Pollard Banknote Annual Report 2019

FY2019 Annual Report · Pollard Banknote

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LETTER TO SHAREHOLDERS

Enclosed please find our 2019 Annual Report. In 2019 Pollard Banknote
achieved record revenue of $397.8 million dollars, a 19.9% increase over 2018,
and strong Net Income of $22.0 million, up over 48% from the prior year. Our
adjusted EBITDA, not including the impact of IFRS 16, increased to record levels
of $54.8 million, 12% higher than 2018. These results were driven by
contributions from our acquisitions completed over the past few years as well as
strong growth from our main lottery operations, including both instant tickets and
digital solutions.

Our strategic vision of being the partner of choice for the lottery and charitable
gaming industries has resulted in our growing stature in these industries and this
is reflected in our 2019 financial achievements. Pollard is recognized as the
thought leader among lotteries and charitable gaming organizations through the
provision of creative and innovative products and solutions that help our
customers maximize the generation of more funds to distribute to good causes.

Sales

Our record revenue of $397.8 million reflects the third year in a row of sales
growth in excess of at least 16%. Sales of our main product, instant tickets, were
significantly higher in 2019 driven by increased orders across a number of our
lottery customers.

Consumer demand for instant tickets remained strong during 2019. Through the
development of a number of unique proprietary products such as Clear PlayTM
and Scratch FX®, we have been able to increase our volumes while at the same
time maintain, and in some cases increase, our average selling price. Sustaining
strong selling prices in a very price competitive market is important for Pollard’s
success, however, this strategy can only be achieved when our products actually
generate greater sales and success for our lottery customers. Pollard Banknote
achieved a record level of instant ticket volume sold in 2019 because of the
creative and innovative solutions offered to our customers.

Our lottery contract portfolio remains healthy. During 2019 we retained all of our
existing contracts, including obtaining renewals for all contracts with renewal
options available during they year. These renewals include a new ten-year
contract to provide instant tickets for the British Columbia Lottery Corporation, a
two-year extension with Loto-Quebec and renewals with a number of important
customers including the lotteries of France, Sweden, Michigan and California.
Our weighted average length of our existing instant ticket contracts, assuming all
available renewals are exercised, is currently in excess of 4 years and while we
have a few mid-size contracts coming due during 2020, as is typical with the
lottery contract cycle, we have no major contracts expiring over the next year.

While still small in overall financial impact, our significant investments in ancillary
lottery products continue to generate traction in the marketplace. In 2019 we
achieved key installations of our PlayOnTM loyalty platform, rolled out our
proprietary SureTrack® 2.0 Lottery Management System to a number of
customers and maintained a strong sales record of digital lottery products such
as individual game apps and second chance draw solutions. During the year we
were awarded a contract to operate the instant ticket warehousing and
distribution system on behalf of the Arizona Lottery, which began successful
operation in March 2020. While the financial impact of this one contract will be
small, it is an important strategic development to showcase our ongoing
multifaceted service offering to the market.

In addition to strong growth in our lottery operation, our sales and earnings
increased due to the ongoing contribution of our recent acquisitions. During
2019, our financial results included a full year of International Gamco operations
(compared to 11 months in 2018), a full year of Schafer Systems business
results (versus only 2 months in 2018) and 8 months of impact from the
acquisition of Fastrak Retail. Incremental revenue based on the timing of these
acquisitions increased revenue by approximately $20 million.

Our iLottery operations continue to lead the market with continued growth in
Michigan and the launching of the iLottery operation for the North Carolina
Education Lottery in the fall of 2019. Our 50% joint venture, NeoPollard, now
operates 4 iLottery solutions in the United States and we remain the clear leader
in providing successful innovative solutions in this space.

Charitable gaming revenue attained a new record of $62.5 million, driven by
higher demand for pull-tab tickets as well as pull-tab vending machines. In a
number of important jurisdictions, we have seen positive growth at the retail level
for charitable gaming products and this factor, in conjunction with broader
product offerings of pull-tab tickets, has helped generate a 13.4% increase in
charitable gaming revenue.

Diamond Game and Oasis branded egaming machines continued to generate
solid returns. A number of markets in which our machines are deployed have
changed their economic model. Previous single supplier markets have become
multiple supplier markets with more competitive pricing, however in most of these
situations the previous cap or limited number of machines has been modified or
lifted, allowing Pollard the opportunity to place more machines. Our 2019
revenue declined by 1% overall, with lower pricing in certain jurisdictions being
substantially offset by slightly increased number of machines and improved per
machine performance. The North Dakota market, originally opened in 2018,
continued to grow, with additional machines and improving per machine
performance.

Operations

In 2019 we achieved a record gross margin of $91.1 million, 20.3% higher than
last year. The higher gross margin was due to the higher levels of revenue from
greater instant ticket volumes and the impact of acquisitions. Our gross margin
percentage of 22.9% was consistent with our 2018 gross margin of 22.8%.
Instant ticket production volume set a new record, approximately 7% higher than
the previous year.

Our gross margin percentage during the fourth quarter of 2019 was impacted
negatively due to certain production inefficiencies stemming from the large
increase in instant ticket order volumes impacting our scheduling and
throughput. Additional incremental manufacturing costs were incurred to meet
the higher demands during a relatively short time frame including higher levels
of overtime, increased spoilage and increased freight costs incurred to meet
delivery deadlines. We are incrementally expanding our capacity on our existing
production lines and increasing our staffing, which will enable us to produce
higher volumes more efficiently in 2020.

Administration expenses increased $8.4 million due partially to the inclusion of a
full year of International Gamco, Schafer Systems and 8 months of Fastrak Retail
operations. In addition, increased personnel costs were incurred relating to our
growth strategies and product development of our digital innovations and
increased investment in our technology infrastructure, including implementation
of a number of product installations. Higher acquisition costs increased
expenditures by $0.4 million and additional professional fees of $1.5 million
relating to legal fees to defend our intellectual property, including certain
patents, were incurred. Selling expenses increased $2.5 million over 2018
primarily due to the inclusion of a full year of our earlier acquisitions and ongoing
investments in additional personnel to support our expanded portfolio of
products and services offered to the lottery market.

Our capital expenditures and investments in intangibles totaled $25.8 million
during 2019, covering a number of important manufacturing improvements as
well as new product development. Additional equipment was added to our
original press in Ypsilanti to grow instant ticket capacity and increase scheduling
flexibility. Upgrades to our finishing lines were undertaken to expand and
improve product handling. Significant investments were made in our charitable
gaming business, including a new state of the art digital press and additional
manufacturing equipment, to improve efficiency and increase capacity. We
continued to invest in our digital product offerings with major expenditures on
our PlayOnTM loyalty solution, complete upgrades for our SureTrack® 2.0 Lottery
Management Systems and a substantial investment in expanding our electronic
game portfolio for our egaming machines.

Acquisitions

Over the last three years, acquisitions have been an important feature of our
strategic plan, with a focus on building our portfolio of lottery products and
services, expanding our presence in the charitable gaming market and growing
additional technological solutions. 2019 continued this successful avenue of
growth.

On May 2, 2019, Pollard acquired 100% of the common shares of Fastrak Retail
(UK) Limited for initial consideration of £4.0 million, subject to a working capital
adjustment and future contingent consideration based on certain earn-outs.
Fastrak Retail is a leading supplier of creative and innovative instant ticket lottery
merchandising including key relationships with a number of major lotteries.
Fastrak Retail and our existing lottery merchandising business, Schafer Systems,
have already integrated many aspects of their marketing and research and
development and we are very pleased with the results.

Subsequent to year end, Pollard acquired 100% of the equity of mkodo Limited
for a consideration of £7.8 million subject to a working capital adjustment and
future contingent consideration based on certain earn-outs. mkodo is a leading
technology developer focused on mobile apps and user interfaces specifically in
the lottery and gaming industries. mkodo expands our capabilities in this
important link between lotteries and their customers in all things digital and is a
key strategic addition for Pollard.

