The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard ExEcuT1vE CHAIR
1
Dave Brown
1•2
Jerry Gray
1
Garry Leach
John Pollard
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Lead Director
John Pollard
CO-CHIEF EXECUTIVE OFFICER
Douglas Pollard
CO-CHIEF EXECUTIVE OFFICER
Paul Franzmann
EXECUTIVE VICE PRESIDENT, CORPORATE DEVELOPMENT
Pedro Melo
EXECUTIVE VICE PRESIDENT, INFORMATION TECHNOLOGY
Riva Richard
GENERAL COUNSEL AND EXECUTIVE VICE PRESIDENT,
LEGAL AFFAIRS
Robert Rose
EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
Jennifer Westbury
EXECUTIVE VICE PRESIDENT, SALES AND CUSTOMER
DEVELOPMENT
Robert Young
EXECUTIVE VICE PRESIDENT, OPERATIONS
Senior
Management
Investor
Relations
Robert Rose
140 Otter Street
t: 204-474-2323
e: winnipeg@pollardbanknote.com
Stock
Exchange Listing
I
The Toronto Stock Exchange - PBL
Independent
Auditors
KPMG LLP,
Winnipeg, Manitoba
Transfer
Agent
Computershare Trust Company of Canada,
Toronto, Ontario
Toronto-Dominion Bank,
Winnipeg, Manitoba
Bank of Montreal,
Calgary, Alberta
Bankers
Canadian Western Bank,
Edmonton, Alberta
Head Office
140 Otter Street
Winnipeg, Manitoba, R3T OMS
t: 204-474-2323
f: 204-453-1375
Winnipeg, Manitoba, Canada
1 499 Buffalo Place, R3T 1 L7
1 40 Otter Street, R3T OMS
Barrhead, Alberta, Canada
6203 46th Street, T7N 1 A 1
Sault Ste. Marie, Ontario, Canada
300-45 White Oak Drive East, P6B 4J7
Ypsilanti, Michigan, USA
775 James L. Hart Parkway, 481 97
Manufacturing
Facilities
Council Bluffs, Iowa, USA
504 34th Avenue, 51501
Chatsworth, California, USA
9340 Penfield Avenue, 91 31 1
POLLARD
banknote limited
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information
LETTER TO SHAREHOLDERS
Enclosed please find our 2017 Annual Report. 2017 was a record year for
Pollard, with net income increasing almost 37% compared to 2016, and we are
very proud of our accomplishments. In addition to achieving a number of
important goals, we continue to lay the foundation for continued success in future
years and are very excited about our prospects for 2018.
Our clear focus on the lottery and charitable gaming market has allowed us to
excel in serving customers throughout the world, across a broad platform of
products and services. Our instant ticket sales grew significantly during 2017,
driven by unparalleled demand for our proprietary specialty products such as
Scratch FX® and PlayBook®. Coupled with increased sales of ancillary products
such as digital and loyalty products, our total revenue exceeded $285 million in
2017, up 16% over the prior year.
Our Tresu press in our Ypsilanti facility completed its second full year of
operation and is meeting our high expectations for productivity and cost
efficiency. The quality of instant tickets produced on this press is unmatched and
the increased capacity it provided was a critical factor in achieving our 2017
results.
Our acquisition strategy was successful during this past year with the completion
of our acquisition of INNOVA Gaming Group Inc. (“INNOVA”) in August and,
subsequent to year end, the acquisition of International Gamco, Inc. (“Gamco”).
These acquisitions are important additions to our long term strategic growth
plans and focus on providing the depth of product and services required for our
customers, while generating appropriate financial returns for our shareholders.
Sales
2017 revenue reached a new record at over $285 million, an increase of $39
million or 16%. Significantly higher sales volumes of instant tickets generated
$17.3 million in increased revenue, with a greater mix of high value, specialty
products boosting our average selling price, increasing revenue by $8.0 million
compared to 2016. Ancillary sales such as digital products and licensed games
spawned incremental revenue of $6.6 million. And, of course, the inclusion of
sales from our acquisition of INNOVA and its Diamond Game business added
$10.3 million to our sales since joining Pollard at the beginning of August. The
Canadian dollar on average increased in value relative to the U.S. dollar,
reducing our revenue by $3.5 million when compared to the previous year.
We received key contract renewals in 2017 including those with Ontario and
France and our existing contract portfolio provides significant visibility for our
future revenue. It was within our existing contract base that we saw increased
sales volume as a key factor supporting our higher revenue.
We continue to expand our ancillary products to help lotteries grow their revenue
generating opportunities. Loyalty clubs, digital offerings, licensed products and
our exclusive lottery management services are examples of areas that provide a
wide range of services to complement core instant ticket sales. While still small
in absolute terms, these services help lotteries earn additional revenue by
expanding the gaming experience, while at the same time capturing important
information about their retail customers.
2017 witnessed continued strong demand for our licensed games portfolio,
particularly in regard to such classic games as Frogger, PacManTM and Tetris®.
Licensed games generated stronger revenue growth in 2017 by offering
important alternatives for lotteries.
Our iLottery operations continued to produce higher results, as our Michigan
operation grew strongly again and continues to set the standard in the nation,
while at the same time the sale of physical instant tickets at retail stores in
Michigan grows at industry leading levels. Consumers are increasing their
comfort with purchasing lottery products over the internet, expanding the player
base and providing the lottery with key consumer purchasing data. During 2017
we witnessed increased interest and activity from various lottery jurisdictions,
particularly in the United States, towards establishing iLottery sites, and we are
hopeful this will lead to increased opportunities to expand our iLottery business in
2018.
Charitable games revenue was up slightly in 2017 compared to 2016, reflecting
improved mix of slightly higher priced products and a higher volume of vending
machine sales. The market for charitable gaming products overall remained
fairly steady in 2017 and we have seen some positive trends of higher sales in
certain key jurisdictions.
Our newly acquired Diamond Game operation produced steady revenue
consistent with the underlying economic model of revenue share and leased
gaming machines. The sales cycle of placing additional machines and
expanding to new jurisdictions is a long process and we continue to diligently
educate the key decision leaders throughout the lottery world as to the
advantages of this unique product. The nature of the product and the related
contracts generate strong cash flows, allowing an important source of capital to
fund expansions when additional machine placements are achieved.
Operations
Our gross margin increased by $16.5 million, or 17.5%, due to a number of
factors, including significantly higher revenue driven by higher volumes, higher
average selling price and lower operating costs primarily due to improved
operating efficiencies of the Tresu press. The inclusion of Diamond Game
operating results since August 2017 also provided incremental margin of $6.8
million. As a percentage, our gross margin attained 23%, the highest margin
percentage ever attained while Pollard was a public company.
increased $7.7 million primarily due
Administration expenses
to higher
acquisition and transaction costs relating to the purchase of INNOVA of $2.7
million and the inclusion of Diamond Game, which added $3.3 million. Higher
compensation expenses relating to the investment made in new product
development and ancillary product growth also increased the overall expense.
Selling expenses increased $1.4 million over 2016 primarily due to the inclusion
of the Diamond Game operations.
Our business model generates significant amounts of free cash flow. During
2017 cash flow from operations before investments in capital expenditures and
working capital was $31.2 million. These funds were used to increase our
working capital by $2.9 million, invest in $7.0 million in property, plant and
equipment, pay dividends of $2.8 million and provide a significant portion of the
purchase price of INNOVA Gaming Group Inc. The organic cash generation of
our business is a key strength of Pollard and one that will provide us capital to
grow.
Acquisitions
During the last few years we have been actively focused on acquisitions as a key
complement to our organic growth strategy. 2017 saw the benefit of this
investment in time and resources with the completion of the acquisition of
INNOVA and its Diamond Game operating business. Shortly after the end of the
year we completed the purchase of Gamco.
Diamond Game offers a unique product line of gaming machines that generates
proceeds for charities across North America. We believe there are opportunities
to slowly expand the penetration of this product among existing customers in
addition to opening new jurisdictions in the future. Our integration of Diamond
Game has proceeded well since our purchase in the fall of 2017, with the
elimination of its former public company related costs providing a base for good
returns in 2018.
Gamco`s focus on pull tab ticket production for the charitable gaming market is
an important complement to our existing charitable game operation, American
Games, with the combination of these two businesses establishing a formidable
industry supplier. While still early in the process, we are encouraged by the
opportunities for long term efficiencies on the underlying cost platform as well as
additional incremental revenue possibilities.
We will continue to actively search for additional opportunities to acquire strategic
and financially accretive businesses that can further our goal of being the partner
of choice for lotteries around the world. We will be very disciplined in our
approach to future acquisitions.
Subsequent to year end we completed a very successful common share offering
raising approximately $36 million before costs. This was our first return to the
equity capital markets since our initial public offering more than 10 years ago and
illustrates our commitment to a conservative, effective capital structure to support
our growth.
Outlook for 2018
We anticipate 2018 will be another strong year for Pollard Banknote, building on
the success achieved in 2017. The lottery industry remains very healthy, with
continued growth expected in the instant ticket and ancillary areas. The
investments we have made are paying dividends, with higher sales in our core
products, expanded sales in ancillary products as well as increased recognition
by lotteries that Pollard Banknote is the thought leader in the lottery world.
Innovation is a key focal point for our team and an important driver of our
successful results in 2017. We continue to invest resources to introduce
additional innovation into our markets, and we believe this commitment will
continue to assist us in remaining a leader in the industry.
Our success was also due to the improved operations of our Tresu press based
in Ypsilanti, allowing increased production volume on a cost-efficient basis.
Indeed, our strong growth in 2017 has led to the decision to re-commission our
original press line alongside our Tresu to provide additional capacity and help
improve scheduling flexibility. We expect that line to be back up and running in
the 2nd quarter.
These key initiatives should result in strong cash flow during 2018, providing
options in funding growth investments, acquisitions and debt repayment.
2017 was an exceptionally successful year and we are grateful for all the people
that helped realize our accomplishments: our Pollard team now numbers close to
1,600 dedicated employees who work tirelessly to achieve our goals; our
customers in the lottery and charitable gaming world who grace us with their trust
in helping them generate funds to support great causes; our suppliers who are
continually challenged to help us create innovative products; our board of
directors who support and encourage us and last, but not least, our shareholders
who provide the foundation for all our success and motivate us to ensure Pollard
is the partner of choice in the lottery industry for many years to come. We thank
you for your support and look forward to a successful 2018.
Douglas Pollard
Co-Chief Executive Officer
John Pollard
Co-Chief Executive Officer
DIRECTORS OF POLLARD BANKNOTE LIMITED
Gordon Pollard
Executive Chair
Gordon Pollard joined Pollard Banknote in 1989 as Vice President, Marketing. He became
Co-Chief Executive Officer in 1997 and on May 1, 2011, was appointed Executive Chair of
the Board of Directors. Prior to 1989, he practiced law with a major Manitoba firm
specializing in corporate and securities law. Mr. Pollard has an LL.B. from the University of
Manitoba and a B.A. from the University of Winnipeg.
Dave Brown
Dave Brown is President and CEO of Richardson Capital and Managing Director of RBM
Capital Limited. Previously, he was Corporate Secretary of James Richardson & Sons,
Limited, and a partner in the independent law and accounting firm of Gray & Brown. He
also serves on the Board of Directors of GMP Capital, Inc. and Richardson Financial Group,
and on the Board of Trustees of The Boyd Group Income Fund. He graduated from the
University of Manitoba law school, and is a Chartered Professional Accountant and member
of the Manitoba Bar.
Jerry Gray
Jerry Gray is Dean Emeritus of the I. H. Asper School of Business at the University of
Manitoba where he also held the CA Manitoba Endowed Chair in Business Leadership. He is
a Past Chair of the Winnipeg Regional Health Authority and is a director and Chairman of
the Board of Gendis, Inc. He has consulted with many major corporations in the United
States and Canada in the areas of motivation, organizational design, manpower planning,
managing change, management development, incentive system design, customer service and
strategic planning.
Garry Leach
Garry Leach is the Chief Executive Officer of Mandak Capital Limited (an investment
corporation). From 1988 to 2004, Mr. Leach was President and Chief Executive Officer of
Gerdau MRM Steel (Manitoba Rolling Mills) and its predecessors. Mr. Leach has previously
served on the Board of Directors for Gerdau Ameristeel, GLM Industries, Manitoba Hydro,
the Canadian Steel Producers Association, (Ottawa), the Steel Manufacturers Association,
(Washington), as well as the Business Council of Manitoba. Mr. Leach also served as
Regent for the University of Winnipeg.
Douglas Pollard
Douglas Pollard is Co-Chief Executive Officer of Pollard Banknote. He joined Pollard
Banknote in 1997 as Vice President, Lottery Management Services and on May 1, 2011, he
was appointed Co-Chief Executive Officer. From 1997 to 1999 he was a director and the
General Manager of Imprimerie Spéciale de Banque, a subsidiary of Pollard Banknote based
in Paris, France. Prior
to 1997, Mr. Pollard was a Senior Consultant with
PricewaterhouseCoopers. Mr. Pollard has an M.B.A. from The Richard Ivey School of
Business at the University of Western Ontario and a B.A. from the University of Manitoba.
John Pollard
John Pollard is Co-Chief Executive Officer of Pollard Banknote. He joined Pollard Banknote
in 1986 as Vice President, Finance and became Co-Chief Executive Officer in 1997. Prior to
1986, he was an associate with the accounting firm Deloitte & Touche LLP. Mr. Pollard has
a B.Comm. from the University of Manitoba, and is a former member of the Institute of
Chartered Accountants of Manitoba.
December 31, 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2017
March 12, 2018
This management’s discussion and analysis (“MD&A”) of Pollard Banknote Limited (“Pollard”) for the year
ended December 31, 2017, is prepared as at March 12, 2018, and should be read in conjunction with the
accompanying audited financial statements of Pollard and the notes therein as at December 31, 2017.
Results are reported in Canadian dollars and have been prepared in accordance with International
Financial Reporting Standards (“GAAP” or “IFRS”).
Forward-Looking Statements
Certain statements in this report may constitute “forward-looking” statements which involve known and
unknown risks, uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed
or implied by such forward looking statements. When used in this document, such statements include
such words as “may,” “will,” “expect,” “believe,” “plan” and other similar terminology. These statements
reflect management’s current expectations regarding future events and operating performance and speak
only as of the date of this document. There should not be an expectation that such information will in
all circumstances be updated, supplemented or revised whether as a result of new information, changing
circumstances, future events or otherwise.
Use of Non-GAAP Financial Measures
Reference to “Adjusted EBITDA” is to earnings before interest, income taxes, depreciation and
amortization, unrealized foreign exchange gains and losses and certain non-recurring items including
severance costs and acquisition costs. Adjusted EBITDA is an important metric used by many investors
to compare issuers on the basis of the ability to generate cash from operations and management believes
that, in addition to net income, Adjusted EBITDA is a useful supplementary measure.
Adjusted EBITDA is a measure not recognized under GAAP and does not have a standardized meaning
prescribed by GAAP. Therefore, this measure may not be comparable to similar measures presented by
other entities. Investors are cautioned that Adjusted EBITDA should not be construed as an alternative
to net income determined in accordance with GAAP as an indicator of Pollard’s performance or to cash
flows from operating, investing and financing activities as measures of liquidity and cash flows.
Basis of Presentation
The results of operations in the following discussions encompass the consolidated results of Pollard for
the year ended December 31, 2017. All figures are in millions except for per share amounts.
2
POLLARD BANKNOTE LIMITED
Overview
Pollard Banknote Limited (“Pollard”) is one of the leading providers of products and services to lottery
and charitable gaming industries throughout the world. Management believes Pollard is the largest
provider of instant-win scratch tickets (“instant tickets”) based in Canada and the second largest producer
of instant tickets in the world. With the acquisition of International Gamco Inc. (“Gamco”), on February
1, 2018, management believes Pollard has also become the second largest supplier to the charitable
gaming industry in North America.
During the quarter ending September 30, 2017, Pollard acquired 100% of the common shares of INNOVA
Gaming Group Inc. (“INNOVA”, “Diamond Game”).
Pollard produces and provides a comprehensive line of instant tickets and lottery services including:
licensed products, distribution, SureTrack® lottery management system, retail telephone selling (“tel-
sell”), marketing, iLottery, interactive gaming, Social InstantsTM, retail management services and vending
machines including charitable game systems and tickets marketed under the Diamond Game trade name.
In addition, Pollard’s charitable gaming product line includes pull-tab (or break-open) tickets, bingo
paper, pull-tab vending machines and ancillary products such as pull-tab counting machines. Pollard also
markets products to the commercial gaming and security sector including such items as promotional
scratch and win tickets, transit tickets and parking passes.
Pollard’s lottery products are sold extensively throughout Canada, the United States and the rest of the
world, wherever applicable laws and regulations authorize their use. Pollard serves over 60 instant ticket
lotteries including a number of the largest lotteries throughout the world. Charitable gaming products
are mostly sold in the United States and Canada where permitted by gaming regulatory authorities.
Pollard serves a highly diversified customer base in the charitable gaming market of over 250 independent
distributors with the majority of revenue generated from repeat business.
Product line breakdown of revenue
Year ended
December 31,
2017
Year ended
December 31,
2016
Instant Tickets
Charitable Gaming Products
Diamond Game Products (1)
86.7%
9.7%
3.6%
88.8%
11.2%
-
(1) Diamond Game (INNOVA) was acquired on August 3, 2017.
3
Geographic breakdown of revenue
Year ended
December 31,
2017
Year ended
December 31,
2016
56%
22%
22%
54%
20%
26%
United States
Canada
International
Acquisition of INNOVA Gaming Group Inc.
INNOVA, through its wholly owned subsidiary Diamond Game, designs, develops, produces, markets,
and services games, systems and tickets for the North American gaming industry, predominantly in the
business to government (“B2G”) lottery and charitable gaming sector. INNOVA’s strategy is to enhance
revenues of government-sponsored lotteries and other regulated operators by offering its unique
“extended-play” products in traditional venues and non-traditional venues. INNOVA is licensed or
permitted to sell or lease its gaming machines, ticket dispensers or other alternative gaming products
(“AGP”) in 11 U.S. states, Ontario and Québec.
INNOVA’s primary product is the third generation Lucky Tab machine (“LT-3”), an “extended play” instant
ticket vending machine (“ITVM”) that dispenses tickets while simultaneously displaying the results of
each ticket on a video monitor in an entertaining fashion. INNOVA also develops AGP machines, such as
Class II bingo, skill games and tribal donation games. Its high quality gaming products, systems and
services typically generate recurring revenue, either through revenue sharing agreements or fixed-fee
leases. INNOVA also sells products and services, which include tickets for the machines, servers, software
licenses, technical support, parts, game conversion kits and hardware upgrade kits.
On August 3, 2017, 10188557 Canada Inc. (the “Offeror”), a wholly-owned subsidiary of Pollard, acquired
17,929,021 common shares of INNOVA which had been validly tendered under the offer to acquire all of
the outstanding common shares (the “Offer”) for $2.50 in cash per common share. The Offer was
extended until August 15, 2017.
On August 15, 2017, an additional 1,167,946 common shares were acquired under the extension of the
Offer for $2.50 in cash per common share. A total of 19,096,967 common shares or 95.13% of the
issued and outstanding common shares were acquired under the Offer. On August 18, 2017, Pollard
mailed to all remaining holders of common shares a Notice of Compulsory Acquisition pursuant to the
provisions of Section 206 of the Canada Business Corporations Act to complete the acquisition of 100%
of the common shares. On September 18, 2017, the Compulsory Acquisition was completed and the
Offeror acquired the remaining 976,932 common shares not already held by the Offeror, thereby
becoming the holder of 100% of the common shares. On September 19, 2017, INNOVA was formally
delisted from the Toronto Stock Exchange.
The acquisition was completed for aggregate gross consideration of $50.2 million. After consideration of
the $10.9 million of cash acquired, the net purchase price was $39.3 million. The net purchase price was
funded by proceeds from Pollard’s credit facility and additional subordinated debt.
During the period from August 3, 2017 and December 31, 2017, INNOVA generated revenues of
approximately $10.3 million and had a net loss of $1.2 million, which have been recorded in the
consolidated financial statements. Included in INNOVA’s net loss was $1.7 million of severance costs
4
related to the departure of two former executives. If INNOVA had been acquired on January 1, 2017,
incremental revenue of $16.9 million, net loss of $4.1 million (which includes $4.6 million of Innova’s
transaction costs relating to the sale of the company) and Adjusted EBITDA of $4.7 million would have
been included in the year ended December 31, 2017. For the entire year ended December 31, 2017,
INNOVA’s total revenue was $27.2 million and total Adjusted EBITDA was $8.7 million.
Recent developments:
International Gamco, Inc.
On February 1, 2018, Pollard Holdings, Inc., a wholly-owned subsidiary of Pollard, acquired 100% of the
common shares of International Gamco, Inc., a manufacturer of charitable gaming products, for a total
consideration of $21.6 million.
The purchase price was funded by proceeds from Pollard’s credit facility and cash on hand. The
acquisition will be accounted for using the acquisition method. The allocation of the purchase price to
the identifiable assets and liabilities has not yet been completed.
Share offering
On February 1, 2018, Pollard announced that it had entered into an agreement with a syndicate of
underwriters led by Canaccord Genuity Corp. (together, the “Underwriters”) to purchase on a bought
deal basis 1,800,000 common shares of Pollard at a price of $18.45 per share. Pollard also granted the
Underwriters an over-allotment option exercisable at any time up to 30 days following the closing of the
offering, to purchase up to an additional 270,000 common shares.
The offering, including the full over-allotment, closed on February 21, 2018. The total gross proceeds,
prior to any commissions and offering expenses, from the sale of 2,070,000 common shares was
approximately $38.2 million.
