disrupt our internal operations, harm perception of our products, and expose us to litigation and/or regulatory
penalties, which could have a material adverse effect on our business and our reputation.
In operating a Financial Payment Card business, we manage large amounts of personally identifiable
information of cardholders, including cardholder names, account numbers and similar information. 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
such information makes us a potential target of cyber-attacks or cyber intrusions via the Internet, computer viruses,
break-ins, malware, phishing attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from
unauthorized use of or access to computer systems (including from internal and external sources). A breach of our
security defenses 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 facilities.
These types of incidents have become more prevalent and pervasive across industries, including in our industry.
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 a material adverse effect on our business, financial condition and results of
operations.
The protective measures we have implemented to protect against data and security breaches and cyber-attacks
may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future
security breaches. We regularly evaluate, assess and test our systems and the controls, processes and practices to protect
those systems. The evaluations, assessments and testing identify areas of weakness in, and suggested improvements to,
the maturity of our systems, processes, and risk management framework as well as vulnerabilities in those areas that
could be attacked and exploited to access and acquire proprietary and confidential information. Although cybersecurity
and the continued development and enhancement of our controls, processes and practices designed to protect our
systems, computers, software, data and networks from attack, damage or unauthorized access are a high priority for us,
our activities and investment may not be deployed quickly enough or successfully protect our system or network against
disruptions and may be insufficient to prevent or limit the damage from any future security breaches. 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.
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In addition, we are subject to significant security and privacy regulations. Some state and federal laws impose,
or in the future may impose, privacy and security requirements on us. For example, California recently enacted the
California Consumer Privacy Act (“CCPA”), which will, among other things, require covered companies to provide
certain disclosures to California consumers and allow such consumers to opt-out of certain sharing of personal
information, when it goes into effect on January 1, 2020. The CCPA has already been amended and it remains unclear
whether it will be further amended or how it will be interpreted. The prospect of new data privacy laws and ambiguity
regarding the interpretation of existing laws has resulted in significant uncertainty and compliance costs. Congressional
committees have recently held preliminary hearings about the advisability of a federal data privacy law, but it is
uncertain whether the U.S. government would adopt such a law and whether it would preempt state data privacy laws.
Although we monitor regulatory developments in this area, any actual or perceived failure by us to comply with these
requirements could subject us to significant penalties and negative publicity and require changes to our business
practices. Making these changes is, and will likely continue to be, difficult and expensive. Investigations by the
regulators of data security laws could also result in the payment of fines and harm our reputation. Private actions by
affected individuals or our customers could also result in significant monetary or reputational damage.
Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business
and reputation.
Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary
business functions, including the operation of complex IT systems. In addition, a significant portion of the
communication between our employees, customers, and suppliers depends on our IT systems. 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.
We depend on data centers and computing infrastructure operated by third parties to serve customers and
operate certain aspects of our services. While we control and have access to applications and data that are hosted in
these external locations, we do not control the operation of these facilities or in some cases the hardware and
infrastructure within them. Any disruption of, interference at, or inability to keep up with our needs for capacity by our
third-party data center or hosted infrastructure partners could interrupt our business operations. In addition, any
problems faced by our third-party data center operations or hosted infrastructure partners, with the telecommunications
network providers with whom we or they contract, or with the systems by which our telecommunications providers
allocate capacity among their customers, including us, could adversely affect the experience of our customers. Any
interruption in our business applications, systems or networks, including, but not limited to, new system
implementations, server downtime, facility issues or energy blackouts, could have a material adverse impact on our
operations, sales and operating results.
Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or
interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements
with financial institutions require the payment of penalties if our systems do not meet certain operating standards, and
failure to operate in accordance with the standards of one or more of the Payment Card Brands could result in a loss of
the certification of our facilities, any of which could have a material adverse effect on our business. 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. We have established certain protective measures in an effort to
ensure the continuation of core business operations in the event that normal operations could not be performed due to a
catastrophic event. However, these measures may be insufficient to prevent or limit the damage from any future
disruptions, and any such disruption could have a material adverse effect on our business, financial condition and results
of operations.
Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results
of operations and/or financial condition.
Any serious disruption at any of our facilities could impair our ability to use our facilities and have a material
adverse impact on our revenues and increase our costs and expenses. Our other facilities may not have sufficient
capacity, may not have the specialized equipment necessary, may have higher production costs, may take significant
time to increase production or may fail to meet our customers’ requirements, any of which could negatively impact our
business, results of operations and/or financial condition. Long-term production disruptions may cause our customers to
seek alternative supply which could further adversely affect our profitability.
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Additionally, a significant amount of certain specialized manufacturing capacity is concentrated in single-site
location. Due to the specialized nature of the assets, in the event such a location experiences disruption, it may not be
possible to find replacement capacity quickly or substitute production from our other facilities. Accordingly, disruption
at a single-site manufacturing operation could significantly impact our ability to supply our customers and could produce
severe impact on us.
If we fail to meet the continued listing standards of NASDAQ, our common stock may be delisted, which may
adversely affect the market price and liquidity of our common stock.
Our common stock is currently traded on the NASDAQ Capital Market (“NASDAQ”). As a condition of the
continued listing of our common stock, NASDAQ generally requires that, among other requirements, (i) we maintain at
least $2.5 million in stockholders equity, or $35.0 million in market capitalization, or $0.5 million in net income from
continuing operations, in either the last fiscal year, or two out of the last three fiscal years, and (ii) we maintain a
minimum bid price of $1.00 per share. As of December 31, 2018, we had $149.6 million in stockholders’ deficit. Our
net loss from continuing operations was $14.8 million and $23.1 million for the years ended December 31, 2018, and
2017, respectively. As of March 4, 2019, our market capitalization was approximately $40.2 million. There can be no
assurance that we will be able to maintain compliance with the requirements for continued listing of our common stock
on NASDAQ. If our common stock is delisted and we are unable to list our common stock on another U.S. national
securities exchange, we expect our securities would be quoted on an over-the-counter market. We believe our stock
would likely remain listed on the Toronto Stock Exchange (TSX). Any delisting from NASDAQ could result in
significant material adverse consequences for our stockholders, including limited availability of market quotations for
our common stock and reduced liquidity for the trading of our securities. Furthermore, if our common stock were
delisted it could adversely affect our ability to obtain financing for the continuation of our operations and/or result in the
loss of confidence by investors, customers, suppliers and employees.
We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or
infringement, which may have a material adverse effect on our business.
Our ability to protect our intellectual property is important to our business. We depend on patents and other
intellectual property rights to protect our products, proprietary designs, and technological processes against
misappropriation by others. There is no assurance that our existing or future patents will not be challenged, invalidated
or circumvented. Furthermore, we may have difficulty obtaining additional patents and other intellectual property
protections in the future. The patents and intellectual property rights that we receive may be insufficient to provide us
with meaningful protection or commercial advantage. Moreover, effective patent, trademark, service mark, copyright
and trade secret protection may not be available in every country in which we provide services.
Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual
property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by
engaging in litigation and by entering into confidentiality agreements with our employees, consultants and strategic
partners and controlling access to and distribution of our technologies, documentation and other proprietary information.
Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain and use
information that we regard as proprietary and may use such information to interfere with our customers. Enforcing our
intellectual property rights may also cause us to incur significant costs. These costs and other consequences from the
unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition
and results of operations.
Irrespective of our intellectual property rights, we may be required to defend against alleged infringement of the
intellectual property rights of others. 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.
Companies in our industry aggressively protect their intellectual property rights. From time to time, we receive
notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’
proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from
intellectual property litigation, an adverse determination in these types of disputes could prevent us from offering some
of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other
payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our
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suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against
infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to
allegations, regardless of merit, that our products infringe on the intellectual property rights of others.
We also face risks related to open source software. 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. 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 open source software cannot be eliminated
and could have a material adverse effect on our business, financial condition and results of operations.
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.
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 delay of, or quality issues with, materials provided by suppliers, interruption of our
electrical service or a natural disaster. Any such event could have a material adverse effect on our business, financial
condition and results of operations.
Failure to retain our existing customers or identify and attract new customers could have a material adverse effect on
our business.
A substantial portion of our net sales is derived from several large customers. Our top five customers
accounted for approximately 39% of our net sales for the year ended December 31, 2018. Our ability to provide
products and services to these customers and our other customers 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 often are 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, our relationships with our customers may be adversely affected and we may
lose contracts.
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In addition, our continued business relationship with our 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 whom operate in competitive businesses and depend on favorable macroeconomic conditions.
Because our contractual arrangements include neither exclusivity clauses nor commitments to order specified quantities
of products on a medium or long-term basis, there is no guarantee that we will be able to renew or win contracts or
purchase orders in a given year.
If we experience difficulty attracting and retaining customers, our business, financial condition and results of
operations may be materially and adversely affected.
We face competition that may result in a loss of our market share and/or a decline in our profitability.
Our marketplace is highly competitive, relatively saturated, and increasingly consolidated. We expect these
market dynamics to continue as new product markets develop, companies develop lower-cost production processes, our
competitors consolidate, and other competitors attempt to enter the markets in which we operate.
Some of our competitors have larger global 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 technological requirements and changes in customer and/or regulatory requirements and to
leverage their scale to lower production costs and prices. We also face competition from newly established competitors,
suppliers of products and customers who choose to develop their own products and services.
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. As the technological
sophistication of our competitors and the size of the market increases, competing low-cost producers could emerge and
grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our
businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we
may not be able to compete successfully and we may lose market share, which could have a material adverse effect on
our business, financial condition and results of operations.
The ability to recruit, retain and develop qualified personnel is critical to our success and ability to grow.
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 highly competitive, particularly in the states in which our operations are
concentrated. This may result in market increases in compensation. Our efforts to retain and develop personnel may
also result in significant additional expenses, which could have a material adverse effect on our profitability. Even then,
we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart
with qualified or effective successors. In addition, our key personnel may not continue to be employed or we may be
unable to attract and retain qualified personnel in the future. Any failure to retain or attract employees or key personnel
could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our
strategy or that should be consolidated.
In executing our strategy, we have experienced consolidation of certain of our facilities and/or the divestiture of
certain of our businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could
adversely affect our continuing business and expenses, revenues, results of operations, cash flows and financial position.
We cannot provide any assurance that we will be able to sell non-strategic businesses on terms that are
acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not
practical, alternative courses of action, including relocation of operations or closure, may not be available to us or may
be more costly than anticipated.
15
Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a
lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a
timely basis, or at all.
The development of new or enhanced products is a complex and uncertain process requiring the accurate
anticipation of technological, market and industry trends, as well as precise technical execution. The successful
development of new products may require us to undertake time-consuming and costly development activities, and we
may experience difficulties or challenging market conditions that could delay or prevent the successful development,
commercialization and marketing of these new products, including, for example, limited market acceptance of dual-
interface EMV technology in the United States. Before we can commercialize any new products, we may need to
expend significant funds in order to conduct substantial research and development. If we have difficulty producing
innovative products, there could be a material adverse effect on our revenue, results of operations, reputation and
business.
As we develop products, we may need to make significant investments in product development, as well as sales
and marketing resources. 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. In addition, competitors
may develop and commercialize competing products faster than we are able to do so. Any of these factors could have a
material adverse effect on our business, financial condition and results of operations.
Our business and financial results may be materially adversely affected by various legal and regulatory proceedings.
We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could
become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement
or unfavorable development could result in charges that could have a material adverse effect on our business, operating
results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any
liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any
liability that may be imposed on us. See Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K for
information on our currently pending legal proceedings.
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 materially 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 in the U.S. 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 efforts to innovate and upgrade
our products and services. If we do not complete or gain 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. For
example, one of our growth opportunities is the potential adoption of dual-interface EMV cards by U.S. card issuing
banks. Banks may be delayed in transitioning to the issuance of dual-interface EMV cards due to increased costs and
other factors. If these entities do not deploy dual-interface EMV technology or do so less quickly and/or completely
than we expect, our ability to grow could be significantly affected which could have a material adverse effect on our
business, financial condition and results of operations.
16
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;
comply with applicable data protection regulations; and
retain and hire talent experienced in developing new products and services
Additionally, 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, this may have a material 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.
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, production problems and other
factors.
Furthermore, in periods of industry overcapacity or when our 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, profits and cash
flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations
as visibility is reduced. This 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, 2018 were $121.7 million, representing 59% of our total
assets, of which we have recorded plant, equipment and leasehold improvements of $39.1 million, as our operations
require 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
decline in expected future cash flows and could have a material adverse effect on our business, financial condition and
results of operations.
During the second quarter of 2018, we recorded an impairment charge of $7.6 million on the long lived assets
in our U.K. Limited segment. During the fourth quarter of 2018, based on the goodwill impairment test performed
annually as of October 1, there were no other impairment charges necessary. See Part II, Item 8, Financial Statements
and Supplementary Data, Note 7 “Goodwill and Other Intangible Assets,” and Note 4 “Discontinued Operations and
Dispositions” in this Annual Report on Form 10-K for more information.
17
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 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, 2018, 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, which could have a material
adverse effect on our business, financial condition and results of operations.
A disruption in our operations or supply chain could adversely affect our business and financial results.
As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities,
including disruptions or delays in supply chain or information technology, product quality control, as well other external
factors over which we have no control. One of the most important components of our products is the EMV microchip.