On March 20, 2020, Pollard acquired certain fixed assets and intellectual
property for a purchase price of $3.8 million which were being sold under a
bankruptcy process. These assets had previously been used in the operation of a
business producing pull-tab tickets for the lottery and charitable gaming industry
and will be utilized to expand our existing charitable gaming operations.

Pollard continues to be actively engaged in seeking out future acquisitions to
further enhance Pollard’s position in the market. We believe there are actionable
opportunities to acquire valuable organizations at reasonable prices available,
however we will remain very disciplined in our approach.

Capital

The preservation and appropriate allocation of capital is a critical component of
Pollard’s strategic vision. To that end, during 2019 we were successful on a
number of fronts ensuring our capital management program and structure
provided the optimal results.

In the first quarter of 2019 we raised our dividend for the very first time in our
history of being a public company, increasing it by 33%. We believe there is an

important balance between retaining capital for investment and ensuring a
minimum return is available for our shareholders.

On December 31, 2019, we renewed our senior bank facility for a further three-
year period. The new facility increased the available capacity, improved the
flexibility relative to operations and future acquisitions, and lowered costs.

Our balance sheet remains very strong with significant availability of funds
through cash on hand and substantial unused capacity within our senior credit
facility, including a separate accordion feature to expand our source of capital.

Our cash conversion rate of our operating earnings is high, resulting in very
strong organic cashflow. This allows us to utilize a very conservative approach
to funding our initiatives, including important capital additions when needed and
enabling us to finance large increases in our working capital as occurred in 2019.

Conclusion

As we write this letter, the world today is undergoing very significant uncertainty
and challenges due to the COVID-19 virus and all organizations, including
Pollard, are dealing with the issues as best as they can. Despite these
temporary headwinds, the underlying fundamentals for Pollard and the lottery
and charitable gaming industry remain positive. The long-term consumer
demand for our products and solutions we believe will be strong, including
traditional instant tickets and charitable gaming products, as well as the
increasing interest in the emerging area of digital solutions, including iLottery.

We will make the necessary investments to continue to be the thought leader to
the industries we are privileged to serve. New market-leading instant ticket
innovations, expanded ancillary lottery products, growing production capacity
across all our business lines and enlarging our digital solutions portfolio will allow
us to be the partner of choice to lotteries and charitable gaming organizations
around the world. We will supplement these initiatives with a discerning
acquisition strategy, allowing us to selectively add to Pollard expertise and
unique products and services to further meet our objectives.

2019 was a successful year for Pollard, which would not have been attained
without the support and hard work of so many people. The Pollard family
extends to 1,900 enthusiastic employees who provide an unmatched level of
dedication in doing the right thing. We are fortunate to work with dozens of
lottery and charitable gaming organizations, all leaders in generating record
amounts to fund so many good causes. In many ways our suppliers are the
silent partners, working around the clock to ensure the highest quality inputs for
Pollard’s operations. Despite a relatively small public share float, many of our
investors have been long-standing supporters of our vision and, notwithstanding
the extreme volatility experienced in the stock market thus far in 2020, remain

very committed to the long-term success of Pollard. And lastly, our Board of
Directors provides us with a critically important sounding board, delivering
invaluable advice and leadership at both the strategic and operational level. To
all of you, thank you very much, and together we are confident in our ability to
take on the challenges we will face in 2020.

Douglas Pollard
Co-Chief Executive Officer

John Pollard
Co-Chief Executive Officer

March 30, 2020

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., Richardson Financial Group and
Boyd Services Inc.. 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 former 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. (Honours) from the University of Manitoba and is a former member of the
Institute of Chartered Accountants of Manitoba.

December 31, 2019

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2019

March 11, 2020

This management’s discussion and analysis (“MD&A”) of Pollard Banknote Limited (“Pollard”) for the year
ended December 31, 2019, is prepared as at March 11, 2020, and should be read in conjunction with the
accompanying audited financial statements of Pollard and the notes therein as at December 31, 2019.
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, purchase accounting amortization, unrealized foreign exchange gains and losses and
certain non-recurring items including severance costs, acquisition costs and contingent consideration fair
value adjustments. 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, 2019. All figures are in millions except for per share amounts.

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. In addition, management believes Pollard is also the second largest bingo
paper and pull-tab supplier to the charitable gaming industry in North America.

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 digital gaming, PlayOnTM loyalty program, retail management
services, ScanACTIVTM, lottery ticket dispensers and play stations and vending machines including
charitable game systems marketed under the Diamond Game and Oasis trade names. 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 275 independent
distributors with the majority of revenue generated from repeat business.

On May 1, 2019, Pollard acquired 100% of the common shares of Fastrak Retail (UK) Limited (“Fastrak”)
for a purchase price of £4.0 million, subject to standard working capital adjustments and potential future
EBITDA and revenue earn-out payments. Fastrak, based in the United Kingdom, is a leading provider of
lottery ticket dispensers, lottery play points and other retail merchandising products.

Product line breakdown of revenue

Year ended
December 31,
2019

Year ended
December 31,
2018

Lottery (1) (2)
Charitable (3)
Gaming systems

77.8%
15.7%
6.5%

75.5%
16.6%
7.9%

(1) Includes Fastrak Retail (UK) Limited (“Fastrak”) which was acquired on May 1, 2019.

(2) Includes the business of Schafer Systems Inc. (“Schafer”) which was acquired on October 31, 2018.

(3) Includes International Gamco, Inc. (“Gamco”) which was acquired on February 1, 2018.

Geographic breakdown of revenue

Year ended
December 31,
2019

Year ended
December 31,
2018

60%
21%
19%

56%
23%
21%

United States
Canada
International

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, 2019.

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

Adjusted EBITDA excluding IFRS 16

Adjusted EBITDA as a % of sales

Year ended
December 31,
2019

Year ended
December 31,
2018

Year ended
December 31,
2017

$397.8

$331.9

$285.6

306.7

256.2

219.9

91.1

22.9%

40.6

10.2%

15.9

4.0%

22.0

5.5%

60.2

15.1%

54.8

13.8%

75.7

22.8%

32.2

9.7%

13.4

4.0%

14.9

4.5%

48.8

14.7%

48.8

14.7%

65.7

23.0%

28.6

10.0%

9.4

3.3%

16.8

5.9%

44.0

15.4%

44.0

15.4%

Net income per share (basic and diluted)

$0.86

$0.58

$0.71

December 31,

2019

2018

2017

Total Assets

Total Non-Current Liabilities

$352.3

$175.6

$305.6

$142.9

$228.3

$124.8

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

(millions of dollars)

Year ended
December 31,
2019

Year ended
December 31,
2018

Year ended
December 31,
2017

Net income

Adjustments:

Amortization and depreciation

Interest

Unrealized foreign exchange (gain) loss

Acquisition costs

Severance costs

Contingent consideration fair value
adjustment

Income taxes

$22.0

$14.9

$16.8

27.1

6.4

(3.3)

1.2

(0.2)

7.0

18.0

4.2

4.6

0.8

0.4

5.9

13.1

3.9

(1.4)

2.7

1.7

7.2

Adjusted EBITDA

$60.2

$48.8

$44.0

Less impact of implementation of IFRS 16
Leases*:

IFRS 16 related depreciation

IFRS 16 related interest

Adjusted EBITDA excluding IFRS 16
impact

Lotteries and charitable gaming

Diamond Game

Adjusted EBITDA

Lotteries and charitable gaming

Diamond Game

Adjusted EBITDA excluding IFRS 16
impact

4.7

0.7

$54.8

$50.2

10.0

$60.2

$45.5

9.3

$48.8

$38.4

10.4

$48.8

$38.4

10.4

$44.0

$40.0

4.0

$44.0

$40.0

4.0

$54.8

$48.8

$44.0

* IFRS 16 Leases was implemented effective January 1, 2019. Qualifying leases are now capitalized and
an offsetting liability is recorded. The right-of-use asset is depreciated over the term of the lease and
interest expense related to the liability is expensed over the term of the lease. As a result, Adjusted
EBITDA has been increased by the conversion of operating lease expenses into depreciation and interest.