Pollard used the net proceeds to repay indebtedness under the Company’s credit facility and subordinated
debt.
5
The following financial information should be read in conjunction with the accompanying financial
statements of Pollard and the notes therein as at and for the year ended December 31, 2017.
SELECTED FINANCIAL INFORMATION
(millions of dollars, except per share information)
Sales
Cost of sales
Gross profit
Gross profit as a % of sales
Administration expenses
Expenses as a % of sales
Selling expenses
Expenses as a % of sales
Net income
Net income as a % of sales
Adjusted EBITDA
Adjusted EBITDA as a % of sales
Earnings per share (basic)
Earnings per share (diluted)
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$285.6
$246.4
$221.0
219.9
197.2
176.7
65.7
23.0%
28.6
10.0%
9.4
3.3%
16.8
5.9%
44.0
15.4%
$0.71
$0.71
49.2
20.0%
20.9
8.5%
8.0
3.2%
12.3
5.0%
29.7
12.1%
$0.52
$0.52
44.3
20.0%
19.2
8.7%
7.4
3.3%
7.5
3.4%
26.8
12.1%
$0.32
$0.32
December 31,
December 31,
December 31,
2017
2016
2015
Total Assets
Total Non-Current Liabilities
$228.3
$124.8
$176.8
$94.4
$164.1
$96.3
6
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(millions of dollars)
Net income
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange (gain) loss
Acquisition costs
Severance costs
Mark-to-market gain on foreign
currency contracts
Income taxes
Adjusted EBITDA
Pollard Banknote Limited
Diamond Game (INNOVA)
Total Adjusted EBITDA
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$16.8
$12.3
$7.5
10.6
3.6
(1.6)
-
-
-
4.8
$29.7
$29.7
-
$29.7
8.1
3.2
3.8
-
-
(0.5)
4.7
$26.8
$26.8
-
$26.8
13.1
3.9
(1.4)
2.7
1.7
-
7.2
$44.0
$40.0
4.0
$44.0
7
REVIEW OF OPERATIONS
Financial and operating information has been derived from, and should be read in conjunction with, the
consolidated financial statements of Pollard and the selected financial information disclosed in this MD&A.
ANALYSIS OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 2017
Sales
Product Line Sales
Fiscal 2017
(in millions of dollars)
Product Line Sales
Fiscal 2016
(in millions of dollars)
Instant
Tickets,
$247.6
Charitable
Gaming
Products,
$27.7
Diamond
Game
(INNOVA),
$10.3
Instant
Tickets,
$218.7
Charitable
Gaming
Products,
$27.7
During the year ended December 31, 2017 (“Fiscal 2017” or “2017”), Pollard achieved sales of $285.6
million, compared to $246.4 million in the year ended December 31, 2016 (“Fiscal 2016” or “2016”).
Factors impacting the $39.2 million sales increase were:
Higher instant ticket sales volumes increased sales by $17.3 million in Fiscal 2017 compared to Fiscal
2016 due to higher volumes from existing customers. Additionally, higher instant ticket average selling
price increased sales by $8.0 million when compared to 2016. This increase was a result of the higher
proportion of instant tickets sales coming from Pollard’s proprietary products such as Scratch FX® and
Playbook®.
Higher sales of our ancillary instant ticket products and services increased sales by $6.6 million from
2016. The increase in these sales was due primarily to higher sales of licensed products, greater revenues
from iLottery and added sales from our loyalty solution. As well, the addition of Diamond Game (INNOVA)
added $10.3 million in sales. An increase in the average selling price for charitable games increased
sales by $0.8 million from 2016, while a decrease in charitable gaming volumes reduced sales by $0.3
million from 2016.
Sales Breakdown
Fiscal 2017
Sales Breakdown
Fiscal 2016
United
States
56%
International
22%
Canada
22%
United
States
54%
International
26%
Canada
20%
8
During Fiscal 2017, Pollard generated approximately 69.4% (2016 – 68.8%) of its revenue in U.S. dollars
including a portion of international sales which are priced in U.S. dollars. During Fiscal 2017 the actual
U.S. dollar value was converted to Canadian dollars at an average rate of $1.304 compared to an average
rate of $1.328 during Fiscal 2016. This 1.8% decrease in the U.S. dollar value resulted in an approximate
decrease of $3.5 million in revenue relative to Fiscal 2016.
Cost of sales and gross profit
Cost of sales was $219.9 million in Fiscal 2017 compared to $197.2 million in Fiscal 2016. Cost of sales
was higher in Fiscal 2017 relative to Fiscal 2016 as a result of an increase in instant ticket volumes and
increased ancillary lottery products and services sales, partially offset by lower exchange rates on U.S.
dollar transactions in 2017. A portion of the increase also related to the inclusion of Diamond Game
(INNOVA) financial results which amounted to $6.8 million, including $0.8 million of additional
amortization related to intangible assets recognized on the acquisition.
Gross profit was $65.7 million (23.0% of sales) in Fiscal 2017 compared to $49.2 million (20.0% of sales)
in Fiscal 2016. This increase in gross profit was primarily the result of the increase in instant ticket
volumes, higher instant ticket average selling price, higher ancillary instant ticket products and services
sales and the addition of Diamond Game (INNOVA). The higher gross profit percentage was due to the
larger volumes of instant tickets, the instant ticket sales mix weighted to higher margin products,
increased sales of ancillary instant ticket products and services, including higher iLottery sales, and
improved manufacturing efficiencies. Pollard produced a record level of instant tickets in 2017, exceeding
2016 volumes by over 13%, thereby reducing our cost per unit by spreading its fixed manufacturing
overhead over the greater volume.
Administration expenses
Administration expenses increased to $28.6 million in Fiscal 2017 from $20.9 million in Fiscal 2016. The
increase was partly a result of the inclusion of Diamond Game (INNOVA) of $3.3 million (which includes
$1.7 million in severance costs related to the departure of two former executives). Additional reasons
for the increase were the $2.7 million in acquisition costs incurred in Fiscal 2017 and an increase in
compensation expenses (which primarily related to expansion of our ancillary lottery product and services
sales and acquisition efforts) including incentive accruals compared to 2016. These increases were
partially offset by lower professional fees, primarily legal costs, which were lower by $0.7 million in 2017
compared to 2016.
Selling expenses
Selling expenses increased to $9.4 million in Fiscal 2017 from $8.0 million in Fiscal 2016 due to higher
compensation costs and $1.0 million from the addition of Diamond Game (INNOVA).
Other expenses
Other expenses in Fiscal 2017 increased to $0.7 million, primarily due to the increase in the loss on equity
investment, compared to $nil in 2016.
Interest expense
Interest expense, including deferred financing amortization, increased to $3.9 million in Fiscal 2017 from
$3.6 million in Fiscal 2016 primarily as a result of the additional interest expense related to long term
9
and subordinated debt incurred with the acquisition of Diamond Game (INNOVA). The increase was
partially offset by lower interest rates and higher cash flow reducing long-term debt in 2017 prior to the
acquisition.
Foreign exchange gain
The net foreign exchange gain was $0.9 million in Fiscal 2017 compared to a net gain of $0.4 million in
Fiscal 2016. The 2017 net foreign exchange gain consisted of a $1.4 million unrealized gain primarily a
result of the decreased Canadian equivalent value of U.S. denominated accounts payable and long-term
debt with the strengthening of the Canadian dollar relative to the U.S. dollar. This gain was partially
offset by the realized foreign exchange loss of $0.5 million as a result of foreign currency denominated
account receivables collected being converted into Canadian dollars at unfavorable foreign exchange
rates.
The 2016 net foreign exchange gain consisted of a $1.6 million unrealized gain primarily a result of the
decreased Canadian equivalent value of U.S. denominated accounts payable and long-term debt with the
strengthening of the Canadian dollar relative to the U.S. dollar. This gain was partially offset by the
realized foreign exchange loss of $1.2 million as a result of foreign currency denominated account
receivables collected being converted into Canadian dollars at unfavorable foreign exchange rates.
Amortization and depreciation
Amortization and depreciation, including depreciation of property and equipment and the amortization of
intangible assets, totaled $13.1 million during Fiscal 2017 which increased from $10.6 million during
Fiscal 2016. The increase was primarily as a result of the inclusion of Diamond Game (INNOVA), with
$1.6 million of amortization and depreciation and $0.8 million of additional amortization related to
intangible assets recognized upon the acquisition.
Adjusted EBITDA
Adjusted EBITDA was $44.0 million in Fiscal 2017 compared to $29.7 million in Fiscal 2016. The primary
reasons for the increase in Adjusted EBITDA of $14.3 million were the increase in gross profit of $19.0
million (net of amortization and depreciation) and a decrease in realized foreign exchange loss of $0.7
million. These increases were partially offset by higher administration expenses (net of acquisition and
severance costs) of $3.3 million, an increase in selling expenses of $1.4 million and an increase other
expenses of $0.7 million.
Income taxes
Income tax expense was $7.2 million in Fiscal 2017, an effective rate of 30.0%, which was higher than
our expected effective rate of 27.0% due primarily to adjustments relating to the acquisition of INNOVA,
the effect of higher tax rates in the United States in 2017 and non-deductible amounts primarily relating
to expenses incurred in the acquisition of INNOVA. Partially offsetting these increases was the reduction
in the future federal income tax rates in the United States.
Income tax expense was $4.8 million in Fiscal 2016, an effective rate of 28.1%, which was similar to our
expected effective rate of 27.0%.
10
Net income
Net income was $16.8 million in Fiscal 2017 compared to net income of $12.3 million in Fiscal 2016. The
primary reasons for the increase in net income were the increase in gross profit of $16.5 million and the
increase in net foreign exchange gain of $0.5 million. Partially offsetting these increases in net income
were the increase in administration expenses of $7.7 million, which includes $2.9 million in acquisition
costs and $1.7 million in severance costs. Also reducing net income were the increase in selling expenses
of $1.4 million, the increase in other expenses of $0.7 million, the increase in interest expense of $0.3
million and the increase in income taxes of $2.4 million.
Earnings per share (basic and diluted) increased to $0.71 per share in Fiscal 2017 from $0.52 per share
in Fiscal 2016.
Liquidity and Capital Resources
Cash provided by operating activities
For the year ended December 31, 2017, cash flow provided by operating activities was $28.4 million
compared to $11.7 million in Fiscal 2016. Higher net income before income taxes after non-cash
adjustments in Fiscal 2017 contributed to an increase in cash provided by operating activities compared
to Fiscal 2016. Changes in the non-cash component of working capital decreased cash flow from
operations by $2.9 million for Fiscal 2017 (due primarily to increases in inventory and prepaid expenses
and deposits, partially offset by an increase in accounts payable and accrued liabilities), compared to a
decrease of $16.9 million for Fiscal 2016 (due primarily to increases in accounts receivable and inventory,
partially offset by an increase in accounts payable and accrued liabilities).
Cash used for interest payments increased to $3.7 million in 2017 as compared to $3.3 million in 2016.
As well, cash used for pension plan contributions increased to $5.3 million in 2017 as compared to $3.1
million in 2016, primarily because of the initiation of special solvency payments of $1.1 million in 2017.
Cash used for income taxes paid was $6.1 million in 2017 compared to $0.7 million of income taxes
recovered in 2016. Income taxes paid in 2017 included the final payment for 2016 taxes owing and the
required installments for 2017, while the income taxes recovered in 2016 were as a result of tax loss
carrybacks generated from accelerated depreciation on U.S. based equipment.
Cash used for investing activities
In the year ended December 31, 2017, cash used for investing activities was $51.2 million compared to
$6.4 million in the year ended December 31, 2016. In Fiscal 2017, Pollard used $39.3 million, net of
cash acquired, to purchase Diamond Game (INNOVA). In addition, Pollard invested $6.9 million in capital
expenditures, $2.2 million in its iLottery joint venture and $2.2 million on additions to intangible assets.
In Fiscal 2016, capital expenditures were $5.0 million. Pollard expended $0.8 million on its investment
in its iLottery joint venture and $1.1 million on additions to intangible assets. Proceeds from the sale of
Pollard’s investment in associate provided cash of $0.5 million.
Cash provided by financing activities
Cash provided by financing activities was $21.3 million in the year ended December 31, 2017, compared
to cash used for financing activities of $5.4 million in the year ended December 31, 2016.
11
During Fiscal 2017, Pollard received net proceeds from long-term debt of $13.5 million and $10.6 million
from subordinated debt, primarily to partially fund the acquisition of INNOVA. These receipts of cash
were partially offset by $0.3 million of financing costs and dividends paid of $2.8 million.
During Fiscal 2016, cash was used to repay $1.8 million of long-term debt, $0.7 million of subordinated
debt, $0.2 million of financing costs and dividends paid of $2.8 million.
As at December 31, 2017, Pollard had unused committed credit facility of $34.2 million, in addition to
$5.6 million in available cash resources. These amounts, in addition to cash flow provided by operating
activities, are available to be used for future working capital requirements, contractual obligations, capital
expenditures, dividends and to assist in financing future acquisitions.
ANALYSIS OF RESULTS FOR THE PERIOD OCTOBER 1, 2017 TO DECEMBER 31, 2017
FOURTH QUARTER OF 2017
SELECTED FINANCIAL INFORMATION
(millions of dollars)
Three months ended Three months ended
December 31, 2016
December 31, 2017
(unaudited)
(unaudited)
Sales
Cost of sales
Gross profit
Administration
Selling
Other expenses
Income from operations
Finance costs
Income before income taxes
Income taxes:
Current
Future
Net income
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange loss
Acquisition costs
Severance costs
Income taxes
Adjusted EBITDA
Pollard Banknote Limited
Diamond Game (INNOVA)
Adjusted EBITDA
$79.6
62.1
17.5
7.5
2.6
-
7.4
1.3
6.1
1.5
0.3
1.8
$4.3
4.5
1.3
0.5
0.3
0.3
1.8
$13.0
$10.1
2.9
$13.0
12
$65.7
51.5
14.2
4.9
2.2
0.3
6.8
1.2
5.6
1.2
0.6
1.8
$3.8
2.2
0.9
0.4
-
-
1.8
$9.1
$9.1
-
$9.1
Sales
During the three months ended December 31, 2017, Pollard achieved sales of $79.6 million, compared
to $65.7 million in the three months ended December 31, 2016. Factors impacting the $13.9 million
sales increase were:
Instant ticket sales volumes for the fourth quarter of 2017 were higher than the fourth quarter of 2016
by 19.8%, which increased sales by $10.6 million, due to higher volumes from existing customers. In
addition, an increase in our ancillary instant ticket products and services volumes, primarily sales from
iLottery and licensed products, increased revenue by $1.6 million. As well, the addition of Diamond Game
(INNOVA) added $6.4 million in sales. Higher average price of charitable game sales added $0.3 million
in revenue compared to the fourth quarter of 2016. Partially offsetting these increases in sales was a
slight decrease in average selling price of instant tickets compared to 2016 which reduced sales by $1.6
million and a decrease in the volume of charitable game sales which further decreased sales by $1.2
million.
During the three months ended December 31, 2017, Pollard generated approximately 67.1% (2016 –
68.2%) of its revenue in U.S. dollars including a portion of international sales which were priced in U.S.
dollars. During the fourth quarter of 2017 the actual U.S. dollar value was converted to Canadian dollars
at an average rate of $1.266, compared to an average rate of $1.332 during the fourth quarter of 2016.
This 5.0% decrease in the value of the U.S. dollar resulted in an approximate decrease of $2.3 million in
revenue relative to 2016. Also during the fourth quarter of 2017, the Canadian dollar weakened against
the Euro resulting in an approximate increase of $0.1 million in revenue relative to 2016.
Cost of sales and gross profit
Cost of sales was $62.1 million in the fourth quarter of 2017 compared to $51.5 million in the fourth
quarter of 2016. Cost of sales was higher in the quarter relative to the fourth quarter of 2016 as a result
of an increase in instant ticket volumes and higher ancillary instant ticket products and services volumes,
partially offset by lower exchange rates on U.S. dollar transactions in the fourth quarter of 2017. A
portion of the increase also related to the inclusion of Diamond Game (INNOVA) financial results which
amounted to $4.2 million, including $0.6 million of additional amortization related to intangible assets
recognized on the acquisition.
Gross profit was $17.5 million (22.0% of sales) in the fourth quarter of 2017 compared to $14.2 million
(21.6% of sales) in the fourth quarter of 2016. This increase in gross profit was primarily the result of
the increase in instant ticket volumes, higher ancillary instant ticket products and services sales and the
addition of Diamond Game (INNOVA). The higher gross profit percentage was due to the larger volumes
of instant tickets, increased sales of ancillary instant ticket products and services, including higher iLottery
sales, and improved manufacturing efficiencies. Pollard produced over 17% more tickets in the fourth
quarter of 2017 as compared to the comparable quarter of 2016, thereby reducing our cost per unit by
spreading its fixed manufacturing overhead over the greater volume.
Administration expenses
Administration expenses were $7.5 million in the fourth quarter of 2017 which was higher compared to
$4.9 million in the fourth quarter of 2016. The increase was partly a result of the inclusion of Diamond
Game (INNOVA) of $1.2 million (which includes $0.3 million in severance costs related to the departure
of a former executive). Additional reasons for the increase were $0.3 million in acquisition costs in the
fourth quarter of 2017 and an increase in compensation expenses (which primarily related to expansion
13
of our ancillary lottery product and services sales and acquisition efforts) including incentive accruals
compared to 2016. In addition, 2016 administration expenses included a credit for a recovery of legal
fees.
Selling expenses
Selling expenses increased to $2.6 million in the fourth quarter of 2017 from $2.2 million in the fourth
quarter of 2016 primarily as a result of the $0.6 million in expenses resulting from the addition of Diamond
Game (INNOVA), partially offset by a decrease in contract support costs.
Interest expense
Interest expense, including deferred financing amortization, increased to $1.3 million in the fourth quarter
of 2017 compared to $0.9 million in the fourth quarter of 2016 primarily as a result of the additional
interest expense related to long term and subordinated debt incurred with the purchase of Diamond
Game (INNOVA).
Foreign exchange loss
The net foreign exchange loss was $nil in the fourth quarter of 2017 compared to a net loss of $0.3
million in the fourth quarter of 2016. The 2017 net foreign exchange loss consisted of a $0.5 million
unrealized loss which was primarily a result of the decreased Canadian equivalent value of U.S.
denominated accounts receivables with the weakening of the Canadian dollar relative to the U.S. dollar.
This loss was fully offset by the realized foreign exchange gain of $0.5 million, as a result of foreign
currency denominated account receivables collected being converted into Canadian dollars at favorable
foreign exchanges rates.
The 2016 net foreign exchange loss consisted of a $0.4 million unrealized loss which was primarily a
result of the increased Canadian equivalent value of U.S. denominated debt with the weakening of the
Canadian dollar relative to the U.S. dollar. This loss was partially offset by the realized foreign exchange
gain of $0.1 million, as a result of foreign currency denominated account receivables collected being
converted into Canadian dollars at favorable foreign exchange rates.
Amortization and depreciation
Amortization and depreciation, including depreciation of property, plant and equipment and the
amortization of intangible assets, increase to $4.5 million during the fourth quarter of 2017 as compared
to $2.2 million during the fourth quarter of 2016. The increase was primarily as a result of the inclusion
of Diamond Game (INNOVA), with $1.0 million of amortization and depreciation and $0.6 million of
additional amortization related to intangible assets recognized upon the acquisition.
Adjusted EBITDA
Adjusted EBITDA was $13.0 million in the fourth quarter of 2017 compared to $9.1 million in the fourth
quarter of 2016. The primary reasons for the increase in Adjusted EBITDA were the increase in gross
profit (net of amortization and depreciation) of $5.6 million, the decrease in other expenses of $0.3
million and an increase in realized foreign exchange gain of $0.4 million. Partially offsetting the increases
were higher administration expenses (net of severance and acquisition costs) of $2.0 million and an
increase in selling expenses of $0.4 million.
14
Income taxes
Income tax expense was $1.8 million in the fourth quarter of 2017, an effective rate of 28.8% which was
higher than our expected effective rate of 27.0% due primarily to adjustments relating to the acquisition
of INNOVA, the effect of higher tax rates in the United States in 2017, the effect of foreign exchange
and non-deductible amounts primarily relating to expenses incurred in the acquisition of INNOVA.
Partially offsetting these increases was the reduction in the future federal income tax rates in the United
States.
Income tax expense was $1.8 million in the fourth quarter of 2016, an effective rate of 32.5% which was
higher than our expected effective rate of 27.0% due primarily to differences relating to the foreign
exchange impact of Canadian dollar denominated debt in its U.S. subsidiaries. Pollard has capitalized its
U.S. operations using intercompany Canadian dollar debt. The significant weakening of the Canadian
dollar versus the U.S. dollar in the fourth quarter results in a future gain on debt repayment for U.S. tax
purposes in the subsidiary, creating a deferred tax expense with no related income (as the gain is
eliminated on consolidation). This increased the consolidated provision percentage by about 8%. Other
permanent differences relating to the foreign exchange translation of property, plant and equipment
decreased the provision by approximately 4%.
Net income
Net income was $4.3 million in the fourth quarter of 2017 compared to $3.8 million in the fourth quarter
of 2016. The primary reasons for the increase in net income were the higher gross profit of $3.3 million,
a reduction in other expenses of $0.3 million and the decrease in net foreign exchange loss of $0.3
million. Partially offsetting these increases were the increase in administration expenses of $2.6 million
which included $0.3 million in acquisition costs and $0.3 million in severance costs. Also reducing net
income were the increase in selling expenses of $0.4 million and higher interest expense of $0.4 million.
Earnings per share (basic and diluted) increased to $0.18 per share in the fourth quarter of 2017 from
$0.16 per share in the fourth quarter of 2016.