We obtain our components from multiple suppliers located in South Korea, France, the United States and Singapore,
primarily on a purchase order basis. Key components for our products include EMV microchips, substrates (such as
PVC), modules, antennas, and inlays, which we source from a few key suppliers. Changes in the financial or business
condition of our suppliers could subject us to losses or adversely affect our ability to bring products to market. Further,
the failure of our suppliers to deliver goods and services in sufficient quantities, in compliance with applicable standards,
and in a timely manner could adversely affect our customer service levels and overall business. For example, we have in
the past experienced delays in our supply chain, which made it difficult to produce our products in a timely manner. In
addition, any increases in the costs of goods and services for our business may adversely affect our profit margins if we
are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in our
operations.
Risks associated with reduced levels of consumer and business spending could adversely affect our business,
financial condition and results of operations.
Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed
to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or
changes in consumer purchasing habits. A sustained deterioration in general economic condition, particularly in the
United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for
our Financial Payment Card solutions or reduce the purchase of our higher margin products. If a downturn occurs, credit
card issuers may reduce credit limits, close accounts, and become more selective with respect to whom they issue credit
cards. These and other changes in economic conditions could also adversely impact our future revenues and profits and
cause a materially adverse effect on our business, financial condition and results of operations.
Costs relating to product defects, and any related product liability and warranty claims may materially adversely
affect our business
We offer highly complex services and products and, accordingly, from time to time defects have occurred.
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
18
by such defects. If we sell defective products into 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 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 a material adverse effect on our business, financial condition and results of
operations.
If the U.S. government puts significant tariffs or other restrictions on goods imported into the United States, our
revenue and results of operations may be materially harmed.
Most of our chips, as well as certain other raw materials, are imported from companies located outside of the
United States. The U.S. government has already imposed tariffs on imports from certain countries and may impose
further tariffs and/or trade restrictions. The current U.S. administration has also expressed antipathy towards certain
existing international trade agreements. Any of these factors could depress economic activity, restrict our access to
suppliers and have a material adverse effect on our business, financial condition and results of operations.
These tariffs are subject to a number of uncertainties as they are implemented, including future adjustments and
changes to the products covered by additional tariffs and to the countries included or excluded from such tariffs. The
ultimate reaction of other countries, and the impact of these tariffs or other actions on the United States and our business,
financial condition and results of operations, cannot be predicted at this time, nor can we predict the impact of any other
developments with respect to global trade.
We may become subject to additional sales tax collection obligations and claims for uncollected amounts.
In recent years, a number of states have adopted or considered adopting legislation requiring out-of-state sellers
to collect and remit sales tax on sales transactions into those states where they have no physical presence. The United
States Supreme Court’s June 2018 decision in South Dakota v. Wayfair, Inc. significantly increased the ability of states
to impose sales tax collection responsibilities on out-of-state sellers. The ruling is widely expected to result in an
increased number of states seeking to expand the applicability of their own laws regarding sales tax “nexus.” If this
occurs, we could become subject to additional costs and administrative requirements to collect and remit sales tax in
additional jurisdictions. Further, we may be subject to the retroactive assessment of state or local sales taxes in certain
jurisdictions. Such assessments may adversely affect our future cash flow and financial results.
We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners
could have a material adverse effect on 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 have a material adverse effect on our operations.
We are required to comply with complex laws and regulations in the United States and other countries and are
exposed to business risks associated with our international operations.
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, environmental regulations and
19
permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each
jurisdiction in which we operate. 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.
We may not be in full compliance at all times with the laws and regulations to which we are subject and we
may not have obtained the permits, authorizations, or licenses that we need. Any failure to comply with applicable laws
or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to
materialize, there could be a material 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 have a
material adverse effect on 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 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 have a material adverse effect on our
business, financial condition and results of operations.
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% and 22% of our common stock, respectively, as of December 31,
2018. 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;
other acquisitions or dispositions of businesses or assets;
incurrence of indebtedness and the issuance of equity securities;
•
•
20
•
•
repurchases of stock and payment of dividends; and
the issuance of shares to management under our incentive plans.
Tricor Funds may divest all or some of their ownership of our common stock at any time, either through sale on
the open market or through a distribution to the participants in the funds. If Tricor Funds or the participants in the funds
cause a large number of securities to be sold in the public market, the sales could reduce the trading price of our common
stock.
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 and Nicholas Peters, 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.
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:
•
•
•
•
•
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
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
21
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
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 when 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, the potential issuance of preferred stock
may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market
price.
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 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 or issuance of
preferred stock may adversely affect the market price and the voting and other rights of the holders of our common
stock.
Item 1B. Unresolved Staff Comments
None.
22
Item 2.
Properties
Information regarding each of our facilities is set forth below.
Location
Littleton, Colorado
(Corporate)
Littleton, Colorado
(Centennial)
Roseville, Minnesota
Fort Wayne, Indiana
Nashville, Tennessee
Toronto, Ontario
Corporate headquarters facility
Operations
Financial Payment Card production
Financial Payment Card production, card personalization, card packaging
services, secure fulfillment
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
Square
Footage
Owned/
Leased
12,000 Leased
65,000 Leased
200,000 Leased
36,000 Leased
66,000 Leased
67,000 Leased
Item 3. Legal Proceedings
In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) (the “Class Action”)
On June 15, 2016, two purported CPI stockholders filed putative class action lawsuits captioned Vance, et al. v.
CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc. in the United States District Court for the
Southern District of New York (the “Court”) against CPI, certain of its former officers and current and former directors,
along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public
offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the
October 8, 2015 Registration Statement filed in connection with the IPO, asserted claims under §§11 and 15 of the
Securities Act of 1933, as amended (the “Securities Act”) and sought, among other things, damages and costs. In
particular, the complaints alleged that the Registration Statement contained false or misleading statements or omissions
regarding CPI’s customers’ (i) purchases of Europay, MasterCard and VISA chip cards (collectively, “EMV® cards”)
during the first half of fiscal year 2015 and resulting EMV® card inventory levels; and (ii) capacity to purchase
additional EMV® cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended
December 31, 2015. The complaints alleged 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. On October 17, 2016, lead plaintiff filed a
consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The
amended complaint was based principally on the same theories as the original complaints, but added 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 September 21, 2018, the parties executed a stipulation and agreement of settlement (“Stipulation”) to
resolve the claims asserted in the amended complaint. On October 22, 2018, the Court granted lead plaintiff’s motion
for authorization to notify the settlement class of the proposed settlement. After distribution of the notice to the class
and a final settlement hearing on February 5, 2019, the Court entered orders on February 6, 2019: (i) approving the
proposed settlement; and (ii) granting in part lead plaintiff’s motion for attorneys’ fees and expenses. On February 25,
2019, the Court entered an order and final judgment dismissing the case, in its entirety, with prejudice.
Heckermann v. Montross et al., Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”)
On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United
States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and
former directors, along with the sponsors of the IPO. CPI is also named as a nominal defendant. The derivative
complaint asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and
seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions
23
in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The
derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement
and waste of corporate assets.
On March 28, 2018, the Court entered the parties’ stipulated order staying the Derivative Suit pending final
determination of the Class Action. Under its terms, the stay of the Derivative Suit will be lifted 30 days after the entry of
final judgment in the Class Action which was entered on February 25, 2019.
The Company believes these claims are without merit and is defending the Derivative Suit vigorously.
CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. (2 cases)
First case. On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging
Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS
ultra secure gift card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages.
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 underway. MPS’s early motion for summary judgment
was denied in August 2017 and its motion to dismiss on jurisdictional grounds was denied in July 2018. The Company’s
subsidiary CPI Card Group-Minnesota, Inc., has been added to the case as plaintiff. The Company’s patent will expire in
2028.
In June 2017, MPS filed an Inter Partes Review (“IPR”) petition with the United States Patent & Trademark
Office’s Patent Trial & Appeal Board (“PTAB”) to review the patent at issue in the patent infringement suit. The PTAB
instituted the IPR on January 9, 2018. The PTAB entered its final written decision on January 4, 2019, determining that
all of the claims in the patent are unpatentable. The Company filed an appeal of this decision to the federal circuit court
on March 1, 2019. The patent infringement suit is administratively dismissed pending the final determination of the
patent validity.
The Company intends to vigorously assert its intellectual property rights in connection with this litigation and
the IPR.
Second case. During the summer of 2017, the Company commenced a lawsuit in the District of Minnesota
against a former employee, MPS, and two MPS employees (collectively, the Defendants). The former employee was a
sales executive who left the Company in 2017 to join MPS. In the lawsuit, the Company alleges that the Defendants
misappropriated the Company's trade secrets and confidential information, that the former employee violated his
employment agreements with the Company, and that Defendants committed various related business torts. After some
early discovery, the Company moved for a preliminary injunction, which the Court granted in December, 2017. The
company received a second preliminary injunction in August 2018. The litigation is ongoing.
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.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information for Common Stock
Our common stock is listed on the NASDAQ and the Toronto Stock Exchange (“TSX”) under the symbol
“PMTS” and “PMTS.TO”, respectively.
24
On December 20, 2017, we effected a one-for-five reverse stock split of our common stock, whereby each lot of
five shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and
became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than
one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the
one-for-five reverse stock split for all periods presented throughout this Annual Report on Form 10-K and the
accompanying consolidated financial statements.
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, as adjusted for the reverse stock split discussed above.
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
Cash Dividends
Declared
—
—
—
—
$
$
$
$
NASDAQ ($)
Toronto Stock Exchange (CAD$)
Low
High
$ 4.13 $ 2.52 $
$ 2.98 $ 2.00 $
$ 3.95 $ 1.96 $
$ 3.15 $ 1.98 $
High
Low
5.20 $
3.95 $
5.22 $
4.03 $
3.20
2.66
2.53
2.73
$
$
$
$
0.225
0.225
—
—
$ 24.51 $20.36 $
$ 20.61 $ 9.32 $
$ 15.75 $ 4.53 $
$ 7.25 $ 3.44 $
33.50 $
28.10 $
21.95 $
9.60 $
27.90
11.80
5.50
4.90
There were eight stockholders of record as of February 22, 2019. 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
During the year ended December 31, 2017, the Company declared quarterly cash dividends of $0.225 per share
payable on April 7 and July 7, respectively. The Company discontinued its quarterly dividend during August 2017.
Issuer Purchases of Equity Securities
There were no shares repurchased under the Company’s stock repurchase plan during the years ended
December 31, 2018 and 2017, and the stock repurchase plan expired by its terms during May 2017.
Item 6.
Selected Financial Data
Not required due to small reporting company status
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.”
Company Overview
We are engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment
Cards, which we define as credit cards, debit cards and prepaid cards issued on the networks of Payment Card Brands
(Visa, MasterCard, American express and Discover) in the United States of America. We have established a leading
position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on
25
this attractive subsector of the financial technology market. Our customers include leading national and regional banks,
independent community banks, credit unions, Prepaid Debit Card program managers, 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, core banking operations and other financial services)
card transaction processors. We serve a diverse set of over 2,000 direct customers and several thousand indirect
customers, including some of the largest issuers of debit and credit cards in the United States of America 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 production and card services facilities, including 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 customer base.
In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary to Allcard
Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include customers for
which we only manufacture and personalize Financial Payment Cards. The transaction is expected to close in the first
half of 2019. The Financial Payment Card business customers of our Canada operations will migrate to our operations
in the U.S. or migrate to other service providers before the transaction closes. The divestiture allows us to further
optimize our footprint and is consistent with our previously announced plan to better position ourselves to serve
customers by focusing on our core businesses. Our Canadian subsidiary is part of the Other reportable segment.
On August 3, 2018, we completed the sale of our three facilities in the United Kingdom that produce retail
cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide
personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby
locations. The transaction was structured as a sale of all of the outstanding shares of CPI Card Group – UK Limited, for
total consideration of approximately $4.5 million. During the third quarter 2018, the Company received net cash
proceeds of $0.3 million after the repayment of liabilities associated with the United Kingdom facilities, excluding tax
benefits related to the structure of the sale. The historical financial position, results of operations and cash flows for the
U.K. segment have been restated for all periods presented to conform with discontinued operations presentation. Unless
otherwise indicated, information in Management’s Discussion and Analysis of Financial Condition and Results of
Operations relates to continuing operations. The operations and cash flows were removed from the Company’s
consolidated operating results. In connection with the substantial liquidation of the Company’s U.K Limited segment in
the third quarter of 2018, we released the related foreign currency cumulative translation adjustment of $4.0 million from
accumulated other comprehensive loss into loss from discontinued operations. U.K. Limited incurred a pre-tax loss from
operations of $15.4 million for the year ended December 31, 2018, due to the softness in our U.K. Limited retail sector
and a decline in sales relating to certain customers. Additionally, we recorded the following charges during the year
ended December 31, 2018: impairment charges of $7.6 million associated with goodwill and customer relationship
intangible assets, and a $7.2 million loss on the sale. The major line items constituting the (loss) income of the
discontinued operation were as follows:
Total net sales
Total cost of sales
Selling, general and administrative
Impairments
Other expense (income), net
Pretax (loss) income from discontinued operation
Pretax loss on sale of discontinued operation
Total pretax (loss) income on discontinued operation
Income tax benefit (expense)
Net income (loss) from discontinued operation
26
For the year ended
December 31,
$
2018
10,741 $
10,222
4,336
7,615
4,006
(15,438)
(7,248)
(22,686)
23
$ (22,663) $
2017
31,119
24,331
5,591
—
(43)
1,240
—
1,240
(165)
1,075
During February 2018, we made the decision to consolidate our three personalization operations in the United
States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a
cost-competitive business model.