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, 2019

Sales

Product Line Sales
Fiscal 2019
(in millions of dollars)

Lottery,
$309.4

Product Line Sales
Fiscal 2018
(in millions of dollars)

Charitable,
$62.5

Gaming
Systems,
$25.9

Lottery,
$250.6

Charitable,
$55.2

Gaming
Systems,
$26.1

During the year ended December 31, 2019 (“Fiscal 2019” or “2019”), Pollard achieved sales of $397.8
million, compared to $331.9 million in the year ended December 31, 2018 (“Fiscal 2018” or “2018”).
Factors impacting the $65.9 million sales increase were:

Higher sales of ancillary lottery products and services increased revenue in Fiscal 2019 by $28.8 million.
This increase included the addition of Fastrak and a full year of Schafer in 2019, as well as increased
sales of licensed products, iLottery, and digital and loyalty products. Higher instant ticket volumes in
2019 increased revenue by $19.4 million. Pollard achieved record quarterly instant ticket volumes in the
fourth quarter of 2019 due to increased orders from existing customers. The fourth quarter of 2018
volumes were substantially lower due to a temporary reduction in customer orders. An increase in the
instant ticket average selling price in 2019 further increased sales by $6.5 million. This increase was a
result of significant sales of Pollard’s proprietary Scratch FX® product and other value-added products in
2019.

Diamond Game’s sales decreased slightly in 2019, reducing sales by $0.7 million compared to 2018 due
to lower pricing in certain jurisdictions, which took effect midway through 2019. An increase in charitable
gaming volumes increased sales by $3.4 million from 2018. In addition, a higher average selling price
for charitable gaming products in 2019 further increased sales by $2.2 million.

Sales Breakdown
Fiscal 2019

Sales Breakdown
Fiscal 2018

United
States
60%

International
19%

Canada
21%

United
States
56%

International
21%

Canada
23%

During Fiscal 2019, Pollard generated approximately 71.8% (2018 – 69.8%) of its revenue in U.S. dollars
including a portion of international sales which are priced in U.S. dollars. During Fiscal 2019 the actual
U.S. dollar value was converted to Canadian dollars at an average rate of $1.327 compared to an average
rate of $1.292 during Fiscal 2018. This 2.7% increase in the U.S. dollar value resulted in an approximate
increase of $7.1 million in revenue relative to Fiscal 2018. During 2019 the value of the Canadian dollar
strengthened against the Euro resulting in an approximate decrease of $0.7 million in revenue relative
to 2018.

Cost of sales and gross profit

Cost of sales was $306.7 million in Fiscal 2019 compared to $256.2 million in Fiscal 2018. Cost of sales
was higher as a result of the inclusion of Fastrak and a full year of Schafer in 2019, the increase in instant
ticket and charitable gaming volumes, and higher exchange rates on U.S. dollar denominated
transactions. Additionally, increased instant ticket manufacturing overheads contributed to the increase
in cost of sales in 2019.

Gross profit was $91.1 million (22.9% of sales) in Fiscal 2019 compared to $75.7 million (22.8% of sales)
in Fiscal 2018. This increase of $15.4 million in gross profit was primarily the result of the additions of
Fastrak and a full year of Schafer in 2019, and higher instant ticket volumes, partially offset by increased
manufacturing overheads. Higher charitable gaming sales also contributed to the increase in gross profit.
The higher gross profit percentage was due to increased instant ticket volumes and ancillary lottery
products and services which was offset by increased production inefficiencies. Gross margin percentage
was impacted negatively during the fourth quarter of 2019 due to certain production inefficiencies
stemming from a large increase in instant ticket order volumes impacting scheduling. Additional
manufacturing costs were incurred to meet the higher demands during this time frame including higher
levels of overtime, increased spoilage and increased freight costs.

Administration expenses

Administration expenses increased to $40.6 million in Fiscal 2019 from $32.2 million in Fiscal 2018. The
increase of $8.4 million was partially a result of the inclusion of Fastrak and a full year of Schafer in 2019
which increased administration expenses by $2.2 million. In addition, higher compensation expenses to
support Pollard’s growth strategies of developing digital innovation products and higher professional fees
further increased administration expenses. Professional fees, excluding acquisition costs, were higher by
$1.5 million primarily due to higher legal fees incurred by Pollard to defend our intellectual property
including certain patents. Acquisition costs were $0.4 million higher in 2019 relative to Fiscal 2018. These
increases were partially offset by a $0.4 million reduction in severance costs as compared to 2018.

Selling expenses

Selling expenses increased to $15.9 million in Fiscal 2019 from $13.4 million in Fiscal 2018 primarily due
to the addition of Fastrak and a full year of Schafer, as well as higher compensation and contract support
costs.

Other expenses

Other expenses increased to $2.0 million in Fiscal 2019 from $0.4 million in Fiscal 2018, primarily due to
the increased loss on equity investment as compared to 2018.

Foreign exchange

The net foreign exchange gain was $2.8 million in Fiscal 2019 compared to a net loss of $4.7 million in
Fiscal 2018. The 2019 net foreign exchange gain consisted of a $3.3 million unrealized gain primarily a
result of the decreased Canadian equivalent value of U.S. dollar denominated accounts payable and long-
term debt with the strengthening of the Canadian dollar relative to the U.S. dollar. Partially offsetting the
unrealized foreign exchange gain, Pollard incurred a realized foreign exchange loss of $0.5 million as a
result of foreign currency denominated accounts receivable collected being converted into Canadian
dollars at unfavorable foreign exchange rates.

The 2018 net foreign exchange loss consisted of a $4.6 million unrealized loss primarily a result of the
increased Canadian equivalent value of U.S. dollar denominated accounts payable and long-term debt
with the weakening of the Canadian dollar relative to the U.S. dollar. In 2018 Pollard added almost $29
million of U.S. dollar denominated debt, with the acquisitions of Gamco and Schafer, which is subject to
revaluation through the income statement. At December 31, 2018, the Canadian dollar had weakened
relative to the U.S. dollar, resulting in the substantial unrealized foreign exchange loss.

In addition to the unrealized foreign exchange loss in 2018, Pollard incurred a realized foreign exchange
loss of $0.1 million as a result of foreign currency denominated accounts receivable collected being
converted into Canadian dollars at unfavorable foreign exchange rates.

Adjusted EBITDA

Adjusted EBITDA excluding the impact of IFRS 16 Leases increased to $54.8 million in Fiscal 2019
compared to $48.8 million in Fiscal 2018. The primary reason for the increase of $6.0 million was the
increase in gross profit of $19.1 million (net of amortization and depreciation and IFRS 16 impact). This
increase was partially offset by higher administration expenses (net of acquisition and severance costs)
of $8.4 million, an increase in selling expenses of $2.5 million, an increase in other expenses of $1.6
million and an increase in the realized foreign exchange loss of $0.4 million.

Interest expense

Interest expense increased to $6.4 million in Fiscal 2019 from $4.2 million in Fiscal 2018 primarily as a
result of the additional interest expense related to increased long-term debt due to the acquisitions of
Schafer and Fastrak, and additional interest expense incurred with the implementation of IFRS 16
effective January 1, 2019 of $0.7 million.

Amortization and depreciation

Amortization and depreciation, including amortization of intangible assets and depreciation of property
and equipment, totaled $27.1 million during Fiscal 2019 which increased from $18.0 million during Fiscal
2018. The increase of $9.1 million was partially a result of $4.7 million of former operating lease costs
being characterized as depreciation with the implementation of IFRS 16 effective January 1, 2019. The
addition of Fastrak and a full year of Schafer, including the amortization and depreciation relating to the
identifiable assets acquired, including intangible assets and property, plant and equipment, and higher
depreciation and amortization on new equipment and intangible assets increased expenses in 2019.

Income taxes

Income tax expense was $7.0 million in Fiscal 2019, an effective rate of 24.1%, which was lower than
our domestic rate of 27.0% due primarily to lower federal income tax rates in the United States and the
effect of foreign exchange. Partially offsetting these reductions in effective rate was the non-deductible
amounts relating to expenses incurred in the acquisitions.