Quarterly Information
(unaudited)
(millions of dollars)
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Sales
$79.6
$70.6
$77.9
$57.5
$65.7
$62.7
$54.0
$64.0
Adjusted EBITDA
13.0
11.6
13.1
6.3
9.1
7.8
6.0
6.8
Net income
4.3
4.7
6.0
1.8
3.8
2.8
2.1
3.6
Q4 2017 sales and Adjusted EBITDA were high relative to previous quarters primarily as a result of higher
instant ticket volumes and the addition of Diamond Game (INNOVA).
15
Q3 2017 Adjusted EBITDA was higher relative to quarters prior to Q2 2017 due to increased gross profit
(net of amortization and depreciation) as a result of the higher average selling price of instant tickets
and increased sales of ancillary lottery products and services. The addition of Diamond Game (INNOVA)
also contributed to the increase in Adjusted EBITDA.
Q2 2017 sales, Adjusted EBITDA and net income were higher due to a number of positive factors including
sales volumes boosted by the significant amount of product in transit at the end of Q1 2017.
Working Capital
Net non-cash working capital varies throughout the year based on the timing of individual sales
transactions and other investments. The nature of the lottery industry is few individual customers who
generally order large dollar value transactions. As such, the change in timing of a few individual orders
can impact significantly the amount required to be invested in inventory or receivables at a particular
period end. The high value, low volume of transactions results in some significant volatility in non-cash
working capital, particularly during a period of rising volumes. Similarly, the timing of the completion of
the sales cycle through collection can significantly impact non-cash working capital.
Instant tickets are produced specifically for individual clients resulting in a limited investment in finished
goods inventory. Customers are predominantly government agencies, which result in regular payments.
There are a limited number of individual customers, and therefore net investment in working capital is
managed on an individual customer by customer basis, without the need for company wide benchmarks.
The overall impact of seasonality does not have a material impact on the carrying amounts in working
capital.
As at December 31, 2017, Pollard’s investment in non-cash working capital increased $2.9 million
compared to December 31, 2016, primarily as a result of increased investments in inventories and prepaid
expenses, which were partially offset by an increase in accounts payable and accrued liabilities.
December 31, December 31,
2017
2016
Working Capital
Total Assets
Total Non-Current Liabilities
$44.6
$228.3
$124.8
$49.5
$176.8
$94.4
Credit Facility
Pollard’s credit facility was renewed effective June 22, 2017. The credit facility provides loans of up to
$105.0 million for its Canadian operations and US$12.0 million for its U.S. subsidiaries. The borrowings
for the Canadian operations can be denominated in Canadian or U.S. dollars, to a maximum of $105.0
million Canadian equivalent. The credit facility also includes an accordion feature which can increase the
facility by $15.0 million. Borrowings under the credit facility bear interest at fixed and floating rates
based on Canadian and U.S. prime bank rates, banker’s acceptances or LIBOR. At December 31, 2017,
the outstanding letters of guarantee were $1.9 million. The remaining balance available for drawdown
under the credit facility was $34.2 million.
16
Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including working capital ratios, debt to income before interest, income taxes,
amortization and depreciation (“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As
at December 31, 2017, Pollard is in compliance with all financial covenants.
Pollard’s credit facility is secured by a first security interest in all of the present and after acquired property
of Pollard. The facility can be prepaid without penalties. Under the terms of the agreement the facility
was committed for a two year period, renewable June 22, 2019.
Pollard believes that its credit facility, funds from the subordinated loan from Pollard Equities Limited
(“Equities”) and ongoing cash flow from operations will be sufficient to allow it to meet ongoing
requirements for investment in capital expenditures, working capital and dividends.
Subordinated Debt
On April 2, 2014, Pollard entered into a loan agreement with Equities for a subordinated term loan with
a seven year term, repayable at any time (subject to meeting certain financial covenants under the
secured credit facility), in the amount of $6.8 million. The term loan was provided to assist in the
purchase of a printing press. Quarterly principal payments on the subordinated loan facility commenced
the quarter following June 30, 2016. Interest on the subordinated debt commenced with the first draw
at a rate of 9%. On September 28, 2017, Pollard repaid the outstanding balance of the loan.
On June 23, 2017, Pollard entered into a second loan agreement with Equities for an additional
subordinated term loan with a seven year term, repayable at any time (subject to meeting certain
financial covenants under the secured credit facility). The loan was provided to assist with the purchase
of the common shares of INNOVA. A total of $25.1 million was drawn in the third quarter of 2017. On
September 20, 2017, Pollard repaid $7.5 million in outstanding principal. Quarterly principal payments
on the second loan facility commenced the month following the first draw, which occurred August 4,
2017. Interest on the subordinated debt commenced with the first draw at a rate of 8%.
The loans are fully subordinated to the secured credit facility.
Outstanding Share Data
As at December 31, 2017 outstanding share data was as follows:
Common shares
23,543,158
As noted previously in the recent developments section, on February 21, 2018, Pollard closed it’s offering
for an additional 2,070,000 common shares. As at March 12, 2018, outstanding share data was as
follows:
Common shares
25,613,158
Share Options
Under the Pollard Banknote Limited Stock Option Plan the Board of Directors has the authority to grant
options to purchase common shares to eligible persons and to determine the applicable terms. The
aggregate maximum number of common shares available for issuance from Pollard’s treasury under the
Option Plan is 2,354,315 common shares.
17
On March 13, 2017, the Board of Directors approved the award of 125,000 options to purchase common
shares of Pollard for certain key management personnel. The options were granted on April 24, 2017
and have a seven year term, vesting 25% per year over the first four years. The exercise price of the
options was equal to the closing price of the common shares on April 21, 2017. As at December 31,
2017, the total share options outstanding were 250,000.
Contractual Obligations
Pollard rents premises and equipment under long-term operating leases. The following is a schedule by
year of commitments and contractual obligations outstanding, including related interest payments:
(millions of dollars)
Total
<1 Year
2-3 Years
4-5 Years Thereafter
Long-term debt
$89.3
$3.6
$85.7
-
Subordinated debt
$19.9
$4.8
$8.7
$6.4
-
-
Operating leases
$21.2
$5.7
$8.1
$5.5
$1.9
Total
$130.4
$14.1
$102.5
$11.9
$1.9
Pension Obligations
Pollard sponsors four non-contributory defined benefit pension plans, of which three are final pay plans
and one is a flat benefit plan. As of December 31, 2017, the aggregate fair value of the assets of Pollard’s
defined benefit pension plans was $50.5 million and the accrued benefit plan obligations were $73.5
million. Pollard’s total annual funding contribution for its defined pension plans in 2018 is expected to be
approximately $4.4 million, compared to $3.9 million in 2017, including $1.1 million in additional solvency
payments.
One of Pollard’s Canadian pension plans was subject to a solvency valuation as of December 31, 2016.
The valuation determined there was a deficit of $10.1 million due the low current levels of the mandated
interest rate used to discount the future liabilities. As a result, Pollard will be subject to additional special
pension plan payments beginning in 2017 of approximately $1.1 million per year through to 2026. These
additional solvency payments do not impact pension expense and therefore will not affect our net income
or EBITDA. These additional pension solvency payments will be funded from operating cash flows.
Off-Balance Sheet Arrangements
Other than the operating leases described previously, Pollard has no other off-balance sheet
arrangements.
Related Party Transactions
Pollard Equities Limited and affiliates
During the year ended December 31, 2017, Pollard paid property rent of $3.2 million (2016 - $3.1 million)
and $0.4 million (2016 - $0.4 million) in plane charter costs to affiliates of Equities. In addition, Pollard
paid Equities $1.0 million (2016 - $0.6 million) of interest on Pollard’s subordinated debt.
18
During the year ended December 31, 2017, Equities paid Pollard $0.07 million (2016 - $0.07 million) for
accounting and administration fees.
At December 31, 2017, Pollard owed Equities and its affiliates $1.9 million (2016 - $0.9 million) for rent,
interest, expenses and other items.
Neogames S.à r.l. and affiliates
During the year ended December 31, 2017, Pollard reimbursed operating costs and paid software
royalties of $2.9 million (2016 - $1.8 million) to its iLottery partner which are recorded in cost of sales
and $nil (2016 - $0.6 million) of development costs.
At December 31, 2017, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $0.7 million (2016 - $0.8 million) for reimbursement of operating costs and
capital expenditures, and its share of operating profits.
Critical Accounting Policies and Estimates
The preparation of the financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Management of Pollard regularly reviews its estimates
and assumptions based on historical experience and various other assumptions that it believes would
result in reasonable estimates given the circumstances. Actual results could differ from those estimates
under different assumptions. The following is a discussion of accounting policies which require significant
management judgment and estimation.
Impairment of goodwill
Pollard determines whether goodwill is impaired at least on an annual basis. This requires an estimation
of the “value in use” or “fair value less costs to sell” of the cash-generating units (“CGUs”) to which
goodwill is allocated. Estimating a value in use requires Pollard to make an estimate of the expected
future cash flows from the CGUs and also to choose a suitable discount rate in order to calculate the
present value of those cash flows. Judgment is required in determining the level at which to test goodwill,
including the grouping of assets that generate cash inflows.
Employee future benefits
Accounting for defined benefit plans requires Pollard to use actuarial assumptions. These assumptions
include the discount rate and the rate of compensation increases. These assumptions depend on
underlying factors such as economic conditions, government regulations, investment performance,
employee demographics and mortality rates.
Income taxes
Pollard is required to evaluate the recoverability of deferred income tax assets. This requires an estimate
of Pollard’s ability to utilize the underlying future income tax deductions against future taxable income
before they expire. In order to evaluate the recoverability of these deferred income tax assets, Pollard
must estimate future taxable income.
19
Acquisition accounting
For acquisition accounting purposes, all identifiable assets, liabilities and contingent liabilities acquired in
a business combination are recognized at fair value at the date of acquisition. Estimates are used to
calculate the fair value of these assets and liabilities.
Future Changes in Accounting Policies
In July 2014, the International Accounting Standards Board (“IASB”) issued International Financial
Reporting Standards (“IFRS”) 9 Financial Instruments, which replaces the existing guidance in IAS 39
Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the
classification and measurement of financial instruments, a new expected credit loss model for calculating
impairment on financial assets and new general hedge accounting requirements. It also carries forward
the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is required
for fiscal years beginning on or after January 1, 2018. Pollard does not expect these amendments to
have a material impact on its consolidated financial statements.
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard
specifies the steps and timing for recognizing revenue, as well as requiring more informative, relevant
disclosures. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue. IFRS 15 is required
for fiscal years beginning on or after January 1, 2018, with early adoption available. Under certain
contracts, Pollard is compensated for its products based on its customers’ sales of those products at
retail. Prior to IFRS 15, Pollard recognized sales under these contracts at the time the product was sold
at retail. Under IFRS 15 Pollard has concluded that control transfers to its customers at delivery of the
product to the customer. This will accelerate the recognition of sales under these contracts to the time
of shipment. Pollard’s sales under these contracts could vary year over year depending on the timing of
shipments. Pollard expects the new standard will not have a material impact on its consolidated financial
statements. Pollard intends to adopt the standard retrospectively with the cumulative effect of initially
applying the standard recognized at January 1, 2018 in opening retained earnings.
In January 2016, the IASB issued IFRS 16 Leases which replaces IAS 17 Leases. This standard introduces
a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases
with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to
recognize a right-of-use asset representing its right to use the underlying asset and a lease liability
representing its obligation to make lease payments. This standard substantially carries forward the lessor
accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other
areas of the lease accounting model have been impacted, including the definition of a lease. Transitional
provisions have been provided. The new standard is effective for annual periods beginning on or after
January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts
with Customers at or before the date of initial adoption of IFRS 16. Pollard is currently assessing the
impact of the new standard on its consolidated financial statements.
In June 2016, the IASB issued amendments to IAS 2 Share-Based Payments. The amendments clarify
how to account for certain types of share-based payment transactions. These amendments are effective
for annual periods beginning on or after January 1, 2018. Retrospective or earlier application is permitted
under certain conditions. Pollard does not expect these amendments to have a material impact on its
consolidated financial statements.
In December 2016, the IASB issued IFRIC Interpretation 22 Foreign Currency Transactions and Advance
Consideration. The Interpretation clarifies the date of the transaction for the purposes of determining the
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exchange rate to use on initial recognition of the related asset, expense or income is the date on which
an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment
or receipt of advance consideration. The Interpretation is effective for annual periods beginning on or
after January 1, 2018. Retrospective or earlier application is permitted under certain conditions. Pollard
does not expect these amendments to have a material impact on its consolidated financial statements.
In June 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The
Interpretation aims to reduce diversity in how companies recognize and measure a tax liability or tax
asset when there is uncertainty over income tax treatments. The Interpretation is effective for annual
periods beginning on or after January 1, 2019 and is to be applied retrospectively. Early adoption is
permitted. Pollard is currently assessing the impact of the Interpretation on its consolidated financial
statements.
In October 2017, the IASB issued amendments to IAS 28 Investments in Associates and Joint Ventures.
The amendments clarify that long-term interests in associates and joint ventures, to which the equity
method is not applied, are in the scope of both IFRS 9 Financial Instruments (including impairment
testing) and IAS 28 in terms of the application of IFRS 9 loss absorption and the impairment requirements
of IAS 28. Pollard is currently assessing the impact of these amendments on its consolidated financial
statements.
Industry Risks and Uncertainties
Pollard is exposed to a variety of business and industry risks. A summary of the major risks faced by Pollard
is noted below.
Dependence on Key Products
Instant tickets accounted for approximately 86.7% of Pollard’s revenues for Fiscal 2017. Pollard's financial
results and condition are substantially dependent on the continued success and growth in sales of this
product and the profitability of such sales. Competitive efforts by other manufacturers of similar or
substitute products, shifts in consumer preferences or the introduction and acceptance of alternative
product offerings could have a material adverse effect on Pollard’s business, financial condition, liquidity
and results of operations and the amount of cash available for dividends to shareholders.
Inability to Sustain Sales or EBITDA Margins
Pollard’s income depends upon its ability to generate sales to customers and to sustain its EBITDA
margins. These margins are dependent upon Pollard’s ability to continue to profitably sell lottery tickets
and gaming products and to continue to provide products and services that make it the supplier of choice
to its customers. If Pollard’s cost of sales or operating costs increase, or other manufacturers of gaming
products could compete more favourably with it, Pollard may not be able to sustain its level of sales or
EBITDA margins.
General Economic Conditions
Instant lottery tickets account for approximately 86.7% of revenue and Pollard’s financial results and
condition are substantially dependent on the continued success and growth in sales of this product and
the profitability of such sales. Historically the lottery industry, and particularly the instant ticket product
lines, has not shown any significant negative impact during downturns in the economic cycles. However,
lotteries, similar to many government agencies, are increasingly under pressure to reduce costs and
expenditures. As such, Pollard has witnessed downward pressure on its selling prices. Continued pressure
on lotteries to reduce their costs may further negatively impact Pollard’s selling prices. Significant shifts
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in consumer preferences or the introduction and acceptance of alternative product offerings could have
a material adverse effect on Pollard’s business, financial condition, liquidity and results of operations.
Dependence on Major Customers
Pollard’s 10 largest customers accounted for 57.4% of its Fiscal 2017 revenues. In 2017, sales to one
customer amounted to 12.0% of consolidated sales and 11.7% to a second customer. The nature of the
worldwide lottery industry limits the absolute number of lottery operations. As is customary in the
industry, Pollard does have long-term contracts with most of its customers. However, most allow the
customer to cancel the contract at will and none guarantee volumes or order levels. A significant reduction
of purchases by any of Pollard’s largest customers could have a material adverse effect on Pollard’s
business, financial condition, liquidity and results of operations.
Exchange Rate Fluctuations
A significant portion of Pollard’s revenues and expenses, principally related to its U.S. operations and to
the purchase of raw materials, are denominated in U.S. dollars. In addition a portion of Pollard’s revenues
are denominated in Euros. Furthermore, although certain raw materials may be purchased in Canadian
dollars, they may have inputs that are denominated in foreign currencies. Any changes in the exchange
rate between the Canadian dollar and these foreign currencies could have a material effect on the results
of Pollard. Pollard’s dividends to shareholders are denominated in Canadian dollars.
For the purposes of financial reporting, any change in the value of the Canadian dollar against the
U.S. dollar or the Euro during a given financial reporting period would result in a foreign exchange loss
or gain on the translation of any foreign currency denominated monetary assets and liabilities. Further,
Pollard’s reported earnings could fluctuate materially as a result of revenues and expenses denominated
in U.S. dollars or Euros under Canadian GAAP. There can be no assurance that changes in the currency
exchange rate will not have a material adverse effect on Pollard or on its ability to maintain a consistent
level of dividends in Canadian dollars.
In addition the use of certain cash flow and interest rate hedging strategies may result in increased
volatility in net income due to mark-to-market accounting rules.
Additional Capital Requirements
Pollard believes that its operating income will be sufficient to fund operations and planned capital
expenditures in the near term. However, Pollard may be required to raise additional capital in the future
if it decides to make additional acquisitions. The availability of future borrowings and access to capital
markets for financing depends on prevailing market conditions and the acceptability of financing terms
offered to it. There can be no assurance that future borrowings or equity financing will be available to it,
or available on acceptable terms, in an amount sufficient to fund its needs.
Inability to Sustain and Manage Growth
A principal component of Pollard’s strategy is to continue its internal growth. Pollard may not be
successful in growing its business or in managing its growth. Pollard’s growth depends on its ability to
accomplish a number of things, including:
successfully introducing new products;
identifying and developing new geographic markets;
developing new products and gaining market acceptance for them;
establishing and maintaining favourable relationships with customers in new markets and market
segments and maintaining these relationships in existing markets; and
successfully managing expansion and obtaining the required financing.
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Any growth Pollard achieves may require additional employees and an increase in the scope of both its
operating and financial systems and the geographic area of its operations. Pollard may be unable to
attract and retain qualified management and employees, and its existing operating and financial systems
and controls may not be adequate to support any growth. Pollard’s ability to improve its systems and
controls may be limited by increased costs, technological challenges, or lack of qualified employees. The
past results of Pollard may not be indicative of Pollard’s prospects or its ability to penetrate new markets,
many of which may have different competitive conditions and demographic characteristics than current
markets.
Competition
The instant ticket business is highly competitive, and Pollard faces competition from a number of domestic
and foreign instant ticket manufacturers and other competitors. Pollard currently has two instant ticket
competitors in North America, Scientific Games Corporation (Sci Games) and IGT. Internationally, there
are a number of lottery instant ticket vendors which compete with Pollard including Sci Games, IGT and
Eagle Press Group of Companies.
Some of Pollard’s competitors have longer operating histories, greater name recognition, larger customer
bases and greater financial, technical and marketing resources than Pollard. These resources may allow
them to respond more quickly than Pollard can to new or emerging technologies and to changes in
customer requirements. It may also allow them to devote greater resources than Pollard can to the
development, promotion and sale of their products. Pollard’s competitors may also engage in more
extensive research and development, undertake more far reaching marketing campaigns and adopt more
aggressive pricing policies. The market for Pollard’s products is highly competitive and it is fragmented
at both the lottery and charitable gaming levels. Pollard expects competition to continue to be intense
because of capacity in its markets. To the extent one of Pollard’s competitors undertakes a consolidation
program, Pollard’s competition would increase further. Pollard also faces competition from emerging and
existing lottery and charitable gaming products, such as internet gaming products and video lottery
terminals. Competition from these and other gaming products may weaken demand for Pollard’s
products.
Future Acquisition and Integration Risks
To grow by acquisition, Pollard must identify and acquire suitable acquisition candidates at attractive
prices and successfully integrate any acquired businesses with its existing operations. If the expected
synergies from acquisitions do not materialize or Pollard fails to successfully integrate any new businesses
into its existing business, Pollard’s financial performance could be significantly impacted. To the extent
that businesses acquired by Pollard or their prior owners failed to comply with or otherwise violated
applicable laws, Pollard, as a successor owner may be financially responsible for these violations.
In connection with future acquisitions by Pollard, there may be liabilities that Pollard, as the case may
be, failed or was unable to discover in its due diligence prior to the consummation of the acquisition. The
discovery of any material liabilities could have a material adverse effect on Pollard’s business, financial
condition, liquidity and results of operations or future prospects.
Failure to Realize Anticipated Benefits of INNOVA or Gamco Acquisitions
On September 18, 2017, Pollard completed the acquisition of INNOVA and on February 1, 2018, Pollard
completed the Gamco acquisition. Achieving the benefits of both of these acquisitions depends in part
on successfully consolidating functions and integrating operations and procedures in a timely and efficient
manner as well as Pollard’s ability to realize the anticipated growth opportunities and synergies from
combining the acquired businesses and operations with those of Pollard. The integration of the acquired
businesses will require substantial management effort, time and resources and may divert management’s
focus from other strategic opportunities and operational matters. In addition, Pollard may be required to
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assume greater than expected liabilities due to undisclosed liabilities of both INNOVA and Gamco existing
at the time of the acquisitions.
Reliance on Manufacturing Facilities
Pollard manufactures substantially all of its lottery tickets and gaming products at its facilities. Pollard
expects to continue to expand its manufacturing capabilities by adding production lines and additional
acquisitions, either of which could result in disruptions to its manufacturing operations. Pollard’s
manufacturing operations use certain custom designed equipment which, if damaged or otherwise
rendered inoperable or unavailable, could result in the disruption of its manufacturing operations. Further,
Pollard does not generally maintain an inventory of finished products due, in part, to the customized
nature of its product line and its “just in time” approach to manufacturing. Consequently, any interruption
of operations at any of its manufacturing facilities or at any facility of a supplier to Pollard or at which
Pollard outsources production could have a material adverse effect on Pollard’s business, financial
condition, liquidity and results of operation.
