UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the Quarterly Period Ended March 31, 2017 .
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from to
Commission File Number 001-37584
CPI Card Group Inc.
(Exact name of the registrant as specified in its charter)
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Delaware |
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26-0344657 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. employer identification no.) |
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10026 West San Juan Way |
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Littleton, CO |
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80127 |
( Address of principal executive offices ) |
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( Zip Code ) |
(303) 973-9311
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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(Do not check if a smaller reporting company) |
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Emerging growth company |
☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐ No☒
Number of shares of Common Stock, $0.001 par value, outstanding as of April 24, 2017: 55,592,024
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Page |
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Part I — Financial Information |
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3 |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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19 |
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Item 3 — Quantitative and Qualitative Disclosures About Market Risk |
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27 |
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27 |
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28 |
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29 |
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Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds |
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29 |
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30 |
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31 |
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2
CPI Card Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Amounts)
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March 31, |
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December 31, |
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2017 |
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2016 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
25,906 |
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$ |
36,955 |
Accounts receivable, net of allowances of $71 and $126, respectively |
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33,955 |
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31,492 |
Inventories |
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23,975 |
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19,369 |
Prepaid expenses and other current assets |
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5,054 |
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4,601 |
Income taxes receivable |
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1,947 |
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— |
Total current assets |
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90,837 |
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92,417 |
Plant, equipment and leasehold improvements, net |
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53,470 |
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53,419 |
Intangible assets, net |
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45,143 |
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46,348 |
Goodwill |
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72,083 |
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71,996 |
Other assets |
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271 |
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240 |
Total assets |
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$ |
261,804 |
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$ |
264,420 |
Liabilities and stockholders’ deficit |
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Current liabilities: |
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Accounts payable |
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$ |
12,799 |
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$ |
10,996 |
Accrued expenses |
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15,701 |
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17,487 |
Income taxes payable |
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— |
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64 |
Deferred revenue and customer deposits |
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10,241 |
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6,729 |
Total current liabilities |
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38,741 |
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35,276 |
Long-term debt |
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302,406 |
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301,922 |
Deferred income taxes |
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20,936 |
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21,261 |
Other long-term liabilities |
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1,599 |
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1,234 |
Total liabilities |
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363,682 |
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359,693 |
Commitments and contingencies (Note 10) |
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Stockholders’ deficit: |
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Common Stock; $0.001 par value—100,000,000 shares authorized; 55,592,024 and 55,359,251 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively |
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56 |
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55 |
Capital deficiency |
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(114,383) |
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(114,881) |
Accumulated earnings |
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18,663 |
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25,968 |
Accumulated other comprehensive loss |
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(6,214) |
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(6,415) |
Total stockholders’ deficit |
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(101,878) |
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(95,273) |
Total liabilities and stockholders’ deficit |
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$ |
261,804 |
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$ |
264,420 |
See accompanying notes to condensed consolidated financial statements
3
CPI Card Group Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
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Three Months Ended March 31, |
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2017 |
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2016 |
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Net sales: |
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Products |
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$ |
29,764 |
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$ |
54,958 |
Services |
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26,244 |
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31,435 |
Total net sales |
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56,008 |
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86,393 |
Cost of sales: |
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Products (exclusive of depreciation and amortization shown below) |
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19,688 |
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36,353 |
Services (exclusive of depreciation and amortization shown below) |
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17,441 |
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17,764 |
Depreciation and amortization |
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2,784 |
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2,584 |
Total cost of sales |
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39,913 |
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56,701 |
Gross profit |
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16,095 |
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29,692 |
Operating expenses: |
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Selling, general and administrative (exclusive of depreciation and amortization shown below) |
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16,155 |
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14,498 |
Depreciation and amortization |
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1,749 |
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1,529 |
Total operating expenses |
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17,904 |
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16,027 |
(Loss) income from operations |
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(1,809) |
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13,665 |
Other expense, net: |
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Interest, net |
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(5,062) |
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(5,033) |
Foreign currency gain (loss) |
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73 |
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(102) |
Other income (loss), net |
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1 |
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(2) |
Total other expense, net |
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(4,988) |
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(5,137) |
(Loss) income before income taxes |
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(6,797) |
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8,528 |
Income tax benefit (expense) |
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2,291 |
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(2,814) |
Net (loss) income |
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$ |
(4,506) |
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$ |
5,714 |
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Basic and diluted (loss) earnings per share: |
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$ |
(0.08) |
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$ |
0.10 |
Weighted-average shares outstanding: |
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Basic |
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55,424,559 |
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56,542,116 |
Diluted |
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55,424,559 |
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56,836,082 |
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Dividends declared per common share |
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$ |
0.045 |
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$ |
0.045 |
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Comprehensive (loss) income |
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Net (loss) income |
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$ |
(4,506) |
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$ |
5,714 |
Currency translation adjustment |
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201 |
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82 |
Total comprehensive (loss) income |
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$ |
(4,305) |
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$ |
5,796 |
See accompanying notes to condensed consolidated financial statements
4
CPI Card Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
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Three Months Ended March 31, |
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2017 |
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2016 |
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Operating activities |
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Net (loss) income |
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$ |
(4,506) |
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$ |
5,714 |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
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Depreciation and amortization expense |
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4,533 |
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4,113 |
Stock-based compensation expense |
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546 |
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745 |
Amortization of debt issuance costs and debt discount |
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484 |
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482 |
Excess tax benefits from stock-based compensation |
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— |
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(239) |
Deferred income taxes |
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(351) |
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(58) |
Other, net |
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(39) |
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(13) |
Changes in operating assets and liabilities: |
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Accounts receivable |
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(2,375) |
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7,711 |
Inventories |
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(4,551) |
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1,957 |
Prepaid expenses and other assets |
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(485) |
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(532) |
Income taxes |
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(2,005) |
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4,433 |
Accounts payable |
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1,751 |
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(3,758) |
Accrued expenses |
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(1,794) |
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(3,980) |
Deferred revenue and customer deposits |
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3,424 |
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199 |
Other liabilities |
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357 |
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(18) |
Cash (used in) provided by operating activities |
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(5,011) |
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16,756 |
Investing activities |
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Acquisitions of plant, equipment and leasehold improvements |
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(3,283) |
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(3,780) |
Cash used in investing activities |
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(3,283) |
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(3,780) |
Financing activities |
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Dividends paid on common stock |
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(2,527) |
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— |
Taxes withheld and paid on stock-based compensation awards |
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(336) |
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— |
Excess tax benefits from stock-based compensation |
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— |
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239 |
Cash (used in) provided by financing activities |
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(2,863) |
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239 |
Effect of exchange rates on cash |
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108 |
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32 |
Net (decrease) increase in cash and cash equivalents: |
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(11,049) |
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13,247 |
Cash and cash equivalents, beginning of period |
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36,955 |
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13,606 |
Cash and cash equivalents, end of period |
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$ |
25,906 |
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$ |
26,853 |
Supplemental disclosures of cash flow information |
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Cash paid during the period for: |
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Interest |
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$ |
4,488 |
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$ |
4,621 |
Income taxes, net payments (refunds) |
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$ |
65 |
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$ |
(1,567) |
See accompanying notes to condensed consolidated financial statements
5
CPI Card Group Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)
(Unaudited)
1. Business Overview and Summary of Significant Accounting Policies
Business Overview
CPI Card Group Inc. (which, together with its subsidiaries, is referred to herein as “CPI” or the “Company”) is a leading provider of comprehensive Financial Payment Card solutions in the United States. The Company defines Financial Payment Cards as credit, debit and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) and Interac (in Canada). The Company serves its customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by the Company’s customers, certified to be in compliance with the standards of the Payment Card Industry (“PCI”) Security Standards Council.
In addition to its eight facilities in the United States and Canada, the Company has two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, and provide card personalization, packaging and fulfillment services for customers in the United Kingdom and continental Europe. These facilities are not certified by the Payment Card Brands or to be in compliance with the Standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards.
Basis of Presentation
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2016 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Use of Estimates
Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets; valuation allowances for inventories and deferred tax assets; debt; and stock-based compensation expense. Actual results could differ from those estimates.
Inventories
Inventories consist of raw materials, work–in-process and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out or specific identification basis) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory — Simplifying the Measurement of Inventory, which the Company adopted on January 1, 2017. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this standard did not impact the Company’s financial position, results of operations or cash flows during the three months ended March 31, 2017.
Adoption of New Accounting Standard
As of January 1, 2017, the Company adopted FASB ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting ( “ASU 2016-09” ) , which simplified several aspects of the
6
accounting for employee share based payment transactions, including classification in the statement of cash flows, the accounting for forfeitures and statutory withholding requirements.
Classification in the Statement of Cash Flows
As a result of the adoption of ASU 2016-09, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are no longer recorded directly through equity, and are recorded in “Income tax benefit” in the Condensed Consolidated Statement of Operations and Comprehensive (Loss) Income. The impact to the Company’s condensed consolidated financial statements was not material during the three months ended March 31, 2017. See Note 7, “Income Taxes” and Note 11, “Stock-Based Compensation”.
The Company has also elected to present excess tax benefits as an operating activity prospectively, commencing with the Company’s Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2017.
Additionally, during the three months ended March 31, 2017, the Company paid $336 to tax authorities for shares withheld to satisfy employer income tax obligations in relation to the vesting of stock-based compensation awards. As required by ASU 2016-09, the Company classified these payments as a financing activity in the Condensed Consolidated Statement of Cash Flows. There was no impact to prior periods as a result of the required retrospective application of this requirement within ASU 2016-09.