2018 Summary of Financial Performance
Information below is described on a continuing operations basis. During the year ended December 31, 2018,
net sales increased 14.3% from 2017, to $255.8 million, and we recorded income from operations of $4.6 million
compared to $19.3 million loss from operations during 2017. The operating income margin for the year ended
December 31, 2018 was 2%, an increase from operating loss margin of 9% in 2017. For the year ended December 31,
2018, we recorded net loss from continuing operations of $14.8 million, compared to net loss of $23.1 million in 2017.
Included in loss from operations and net loss from continuing operations during the prior year ended
December 31, 2017, were goodwill impairment charges of $19.1 million. This impairment charge was comprised of
$17.2 million related to the U.S. Debit and Credit segment resulting from continued market softness in demand for EMV
cards, including price erosion and loss of market share in the United States. The other impairment for $1.9 million
related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. See
Note 7 “Goodwill and Other Intangible Assets” in Part II, Item 8, “Financial Statements and Supplementary Data” and
“Critical Accounting Policies and Estimates” in this Annual Report on Form 10-K for additional information.
Cash provided by operating activities from continuing operations for the year ended December 31, 2018 was
$7.1 million, representing an increase of $3.6 million compared to $3.5 million during the prior year period.
Segment Overview
During the first quarter of 2018, we reorganized our United States business operations and realigned our United
States reporting segments to correspond with the manner with which our chief operating decision maker evaluates
operating performance and makes decisions as to the allocation of resources. As a result of this realignment, the CPI On-
Demand business operations have been moved from the U.S. Prepaid Debit segment into the U.S. Debit and Credit
reporting segment, consistent with the other related personalization operations. Segment information for previous
periods has been restated to conform with this realignment and current year presentation. The restatement of the prior
year segment information was not material.
Our reportable segments were as follows:
• U.S. Debit and Credit,
• U.S. Prepaid Debit, and
• Other.
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 Financial Payment Cards, including contact, contactless, and dual interface cards, and CPI Metals TM, a
premium product capability. We also sell instant card issuance systems, 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). We provide CPI On-Demand services, where we
produce images, personalized payment cards, and related collateral on a one-by-one, on demand basis for our customers.
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.
27
U.S. Prepaid Debit Segment
Our U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in
the United States, including tamper-evident security packaging. 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. 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.
Other
Our Other segment includes our corporate headquarter costs and a less significant operations that generate
revenue from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment
services in Canada.
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 loss. All line items below are described on a continuing operations basis.
Net Sales
Net sales reflect our revenue generated from the sale of products and services. Product net sales include the
design and production of EMV and non-EMV Financial Payment Cards, including contact, contactless, and dual
TM. We also generate product revenue from the sale of our Card@Once® instant
interface cards, and CPI Metals
issuance equipment and supplies, Private Label Credit Cards and retail gift cards. Services net sales include revenue
from the personalization and fulfillment of Financial Payment Cards, including CPI On-Demand services, tamper-
evident security packaging, fulfillment services and software as a service personalization of instant issuance Financial
Payment cards. We also generate services revenue from personalizing retail gift cards primarily in Canada.
As of January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, (“ASC
606”), which 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. In accordance with this new standard, certain of our performance obligations are required to be recognized over
time as the goods are produced rather than upon shipment, as required under applicable accounting guidance prior to
ASC 606, as those products provide value only to a specified customer, have no alternative use, and we have the right to
payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements,
as revenue will be recognized as goods are produced rather than upon shipment or delivery of goods. See Note 2,
“Summary of Significant Accounting Policies” in Part II, Item 8, “Financial Statements and Supplementary Data” and
“Critical Accounting Policies and Estimates—Revenue Recognition.” in this Annual Report on Form 10-K for additional
information.
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 contactless and 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 and the potential rising costs associated with 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, procurement costs, 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. We include gross shipping and handling revenue and cost in net sales and cost of sales respectively
28
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, research and development, and administrative personnel, including payroll, benefits and stock-based
compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and
software related fees. Operating expense also includes depreciation and amortization expense, and may include
impairment charges on tangible and intangible assets, when necessary.
Income (Loss) from Operations and Operating Margin
Income (loss) from operations consists of our gross profit less our operating expenses and impairments, if
applicable. Operating margin is income (loss) 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 Loss from Continuing Operations
Net loss from continuing operations consists of our income (loss) from operations, less other expense, net, and
income tax benefit.
Results of Operations
Year Ended December 31, 2018 Compared With Year Ended December 31, 2017
The table below presents our results of operations, on a continuing operations basis, for the years ended
December 31, 2018 and 2017:
2018
Year Ended December 31,
$ Change
2017
(dollars in thousands)
% Change
Net sales:
Products
Services
Total net sales
Cost of sales
Gross profit
Operating expenses (exclusive of
impairments shown below)
Impairments
Income (loss) from operations
Other expense, net:
Interest, net
Foreign exchange (loss) gain
Other income
$ 125,069 $ 104,459 $
130,745
255,814
177,224
78,590
74,002
—
4,588
119,285
223,744
155,539
68,205
68,431
19,074
(19,300)
(23,431)
(311)
16
(19,138)
4,339
(20,850)
517
12
(39,621)
16,536
20,610
11,460
32,070
21,685
10,385
5,571
(19,074)
23,888
(2,581)
(828)
4
20,483
(12,197)
8,286
19.7 %
9.6 %
14.3 %
13.9 %
15.2 %
8.1 %
*
* %
12.4 %
*
33.3 %
51.7 %
*
35.9 %
Loss before income taxes
Income tax benefit
Net loss from continuing operations $ (14,799) $ (23,085) $
* Not meaningful
29
Net Sales
Net sales by segment:
U.S. Debit and Credit
U.S. Prepaid Debit
Other
Eliminations
Total
* Not meaningful
2018
Year Ended December 31,
$ Change
2017
(dollars in thousands)
% Change
$ 178,597 $ 162,216 $
69,199
9,891
(1,873)
57,005
11,049
(6,526)
$ 255,814 $ 223,744 $
16,381
12,194
(1,158)
4,653
32,070
10.1 %
21.4
(10.5) %
*
14.3 %
Net sales for the year ended December 31, 2018 increased $32.1 million, or 14.3%, to $ 255.8 million
compared to $223.7 million for the year ended December 31, 2017. The increase in net sales during 2018 was due to a
10.1% increase in U.S. Debit and Credit and a 21.4% increase in U.S. Prepaid Debit, partially offset by a 10.5% decrease
in Other.
U.S. Debit and Credit
Net sales for U.S. Debit and Credit for the year ended December 31, 2018 increased $16.4 million, or 10.1%, to
$178.6 million compared to $162.2 million for the year ended December 31, 2017. The increase was primarily due to
higher net sales from our emerging products and solutions, including metal cards, dual interface EMV® cards, and
Card@Once®. Metal cards are a premium product, and dual interface EMV cards include additional technology to
process contactless transactions and generally have a higher selling price than other contact-only EMV cards. Partially
offsetting these increases was a decline in EMV® card net sales, excluding metal and dual interface, and non-EMV card
net sales. Volumes of EMV card net sales, excluding metal and dual interface, increased 5% during the year ended
December 31, 2018 compared to the prior year, while average selling prices declined on a year over year basis.
U.S. Prepaid Debit
Net sales for U.S. Prepaid Debit for the year ended December 31, 2018 increased $12.2 million, or 21.4%, to
$69.2 million compared to $57.0 million for the year ended December 31, 2017. The increase was the result of
additional sales volumes from new portfolio wins with existing customers and overall higher volumes from our existing
customer base.
Other
Net sales in Other decreased $1.2 million, or 10.5%, from the year ended December 31, 2018, compared to the
year ended December 31, 2017, as a result of lower volumes with certain customers.
Eliminations
Amounts include the sales between segments and are eliminated upon consolidation. The decrease in
eliminations for the year ended December 31, 2018 compared to the year ended December 31, 2017 is due to less sales
between segments.
30
Gross Profit and Gross Margin
Year Ended December 31,
% of
% of
2018
net sales
2017
net sales
(dollars in thousands)
$ Change % Change
Gross profit by segment:
U.S. Debit and Credit
U.S. Prepaid Debit
Other
Total
$ 50,036
26,422
2,132
$ 78,590
28.0 % $ 45,179
38.2 % 20,358
2,668
19.3 %
30.7 % $ 68,205
27.9 % $ 4,857
6,064
35.7 %
(536)
24.1 %
30.5 % $ 10,385
10.8 %
29.8 %
(20.1)%
15.2 %
Gross profit for the year ended December 31, 2018 increased $10.4 million, or 15.2%, to $78.6 million
compared to $68.2 million for the year ended December 31, 2017.
U.S. Debit and Credit
Gross profit for U.S. Debit and Credit for the year ended December 31, 2018 increased $4.9 million, or 10.8%,
to $50.1 million compared to $45.2 million for the year ended December 31, 2017. The increase in gross profit for U.S.
Debit and Credit was driven by more profitable sales mix as noted in the net sales discussion above, partially offset by
the acceleration of depreciation expense and restructuring charges relating to the consolidation of our personalization
operations.
U.S. Prepaid Debit
Gross profit for U.S. Prepaid Debit for the year ended December 31, 2018 increased $6.1 million, or 29.8%, to
$26.4 million compared to $20.4 million for the year ended December 31, 2017. The increase in gross profit and margin
was attributed primarily to higher sales volumes, favorable overhead cost absorption, and cost efficiencies.
Other
Gross profit in Other decreased 20.1% in 2018 to $2.1 million from $2.7 million in 2017. The decrease is a
result of lower sales volumes with certain customers and unfavorable overhead cost absorption.
Operating Expenses
Operating expenses by segment:
U.S. Debit and Credit
U.S. Prepaid Debit
Other
Total
Year Ended December 31,
2018
2017
$ Change % Change
(dollars in thousands)
$ 27,622 $ 43,053 $ (15,431)
816
3,678
1,112
40,774
$ 74,002 $ 87,505 $ (13,503)
4,494
41,886
(35.8)%
22.2 %
2.7 %
(15.4)%
31
Goodwill Impairments
We perform goodwill impairment testing on an annual basis as of October 1 of each year or more frequently
when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For the year
ended December 31, 2018, there was no goodwill impairment necessary for the continuing operations. Based on the
goodwill impairment test performed in the prior year, as of October 1, 2017, we recorded an impairment charge of $19.1
million. This impairment charge included $17.2 million related to the U.S. Debit and Credit segment resulting from
continued market softness in demand for EMV cards, including price erosion and loss of market share in the United
States. The other impairment for $1.9 million related to Other which resulted from declines in net sales and operating
losses incurred in our Canadian business.
U.S. Debit and Credit
The decrease in operating expenses is primarily attributed to the goodwill impairment charge of $17.2 million
during the year ended December 31, 2017. Partially offsetting this impairment charge were higher costs associated with
the consolidation of our personalization operations and increased employee performance incentive compensation.
U.S. Prepaid Debit
U.S. Prepaid Debit increased $0.8 million, primarily due to increased employee performance incentive
compensation, and administrative costs.
Other
Other operating expenses increased $1.1 million due to increased employee performance incentive
compensation of $3.4 million and consulting and other administrative costs of $1.6 million. Partially offsetting these
costs were decreased legal costs of $2.2 million. Additionally, we recorded a $1.9 million goodwill impairment charge
during the year ended December 31, 2017, relating to the Canada business within the Other segment.
Income (Loss) from Operations and Operating Margin
2018
Year Ended December 31,
% of
net sales
% of
net sales
(dollars in thousands)
2017
$ Change % Change
Income (loss) from operations by
segment:
U.S. Debit and Credit
U.S. Prepaid Debit
Other
Total
* Not meaningful
$ 22,414
21,928
(39,754)
4,588
$
12.6 % $ 2,121
31.7 % 16,679
* % (38,100)
1.8 % $ (19,300)
29.3 %
1.3 % $ 20,293
5,249
* % (1,654)
(8.6) % $ 23,888
956.8 %
31.5 %
4.3 %
123.8 %
During the year ended December 31, 2018 we had income from operations of $4.6 million compared to loss of
$19.3 million for the year ended December 31, 2017. Included in the loss from operations during the year ended
December 31, 2017 were the goodwill impairment charges discussed above, totaling $19.1 million. Operating margins
for the year ended December 31, 2018 increased to 1.8% compared to (8.6)% for the year ended December 31, 2017.
U.S. Debit and Credit
Income from operations for U.S. Debit and Credit for the year ended December 31, 2018 increased $20.3
million to $22.4 million compared to $2.1 million for the year ended December 31, 2017. Operating margins for the
year ended December 31, 2018 increased to 12.6% compared to 1.3% for the year ended December 31, 2017, primarily
due to higher sales volume and more profitable sales mix, partially offset by charges relating to the consolidation of our
personalization operations. Included in income from operations during the year ended December 31, 2017 were the
goodwill impairment charges discussed above, totaling $17.2 million related to the U.S. Debit and Credit segment.
32
U.S. Prepaid Debit
Income from operations for U.S. Prepaid Debit for the year ended December 31, 2018 increased $5.2 million,
or 31.5%, to $21.9 million compared to $16.7 million for the year ended December 31, 2017, primarily due to increased
sales volumes and higher overhead cost absorption, partially offset by increased employee performance compensation.