Reliance on Key Personnel
Pollard’s future performance and development will depend to a significant extent on the efforts and
abilities of its executive officers and key management personnel. The loss of the services of one or more
of its individuals or other senior managers could harm Pollard. Pollard’s success will depend largely on
Pollard’s continuing ability to attract, develop and retain skilled employees in all areas of its business.
Technological Change
Lotteries continue to investigate the use of the internet to augment their product offerings. Either in
conjunction with existing gaming products (such as providing for second chance drawings for customers
who have purchased non-winning instant tickets, digital gaming products or through loyalty and
engagement programs) or as additional platforms to providing gaming products (for example providing
electronic versions of instant tickets). The use of the internet is increasing and will be a key distribution
channel as lotteries look to expand their market share both with existing customers and through obtaining
new customers. Pollard may not be able to participate in this growth with its current product mix and the
reliance on paper tickets may lessen.
Significant Changes to Government Regulations
Pollard is subject to various federal, provincial, state and local laws and regulations. There are laws that
regulate its transporting products, importing and exporting products and employment. Furthermore,
there are extensive gaming laws and approvals. Such laws, regulations and related rules and policies are
administered by various federal, provincial, state and local agencies and other governmental authorities.
New laws governing its business could be enacted and changes to any existing laws could have a
significant impact on business. Failure by Pollard to comply with applicable laws and regulations may
subject it to civil or regulatory proceedings which may have a material adverse effect on Pollard's
business, financial condition, liquidity and results of operations.
Continuing Negotiations on North American Free Trade Agreement (NAFTA)
The governments of Canada, the United States and Mexico are currently renegotiating NAFTA. The
outcome of this agreement may have implications to our overall cross-border trade. Pollard had
significant manufacturing presence in both Canada and the United States and the impact of any possible
changes to NAFTA at this time is unknown.
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Licensing and Regulatory Requirements
Pollard is subject to regulation in most jurisdictions in which its products are sold or used by persons or
entities licensed to conduct gaming activities. The gaming regulatory requirements vary from jurisdiction
to jurisdiction and licensing, other approval or finding of suitability processes with respect to Pollard, its
personnel and its products, can be lengthy and expensive. Most jurisdictions have comprehensive
licensing, reporting and operating requirements with respect to the sale and manufacture of bingo and
bingo related products, including bingo paper and pull-tab tickets. These requirements have a direct
impact on the conduct of the day to day operations of Pollard. There can be no assurance that Pollard,
its products or its personnel will receive or be able to maintain any necessary gaming licenses, other
approvals or findings of suitability. Moreover, failure to comply with the licensing, reporting and operating
requirements may subject Pollard to civil or regulatory proceedings, including the imposition of civil
penalties or the suspension or revocation of a license. The loss of a license in a particular jurisdiction will
prohibit Pollard from selling products in that jurisdiction and may prohibit Pollard from selling its products
in other jurisdictions. The loss of one or more licenses held by Pollard could have an adverse effect on
the business.
Certain jurisdictions require extensive personal and financial disclosure and background checks from
persons and entities beneficially owning a specific percentage (typically five percent or more) of a
vendor’s or licensee’s securities. The failure of beneficial owners of Pollard’s securities to submit to
background checks and provide such disclosure could result in the imposition of penalties upon these
beneficial owners and could jeopardize the award of a lottery contract or the issuance of a gaming license
to Pollard or provide grounds for termination of an existing lottery contract or gaming license.
Income and Other Taxes
Pollard is subject to income taxes, withholding taxes, and Canadian and U.S. federal, provincial and state
taxes. As taxing regimes change their tax basis and rates or initiate reviews of prior tax returns, Pollard
could be exposed to increased costs of taxation.
Intellectual Property
Pollard’s commercial success depends, in part, on its ability to secure and protect intellectual property
rights that are important to its business, including patent, trademark, copyright, and trade secret rights,
to operate without infringing third party intellectual property rights, and to avoid having third parties
circumvent the intellectual property rights that Pollard owns or licenses. In particular, the patents and
trademarks Pollard owns or licenses may not be valid or enforceable. In addition, Pollard cannot be
certain that its proprietary technology affords a competitive advantage, does not infringe third party
rights, or will not need to be altered in response to competing technologies. Pollard also cannot be certain
that technologies developed in the future will be the subject of valid and enforceable intellectual property
rights.
In addition, litigation may be necessary to determine the scope, enforceability and validity of third party
intellectual property rights or to establish Pollard’s intellectual property rights. Regardless of merit, any
such litigation could be time consuming and expensive, divert management’s time and attention, subject
Pollard to significant liabilities, require Pollard to enter into costly royalty or licensing agreements, or
require Pollard to modify or stop using intellectual property that it owns or licenses.
Litigation
Pollard is threatened from time to time with, or has been named as a defendant in, various legal
proceedings and lawsuits based upon product liability, personal injury, breach of contract and lost profits
or other consequential damages claims, in the ordinary course of conducting its business. Management
has seen a growing trend across North America in litigation. A significant judgment against Pollard or the
imposition of a significant fine or penalty, as a result of a finding that Pollard failed to comply with laws
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or regulations, or being named as a defendant on multiple claims could, have a material adverse effect
on Pollard’s business, financial condition, liquidity and results of operations.
Raw Material Price Volatility
Various raw materials are used in the products manufactured by Pollard, and, while historically such raw
materials have not been subject to economic or seasonal cyclicality and wide price variation, future results
may differ. Certain raw materials used by Pollard in its manufacturing processes are made from
commodities that are vulnerable to significant fluctuations in price. Sudden increases in the price or a
reduction in the availability of raw materials or commodities used to make raw materials used in the
manufacture of lottery tickets and gaming products could have a material adverse effect on Pollard’s
business, financial condition, liquidity and results of operations. Pollard may not be able to pass on the
increased costs to customers.
Lack of Long-Term Supplier Agreements
Historically, Pollard has not entered into long-term agreements with its suppliers. Generally, suppliers
may terminate their relationship with Pollard on short notice. In addition, even if suppliers should decide
to continue their relationship with Pollard, there can be no guarantee that suppliers will supply the same
amount of product as in the past, or that supply will be on similar terms. Any loss of a significant supplier,
or a change in the terms of the relationship with a significant supplier could have a material adverse
effect on Pollard’s business, financial condition, liquidity and results of operations.
Dependence on Sole or Limited Sources of Supply
Certain raw materials used in connection with the manufacture of Pollard’s products and packaging
materials are obtained from a sole or a limited group of suppliers. Pollard’s reliance on a sole supplier or
limited groups of suppliers involves several risks including increased risk of inability to obtain adequate
supplies, reduced control over pricing and timely delivery, and in the case of substrate and ink, the long
lead times required to approve the specifications necessary to produce products specific to Pollard’s
specifications. There are no assurances that this dependence on a limited group of suppliers will not have
an adverse effect on Pollard’s business, financial condition, liquidity and results of operations. In addition,
were it necessary for Pollard to source its substrate and ink needs from another supplier, disruption to
Pollard’s business would occur during the period in which Pollard sourced another supplier and was able
to receive supplies based on its particular specifications.
Product Liability
Pollard, like other manufacturers and sellers of retail products, is subject to potential liabilities connected
with its business operations, including potential liabilities and expenses associated with product defects,
performance, and reliability or delivery delays. A major product liability claim could have a material
adverse effect on Pollard’s business, financial condition, liquidity and results of operations because of the
costs of defending against lawsuits, diversion of key employees’ time and attention from the business
and potential damage to its reputation.
Research and development (“R&D”)
Pollard has invested, and may continue to invest, significant resources in our R&D efforts. Pollard invests
in a number of areas, including our manufacturing processes, product development for game and system-
based hardware, software and game content. There can be no assurance that Pollard’s investment in
R&D will lead to successful new technologies or products that gain market acceptance. If a new product
is not successful, Pollard may not recover our development, regulatory approval or promotion costs.
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Inability to innovate
The success of Pollard’s products and services is affected by changing technology and evolving industry
standards. Pollard’s ability to anticipate or respond to such changes and to develop and introduce new
and enhanced products and services, including, but not limited to, games, gaming machines, lottery
tickets, gaming products and services, on a timely basis or at all is a significant factor affecting Pollard’s
ability to remain competitive, retain existing contracts or business, expand and attract new customers
and players. There can be no assurance that Pollard will achieve the necessary technological advances
or have the financial resources needed to introduce new products or services on a timely basis or at all
or that Pollard will otherwise have the ability to compete effectively in the industries we serve.
Pollard’s success depends upon its ability to develop or obtain manufacturing capabilities and processes
to meet the demands of producing new and innovative products. Because newer products are generally
more technologically sophisticated than those produced in the past, we must continually develop or
obtain improved production capabilities to meet the needs of product innovations. If Pollard cannot
efficiently develop its own manufacturing infrastructure or obtain such infrastructure from a reliable
source to meet the needs of Pollard’s product innovations, or if Pollard is unable to increase its production
capacity in a timely manner, the business could be negatively impacted. In addition, the social and mobile
gaming landscape is rapidly evolving and is characterized by major fluctuations in the popularity of social
and mobile products and platforms. Pollard may be unable to develop products at a rate necessary to
successfully enter and compete in the social and mobile product market.
Systems, network or telecommunications failures or cyber-attacks
Any disruption in Pollard’s network or telecommunications services could affect Pollard’s ability to operate
its games or financial systems, which would result in reduced revenues and customer down time. Pollard’s
network and databases of business or customer information are susceptible to outages due to fire, floods,
power loss, break-ins, cyber-attacks, network penetration, data privacy or security breaches, denial of
service attacks and similar events. Despite Pollard’s implementation of network security measures and
data protection safeguards, including a disaster recovery strategy for back office systems, Pollard’s
servers and computer resources are vulnerable to viruses, malicious software, hacking, break-ins or theft,
third-party security breaches, employee error or malfeasance, and other potential compromises.
Disruptions from unauthorized access to or tampering with Pollard’s computer systems in any such event
could have a material adverse effect on Pollard’s business, reputation, operating results and financial
condition.
Money laundering/fraudulent activity
Pollard’s success depends on its ability to avoid, detect, replicate and correct software and hardware
errors and fraudulent manipulation of our games and systems. Pollard incorporates security features into
the design of its games and other systems which are designed to prevent Pollard and its customers from
being defrauded. However, there can be no guarantee that Pollard’s security features will continue to be
effective in the future. If Pollard’s security systems fail to prevent fraud, Pollard’s operating results could
be adversely affected. Additionally, if third parties breach Pollard’s security systems and defraud its
customers, the public may lose confidence in Pollard’s gaming products or Pollard could become subject
to legal claims by its customers or to investigation by gaming authorities.
The occurrence of fraudulent manipulation of Pollard’s games, gaming machines, systems, or online
games and systems may give rise to claims for lost revenues and related litigation by Pollard’s customers
and may subject Pollard to investigation or other action by gaming regulatory authorities including
suspension or revocation of Pollard’s gaming licenses, or disciplinary action.
There is also a risk that Pollard will be subject to fraudulent activities by its employees. Any exposure to
fraud and/or money laundering could subject Pollard to financial losses, business disruption and damage
to Pollard’s reputation. In addition, there is a risk that Pollard may be subject to investigation and
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sanctions by a regulator and/or to civil and criminal liability if we have failed to comply with Pollard’s
legal obligations relating to the reporting of money laundering or other offences.
Labour Disruptions
Approximately 107 of Pollard’s employees, all of whom are employed at the Ypsilanti, Michigan facility,
are subject to a collective bargaining agreement which expires on August 31, 2020. While management
believes that Pollard is generally on good terms with its employees, there are no assurances that a strike
or other disruption by its unionized employees will not occur. A work disruption at this facility would likely
have a material adverse effect on Pollard’s business, financial condition, liquidity and results of
operations.
Operating Hazards
Pollard’s revenues are dependent on the continued operation of its facilities. The operation of facilities
involves some risks, including the failure or substandard performance of equipment, natural disasters,
suspension of operations and new governmental statutes, regulations, guidelines and policies. Pollard
may also have exposure to future claims with respect to workplace exposure, workers’ compensation and
other matters, arising from events both prior to and after any of its acquisitions. There can be no
assurance as to the actual amount or the timing of these liabilities. The occurrence of material operational
problems, including but not limited to the above events, may have a material adverse effect on Pollard’s
business, financial condition, liquidity and results of operations.
Environment, Health and Safety Requirements and Related Considerations
Pollard’s operations and real property are subject to a broad range of increasingly complex federal,
provincial, state and local laws and regulations as well as permits and other approvals governing
environmental and workers’ health and safety matters, including those relating to air emissions, water
discharges, the storage, handling, use, discharge and disposal of hazardous materials and contaminants
(including waste) (the "E, H & S Requirements"). Certain E, H & S Requirements may impose joint and
several liability on lessees and owners or operators of facilities for the costs of investigation or
remediation of contaminated properties regardless of fault or the legality of the original release or
disposal.
Pollard’s past and present operations that are subject to E, H & S Requirements include the use, storage,
handling and contracting for recycling or disposal of hazardous and non-hazardous materials such as
washes, inks, alcohol-based products, fountain solution, photographic fixer and developer solutions,
machine and hydraulic oils and solvents. The use and management of such materials, the nature of the
manufacturing and printing process, and the ownership and/or management or control of commercial
properties carries an inherent liability risk that must be carefully managed. Pollard believes that the
conduct of its operations is in material compliance with applicable E, H & S Requirements. Maintaining
such compliance in the conduct of its operations has not had a material adverse effect on Pollard’s
financial condition or operating results.
As noted earlier, Pollard manufactures its products at seven facilities, two of which are owned by Pollard
and five of which are leased. Four of the seven facilities (Barrhead, Alberta, Ypsilanti, Michigan, Sault
Ste. Marie, Ontario and the Winnipeg, Manitoba manufacturing facility site) were established by Pollard
from green field sites.
As a consequence of Pollard’s historical and current operations, and its ownership, management and
control of real property, it may be involved from time to time in administrative or judicial proceedings
and inquiries relating to E, H & S Requirements. It may also be subject to regulatory orders or actions
(including orders to remediate soil and groundwater contamination). Future inquiries, orders, actions or
proceedings of this nature could have material adverse effects on Pollard’s business, financial condition,
liquidity and results of operations.
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Changes to existing E, H & S Requirements and to the enforcement thereof or the adoption of new
E, H & S Requirements in the future might, individually or in the aggregate, have a material adverse
effect on Pollard’s business, financial condition, liquidity and results of operations. In addition, the
discovery of unknown environmental or workers’ health and safety issues at properties owned, managed
or controlled by Pollard, including the responsibility to remediate hazardous substances whether or not
the contamination was caused by Pollard, could require expenditures that might materially affect Pollard’s
business, financial condition, liquidity and results of operations.
Insufficient Insurance Coverage
Pollard maintains property, general liability, errors and omissions, business interruption insurance and
directors and officer’s liability insurance on such terms as it deems appropriate. This may result in
insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current
market value or current replacement cost of Pollard’s lost investment. This insurance may not remain
available to it at commercially reasonable rates. Future increases in insurance costs, coupled with the
increase in deductibles, may result in higher operating costs and increased risk. Not all risks faced by
Pollard are insured.
Interest Rates
Pollard has certain floating rate loans and may be negatively impacted by increases in interest rates, the
effects of which would be to reduce the amount of cash available for operations.
Financial Instruments
Pollard is exposed to financial risks that arise from fluctuations in interest rates and foreign exchange
rates and the degree of volatility of these rates, liquidity risk and credit risk. Pollard uses financial
instruments, from time to time, to manage these risks.
Pollard’s risk management policies are established to identify and analyze the risks, to set appropriate risk
limits and controls to monitor risks and adherence to limits. The Audit Committee oversees how
management monitors compliance with Pollard’s risk management policies and procedures. The Audit
Committee is assisted in its oversight role by Internal Audit, who undertakes regular reviews of risk
management controls and utilizes the annual risk assessment process as the basis for the annual internal
audit plan.
Risk Exposure
Currency risk
Pollard sells a significant portion of its products and services to customers in the United States and to
international customers where sales are denominated in U.S. dollars. In addition, a significant portion of
its cost inputs are denominated in U.S. dollars. Pollard also generates revenue in currencies other than
Canadian and U.S. dollars, primarily in Euros.
In addition, translation differences arise when foreign currency monetary assets and liabilities are
translated at foreign exchange rates that change over time.
Interest rate risk
Pollard is exposed to interest rate risk relating to its fixed and floating rate instruments. Fluctuation in
interest rates will have an effect on the valuation and repayment of these instruments.
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Credit risk
Credit risk in the risk of financial loss if a customer or counterpart to a financial instrument fails to meet its
financial obligations.
Liquidity risk
Liquidity risk is the risk that Pollard will not be able to meet its financial obligations as they fall due.
Risk Management
Currency risk
Pollard utilizes a number of tools to manage its foreign currency risk including sourcing its manufacturing
facilities in the U.S. and sourcing other cost of sales in U.S. dollars.
A 50 basis point strengthening/weakening in the foreign exchange rate between the Canadian and U.S.
dollar would decrease/increase the income before income taxes due to changes in operating cashflow by
approximately $0.15 million for year ended December 31, 2017 (2016 - $0.06 million). A 50 basis point
strengthening/weakening in the foreign exchange rate between the Canadian dollar and Euro would
decrease/increase the income before income taxes due to changes in operating cashflow by
approximately $0.07 million for year ended December 31, 2017 (2016 - $0.06 million).
Three manufacturing facilities are located in the U.S. and a significant amount of cost inputs for all
production facilities are denominated in U.S. dollars, offsetting a large portion of the U.S. dollar revenue
in a natural hedge.
As at December 31, 2017, the amount of financial liabilities denominated in U.S. dollars exceeded the
amount of financial assets denominated in U.S. dollars by approximately $1.3 million ($2016 - $1.6
million). A 50 basis point weakening/strengthening in the value of the Canadian dollar relative to the
U.S. dollar would result in a decrease/increase in income before income taxes of approximately $0.01
million (2016 - $0.01 million).
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign currency
risk. At December 31, 2017, Pollard had no outstanding foreign currency contracts.
Interest rate risk
A 50 basis point decrease/increase in interest rates would result in an increase/decrease in income before
income taxes of $0.4 million for the year ended December 31, 2017 (2016 - $0.4 million).
Credit risk
Credit risk on Pollard’s accounts receivable is minimized since they are mainly from governments and
their agencies and are collected in a relatively short period of time. Credit risk on foreign currency
contracts is minimized since the counterparties are restricted to Schedule 1 Canadian financial
institutions.
The carrying amount of accounts receivable is reduced through the use of an allowance account and any
adjustment to the allowance account is recognized in the statement of income within selling and
30
administration expenses. When a receivable balance is considered uncollectible, it is written off against
the allowance account.
Liquidity risk
Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet its
liabilities when due. Pollard maintains a committed credit facility including up to $105.0 million for its
Canadian operations and up to US$12.0 million for its U.S. subsidiaries. At December 31, 2017, the
unused balance available for drawdown was $34.2 million (2016 - $18.9 million).
The 2018 requirements for capital expenditures, working capital and dividends are expected to be
financed from cash flow provided by operating activities and unused credit facility. Pollard enters into
contractual obligations in the normal course of business operations.
Outlook
The lottery industry continued to achieve good growth during 2017 and we anticipate this trend to
continue in 2018. Of particular strength were instant tickets, as lotteries increasingly look to expand and
grow this area of their operations to generate greater proceeds for their various good causes. Consumer
demand for instant tickets and related services like digital products are expected to remain robust as
lotteries expand their offerings and gaming platforms to meet this demand.
2017 saw our instant ticket volumes increase significantly when compared to the prior year, reflecting
overall strong demand across our lottery portfolio. The additional production capacity from our Tresu
press allowed us to produce the additional volume created by that demand. To help support further
additional volumes, during 2018 we are also recommissioning the original press line in our Ypsilanti facility
in order to provide some incremental production capacity. While we don’t expect to see the same growth
rate profile in 2018 that was achieved in 2017, we anticipate building on these higher levels achieved
throughout the upcoming fiscal year. Our focus on manufacturing efficiencies is critical to our success
and we expect to see additional improvements in our cost platform going forward, however, significant
improvements were already captured during 2017. As a result, 2018 will not see the same level of
improvements as achieved in 2017.
One of the drivers of the increased demand was the success of many of our proprietary products such
as Scratch FX® and Playbook® products. These value-added products have proven to be very successful
in growing the revenue of lotteries and allows us to maintain our average selling prices in a price
competitive industry. We have new exciting innovative instant ticket products rolling out in 2018 and
are hopeful our ongoing innovations will continue to be a positive factor driving our future revenue
growth.
Our core instant ticket business is driven by formal contracts and in 2018 there are a number of large
instant ticket lottery contracts coming up for bid, particularly in the United States. Our current contract
portfolio is extremely well positioned with existing terms and renewals providing important visibility to
our revenue streams for the next number of years. Our recently announced contract extension with the
Western Canada Lottery Corporation extends our current contract for an additional ten years and during
2017 the Ontario Lottery Corporation extended our contract for another five years. Both of these events
illustrate the strengths of our existing customer relationships and the value of our long-term contracts.
Our contract with the British Columbia Lottery Corporation expires in December 2018. We have been the
primary supplier to this important customer for over 30 years and we are hopeful of continuing this
relationship in future contracts.
31
The charitable gaming market remains very steady relative to the last few years and, with low capital
expenditure requirements, it continues to generate positive cash flows. With the recent addition of
International Gamco, Inc. to our existing American Games business, we are uniquely positioned to benefit
from this important business line. We believe the combination of these two companies will bring
significant synergies and enhanced revenue opportunities in the future as their integration is fully
developed.