Forfeitures
The Company has elected to account for forfeitures when they occur. The cumulative-effect adjustment to “Accumulated earnings” and “Capital deficiency” in the Company’s Condensed Consolidated Balance Sheet was immaterial.
Recently Issued Accounting Pronouncements
The FASB issued ASU 2014-09, Revenue from Contracts with Customers , in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018. The Company plans to adopt the standard using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application. The Company is currently assessing the impact that the future adoption of ASU 2014-09, as amended, may have on its condensed consolidated financial statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the new guidance.
In February 2016, the FASB issued ASU 2016-02, Leases , which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and condensed consolidated financial statements.
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2. Inventories
Inventories are summarized below:
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March 31, 2017 |
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December 31, 2016 |
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Raw materials |
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$ |
9,353 |
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$ |
8,206 |
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Work-in-process |
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9,707 |
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6,340 |
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Finished goods |
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4,915 |
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4,823 |
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$ |
23,975 |
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$ |
19,369 |
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3. Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements consist of the following:
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March 31, 2017 |
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December 31, 2016 |
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Buildings |
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$ |
2,108 |
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$ |
2,077 |
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Machinery and equipment |
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60,193 |
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59,464 |
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Furniture, fixtures and computer equipment |
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6,843 |
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6,634 |
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Leasehold improvements |
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18,715 |
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18,655 |
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Construction in progress |
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3,653 |
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1,136 |
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91,512 |
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87,966 |
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Less accumulated depreciation and amortization |
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(38,042) |
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(34,547) |
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$ |
53,470 |
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$ |
53,419 |
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Amounts recorded for the depreciation of plant, equipment and leasehold improvements was $3,310 and $2,973 for the three months ended March 31, 2017 and 2016, respectively.
4. Goodwill and Other Intangible Assets
The Company’s goodwill by reportable segment at March 31, 2017 and December 31, 2016 is as follows:
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March 31, 2017 |
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December 31, 2016 |
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U.S. Debit and Credit |
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$ |
64,330 |
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$ |
64,330 |
U.K. Limited |
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5,980 |
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5,908 |
Other |
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1,773 |
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1,758 |
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$ |
72,083 |
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$ |
71,996 |
The change in goodwill from December 31, 2016 to March 31, 2017 was a result of foreign currency translation adjustments.
Intangible assets consist of customer relationships, technology and software, non-compete agreements and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 15.6 years. The changes in the cost basis of the intangibles from December 31, 2016 to March 31, 2017 are related to foreign currency translations. Intangible amortization expense was $1,223 and $1,140 for the three months ended March 31, 2017 and 2016, respectively.
8
As of March 31, 2017 and December 31, 2016, intangible assets, excluding goodwill, were comprised of the following:
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March 31, 2017 |
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December 31, 2016 |
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Average Life |
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Accumulated |
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Net Book |
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Accumulated |
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Net Book |
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(Years) |
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Cost |
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Amortization |
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Value |
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Cost |
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Amortization |
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Value |
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Customer relationships |
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12 |
to |
20 |
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$ |
59,036 |
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$ |
(21,874) |
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$ |
37,162 |
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$ |
58,994 |
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$ |
(20,972) |
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$ |
38,022 |
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Technology and software |
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7 |
to |
10 |
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7,100 |
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(2,399) |
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4,701 |
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7,101 |
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(2,167) |
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4,934 |
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Non-compete agreements |
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5 |
to |
8 |
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|
491 |
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(346) |
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145 |
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|
491 |
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(331) |
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160 |
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Trademarks |
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to |
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3,330 |
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(195) |
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3,135 |
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3,330 |
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(98) |
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|
3,232 |
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Intangible assets subject to amortization |
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|
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$ |
69,957 |
|
$ |
(24,814) |
|
$ |
45,143 |
|
$ |
69,916 |
|
$ |
(23,568) |
|
$ |
46,348 |
|
The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of March 31, 2017 is as follows:
|
|
|
|
2017 (remaining 9 months) |
|
$ |
3,672 |
2018 |
|
|
4,895 |
2019 |
|
|
4,875 |
2020 |
|
|
4,835 |
2021 |
|
|
4,575 |
Thereafter |
|
|
22,291 |
|
|
$ |
45,143 |
5. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
|
· |
|
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
|
· |
|
Level 2— Observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities. |
|
· |
|
Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. |
The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value as of |
|
Fair Value as of |
|
Fair Value Measurement at March 31, 2017 |
|
|||||||||
|
|
March 31, |
|
March 31, |
|
(Using Fair Value Hierarchy) |
|
|||||||||
|
|
2017 |
|
2017 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan |
|
$ |
312,500 |
|
$ |
290,625 |
|
$ |
— |
|
$ |
290,625 |
|
$ |
— |
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value as of |
|
Fair Value as of |
|
Fair Value Measurement at December 31, 2016 |
|
|||||||||
|
|
December 31, |
|
December 31, |
|
(Using Fair Value Hierarchy) |
|
|||||||||
|
|
2016 |
|
2016 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan |
|
$ |
312,500 |
|
$ |
290,625 |
|
$ |
— |
|
$ |
290,625 |
|
$ |
— |
|
The aggregate fair value of the Company’s First Lien Term Loan was based on bank quotes.
The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities.
6. Long-Term Debt and Credit Facility
As of March 31, 2017 and December 31, 2016, long-term debt and credit facilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
March 31, |
|
December 31, |
|
||
|
|
Rate (1) |
|
2017 |
|
2016 |
|
||
First lien term loan facility (1) |
|
5.83 |
% |
$ |
312,500 |
|
$ |
312,500 |
|
Unamortized discount |
|
|
|
|
(3,627) |
|
|
(3,795) |
|
Unamortized deferred financing costs |
|
|
|
|
(6,467) |
|
|
(6,783) |
|
Long-term debt |
|
|
|
$ |
302,406 |
|
$ |
301,922 |
|
|
(1) |
|
Interest rate at March 31, 2017. Interest rate at December 31, 2016 was 5.50%. |
First Lien Credit Facility
On August 17, 2015, the Company entered into a first lien credit facility with a syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.
The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.
Interest rates under the First Lien Credit Facility are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.50%, or a base rate plus a margin of 3.50%.
The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage ratio not in excess of 7.0 times Adjusted EBITDA, as defined in the agreement. As of March 31, 2017, the Company was in compliance with all covenants under the First Lien Credit Facility.
The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual Excess Cash Flow calculation, pursuant to the terms of the agreement.
As of March 31, 2017, the Company did not have any outstanding amounts under the Revolving Credit Facility, and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.50% as of March 31, 2017 and December 31, 2016, in addition to a fronting fee of 0.125% per annum. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to
10
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.
Sellers Note
The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition, which was fully repaid on September 2, 2016. Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly.
Deferred Financing Costs
Certain costs incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method.
As of March 31, 2017, long-term debt of $312,500 matures in 2022.
7. Income Taxes
During the three months ended March 31, 2017, the Company recognized an income tax benefit of $2,291 on pre-tax loss of $6,797, representing an effective income tax rate of 33.7%, compared to an income tax expense of $2,814 on pre-tax income of $8,528, representing an effective tax rate of 33.0% during the three months ended March 31, 2016.
The effective tax rates for all periods presented differ from the federal U.S. statutory rate primarily due to a benefit from permanent deductions related to credits for domestic production activities and the impact of state and foreign income taxes.
The Company’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities. In March 2017, the Company was notified that the Internal Revenue Service (" IRS") would examine its 2014 federal income tax return. The Company is in the process of providing information requested by the IRS with respect to such tax year. As the exam process is in the early stages, the Company has not been notified of any items that are being disputed by the IRS.
8. Stockholders’ Equity
During the three months ended March 31, 2017, the Company paid dividends of $2,527, representing $0.045 per share. Additionally, on March 1, 2017, the Board of Directors approved a dividend of $0.045 per share, payable on April 7, 2017 to stockholders of record as of the close of business on March 17, 2017. The accrued dividend of $2,500 is reflected in “Accrued expenses” in the Condensed Consolidated Balance Sheet as of March 31, 2017.
On May 11, 2016, the Board of Directors approved a stock repurchase program that authorizes repurchases of the Company’s common stock up to $20,000, limited to a maximum of 2,827,105 shares, prior to May 11, 2017. Repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions. During the three months ended March 31, 2017, there were no common shares repurchased. At March 31, 2017, up to $13,992 remained available under the share repurchase authorization, limited to 1,387,683 shares.
11
9. (Loss) Earnings per Share
Basic and diluted (loss) earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.
The following table sets forth the computation of basic and diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
Numerator: |
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(4,506) |
|
$ |
5,714 |
|
Denominator: |
|
|
|
|
|
|
|
Basic-weighted-average common shares outstanding |
|
|
55,424,559 |
|
|
56,542,116 |
|
Diluted-weighted-average common shares outstanding |
|
|
55,424,559 |
|
|
56,836,082 |
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
Basic |
|
$ |
(0.08) |
|
$ |
0.10 |
|
Diluted |
|
$ |
(0.08) |
|
$ |
0.10 |
|
The Company reported a net loss for the three months ended March 31, 2017. Accordingly, the potentially dilutive effect of 2,325,878 stock options and 186,763 restricted stock units has been excluded from the computation of diluted earnings per share as their inclusion would be anti-dilutive.
10. Commitments and Contingencies
Commitments
The Company incurred rent expense under non-cancellable operating leases of $953 and $815 for the three months ended March 31, 2017 and 2016, respectively.