Income tax expense was $5.9 million in Fiscal 2018, an effective rate of 28.5%, which was higher than
our domestic rate of 27.0% due primarily to non-deductible amounts relating to expenses incurred in the
acquisitions and the effect of foreign exchange. Partially offsetting these increases in effective rate was
the lower federal income tax rates in the United States.

Net income

Net income was $22.0 million in Fiscal 2019 compared to net income of $14.9 million in Fiscal 2018. The
primary reasons for the increase in net income of $7.1 million were the increase in gross profit of $15.4
million and the higher foreign exchange gain of $7.5 million. These increases were partially offset by the
higher administration expenses of $8.4 million, the increase in selling costs of $2.5 million, the increase
in other expenses of $1.6 million, additional interest expense of $2.2 million and the increase in income
tax expense of $1.1 million.

Net income per share (basic and diluted) increased to $0.86 per share in Fiscal 2019 from $0.58 per
share in Fiscal 2018.

Liquidity and Capital Resources

Cash provided by operating activities

For the year ended December 31, 2019, cash flow provided by operating activities was $29.3 million
compared to $39.7 million in Fiscal 2018.

The primary reason for the reduction in cash flow provided by operations was a significant increase in
our investment in non-cash working capital in 2019. In Fiscal 2019, increases in non-cash working capital
used $22.5 million compared to decreases in 2018 which generated $4.0 million in cash, a $26.5 million
difference.

In 2019, changes in the non-cash component of working capital decreased cash flow from operations
due primarily to an increase in accounts receivable. The higher investment in accounts receivable reflects
the higher sales volume from higher order levels building throughout Fiscal 2019, relative to a very low
order level in the fourth quarter of 2018. In 2018, changes in the non-cash component of working capital

increased cash flow from operations due primarily to a decrease in accounts receivable, partially offset
by an increase in inventory and a decrease in accounts payable and accrued liabilities.

Higher net income before income taxes and after non-cash adjustments in Fiscal 2019 contributed $69.6
million to the cash provided by operating activities compared to $55.9 million in Fiscal 2018. Cash used
for interest payments increased to $6.4 million in 2019 as compared to $4.5 million in 2018. Cash used
for pension plan contributions increased to $7.4 million in 2019 as compared to $5.5 million in 2018.
Cash used for income taxes paid was $4.0 million in 2019 compared to $10.2 million in 2018.

Cash used for investing activities

In the year ended December 31, 2019, cash used for investing activities was $38.3 million compared to
$77.1 million in the year ended December 31, 2018. In Fiscal 2019, Pollard used $8.5 million, net of
cash acquired, to purchase Fastrak. In addition, Pollard expended $17.2 million in capital expenditures,
$4.0 million on our investment in our iLottery joint venture and $8.6 million on additions to intangible
assets.

In Fiscal 2018, Pollard used $21.6 million, net of cash acquired, to purchase Gamco and $30.4 million to
purchase Schafer. In addition, Pollard expended $15.1 million in capital expenditures, $2.8 million on
our investment in our iLottery joint venture and $7.1 million on additions to intangible assets.

Cash provided by financing activities

Cash provided by financing activities was $5.6 million in the year ended December 31, 2019, compared
to $42.6 million in the year ended December 31, 2018.

During Fiscal 2019, Pollard received net proceeds from long-term debt of $14.3 million. This receipt of
cash was partially offset by $4.4 million of lease principal payments, which, starting in 2019 with the
implementation of IFRS 16, are now shown as financing activities, and $3.8 million of dividends.

During Fiscal 2018, Pollard raised $35.4 million, net of expenses, from the issuance of common shares,
which was used, in part, to repay $16.7 million of subordinated debt. In addition, Pollard received net
proceeds from long-term debt of $27.9 million, partially to fund the acquisitions of Gamco and Schafer.
These cash receipts were partially offset by $0.6 million of financing costs and dividends paid of $3.1
million.

As at December 31, 2019, Pollard had unused committed credit facility of $69.7 million, in addition to
$7.4 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, 2019 TO DECEMBER 31, 2019
FOURTH QUARTER OF 2019

SELECTED FINANCIAL INFORMATION

(millions of dollars)

Three months ended Three months ended
December 31, 2018
December 31, 2019

(unaudited)

Sales

Cost of sales
Gross profit

Administration

Selling

Other expense (income)

Income from operations

Finance costs

Finance income

Income (loss) before income taxes

Income taxes:

Current (recovery)

Future

Net income (loss)

Adjustments:

Amortization and depreciation

Interest

Unrealized foreign exchange (gain) loss

Acquisition costs

Contingent consideration fair value adjustment

Income taxes (recovery)

Adjusted EBITDA

Less impact of implementation of IFRS 16 Leases:

IFRS 16 related depreciation

IFRS 16 related interest

Adjusted EBITDA excluding IFRS 16 impact

Lotteries and charitable gaming

Diamond Game

Adjusted EBITDA

Lotteries and charitable gaming

Diamond Game

Adjusted EBITDA excluding IFRS 16 impact

$100.0

78.0
22.0

10.9

4.1

0.2

6.8

1.6

(1.0)

6.2

(0.9)

2.5

1.6

$4.6

7.1

1.6

(1.1)

0.6

(0.2)

1.6

$14.2

1.2

0.2

$12.8

$11.9

2.3

$14.2

$10.7

2.1

$12.8

$70.2

56.9
13.3

7.9

3.6

(0.1)

1.9

4.2

(2.3)

(0.4)

($1.9)

5.3

1.2

3.1

0.2

(0.4)

$7.5

$4.9

2.6

$7.5

$4.9

2.6

$7.5

Sales

During the three months ended December 31, 2019, Pollard achieved sales of $100.0 million, compared
to $70.2 million in the three months ended December 31, 2018. Factors impacting the $29.8 million
sales increase were:

Instant ticket sales volumes for the fourth quarter of 2019 were significantly higher, 57%, than the fourth
quarter of 2018, which increased sales by $23.7 million. The reasons for this significant increase in instant
ticket volumes were two-fold. The fourth quarter of 2019 saw record volumes of instant tickets sold, a
result of increased orders from existing customers; while the comparative quarter from 2018 was
significantly lower than the quarterly volumes achieved over the past few years. The fourth quarter 2018
reduction was a result of a temporary decline in orders from our customer portfolio as a number of our
larger customers had lower orders during the quarter.

Additionally, higher sales of ancillary lottery products and services increased revenue in the fourth quarter
of 2019 by $4.7 million. This growth was due to higher sales of licensed products, digital and loyalty
products, and iLottery. The addition of Fastrak and a full quarter of Schafer in 2019 further increased
ancillary lottery related sales. An increase in the instant ticket average selling price in the quarter
compared to the fourth quarter of 2018 further grew sales by $0.8 million. This increase was, in part, a
result of significant sales of Pollard’s proprietary Scratch FX® product in 2019.

Diamond Game’s sales decreased slightly in the fourth quarter of 2019, which reduced sales by $0.5
million when compared to 2018 due to lower pricing in a certain jurisdiction. An increase in charitable
gaming volumes increased sales by $0.3 million from 2018. In addition, a higher average selling price
for charitable gaming products in 2019 further increased sales by $0.8 million.

During the three months ended December 31, 2019, Pollard generated approximately 70.9% (2018 –
80.5%) 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 2019 the actual U.S. dollar value was converted to Canadian dollars
at an average rate of $1.314, compared to an average rate of $1.311 during the fourth quarter of 2018.
This 0.2% increase in the value of the U.S. dollar resulted in an approximate increase of $0.1 million in
revenue relative to 2018. During the fourth quarter of 2019 the value of the Canadian dollar strengthened
against the Euro resulting in an approximate decrease of $0.1 million in revenue relative to 2018.

Cost of sales and gross profit

Cost of sales was $78.0 million in the fourth quarter of 2019 compared to $56.9 million in the fourth
quarter of 2018. Cost of sales was higher in the quarter as a result of the substantial increase in instant
ticket volumes. In addition, higher ancillary lottery product sales and the inclusion of Fastrak and a full
quarter of Schafer in 2019 increased cost of goods sold as compared to the fourth quarter of 2018.