Our Diamond Game operation continues the integration process with Pollard after being acquired in the
fall of 2017. Their unique product is strategically situated to provide revenue for charitable organizations
directly or through lottery organizations. The sales development cycle is very long and currently we do
not see any major new jurisdiction opportunities in the short term, but continue to focus on key states
and provinces, educating them on the benefits of this product. We have achieved expected savings in
corporate and public company overhead and will benefit from these lower costs throughout 2018.
Excluding our two recent acquisitions, our budgeted capital expenditures for 2018 are expected to be
similar to the expenditures incurred in 2017. As well, we do not anticipate major capital expenditures to
be required for Diamond Game or Gamco this upcoming year. We would anticipate strong operating
cash flows available for investments in future acquisitions, growth in working capital, as required, and
continued reductions in outstanding debt. On February 21, 2018, we raised approximately $38.2 million,
before expenses, in new capital through a common share offering, the proceeds from which were used
to pay down existing debt. This transaction ensures we have significant capital available to support our
future growth plans.
Acquisitions are an important component of our strategy and we have recently been active in this area.
We will continue to be disciplined in our search for additional acquisition opportunities, with our focus
being organizations that can assist in our vision of being the partner of choice to the lottery and charitable
gaming industry.
Disclosure Controls and Procedures
Under National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,”
issuers are required to document the conclusions of the Chief Executive Officer and Chief Financial Officer
(the “Certifying Officers”) regarding the design and effectiveness of the disclosure controls and
procedures. Pollard’s management, with the participation of the Certifying Officers of Pollard, has
concluded that the disclosure controls and procedures as defined in National Instrument 52-109 are
designed appropriately and are effective at providing reasonable assurance of achieving the disclosure
objectives.
Internal Controls over Financial Reporting
Under National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,”
issuers are required to document the conclusions of the Certifying Officers regarding the design and
effectiveness of the internal controls over financial reporting. Management used the Internal Control –
Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO 2013) as the control framework in designing its internal controls over financial
reporting. Pollard’s management, with the participation of the Certifying Officers of Pollard, has
concluded that the internal controls over financial reporting as defined in National Instrument 52-109 are
designed appropriately and are effective at providing reasonable assurance of achieving the financial
reporting objectives.
32
Pollard has limited its design of ICFR to exclude controls, policies and procedures of INNOVA, as it was
acquired not more than 365 days before the end of the financial period to which this MD&A relates.
No changes were made in Pollard’s internal control over financial reporting during the year ended
December 31, 2017, that have materially affected, or are reasonably likely to materially affect, Pollard’s
internal control over financial reporting.
Additional Information
Shares of Pollard Banknote Limited are traded on the Toronto Stock Exchange under the symbol PBL.
Additional information relating to Pollard, including the Audited Consolidated Financial Statements and
the Annual Information Form for the year ended December 31, 2017, is available on SEDAR at
www.sedar.com.
Pollard Banknote Limited
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474-2323
www.Pollardbanknote.com
33
Management’s Report
The accompanying consolidated financial statements and all the information contained in the annual report
of Pollard Banknote Limited (“Pollard”) are the responsibility of management and have been approved by
the Board of Directors of Pollard. Financial and operating data elsewhere in the annual report is consistent
with the information contained in the financial statements. The financial statements and all other
information have been prepared by management in accordance with Canadian generally accepted
accounting principles. The financial statements include some amounts and assumptions based on
management’s best estimates which have been derived with careful judgment.
In fulfilling its responsibilities, management of Pollard has developed and maintains a system of internal
accounting controls. These controls are designed to ensure that the financial records are reliable for
preparing the financial statements. The Board of Directors of Pollard carries out its responsibility for the
financial statements through the Audit Committee. The Audit Committee reviews Pollard’s annual
consolidated financial statements and recommends their approval by the Board of Directors. The auditors
have full access to the Audit Committee with and without management present.
The consolidated financial statements have been audited by KPMG LLP Chartered Accountants, whose
opinion is contained in this annual report.
“John Pollard”
“Robert Rose”
JOHN POLLARD
Co-Chief Executive Officer
March 12, 2018
ROBERT ROSE
Chief Financial Officer
Consolidated Financial Statements of
POLLARD BANKNOTE
LIMITED
Years ended December 31, 2017 and 2016
KPMG LLP
Suite 2000 – One Lombard Place
Winnipeg MB R3B 0X3
Canada
Telephone (204) 957-1770
Fax
(204) 957-0808
www.kpmg.ca
Internet
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Pollard Banknote Limited
We have audited the accompanying consolidated financial statements of Pollard Banknote Limited, which
comprise the consolidated statements of financial position as at December 31, 2017 and 2016, the
consolidated statements of income, comprehensive income, changes in equity, and cash flows for the years
then ended, and notes, comprising a summary of significant accounting policies and other explanatory
information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity.
KPMG Canada provides services to KPMG LLP
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of Pollard Banknote Limited as at December 31, 2017 and 2016, and its consolidated
financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants
March 12, 2018
Winnipeg, Canada
Pollard Banknote Limited
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
Assets
Current assets
Cash
Restricted cash
Accounts receivable
Inventories (note 7)
Prepaid expenses and deposits
Total current assets
Non-current assets
Property, plant and equipment (note 8)
Equity investment (note 9)
Goodwill (note 10)
Intangible assets (note 11)
Deferred income taxes (note 12)
Total non-current assets
December 31,
2017
December 31,
2016
$
$
5,603
5,780
40,749
32,008
6,331
90,471
54,319
877
51,768
27,746
3,093
137,803
7,500
3,203
38,585
27,232
3,437
79,957
46,906
468
37,513
11,916
-
96,803
Total assets
$
228,274
$
176,760
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Dividends payable
Income taxes payable
Deferred revenue
Current portion long-term debt (note 13)
Current portion subordinated debt (note 14)
Total current liabilities
Non-current liabilities
Long-term debt (note 13)
Subordinated debt (note 14)
Deferred revenue
Other non-current liabilities
Pension liability (note 15)
Deferred income taxes (note 12)
Total non-current liabilities
Shareholders’ equity
Share capital (note 16)
Reserves
Deficit
Total shareholders’ equity
Commitments and contingencies (note 17)
Subsequent events (note 28)
December 31,
2017
December 31,
2016
$
$
36,766
706
3,373
702
784
3,585
45,916
83,771
13,149
789
753
22,959
3,368
124,789
73,209
2,965
(18,605)
57,569
25,864
706
2,541
-
-
1,363
30,474
70,852
4,769
-
395
13,524
4,909
94,449
73,209
3,917
(25,289)
51,837
Total liabilities and shareholders’ equity
$
228,274
$
176,760
See accompanying notes to consolidated financial statements.
On behalf of the Board:
“Dave Brown” Director
“John Pollard” Director
Pollard Banknote Limited
Consolidated Statements of Income
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31
Sales
Cost of sales
Gross profit
Administration
Selling
Other (income) expenses (note 18)
Income from operations
Finance costs (note 19)
Finance income (note 19)
Income before income taxes
Income taxes (note 12)
Current
Deferred (reduction)
2017
2016
$
285,654
$
246,414
219,916
65,738
197,177
49,237
28,609
9,412
675
27,042
4,172
(1,104)
23,974
7,902
(712)
7,190
20,919
8,037
(32)
20,313
4,281
(1,042)
17,074
5,144
(339)
4,805
Net income
Net income per share (basic) (note 20)
Net income per share (diluted) (note 20)
$
$
$
16,784
$
12,269
0.71 $
0.71
$
0.52
0.52
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Consolidated Statements of Comprehensive Income
(In thousands of Canadian dollars)
Years ended December 31
Net income
Other comprehensive loss
Items that are or may be reclassified to profit and loss
Foreign currency translation differences – foreign
operations
Items that will never be reclassified to profit and loss
Defined benefit plans remeasurements, net of
income tax reduction of ($2,478) and ($291) (note
12 & note 15)
Other comprehensive loss – net of income tax
2017
2016
$
16,784
$
12,269
(952)
(467)
(7,397)
(8,349)
(737)
(1,204)
Comprehensive income
$
8,435
$
11,065
See accompanying notes to consolidated financial statements.
Total
equity
51,837
16,784
Pollard Banknote Limited
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)
Year ended December 31, 2017
Attributable to equity holders of Pollard Banknote
Limited
Balance at January 1, 2017
$
73,209
3,917
(25,289)
Share
capital
Translation
reserve
Deficit
Net income
Other comprehensive loss
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax reduction of ($2,478) (note
15)
Total other comprehensive loss
Total comprehensive income (loss)
Share based compensation (note 16)
$
$
Dividends to owners of Pollard Banknote Limited
-
-
16,784
-
(952)
-
(952)
-
-
-
-
-
-
(7,397)
(7,397)
(952)
(952)
-
-
(7,397)
9,387
122
(8,349)
8,435
122
(2,825)
(2,825)
Balance at December 31, 2017
$
73,209
2,965
(18,605)
57,569
Year ended December 31, 2016
Attributable to equity holders of Pollard Banknote
Limited
Balance at January 1, 2016
$
73,209
4,384
(34,016)
Share
capital
Translation
reserve
Deficit
Total
equity
43,577
12,269
Net income
Other comprehensive loss
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax reduction of ($291) (note
15)
Total other comprehensive loss
Total comprehensive income (loss)
Share based compensation
$
$
Dividends to owners of Pollard Banknote Limited
-
-
12,269
-
(467)
-
(467)
-
-
-
-
-
-
(737)
(737)
(467)
(467)
-
-
(737)
11,532
(1,204)
11,065
20
20
(2,825)
(2,825)
Balance at December 31, 2016
$
73,209
3,917
(25,289)
51,837
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Years ended December 31
Cash increase (decrease)
Operating activities
Net income
Adjustments
Income taxes
Amortization and depreciation
Interest expense
Unrealized foreign exchange gain
Loss on sale of property, plant and equipment
Loss on equity investment (note 9)
Pension expense (note 15)
Gain on sale of investment in associate
Deferred revenue
Interest paid
Income tax recovered (paid)
Pension contributions
Change in non-cash operating working capital
(note 22)
Investing activities
Additions to property, plant and equipment (note 8)
Acquisition of INNOVA Gaming Group Inc. (note 6)
Acquisition of Integrity (note 6)
Equity investment (note 9)
Proceeds from sale of investment in associate
Additions to intangible assets (note 11)
Financing activities
Net proceeds from (repayments of) long-term debt
(note 13)
Net proceeds from (repayments of) subordinated debt
Change in other non-current liabilities
Deferred financing charges paid (note 13)
Dividends paid
Foreign exchange gain (loss) on cash held in foreign currency
Change in cash position
Cash position, beginning of year
2017
2016
$
16,784
$
12,269
7,190
13,155
3,962
(1,436)
74
1,727
5,082
-
(163)
(3,699)
(6,127)
(5,312)
(2,879)
28,358
(6,948)
(39,318)
(502)
(2,204)
-
(2,246)
(51,218)
13,520
10,602
383
(342)
(2,825)
21,338
(375)
(1,897)
7,500
4,805
10,573
3,600
(1,532)
-
730
4,417
(516)
-
(3,270)
672
(3,102)
(16,920)
11,726
(4,996)
-
-
(807)
516
(1,124)
(6,411)
(1,789)
(681)
16
(165)
(2,825)
(5,444)
42
(87)
7,587
7,500
Cash position, end of year
$
5,603
$
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
1.
Reporting entity:
Pollard Banknote Limited (“Pollard”) was incorporated under the laws of Canada on March 26, 2010.
The address of Pollard’s registered office is 140 Otter Street, Winnipeg, Manitoba, Canada, R3T 0M8.
The consolidated financial statements of Pollard as at and for the year ended December 31, 2017,
comprise Pollard and its subsidiaries and its interest in other entities. Pollard is primarily involved in
the manufacture, development and sale of lottery and gaming products.
The controlling party of Pollard is Pollard Equities Limited (“Equities”), a privately held company.
Equities owns approximately 73.5% of Pollard’s outstanding shares. On February 1, 2018, Pollard
completed a share offering, (note 28), which reduced Equities ownership to approximately 67.6% of
Pollard’s increased outstanding share amount.
The operations of INNOVA Gaming Group Inc. and its wholly owned subsidiaries, Diamond Game
Enterprises and Diamond Game Enterprises Canada ULC, (“INNOVA”), acquired during the year, are
included in the consolidated financial statements from August 3, 2017 (see note 6).
2. Basis of preparation:
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”).
On March 12, 2018, Pollard’s Board of Directors approved these consolidated financial
statements.
(b) Basis of preparation:
These consolidated financial statements have been prepared on a historical cost basis, except
for the following material items in the statement of financial position:
• The pension liability is recognized as the net total of the fair value of plan assets less the
present value of the defined benefit obligation.
These statements are presented in Canadian dollars, Pollard’s functional currency, and all values
are rounded to the nearest thousand (except share and per share amounts) unless otherwise
indicated.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
2.
Basis of preparation (continued):
(c) Use of estimates and judgments:
The preparation of the consolidated financial statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets, liabilities, income and expenses.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates
are recognized prospectively. Actual results may differ from these estimates.
Information about judgments, assumptions and estimation uncertainties that have a significant
risk of resulting in a material adjustment within the next period are as follows:
Impairment of goodwill:
Pollard determines whether goodwill is impaired at least on an annual basis. This requires an
estimation of the “value in use” or “fair value less costs to sell” of the cash-generating units
(“CGUs”) to which goodwill is allocated. Estimating a value in use requires Pollard to make an
estimate of the expected future cash flows from the CGUs and also to choose a suitable
discount rate in order to calculate the present value of those cash flows. Judgment is required
in determining the level at which to test goodwill, including the grouping of assets that generate
cash inflows. Further details are provided in note 10.
Employee future benefits:
Accounting for defined benefit plans requires Pollard to use actuarial assumptions. These
assumptions include the discount rate and the rate of compensation increases. These
assumptions depend on underlying factors such as economic conditions, government
regulations, investment performance, employee demographics and mortality rates. See note
15 for further information.
Income taxes:
Pollard is required to evaluate the recoverability of deferred income tax assets. This requires
an estimate of Pollard’s ability to utilize the underlying future income tax deductions against
future taxable income before they expire. In order to evaluate the recoverability of these
deferred income tax assets, Pollard must estimate future taxable income. Further details are
provided in note 12.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
2.
Basis of preparation (continued):
Acquisition accounting:
For acquisition accounting purposes, all identifiable assets and liabilities acquired in a business
combination are recognized at fair value at the date of acquisition. Estimates are used to
calculate the fair value of these assets and liabilities.
3.
Accounting standards implemented in 2017:
The amendments to IAS 7 Statement of Cash Flows were issued to improve information provided to
users of financial statements about an entity’s changes in liabilities arising from financing activities.
These amendments had no material impact on the consolidated financial statements.
The amendments to IAS 12 Income Taxes were issued to improve information in reference to the
recognition of deferred tax assets for unrealized losses relating to debt instruments measured at fair
value. These amendments had no material impact on the consolidated financial statements.
4.
Significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of Pollard and all its subsidiaries.
Subsidiaries are entities which are under Pollard’s control, where control is defined as the power
to govern financial and operating policies of an entity so as to obtain benefits from its activities.
Pollard holds 100% of the voting rights in, and therefore controls, its subsidiaries.
Significant subsidiaries:
Percent Ownership Interest
December 31, 2017
December 31, 2016
Pollard Holdings, Inc.
Pollard (U.S.) Ltd.
Pollard Games, Inc.
Pollard iLottery Inc.
Diamond Game Enterprises
Diamond Game Enterprises Canada ULC
100
100
100
100
100
100
100
100
100
100
-
-
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
Pollard has entered into a contractual joint agreement with Neogames S.à r.l. for the operation
of iLottery gaming for the Michigan Lottery. As such Pollard has recognized in relation to its
interest in the joint operation: its assets, including its share of any assets held jointly; its liabilities,
including its share of any liabilities incurred jointly and its share of revenue and expenses.
Pollard, in conjunction with NeoGames US, LLP, established NeoPollard Interactive LLC (“NPI”).
Pollard accounts for its investment in NPI as a joint venture. Under the equity method of
accounting Pollard recognizes its share of the income and expenses and equity movements of
NPI.
All inter-company balances and transactions, and any unrealized income and expenses arising
from inter-company transactions, have been eliminated.
(b) Business combination:
Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the fair value of the assets given, equity instruments and liabilities incurred or
assumed at the date of exchange. Acquisition costs for business combinations are expensed as
incurred and included in administration expenses. Identifiable assets acquired and liabilities
assumed are measured at their fair value at the acquisition date. The excess of acquisition costs
over the fair value of the identifiable net assets acquired is recorded as goodwill.
(c) Restricted cash:
Under the terms of Pollard’s iLottery contract with the Michigan Lottery, Pollard holds iLottery
players’ deposits in a bank account for the benefit of the lottery and therefore the cash is not
available for use by Pollard. Pollard records an equal, offsetting liability within accounts payable
and accrued liabilities. Pollard has excluded changes in the restricted cash and related liability
from its calculation of the change in cash position in the statements of cash flows.
(d) Revenue recognition:
Revenue is recognized when persuasive evidence of an arrangement exists, significant risks and
benefits of ownership are transferred, the sales price to the customer is fixed or is determined
and collection of the resulting receivable is reasonably assured. The significant risks of ownership
and benefits of ownership are normally transferred in accordance with the shipping terms agreed
to with the customer. In some instances, revenue is recognized when the customers’ tickets are
sold at retail. Volume rebates are accrued and recorded as a reduction to sales based on
historical experience and management’s expectations regarding sales volume.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
Revenues relating to license and royalty sales, iLottery services, loyalty programs, digital and
lottery management services are recognized pursuant to the terms of the applicable contracts.
Where Pollard provides software and related infrastructure, revenue is recognized in proportion
to the stage of completion of the contracted work.
Certain Pollard subsidiaries’ contracts contain multiple-element revenue arrangements, including
license fees, training, consulting, maintenance, product support services and periodic upgrades.
Where such arrangements exist, the amount of revenue allocated to each element is based upon
the relative fair value of the various elements. The fair values of each element are determined
based on the current market price of each of the elements when sold separately.
Pollard earns revenue from leasing of gaming machines and other equipment and capitalizes the
costs of installing gaming equipment. Revenue from the provision of gaming services is generally
recognized as a daily fee or as a percentage of revenue generated by the gaming machines.
Service and maintenance revenue is recognized as the related services are performed. Deferred
revenue consists of customer advances for services to be rendered in the future and is recognized
as income in future periods. Labour costs associated with performing routine maintenance on
participating gaming machines is expensed as incurred and included in cost of sales.
(e) Inventories:
Raw materials, work-in-process and finished goods are valued at the lower of cost and net
realizable value. The cost of raw material inventory is based on its weighted average cost and
includes all costs incurred to acquire the materials. In addition to the direct costs of conversion,
the cost of work-in-process and finished goods, which Pollard manufactures, also includes an
appropriate share of production overheads based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion.
(f) Goodwill:
Goodwill is comprised of the excess sale price over the underlying carrying amount of the net
assets sold as at August 5, 2005, as part of the 26.7% of Pollard sold in conjunction with the
Initial Public Offering (“IPO”) and the excess purchase price over the underlying carrying amount
of the net assets acquired of Pollard’s subsidiaries. Goodwill is not amortized but is subject to
an annual impairment test to ensure its recoverable value remains greater than, or equal to,
book value.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
(g) Intangible assets:
Deferred development:
Development expenditures are recognized as an intangible asset only if Pollard can demonstrate
that the development costs can be measured reliably, the product is technically and commercially
feasible, future economic benefits are probable and Pollard has sufficient resources to complete
development and to use or sell the asset. The expenditures capitalized include the cost of
materials, direct labour, overhead costs that are directly attributable to preparing the asset for
its intended use and borrowing costs incurred in respect of qualifying assets. Other development
expenditures are expensed as incurred.
Capitalized development expenditures are measured at cost less accumulated amortization and
accumulated impairment losses.
Computer software and licenses:
Computer software consists of the cost of acquiring, developing and implementing these systems.
Cost of implementation include third party costs as well as direct labour and related overhead
costs attributable to the asset. Minimum license fees incurred in connection with our licensing
agreements for our use of third-party brands are capitalized and amortized over the estimated
life of the asset.
Capitalized computer software costs and licenses are measured at cost less accumulated
amortization and accumulated impairment losses.
Customer assets and patents:
Customer assets and patents that have finite useful lives are measured at cost less accumulated
amortization and accumulated impairment losses.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
Intangible assets, with finite useful lives, are amortized, on a straight-line basis, over their
estimated useful lives as follows:
Asset
Customer assets
Patents
Computer software and licenses
Deferred development
Rate
7 to 16 years
Term of patent
3 to 10 years or term of license
2 to 7 years
Amortization methods, estimated useful lives and residual value are reviewed each annual
reporting date and adjusted prospectively if appropriate.
Trademarks:
Trademarks, which were acquired with the acquisition of INNOVA, have been deemed to have
an indefinite life. For purposes of impairment testing, the fair value of the trademarks are
determined using the relief from royalty method.
(h) Property, plant and equipment:
Property, plant and equipment (“PP&E”) are stated at cost less investment tax credits (including
SR&ED credits), accumulated depreciation and accumulated impairment losses. Cost includes
expenditures that are directly attributable to the acquisition of the asset. The cost of self-
constructed assets includes the cost of materials, direct labour and related fringes, other costs
directly attributable to bringing the assets to working condition for their intended use and
borrowing costs incurred in respect to qualifying assets. Major spare parts are treated as PP&E
when they have a useful life greater than a year. Once major spare parts are put in service, they
are transferred into equipment and amortized accordingly.