Contingencies
CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)
On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO.
On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market.
On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of that motion.
12
The Company believes these claims are without merit and intends to defend the action vigorously. Given the current stage of these matters, the range of potential loss is not probable or estimable and no accrual has been recognized as of March 31, 2017 and December 31, 2016.
Gemalto S.A. v. CPI Card Group Inc. (2 cases)
First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent expired in March 2017. The Company successfully moved to transfer the lawsuit to the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors.
On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The district court litigation remains stayed.
Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto alleges that its patent will expire in 2019. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are presently engaged in claim construction activities, including the deposition of the patent-in-suit’s named inventor and the inspection records relating to the alleged commercial embodiment of Gemalto’s patent. During May 2017, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board, seeking re-examination of Gemalto’s asserted patent. The PTAB has not yet ruled on the Company’s petition.
With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. While a risk of loss is reasonably possible, given the current stage of these matters, as well as the aforementioned defenses, counterclaims and indemnity rights, the range of potential loss is not estimable and no accrual has been recognized as of March 31, 2017 and December 31, 2016.
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.
11. Stock-Based Compensation
CPI Card Group Inc. Omnibus Incentive Plan
During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan. As of March 31, 2017, there were 1,460,029 shares available for grant under the Omnibus Plan.
During the three months ended March 31, 2017, the Company granted awards of non-qualified stock options under the Omnibus Plan for 785,370 shares of common stock. The stock option awards were granted at various times
13
during the quarter. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date. As of March 31, 2017, there are no exercisable options outstanding under the Omnibus Plan.
Outstanding stock options under the Omnibus Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
|
Average |
|
Remaining |
|
|
|
|
|
Exercise |
|
Contractual Term |
|
|
|
Options |
|
Price |
|
(in Years) |
|
Outstanding as of December 31, 2016 |
|
1,437,508 |
|
$ |
|
|
|
Granted |
|
785,370 |
|
|
|
|
|
Forfeited |
|
(7,000) |
|
|
|
|
|
Outstanding as of March 31, 2017 |
|
2,215,878 |
|
$ |
|
|
9.14 |
Unvested options as of March 31, 2017 will vest as follows:
|
|
|
|
2017 |
|
377,305 |
|
2018 |
|
744,389 |
|
2019 |
|
715,109 |
|
2020 |
|
366,938 |
|
2021 |
|
12,137 |
|
Total unvested options as of March 31, 2017 |
|
2,215,878 |
|
The fair value of the stock option awards was determined using a Black-Scholes option-pricing model with the following average assumptions:
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March |
|
|
|
31, 2017 |
|
Expected term in years |
|
6.0 |
|
Volatility |
|
33.7 |
% |
Risk-free interest rate |
|
2.1 |
% |
Dividend yield |
|
4.1 |
% |
During the three months ended March 31, 2017, the Company granted awards of restricted stock units for 114,446 shares of common stock. The restricted stock units contain conditions associated with continued employment or service, and a majority will vest three years from the date of grant. On the vesting date, shares of common stock will be issued to the award recipients.
The following table summarizes the changes in the number of outstanding restricted stock units for the three month period ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Average |
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
Fair Value |
|
Outstanding as of December 31, 2016 |
|
270,466 |
|
$ |
7.13 |
Granted |
|
114,446 |
|
|
4.32 |
Vested |
|
(198,149) |
|
|
7.91 |
Forfeited |
|
— |
|
|
|
Outstanding as of March 31, 2017 |
|
186,763 |
|
$ |
4.59 |
During the three months ended March 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 price, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the
14
grant date compared to the Company’s stock price on the date of grant. The cash performance units were valued using a Monte Carlo simulation. The Monte Carlo model used the following valuation assumptions based on the 3-year term of the awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%. The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period. As of March 31, 2017, the amount of liability recorded for cash performance units was not material.
The following table summarizes the changes in the number of outstanding cash performance units for the three month period ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
||
|
|
Units |
|
Grant Date Fair Value |
||
|
|
|
|
|
|
|
Outstanding as of December 31, 2016 |
|
— |
|
$ |
— |
|
Granted |
|
932,837 |
|
|
0.71 |
|
Vested |
|
— |
|
|
— |
|
Forfeited |
|
— |
|
|
— |
|
Outstanding as of March 31, 2017 |
|
932,837 |
|
$ |
0.71 |
Compensation expense for the Omnibus Plan for the three months ended March 31, 2017 and March 31, 2016 was $689 and $422, respectively. As of March 31, 2017, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $3,824, which the Company expects to recognize over an estimated weighted average period of 1.9 years.
CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan
In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted.
As a result of the Company’s adoption of the Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and are fully vested as of March 31, 2017.
The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the three-month period ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Weighted- Average |
|
Contractual Term |
|
|
|
|
Options |
|
Exercise Price |
|
(in Years) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable as of December 31, 2016 |
|
216,334 |
|
$ |
0.0004 |
|
|
|
Granted |
|
— |
|
|
— |
|
|
|
Exercised |
|
(106,334) |
|
|
0.0003 |
|
|
|
Forfeited |
|
— |
|
|
— |
|
|
|
Outstanding and Exercisable as of March 31, 2017 |
|
110,000 |
|
$ |
0.0004 |
|
5.17 |
|
There was no compensation expense related to options previously granted under the Option Plan for the three months ended March 31, 2017, as all options were fully vested. The aggregate intrinsic value of stock option awards outstanding and exercisable under the Option Plan as of March 31, 2017 was $462.
Other Stock-Based Compensation Awards
During June 2015, the Company issued 191,664 restricted shares of common stock to executives with a weighted-average grant date fair value of $9.48 per share. The awards contain conditions associated with continued employment or service. The terms of the unvested restricted shares of common stock provide voting and regular dividend rights to the
15
holders, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings per share calculation. See Note 9, “(Loss) Earnings per Share”. As of March 31, 2017, 94,864 restricted shares of common stock were outstanding, which vest over a three-year period from the grant date. The executive holding the remaining restricted shares changed employment status to a consultant during the first quarter of 2017. Accordingly, the Company remeasured the awards and reduced stock-based compensation expense by $143 during the three months ended March 31, 2017. Compensation expense for the three month period ended March 31, 2016 was $323.
12. Segment Reporting
The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA.
EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments.
As of March 31, 2017, the Company’s reportable segments are as follows:
|
· |
|
U.S. Debit and Credit; |
|
· |
|
U.S. Prepaid Debit; and |
|
· |
|
U.K. Limited. |
The “Other” category includes the Company’s corporate headquarters and less significant operating segments that derive their revenue from the production of Financial Payment Cards and retail gift cards in Canada.
Performance Measures of Reportable Segments
Revenue and EBITDA of the Company’s reportable segments for the three months ended March 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
Revenue |
|
||||
|
|
Three Months Ended March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
U.S. Debit and Credit |
|
$ |
39,508 |
|
$ |
65,091 |
|
U.S. Prepaid Debit |
|
|
9,784 |
|
|
12,341 |
|
U.K. Limited |
|
|
5,587 |
|
|
6,232 |
|
Other |
|
|
2,503 |
|
|
3,142 |
|
Intersegment eliminations |
|
|
(1,374) |
|
|
(413) |
|
Total: |
|
$ |
56,008 |
|
$ |
86,393 |
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
||||
|
|
Three Months Ended March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
U.S. Debit and Credit |
|
$ |
7,630 |
|
$ |
18,922 |
|
U.S. Prepaid Debit |
|
|
1,785 |
|
|
3,267 |
|
U.K. Limited |
|
|
325 |
|
|
219 |
|
Other |
|
|
(6,942) |
|
|
(4,734) |
|
Total: |
|
$ |
2,798 |
|
$ |
17,674 |
|
16
The following table provides a reconciliation of total segment EBITDA to net (loss) income for the three months ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
Total segment EBITDA from continuing operations |
|
$ |
2,798 |
|
$ |
17,674 |
|
Interest, net |
|
|
(5,062) |
|
|
(5,033) |
|
Income tax benefit (expense) |
|
|
2,291 |
|
|
(2,814) |
|
Depreciation and amortization |
|
|
(4,533) |
|
|
(4,113) |
|
Net (loss) income |
|
$ |
(4,506) |
|
$ |
5,714 |
|
Balance Sheet Data of Reportable Segments
Total assets of the Company’s reportable segments as of March 31, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017 |
|
December 31, 2016 |
|
||
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
197,756 |
|
$ |
205,417 |
|
U.S. Prepaid Debit |
|
|
24,638 |
|
|
23,509 |
|
U.K. Limited |
|
|
28,431 |
|
|
26,060 |
|
Other |
|
|
10,979 |
|
|
9,434 |
|
Total assets: |
|
$ |
261,804 |
|
$ |
264,420 |
|
Plant, Equipment and Leasehold Improvement Additions of Geographic Locations
Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the three months ended March 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
|
|
U.S. |
|
$ |
2,275 |
|
$ |
2,402 |
|
Canada |
|
|
72 |
|
|
114 |
|
Total North America |
|
|
2,347 |
|
|
2,516 |
|
U.K. |
|
|
961 |
|
|
624 |
|
Total plant, equipment and leasehold improvement additions |
|
$ |
3,308 |
|
$ |
3,140 |
|
Net Sales to Geographic Locations
Net sales to the Company’s geographic locations for the three months ended March 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
|
|
U.S. |
|
$ |
47,811 |
|
$ |
74,436 |
|
Canada |
|
|
2,028 |
|
|
3,999 |
|
Total North America |
|
|
|
|
|
78,435 |
|
U.K. |
|
|
3,955 |
|
|
6,605 |
|
Other (a) |
|
|
2,214 |
|
|
1,353 |
|
Total net sales |
|
$ |
56,008 |
|
$ |
86,393 |
|
|
(a) |
|
Amounts in Other include sales to various countries that individually are not material. |
17
Long-Lived Assets of Geographic Segments
Long-lived assets of the Company’s geographic segments as of March 31, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017 |
|
December 31, 2016 |
|
||
|
|
|
|
|
|
|
|
U.S. |
|
$ |
155,798 |
|
$ |
157,773 |
|
Canada |
|
|
2,903 |
|
|
2,899 |
|
Total North America: |
|
|
158,701 |
|
|
160,672 |
|
U.K. |
|
|
11,995 |
|
|
11,091 |
|
Total long-lived assets |
|
$ |
170,696 |
|
$ |
171,763 |
|
Net Sales by Product and Services
Net sales from products and services sold by the Company for the three months ended March 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
|
|
|
|
|
|
|
|
Product net sales (a) |
|
$ |
29,764 |
|
$ |
54,958 |
|
Services net sales (b) |
|
|
26,244 |
|
|
31,435 |
|
Total net sales: |
|
$ |
56,008 |
|
$ |
86,393 |
|
|
(a) |
|
Product net sales include the design and production of Financial Payment Cards in contact-EMV, Dual-Interface EMV, contactless and magnetic stripe card formats. The Company also generates product revenue from the sale of Card@Once ® instant issuance systems, private label credit cards and retail gift cards. |
|
(b) |
|
Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant issuance debit cards. The Company also generates service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. |
13. Subsequent Events
On May 3, 2017, the Board of Directors approved a dividend of $0.045 per share. This dividend is payable on July 7, 2017, to stockholders of record as of the close of business on June 16, 2017.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation s
References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”).