Gross profit was $22.0 million (22.0% of sales) in the fourth quarter of 2019 compared to $13.3 million
(18.9% of sales) in the fourth quarter of 2018. This increase in gross profit was primarily the result of
the significant increase in instant ticket volumes. Gross margin percentage was significantly higher than
the fourth quarter of 2018, with higher margins achieved on instant tickets being partially offset by lower
margins in Diamond Game due to the reduction in pricing. Gross margin percentage was impacted
negatively during the fourth quarter of 2019 due to certain production inefficiencies stemming from a
large increase in instant ticket order volumes impacting scheduling. Additional manufacturing costs were
incurred to meet the higher demands during this time frame including higher levels of overtime, increased
spoilage and increased freight costs.

Administration expenses

Administration expenses increased to $10.9 million in the fourth quarter of 2019 compared to $7.9 million
in the fourth quarter of 2018. The increase of $3.0 million was partially a result of the inclusion of Fastrak
and a full quarter of Schafer, increasing administration expenses by $0.4 million. Additionally, higher
compensation expenses to support Pollard’s growth strategies of developing digital innovation products,
increased incentive accruals and additional acquisition costs of $0.4 million contributed to the increase.
Partially offsetting these increases was a decrease in professional services of $0.4 million. Administration
expenses in the fourth quarter of 2019 were similar to the amount incurred in the third quarter of 2019.

Selling expenses

Selling expenses increased to $4.1 million in the fourth quarter of 2019 from $3.6 million in the fourth
quarter of 2018. The increase was primarily due to the addition of Fastrak and a full quarter of Schafer,
as well as higher compensation and contract support costs. Selling expenses in the fourth quarter of
2019 were similar to the amount incurred in the third quarter of 2019.

Foreign exchange

The net foreign exchange gain was $1.0 million in the fourth quarter of 2019 compared to a net loss of
$3.0 million in the fourth quarter of 2018. The 2019 net foreign exchange gain consisted of a $1.1 million
unrealized gain primarily as a result of the decreased Canadian equivalent value of U.S. dollar
denominated accounts payable and long-term debt due to the strengthening of the Canadian dollar
relative to the U.S. dollar. The unrealized foreign exchange gain was partially offset by the realized foreign
exchange loss of $0.1 million, as a result of foreign currency denominated accounts receivable collected
being converted into Canadian dollars at unfavorable foreign exchanges rates.

The 2018 net foreign exchange loss consisted of a $3.1 million unrealized loss primarily as a result of the
increased Canadian equivalent value of U.S. dollar denominated accounts payable and long-term debt
due to the weakening of the Canadian dollar relative to the U.S. dollar. The Canadian dollar weakened
approximately 5.5% since the beginning of the fourth quarter of 2018 and this movement, combined
with higher U.S. dollar denominated debt relating to the acquisitions, generated a substantial unrealized
foreign exchange loss. The unrealized foreign exchange loss was partially offset by the realized foreign
exchange gain of $0.1 million, as a result of foreign currency denominated accounts receivable collected
being converted into Canadian dollars at favorable foreign exchanges rates.

Adjusted EBITDA

Adjusted EBITDA excluding the impact of IFRS 16 Leases was $12.8 million in the fourth quarter of 2019
compared to $7.5 million in the fourth quarter of 2018. The primary reason for the $5.3 million increase
was the higher gross profit of $9.1 million (net of amortization and depreciation and IFRS 16 impact) due
primarily to the increase in instant ticket volumes. This increase was partially offset by the higher
administration costs (net of acquisition costs) of $2.6 million, the increase in selling costs of $0.5 million,
higher other expenses of $0.3 million and an increase in realized foreign exchange loss of $0.2 million.

Interest expense

Interest expense increased to $1.6 million in the fourth quarter of 2019 from $1.2 million in the fourth
quarter of 2018 primarily as a result of the additional interest expense related to increased long-term
debt incurred with the acquisitions of Schafer and Fastrak, and additional interest expense incurred with
the implementation of IFRS 16 effective January 1, 2019 of $0.2 million for the quarter.

Amortization and depreciation

Amortization and depreciation, including amortization of intangible assets and depreciation of property
and equipment, totaled $7.1 million during the fourth quarter of 2019 which increased from $5.3 million
during the fourth quarter of 2018. The increase was primarily a result of $1.2 million of former operating
lease costs being characterized as depreciation with the implementation of IFRS 16 effective January 1,
2019. Also, the addition of Schafer and Fastrak, including the amortization and depreciation relating to
the identifiable assets acquired, including intangible assets and property, plant and equipment, and
higher depreciation and amortization on new equipment and intangible assets increased expenses in
2019.

Income taxes

Income tax expense was $1.6 million in the fourth quarter of 2019, an effective rate of 25.5% which was
lower than our domestic rate of 27.0% due primarily to lower federal income tax rates in the United
States and the effect of foreign exchange. Partially offsetting these reductions in effective rate was non-
deductible amounts relating to expenses incurred in the acquisitions.

Income tax recovery was $0.4 million in the fourth quarter of 2018, an effective rate of 16.3% which
was lower than our domestic rate of 27.0% due primarily to non-deductible amounts relating to expenses
incurred in the acquisitions and the effect of foreign exchange. Partially offsetting these reductions in
effective rate was the lower federal income tax rates in the United States.

Net income (loss)

Net income was $4.6 million in the fourth quarter of 2019 compared to net loss of $1.9 million in the
fourth quarter of 2018. The primary reasons for the $6.5 million increase in net income were the higher
gross profit of $8.7 million, due primarily to the increase in instant ticket volumes, and the increase in
the foreign exchange gain of $4.0 million. Partially offsetting these increases were the increase in
administration expenses of $3.0 million, higher selling expenses of $0.5 million, additional interest
expense of $0.4 million and the increase in income taxes of $2.0 million.

Net income per share (basic and diluted) increased to $0.18 per share in the fourth quarter of 2019 from
a loss of $0.08 per share in the fourth quarter of 2018.

Quarterly Information
(unaudited)
(millions of dollars)

Q4
2019

Q3
2019

Q2
2019

Q1
2019

Q4
2018

Q3
2018

Q2
2018

Q1
2018

Sales

$100.0

$103.2

$97.1

$97.5

$70.2

$94.5

$86.8

$80.4

Adjusted EBITDA

14.2

16.1

13.6

16.3

7.5

14.2

14.1

13.0

Net income (loss)

4.6

4.4

5.0

8.0

(1.9)

7.2

5.0

4.6

Effective the first quarter 2019 Adjusted EBITDA increased as a result of the implementation of IFRS 16
Leases. The amounts per quarter were $1.4 million in Q4 2019, $1.2 million in Q3 2019, $1.3 million in
Q2 2019 and $1.3 million in Q1 2019.

The trend of increased sales, Adjusted EBITDA and net income, starting the first quarter of 2018, with
the exception of the fourth quarter of 2018, was primarily as a result of higher instant ticket volumes
and the acquisitions made during this timeframe.

The significant decrease in instant ticket volumes in the fourth quarter of 2018 reduced sales, Adjusted
EBITDA and net income. Net income was further reduced by the large unrealized foreign exchange loss
in the quarter.

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 significantly impact 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, 2019, Pollard’s investment in non-cash working capital increased $22.5 million
compared to December 31, 2018, primarily a result of the increased investment in accounts receivable.
The higher investment in accounts receivable reflects the increasing sales volume from increased orders
levels building throughout 2019, relative to a period of very low orders in the fourth quarter of 2018.

December 31, December 31,

2019

2018

Working Capital
Total Assets
Total Non-Current Liabilities

$79.2
$352.3
$175.6

$65.5
$305.6
$142.9

Credit Facility

Pollard’s credit facility was renewed effective December 31, 2019. The credit facility provides loans of
up to $190.0 million for its Canadian operations and US$14.0 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 $190.0 million Canadian equivalent. The credit facility also includes an accordion feature which can
increase the facility by $35.0 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, 2019, the outstanding letters of guarantee were $10.7 million. The remaining balance
available for drawdown under the credit facility was $69.7 million.

Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including debt to income before interest, income taxes, amortization and depreciation
(“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As at December 31, 2019, 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. Under the terms of the agreement the facility is committed for a three-year period, renewable
December 31, 2022. Principal payments are not required until maturity. The facility can be prepaid
without penalties.

Pollard believes that its credit facility and ongoing cash flow from operations will be sufficient to allow it
to meet ongoing requirements for investment in capital expenditures, working capital, dividends and
acquisitions.

Outstanding Share Data

As at December 31, 2019 and March 11, 2020, outstanding share data was as follows:

Common shares

25,635,658

On March 19, 2019, 5,000 common shares were issued through the exercise of stock options.

On May 24, 2019, 5,000 common shares were issued through the exercise of stock options.

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. On March 19, 2019, 5,000 stock options were exercised and
an additional 5,000 stock options were exercised on May 24, 2019.

On November 5, 2019, the Board of Directors approved the award of 150,000 options to purchase
common shares of Pollard for key management personnel. The options were granted on November 8,
2019, and have a seven-year term, vesting 25% per year over the first four years. The exercise price of
the options is $20.70. As at December 31, 2019, the total share options issued and outstanding were
377,500.

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

2020

2021

2022

2023

2024

Long-term debt

$146.0

$5.4

$6.4

$134.2

Operating leases

$18.1

$5.5

$4.5

$4.0

$3.2

$0.9

Total

$164.1

$10.9

$138.2

$3.2

$0.9

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, 2019, the aggregate fair value of the assets of Pollard’s
defined benefit pension plans was $65.5 million and the accrued benefit plan obligations were $92.0
million. Pollard’s total annual funding contribution for its defined pension plans in 2020 is expected to be
approximately $6.5 million, compared to $6.3 million in 2019, including $1.5 million in additional solvency
payments.

One of Pollard’s Canadian pension plans was subject to a solvency valuation beginning with its December
31, 2016 valuation. The solvency valuation is required to be updated annually. As at the December 31,
2018 valuation there was a deficit of $9.9 million, due to the low current levels of the mandated interest
rate used to discount the future liabilities. As a result, Pollard is subject to additional special pension plan
payments of approximately $1.5 million per year through to 2026. These additional solvency payments
do not impact pension expense and therefore will not affect our net income or Adjusted EBITDA and 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, 2019, Pollard paid property rent of $3.2 million (2018 - $3.2 million)
and $0.4 million (2018 - $0.5 million) in plane charter costs to affiliates of Equities. In addition, Pollard
paid Equities $nil (2018 - $0.4 million) of interest on Pollard’s subordinated debt.

During the year ended December 31, 2019, Equities paid Pollard $0.07 million (2018 - $0.07 million) for
accounting and administration fees.

At December 31, 2019, Pollard owed Equities and its affiliates $0.5 million (2018 - $0.6 million) for rent,
interest, expenses and other items. Included within property, plant and equipment and lease liabilities
on the consolidated statement of financial position are right-of-use assets and corresponding liabilities
for premises leased to Pollard from Equities. As at December 31, 2019, the net book value of the right-
of-use assets was $10.8 million and the present value of the lease liabilities was $11.8 million.

Neogames S.à r.l. and affiliates

During the year ended December 31, 2019, Pollard reimbursed operating costs and paid software
royalties of $5.7 million (2018 - $3.3 million) to its iLottery partner, which are recorded in cost of sales.

At December 31, 2019, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $0.1 million (2018 - $0.9 million) for reimbursement of operating costs and
capital expenditures, and its share of operating profits.

At December 31, 2019, included in restricted cash and accounts payable and accrued liabilities is an
amount owing to Pollard’s iLottery partner of $2.6 million (2018 - $1.6 million) for funds relating to
contractual performance guarantees.

Critical Accounting Policies and Estimates

Described in the notes to Pollard’s 2019 audited consolidated financial statements are the accounting
policies and estimates that Pollard believes are critical to its business. Please refer to note 2 (c) to the
audited consolidated financial statements for the year ended December 31, 2019, for a discussion of the
significant accounting estimates and judgements.

Future Changes in Accounting Policies

In October 2018, the International Accounting Standards Board issued amendments to IFRS 3 Business
Combinations, that seek to clarify whether a transaction results in an asset or a business acquisition. The
amendments include an election to use a concentration test. This is a simplified assessment that results
in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single
identifiable asset or a group of similar identifiable assets. The amendments apply to businesses acquired
in annual reporting periods beginning on or after January 1, 2020. Pollard does not expect the
amendments to have a significant impact on the consolidated financial statements upon adoption.

Industry Risks and Uncertainties

Pollard is exposed to numerous risks and uncertainties which are described in this MD&A and Pollard’s most
recent Annual Information Form dated March 11, 2020, which is available under Pollard’s profile on SEDAR
(www.sedar.com).

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.

Credit risk

Credit risk is 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 by approximately $0.04 million for year
ended December 31, 2019 (2018 - $0.02 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 $0.08 million for year ended
December 31, 2019 (2018 - $0.08 million).

Five 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, 2019, the amount of financial liabilities denominated in U.S. dollars exceeded the
amount of financial assets denominated in U.S. dollars by approximately $27.9 million (2018 - $36.1
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 $0.1
million (2018 - $0.2 million).

Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign currency
risk. At December 31, 2019, 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 $0.6 million for the year ended December 31, 2019 (2018 - $0.6 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.

Liquidity risk

Pollard’s approach is to ensure that it will always have sufficient liquidity to meet its liabilities when due.
Pollard maintains a committed credit facility including up to $190.0 million for its Canadian operations
and up to US$14.0 million for its U.S. subsidiaries. At December 31, 2019, the unused balance available
for drawdown was $69.7 million (2018 - $58.9 million).

The 2020 requirements for capital expenditures, working capital and dividends are expected to be
financed from cash flow provided by operating activities and unused portion of Pollard’s credit facility.
Pollard enters into contractual obligations in the normal course of business operations.

Outlook

The lottery and charitable gaming industries remain very healthy with growth at the retail level
continuing. In particular, consumer demand for instant tickets, and products and services related to
instant tickets, remains strong with a number of factors driving greater retail sales: constantly changing
ticket offerings, higher price points, larger and varied prize payouts, eye-catching graphics, licensed
themes, innovative merchandising and focused advertising. Growth rates at the manufacturing levels
are traditionally lower than growth rates at the retail level however we expect these positive growth rates
to continue.

Lotteries are expanding their usage of ancillary products like innovative merchandising options, loyalty
programs, digital apps, distribution and warehousing, retail support and other “back office” products.
They are exploring more of these solutions, however many remain in development or early stages and
lotteries have traditionally been slow to adopt these new methods and ideas. Revenue generated from
these solutions are still developing and Pollard will continue to invest the necessary resources for the
long-term growth of these products. We believe these products, in addition to the revenues generated
directly from their sale, will also increase sales of instant tickets.

The foundation of our business is our instant ticket contract portfolio, which remains very strong. We do
not have any major contracts coming due during 2020 but as is typical there are a few of our existing
mid-size contracts that regularly come up for bid including in the next twelve months. We are hopeful
of retaining or growing the long-term relationships we currently have in place. Our strategy is not to
aggressively bid for large contract opportunities simply in order to gain market share, rather we look for
opportunities to compete and strategically bid with a focus on positive margins through expanding our
higher value and proprietary products.

At the beginning of March 2020 our new instant ticket warehousing and distribution operation for the
Arizona Lottery went live. This is just another example of a key ancillary service we can provide lotteries
which expands our touches with our clients and helps drive higher instant ticket sales.

A factor in our success has been the development of a number of unique proprietary products that allow
our clients to generate greater returns for their good causes. Key examples of these include Scratch
FX®, laminated products, such as PlayBooks®, and Clear PlayTM. Our ongoing growth and success in
maintaining strong average selling prices on our products depends on our ability to develop more
specialty value-added enhancements and we will continue to invest resources to develop more innovative
products and services.