An item of PP&E is derecognized upon disposal or when no future economic benefits are expected
from its use or disposal. The gain or loss on disposal of an item of PP&E is determined by
comparing the proceeds from disposal with the carrying value of the PP&E and is recognized in
the statement of income on a net basis.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
The cost of each component of an item of PP&E is depreciated over its estimated useful life on
a straight-line basis, commencing the date it is ready for use. Land is not depreciated. The
estimated useful lives for the current and comparative periods are as follows:
Asset
Buildings
Leasehold improvements
Equipment
Charitable gaming machines
Furniture, fixtures and computers
Rate
10 to 30 years
Term of lease
2 to 11 years
5 to 8 years
3 to 9 years
Depreciation methods, useful lives and residual values are reviewed each annual reporting date
and adjusted prospectively if appropriate.
The carrying value of property, plant and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable.
(i)
Investment in associate:
Pollard accounts for its investment in associate using the equity method of accounting as it has
significant influence, but not control. Significant influence is presumed to exist when Pollard
holds between 20 and 50 percent of the voting power of another entity. The consolidated
financial statements include Pollard’s share of the income and expenses and equity movements
of the entity accounted for under the equity method of accounting.
(j) Investment in joint venture:
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement, rather than rights to the assets
and obligations for the liabilities. Joint control is the contractually agreed sharing of control of
an arrangement, which exists only when decisions about the relevant activities require consent
of both parties.
The consolidated financial statements include Pollard’s share of the income and expenses and
equity movements of the entity accounted for under the equity method of accounting.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
(k) Investment in joint operation:
A joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement. Joint control is the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require consent of both parties.
The consolidated financial statements include Pollard’s interest in the Michigan Lottery iLottery
joint operations: its assets, including its share of any assets held jointly; its liabilities, including
its share of any liabilities incurred jointly and its share of revenue and expenses.
(l) Financial instruments:
Non-derivative financial assets
Pollard initially recognizes loans and receivables on the date that they originated. All other
financial assets (including assets designated at fair value through profit or loss) are recognized
initially on the trade date at which Pollard becomes a party to the contractual provisions of the
instrument. Pollard derecognizes a financial asset when the contractual rights to the cash flows
from the asset expire.
Financial assets and liabilities are offset and the net amount presented on the statement of
financial position when, and only when, Pollard has a legal right to offset the amounts and intends
either to settle on a net basis or to realize the asset and settle the liability simultaneously. Pollard
classifies non-derivative financial assets into the following categories: financial assets at fair
value through profit or loss, held-to-maturity financial assets, loans and receivables and available-
for-sale financial assets.
i) Financial assets at fair value through profit or loss
A financial asset is classified as financial assets at fair value through profit or loss if it is classified
as held for trading or is designated as such upon initial recognition. Attributable transaction
costs are recognized in net income as incurred. Financial assets at fair value through profit or
loss are measured at fair value, and changes therein are recognized in net income. Pollard has
no non-derivative financial assets classified as financial assets at fair value through profit or loss.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
ii) Held-to-maturity financial assets
If Pollard has the positive intent and ability to hold debt securities to maturity, then such financial
assets are classified as held-to-maturity. Held-to-maturity financial assets are initially recognized
at fair value plus any directly attributable transaction costs. Subsequent to initial recognition
held-to-maturity financial assets are measured at amortized cost using the effective interest
method, less any impairment losses. Pollard has no financial assets classified as held-to-maturity.
iii) Loans and receivables
Loans and receivables are financial assets with fixed or determined payments that are not quoted
in an active market. Such assets are initially recognized at fair value plus any directly attributable
transaction costs. Subsequent to initial recognition loans and receivables are measured at
amortized cost using the effective interest method, less any impairment losses, and the net gain
or loss is included in finance income. Pollard has classified cash, restricted cash and accounts
receivable as loans and receivables.
iv) Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are designated as
available-for-sale or are not classified in any of the previous categories. Subsequent to initial
recognition, available-for-sale financial assets are measured at fair value and changes therein,
other than impairment losses and foreign exchange differences, are recognized in other
comprehensive income and are presented in the fair value reserve in equity. When an investment
is derecognized, the gain or loss accumulated in equity is reclassified to net income. Pollard has
no financial assets classified as available-for-sale.
Non-derivative financial liabilities
All non-derivative financial liabilities are classified as other financial liabilities and are recognized
initially at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition, these financial liabilities are measured at amortized cost using the effective interest
method and the net gain or loss is included in finance costs.
Pollard classifies accounts payable and accrued liabilities, dividends payable, long-term debt,
subordinated debt and other non-current liabilities as other financial liabilities.
Share Capital
Common stock is classified as equity. Incremental costs directly attributable to the issue of
common stock are recognized as a deduction from equity, net of any tax effects.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
Derivatives and hedge accounting
Pollard may use certain derivative financial instruments to manage risks of fluctuation in interest
rates and foreign exchange rates. On initial designation of the derivative as the hedging
instrument, Pollard formally documents the relationship between the hedging instrument and the
hedging item, including the risk management objectives and strategy in undertaking the hedge
transaction and the hedged risk, together with the methods that will be used to assess the
effectiveness of the hedging relationship. Pollard makes an assessment, both at the inception
of the hedge relationship as well as on an ongoing basis, of whether the hedging instruments
are expected to be “highly effective” in offsetting the change in the fair value or cash flows of
the respective hedged items attributable to the hedged risk, and whether the actual results of
each hedge are within a range of 80 – 125 percent.
Derivatives are recognized initially at fair value and attributable transaction costs are recognized
in net income as incurred. Subsequent to initial recognition, derivatives are measured at fair
value and changes are accounted for as follows:
i) Cash flow hedges
When a derivative financial instrument is designated as the hedging instrument in a hedge
of the variability in cash flows attributable to a particular risk associated with a recognized
asset or liability, the effective portion of changes in the fair value of the derivative is
recognized in other comprehensive income and presented in the hedging reserve in equity.
Any ineffective portion of changes in fair value of the derivative is recognized immediately in
net income. If the hedging instrument no longer meets the criteria for hedge accounting,
then hedge accounting is discontinued prospectively. This results in the amortization of the
respective derivative’s cumulative changes in fair value in the hedging reserve, over the
remaining term of the derivative. Any adjustments to fair value after discontinuing hedge
accounting are recognized immediately in net income as finance income or loss.
ii) Other non-trading derivatives
When a derivative financial instrument is not designated in a hedge relationship that qualifies
for hedge accounting, all changes in its fair value are recognized immediately in net income
as finance income or loss.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
(m) Translation of foreign currencies:
The functional currency for each of Pollard’s subsidiaries is the currency of the primary economic
environment in which the entity operates. Transactions in foreign currencies are translated to
the respective functional currencies of each entity within the consolidated group using the
exchange rates in effect at the date of the transactions. Monetary assets and liabilities
denominated in foreign currencies at the reporting date are translated to the functional currency
at the exchange rates prevailing at the end of the reporting period. Non-monetary items
measured at historical cost in a foreign currency are translated to the functional currency using
the exchange rate prevalent at the date of acquisition. Non-monetary items denominated in
foreign currencies that are measured at fair value are translated to the functional currency at the
exchange rate prevalent at the date that the fair value was determined. Foreign currency
differences arising from translation are recognized in net income, except for exchange differences
arising on the translation of financial instruments qualifying as a cash flow hedge, which are
recognized directly in other comprehensive income (“OCI”).
The results and financial position of entities within the consolidated group that have a functional
currency different from the presentation currency are translated into Canadian dollars as follows:
assets and liabilities are translated at the exchange rate prevailing at the end of the reporting
period; income and expenses are translated at the average rate for the reporting period; all
resulting exchange differences are recognized in OCI. On disposal of a foreign operation, the
deferred cumulative amount recognized in OCI relating to that particular foreign operation is
recognized in net income.
(n) Employee benefits:
Share based compensation
The grant date fair value of stock options granted to employees is recognized as an expense,
with a corresponding increase in equity, over the vesting period of the awards.
Defined contribution plans
Pollard’s U.S. subsidiaries maintain three defined contribution plans in the United States. The
obligation to contribute to these plans is recognized as an employee benefit expense as incurred.
Defined benefit plans
Pollard maintains four non-contributory defined benefit pension plans in Canada and the United
States, three being final pay plans and one being a flat benefit plan. None of the plans have
indexation features.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
The costs of Pollard’s defined benefit plans are recognized over the period in which employees
render service to Pollard in return for the benefits. The defined benefit obligations associated
with the plans are actuarially determined using the projected unit credit method pro-rated on
service and management’s best estimate of salary escalation and retirement ages of employees.
The present value of the defined benefit obligations are determined by discounting the estimated
future cash outflows using interest rates of high quality corporate bonds that have maturity terms
approximating the maturity terms of the related obligation and that are denominated in the
currency in which the benefits will be paid. The expected return on pension plan assets is
calculated utilizing the discount rate used to measure the defined benefit obligation at the
beginning of the annual period.
Past service costs are recognized as an expense on a straight line basis over the average period
until the benefits becomes vested. If the benefits have vested, past service costs are recognized
in net income immediately.
Remeasurements that arise in calculating the present value of the defined benefit obligation and
the fair value of plan assets are recognized immediately in OCI.
Pollard’s pension asset is limited to the total of any unrecognized past services costs and the
present value of economic benefits available in the form of any future refunds from the plan or
reductions in future contributions to the plan. In order to calculate the present value of economic
benefits, consideration is given to any minimum funding requirements that apply to Pollard’s
plans. An economic benefit is available to Pollard if it is realizable during the life of the plan, or
on settlement of the plan liabilities.
(o) Income taxes:
Current income tax and deferred income tax are recognized in the statement of income except
to the extent that the tax relates to items recognized directly in equity or in OCI. Current income
tax is the expected tax payable or receivable on the taxable income or loss for the period and
any adjustment to tax payable in respect to previous years. Current income tax expense includes
withholding taxes.
Deferred income tax is recorded to reflect the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities and their tax basis. Deferred
income tax assets and liabilities are determined based on the enacted or substantively enacted
tax rates, which are expected to be in effect when the underlying items of income and expense
are expected to be realized.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
Deferred income tax is not recognized for: temporary differences related to investments in
subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future,
taxable temporary differences arising on the initial recognition of goodwill or temporary
differences on the initial recognition of assets or liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit or loss.
Deferred income tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realized.
The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the date of enactment or substantive enactment, except if it
relates to an item previously recognized in equity, in which case the adjustment is made to
equity.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to
offset current income tax liabilities and assets, and they are levied by the same taxation authority
on the same taxable entity, or on different tax entities which intend to settle their current income
tax assets and liabilities on a net basis.
(p) Provisions:
Provisions are recognized when Pollard has a present legal or constructive obligation as a result
of a past event that can be estimated reliably, and it is probable that an outflow of economic
benefits will be required to settle the obligation. If the effect of the time value of money is
material, provisions are discounted using a current pre-tax rate that reflects, where appropriate,
the risks specific to the liability. Where discounting is used, the increase in the provision due to
the passage of time is recognized as a finance cost.
(q) Impairment:
Financial assets
Financial assets classified as loans and receivables, held-to-maturity and available-for-sale are
assessed at each reporting period date to determine whether there is objective evidence that it
is impaired. A financial asset is impaired if objective evidence indicates that a loss event has
occurred after the initial recognition of the asset, and that the loss event had a negative effect
on the estimated future cash flows of that asset that can be estimated reliably. Evidence of
impairment may include default or delinquency by a debtor, indications that a debtor will enter
bankruptcy or economic conditions that correlate with defaults. Pollard has neither available-
for-sale nor held-to-maturity instruments.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
For loans and receivables, Pollard first assesses whether objective evidence of impairment exists
for financial assets that are individually significant, or collectively for financial assets that are not
individually significant. If Pollard determines that no objective evidence of impairment exists for
an individually assessed financial asset, whether significant or not, it includes the asset in a group
of financial assets with similar credit risk characteristics and collectively assess them for
impairment. Individually assessed assets with an impairment loss are not included in the
collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss
is measured as the difference between the asset’s carrying amount and the present value of the
estimated future cash flows. The present value of the estimated future cash flows is discounted
at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced
through the use of an allowance account and the amount of the loss is recognized in the
statement of income. If, in a subsequent year, the amount of the estimated impairment loss
increases or decreases because of an event occurring after the impairment was recognized, the
previously recognized impairment is increased or reduced by adjusting the allowance account,
through the statement of income.
Non-financial assets
The carrying amount of Pollard’s non-financial assets, other than inventories and deferred income
tax assets, are reviewed at each reporting date to determine whether there is an indication that
an asset may be impaired. If any such indication exists, or when the annual impairment testing
for an asset is required, Pollard estimates the asset’s recoverable amount. For goodwill the
recoverable amount is estimated as of December 31 each year. An impairment loss is recognized
if the carrying amount of an asset or its related CGU exceeds its estimated recoverable amount.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value
less costs to sell. In assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset of CGU. For the purpose of impairment
testing, assets that cannot be tested individually are grouped together into the smallest group of
assets that generates cash inflows from continuing use that are largely independent of cash
inflows of other assets or CGUs.
Impairment losses are recognized in net income. Impairment losses recognized in respect to
CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and
then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An
impairment loss in respect to goodwill is not reversed. In respect to other assets, impairment
losses recognized in prior periods are assessed at each reporting date for any indications that
the loss has decreased or no longer exists. An impairment loss is reversed if there has been a
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
4.
Significant accounting policies (continued):
change in the estimates used to determine the recoverable amount. An impairment loss can
only be reversed to the extent that the asset’s carrying value that would have been determined,
net of amortization, if no impairment had been recognized.
(r) Finance costs and finance income:
Finance costs comprise interest expense on borrowings, amortization of deferred financing costs,
mark-to-market losses on foreign exchange contracts and net foreign exchange losses.
Borrowing costs that are not directly attributable to the acquisition, construction or production
of an asset that necessarily takes a substantial period of time to get ready for its intended use
or sale are expensed in the period incurred using the effective interest method.
Finance income comprises mark-to-market gains on foreign exchange contracts and net foreign
exchange gains.
(s) Leases:
The determination of whether an arrangement is or contains a lease is based on the substance
of the arrangement and requires an assessment of whether the arrangement conveys a right to
use the asset. When substantially all risk and rewards of ownership are transferred from the
lessor to the lessee, lease transactions are accounted for as finance leases. All other leases are
accounted for as operating leases.
Certain Pollard subsidiaries, as lessees, have entered into leases which are classified as finance
leases. These leases are presented in the consolidated financial statements according to their
nature. The interest element of the lease payment is recognized over the term of the lease
based on the effective interest rate method and is included in finance expenses.
5.
Future accounting standards:
In July 2014, the International Accounting Standards Board (“IASB”) issued International Financial
Reporting Standards (“IFRS”) 9 Financial Instruments, which replaces the existing guidance in IAS
39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the
classification and measurement of financial instruments, a new expected credit loss model for
calculating impairment on financial assets and new general hedge accounting requirements. It also
carries forward the guidance on recognition and derecognition of financial instruments from IAS 39.
IFRS 9 is required for fiscal years beginning on or after January 1, 2018. Pollard does not expect
these amendments to have a material impact on its consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
5.
Future accounting standards (continued):
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard
specifies the steps and timing for recognizing revenue, as well as requiring more informative, relevant
disclosures. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue. IFRS 15 is
required for fiscal years beginning on or after January 1, 2018, with early adoption available. Under
certain contracts, Pollard is compensated for its products based on its customers’ sales of those
products at retail. Prior to IFRS 15, Pollard recognized sales under these contracts at the time the
product was sold at retail. Under IFRS 15 Pollard has concluded that control transfers to its customers
at delivery of the product to the customer. This will accelerate the recognition of sales under these
contracts to the time of shipment. Pollard’s sales under these contracts could vary year over year
depending on the timing of shipments. Pollard expects the new standard will not have a material
impact on its consolidated financial statements. Pollard intends to adopt the standard retrospectively
with the cumulative effect of initially applying the standard recognized at January 1, 2018, in opening
retained earnings.
In January 2016, the IASB issued IFRS 16 Leases which replaces IAS 17 Leases. This standard
introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities
for all leases with a term of more than 12 months, unless the underlying asset is of low value. A
lessee is required to recognize a right-of-use asset representing its right to use the underlying asset
and a lease liability representing its obligation to make lease payments. This standard substantially
carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures
to be provided by lessors. Other areas of the lease accounting model have been impacted, including
the definition of a lease. Transitional provisions have been provided. The new standard is effective
for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities
that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption
of IFRS 16. Pollard is currently assessing the impact of the new standard on its consolidated financial
statements.
In June 2016, the IASB issued amendments to IAS 2 Share-Based Payments. The amendments clarify
how to account for certain types of share-based payment transactions. These amendments are
effective for annual periods beginning on or after January 1, 2018. Retrospective or earlier application
is permitted under certain conditions. Pollard does not expect these amendments to have a material
impact on its consolidated financial statements.
In December 2016, the IASB issued IFRIC Interpretation 22 Foreign Currency Transactions and
Advance Consideration. The Interpretation clarifies the date of the transaction for the purposes of
determining the exchange rate to use on initial recognition of the related asset, expense or income
is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability
arising from the payment or receipt of advance consideration. The Interpretation is effective for
annual periods beginning on or after January 1, 2018. Retrospective or earlier application is permitted
under certain conditions. Pollard does not expect these amendments to have a material impact on
its consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
5.
Future accounting standards (continued):
In June 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The
Interpretation aims to reduce diversity in how companies recognize and measure a tax liability or tax
asset when there is uncertainty over income tax treatments. The Interpretation is effective for annual
periods beginning on or after January 1, 2019 and is to be applied retrospectively. Early adoption is
permitted. Pollard is currently assessing the impact of the Interpretation on its consolidated financial
statements.
In October 2017, the IASB issued amendments to IAS 28 Investments in Associates and Joint
Ventures. The amendments clarify that long-term interests in associates and joint ventures, to which
the equity method is not applied, are in the scope of both IFRS 9 Financial Instruments (including
impairment testing) and IAS 28 in terms of the application of IFRS 9 loss absorption and the
impairment requirements of IAS 28. Pollard is currently assessing the impact of these amendments
on its consolidated financial statements.
6.
Acquisitions:
INNOVA Gaming Group Inc.
On August 3, 2017, 10188557 Canada Inc. (the “Offeror”), a wholly-owned subsidiary of Pollard,
acquired 17,929,021 common shares of INNOVA which had been validly tendered under the offer to
acquire all of the outstanding common shares (the “Offer”) for $2.50 in cash per common share. The
Offer was extended until August 15, 2017.
On August 15, 2017, an additional 1,167,946 common shares were acquired under the extension of
the Offer for $2.50 in cash per common share. A total of 19,096,967 common shares or 95.13% of
the issued and outstanding common shares were acquired under the Offer. On August 18, 2017,
Pollard mailed to all remaining holders of common shares a Notice of Compulsory Acquisition pursuant
to the provisions of Section 206 of the Canada Business Corporations Act to complete the acquisition
of 100% of the common shares. On September 18, 2017, the Compulsory Acquisition was completed
and the Offeror acquired the remaining 976,932 common shares not already held by the Offeror,
thereby becoming the holder of 100% of the common shares. On September 19, 2017, INNOVA was
formally delisted from the Toronto Stock Exchange. The acquisition was completed for aggregate
consideration of $50,185.
The purchase price was funded by proceeds from Pollard’s credit facility and additional subordinated
debt. The acquisition has been accounted for using the acquisition method. The fair values of the
identifiable assets and liabilities have been based on management’s best estimates and valuation
techniques as at August 3, 2017, the acquisition date.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
6.
Acquisitions (continued):
Cash purchase price
Cash acquired
Net purchase price
Additional net tangible assets acquired
Accounts receivable
Inventories
Prepaid expenses and deposits
Property and equipment
Deferred income tax asset
Accounts payable and accrued liabilities
Income tax payable
Deferred revenue
Long-term debt
Deferred income tax liability
Net tangible assets acquired (excluding cash)
Trademarks
Software
Patents
Customer contracts
Identifiable intangible assets acquired
Goodwill acquired
$
$
$
$
$
$
$
50,185
(10,867)
39,318
3,702
1,739
2,255
10,288
5,912
(5,915)
(189)
(2,505)
(1,467)
(4,892)
8,928
2,616
2,733
436
10,247
16,032
14,358
The goodwill acquired is largely attributable to the assembled workforce and the expected synergies
from the combined businesses. This goodwill is not expected to be deductible for tax purposes.
Acquisition costs related to the INNOVA purchase in the year ended December 31, 2017, were
$2,694. These costs were included in administration expenses.
Subsequent to the preliminary purchase price allocation, Pollard assessed there to be a high degree
of uncertainty that it will be able to recognize value from a portion of the deferred tax asset initially
valued. As a result, Pollard has reduced the deferred income tax asset by $3,128, from $9,040 to
$5,912 and increased the goodwill from $11,230 to $14,358.
During the period between August 3, 2017 and December 31, 2017, INNOVA generated revenues of
approximately $10,267 and had a net loss of $1,233, which have been recorded in the consolidated
financial statements. Included in INNOVA’s net loss was $1,656 of severance costs related to the
departure of two former executives. If INNOVA had been acquired on January 1, 2017, incremental
revenue of $16,858 and net loss of $4,088 (which includes $4,637 of Innova’s transaction costs
relating to the sale of the company) would have been included in the year ended December 31, 2017.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
6.
Acquisitions (continued):
Integrity
On December 22, 2017, Pollard Games Inc., a wholly-owned subsidiary of Pollard, acquired certain
bingo assets, predominately inventory, from Integrity Gaming, Inc. and Integrity Gaming of Kansas,
Inc. (“Integrity”), the sellers. Pollard’s subsidiary also assumed two leases as part of the transaction.
