15. Stock Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company had reserved 800,000 shares of common stock for issuance under the Omnibus Plan. Effective September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of December 31, 2018, there were 156,917 shares available for grant under the Omnibus Plan.

During the year ended December 31, 2018, the Company granted awards of non-qualified stock options for 159,755 shares of common stock. During the year ended December 31, 2017, the Company granted awards of non-qualified stock options for 713,075 shares of common stock. During the third quarter of 2017, the Company granted stock option awards in lieu of the regular cycle of Omnibus Plan awards that the Company would have otherwise made in the first quarter of 2018, and also in conjunction with the appointment of the Company’s President and Chief Executive Officer. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date.

The following is a summary of the activity in outstanding stock options under the Omnibus Plan:


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

Outstanding as of December 31, 2017	937,310	$	17.11
Granted	159,755		2.74
Forfeited	(186,438)		15.17
Outstanding as of December 31, 2018	910,627	$	14.99	8.38
Options vested and exercisable as of December 31, 2018	305,275		23.04	7.93
Options vested and expected to vest as of December 31, 2018	910,627		14.99	8.38

The following is a summary of the activity in non-vested stock options under the Omnibus Plan:



		Weighted-
		Average
		Grant-Date
	Number	Fair Value
Non-vested as of December 31, 2017	876,903	$	4.08
Granted	159,755		1.21
Forfeited	(152,242)		3.45
Vested	(279,064)		4.81
Non-vested as of December 31, 2018	605,352	$	3.14

Unvested options as of December 31, 2018 vest as follows:


2019		301,267
2020		250,228
2021		53,857
2022		-
Total unvested options as of December 31, 2018		605,352

Stock options were granted under the Omnibus Plan at various times during the years ended December 31, 2018 and 2017. The fair value of stock option awards was determined at the date of grant using either a Black-Scholes option-pricing model, or a Monte Carlo simulation, with the following weighted-average assumptions:



	Year ended December 31,
	2018		2017
Expected term in years	6.0		6.0
Volatility	48.0	%	31.9	%
Risk-free interest rate	2.7	%	2.0	%
Dividend yield(1)	-	%	0.9	%

⁽¹⁾

Represents the weighted-average dividend yield for grants made during the year ended December 31, 2017. The Company discontinued its quarterly dividend program during August 2017.

Expected term –For option grants valued using a Black-Scholes option-pricing model, the Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. Certain stock option awards granted in 2016 with an exercise price of $50 per share were valued using a Monte Carlo simulation. The Monte Carlo model simulates many future stock price paths, and assumes the exercise of vested options will occur uniformly once the options are projected to be in-the money.

Volatility – The Company considered the volatility of its own common stock in determining the fair value of stock option awards, in addition to a peer group average historical volatility over the expected option term. This is due to the limited amount of trading history of the Company’s common stock. The peer group was based on financial technology companies that completed an initial public offering of common stock within the last 10 years.

Risk-free interest rate – The risk-free interest rate was determined by using the United States Treasury rate for the period that coincided with the expected option term.

Dividend yield – The estimated dividend yield is based on the Company’s recent historical dividend practice and the market value of its common stock.

The weighted average grant-date fair value of options granted is as follows:

The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2018 under the Omnibus Plan:


		Weighted-
		Average
		Grant-Date
	Shares	Fair Value
Outstanding as of December 31, 2017	49,677	$	16.20
Granted	75,188		2.66
Vested	(25,928)		10.63
Forfeited	(30,288)		9.91
Outstanding as of December 31, 2018	68,649	$	6.25

During the year ended December 31, 2018, the Company granted awards of restricted stock units for 75,188 shares of common stock. During the year ended December 31, 2017, the Company granted awards of restricted stock units for 47,870 shares of common stock. The restricted stock unit awards contain conditions associated with continued employment or service, and generally vest one year from the date of grant. On the vesting dates, shares of common stock will be issued to the award recipients.

Unvested restricted stock units as of December 31, 2018 will vest as follows:


2019		57,563
2020		10,843
2021		243
Total unvested restricted stock units as December 31, 2018		68,649

The following table summarizes the changes in the number of outstanding cash performance awards for the year ended December 31, 2018:





		Shares
Outstanding as of December 31, 2017		822,915
Granted		—
Vested		(274,854)
Forfeited		(123,049)
Outstanding as of December 31, 2018		425,012

During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant-date fair value of $663. These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units are based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant. The cash performance units were valued using a Monte Carlo simulation. The Monte Carlo model used the following valuation assumptions based on the 3-year term of the awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%, which was based on the Company’s dividend practice in March 2017 when the awards were granted. The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period. As of December 31, 2018, the Company recognized a liability of $96 in “Accrued expenses” and $64 in “Other long-term liabilities” in the Consolidated Balance Sheet for unsettled cash performance units.

Compensation expense for the Omnibus Plan for the years ended December 31, 2018 and 2017 was $961 and $2,360, respectively. As of December 31, 2018, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $840, which the Company expects to recognize over an estimated weighted average period of 1.2 years.

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

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

As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and are fully vested as of December 31, 2018.

During the year ended December 31, 2018, there was no activity under the Option Plan. As such, total shares outstanding and exercisable were 6,600 shares with a weighted-average exercise price of $0.002 per share and a weighted-average remaining contract term of 4.4 years at December 31, 2018.

Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for years ended December 31, 2018 and 2017 were de minimis.

Other Stock-Based Compensation Awards

During the year ended December 31, 2017, of the remaining 18,972 of unvested restricted stock awards that were outstanding, 9,486 shares vested, and the remaining 9,486 shares were forfeited. The executive who held the remaining 18,972 unvested restricted shares changed employment status to a consultant during the first quarter of 2017, and accordingly, the Company remeasured the awards on the date of the change in employment status and reduced stock-based compensation expense by $143. Compensation expense related to these awards for the year ended December 31, 2017, was $(371).

Year Ended December 31,

Weighted Average Grant-Date Fair Value of Options Granted