U.S. Prepaid Debit operating income margin for the year ended December 31, 2018 increased to 31.7% from 29.3% for
the same period in 2017.
Other
Loss from operations in Other of $39.8 million represented an increased loss of $1.7 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017. The larger operating loss was mainly attributable to
higher operating expenses, and lower profit in the Canadian business from reduced sales volumes.
Interest, net
Interest expense for the year ended December 31, 2018 increased $2.6 million, or 12.4%, to $23.4 million
compared to $20.9 million for the year ended December 31, 2017. The additional interest expense resulted from a higher
average interest rate on the First Lien Term Loan during the year ended December 31, 2018 compared to the same period
ended 2017.
Income tax benefit
During the year ended December 31, 2018 there was an income tax benefit of $4.3 million compared with an
income tax benefit of $16.5 million for the year ended December 31, 2017. In December 2017, the U.S. government
enacted comprehensive tax reform legislation, and the U.S. federal tax rate reduced from 35.0% in 2017 to 21.0% in
2018. The effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of a tax benefit
recorded during the year ended December 31, 2018 in connection with the U.K. Limited sale, and to a lesser extent, due
to state income taxes and federal tax credits. Partially offsetting the increased tax benefit was the establishment of a
partial valuation allowance on certain U.S. deferred tax assets and an uncertain tax position reserve.
Net loss from continuing operations
Net loss from continuing operations for the year ended December 31, 2018 was $14.8 million, compared to net
loss of $23.1 million for the year ended December 31, 2017. The change was primarily due to more profitable sales mix,
higher sales volumes resulting improved gross margin, offset by lower other EMV® card pricing, and higher operating
expenses and interest expense as described above. Contributing to the change was the impairment charge recorded
during the year ended December 31, 2017.
Fourth Quarter
Our net sales increased 19.2% in the fourth quarter of 2018 compared to the fourth quarter of 2017. Net sales
for U.S. Debit and Credit increased 23.9% in the fourth quarter of 2018 compared to fourth quarter of 2017. The increase
in net sales was primarily due to higher net sales from our emerging products and solutions, including metal cards, dual
interface EMV cards, and Card@Once® instant issuance systems. Volumes of EMV card sales, excluding metal and
dual interface, increased 17% during the quarter ended December 31, 2018 compared to the prior year, while average
selling prices declined on a year over year basis.
Net sales for our U.S. Prepaid Debit segment increased $1.0 million, or 6.0%, to $17.1 million in the fourth
quarter of 2018 compared to $16.1 million in the fourth quarter of 2017. The increase was the result of additional sales
volumes from our existing customer base.
Selling, general and administrative (exclusive of depreciation and amortization) expenses increased $1.5 million
to $19.9 million in the fourth quarter of 2018 compared to $18.4 million in the fourth quarter 2017. This increase was
included employee termination charges of $1.0 million, in our Other segment, related to the sale of our Canadian
operations which is expected to close in the first half of 2019.
33
During the fourth quarter of 2018 there was a loss from operations of $0.4 million compared to a loss from
operations of $21.5 million in the fourth quarter of 2017. The decrease in loss from operation was primarily due to the
goodwill impairment charges of $19.1 million relating to reporting units within U.S. Debit and Credit and Other, during
the three months ended December 31, 2017, as further described above.
Liquidity and Capital Resources
As of December 31, 2018, we had $20.3 million of cash and cash equivalents. Of this amount, $1.4 million was
held in accounts outside of the United States.
Our ability to make investments in and grow our business, service our debt and improve our debt leverage
ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through
our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations,
combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service
requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations
and working capital needs.
At December 31, 2018, there was $312.5 million outstanding under the First Lien Term Loan. We have a $40.0
million Revolving Credit Facility, of which $20.0 million was available for borrowing as of December 31, 2018.
Additional amounts may be available for borrowing during the term of the Revolving Credit Facility, up to the full $40.0
million, to the extent our net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement.
The First Lien Term Loan and Revolving Credit Facility (collectively, “First Lien Credit Facility”) mature on August 17,
2022 and August 17, 2020, respectively. As of December 31, 2018, our net leverage ratio was 10.9 times Adjusted
EBITDA.
Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate,
subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%. As of
December 31, 2018, the interest rate on our First Lien Term Loan was 7.02% and increased to 7.35% for the first six
months of 2019, as the interest rate was reset on the First Lien Term Loan during January 2019. Total cash interest paid
during 2018 was $20.7 million, an increase of $2.2 million compared to the prior year 2017.
The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions
or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity
holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our
assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loan in advance
of the maturity date based on a calculation of excess cash flows, as defined in the agreement, with any required
payments to be made after the issuance of the Company’s annual financial statements. We do not have a required excess
cash flow payment related to 2018, and we were in compliance with all covenants under the First Lien Credit Facility as
of December 31, 2018.
During August 2017, we discontinued our quarterly dividend of $0.225 per share. The dividend discontinuation
was part of our plan to utilize a greater portion of available cash to reinvest back into the business and fund growth
initiatives and to service our debt.
Operating Activities
Cash provided by operating activities from continuing operations for the year ended December 31, 2018 was
$7.1 million compared to cash provided by operating activities of $3.5 million during the year ended December 31,
2017. The year over year increase was due to net working capital fluctuations, including accruals in 2018 for employee
performance incentive compensation, and income taxes. Certain working capital fluctuations were partially offsetting
the benefit, including an accounts receivable increase from the prior year. Additionally, during the year ended
December 31, 2018, we recorded a lower net loss from continuing operations than compared to the prior year period.
Included in the net loss from continuing operations during the year ended December 31, 2017, were non-cash
impairment charges of $19.2 million, which did not impact cash flows from operating activities. Cash outflows from
operating activities relating to our discontinued operation in the U.K., were a result of the decline in sales and operating
losses incurred during 2018, and direct costs relating to the sale.
34
Investing Activities
Cash used in investing activities from continuing operations for the year ended December 31, 2018 was $5.6
million relating to capital expenditures. In 2018, we financed $1.8 million of machinery and equipment under capital
leases. In addition to investments in machinery for our Financial Payment Card production and personalization
operations, our capital expenditures in 2018 included investments in information technology. During the year ended
December 31, 2017, capital expenditures from continuing operations were $7.3 million.
Financing Activities
Cash used in financing activities for the year ended December 31, 2018 was $0.5 million related to principal
payments on capital leases. Cash used in financing activities for the year ended December 31, 2017, primarily related to
dividend payments of $7.5 million.
Working Capital
Our working capital relating to continuing operations as of December 31, 2018 was $43.2 million, compared to
$52.1 million as of December 31, 2017. During the year ended December 31, 2018, our cash balance decreased by $2.9
million, and our inventory balance decreased $4.0 million. Additionally, we had a net decrease in working capital
compared to the prior year due to higher accrued expenses of $11.1 million. The increase to accrued expenses was
primarily due to employee incentive compensation accruals. Partially offsetting these impacts was an increase in
accounts receivable of $11.3 million. Refer to Note 2 in Item 8, Financial Statements, for further discussion of the
impacts on the consolidated balance sheet of new accounting guidance for revenue recognition, implemented January 1,
2018.
Contractual Obligations
Not required due to smaller reporting company status.
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. Net sales are also influenced by Financial Payment Card
renewal cycles. Additionally, we generally generate higher net sales in the third quarter of the year, as our sales of
Prepaid Debit Card solutions 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 in the United States.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements at December 31, 2018 and 2017.
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 net sales, 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.
35
Impairment Assessments of Goodwill and Long-Lived Assets
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 values in impairment tests, we use one or more of the following recognized valuation
methods:
•
•
•
the income approach (including discounted cash flows);
the market approach; or
the cost approach.
We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present
value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the
fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate
in the future. 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 net sales and earnings multiples. Further,
when measuring fair value based on discounted cash flows, we make assumptions about future price levels, rates of
increase in net sales, cost of sales 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 used in 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 and other indefinite-lived intangible assets are not amortized, but instead are tested for impairment at
least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying
value may not be recoverable. For impairment evaluations, we first make a qualitative assessment with respect to both
goodwill and other indefinite-lived intangibles. In 2017, we adopted ASU 2017-04, Intangibles – Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with our annual
impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill
impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment
charge for the amount by which the carrying amount of the reporting unit exceeds its fair value. We completed our
annual goodwill impairment testing as of October 1, 2018, which resulted in no such impairment charge.
On August 3, 2018, we completed the sale of our United Kingdom facilities that comprised the U.K. Limited
reporting segment. We did not retain significant continuing involvement with the discontinued operation subsequent to
the disposal. In connection with the sale, we performed a goodwill impairment test and recorded a charge of $6.4 million
in the second quarter of 2018. The impairment was a result of continued market softness in the U.K. Limited segment,
resulting in lower sales and margins and an expected sales price below the carrying value of the segment. We recorded
an impairment charge of $1.2 million to customer relationship intangible assets related to the U.K. Limited segment in
the second quarter of 2018, which is reported in discontinued operations.
For the year ended December 31, 2017, we recorded impairment charges of $19.1 million, of which $17.2
million related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including
price erosion and loss of market share in the United States. The other impairment for $1.9 million related to the Other
segment which resulted from declines in net sales and operating losses incurred in our Canadian business.
Goodwill is allocated to our reporting units at the date the goodwill is initially recorded. Once goodwill has
been allocated to a reporting unit, it no longer retains its identification with a particular acquisition and becomes
identified with that reporting unit. Accordingly, the fair value of the reporting unit as a whole is available to support the
36
recoverability of its goodwill. As of December 31, 2018, all of our goodwill is included within reporting units in our
U.S. Debit and Credit segment.
Refer to Note 7, “Goodwill and Other Intangible Assets” and Note 8 “Fair Value of Financial Instruments” in
Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for certain
additional information on goodwill and intangible asset impairments and for further definition of valuation inputs.
Long-lived assets, such as plant, 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. There were no material long-lived asset impairments recorded
for the years ended December 31, 2018 and 2017, relating to the continuing operations of the Company.
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.
Revenue Recognition
For periods after January 1, 2018, we account for our net sales as follows:
Products Net Sales: “Products” net sales are recognized when obligations under the terms of a contract with a
customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and
have no alternative use and the Company has an enforceable right to payment for work performed. For work performed
but not completed and billed, we estimate net sales by taking actual costs incurred and applying historical margins for
similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including
in contact-EMV®, Dual-Interface EMV®, contactless and magnetic stripe cards, private label credit cards and retail gift
cards. Card@Once® printers and consumables are also included in “Products” net sales, and their associated revenues
are recognized at the time of shipping.
Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in
“Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident
secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service
personalization of instant issuance debit cards. For work performed but not completed and billed, we estimate revenue
by taking actual costs incurred and applying historical margins for similar types of contracts.
Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its
customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a
purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASU
2014-09 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of
work. As such, the Company's contracts are generally short term in nature.
Inventory Valuation
Raw materials, and finished goods inventories are valued at the lower of cost or net realizable value, with cost
determined using a first-in, first-out, specific identification or weighted-average method. Cost is calculated based upon
the price paid for an item at the time it is received by us. Net realizable value is the estimated selling price in the
ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company
monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value
of inventory, such as negative margins, expiration of material usage, and other forms of obsolescence. We record
37
adjustments to the valuation of inventory, as necessary. For manufacturing work performed but not completed and
billed, inventory costs are recognized through cost of sales as the work is completed, consistent with the recognition of
revenue.
Stock-Based Compensation
During October 2015, we adopted the CPI Card Group Inc. Omnibus Incentive Plan (“Omnibus Plan”). During
the years ended December 31, 2018 and 2017, we granted stock options to certain employees. 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 have partially utilized a peer group to estimate the volatility assumption when
calculating the fair value of stock options granted during 2018 and 2017. As we obtain more trading history on our own
common stock, our specific trading history and associated volatility has been gradually included to replace the peer
group volatility assumption. As such, once our own common stock is fully utilized for the volatility assumption within
the Black-Scholes option pricing model, our volatility assumption in the future could be significantly different going
forward than what we have estimated for our 2018 and 2017 grants. This change could impact our stock-based
compensation expense in future periods.
A 10% change in our stock-based compensation expense for the year ended December 31, 2018, would have
affected pre-tax income by approximately $0.1 million. We include stock-based compensation expense in selling,
general and administrative expenses in our consolidated statement of operations and comprehensive (loss) 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
was $6.8 and $4.6 million as of December 31, 2018 and December 31, 2017, 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
38
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
Recently Adopted Accounting Pronouncements
As of January 1, 2018, we adopted ASC 606, which 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. ASC 606 also requires an entity to 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. We adopted ASC 606 using the
modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance
of “Accumulated loss” on the Consolidated Balance Sheet. Under the new guidance, we recognizes certain performance
obligations over time as the goods are produced, since those products provide value to only a specified customer, have
no alternative use, and we have the right to payment for work completed on such items. This accelerates the timing of
revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment
or delivery of goods. In addition, as a result of adopting the new guidance, we have recorded decreases to deferred
revenue, and work in process, and an increase to accounts receivable.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases
(“ASC 842”), 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. ASC 842 is effective for annual and interim
periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new
guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period
presented in the financial statements. The guidance required a modified retrospective approach, with an option to apply
the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented.
In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing
for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings.