The total value of consideration of the transaction was $502. The amount of the purchase price
allocated to inventory was $313 with the remainder allocated to goodwill.
7.
Inventories:
Raw materials
Work-in-process
Finished goods
December 31,
2017
December 31,
2016
$
$
$
11,755
930
19,323
11,246
784
15,202
32,008
$
27,232
During 2017 Pollard recorded inventory write-downs of $457 representing an increase in the
obsolescence reserves and reversal of previous write-downs of $26 due to changes in foreign
exchange rates.
During 2016 Pollard recorded inventory write-downs of $622 representing an increase in the
obsolescence reserves and write-downs of $22 due to changes in foreign exchange rates.
The cost of sales reflects the costs of inventory including direct material, direct labour and
manufacturing overheads.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
8.
Property, plant and equipment:
Leasehold
improve-
Land Buildings
ments Equipment
Charitable
gaming
machines
Furniture,
fixture and
computers
Assets in
progress &
spare parts Total
Cost
Balance at January 1,
2016
Additions/net transfers
Effect of movements in
exchange rates
Balance at December 31,
$
803
11,879
2,614
150,653
189
722
3,578
-
-
(30)
(177)
-
-
-
-
4,168
1,784
171,901
712
(205)
4,996
(1)
-
(208)
4,879
1,579
176,689
2016
$
803
12,068
3,306
154,054
INNOVA acquisition
Additions/net transfers
Disposals
Effect of movements in
exchange rates
Balance at December 31,
-
-
-
-
-
88
-
-
-
725
7,743
1,527
293
10,288
284
4,950
724
422
480
6,948
-
(10,087)
(63)
(385)
-
76
(6)
8
-
(10,093)
-
(364)
2017
$
803
12,156
3,527
149,257
8,543
6,830
2,352
183,468
Accumulated
depreciation
Land Buildings
Leasehold
improve-
ments
Charitable
gaming
machines
Furniture,
fixture and
computers
Assets in
progress &
spare parts Total
Equipment
Balance at January 1,
2016
Depreciation for the
year
Effect of movements in
exchange rates
Balance at December 31,
2016
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2017
$
$
$
-
-
-
-
-
-
-
-
4,550
1,688
111,649
362
-
250
7,574
(23)
(138)
4,912
1,915
119,085
-
-
-
-
237
-
3,871
3,634
- 121,521
-
8,423
-
(161)
- 129,783
-
9,784
369
7,552
917
522
424
-
-
-
(10,013)
(189)
(199)
-
(7)
(6)
- (10,019)
(4)
-
(399)
5,281
2,150
116,425
910
4,383
- 129,149
Carrying amounts
Leasehold
improve-
Land Buildings
ments Equipment
Charitable
gaming
machines
Furniture,
fixture and
computers
Assets in
progress &
spare parts Total
At December 31, 2016
At December 31, 2017
$
$
803
803
7,156
6,875
1,391
1,377
34,969
-
32,832
7,633
1,008
2,447
1,579 46,906
2,352 54,319
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
9. Equity investment:
Interest in joint venture
Balance – beginning of year
Investment
Equity loss
Effects of movements in exchange rates
Balance – end of year
December 31,
2017
December 31,
2016
$
$
$
468
2,204
(1,727)
(68)
877
$
401
807
(730)
(10)
468
Pollard has entered into an agreement with NeoGames US, LLP for the establishment of NeoPollard
Interactive LLC. The entity was established to provide iLottery services in the United States and
Canada, excluding the State of Michigan.
Pollard and Neogames S.à r.l. operate the iLottery operation for the Michigan Lottery under a
separate joint operating agreement. Pollard recognizes its interest in the joint operation by including
its assets, including its share of any assets held jointly, its liabilities, including its share of any liabilities
incurred jointly and its share of revenue and expenses.
10. Goodwill:
Goodwill is comprised of $30,620 (2016 - $30,620), representing the excess purchase price over the
underlying carrying amount of the net assets sold, as at August 5, 2005, as a result of the 26.7% of
Pollard sold as part of its IPO. Goodwill of $14,358, which is subject to foreign exchange revaluation,
was recognized with the purchase of INNOVA in the third quarter of 2017. The remaining $6,653
(2016 - $6,893) of goodwill is from Pollard’s purchase of certain subsidiaries, including $189 from
the purchase of Integrity in the fourth quarter of 2017. Goodwill has been allocated to CGUs for
impairment testing in this manner, as described in the table below.
Lottery
Diamond Game (INNOVA)
Charitable games
December 31,
2017
December 31,
2016
$
$
30,620 $
14,495
6,653
51,768 $
30,620
-
6,893
37,513
During 2017 the value of Charitable games related goodwill decreased $429 (2016 – decreased $204)
as a result of changes in foreign exchange rates. Also during 2017 the value of Diamond Game
(INNOVA) related goodwill increased $137 (2016 – $nil) as a result of changes in foreign exchange
rates.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
10. Goodwill (continued):
Impairment assessment methodology
For each CGU the recoverable amounts have been determined based on a value in use calculation
using cash flow projections from financial forecasts approved by senior management. These
forecasts cover a period of five years and reflect an estimate of a terminal value. Included in these
forecasts is an assumption of certain growth rates which was based on historical trend and expected
future performance.
The calculation of value in use for the CGUs described above are most sensitive to the following key
assumptions on which management has based its cash flow projections to undertake impairment
testing of goodwill:
Revenue and related gross profit
Foreign exchange rates
Discount rates
Growth rates
Revenue and related gross profit
Projected cash flows from revenue assumes the continuation of recent historical trends adjusted for
expected new contract wins, anticipated contract renewal pricing pressures and the expected impact
of sales initiatives in conjunction with certain production efficiencies that are being developed or are
expected to be developed.
Foreign exchange rates
A significant portion of revenue is denominated in U.S. dollars and Euros, partially offset by U.S.
dollar denominated costs. In addition, certain financial assets and liabilities are denominated in U.S.
currency. Projected cash flows assume an estimated exchange rate between Canadian dollars to
U.S. dollars and Euros based on expected exchange rates during the forecast period.
Discount rates
Discount rates were calculated based on the estimated cost of equity capital and debt capital
considering data and factors relevant to the economy, the industry and the CGUs. These costs were
then weighted in terms of a typical industry capital structure to arrive at an estimated weighted
average cost of capital. The after-tax discount rates applied to the cash flow projections for the
CGUs described above were as follows:
Lottery
Diamond Game (INNOVA)
Charitable games
10.0%
10.0%
11.0%
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
10. Goodwill (continued):
Growth rates
Growth rates are based on estimated sustainable long-term growth rates of the CGUs.
Management believes that any reasonable possible change in any of the key assumptions on which
the cash generating unit’s recoverable amounts are based would not cause the unit’s carrying
amounts to exceed its recoverable amount.
11. Intangible assets:
Cost
Balance at January 1,
2016
Additions (net of
investment tax credits)
Additions – internally
developed (net of
investment tax credits)
Balance at December 31,
2016
INNOVA acquisition
Additions (net of
investment tax credits)
Additions – internally
developed (net of
investment tax credits)
Effect of movements in
exchange rates
Balance at December 31,
Customer
assets
Patents
Trademarks
Deferred
development
Computer
software
and
licenses
Total
$
18,645
5,132
-
55
-
-
-
-
-
1,141
6,077
30,995
-
898
953
7
164
171
$
18,645
10,247
5,187
436
-
2,616
1,148
-
7,139
2,733
32,119
16,032
-
69
-
99
-
4
-
-
25
-
867
936
62
-
1,248
1,310
17
145
2017
$
28,991
5,696
2,641
1,210
12,004
50,542
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
11. Intangible assets (continued):
Customer
assets
Patents
Trademarks
Deferred
development
Computer
software
and
licenses
Total
Accumulated
amortization
Balance at January 1,
2016
Amortization for the
year
Balance at December 31,
2016
Amortization for the
$
12,132
4,667
1,165
114
$
13,297
4,781
year
1,789
128
Effect of movements in
exchange rates
Balance at December 31,
(16)
(1)
2017
$
15,070
4,908
-
-
-
-
-
-
955
151
901
18,655
118
1,548
1,106
1,019
20,203
104
595
2,616
-
(6)
(23)
1,210
1,608
22,796
Carrying amounts
Customer
assets
Patents
Trademarks
Deferred
development
Computer
software
and
licenses
Total
At December 31, 2016
At December 31, 2017
5,348
$
$ 13,921
406
788
-
2,641
42
6,120
- 10,396
11,916
27,746
Customer assets of $18,645, $3,874 of patents and $229 of computer software were recognized as
a result of the excess purchase price over the underlying carrying amount of the intangible assets
acquired as at August 5, 2005, as part of the 26.7% of Pollard sold in conjunction with the IPO. As
at December 31, 2011, computer software and licenses, and patents recognized at IPO were fully
amortized. IPO related customer assets will continue to be amortized until fiscal 2021.
Customer assets of $10,247, $436 of patents, $2,616 of trademarks and $2,733 of computer software
were recognized as a result of the acquisition of INNOVA in the third quarter of 2017.
Amortization of intangible assets in 2017 of $2,616 (2016 – $1,548), was included in cost of sales.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
12. Income taxes:
Income tax expense
Current
Deferred (reduction)
Total
2017
7,902
(712)
7,190
$
$
2016
5,144
(339)
4,805
$
$
Income tax recognized in other comprehensive income (loss)
Amount
before
tax
Tax
benefit
2017
Amount
net of tax
Amount
before
tax
Tax
expense
2016
Amount
net of tax
Defined benefit plans
remeasurement loss $
(9,875)
2,478
(7,397) $
(1,028)
291
(737)
Reconciliation of effective tax rate
Net income for the year
Total income tax expense
Income before income taxes
Income tax using Pollard's domestic tax rate
Effect of tax rates in foreign jurisdictions
Non-deductible amounts
Changes in enacted United States federal
2017
2017
2016
$
$
27.0%
4.1%
3.7%
16,784
7,190
23,974
6,473
996
887
$
$
27.0%
3.0%
0.6%
income tax rates
(9.4%)
(2,261)
(0.8%)
Adjustment related to INNOVA acquisition
Other items
Effect of non-taxable items related to
foreign exchange
5.1%
1.4%
1,217
331
-
1.7%
(1.9%)
(453)
(3.4%)
(578)
30.0% $
7,190
28.1% $
4,805
2016
12,269
4,805
17,074
4,610
515
106
(133)
-
285
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
12. Income taxes (continued):
Deferred income tax assets and liabilities
Recognized deferred income tax assets and liabilities
Deferred income tax assets and liabilities are attributable to the following:
Assets
Liabilities
Net
2017
2016
2017
2016
2017
2016
Property, plant and
equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign
exchange (gains)
and losses
Unused tax losses
Deferred revenue
Other
$
48
685
432
7,738
393
1,855
182
98
19 $
108
364
5,758
1,611
-
-
72
(7,762)
(2,082)
-
(1,488)
(6,926) $
(3,265)
-
(1,458)
(7,714)
(1,397)
432
6,250
(6,907)
(3,157)
364
4,300
(303)
-
-
(71)
(1,192)
-
-
-
90
1,855
182
27
419
-
-
72
Tax assets (liabilities)
$
11,431
7,932 $
(11,706)
(12,841) $
(275)
(4,909)
Movement in temporary differences during the year
Balance January
1, 2016
Recognized in
profit or loss
Recognized in other
comprehensive
income
Balance
December 31,
2016
Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange (gains) and
$
losses
Unused tax losses
Deferred revenue
Other
(6,199)
(3,515)
325
3,743
238
-
-
(343)
Tax assets (liabilities)
$
(5,751)
(708)
358
39
266
181
-
-
415
551
-
-
-
291
-
-
-
-
(6,907)
(3,157)
364
4,300
419
-
-
72
291
(4,909)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
12. Income taxes (continued):
January 1,
2017
Recognized
in profit or
loss
INNOVA
acquisition
Recognized in
other
comprehensive
income
Balance
December 31,
2017
Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange
(gains) and losses
Unused tax losses
Deferred revenue
Other
$
(6,907)
(3,157)
364
4,300
419
-
-
72
2,104
911
52
(1,506)
(329)
193
(159)
(127)
(2,911)
849
16
978
-
1,662
341
82
-
-
-
2,478
-
-
-
-
(7,714)
(1,397)
432
6,250
90
1,855
182
27
Tax assets (liabilities)
$
(4,909)
1,139
1,017
2,478
(275)
Recognized in the consolidated statements of financial position as follows:
Deferred income tax asset
Deferred income tax liability
December 31,
2017
December 31,
2016
$
$
3,093
(3,368)
$
(275)
$
-
(4,909)
(4,909)
Recognized in the consolidated statements of comprehensive income as follows:
Deferred income tax reduction
Finance income
2017
(712)
(427)
$
(1,139)
$
2016
(339)
(212)
(551)
$
$
Amounts included in finance income relate to unrealized foreign exchange.
Unrecognized deferred tax assets
Deferred tax assets have not been recognized in respect to certain tax losses because it is not
probable that future taxable profit will be available against which Pollard can use the benefits
therefrom. The amount of tax losses not recognized at December 31, 2017 was $8,426 (2016 - $nil),
with an estimated tax effect of $2,232 (2016 - $nil). These tax losses, related to the acquisition of
INNOVA in 2017, will expire between 2034 and 2037.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
13. Long-term debt:
Credit facility, interest of 3.3% to 4.3%, payable
monthly, maturing 2019
$
83,972
$
71,003
December 31,
2017
December 31,
2016
Equipment debt, interest of 6.72%, payable monthly,
maturing 2019
Equipment lease, interest of 3.89% to 10.90%
payable monthly, maturing 2019
Deferred financing charges, net of amortization
Less current portion
Credit facility
189
647
(253)
84,555
(784)
-
-
(151)
70,852
-
$
83,771
$
70,852
Effective June 22, 2017, Pollard renewed its credit facility. The credit facility provides loans of up to
$105,000 for its Canadian operations and US$12,000 for its U.S. subsidiaries. The credit facility also
includes an accordion feature which can increase the facility by $15,000. The borrowings for the
Canadian operations can be denominated in Canadian or U.S. dollars, to a maximum of $105,000
Canadian equivalent. Borrowings under the credit facility bear interest at fixed and floating rates
based on Canadian and U.S. prime bank rates, banker’s acceptances or LIBOR. At December 31,
2017, the outstanding letters of guarantee drawn under the credit facility were $1,909 (2016 -
$1,205).
Included in the total credit facility balance is a U.S. dollar loan balance of US$14,700 (2016 -
US$13,400).
Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including working capital ratios, debt to income before interest, income taxes,
amortization and depreciation (“Adjusted EBITDA”) ratios and certain debt service coverage ratios.
As at December 31, 2017, Pollard is in compliance with all financial covenants.
As of December 31, 2017, Pollard has unused credit facility available of $34,202 (2016 - $18,908).
Pollard’s credit facility is secured by a first security interest in all of the present and after acquired
property of Pollard. The facility can be prepaid without penalties. Under the terms of the agreement
the facility was committed for a two year period, renewable June 22, 2019.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
13. Long-term debt (continued):
Equipment debt and leasing
Pollard’s subsidiary, INNOVA, entered into agreements to purchase equipment payable in monthly
installments including interest. The equipment purchased includes charitable gaming machines,
machinery and equipment, and computer equipment all relating to the operations of INNOVA.
Credit facility
Deferred
financing
Equipment
debt
Equipment
lease
Total
Balance at January 1, 2017
$
71,003
(151)
-
-
70,852
Net proceeds (payments)
Payment of deferred financing
charges
Total changes from financing
cash flows
14,164
-
(193)
(451)
13,520
-
(342)
-
-
(342)
14,164
(342)
(193)
(451)
13,178
Effect of movements in
exchange rates
INNOVA acquisition
Amortization of deferred
financing charges
Total other changes
(1,195)
-
-
(1,195)
-
-
240
240
3
379
-
382
10
1,088
-
1,098
(1,182)
1,467
240
525
Balance at December 31, 2017
$
83,972
(253)
189
647
84,555
14. Subordinated debt:
Subordinated debt, interest of 9.00%
Subordinated debt, interest of 8.00% payable
quarterly, maturing 2024
Less current portion
December 31,
2017
December 31,
2016
$
$
$
- $
6,132
16,734
16,734 $
(3,585)
-
6,132
(1,363)
13,149 $
4,769
On April 2, 2014, Pollard entered into a loan agreement with Equities for a subordinated term loan
with a seven year term, repayable at any time (subject to meeting certain financial covenants under
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
14. Subordinated debt (continued):
the secured credit facility), in the amount of $6,813. The term loan was provided to assist in the
purchase of a printing press. Quarterly principal payments on the subordinated loan facility
commenced the quarter following June 30, 2016. Interest on the subordinated debt commenced with
the first draw at a rate of 9%. On September 28, 2017, Pollard repaid the outstanding balance of the
loan.
On June 23, 2017, Pollard entered into a second loan agreement with Equities for an additional
subordinated term loan with a seven year term, repayable at any time (subject to meeting certain
financial covenants under the secured credit facility). The loan was provided to assist with the
purchase of the common shares of INNOVA. A total of $25,092 was drawn in the third quarter of
2017. On September 20, 2017, Pollard repaid $7,462 in outstanding principal. Quarterly principal
payments on the second loan facility commenced the month following the first draw, which occurred
August 4, 2017. Interest on the subordinated debt commenced with the first draw at a rate of 8%.
The loans are fully subordinated to the secured credit facility.
15. Pension liability:
December 31,
2017
December 31,
2016
Fair value of benefit plan assets
Present value of benefit plan obligations
Net pension liability
$
$
50,506 $
(73,465)
44,372
(57,896)
(22,959) $
(13,524)
Pollard sponsors non-contributory defined benefit plans providing pension benefits to its employees.
Pollard has four pension plans of which three are final pay plans and one is a flat benefit plan. None
of the plans have indexation features. The measurement date for all the plans is December 31. The
two plans of the U.S. subsidiaries require valuations annually with the last valuations being as of
January 1, 2017. One of the Canadian plans of Pollard currently requires valuation every year with
the last valuation as of December 31, 2016. Pollard’s other Canadian plan’s valuation was as of
January 1, 2017. Pollard’s U.S. subsidiaries also maintain three defined contribution plans. The
pension expense for these defined contribution plans is the annual funding contribution by the
subsidiaries.
Pollard expects to contribute approximately $4,403 to its defined benefit plans in 2018. Included in
the 2018 estimated contributions is $1,140 in additional solvency payments.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
15. Pension liability (continued):
The benefit plan assets are held in trust and are invested as follows:
Equities
Bonds
Cash and cash equivalents
December 31,
2017
December 31,
2016
60.8%
36.2%
3.0%
61.5%
35.8%
2.7%
100.0%
100.0%
Information about Pollard’s defined benefit plans, in aggregate, is as follows:
Benefit plan assets
Fair value, beginning of year
Expected return on plan assets
Employer contributions
Benefits paid
Remeasurement gains
Effect of movements in exchange rates
2017
2016
$
$
44,372
1,834
4,623
(1,773)
1,825
(375)
40,073
1,733
2,577
(1,743)
1,866
(134)
Fair value, end of year
$
50,506
$
44,372
Accrued benefit plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Remeasurement losses
Effect of movements in exchange rates
Balance, end of year
Net pension liability
2017
2016
$
$
$
$
57,896
3,934
2,294
(1,773)
11,671
(557)
51,343
3,464
2,161
(1,743)
2,894
(223)
73,465
$
57,896
(22,959) $
(13,524)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
15. Pension liability (continued):
The total net cost for Pollard’s defined benefit and defined contribution pension plans recognized in
cost of sales is as follows:
2017
2016
Net defined benefit plans cost
Current service cost
Interest on plan obligations
Actual return on plan assets
Difference between expected return and actual
return on plan assets
Net defined benefit plans cost
Defined contribution plans cost
$
$
3,934
2,294
(3,659)
2,190
4,759
323
Net pension plans cost
$
5,082
$
3,464
2,161
(3,599)
2,142
4,168
249
4,417
Actuarial assumptions
The principal actuarial assumptions used in measuring at the reporting date are as follows:
Discount rate
Rate of compensation increase
2017
2016
3.4% to 3.8%
0% to 3.0%
4.0% to 4.3%
0% to 3.0%
Assumptions regarding future mortality have been based on published statistics and mortality tables.
As of December 31, 2017, Pollard used CPM2014 Private Sector projected CPM-B mortality table for
its Canadian subsidiary’s pension plans and the RP-2017 healthy mortality tables for its U.S.
subsidiary’s pension plans. As of December 31, 2016, Pollard used CPM2014 Private Sector projected
CPM-B mortality table for its Canadian subsidiary’s pension plans and the RP-2016 healthy mortality
tables for its U.S. subsidiary’s pension plans.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
15. Pension liability (continued):
Sensitivity analysis
Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions,
holding other assumptions constant, would have affected the defined benefit obligation by the
amounts show below:
Discount rate (1% movement)
Rate of compensation increase (1% movement)
Future mortality (one year)
$
$
$
(13,868) $
$
$
1,974
1,005
18,604
(1,800)
(1,012)
Increase
Decrease
Remeasurements
Remeasurement gains arising on plan assets
$
1,825
$
2017
2016
1,866
Remeasurement (gains) losses arising on plan
liabilities from:
Demographic assumptions
Financial assumptions
Experience adjustments
$
$
589
8,698
2,384
(81)
3,223
(248)
Remeasurement losses arising on plan liabilities
$
11,671
$
2,894
Remeasurements recognized in other comprehensive income
Amount accumulated in deficit, beginning of year
Recognized during the year
Amount accumulated in deficit, end of year
$
$
(11,996) $
(7,397)
(11,259)
(737)
(19,393) $
(11,996)
2017
2016
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
16. Share capital:
Authorized
Unlimited common shares
Unlimited preferred shares
Issued
23,543,158 common shares
Ownership restrictions:
December 31,
2017
December 31,
2016
$
$
73,209
73,209
$
$
73,209
73,209
The holders of the common shares are entitled to one vote in respect to each common share held,
subject to the Board of Directors ability to take constraint actions when a person, or group of persons
acting in concert acquires, agrees to acquire, holds, beneficially owns or controls, either directly or
indirectly, a number of shares equal to or in excess of 5% of the common shares (on a non-diluted
basis) issued and outstanding (“Ownership Threshold”). The Board of Directors, in its sole discretion,
can take the following constraint actions:
• place a stop transfer on all or any of the common shares believed to be in excess of the
Ownership Threshold;
•
•
suspend all voting and/or dividend rights on all or any of common share held believed to be
in excess of the Ownership Threshold;
apply to a court seeking an injunction to prevent a person from acquiring, holding, owning,
controlling and/or directing, directly or indirectly, common shares in excess of the Ownership
Threshold; and/or
• make application to the relevant securities commission to effect a cease trading order or
such similar restriction, until the person no longer controls common shares equal to or in
excess of the Ownership Threshold.