Interest in iLottery continues to be active among lotteries in North America. Traditionally, lotteries and
state legislatures are slow to make the changes required to enable new revenue streams such as iLottery,
and the adoption of these complex operations can take long periods. As a result, we do not anticipate
many new iLottery operations going live during the next year. However, we believe in the long term new
iLottery implementations will grow as lotteries recognize the critical importance of expanding distribution
methods and the positive impact it can have on incremental revenue. Our existing operations in this
space continue to develop, with stronger growth in those jurisdictions that allow a broader range of
gaming options including selling e-instants versus jurisdictions that only allow the online sale of draw
based game tickets.

The charitable gaming market has shown positive growth at the retail level over the last year and this
for our American
renewed growth
Games/International Gamco operations. We have invested resources in additional press capabilities for

incremental opportunities

into additional

translates

our pull-tab production and we believe the positive market reception of our combined businesses will
continue to provide strong free cashflow. Our Diamond Game operation will continue to focus on new
jurisdictions for their charitable egaming machines. The impact of new pricing environments in certain
jurisdictions, introduced in 2019, will continue to have a negative impact on a full year basis in 2020,
however we believe this will be partially mitigated by our ability to introduce additional machines in these
same markets.

We continue to invest heavily in our business through an ongoing capital expenditure program and
increasingly, our development of digital solutions and other important intangible assets. We expect CAPEX
in 2020 to be at similar or slightly higher levels then expended in 2019. Included in our planned capital
expenditures are new egaming machines for our Diamond Game and Oasis operations, however this
amount will vary depending on the timing of new jurisdiction implementation. With our continued strong
cash conversion from earnings and a large senior debt facility in place, our cash resources allow us to
fund required investments while still generating free cash-flow to provide for dividends, investment in
working capital and make significant payments in servicing our debt.

On February 1, 2020, we completed the acquisition of mkodo Limited, a specialized technology company
focused on mobile apps and user interfaces for the lottery and gaming industry. A key component of
our vision is to expand our offerings and expertise through strategic acquisitions. We will continue to
pursue appropriate opportunities which are both financially prudent and can enhance our business
offerings.

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.

Pollard has limited its design of disclosure controls and procedures to exclude controls, policies and
procedures of Fastrak, as it was acquired not more than 365 days before the end of the financial period
to which this MD&A relates.

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.

Pollard has limited its design of ICFR to exclude controls, policies and procedures of Fastrak, 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, 2019, 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, 2019, is available on SEDAR at
www.sedar.com.

Pollard Banknote Limited
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474-2323
www.Pollardbanknote.com

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 30, 2020

ROBERT ROSE
Chief Financial Officer

Consolidated Financial Statements of

POLLARD BANKNOTE
LIMITED

Years ended December 31, 2019 and 2018

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Pollard Banknote Limited

Opinion

We have audited the consolidated financial statements of Pollard Banknote Limited (the “Entity”), which
comprise the consolidated statements of financial position as at December 31, 2019 and December 31,
2018, the consolidated statements of income, comprehensive income, changes in equity and cash
flows for the years then ended, and notes to the financial statements, including a summary of significant
accounting policies (hereinafter referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Entity as at December 31, 2019 and December 31, 2018, and its
consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities for the
Audit of the Financial Statements” section of our auditors’ report.

We are independent of the Entity in accordance with the ethical requirements that are relevant to our
audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in
accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.

Other Information

Management is responsible for the other information. Other information comprises:



the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included in a
document likely to be entitled “Annual Report 2019”.

Our opinion on the financial statements does not cover the other information and we do not and will not
express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit, and remain alert for indications that
the other information appears to be materially misstated.

KPMG LLP One Lombard Place Suite 2000 Winnipeg MB R3B 0X3 Telephone (204) 957-1770 Fax (204) 957-0808 www.kpmg.ca 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. Document Classification: KPMG Confidential We obtained the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions, as at the date of this auditors’ report. If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other
information, we are required to report that fact in the auditors’ report.

We have nothing to report in this regard.

The information, other than the financial statements and the auditors’ report thereon, included in a
document likely to be entitled “Annual Report 2019” is expected to be made available to us after the
date of this auditors’ report. If, based on the work we will perform on this other information, we conclude
that there is a material misstatement of this other information, we are required to report that fact to those
charged with governance.

Responsibilities of Management and Those Charged with Governance for the
Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud
or error.

In preparing the financial statements, management is responsible for assessing the Entity’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Entity or to cease
operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Entity’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that
includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.

We also:



Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.

 Obtain an understanding of internal control relevant to the audit 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.



Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.

 Conclude on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditors’
report to the related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of
our auditors’ report. However, future events or conditions may cause the Entity to cease to continue
as a going concern.



Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events
in a manner that achieves fair presentation.

 Communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.



Provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where applicable,
related safeguards.

 Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the group Entity to express an opinion on the financial statements. We
are responsible for the direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.

Chartered Professional Accountants
The engagement partner on the audit resulting in this auditors’ report is Robert Kowalchuk.

Winnipeg, Canada

March 11, 2020

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
Income tax receivable

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,
2019

December 31,
2018*

7,448
13,000
57,213
42,540
7,224
5,200
132,625

91,904
1,161
69,993
54,207
2,375
219,640

11,174
10,158
34,675
45,353
6,943
2,279
110,582

71,606
1,164
69,667
50,086
2,495
195,018

Total assets

352,265

305,600

Pollard Banknote Limited
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)

Liabilities and Shareholders’ Equity

Current liabilities

Accounts payable and accrued liabilities
Dividends payable
Income taxes payable
Contract liabilities (note 17)
Current portion lease liabilities (note 3)
Current portion long-term debt (note 13)

Total current liabilities

Non-current liabilities

Long-term debt (note 13)
Contract liabilities (note 17)
Other non-current liabilities
Pension liability (note 14)
Lease liabilities (note 3)
Deferred income taxes (note 12)

Total non-current liabilities

Shareholders’ equity

Share capital (note 15)
Reserves
Retained earnings (deficit)

Total shareholders’ equity

Commitments and contingencies (note 16)
Subsequent event (note 28)

December 31,
2019

December 31,
2018*

47,368
1,025
641
–
4,375
–
53,409

43,058
768
408
814
–
40
45,088

127,295
–
337
26,547
11,554
9,839
175,572

108,642
5,705
8,937
123,284

115,756
43
466
20,357
–
6,252
142,874

108,605
12,698
(3,665)
117,638

Total liabilities and shareholders’ equity

352,265

305,600

* Pollard Banknote Limited (“Pollard”) has initially applied IFRS 16 Leases at January 1, 2019. Under the
transition methods chosen, comparative information has not been restated. See note 3.

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 (note 17)

Cost of sales
Gross profit

Administration
Selling
Other expenses (note 18)
Income from operations

Finance costs (note 19)
Finance income (note 19)
Income before income taxes

Income taxes (note 12)

Current
Deferred

2019

2018*

397,839

331,868

306,733
91,106

40,625
15,912
1,955
32,614

7,544
(3,931)
29,001

2,136
4,848
6,984

256,131
75,737

32,154
13,395
464
29,724

9,836
(881)
20,769

5,175
742
5,917

Net income

Net income per share (basic) (note 20)

Net income per share (diluted) (note 20)

22,017

14,852

0.86 $

0.86

0.58

* Pollard has initially applied IFRS 16 Leases at January 1, 2019. Under the transition methods chosen,
comparative information has not been restated. See note 3.

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

22,017

14,852

2019

2018*

Other comprehensive income (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

(6,993)

9,733

Defined benefit plans remeasurements, net of
income tax (reduction) (note 12 & note 14)

Other comprehensive income (loss)

(5,409)
(12,402)

2,720
12,453

Comprehensive income

9,615

27,305

* Pollard has initially applied IFRS 16 Leases at January 1, 2019. Under the transition methods chosen,
comparative information has not been restated. See note 3.

See accompanying notes to consolidated financial statements.