Cautionary Statement Regarding Forward-Looking Information
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding the Company’s financial position, business strategy and the plans, objectives, expectations, or assumptions of management for future operations, are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue”, “project”, “plan”, “foresee”, and other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks and uncertainties include, but are not limited to: material breaches in the security of our systems; market acceptance of developing technologies that make Financial Payment Cards less relevant; a slower or less widespread adoption of EMV and dual-interface EMV technology than we anticipate; difficulties in production quality and process; defects in our software; our failure to operate our business in accordance with the PCI security standards or other industry standards such as Payment Card Brand certification standards; failure to accurately predict demand for our products and services; extension of card expiration cycles; a decline in U.S. and global market and economic conditions; failure to identify, attract and retain new customers or a failure to maintain our relationships with our major customers; potential imposition of tariffs and/or trade restrictions on goods imported into the United States; our substantial indebtedness; infringement on our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; failure to meet our customers’ demands in a timely manner; competition and/or price erosion in the payment card industry; our dependence on licensing arrangements; inability to renew leases for our facilities; interruptions in our IT systems or production capabilities; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; non-compliance with, and changes in, laws in foreign jurisdictions in which we operate and sell our products; challenges related to our acquisition strategy; our dependence on specialized equipment from third party suppliers; and other risks and other risk factors or uncertainties identified from time to time in our filings with the SEC. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more complete discussion of forward-looking statements and applicable risks contained under the captions “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 2, 2017. CPI Card Group Inc. undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leading provider of comprehensive Financial Payment Card solutions in the United States. We define Financial Payment Cards as credit, debit and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) and Interac (in Canada). We have established a leading position in the Financial Payment Card market through more than 20 years of experience and are focused primarily on this growing subsector of the financial technology market. Our customers are primarily leading national and regional banks, independent community banks, credit unions, managers of prepaid debit card programs, Group Service Providers (organizations that assist small issuers with managing their credit and debit card programs) and card processors. We serve a diverse set of direct and indirect customers, including many of the largest issuers of debit and credit cards in the United States and Canada, and largest U.S. prepaid debit card program managers, as well as thousands of independent community banks, credit unions, Group Service Providers and card processors.
We serve our customers through a network of ten production and card services facilities, including eight high-security facilities in the United States and Canada that are each certified by one or more of the Payment Card Brands and
19
Interac (in Canada) and, where required by our customers, certified to be in compliance with the Payment Card Industry Security Standards Council.
In addition to our eight facilities in the United States and Canada, we have two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, and provide personalization, packaging and fulfillment services. These facilities are not certified by the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards.
Results of Operations
The following table presents the components of our condensed consolidated statements of operations for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
||||
|
|
March 31, |
|
|
||||
|
|
2017 |
|
2016 |
|
|
||
|
|
(dollars in thousands) |
|
|
||||
Net sales: |
|
|
|
|
|
|
|
|
Products |
|
$ |
29,764 |
|
$ |
54,958 |
|
|
Services |
|
|
26,244 |
|
|
31,435 |
|
|
Total net sales |
|
|
56,008 |
|
|
86,393 |
|
|
Cost of sales |
|
|
39,913 |
|
|
56,701 |
|
|
Gross profit |
|
|
16,095 |
|
|
29,692 |
|
|
Operating expenses |
|
|
17,904 |
|
|
16,027 |
|
|
(Loss) income from operations |
|
|
(1,809) |
|
|
13,665 |
|
|
Other expense, net: |
|
|
|
|
|
|
|
|
Interest, net |
|
|
(5,062) |
|
|
(5,033) |
|
|
Foreign exchange gain (loss) |
|
|
73 |
|
|
(102) |
|
|
Other income, net |
|
|
1 |
|
|
(2) |
|
|
(Loss) income before taxes |
|
|
(6,797) |
|
|
8,528 |
|
|
Income tax benefit (expense) |
|
|
2,291 |
|
|
(2,814) |
|
|
Net (loss) income |
|
$ |
(4,506) |
|
$ |
5,714 |
|
|
Segment Discussion
Three Months Ended March 31, 2017 Compared With Three Months Ended March 31, 2016
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
||||
|
|
2017 |
|
2016 |
|
$ Change |
|
% Change |
|
|
|||
|
|
(dollars in thousands) |
|
|
|||||||||
Net sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
39,508 |
|
$ |
65,091 |
|
$ |
(25,583) |
|
(39.3) |
% |
|
U.S. Prepaid Debit |
|
|
9,784 |
|
|
12,341 |
|
|
(2,557) |
|
(20.7) |
% |
|
U.K. Limited |
|
|
5,587 |
|
|
6,232 |
|
|
(645) |
|
(10.3) |
% |
|
Other |
|
|
2,503 |
|
|
3,142 |
|
|
(639) |
|
(20.3) |
% |
|
Eliminations |
|
|
(1,374) |
|
|
(413) |
|
|
(961) |
|
* |
% |
|
Total |
|
$ |
56,008 |
|
$ |
86,393 |
|
$ |
(30,385) |
|
(35.2) |
% |
|
* Not meaningful
Net sales for the three months ended March 31, 2017 decreased $30.4 million, or 35.2%, to $56.0 million compared to $86.4 million for the three months ended March 31, 2016. The decrease in net sales was due to a 39.3% decrease in U.S. Debit and Credit, a 20.7% decrease in U.S. Prepaid Debit, a 10.3% decrease in U.K. Limited and a 20.3% decrease in Other.
20
U.S. Debit and Credit:
Net sales for U.S. Debit and Credit for the three months ended March 31, 2017 decreased $25.6 million, or 39.3%, to $39.5 million compared to $65.1 million for the three months ended March 31, 2016. The decrease in net sales was primarily due to a $23.5 million decrease in EMV related revenue and a $2.7 million decrease in card personalization and fulfillment, partially offset by an increase in other non-EMV card and other sales.
The decrease in EMV revenue is the result of continued softness in demand for EMV cards, particularly with large issuer and processor customers. For the three months ended March 31, 2017, we sold 18.3 million EMV cards at an average selling price (“ASP”) of $0.84, compared to 41.4 million EMV cards at an ASP of $0.94 for the three months ended March 31, 2016. The decrease in ASP for EMV cards during the three months ended March 31, 2017 compared to March 31, 2016 is primarily due to customer mix.
U.S. Prepaid Debit:
Net sales for U.S. Prepaid Debit for the three months ended March 31, 2017 decreased $2.6 million, or 20.7%, to $9.8 million compared to $12.3 million for the three months ended March 31, 2016. The decline was driven primarily by decreased sales activity associated with a delay in the roll out of a packaging design refresh related to one of our larger customers.
U.K. Limited :
Net sales for U.K. Limited for the three months ended March 31, 2017 decreased $0.6 million, or 10.3%, to $5.6 million compared to $6.2 million for the three months ended March 31, 2016. Increased sales activity related to card manufacturing, personalization and fulfillment was more than offset by the impact of foreign currency translation, resulting in an overall decrease in net sales during the quarter. Fluctuations in the exchange rate between the United States dollar and the British Pound resulted in a $0.9 million reduction of net sales in the three months ended March 31, 2017 compared to the three months ended March 31, 2016.
Other:
Net sales in Other decreased $0.6 million, or 20.3%, to $2.5 million during the three months ended March 31, 2017 compared to $3.1 million in the three months ended March 31, 2016. Net sales in Canada were lower during the three months ended March 31, 2017, primarily as a result of one of our largest customers refreshing its card designs during the prior year, resulting in higher than usual net sales during the three months ended March 31, 2016.