In addition, if a Gaming Regulatory Authority has determined that ownership by a holder of common
shares is inconsistent with its declared policies, the Board of Directors is entitled to take constraint
action against such shareholder. Any person who controls common shares equal to or in excess of
the Ownership Threshold, may be required to file an application, be investigated and have suitability
as a shareholder determined by a Gaming Regulatory Authority, if such Gaming Regulatory Authority
has reason to believe such ownership would otherwise be inconsistent with its declared policies. The
shareholder must pay all the costs of the investigation incurred by any such Gaming Regulatory
Authority.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
16. Share capital (continued):
Capital management:
Pollard’s objectives in managing capital are to maintain a strong capital base so as to maintain
investor, creditor and market confidence and to sustain future development of the business. Pollard
also strives to maintain an optimal capital structure to reduce the overall cost of capital.
In the management of capital, Pollard includes long-term debt, subordinated debt, share capital and
deficit, but excludes reserves. The Board of Directors regularly monitors the levels of debt, equity
and dividends.
Pollard monitors capital on the basis of funded debt to Adjusted EBITDA, working capital ratio and
debt service coverage. Pollard has externally imposed capital requirements as determined through
its bank credit facility. As at December 31, 2017, Pollard is in compliance with all financial covenants.
Dividends:
Dividends are paid on the common shares within 15 days of the end of each quarter and are fully
discretionary, as determined by the Board of Directors of Pollard.
On November 8, 2017, a dividend of $0.03 per share was declared, payable on January 15, 2018, to
the shareholders of record on December 31, 2017.
There were no other changes in Pollard’s approach to capital management during the current period.
Share based compensation:
Under the Pollard Banknote Limited Stock Option Plan the Board of Directors has the authority to
grant options to purchase common shares to eligible persons and to determine the applicable terms.
The aggregate maximum number of common shares available for issuance from Pollard’s treasury
under the Option Plan is 2,354,315 common shares.
On March 5, 2014, the Board of Directors approved the award of 100,000 options to purchase
common shares of Pollard for certain key management personnel. The options were granted on
March 10, 2014, and have a seven year term, vesting 25% per year over the first four years. The
exercise price of the options was equal to the closing price of the common shares on March 7, 2014.
On September 7, 2016, the Board of Directors approved the award of 25,000 options to purchase
common shares of Pollard for a key management member. The options were granted on October 3,
2016, and have a seven year term, vesting 25% per year over the first four years. The exercise price
of the options was equal to the closing price of the common shares on September 30, 2016.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
16. Share capital (continued):
On March 13, 2017, the Board of Directors approved the award of 125,000 options to purchase
common shares of Pollard for certain key management personnel. The options were granted on April
24, 2017 and have a seven year term, vesting 25% per year over the first four years. The exercise
price of the options was equal to the closing price of the common shares on April 21, 2017.
The grant date fair value of these options was determined based on the Black-Scholes formula.
Expected volatility is estimated by considering historic average share price volatility. The inputs used
in the measurement of the fair values of the share based compensation granted are the following:
Option grant date
April 24,
2017
October 3,
2016
March 10,
2014
Fair value at grant date
Share price
Exercise price
Expected volatility
Option life (expected weighted average life)
Risk-free interest rate (based on Canadian
government bonds)
$
$
$
2.27
10.00
10.00
29.3%
4.75 years
0.6% to
0.7%
$
$
$
1.87
8.12
8.12
30.7%
4.75 years
0.6% to
0.7%
$
$
$
0.82
3.63
3.63
33.7%
4.75 years
1.7% to
2.1%
2017
Number
Weighted
average
exercise price
2016
Number
Weighted
average
exercise price
Balance at beginning of
year
Granted during the year
125,000 $
125,000 $
4.53
10.00
100,000 $
25,000 $
Balance at end of year
250,000 $
7.26
125,000 $
3.63
8.12
4.53
As of December 31, 2017, no share options had been exercised or expired. Of the 250,000 options
outstanding at December 31, 2017, 81,250 were exercisable.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
17. Commitments and contingencies:
Pollard and certain subsidiaries rent premises and equipment under long-term operating leases. The
following is a schedule by fiscal year of rental payment commitments under operating leases
outstanding:
2018
2019
2020
2021
2022
Thereafter
$
5,727
4,336
3,733
2,982
2,562
1,867
Pollard is contingently liable for outstanding letters of guarantee in the amount of $1,909 at
December 31, 2017 (2016 - $1,205). These letters of guarantee are part of Pollard’s credit facility
and are secured as disclosed in note 13.
During 2008 Pollard entered into a sale leaseback with an affiliate of Equities for land and building in
Council Bluffs, Iowa. The property was sold for $4,081 and leased back for ten years at an annual
lease rate of approximately US$260. The sale value was determined through independent appraisal.
Also in 2008 Pollard entered into a lease with an affiliate of Equities for a manufacturing facility in
Winnipeg, Manitoba. The lease was for a 12 year 6 month period, ending March 31, 2021, at an
annual base rate of approximately $2,453. In 2015, Pollard agreed to exercise its renewal clause.
The renewal covers the period from April 2021 to September 2023 with an approximate annual lease
rate of $2,400, including an annual amortization of a leasehold improvement allowance of
approximately $1,000. The total leasehold allowance is $2,500. The base rental rate was based on
current market value as determined through independent appraisal.
During 2011 Pollard entered into a sale leaseback with an affiliate of Equities for land and building in
Winnipeg, Manitoba. The property was sold for $3,473 and leased back for five years (with an option
to renew for an additional five year term) at an annual lease rate of approximately $313. The sale
value was determined through independent appraisal. During 2016, Pollard exercised its option to
renew its lease for an additional five year term for annual rent of $363 per year. The rental rate was
based on current market value as determined through independent appraisal.
Pollard is involved in litigation and claims associated with operations, the aggregate amounts of which
are not determinable. While it is not possible to estimate the outcome of the proceedings,
management is of the opinion that any resulting settlements would not materially affect the financial
position of Pollard. Should a loss occur on resolution of these claims, such loss would be accounted
for as a charge to income in the period in which the settlement occurs.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
17. Commitments and contingencies (continued):
Pollard has agreed to indemnify Pollard’s current and former directors and officers from and against
liability and costs in respect of any action or suit against them in connection with the execution of
their duties of office, subject to certain usual limitations. No claims with respect to such occurrences
have been made and, as such, no amount has been recorded in these financial statements with
respect to these indemnifications.
18. Other (income) expenses:
Loss on equity investment (note 9)
EBITDA support agreement
Loss on sale of property, plant and equipment
Gain on sale of investment in associate
Other income
EBITDA support agreement
$
2017
1,727
(825)
74
-
(301)
675
$
$
$
2016
730
-
-
(516)
(246)
(32)
One of Pollard’s subsidiaries, INNOVA, previously entered into an EBITDA support agreement with
Amaya Inc. pursuant to which, subject to certain terms and conditions, Amaya Inc. will pay INNOVA
each year for up to five years from July 1, 2015, an amount equal to the shortfall, if any, between
(i) INNOVA’s EBITDA directly or indirectly derived from the deployment of INNOVA’s products at
certain entertainment centers or in connection with INNOVA’s relationship with a certain customer,
and (ii) $2,000. This agreement remains in effect after the acquisition of INNOVA’s common shares
by Pollard.
Gain on sale of investment in associate
During the second quarter 2016, Pollard sold its investment in Shenzhen Palm Commerce & Pollard
Banknote Technology Co., Ltd. to Palm Commerce Information and Technology (China) Co., Ltd., the
majority shareholder, for proceeds of US$400.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
19. Finance costs and finance income:
Finance costs
Foreign exchange loss
Interest
Amortization of deferred financing costs
Finance income
Foreign exchange gain
20. Net income per share:
2017
211
3,722
239
$
4,172
$
2017
1,104
1,104
$
$
$
$
$
$
2016
681
3,374
226
4,281
2016
1,042
1,042
2017
2016
Net income attributable to shareholders for basic
and diluted net income per share
$
16,784
$
12,269
Weighted average number of shares (basic)
Weighted average impact of share options
23,543,158
212,329
23,543,158
106,216
Weighted average number of shares (diluted)
23,755,487
23,649,374
Net income per share (basic)
Net income per share (diluted)
21. Personnel expenses:
Wages and salaries
Benefits and government payroll remittances
Profit share
Expenses related to defined contribution plans
Expenses related to defined benefit plans
$
$
$
0.71
0.71
$
$
0.52
0.52
$
2017
84,718
12,327
2,792
323
4,759
2016
70,851
11,645
2,028
249
4,168
$
104,919
$
88,941
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
22. Supplementary cash flow information:
Change in non-cash operating working capital:
Accounts receivable
Inventories
Prepaid expenses and deposits
Income taxes payable
Accounts payable and accrued liabilities
Deferred revenue
2017
2016
$
$
632
(3,184)
(1,236)
(1,086)
2,877
(882)
(14,724)
(3,657)
182
(417)
1,696
-
$
(2,879) $
(16,920)
23. Related party transactions:
Pollard Equities Limited and affiliates
During the year ended December 31, 2017, Pollard paid property rent of $3,177 (2016 - $3,146) and
$379 (2016 - $357) in plane charter costs to affiliates of Equities. In addition, during the year, Pollard
paid Equities $1,006 (2016 - $592) interest on Pollard’s subordinated debt.
During the year, Equities paid Pollard $72 (2016 - $72) for accounting and administration fees.
At December 31, 2017, included in accounts payable and accrued liabilities is an amount owing to
Equities and its affiliates for rent, expenses and other items of $1,900 (2016 - $907).
Neogames S.à r.l. and affiliates
During the year ended December 31, 2017, Pollard reimbursed operating costs and paid software
royalties of $2,878 (2016 - $1,755) to its iLottery partner, which are recorded in cost of sales and
$nil (2016 - $633) of development costs.
At December 31, 2017, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $698 (2016 - $789) for reimbursement of operating costs and capital
expenditures, and its share of operating profits.
Key management personnel
Key management personnel are those having authority and responsibility for planning, directing and
controlling the activities of the company. The Board of Directors and the Executive Committee are
considered key management personnel.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
23. Related party transactions (continued):
Key management personnel compensation comprised:
Wages, salaries and benefits
Profit share
Expenses related to defined benefit plans
2017
3,115
22
512
$
3,649
$
2016
2,631
14
447
3,092
$
$
As at December 31, 2017, the Directors and Named Executive Officers of Pollard, as a group,
beneficially owned or exercised control or direction over 17,431,658 common shares of Pollard.
24. Sales to major customers:
For the year ended December 31, 2017, sales to one customer amounted to 12.0 percent of
consolidated sales and 11.7 percent to a second customer. In 2016 sales to one customer amounted
to 16.7 percent of consolidated sales.
25. Segmented information:
Pollard has two reportable segments: Instant ticket and Diamond Game (INNOVA), which are
Pollard’s strategic business units. The strategic business units offer different products and services,
and are managed separately. For each of the strategic business units, Pollard’s Co-CEO’s review
internal management reports on a monthly basis. The Diamond Game (INNOVA) segment was
acquired August 3, 2017, therefore in 2016 Pollard had only one segment.
The Instant ticket segment derives its revenues from the manufacture of instant tickets and related
products. The Diamond Game (INNOVA) segment derives its revenues from the development of
game systems.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
25. Segmented information (continued):
There was no inter-segment revenue.
Segment information about profits and assets is as follows:
Instant ticket
2017
Diamond Game
(INNOVA)
Total
Sales from external customers
Operating costs and expenses
Income before income taxes
Total assets
$
$
275,387
251,433
23,953
173,605
$
10,267
10,246
21
54,669
285,654
261,679
23,974
228,274
Sales:
Canada
U.S.
Other
Property, plant and equipment and goodwill:
Canada
U.S.
2017
2016
$
64,302
159,583
61,769
49,399
134,130
62,885
285,654
$
246,414
December 31,
2017
December 31,
2016
63,188
42,899
$
106,087
$
43,893
40,526
84,419
$
$
$
$
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
26. Financial instruments:
The fair value of a financial instrument is the estimated amount that Pollard would receive or pay to
terminate the instrument agreement at the reporting date. The following methods and assumptions
were used to estimate the fair value of each type of financial instrument by reference to various
market value data and other valuation techniques as appropriate.
The fair values of accounts receivable, accounts payable and accrued liabilities and dividends payable
approximate their carrying values given their short-term maturities.
The fair value of the long-term debt approximates the carrying value due to the variable interest rate
of the debt.
The fair value of the subordinated debt approximates the carrying value based on the terms
associated with the debt.
The fair value of the other non-current liabilities approximates the carrying value based on the
expected settlement amount of these liabilities.
Certain financial instruments recorded at fair value on the statements of financial position are
classified using a fair value hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
Level 1 - valuation based on the quoted prices observed in active markets for identical assets or
liabilities
Level 2 - valuation techniques based on inputs that are quoted prices of similar instruments in
active markets; quoted prices for identical or similar instruments in markets that are not active;
other than quoted prices used in a valuation model that are observable for that instrument; and
inputs that are derived principally from or corroborated by observable market data by correlation
or other means
Level 3 - valuation techniques with significant unobservable market inputs
A financial instrument is classified to the lowest level of the hierarchy for which a significant input
has been considered in measuring fair value.
As at December 31, 2017, the cash and restricted cash recorded at fair value was classified as level
one of the fair value hierarchy.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
27. Financial risk management:
Pollard has exposure to the following risks from its use of financial instruments:
Credit risk
Liquidity risk
Currency risk
Interest rate risk
Pollard’s risk management policies are established to identify and analyze the risks, to set appropriate
risk limits and controls and to monitor risks and adherence to limits. The Audit Committee oversees
how management monitors compliance with Pollard’s risk management policies and procedures. The
Audit Committee is assisted in its oversight role by Internal Audit, who undertakes regular reviews
of risk management controls and utilizes the annual risk assessment process as the basis for the
annual internal audit plan.
Credit risk
The following table outlines the details of the aging of Pollard’s receivables and the related allowance
for doubtful accounts:
Current
Past due for 1 to 60 days
Past due for more than 60 days
Less: Allowance for doubtful accounts
Liquidity risk
December 31,
2017
December 31,
2016
$
$
37,786
2,635
366
(38)
36,670
1,530
449
(64)
$
40,749
$
38,585
Liquidity risk is the risk that Pollard will not be able to meet its financial obligations as they fall due.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
27. Financial risk management (continued):
The following table outlines Pollard’s maturity analysis of the undiscounted cash flows, including
related interest payments, of certain non-current financial liabilities and leases as of December 31,
2017:
Total
2018
2019 - 2020
2021 - 2022
After
Long-term debt
Subordinated debt
Operating leases
$
89,250
19,913
21,207
3,571
4,792
5,727
85,679
8,723
8,069
-
6,398
5,544
-
-
1,867
$
130,370
14,090
102,471
11,942
1,867
Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due. In addition, Pollard maintains a committed credit facility including up to
$105,000 for its Canadian operations and up to US$12,000 for its U.S. subsidiaries. At December
31, 2017, the unused balance available for drawdown under the credit facility was $34,202 (2016 -
$18,908).
The 2018 requirements for capital expenditures, working capital and dividends are expected to be
financed from cash flow provided by operating activities and the unused credit facility. Pollard enters
into contractual obligations in the normal course of business operations.
Currency risk
Pollard sells a significant portion of its products and services to customers in the United States and
to some international customers where sales are denominated in U.S. dollars. In addition, a
significant portion of its cost inputs are denominated in U.S. dollars. Pollard also generates revenue
in currencies other than the Canadian and U.S. dollar, primarily in Euros.
A 50 basis point strengthening/weakening in the foreign exchange rate between the Canadian and
U.S. dollar would decrease/increase the income before income taxes due to changes in operating
cashflow by approximately $147 for year ended December 31, 2017 (2016 - $64). A 50 basis point
strengthening/weakening in the foreign exchange rate between the Canadian dollar and Euro would
decrease/increase the income before income taxes due to changes in operating cashflow by
approximately $65 for year ended December 31, 2017 (2016 - $64).
In addition, translation differences arise when foreign currency monetary assets and liabilities are
translated at foreign exchange rates that change over time. As at December 31, 2017, the amount
of financial liabilities denominated in U.S. dollars exceeded the amount of financial assets
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
27. Financial risk management (continued):
denominated in U.S. dollars by approximately $1,305 (2016 - $1,552). A 50 basis point
weakening/strengthening in the value of the Canadian dollar relative to the U.S. dollar would result
in a decrease/increase in income before taxes of approximately $7 for the year ended December 31,
2017 (2016 - $8).
Pollard utilizes a number of strategies to mitigate its exposure to currency risk. Three manufacturing
facilities are located in the U.S. and a significant amount of cost inputs for all production facilities are
denominated in U.S. dollars, offsetting a large portion of the U.S. dollar revenue in a natural hedge.
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign
currency risk. At December 31, 2017, Pollard had no outstanding foreign currency contracts.
Interest rate risk
Pollard is exposed to interest rate risk relating to its fixed and floating rate instruments. Fluctuation
in interest rates will have an effect on the valuation and repayment of these instruments.
A 50 basis point decrease/increase in interest rates would result in an increase/decrease in income
before income taxes of approximately $423 for the year ended December 31, 2017 (2016 - $355).
28. Subsequent events:
International Gamco, Inc.
On February 1, 2018, Pollard Holdings, Inc., a wholly-owned subsidiary of Pollard, acquired 100% of
the common shares of International Gamco, Inc. for a total consideration of $21,648.
The purchase price was funded by proceeds from Pollard’s credit facility and cash on hand. The
acquisition will be accounted for using the acquisition method. The allocation of the purchase price
to the identifiable assets and liabilities has not yet been completed.
Share offering
On February 1, 2018, Pollard announced that it had entered into an agreement with a syndicate of
underwriters led by Canaccord Genuity Corp. (together, the “Underwriters”) to purchase on a bought
deal basis 1,800,000 common shares of Pollard at a price of $18.45 per share. Pollard also granted
the Underwriters an over-allotment option exercisable at any time up to 30 days following the closing
of the offering, to purchase up to an additional 270,000 common shares.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2017 and 2016
28. Subsequent events (continued):
The offering, including the full over-allotment, closed on February 21, 2018. The total gross
proceeds, prior to any commissions and offering expenses, from the sale of 2,070,000 common
shares was approximately $38,200.
Pollard used the net proceeds to repay indebtedness under the Company’s credit facility and
subordinated debt.
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard ExEcuT1vE CHAIR
1
Dave Brown
1•2
Jerry Gray
1
Garry Leach
John Pollard
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Lead Director
John Pollard
CO-CHIEF EXECUTIVE OFFICER
Douglas Pollard
CO-CHIEF EXECUTIVE OFFICER
Paul Franzmann
EXECUTIVE VICE PRESIDENT, CORPORATE DEVELOPMENT
Pedro Melo
EXECUTIVE VICE PRESIDENT, INFORMATION TECHNOLOGY
Riva Richard
GENERAL COUNSEL AND EXECUTIVE VICE PRESIDENT,
LEGAL AFFAIRS
Robert Rose
EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
Jennifer Westbury
EXECUTIVE VICE PRESIDENT, SALES AND CUSTOMER
DEVELOPMENT
Robert Young
EXECUTIVE VICE PRESIDENT, OPERATIONS
Senior
Management
Investor
Relations
Robert Rose
140 Otter Street
t: 204-474-2323
e: winnipeg@pollardbanknote.com
Stock
Exchange Listing
I
The Toronto Stock Exchange - PBL
Independent
Auditors
KPMG LLP,
Winnipeg, Manitoba
Transfer
Agent
Computershare Trust Company of Canada,
Toronto, Ontario
Toronto-Dominion Bank,
Winnipeg, Manitoba
Bank of Montreal,
Calgary, Alberta
Bankers
Canadian Western Bank,
Edmonton, Alberta
Head Office
140 Otter Street
Winnipeg, Manitoba, R3T OMS
t: 204-474-2323
f: 204-453-1375
Winnipeg, Manitoba, Canada
1 499 Buffalo Place, R3T 1 L7
1 40 Otter Street, R3T OMS
Barrhead, Alberta, Canada
6203 46th Street, T7N 1 A 1
Sault Ste. Marie, Ontario, Canada
300-45 White Oak Drive East, P6B 4J7
Ypsilanti, Michigan, USA
775 James L. Hart Parkway, 481 97
Manufacturing
Facilities
Council Bluffs, Iowa, USA
504 34th Avenue, 51501
Chatsworth, California, USA
9340 Penfield Avenue, 91 31 1
POLLARD
banknote limited
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information