The Company will adopt the new guidance on the effective date of January 1, 2019 and use the adoption date as
the date of initial application as allowed under ASC 842. Consequently, financial information will not be updated and
the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company expects to
elect the ‘package of practical expedients’, which permits the Company not to reassess under the new standard our prior
conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect
the use-of-hindsight transition practical expedient.
The Company’s adoption process of ASC 842 is ongoing, including evaluating and quantifying the impact on
the financial statements, identifying the population of leases and collecting and validating lease data. While the
Company continues to assess all of the effects of adoption, the Company currently believes the most significant effects
relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for real estate operating
leases, and providing significant new disclosures about the Company’s leasing activities.
The new standard also provides practical expedients for the Company’s ongoing accounting. The Company
expects to elect the short-term lease recognition exemption for all leases that qualify, meaning the Company will not
recognize right-of-use assets or lease liabilities for existing and new lease agreements that qualify. The Company also
expects to elect the practical expedient to not separate lease and non-lease components for all of its leases.
39
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required due to smaller reporting company status
40
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CPI Card Group Inc.
As of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
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
To the Stockholders and Board of Directors
CPI Card Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company)
as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders’
deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with
U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for
revenue in the year ended December 31, 2018 due to the adoption of ASC Topic 606, Revenue from Contracts with
Customers.
Basis for Opinion
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 are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/KPMG LLP
We have served as the Company’s auditor since 2014.
Denver, Colorado
March 5, 2019
F-2
CPI Card Group Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands, Except Shares and Per Share Amounts)
December 31,
2018
2017
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $211 and $48, respectively
Inventories
Prepaid expenses and other current assets
Income taxes receivable
Assets of discontinued operation
Total current assets
Plant, equipment and leasehold improvements, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue and customer deposits
Liabilities of discontinued operation
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 11,160,377 shares
issued and outstanding and 11,134,714 shares issued and outstanding at December 31,
2018 and 2017, respectively
Capital deficiency
Accumulated loss
Accumulated other comprehensive loss
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
$
20,291 $
43,794
9,827
4,997
5,564
—
84,473
39,110
35,437
47,150
1,034
23,205
32,531
13,799
3,681
8,208
20,651
102,075
44,436
40,093
47,150
251
$ 207,204 $ 234,005
$
16,511 $
23,853
912
—
41,276
305,818
5,749
3,937
356,780
13,239
12,789
3,342
5,669
35,039
303,869
12,168
2,503
353,579
11
(112,223)
(36,004)
(1,360)
(149,576)
11
(113,081)
(1,366)
(5,138)
(119,574)
$ 207,204 $ 234,005
See accompanying notes to consolidated financial statements
F-3
CPI Card Group Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(Dollars in Thousands, Except Share and Per Share Amounts)
Net sales:
Products
Services
Total net sales
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)
Impairments
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other expense, net:
Interest, net
Foreign currency (loss) gain
Other income, net
Total other expense, net
Loss before income taxes
Income tax benefit
Net loss from continuing operations
Net (loss) income from discontinued operation, net of taxes
Net loss
Basic and diluted (loss) earnings per share:
Continuing operations
Discontinued operation
Year Ended December 31,
2017
2018
$
125,069 $
130,745
255,814
104,459
119,285
223,744
82,110
82,697
12,417
177,224
78,590
68,014
—
5,988
74,002
4,588
(23,431)
(311)
16
(23,726)
(19,138)
4,339
(14,799)
(22,663)
(37,462) $
70,527
74,315
10,697
155,539
68,205
62,206
19,074
6,225
87,505
(19,300)
(20,850)
517
12
(20,321)
(39,621)
16,536
(23,085)
1,075
(22,010)
(1.33) $
(2.03)
(3.36) $
(2.08)
0.10
(1.98)
$
$
$
Basic and dilutive weighted-average shares outstanding
11,149,554
11,117,454
Dividends declared per common share
$
— $
0.45
Comprehensive loss
Net loss
Reclassification adjustment from discontinued operations
Currency translation adjustment
Total comprehensive loss
(37,462)
3,983
(205)
(33,684) $
(22,010)
—
1,277
(20,733)
$
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
Capital
Accumulated comprehensive
Shares(1)
Amount(1) deficiency earnings (loss)
loss
Accumulated
other
December 31, 2016
Adoption of ASU 2016-09
Common stock dividends
Shares issued under stock-based compensation plans
Stock-based compensation
Components of comprehensive (loss) income:
Net loss
Currency translation adjustment
December 31, 2017
Adoption of ASU 2014-09
Shares issued under stock-based compensation plans
Stock-based compensation
Components of comprehensive (loss) income:
Net loss
Other comprehensive loss from discontinued
operations
Currency translation adjustment
December 31, 2018
11,071,813 $
—
—
62,901
—
—
—
11,134,714 $
—
25,663
—
11 $ (114,837) $
(38)
—
—
—
—
—
1,794
—
—
—
—
—
11 $ (113,081) $
—
—
—
—
858
—
25,968 $
38
(5,021)
(341)
—
(22,010)
—
(1,366) $
2,824
—
—
(6,415) $
—
—
—
—
Total
(95,273)
—
(5,021)
(341)
1,794
(22,010)
—
1,277
1,277
(5,138) $ (119,574)
2,824
—
858
—
—
—
—
—
—
(37,462)
—
(37,462)
—
—
11,160,377 $
—
—
—
—
11 $ (112,223) $
—
—
(36,004) $
3,983
(205)
3,983
(205)
(1,360) $ (149,576)
(1) Common share and par value amounts have been adjusted to give retroactive effect to the 1-for-5 reverse stock split effected on December 20,
2017.
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 loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss (income) from discontinued operations
Impairments
Depreciation and amortization expense
Stock-based compensation expense
Amortization of debt issuance costs and debt discount
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 - continuing operations
Cash used in operating activities -discontinued operations
Investing activities
Acquisitions of plant, equipment and leasehold improvements
Cash used in investing activities - continuing operations
Cash used in investing activities - discontinued operations
Financing activities
Dividends paid on common stock
Payments on capital leases
Taxes withheld and paid on stock-based compensation awards
Cash used in financing activities
Effect of exchange rates on cash
Net decrease in cash and cash equivalents:
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Year Ended December 31,
2018
2017
$ (37,462) $
(22,010)
22,663
—
18,405
961
1,949
(6,897)
302
(5,523)
(1,998)
(2,108)
2,644
2,411
10,436
632
655
7,070
(3,550)
(5,634)
(5,634)
(220)
(1,075)
19,074
16,922
1,989
1,947
(9,167)
(165)
(6,396)
2,826
619
(8,581)
5,655
(456)
599
1,671
3,452
(1,025)
(7,263)
(7,263)
(1,527)
—
(519)
—
(519)
(61)
(2,914)
23,205
20,291 $
(7,540)
—
(341)
(7,881)
494
(13,750)
36,955
23,205
$
Interest
Income tax (refunds) payments, net
Capital lease obligations incurred for certain machinery and equipment
Accounts payable for acquisition of plant, equipment and leasehold improvements
$
$
$
$
20,703 $
(657) $
1,812 $
1,339 $
18,466
30
—
400
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., (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 offers an instant card issuance system and services, which provides card issuing bank
customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.
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.
In 2018, the Company consolidated three personalization operations in the United States into two facilities to
better enable the Company to optimize operations and achieve market-leading quality and service with a market-
competitive business model. In conjunction with this decision, the Company accelerated the depreciation of certain
related assets, which totaled $2,398 for the year ended December 31, 2018. The Company recorded severance charges of
$552, and recorded lease termination charges of $476 during the year ended December 31, 2018. The charges were
recorded in the U.S. Debit and Credit segment and were included in “Cost of sales” and “Selling, general and
administrative” expenses on the Consolidated Statement of Operations.
On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produce
retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide
personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby
locations. The transaction was structured as a sale of all of the outstanding shares of CPI Card Group – UK Limited, for
total consideration of approximately $4,500. During the third quarter 2018, the Company received net cash proceeds of
$315 after the repayment of liabilities associated with the United Kingdom facilities, excluding tax benefits related to the
structure of the sale.
During the first quarter of 2018, the Company reorganized its United States business operations and realigned
its United States reporting segments to correspond with the manner with which the Company’s chief operating decision
maker evaluates operating performance and makes decisions as to the allocation of resources. As a result of this
realignment, the Company’s CPI on Demand business operations moved from the U.S. Prepaid Debit segment into the
U.S. Debit and Credit reporting segment, consistent with the other related personalization operations. Segment
information for previous periods has been restated to conform with this realignment and the current period presentation.
The restatement of the segment information was not material.
The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid
Debit and Other.
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, 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). The Company’s
sales of instant card issuance systems are recorded in this segment. CPI On-Demand services, where the Company is
able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand basis for its
F-7
customers, enabling individualized offerings and reducing waste. 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
The U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in
the United States, including tamper-evident security packaging and fulfillment. 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. 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.
Other
The Other category includes corporate headquarters and a less significant operating segment that derives
revenue from the production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment
services in Canada.
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.
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.
Trade accounts receivable
Unbilled accounts receivable
Less allowance for doubtful accounts
December 31, 2018
$
December 31, 2017
36,428 $
7,577
44,005
(211)
43,794 $
32,579
—
32,579
(48)
32,531
$
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 is
F-8
determined collection will not occur. The allowance for bad debt and credit activity for the years ended December 31,
2018 and 2017 is summarized as follows:
Balance as of December 31, 2016
Bad debt expense
Write-off of uncollectible accounts
Currency translation adjustments
Balance as of December 31, 2017
Bad debt expense
Write-off of uncollectible accounts
Balance as of December 31, 2018
$
$
$
124
4
(82)
2
48
169
(6)
211
For the year ended December 31, 2018 one customer represented 19% of the Company’s consolidated net sales.
For the year ended December 31, 2017 one customer represented 15% of the Company’s consolidated net sales.
Inventories
Inventories consist of raw materials, and finished goods and are measured at the lower of cost or net realizable
value (determined on the first-in, first-out, specific identification or weighted-average method basis). Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation.
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.
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.
Goodwill and Intangible Assets
Goodwill is not amortized, but instead is tested for impairment at least annually on October 1 or more
frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For
impairment evaluations, the Company first makes a qualitative assessment with respect to both goodwill and other
indefinite-lived intangibles. During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment
testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment
test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for
the amount by which the carrying amount of the reporting unit exceeds its fair value.
The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the
present value of future discounted cash flows and the market valuation approach. The discounted cash flows model
indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the
reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include:
its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's
business; and working capital effects. The market valuation approach indicates the fair value of the business based on a
comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant
estimates in the market valuation approach model include identifying similar companies with comparable business
factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating
income multiples in estimating the fair value of the reporting unit.
F-9
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.
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 15 “Stock Based Compensation” for additional discussion
regarding details of the Company's stock-based compensation plans.
Accrued Expenses
Accrued liabilities include accrued payroll expense of $2,371, and $2,526, as of December 31, 2018, and 2017,
respectively. Accrued liabilities as of December 31, 2018, also includes accrued employee performance bonus of
$7,137.
Use of Estimates
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). These accounting principles require
management to make assumptions and estimates 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, uncertain tax positions and stock-based compensation expense. Actual results could differ from those
estimates.
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 net sales, expenses, gains and losses. Translation adjustments are recorded as
a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements.
F-10
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 (Loss)
Income. For the years ended December 31, 2018 and 2017 there were $(311) and $517 of such foreign currency (losses)
gains, respectively.
Recently Accounting Pronouncements
Recently Adopted Accounting Pronouncements
As of January 1, 2018, the Company adopted Accounting Standards Codification ASC 606, Revenue from
Contracts with Customers, (“ASC 606”), which 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. ASC 606 also requires an entity to 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. The Company adopted ASC 606 of January 1, 2018 to all its
contracts using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to
the opening balance of “Accumulated loss” on the Consolidated Balance Sheet. Under the new guidance, the Company
recognizes certain performance obligations over time as the goods are produced, since those products provide value to
only a specified customer, have no alternative use and the Company has the right to payment for work completed on
such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods
are produced rather than upon shipment or delivery of goods. In addition, as a result of adopting the new guidance, the
Company has recorded decreases to deferred revenue, and work in process and finished goods inventories, and an
increase to accounts receivable. These changes are reflected in the adoption adjustments table below. The comparative
financial information has not been restated and continues to be reported under the accounting standards in effect for
those periods.
See Note 3 “Net sales” for revenue recognition timing and methodology under ASC 606.