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
||||
|
|
2017 |
|
2016 |
|
$ Change |
|
% Change |
|
|
|||
|
|
(dollars in thousands) |
|
|
|||||||||
Cost of sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
27,665 |
|
$ |
41,931 |
|
$ |
(14,266) |
|
(34.0) |
% |
|
U.S. Prepaid Debit |
|
|
7,576 |
|
|
8,265 |
|
|
(689) |
|
(8.3) |
% |
|
U.K. Limited |
|
|
4,138 |
|
|
4,623 |
|
|
(485) |
|
(10.5) |
% |
|
Other |
|
|
1,930 |
|
|
2,317 |
|
|
(387) |
|
(16.7) |
% |
|
Eliminations |
|
|
(1,396) |
|
|
(435) |
|
|
(961) |
|
* |
% |
|
Total |
|
$ |
39,913 |
|
$ |
56,701 |
|
$ |
(16,788) |
|
(29.6) |
% |
|
* Not meaningful
Cost of sales for the three months ended March 31, 2017 decreased $16.8 million, or 29.6%, to $39.9 million compared to $56.7 million for the three months ended March 31, 2016. The decrease in cost of sales was driven primarily by a 34.0% decrease in U.S. Debit and Credit, an 8.3% decrease in in U.S. Prepaid Debit, a 10.5% decrease in U.K. Limited and a 16.7% decrease in Other.
21
U.S. Debit and Credit:
Cost of sales for U.S. Debit and Credit for the three months ended March 31, 2017 decreased $14.3 million, or 34.0%, to $27.7 million compared to $41.9 million for the three months ended March 31, 2016. The decrease was driven by lower EMV chip card sales volumes resulting in lower corresponding manufacturing costs. Lower per unit EMV chip prices and decreases in card personalization and fulfillment sales also contributed to the decrease in cost of sales in the quarter.
U.S. Prepaid Debit:
Cost of sales for U.S. Prepaid Debit for the three months ended March 31, 2017 decreased $0.7 million, or 8.3%, to $7.6 million compared to $8.3 million for the three months ended March 31, 2016. The decrease was primarily a result of the decreased sales volumes discussed above. In addition, overhead costs as a percent of net sales were higher during the three months ended March 31, 2017, partially due to increased costs to ramp up Print on Demand Services capabilities.
U.K. Limited :
Cost of sales for U.K. Limited for the three months ended March 31, 2017 decreased $0.5 million, or 10.5%, to $4.1 million compared to $4.6 million for the three months ended March 31, 2016, primarily due to foreign currency exchange rate fluctuations and lower overhead costs, partially offset by higher material and labor costs in conjunction with the increased sales activity discussed above. Fluctuations in exchange rates between the United States dollar and the British Pound resulted in a $0.6 million reduction of cost of sales in the three months ended March 31, 2017 compared to the three months ended March 31, 2016.
Other:
Cost of sales in Other decreased $0.4 million, or 16.7%, to $1.9 million during the three months ended March 31, 2017 compared to $2.3 million in the three months ended March 31, 2016, primarily due to lower materials and labor costs related to the decreased net sales described above.
Gross Profit and Gross Profit Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
% of 2017 |
|
|
|
|
% of 2016 |
|
|
|
|
|
|
|
|
|
2017 |
|
net sales |
|
2016 |
|
net sales |
|
$ Change |
|
% Change |
|
|
|||
|
|
(dollars in thousands) |
|
|
|||||||||||||
Gross profit by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
11,843 |
|
|
% |
$ |
23,160 |
|
35.6 |
% |
$ |
(11,317) |
|
(48.9) |
% |
|
U.S. Prepaid Debit |
|
|
2,208 |
|
|
% |
|
4,076 |
|
33.0 |
% |
|
(1,868) |
|
(45.8) |
% |
|
U.K. Limited |
|
|
1,449 |
|
|
% |
|
1,609 |
|
25.8 |
% |
|
(160) |
|
(9.9) |
% |
|
Other |
|
|
595 |
|
|
% |
|
847 |
|
27.0 |
% |
|
(252) |
|
(29.8) |
% |
|
Total |
|
$ |
16,095 |
|
|
% |
$ |
29,692 |
|
34.4 |
% |
$ |
(13,597) |
|
(45.8) |
% |
|
Gross profit for the three months ended March 31, 2017 decreased $13.6 million, or 45.8%, to $16.1 million compared to $29.7 million for the three months ended March 31, 2016. Gross profit margin for the three months ended March 31, 2017 decreased to 28.7% compared to 34.4% for the three months ended March 31, 2016.
U.S. Debit and Credit:
Gross profit for U.S. Debit and Credit for the three months ended March 31, 2017 decreased $11.3 million, or 48.9%, to $11.8 million compared to $23.2 million during the three months ended March 31, 2016. The decrease in gross profit for U.S. Debit and Credit was driven primarily by the reduction in net sales. Gross profit margin for U.S. Debit and Credit for the three months ended March 31, 2017 decreased to 30.0% compared to 35.6% for the same period in the prior year due to lower overhead cost absorption attributed to reduced volumes.
22
U.S. Prepaid Debit:
Gross profit for U.S. Prepaid Debit during the three months ended March 31, 2017 decreased 45.8% to $2.2 million compared to $4.1 million for the three months ended March 31, 2016 attributed to the lower sales activity and increased costs to ramp up Print on Demand Services capabilities, as discussed above. Gross profit margin for U.S. Prepaid Debit for the three months ended March 31, 2017 decreased to 22.6% compared to 33.0% due to lower overhead cost absorption attributed to reduced volumes.
U.K. Limited :
Gross profit for U.K. Limited decreased 9.9% in the three months ended March 31, 2017 to $1.4 million compared to $1.6 million for the three months ended March 31, 2016, primarily due to foreign currency exchange rate fluctuations of $0.2 million. Gross profit margin for U.K. Limited was 25.9% during the three months ended March, 2017, consistent with the gross profit margin of 25.8% during the three months ended March 31, 2016.
Other:
Other gross profit during the three months ended March 31, 2017 was $0.6 million compared to $0.8 million during the same period in 2016. The decrease is primarily due to decreased sales during the three months ended March 31, 2017 compared to the same period in 2016.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
||||
|
|
2017 |
|
2016 |
|
$ Change |
|
% Change |
|
|
|||
|
|
(dollars in thousands) |
|
|
|||||||||
Operating expenses by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
6,437 |
|
$ |
6,096 |
|
$ |
341 |
|
5.6 |
% |
|
U.S. Prepaid Debit |
|
|
1,161 |
|
|
1,388 |
|
|
(227) |
|
(16.4) |
% |
|
U.K. Limited |
|
|
1,334 |
|
|
1,519 |
|
|
(185) |
|
(12.2) |
% |
|
Other |
|
|
8,972 |
|
|
7,024 |
|
|
1,948 |
|
27.7 |
% |
|
Total |
|
$ |
17,904 |
|
$ |
16,027 |
|
$ |
1,877 |
|
11.7 |
% |
|
Operating expenses for the three months ended March 31, 2017 increased $1.9 million, or 11.7%, to $17.9 million compared to $16.0 million for the three months ended March 31, 2016. The increase in operating expenses was driven primarily by a 27.7% increase in Other and a 5.6% increase in U.S. Debit and Credit, partially offset by a 16.4% decrease in U.S. Prepaid Debit, and a 12.2% decrease in U.K. Limited.
U.S. Debit and Credit operating expenses increased $0.3 million, or 5.6%, driven by increased salaries and benefits in the card personalization business.
U.S. Prepaid Debit operating expenses decreased $0.2 million, or 16.4%, primarily driven by cost reductions in sales and administrative salaries.
U.K. Limited operating expenses decreased $0.2 million, or 12.2%, due to foreign currency exchange rate fluctuations.
The $1.9 million increase in Other operating expenses was primarily due to increased legal costs of $0.8 million, including $0.6 million in patent and shareholder litigation and related charges, a $0.8 million net increase in corporate salaries and benefits costs, and increased facilities and insurance costs incurred during the three months ended March 31, 2017.
23
(Loss) Income from Operations and Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
% of 2017 |
|
|
|
|
% of 2016 |
|
|
|
|
|
|
|
|
|
|
2017 |
|
net sales |
|
2016 |
|
net sales |
|
$ Change |
|
% Change |
|
|
||||
|
|
(dollars in thousands) |
|
|
||||||||||||||
(Loss) income from operations by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
5,406 |
|
13.7 |
% |
$ |
17,064 |
|
|
% |
$ |
(11,658) |
|
(68.3) |
% |
|
|
U.S. Prepaid Debit |
|
|
1,047 |
|
10.7 |
% |
|
2,688 |
|
|
% |
|
(1,641) |
|
(61.0) |
% |
|
|
U.K. Limited |
|
|
115 |
|
2.1 |
% |
|
90 |
|
1.4 |
% |
|
25 |
|
27.8 |
% |
|
|
Other |
|
|
(8,377) |
|
* |
% |
|
(6,177) |
|
* |
% |
|
(2,200) |
|
* |
% |
|
|
Total |
|
$ |
(1,809) |
|
(3.2) |
% |
$ |
13,665 |
|
|
% |
$ |
(15,474) |
|
(113.2) |
% |
|
* Not meaningful
During the three months ended March 31, 2017 there was a loss from operations of $1.8 million, resulting in an operating loss margin of (3.2)%, compared to income from operations for the three months ended March 31, 2016 of $13.7 million, representing an operating income margin of 15.8%.
U.S. Debit and Credit:
Income from operations for U.S. Debit and Credit for the three months ended March 31, 2017 decreased $11.7 million, or 68.3%, to $5.4 million compared to $17.1 million for the three months ended March 31, 2016. Operating margins for the three months ended March 31, 2017 decreased to 13.7% compared to 26.2% for the three months ended March 31, 2016 due primarily to the lower sales volumes, and the lower overhead cost absorption from the sales volume decline discussed above.