The cumulative effects of the adjustments made to the Company’s January 1, 2018 Consolidated Balance Sheet
upon adoption of ASC 606 were as follows:
Assets:
Accounts receivable, net
Inventories
Assets of discontinued operation
Liabilities:
Deferred revenue and customer deposits
Liabilities of discontinued operation
Deferred income taxes
Stockholders' deficit:
Accumulated (loss) earnings
December 31,
2017
Adoption
Adjustments
January 1,
2018
$
32,531 $
13,799
20,651
5,991 $
(5,929)
(357)
38,522
7,870
20,294
3,342
5,669
12,168
(3,063)
(535)
479
279
5,134
12,647
(1,366)
2,824
1,458
F-11
In accordance with ASC 606, the impact on the Company’s Consolidated Balance Sheet and Statement of
Operations and Comprehensive Loss was as follows:
Balance Sheet
Assets:
Accounts receivable, net
Inventories
Liabilities:
Deferred revenue and customer deposits
Deferred income taxes
Stockholders' deficit:
Accumulated loss
Statement of Operations and
Comprehensive Loss
Net sales:
Products
Services
Cost of sales:
As Reported
December 31,
Balances
Without
Adoption of
2018
Adjustments
ASC 606
$
43,794 $
9,827
(7,508) $
7,350
36,286
17,177
912
5,749
1,893
(567)
2,805
5,182
(36,004)
(1,484)
(37,488)
Year ended December 31, 2018
As Reported
December 31,
Balances
Without
Adoption of
2018
Adjustments
ASC 606
$
125,069 $
130,745
(1,803) $
387
123,266
131,132
Products (exclusive of depreciation and amortization)
Services (exclusive of depreciation and amortization)
82,110
82,697
(1,738)
510
80,372
83,207
Gross profit
78,590
(188)
78,402
Income tax benefit (expense)
4,339
39
4,378
Net loss from continuing operations
Net loss from discontinued operation, net of tax
(14,799)
(22,663)
(149)
157
(14,948)
(22,506)
During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing
effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by
comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the
amount by which the carrying amount of the reporting unit exceeds its fair value.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases
(“ASC 842”), 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. ASC 842 is effective for annual and interim
periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new
guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period
presented in the financial statements. The guidance required a modified retrospective approach, with an option to apply
the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented.
In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing
for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings.
F-12
The Company will adopt the new guidance on the effective date of January 1, 2019 and use the adoption date as
the date of initial application as allowed under ASC 842. Consequently, financial information will not be updated and
the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company expects to
elect the ‘package of practical expedients’, which permits the Company not to reassess under the new standard our prior
conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect
the use-of-hindsight transition practical expedient.
The Company’s adoption process of ASC 842 is ongoing, including evaluating and quantifying the impact on
the financial statements, identifying the population of leases, calculating its incremental borrowing rate and collecting
and validating lease data. While the Company continues to assess all of the effects of adoption, the Company currently
believes the most significant effects relate to the recognition of new right-of-use assets and lease liabilities on the
balance sheet for real estate operating leases, and providing significant new disclosures about the Company’s leasing
activities.
The new standard also provides practical expedients for the Company’s ongoing accounting. The Company
expects to elect the short-term lease recognition exemption for all leases that qualify, meaning the Company will not
recognize right-of-use assets or lease liabilities for existing and new lease agreements that qualify. The Company also
expects to elect the practical expedient to not separate lease and non-lease components for all of its leases.
3. Net Sales
The Company disaggregates its net sales by major source as follows:
U.S. Debit and Credit
U.S. Prepaid Debit
Other
Intersegment eliminations
Total
For the year ended December 31, 2018
Products
Services
Total
$
$
122,119
—
4,398
(1,448)
125,069
$
$
56,478
69,199
5,493
(425)
130,745
$
$
178,597
69,199
9,891
(1,873)
255,814
For periods after January 1, 2018, the Company accounts for its net sales as follows:
Products Net Sales
“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied.
In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and
the Company has an enforceable right to payment for work performed. For work performed but not completed and
unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar
types of contracts. Items included in “Products” revenue are manufactured Financial Payment Cards, including in
contact-EMV, Dual-Interface EMV®, contactless and magnetic stripe cards, private label credit cards and retail gift
cards. Card@Once® printers and consumables are also included in “Products” revenue, and their associated revenues are
recognized at the time of shipping.
The Company includes gross shipping and handling revenue and cost in net sales and cost of sales respectively.
Services Net Sales
Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales
include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and
F-13
fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant
issuance debit cards. For work performed but not completed and unbilled, the Company estimates revenue by taking
actual costs incurred and applying historical margins for similar types of contracts.
Customer Contracts
The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally,
enforceable rights and obligations for goods and services occur only when a customer places a purchase order or
statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606 is the length of
time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the
Company's contracts are generally short term in nature.
4. Discontinued Operation
On August 3, 2018, the Company completed the sale of its United Kingdom facilities that comprised the U.K.
Limited reporting segment. The Company did not retain significant continuing involvement with the discontinued
operation subsequent to the disposal. In connection with the sale, the Company performed a goodwill impairment test
and recorded a charge of $6,366 in the second quarter of 2018. The impairment was a result of continued market
softness in the U.K. Limited segment, resulting in lower sales and margins and an expected sales price below the
carrying value of the segment. The Company also recorded an impairment charge of $1,249 to customer relationship
intangible assets related to the U.K. Limited segment in the second quarter of 2018.
The Company recorded a $7,248 loss on sale of U.K Limited for the year ended December 31, 2018. In
connection with the substantial liquidation of the foreign entity, the Company released the related cumulative translation
adjustment from accumulated other comprehensive loss into loss from discontinued operations. This adjustment was
$3,983 and is included in other expense (income), net in the schedule below.
As of December 31, 2017, the carrying amounts of the major classes of assets and liabilities of the discontinued
operation were as follows:
Assets:
Accounts receivable
Inventories
Other assets
Plant, equipment and leasehold improvements
Intangible assets
Goodwill
Total assets of discontinued operation
Liabilities:
Accounts payable
Other current liabilities
Other long-term liabilities
Total liabilities of discontinued operation
December 31, 2017
5,006
2,438
506
4,864
1,379
6,458
20,651
3,307
1,866
496
5,669
$
$
F-14
The major line items constituting the (loss) income of the discontinued operation for the year ended
December 31, 2018 and 2017 were as follows:
Total net sales
Total cost of sales
Selling, general and administrative
Impairments
Other expense (income), net
Pretax (loss) income from discontinued operation
Pretax loss on sale of discontinued operation
Total pretax (loss) income on discontinued operation
Income tax benefit (expense)
Net income (loss) from discontinued operation
5. Inventories
Inventories are summarized below:
Raw materials
Work-in-process
Finished goods
Inventory reserve
6. Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements consist of the following:
Machinery and equipment
Machinery and equipment under capital leases
Furniture, fixtures and computer equipment
Leasehold improvements
Construction in progress
Less accumulated depreciation and amortization
For the year ended
December 31,
$
2018
10,741 $
10,222
4,336
7,615
4,006
(15,438)
(7,248)
(22,686)
23
$ (22,663) $
2017
31,119
24,331
5,591
—
(43)
1,240
—
1,240
(165)
1,075
December 31,
2018
2017
$ 8,235 $ 7,411
5,107
2,974
(1,693)
$ 9,827 $ 13,799
—
2,991
(1,399)
December 31,
2018
$ 62,067 $
1,812
7,730
19,651
1,596
92,856
(53,746)
$ 39,110 $
2017
58,595
—
6,288
19,601
1,512
85,996
(41,560)
44,436
Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $13,749 and
$12,235 for the years ended December 31, 2018 and 2017, respectively.
There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the
continuing operations of the Company for the years ended December 31, 2018 and 2017.
F-15
7. Goodwill and Other Intangible Assets
The Company’s goodwill by reportable segment at December 31, 2018 and 2017 is as follows:
U.S. Debit and Credit
Goodwill activity is summarized as follows:
Balance as of December 31, 2016
Currency translation
Impairments
Balance as of December 31, 2017
Currency translation
Impairments
Balance as of December 31, 2018
December 31,
2018
47,150
2017
47,150
$
$
$
$
$
66,088
136
(19,074)
47,150
—
—
47,150
In connection with the sale of the Company’s U.K. Limited segment, the Company performed a goodwill
impairment test and recorded a charge of $6,366 in discontinued operations during the year ended December 31, 2018.
The impairment was a result of continued market softness in the U.K. operations, resulting in lower sales and margins
and an expected sale price below the carrying value of the segment.
The Company completed its goodwill impairment testing as of October 1, 2018, and no other impairments were
recognized as a result of this analysis.
The Company completed its goodwill impairment testing as of October 1, 2017, and recorded impairment
charges of $19,074, of which $17,181 related to U.S. Debit and Credit resulting from continued market softness in
demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for
$1,893 related to Other which resulted from declines in net sales and operating losses incurred in our Canadian business.
The Company determined the fair value of the reporting units primarily based on an income approach, using the present
value of future discounted cash flows of the reporting unit. This approach includes significant estimates of the reporting
unit’s weighted average cost of capital, financial forecasts developed by management, and long-term rate of growth and
profitability. The market approach was also considered, with fair value determined by applying pricing multiplies
derived from publicly-traded companies that are comparable to the reporting unit.
CPI’s amortizable intangible assets consist of customer relationships, technology and software, trademarks and
non-compete agreements. Total intangible assets are being amortized over a weighted-average useful life of 15.7 years.
Intangible amortization expense totaled $4,656 and $4,687 for the years ended December 31, 2018 and 2017,
respectively. During the years ended December 31, 2018 and 2017, there were no material impairments of the
Company’s amortizable intangible assets from continuing operations. The Company recorded an impairment charge of
$1,249 to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018,
which is reported in discontinued operations.
Intangible assets consist of the following:
Customer relationships
Technology and software
Trademarks
Noncompete agreements
Intangible assets subject to
amortization
Cost
Average
Life (Years)
12 to 20 $ 55,454
7,101
7 to 10
3,330
7.5 to 10
491
5 to 8
December 31, 2018
Accumulated Net Book
Amortization
Value
December 31, 2017
Accumulated Net Book
Amortization
Value
Cost
(25,587) $ 29,867 $ 55,454 $ (22,311) $ 33,143
4,006
7,101
2,843
3,330
101
491
(3,095)
(487)
(390)
(4,024)
(877)
(451)
3,077
2,453
40
$ 66,376 $ (30,939) $ 35,437 $ 66,376 $ (26,283) $ 40,093
F-16
The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as
of December 31, 2018 is as follows:
2019
2020
2021
2022
2023
Thereafter
$
$
4,635
4,595
4,352
3,867
3,867
14,121
35,437
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.
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:
Carrying
Value as of
December 31,
Fair Value as of
December 31,
2018
Fair Value Measurement at
December 31, 2018
(Using Fair Value Hierarchy)
Level 1
Level 2
Level 3
Liabilities:
First Lien Term
2018
Loan
$
312,500 $
203,125 $
— $ 203,125 $
—
Carrying
Value as of
December 31,
Fair Value as of
December 31,
2017
Fair Value Measurement at
December 31, 2017
(Using Fair Value Hierarchy)
Level 1
Level 2
Level 3
Liabilities:
First Lien Term
2017
Loan
$
312,500 $
228,125 $
— $ 228,125 $
—
The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 9, “Long-Term Debt and
Credit Facility,” was based on bank quotes.
The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities.
Nonrecurring fair value measurements include the Company’s goodwill and intangible asset impairments
recognized during the year ended December 31, 2018 and 2017, as determined based on unobservable Level 3 inputs.
Refer to Note 7, “Goodwill and Other Intangible Assets”, and Note 4, “Discontinued Operations”.
F-17
9. Long-Term Debt and Credit Facility
Long-term debt consists of the following:
First Lien Term Loan (a)
Unamortized discount
Unamortized deferred financing costs
Total long-term debt
Less current maturities
Long-term debt, net of current maturities
(a)
Interest rate on December 31, 2018
First Lien Credit Facility
2017
Rate
Interest December 31, December 31,
2018
7.02% $ 312,500 $ 312,500
(3,122)
(5,509)
303,869
—
$ 305,818 $ 303,869
(2,448)
(4,234)
305,818
—
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.
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, 2018, the
Company was in compliance with all covenants under the First Lien Credit Facility.
The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of
certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the
agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The
Company does not have a required excess cash flow payment related to 2018.
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.
As of December 31, 2018, the Company did not have any outstanding amounts under the Revolving Credit
Facility, and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of
the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0
times Adjusted EBITDA, as defined in the agreement. The Company has one outstanding letter of credit for $50 relating
to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the
applicable margin, which was 4.5% as of December 31, 2018, in addition to a fronting fee of 0.125% per annum. In
addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per
annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the
basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines. The
Company has accrued interest of $5,058 and $4,296 recorded within “Accrued expenses” on the Consolidated Balance
Sheets as of December 31, 2018, and 2017, respectively.
F-18
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.
10. Income Taxes
Income tax benefit from continuing operations and effective income tax rates consist of the following:
Current taxes:
Domestic
Foreign
Deferred taxes:
Domestic
Foreign
Income tax benefit
Loss before income taxes
Domestic
Foreign
Total
Effective income tax rate
December 31,
2018
2017
$
2,558
—
2,558
$ (7,369)
—
(7,369)
(6,897)
—
(6,897)
$ (4,339)
(9,167)
—
(9,167)
$ (16,536)
$ (18,383)
(755)
$ (19,138)
$ (36,985)
(2,636)
$ (39,621)
22.7 %
41.7 %
The effective income tax rate differs from the U.S. federal statutory income tax rate as follows:
Tax at federal statutory rate
State income taxes
Foreign taxes
Tax benefit for U.K. sale
Valuation allowance
Unrecognized tax benefits
Tax credits
Deferred tax impact of enacted tax rate and law changes
Goodwill impairments
Other
Effective income tax rate
December 31,
2018
21.0 %
4.0
(0.1)
17.5
(13.5)
(4.8)
2.5
(0.7)
—
(3.2)
22.7 %
2017
35.0 %
0.5
(0.1)
—
(1.5)
(3.2)
10.8
18.4
(17.4)
(0.8)
41.7 %
F-19
The components of the deferred tax assets and liabilities are as follows:
Deferred tax assets:
Accrued expense
Unrealized foreign exchange loss
Net operating loss carryforward
Deferred financing costs
Stock compensation
Tax credit carryforward
Interest limitation
Other
Total gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Plant, equipment and leasehold improvements
Intangible assets
Prepaid expenses and other
Total gross deferred tax liabilities
Net deferred tax liabilities
$
December 31,
2018
2017
2,553 $
—
5,589
553
861
1,118
4,412
927
16,013
(6,823)
9,190
744
647
2,156
707
679
420
—
753
6,106
(4,617)
1,489
(3,851)
(9,311)
(1,777)
(14,939)
(5,749) $
(2,819)
(9,912)
(926)
(13,657)
(12,168)
$
The net change in the valuation allowance during the year ended December 31, 2018 was an increase of $2,206
and related to the limitation on the deductibility of interest expense, changes in net operating losses of foreign locations,
the interest limitation related to section 163(j) of tax reform legislation that is not expected to be realized, and state
research and development credits carried forward.
The Company has potential tax benefits associated with $10,791 of gross foreign operating loss carryforwards,
which expire at various dates from 2024 through 2038. 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. Additionally, the Company
has potential tax benefits associated with $9,156 of gross domestic operating loss carryforwards, which do not expire.
The Company also has various state and local operating loss carryforwards which will expire at various dates from 2033
to 2038. The Company does expect to be able to utilize these losses prior to expiration.
The Company has potential tax benefits associated with state research and development tax credit carryforwards
as of December 31, 2018 of $778, which will expire at various dates between 2029 and 2033. Due to the uncertainty of
being able to recognize these credit carryforwards, the Company has provided a valuation allowance of 100% of the tax
benefit. Additionally, the Company has potential tax benefits associated with federal research and development tax credit
carryforwards as of December 31, 2018 of $340, which will expire in 2038. Due to the uncertainty of the research and
development credit the Company has provided a 100% valuation allowance.
At December 31, 2018, no provision has been made for U.S. federal and state taxes on cumulative foreign
earnings as there are no current or cumulative earnings of foreign operations. The Company recorded a current tax
benefit in 2018 related to the sale of the U.K. Limited segment of $3,332.
2017 Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation that includes
significant changes to taxation of business entities. These changes include, among others, (i) a permanent reduction to
the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) elimination of
deduction for income attributable to domestic production activities and (iv) a partial shift of the U.S. taxation of
multinational corporations from a tax on worldwide income to a territorial system (along with a transitional rule that
taxes certain historic foreign accumulated earnings and certain rules that aim to prevent erosion of U.S. income tax
base). In conjunction with tax reform and the reduction of the U.S. federal tax rate from 35.0% to 21.0%, the Company
accrued a $7,057 tax benefit during the year ended December 31, 2017 related to the net change in deferred tax
liabilities.
F-20
Unrecognized Tax Benefits
Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and
the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Other long
term liabilities” and “Deferred income taxes” in the Company’s consolidated balance sheets. The Company accounts for
uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the
technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination.
Balance as of December 31, 2017
Increase related to current year tax position
Increase related to prior year tax position
Decrease related to settlements with tax authorities, net of federal benefit
Lapse of statute of limitations
Balance as of December 31, 2018
$
$
1,212
506
871
(545)
—
2,044
The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of
income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits as of and for the
year ended December 31, 2018 was $221 and not material for the year ended December 31, 2017.
The Company is generally subject to potential federal and state examinations for the tax years on and after
December 31, 2015 for federal purposes and December 31, 2013 for state purposes. The Company’s locations in the
United Kingdom and Canada are subject to examinations for tax years on and after December 31, 2018 and
December 31, 2014, respectively. The Company’s U.K. Limited segment which was sold on August 3, 2018, is subject
to examinations for tax years on and after December 31, 2017.
11. 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, 2017, the Company paid dividends of $7,540, representing $0.675 per
share. During August 2017, the Company discontinued its quarterly dividend of $0.225 per share.
12. (Loss) Earnings per Share
Basic or diluted (loss) earnings per share is computed by dividing net earnings or loss by the weighted-average
number of ordinary shares outstanding during the period.
F-21
The following table sets forth the computation of basic and diluted (loss) earnings per share, giving retroactive
effect for the one-for-five reverse stock split effective December 20, 2017, attributable to continuing and discontinued
operations:
Numerator:
Net loss from continuing operations
Net (loss) income from a discontinued operation, net of taxes
Net loss
Denominator:
December 31,
2018
2017
$
$
(14,799) $
(22,663)
(37,462) $
(23,085)
1,075
(22,010)
Basic and dilutive EPS—weighted average common shares outstanding
11,149,554
11,117,454
Basic and Diluted EPS:
(Loss) per share from continuing operations
(Loss) income per share from discontinued operations, net of taxes
(Loss) per share
$
$
(1.33) $
(2.03)
(3.36) $
(2.08)
0.10
(1.98)
The potentially dilutive effect of 985,876 and 993,587, stock options and restricted stock units as of
December 31, 2018 and 2017, respectively, has been excluded from the computation of diluted earnings per share as
their inclusion would be anti-dilutive.
13. Commitments and Contingencies
Commitments
The Company leased certain machinery and equipment under capital lease obligations, which consisted of the
following at December 31, 2018:
Machinery and equipment
Less current portion of capital lease obligations
Total long-term capital lease obligations
December 31,
2018
$
$
1,565
(521)
1,044
The Company has recorded the current portion of capital lease obligations in “Accrued expenses” and the long-
term capital lease obligations in “Other long-term liabilities”, within the consolidated balance sheet as of December 31,
2018.
The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and
facility leases expire at various dates between 2019 and 2024 and contain various provisions for rental adjustments and
renewals. The leases typically 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. The 2019 purchase obligations
in the table below relates primarily to purchases of capital expenditures.
F-22
Future cash payments with respect to leases and purchase obligations as of December 31, 2018 are as follows:
2019
2020
2021
2022
2023
Thereafter
Total
Operating Capital
Leases
Leases
$ 2,927 $
2,771
2,512
1,243
971
652
Purchase
Obligations
521 $ 3,848
—
474
—
243
—
256
—
71
—
—
$ 11,076 $ 1,565 $ 3,848
The Company incurred rent expense under non-cancellable operating leases during the years ended
December 31, 2018 and 2017, totaling $3,767 and $3,528, respectively.
Contingencies
In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss
contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts
accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on
an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss
contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a
corresponding amount of litigation-related expense. The Company expenses professional fees associated with litigation
claims and assessments as incurred.
In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) (the “Class Action”)
On June 15, 2016, two purported CPI stockholders filed putative class action lawsuits captioned Vance, et al. v.
CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc. in the United States District Court for the
Southern District of New York (the “Court”) against CPI, certain of its former officers and current and former directors,
along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public
offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the
October 8, 2015 Registration Statement filed in connection with the IPO, asserted claims under §§11 and 15 of the
Securities Act of 1933, as amended (the “Securities Act”) and sought, among other things, damages and costs. In
particular, the complaints alleged that the Registration Statement contained false or misleading statements or omissions
regarding CPI’s customers’ (i) purchases of Europay, MasterCard and VISA chip cards (collectively, “EMV® cards”)
during the first half of fiscal year 2015 and resulting EMV® card inventory levels; and (ii) capacity to purchase
additional EMV® cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended
December 31, 2015. The complaints alleged 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. On October 17, 2016, lead plaintiff filed a
consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The
amended complaint was based principally on the same theories as the original complaints, but added 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 September 21, 2018, the parties executed a stipulation and agreement of settlement (“Stipulation”) to
resolve the claims asserted in the amended complaint. On October 22, 2018, the Court granted lead plaintiff’s motion
for authorization to notify the settlement class of the proposed settlement. After distribution of the notice to the class
and a final settlement hearing on February 5, 2019, the Court entered orders on February 6, 2019: (i) approving the
proposed settlement; and (ii) granting in part lead plaintiff’s motion for attorneys’ fees and expenses. On February 25,
2019, the Court entered an order and final judgment dismissing the case, in its entirety, with prejudice.
F-23
The Company paid an insignificant amount during the fourth quarter of 2018 in relation to an allocation of the
total agreed settlement amount. As of December 31, 2018, the Company did not have any liability recorded for an
estimate of additional probable loss relating to this matter. There was no liability recorded as of December 31, 2017.
Heckermann v. Montross et al., Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”)
On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United
States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and
former directors, along with the sponsors of the IPO. CPI is also named as a nominal defendant. The derivative
complaint asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 and
seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions
in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The
derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement
and waste of corporate assets.
On March 28, 2018, the Court entered the parties’ stipulated order staying the Derivative Suit pending final
determination of the Class Action. Under its terms, the stay of the Derivative Suit will be lifted 30 days after the entry of
final judgment in the Class Action which was entered on February 25, 2019.
The Company believes these claims are without merit and is defending the Derivative Suit vigorously. Given
the current stage of these matters, the range of any potential loss is not probable or estimable and no liability has been
recorded as of December 31, 2018 and 2017.
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 its business, financial condition or results of operations.
14. 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 options. The Company matches 100% of the participant’s first 3% of deferrals
and 50% matching on each of the 4th and 5th percent contributed by the participant. As the Company operates the plan as
a safe harbor 401(k) plan, the Company’s match is 100% vested at the time of the match.
The aggregate amounts charged to expense in connection with the plan were $1,235 and $1,236 for the years
ended December 31, 2018 and 2017, respectively.
15. Stock Based Compensation
CPI Card Group Inc. Omnibus Incentive Plan
During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus
Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and
directors. The Company had reserved 800,000 shares of common stock for issuance under the Omnibus Plan. Effective
September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of
common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of
2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000
shares of common stock for issuance. As of December 31, 2018, there were 156,917 shares available for grant under the
Omnibus Plan.
During the year ended December 31, 2018, the Company granted awards of non-qualified stock options for
159,755 shares of common stock. During the year ended December 31, 2017, the Company granted awards of non-
qualified stock options for 713,075 shares of common stock. During the third quarter of 2017, the Company granted
stock option awards in lieu of the regular cycle of Omnibus Plan awards that the Company would have otherwise made
F-24
in the first quarter of 2018, and also in conjunction with the appointment of the Company’s President and Chief
Executive Officer. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period
beginning on the first anniversary of the grant date.
The following is a summary of the activity in outstanding stock options under the Omnibus Plan:
Outstanding as of December 31, 2017
Granted
Forfeited
Outstanding as of December 31, 2018
Options vested and exercisable as of December 31, 2018
Options vested and expected to vest as of December 31, 2018
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Term
(in Years)
17.11
2.74
15.17
14.99
23.04
14.99
8.38
7.93
8.38
Options
937,310
159,755
(186,438)
910,627
305,275
910,627
$
$
The following is a summary of the activity in non-vested stock options under the Omnibus Plan:
Non-vested as of December 31, 2017
Granted
Forfeited
Vested
Non-vested as of December 31, 2018
Unvested options as of December 31, 2018 vest as follows:
2019
2020
2021
2022
Total unvested options as of December 31, 2018
Number
876,903
159,755
(152,242)
(279,064)
605,352
$
$
Weighted-
Average
Grant-Date
Fair Value
4.08
1.21
3.45
4.81
3.14
301,267
250,228
53,857
—
605,352
Stock options were granted under the Omnibus Plan at various times during the years ended December 31, 2018
and 2017. The fair value of stock option awards was determined at the date of grant using either a Black-Scholes option-
pricing model, or a Monte Carlo simulation, with the following weighted-average assumptions:
Expected term in years
Volatility
Risk-free interest rate
Dividend yield(1)
Year ended December 31,
2017
2018
6.0
48.0 %
2.7 %
— %
6.0
31.9 %
2.0 %
0.9 %
(1) Represents the weighted-average dividend yield for grants made during the year ended December 31, 2017. The
Company discontinued its quarterly dividend program during August 2017.
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
F-25
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 stock option awards granted in 2016 with an exercise
price of $50 per share 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.
Volatility – The Company considered the volatility of its own common stock in determining the fair value of
stock option awards, in addition to a peer group average historical volatility over the expected option term. This is due
to the limited amount of trading history of the Company’s common stock. 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.
The weighted average grant-date fair value of options granted is as follows:
Weighted Average Grant-Date Fair Value of Options Granted
Year Ended December 31,
2018
$
1.21
$
2017
2.43
The following table summarizes the changes in the number of outstanding restricted stock units for the year
ended December 31, 2018 under the Omnibus Plan:
Outstanding as of December 31, 2017
Granted
Vested
Forfeited
Outstanding as of December 31, 2018
Weighted-
Average
Grant-Date
Fair Value
16.20
2.66
10.63
9.91
6.25
Shares
49,677 $
75,188
(25,928)
(30,288)
68,649 $
During the year ended December 31, 2018, the Company granted awards of restricted stock units for 75,188
shares of common stock. During the year ended December 31, 2017, the Company granted awards of restricted stock
units for 47,870 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.