U.S. Prepaid Debit:
Income from operations for U.S. Prepaid Debit for the three months ended March 31, 2017 decreased 61.0% to $1.0 million compared to $2.7 million for the three months ended March 31, 2016. Operating margins for the three months ended March 31, 2017 decreased to 10.7% compared to 21.8% for the three months ended March 31, 2016, due primarily to the lower sales volumes, increased costs to ramp up Print on Demand Services capabilities, and the lower overhead cost absorption from the decline in sales discussed above.
U.K. Limited :
Income from operations for U.K. Limited for the three months ended March 31, 2017 was $0.1 million during both the three months ended March 31, 2017 and 2016.
Other :
The loss from operations in Other was $8.4 million in the three months ended March 31, 2017 compared to $6.2 million in the three months ended March 31, 2016. The increased loss was primarily attributable to the higher corporate expenses discussed above.
Interest, net :
Interest expense for the three months ended March 31, 2017 increased to $5.1 million compared to $5.0 million for the three months ended March 31, 2016. The additional interest expense resulting from the increase in the interest rate on the First Lien Term Loan during the three months ended March 31, 2017 was partially offset by lower interest expense associated with the Sellers’ Note, which was repaid during September 2016.
Income tax (benefit) expense:
During the three months ended March 31, 2017, there was an income tax benefit of $2.3 million on pre-tax losses of $6.8 million, representing an effective income tax rate of 33.7%, compared with an income tax expense of $2.8
24
million on pre-tax income of $8.5 million for the three months ended March 31, 2016, representing an effective income tax rate of 33.0%. Our effective tax rate differs in the current year period primarily due to the impact of state and foreign income taxes.
Net (loss) income:
During the three months ended March 31, 2017, net loss was $4.5 million, compared to net income of $5.7 million during the three months ended March 31, 2016 primarily due to the lower net sales, gross profit and higher operating expenses described above.
Liquidity and Capital Resources
As of March 31, 2017, we had $25.9 million of cash and cash equivalents. Of this amount, $8.9 million was held in accounts outside of the United States.
Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, and return capital to shareholders through dividends and share repurchases while maintaining strong liquidity will depend upon our ability to continue to generate excess operating cash flows through our operating subsidiaries. We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, dividend payments, lease obligations and working capital needs.
At March 31, 2017, there was $312.5 million outstanding under the First Lien Term Loan, and we had an undrawn $40.0 million Revolving Credit Facility, of which $20.0 million is available for borrowing. Additional amounts may be available for borrowing during the term of the Revolving Credit Facility, up to the full $40.0 million, to the extent our net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The First Lien Term Loan and Revolving Credit Facility (collectively, “First Lien Credit Facility”) mature on August 17, 2022 and August 17, 2020, respectively.
Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate plus a margin of 4.5% or a base rate plus a margin of 3.5%. As of March 31, 2017, the interest rate on our First Lien Term Loan was 5.83%.
The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets, and affiliate transactions. We may also be required to make repayments on the First Lien Term Loan in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement. As of March 31, 2017, we were in compliance with all covenants under the First Lien Credit Facility.
We had a subordinated, unsecured promissory note for $9.0 million with certain sellers of EFT Source which we fully repaid when it became due on September 2, 2016.
During the year ended December 31, 2016, the Board of Directors approved a stock repurchase program authorizing repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares, prior to May 11, 2017. There were no shares repurchased under this plan during the three months ended March 31, 2017. At March 31, 2017, up to $14.0 million remained available under the share repurchase authorization, up to a maximum of 1,387,683 shares. Our Board of Directors may, in its sole discretion, change the amount or frequency of stock repurchases, or discontinue stock repurchases entirely.
On March 1, 2017, our Board of Directors approved a dividend of $0.045 per share. This dividend was paid on April 7, 2017 to stockholders of record as of the close of business on March 17, 2017. The accrued dividend of $2.5 million is reflected in “Accrued expenses” in our Condensed Consolidated Balance Sheet as of March 31, 2017. On May 3, 2017, our Board of Directors approved a dividend of $0.045 per share, payable on July 7, 2017 to stockholders of record as of the close of business on June 16, 2017. Our current quarterly cash dividend rate is $0.045 per share, or $0.18 per share on an annualized basis. The declaration and payment of any future dividends will be subject to the
25
discretion of the Board of Directors, who will evaluate the Company’s dividend program from time to time based on factors it deems relevant.
Operating Activities
Cash used in operating activities for the three ended March 31, 2017 was $5.0 million and was primarily due to the net operating loss of $4.5 million and a net decrease in cash flows from working capital.
Cash provided by operating activities during the three months ended March 31, 2016 was $16.8 million and was driven primarily by net operating income of $5.7 million and a net decrease in cash flows from working capital, particularly from a decrease in accounts receivable.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2017 and 2016 was $3.3 million and $3.8 million, respectively. Cash used in investing activities during both periods was related to capital expenditures.
Financing Activities
During the three months ended March 31, 2017, cash used in financing activities was $2.9 million, related to dividend payments of $2.5 million and $0.3 million of taxes withheld and paid on stock-based compensation awards.
Cash provided by financing activities during the three months ended March 31, 2016 was $0.2 million, due to excess tax benefits associated with stock option exercises.
As of January 1, 2017, we adopted FASB ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting , which simplified several aspects of the accounting for employee share based payment transactions, including classification in the statement of cash flows. See Note 1, “Business Overview” in Part I, Item I in this Quarterly Report on Form 10-Q.
Contractual Obligations
During the three months ended March 31, 2017, there were no material changes in our contractual obligations from those reported in our Annual Report on Form 10-K for the year ended December 31, 2016.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements at March 31, 2017.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2016, for which there were no material changes as of March 31, 2017, included:
|
· |
|
Revenue Recognition; |
|
· |
|
Multiple-Element Arrangements; |
|
· |
|
Impairment Assessments of Goodwill and Long-Lived Assets; |
|
· |
|
Inventory Valuation; |
|
· |
|
Stock-Based Compensation; and |
|
· |
|
Income Taxes. |
26
Item 3. Quantitative and Qualitative Disclosures About Market Ris k
As of March 31, 2017, there have been no material changes in market risk for key input prices, labor and benefits costs, interest rate risk, foreign currency exchange rates, or pricing from those included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 4. Controls and Procedure s
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
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 March 31, 2017.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
27
CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)
On June 15, 2016, two purported CPI shareholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc., in the United States District Court for the Southern District of New York against CPI and certain of its officers and directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 IPO. The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933 (the “Securities Act”) and seek, among other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO.
On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (“PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market.
On November 16, 2016, the Company filed a motion to dismiss the amended complaint. All discovery and other proceedings in the action are stayed under the PSLRA pending the resolution of that motion.
The Company believes these claims are without merit and intends to defend the action vigorously.
Gemalto S.A. v. CPI Card Group Inc. (2 cases)
First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The now-stayed complaint alleges that the Company infringes a Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. Gemalto’s patent expired in March 2017. The Company successfully moved to transfer the lawsuit to the District of Colorado. On January 28, 2016, the Company answered the complaint and filed counterclaims that the asserted patent is invalid and unenforceable, and that Gemalto’s lawsuit is a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims on February 5, 2016. On March 8, 2016, Gemalto provided specific infringement contentions, which—contrary to the complaint’s claim that all EMV-compliant products infringed upon Gemalto’s patent—only named CPI products that incorporate microchips supplied by two specific vendors.
On May 31, 2016, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. In light of the Company’s petition, on July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The district court litigation remains stayed.
Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleges that the Company infringes a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto alleges that its patent will expire in 2019. Gemalto provided initial infringement contentions to the Company on July 29, 2016, and amended its contentions on October 13, 2016. The parties are presently engaged in claim construction activities, including the
28
deposition of the patent-in-suit’s named inventor and the inspection records relating to the alleged commercial embodiment of Gemalto’s patent. During May 2017, the Company filed an Inter Partes Review petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board, seeking re-examination of Gemalto’s asserted patent. The PTAB has not yet ruled on the Company’s petition.
With respect to both cases, the Company believes Gemalto’s claims are without merit and that the Company has strong legal and equitable defenses, plus meritorious counterclaims and indemnity rights. The Company intends to defend these suits vigorously. However, the Company may incur material legal expenses, and no assurance can be given that these matters will be resolved in our favor, and if determined adversely, whether indemnification will be received. Accordingly, it is not yet possible to reliably determine any potential liability that could result from these matters in the event of an adverse determination.
CPI Card Group Inc. v. Multi Packaging Solutions, Inc.
On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultrasecure gift card packages sold to at least one customer infringe a Company patent on ultrasecure gift card packages. The Company’s patent will expire in 2028. MPS has answered the complaint and counterclaimed for invalidity and noninfringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts. Discovery is ongoing. The Company intends to vigorously assert its intellectual property rights in connection with this litigation.
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.
The risk factors disclosed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Such risk factors continue to be relevant to an understanding of our business, financial condition and operating results. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with respect to such risk factors .
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
In the second quarter of fiscal year 2016, the Company’s Board of Directors approved a stock repurchase program that authorizes repurchases of the Company’s common stock up to $20.0 million, limited to a maximum of 2,827,105 shares. The Company’s repurchases may be executed using open market purchases, privately negotiated transactions, accelerated share repurchase programs or other transactions. Our board of directors may, in its sole discretion, change the amount or frequency of stock repurchases or discontinue stock repurchases entirely.