Unvested restricted stock units as of December 31, 2018 will vest as follows:
2019
2020
2021
Total unvested restricted stock units as December 31, 2018
57,563
10,843
243
68,649
F-26
The following table summarizes the changes in the number of outstanding cash performance awards for the year
ended December 31, 2018:
Outstanding as of December 31, 2017
Granted
Vested
Forfeited
Outstanding as of December 31, 2018
Shares
822,915
—
(274,854)
(123,049)
425,012
During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units
with a grant-date fair value of $663. These awards will settle in cash in three annual payments on the first, second and
third anniversaries of the date of grant. The cash performance units are based on the performance of the Company’s
stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date
compared to the Company’s stock price on the date of grant. The cash performance units were valued using a Monte
Carlo simulation. The Monte Carlo model used the following valuation assumptions based on the 3-year term of the
awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%, which was based
on the Company’s dividend practice in March 2017 when the awards were granted. The Company recognizes
compensation expense on a straight-line basis for each annual performance period. The cash performance units are
accounted for as a liability and remeasured to fair value at the end of each reporting period. As of December 31, 2018,
the Company recognized a liability of $96 in “Accrued expenses” and $64 in “Other long-term liabilities” in the
Consolidated Balance Sheet for unsettled cash performance units.
Compensation expense for the Omnibus Plan for the years ended December 31, 2018 and 2017 was $961 and
$2,360, respectively. As of December 31, 2018, the total unrecognized compensation expense related to unvested
options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $840, which the Company
expects to recognize over an estimated weighted average period of 1.2 years.
CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan
In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007
Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to
employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market
value of a share on the date the option is granted.
As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will
be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year
life and are fully vested as of December 31, 2018.
During the year ended December 31, 2018, there was no activity under the Option Plan. As such, total shares
outstanding and exercisable were 6,600 shares with a weighted-average exercise price of $0.002 per share and a
weighted-average remaining contract term of 4.4 years at December 31, 2018.
Compensation expense and unrecorded compensation expense related to options previously granted under the
Option Plan, for years ended December 31, 2018 and 2017 were de minimis.
Other Stock-Based Compensation Awards
During the year ended December 31, 2017, of the remaining 18,972 of unvested restricted stock awards that
were outstanding, 9,486 shares vested, and the remaining 9,486 shares were forfeited. The executive who held the
remaining 18,972 unvested restricted shares changed employment status to a consultant during the first quarter of 2017,
and accordingly, the Company remeasured the awards on the date of the change in employment status and reduced
F-27
stock-based compensation expense by $143. Compensation expense related to these awards for the year ended
December 31, 2017, was $(371).
16. Segment Reporting
The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more
of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the
segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its
Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of
operating performance and decision making about the allocation of resources to operating segments based on measures,
such as net sales and EBITDA.
EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment
operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income
taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful
measure and is superior to available GAAP measures as it represents a transparent view of the Company’s operating
performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The
Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating
trends and identify strategies to improve the allocation of resources amongst segments.
On August 3, 2018, the Company completed the sale of the U.K. Limited segment. See Note 4 “Discontinued
Operation” for further information. The Company has restated all historical periods presented within these financial
statements and has not included U.K. Limited as a reportable segment.
During the first quarter of 2018, the Company reorganized its United States business operations and realigned
its United States reporting segments to correspond with the manner with which the Company’s chief operating decision
maker evaluates operating performance and makes decisions as to the allocation of resources. As a result of this
realignment, the Company’s CPI on Demand business operations have been moved from the U.S. Prepaid Debit segment
into the U.S. Debit and Credit reporting segment, consistent with the other related personalization operations. Segment
information for previous periods has been restated to conform with this realignment and current period presentation. The
restatement of the segment information for the year ended December 31, 2017 was not material.
As of December 31, 2018, the Company’s reportable segments were as follows:
• U.S. Debit and Credit,
• U.S. Prepaid Debit, and
• Other.
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 Financial Payment Cards, including contact, contactless, and dual interface cards, and CPI Metals TM, a
premium product capability. This segment also sells instant card issuance systems, 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). The Company provides CPI On-Demand
services, where we produce images, personalized payment cards, and related collateral on a one-by-one, on demand
basis for our customers. 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.
The U.S. Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in
the United States, including tamper-evident security packaging. 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. The U.S.
F-28
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 Other category includes the Company’s corporate headquarters and a less significant operating segment
that derives its net sales from the production of Financial Payment Cards and retail gift cards in Canada.
Performance Measures of Reportable Segments
Net sales and EBITDA from continuing operations of the Company’s reportable segments for the years ended
December 31, 2018 and 2017 were as follows:
Net Sales
December 31,
EBITDA
December 31,
2018
2017
2018
2017
U.S. Debit and Credit
U.S. Prepaid Debit
Other
Intersegment eliminations(a)
Total:
$ 178,597 $ 162,216 $ 34,213 $ 11,618
18,847
(32,314)
—
$ 255,814 $ 223,744 $ 22,698 $ (1,849)
23,782
(35,297)
—
69,199
9,891
(1,873)
57,005
11,049
(6,526)
(a) Amounts include the elimination of sales between segments for consolidation.
The following table provides a reconciliation of total segment EBITDA from continuing operations to “Net
(loss) income from continuing operations” for the years ended December 31, 2018 and 2017:
Total segment EBITDA from continuing operations
Interest, net
Income tax benefit
Depreciation and amortization
Net loss from continuing operations
Balance Sheet Data of Reportable Segments
December 31,
2018
2017
$ 22,698 $ (1,849)
(20,850)
16,536
(16,922)
$ (14,799) $ (23,085)
(23,431)
4,339
(18,405)
Total assets of the Company’s reportable segments as of December 31, 2018 and 2017 were as follows:
December 31,
2018
2017
U.S. Debit and Credit
U.S. Prepaid Debit
Other
Total assets - reportable segments
Assets of discontinued operation
Total assets:
25,117
12,520
$ 169,567 $ 174,717
22,810
15,827
$ 207,204 $ 213,354
20,651
$ 207,204 $ 234,005
—
Net Sales to Geographic Location, Property, Equipment and Leasehold Improvements and Long-Lived assets by
Geographic Segments
Subsequent to the sale of the Company’s U.K. Limited segment and reclassification to discontinued operations,
the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to
geographic locations outside of the United States is insignificant.
F-29
Net Sales by Product and Services
Net sales from products and services sold by the Company for the years ended December 31, 2018 and 2017
were as follows:
Product net sales(a)
Services net sales(b)
Total net sales:
December 31,
2018
2017
$ 125,069 $ 104,459
119,285
$ 255,814 $ 223,744
130,745
(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, CPI on Demand 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). It is impracticable to split
the services described into dollar amounts in the table above.
17. Quarterly Financial Information (Unaudited)
Summarized quarterly results for the years ended December 31, 2018 and 2017 on a continuing operations
basis, were as follows:
2018 by Quarter:
Net sales
Gross profit
Net loss from continuing operations
Q1
$ 54,857
14,428
(5,677)
Q2
61,454
19,875
(802)
Q3
70,987
23,308
(1,085)
Q4
68,516
20,979
(7,235)
Year Ended
December 31,
2018
255,814
78,590
(14,799)
Basic and diluted loss per share from continuing
operations
$ (0.51)
(0.07)
(0.10)
(0.65)
(1.33)
2017 by Quarter:
Net sales
Gross profit
Net loss from continuing operations
Q1
$ 50,422
14,648
(4,598)
Q2
54,836
16,666
(3,273)
Q3
Q4
60,997 $ 57,489 $
19,444
(798)
17,447
(14,416)
Year Ended
December 31,
2017
223,744
68,205
(23,085)
Basic and diluted loss per share from continuing
operations
$ (0.42) $ (0.30) $ (0.07) $
(1.29) $
(2.08)
F-30
(This page has been left blank intentionally.)
41
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, 2018.
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.
As of December 31, 2018, 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, 2018, 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.
42
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fourth quarter of 2018 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item will be included in our definitive Proxy Statement for the 2019 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, 2018 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.
43
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 Loss
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
Exhibit No.
2.1
2.2
3.1
3.2
3.3
4.1
10.1**
10.2**
Exhibit Description
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)).
Share Purchase Agreement, dated August 1, 2018, by and between CPI Card Group-Europe Limited,
SEAFOX BIDCO Limited and CPI Acquisition, Inc. (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed August 9, 2018).
Third 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)).
Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of CPI Card
Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed
December 22, 2017).
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)).
First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017,
between CPI Acquisition, Inc. and Steven Montross (incorporated by reference to the Company’s
Current Report on Form 8-K filed on April 20, 2017).
44
10.3**
10.4**
10.5**
10.6**
10.7**
10.8**
10.9**
10.10**
10.11**
10.12**
10.13**
10.14
10.15
10.16
10.17
10.18
Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card
Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on
Form 8-K filed September 29, 2017).
Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated
September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by
reference to the Company’s Current Report on Form 8-K filed September 29, 2017).
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)).
Employment and Non-Competition Agreement, effective as of January 1, 2017, between CPI Card
Group, Inc. and Lillian Etzkorn (incorporated by reference to the Company’s Current Report on
Form 8-K filed on April 13, 2017).
CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective September 25, 2017
(incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017).
Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc.Omnibus Incentive
Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017).
Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive
Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8,
2017).
Form of Nonqualified Stock Option Agreement for United Kingdom Participants under the CPI Card
Group Inc. Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on
Form 10-Q filed November 8, 2017).
Form of Stock Option Agreement for Canadian Eligible Participants under the CPI Card Group Inc.
Omnibus Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q
filed November 8, 2017).
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)).
CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017).
Form of Indemnification Agreement (incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-206218)).
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).
First Amendment to Credit Agreement dated December 31, 2016, between CPI Card Group Inc. and
the Bank of Nova Scotia (incorporated by reference to the Company’s Quarterly Report on Form 10-Q
filed November 7, 2018).
45
10.19* **
2019 Executive Retention Agreement dated November 7, 2018 between CPI Card Group Inc. and Scott
Scheirman.
10.20* **
Form of 2019 Executive Retention Agreement for certain Executive Officers.
10.21* **
2019 Executive Incentive Plan dated February 27, 2019.
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.
46
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/ John Lowe
John Lowe
Chief Financial Officer
March 6, 2019
KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below
hereby constitute and appoint Scott Scheirman and John Lowe and each of them severally, as his or her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his 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.
Name
Title
Date
/s/ Scott Scheirman
Scott Scheirman
/s/ John Lowe
John Lowe
/s/ Kevin O’Brien
Kevin O’Brien
/s/ Bradley Seaman
Bradley Seaman
/s/ Douglas Pearce
Douglas Pearce
/s/ Robert Pearce
Robert Pearce
/s/ Nicholas Peters
Nicholas Peters
/s/ Valerie Soranno Keating
Valerie Soranno Keating
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
March 6, 2019
March 6, 2019
March 6, 2019
Chairman of the Board
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
March 6, 2019
Director
Director
Director
Director
47
I, Scott Scheirman, certify that:
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this Annual Report on Form 10-K of CPI Card Group Inc.;
Exhibit 31.1
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
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal controls over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of 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 6, 2019
/s/ Scott Scheirman
Scott Scheirman
Chief Executive Officer (Principal
Executive Officer)
I, John Lowe, certify that:
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this Annual Report on Form 10-K of CPI Card Group Inc.;
Exhibit 31.2
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 present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal 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 6, 2019
/s/ John Lowe
John Lowe
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, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we Scott
Scheirman, Chief Executive Officer of the Company, and John Lowe, 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/ Scott Scheirman
Scott Scheirman
Chief Executive Officer (Principal Executive Officer)
By: /s/ John Lowe
John Lowe
Chief Financial Officer (Principal Financial Officer)
Date: March 6, 2019
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.
Board of Directors
Bradley Seaman (2)
Non-Executive Chairman
Valerie Soranno Keating (1)(3)
Doug Pearce (1)(3)*
Robert Pearce (1)*(2)
Nicholas Peters (2)*(3)
Scott Scheirman
President and Chief Executive Officer
(1) Audit Committee (2) Compensation Committee (3) Corporate Governance Committee *Committee Chair
Executive Officers
Scott Scheirman
President and Chief Executive Officer
Jason Bohrer
SVP and General Manager, Secure Card Solutions
Guy DiMaggio
SVP and General Manager, Personalization
Lane Dubin
SVP and General Manager, Prepaid and Instant Issuance
Rob Grant
VP and Chief Information Officer
Lisa Jacoba
Chief Human Resources Officer
Sarah Kilgore
Chief Legal and Compliance Officer
John Lowe
Chief Financial Officer
Kevin O’Brien
Chief Accounting Officer
Board of Directors
Awards
Silver in Best in Biz Awards 2018
Card@Once® Instant Issuance
solution recognized as an
enterprise product of the year
Bronze Stevie® Award in 2018
American Business Awards®
CPI Card Group’s suite of metal
card solutions earns bronze
Stevie® Award in 2018
American Business Awards®
ICMA’s Élan Awards
CPI Card Group® wins loyalty,
promotional and gift cards
category. Named first finalist
for best secure payment card
and people’s choice award
categories
Executive Officers
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 or TSX
Investor Relations
Jennifer Almquist
(877) 369-9016
InvestorRelations@cpicardgroup.com
Transfer Agent and Registrar
EQ Shareowner Services
1110 Centre Pointe Curve
Suite 101
Mendota Heights, Minnesota
55120
(800) 468-9716
www.shareowneronline.com
Canadian Transfer Agent
Acting as Co-Agent
TSX Trust
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 8:00 am Mountain Time on Thursday, May 30th, 2019 at the
Hampton Inn & Suites, 7611 Shaffer Parkway, Littleton, Colorado 80127.
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www.cpicardgroup.com 1-800-446-5036