There was no stock repurchase activity during the three months ended March 31, 2017. As of March 31, 2017, the total number of shares purchased as part of the publicly announced program was 1,439,422. The approximate dollar value of shares that may yet be purchased under the program was $14.0 million, limited to an additional repurchase of 1,387,683 common shares.
29
|
|
|
Exhibit
|
|
Description |
10.1 |
|
Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc.Omnibus Plan |
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS |
|
XBRL Instance Document. |
101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
30
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
CPI CARD GROUP INC. |
|
|
|
|
|
/s/ Lillian Etzkorn |
|
Lillian Etzkorn |
|
Chief Financial Officer |
|
|
May 4, 2017 |
|
31
EXHIBIT INDEX
|
|
|
Exhibit
|
|
Description |
10.1 |
|
Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc.Omnibus Plan |
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS |
|
XBRL Instance Document. |
101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
32
Exhibit 10.1
CPI CARD GROUP INC.
OMNIBUS INCENTIVE PLAN
CASH PERFORMANCE UNIT AGREEMENT
This CASH PERFORMANCE UNIT AGREEMENT (this “ Agreement ”) is made effective as of March 22, 2017 (the “ Grant Date ”) by and between CPI Card Group Inc., a Delaware corporation (the “ Company ”), and ___________________ (the “ Participant ”), pursuant to the CPI Card Group Inc. Omnibus Incentive Plan, as in effect and as amended from time to time (the “ Plan ”). Capitalized terms that are not defined herein shall have the meanings given to such terms in the Plan.
WHEREAS, the Company has adopted the Plan to grant Awards from time to time to certain key Employees, Directors and Consultants of the Company and its Subsidiaries or Affiliates;
WHEREAS, the Participant is an Eligible Recipient as contemplated by the Plan; and
WHEREAS, the Committee has determined that it is in the interest of the Company to grant this Award to the Participant.
NOW, THEREFORE, in consideration of the premises and subject to the terms and conditions set forth herein and in the Plan, the parties hereto agree as follows:
1. Grant of Cash Performance Units . Subject to and upon the terms and conditions set forth in this Agreement and in the Plan, the Committee has granted to the Participant [____ (__)] cash performance units (“ Cash Performance Units ”) on the Grant Date and the Participant hereby accepts the grant of the Cash Performance Units as set forth herein. The target performance value of each Cash Performance Unit is $1.00 (the “ Target Performance Value ”). Each Cash Performance Unit entitles the Participant to a cash payment based on the Target Performance Value and the Company’s Stock Price Performance during the applicable Performance Sub-Period (each as defined below). The Participant will receive payment with respect to up to one-third (1/3) of the Cash Performance Units for each Performance Sub-Period, depending on performance. Except as otherwise provided herein, the Cash Performance Units shall have no value until the applicable vesting date. To the extent that the Committee determines that Code Section 162(m) applies to any portion of this Award, (a) such portion(s) of this Award shall be contingent upon shareholder approval of the Plan in accordance with Code Section 162(m) and the regulations promulgated thereunder and shall comply with such other requirements as necessary to qualify as “performance-based compensation” under Code Section 162(m) and (b) if any portion(s) of this Award would not be deductible under Code Section 162(m), no payment will be made with respect to such portion(s) of the Award.
1
2. Definitions . For purposes of this Agreement:
(a) “ Award Percentage ” means a percentage determined pursuant to the table below, based on the Company’s Stock Price Performance:
2
Payout Level |
Award
|
Stock Price Performance |
Threshold |
50% |
-25% or below |
|
60% |
0% |
Target |
100% |
20% |
|
125% |
50% |
|
150% |
100% |
Maximum |
200% |
150% or more |
Note: To the extent that the Stock Price Performance is in between the percentages listed in the table above, the applicable Award Percentage will be interpolated on a straight-line basis.
(b) “ Closing Stock Price ” means the average of the closing prices of the Company’s Common Stock for each trading day during the thirty (30) day trading period immediately preceding and including the last day of the Performance Sub-Period.
(c) “ Opening Stock Price ” means the average of the closing prices of the Company’s Common Stock for each trading day during the thirty (30) day trading period immediately preceding and including the Grant Date.
(d) “ Performance Period ” shall mean the period commencing on the Grant Date and ending on the third (3 rd ) anniversary of the Grant Date.
(e) “ Performance Sub-Period ” shall mean the sub-periods comprising the Performance Period, lasting from the Grant Date through, respectively, (i) the first (1 st ) anniversary of the Grant Date, (ii) the second (2 nd ) anniversary of the Grant Date and (iii) the third (3 rd ) anniversary of the Grant Date.
(f) “ Stock Price Performance ” means the result (positive or negative) of the following formula (expressed as a percentage): (A – B)/B, where “A” equals the Closing Stock Price and “B” equals the Opening Stock Price. For purposes of illustration only, if, for a Performance Sub-Period, the Opening Stock Price were $10.00 and the Closing Stock Price were $12.00, the Stock Price Performance would be 20% (or (12-10)/10)).
3. Timing and Form of Payment . Within two and one-half (2½) months following the end of each Performance Sub-Period, but in no event later than the end of the calendar year following the year in which the Performance Sub-Period ends, the Company will pay the Participant an amount equal to (a) the product of the applicable number of Cash Performance Units and the Target Performance Value, multiplied by (b) the Award Percentage. The amount payable hereunder shall be subject to tax withholding as required by Section 6.
4. Termination of Service .
(a) Continuous Service Required . Except as may otherwise be provided in the Participant’s employment or other services agreement with the Company (if applicable) or as otherwise provided herein, the Cash Performance Units for a Performance Sub-Period may be earned only if the Participant has remained in continuous service with the Company or a Subsidiary
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or Affiliate thereof, as applicable, whether as an Employee, Director or Consultant (“ Service ”), from the beginning through the end of the applicable Performance Sub-Period. Upon a termination of the Participant’s Service for any reason (including for or without Cause or due to the Participant’s voluntary resignation for any reason) other than due to the Participant’s (i) death or Disability or (ii) Qualifying Termination (as defined below), the Participant shall forfeit all Cash Performance Units that have not vested prior thereto ( i.e. , the Participant shall forfeit the Cash Performance Units for the Performance Sub-Period in which the termination of Service occurs and any subsequent Performance Sub-Period that has not been completed) and shall not be entitled to receive any distribution with respect to such Cash Performance Units.
(b) Termination due to Death or Disability . Notwithstanding the foregoing, in the event that the Participant’s Service terminates by reason of the Participant’s death or Disability prior to the end of the Performance Period, any unvested Cash Performance Units shall vest in full as of the date of such termination of Service at the greater of (i) the actual Award Percentage achieved for the immediately preceding Performance Sub-Period or (ii) the target Award Percentage; provided that, if the Participant’s Service terminates by reason of the Participant’s death or Disability prior to the end of the first Performance Sub-Period, any unvested Cash Performance Units shall vest in full at the target Award Percentage.
5. Qualifying Terminations Following a Change in Control .
(a) Qualifying Termination . Notwithstanding any language in the Plan or the Participant’s employment or other services agreement with the Company to the contrary, the Cash Performance Units will not vest solely upon a Change in Control unless such Cash Performance Units are not assumed by the Company’s successor or converted to an equivalent value award upon substantially the same terms effective immediately following the Change in Control. However, the Cash Performance Units will vest in their entirety at the greater of (i) the actual Award Percentage achieved for the immediately preceding Performance Sub-Period or (ii) the target Award Percentage if the Participant experiences a Qualifying Termination. A “ Qualifying Termination ” occurs if, within two (2) years following a Change in Control, the Participant’s Service is terminated (x) by the Company without Cause or (y) by the Participant for Good Reason.
(b) For purposes of this Agreement, “Good Reason” shall have the same meaning set forth in the Participant’s employment or other services agreement with the Company. If the Participant is not party to such an agreement that defines such term, “ Good Reason ” shall mean the occurrence of any of the following circumstances or events:
(i) a material reduction by the Company of the Participant’s base compensation (other than pursuant to an across-the-board reduction in base compensation applicable to similarly situated service providers of the Company);
(ii) the transfer of the Participant’s principal place of Service to a location fifty (50) or more miles from its location immediately preceding the transfer; or
(iii) the material diminution by the Company of the Participant’s duties or responsibilities with respect to his or her Service.
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(c) The Participant will provide the Company with written notice describing which of the circumstances above is cause for the Good Reason termination within thirty (30) calendar days after the occurrence of the event giving rise to the notice. The Company will have thirty (30) calendar days from the receipt of such notice to cure the event prior to the Participant exercising his or her right to terminate for Good Reason and, if not cured, the Participant’s termination will be effective upon the expiration of such cure period.
6. Tax Withholding . The Company or any Affiliate thereof shall have the power to withhold, or require the Participant to remit to the Company or such Affiliate thereof, cash that would otherwise be distributable to the Participant with respect to the Cash Performance Units in an amount sufficient to satisfy the federal, state, and local withholding tax requirements, both domestic and foreign, relating to such transaction, and the Company or such Affiliate thereof may defer payment of cash until such requirements are satisfied.
7. Non-Competition, Non-Solicitation and Non-Disparagement .
(a) Restrictive Covenants . In exchange for good and valuable consideration, including the Cash Performance Units granted herein, the sufficiency of which is acknowledged, the Participant agrees as follows (the “ Restrictive Covenants ”):
(i) Non-Competition and Non-Solicitation . During the period of the Participant’s Service and for one (1) year following the termination thereof, the Participant shall not and shall cause each of his or her Affiliates not to:
(A) enter into or engage in any business that competes with the Business within the Restricted Territory;
(B) solicit customers, active prospects, business or patronage for any business, wherever located, that competes with the Business within the Restricted Territory or sell any products or services for any business, wherever located, that competes with the Business or could then be provided by the Business within the Restricted Territory;
(C) solicit, divert, entice or otherwise take away any employees, customers, former customers, active prospects, business, patronage or orders of the Company or any Subsidiary within the Restricted Territory or attempt to do so; or
(D) counsel, promote or assist, financially or otherwise, any person engaged in any business that competes with the Business within the Restricted Territory .
(ii) Non-Disparagement . The Participant shall not, during the period of his or her Service or at any time thereafter, disparage, denigrate or harass the Company, any of its Affiliates or any of their respective agents, employees, managers, shareholders, directors, officers, or partners.
(iii) Other Covenants . For the avoidance of doubt, the Restrictive Covenants are in addition to, and not in lieu of, any restrictive covenants to which the Participant may
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otherwise be subject, whether under the terms of his or her employment or services agreement or otherwise.
(iv) Acknowledgement . The Participant acknowledges that these Restrictive Covenants are reasonably necessary to protect the Company’s and its clients’ and business partners’ legitimate business interests. The Participant also acknowledges that by serving in the position of ____________________, he/she is in an executive/management level position and has been entrusted with access to trade secrets and confidential information that, if made available to non-Company employees, would cause irreparable harm to the Company because of the significant time, effort, and expense the Company expended in developing such trade secrets and confidential information.
(b) Definitions . For purposes of this Agreement:
(i) “ Business ” means manufacturing, personalizing, designing, fulfilling, packaging, distributing, selling and marketing plastic cards, including, without limitation, credit cards, debit cards, ATM cards, loyalty cards, gift cards, membership cards, gaming cards, player tracking cards, casino cards, hotel key cards, access cards, ID cards, contactless cards, prepaid cards, chip cards, EMV cards, dual interface cards, and blank cards; and
(ii) “ Restricted Territory ” means (A) the United States, Canada, Mexico, Europe and the United Kingdom; and (B) the geographic area, whether within or outside of the geographic area described in clause (A), in which reside any customers with which the Participant had any contact or for which the Participant had any responsibility (whether indirect, direct or advisory) at the time of the Participant’s termination of Service or at any time during the two (2) year period prior to such termination.
(c) Reasonableness of Restrictions . The Participant agrees that the scope and duration of the Restrictive Covenants are reasonable and necessary to protect the legitimate business interests of the Company. The Participant also agrees that these Restrictive Covenants will not preclude the Participant from obtaining other gainful employment in his or her profession.
(d) Remedies for Breach .
(i) Forfeiture of Cash Performance Units . In the event of the Participant’s breach of any of the Restrictive Covenants, the Cash Performance Units (whether vested or unvested) shall immediately be forfeited and the Participant may be required to repay any amount previously paid to the Participant by the Company with respect to a vested Cash Performance Unit.
(ii) Other Relief . In the event of the Participant’s actual or threatened breach of this Agreement, the Participant agrees that the Company will be entitled to provisional and injunctive relief in addition to any other available remedies at law or equity.
8. Nontransferability of Cash Performance Units . The Cash Performance Units granted hereunder may not be sold, transferred, pledged, assigned, encumbered or otherwise
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alienated or hypothecated, other than by will or by the laws of descent and distribution or, on such terms and conditions as the Committee shall establish, to a permitted transferee.
9. Beneficiary Designation . The Participant may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) by whom any right under the Plan and this Agreement is to be exercised in case of his or her death. Each designation will revoke all prior designations by the Participant, shall be in a form reasonably prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his or her lifetime.
10. Transfer of Data . The Participant consents to the Company or any Affiliate thereof processing data relating to the Participant for legal, personnel, administrative and management purposes and in particular to the processing of any sensitive personal data relating to the Participant. The Company may make such information available to any Affiliate thereof, those who provide products or services to the Company or any Affiliate thereof (such as advisers and payroll administrators), regulatory authorities, potential purchasers of the Company or the business in which the Participant works, and as may be required by law.
11. Compliance with Applicable Laws and Regulations . Notwithstanding anything herein to the contrary, the Company shall not be obligated to pay amounts due hereunder unless and until the Company is advised by its counsel that such payment is in compliance with all applicable laws, regulations of governmental authority, and the requirements of any exchange upon which the Common Stock is traded. The Company may require, as a condition of such payment, and in order to ensure compliance with such laws, regulations and requirements, that the Participant make such covenants, agreements, and representations as the Company, in its sole discretion, considers necessary or desirable. In addition, to the extent that all or any portion of any payment otherwise due hereunder would not be deductible by the Company for federal tax purposes (irrespective of whether the Company would, in fact, have the ability to take advantage of such deduction), then the Company reserves the right to reduce or eliminate such payment to an amount that would be deductible by the Company for federal tax purposes.
12. No Guarantee of Continued Service . Nothing in the Plan or in this Agreement shall interfere with or limit in any way the right of the Company or an Affiliate thereof to terminate the Participant’s Service at any time or confer upon the Participant any right to continued Service.
13. No Rights as a Shareholder . The Cash Performance Units represent only the right to receive cash pursuant to the terms hereof, shall not represent an equity security of the Company and shall not carry any voting or dividend rights.
14. Interpretation; Construction . Any determination or interpretation by the Committee under or pursuant to this Agreement shall be final and conclusive on all persons affected hereby. Except as otherwise expressly provided in the Plan, in the event of a conflict between any term of this Agreement and the terms of the Plan, the terms of the Plan shall control.
15. Amendments . No amendment, alteration or termination of the Plan may, without the written consent of the Participant, impair the rights of the Participant under this Agreement. This Agreement may be amended as provided under the Plan, but except as provided in the Plan,
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no such amendment will, without the prior written consent of the Participant, adversely alter or impair any rights or obligations under this Award.
16. Miscellaneous .
(a) Notices . All notices, requests, demands, letters, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (A) delivered personally, (B) mailed, certified or registered mail with postage prepaid, (C) sent by next-day or overnight mail or delivery, or (D) sent by fax, as follows:
(i) If to the Company:
CPI Card Group Inc.
10026 West San Juan Way
Littleton, CO 80127
Attention: Chief Human Resources Officer
Phone: 303-345-2424
(ii) If to the Participant, to the Participant’s last known home address,
or to such other person or address as any party shall specify by notice in writing to the Company. All such notices, requests, demands, letters, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the fifth business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, or (z) if by fax, on the day delivered, provided that such delivery is confirmed.
(b) Binding Effect; Benefits . This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein.
(c) No Guarantee of Future Awards . This Agreement does not guarantee the Participant the right to or expectation of future Awards under the Plan or any future plan adopted by the Company.
(d) Waiver . Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this. Agreement, (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement and (iii) waive or modify performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of either party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by either party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by either party to exercise any right or
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privilege hereunder shall be deemed a waiver of such party’s rights or privileges hereunder or shall be deemed a waiver of such party’s rights to exercise the same at any subsequent time or times hereunder.
(e) Code Section 409A Compliance . The Cash Performance Units are intended to be exempt from or comply with the requirements of Code Section 409A and this Agreement shall be interpreted accordingly. Notwithstanding any provision of this Agreement, to the extent that the Committee determines that any portion of the Cash Performance Units granted under this Agreement is subject to Code Section 409A and fails to comply with the requirements of Code Section 409A, notwithstanding anything to the contrary contained in the Plan or in this Agreement, the Committee reserves the right to amend, restructure, terminate or replace such portion of the Cash Performance Units in order to cause such portion of the Cash Performance Units to either not be subject to Code Section 409A or to comply with the applicable provisions of such section.
(f) Applicable Law . This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, regardless of the law that might be applied under principles of conflict of laws. The Company and the Participant agree that the jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), this Agreement shall be exclusively in the courts in the State of Colorado, County of Arapahoe or Denver, including the Federal Courts located therein (should Federal jurisdiction exist), and the Company and the Participant hereby submit and consent to said jurisdiction and venue.
(g) Section and Other Headings . The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
(h) Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument.
(i) Erroneously Awarded Compensation . Notwithstanding any provision in the Plan or in this Agreement to the contrary, this Award shall be subject to any compensation recovery and/or recoupment policy adopted and amended from time to time by the Company to comply with applicable law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or to comport with good corporate governance practices.
— Signature page follows —
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Notwithstanding anything in this Agreement or in the Plan to the contrary, the Committee hereby reserves the right, in its sole discretion, to terminate and cancel this Award if the Participant fails to accept this Agreement on or prior to May 5, 2017 .
IN WITNESS WHEREOF, the Company and the Participant have duly executed this Agreement as of the date first above written.
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CPI CARD GROUP INC. |
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By: CPI Card Group Inc. |
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PARTICIPANT |
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Accepted via electronic acceptance |
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Name: |
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Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Steven Montross, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 4, 2017
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/s/ Steven Montross |
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Steven Montross |
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President and Chief Executive Officer |
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Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Lillian Etzkorn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 4, 2017
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/s/ Lillian Etzkorn |
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Lillian Etzkorn |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Montross, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Steven Montross |
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Steven Montross |
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President and Chief Executive Officer |
Date: May 4, 2017
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lillian Etzkorn, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Lillian Etzkorn |
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Lillian Etzkorn |
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Chief Financial Officer |
Date: May 4, 2017