Pollard Banknote Limited
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)

Year ended December 31, 2019

Share
capital

Translation
reserve

Retained
earnings
(deficit)

Total
equity

Balance at December 31, 2018

108,605

12,698

(3,665)

117,638

Net income

Other comprehensive loss

Foreign currency translation differences –

foreign operations

Defined benefit plans remeasurements, net
of income tax reduction (note 12 & note
14)

Total other comprehensive loss

Total comprehensive income (loss)

Issue of common shares (note 15)

Share based compensation

$
$

Dividends to owners of Pollard Banknote Limited

–

22,017

–

(6,993)

–

(6,993)

–

–
–

–

(5,409)

(6,993)
(6,993)

(5,409)
16,608

(12,402)
9,615

–

(18)

114

(4,102)

Balance at December 31, 2019

108,642

5,705

8,937

123,284

Year ended December 31, 2018

Balance at December 31, 2017

73,209

2,965

(18,605)

57,569

Share
capital

Translation
reserve

Deficit

Total
equity

Adjustment on initial application of IFRS 15, net of

income tax

–

332

Adjusted balance at January 1, 2018

73,209

2,965

(18,273)

Net income

Other comprehensive income

Foreign currency translation differences –

foreign operations

Defined benefit plans remeasurements, net

of income tax (note 12 & note 14)

Total other comprehensive income

Total comprehensive income

$
$

–

–
–

–

14,852

9,733

–

2,720

9,733
9,733

2,720
17,572

–

110

332

57,901

14,852

9,733

2,720

12,453
27,305

35,396

110

Issue of common shares (note 15)

35,396

–

Share based compensation

Dividends to owners of Pollard Banknote Limited

–

(3,074)

Balance at December 31, 2018

108,605

12,698

(3,665)

117,638

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 loss (gain)
Loss on equity investment (note 9)
Pension expense (note 14)
Contract liabilities (note 17)

Interest paid
Income tax paid
Pension contribution
Change in non-cash operating working capital

(note 22)

Investing activities

Additions to property, plant and equipment (note 8)
Acquisition of Fastrak Retail (UK) Limited (note 6)
Acquisition of International Gamco, Inc.
Acquisition of Schafer (note 6)
Proceeds from sale of equipment
Equity investment (note 9)
Additions to intangible assets (note 11)

Financing activities

Proceeds from issue of share capital (note 15)
Net proceeds from long-term debt (note 13)
Net repayments of subordinated debt
Change in other non-current liabilities
Deferred financing charges paid (note 13)
Change in dividend payable
Lease principal payments
Dividends paid

Foreign exchange gain (loss) on cash held in foreign currency

Change in cash position

Cash position, beginning of year

2019

2018*

22,017

14,852

6,984
27,138
6,415
(3,361)
3,942
6,476
(43)
(6,372)
(3,988)
(7,413)

(22,500)
29,295

(17,240)
(8,542)
–
–
20
(3,997)
(8,553)
(38,312)

19
14,321
–
(107)
(450)
–
(4,378)
(3,845)
5,560

(269)

(3,726)

11,174

5,917
18,017
4,243
4,533
2,631
6,449
(773)
(4,484)
(10,187)
(5,534)

3,997
39,661

(15,090)
–
(21,558)
(30,447)
–
(2,842)
(7,145)
(77,082)

35,396
27,878
(16,734)
(328)
(561)
62
–
(3,074)
42,639

353

5,571

5,603

Cash position, end of year

7,448

11,174

* Pollard has initially applied IFRS 16 Leases at January 1, 2019. Under the transition methods chosen, comparative

information has not been restated. See note 3.

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, 2019 and 2018

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, 2019,
comprise Pollard, Pollard’s subsidiaries and its interest in other entities. Pollard is primarily involved
in the manufacture and sale of lottery and gaming products.

The controlling entity of Pollard is Pollard Equities Limited (“Equities”), a privately held company.
Equities owns approximately 67.5% of Pollard’s outstanding shares.

The operations of Fastrak Retail (UK) Limited (“Fastrak”), acquired during the second quarter of
2019, are included in the consolidated financial statements from May 1, 2019. Further details are
provided in 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 11, 2020, 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, 2019 and 2018

2. Basis of preparation (continued):

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. Pollard also chooses 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. Further
details are provided in note 14.

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.

Leases:

Upon inception of all leases, Pollard assesses whether it is reasonably certain that lease
extension options will be exercised.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

2. Basis of preparation (continued):

Pollard also makes assumptions as to the discount rate applied to the lease liability upon
recognition. If there is a significant event or change in circumstances within Pollard’s control,
these judgments and assumptions could change and may result in material adjustments to
right-of-use assets and corresponding lease liabilities.

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.

Accounting standards implemented in 2019:

(a) Leases:

Pollard has adopted IFRS 16 Leases with a date of initial application of January 1, 2019. The new
standard introduces a statement of financial position recognition and measurement model for
lessees, eliminating the distinction between operating and finance leases. As a result, most leases
are recognized on the statement of financial position. Certain exemptions apply for short-term
leases and leases for low-value assets. Lessors continue to classify leases as operating and
finance leases. IFRS 16 replaces IAS 17 Leases and the related interpretations.

Pollard has applied IFRS 16 using the modified retrospective approach, and therefore the
comparative information has not been restated and continues to be reported under IAS 17.

Impact on the 2019 Consolidated Financial Statements

On initial application, Pollard has elected to record right-of-use assets based on the corresponding
lease liability. Right-of-use assets (included in property, plant and equipment on the statement
of financial position) of $18,279, current portion of lease liabilities of $4,348 and long-term
portion of lease liabilities of $13,931 were recorded as of January 1, 2019, with no net impact
on retained earnings. When measuring lease liabilities, Pollard discounted lease payments using
its incremental borrowing rate of 4.0% at January 1, 2019.

For leases with a lease term ending within 12 months of the date of initial application and leases
for low-value assets, Pollard has elected to apply the practical expedient which allows the
recognition of the lease payments associated with these leases as an expense on a straight-line
basis over the lease term. The discounted value of the leases classified under the recognition
exemption as at January 1, 2019 was $343.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Accounting standards implemented in 2019 (continued):

The following tables summarize the impact of adopting IFRS 16 on Pollard’s consolidated
statement of financial position as at December 31, 2019 and its consolidated statement of income
for the twelve months ended December 31, 2019.

Impact on Pollard’s consolidated statement of financial position as at December 31, 2019:

Amount
without
IFRS 16

IFRS 16
Adjustment

As Reported

Property, plant and equipment
Current portion lease liabilities
Lease liabilities
Retained earnings (deficit)

76,315

–
–
9,277

15,589
4,375
11,554
(340)

91,904
4,375
11,554
8,937

Impact on Pollard’s consolidated statement of income for the twelve months ended December
31, 2019:

Amount
without
IFRS 16

IFRS 16
Adjustment

As Reported

Cost of sales
Finance costs

$ 307,055
6,882

(322) $
662

306,733
7,544

The following table presents a continuity schedule from the date of adoption of Pollard’s right-
of-use assets by asset class:

Buildings

Equipment

Furniture,
Fixtures and
Computers

Total

Opening balance,
January 1, 2019
Acquisition
Additions
Depreciation
Effect of movements in
exchange rates

Closing balance,
December 31, 2019

17,750
322
1,756
(4,492)

132 $
100
–
(72)

397 $
–
5
(178)

18,279
422
1,761
(4,742)

(104)

(18)

(9)

(131)

15,232

142 $

215 $

15,589

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Accounting standards implemented in 2019 (continued):

For the year ended December 31, 2019, Pollard’s total cash outflow, principal and interest,
relating to its lease obligations classified under IFRS 16 Leases was $5,039.

Significant accounting policies:

The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements, except as described in note 3.

(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

Pollard Holdings, Inc.
Pollard (U.S.) Ltd.
Pollard Games, Inc.
Pollard iLottery Inc.
Diamond Game Enterprises
Diamond Game Enterprises Canada ULC
International Gamco Inc.*
Schafer Systems (2018) Inc.
Fastrak Retail (UK) Limited

December 31, 2019

December 31, 2018

100
100
100
100
100
100

–

100
100

100
100
100
100
100
100
100
100
–

*Effective December 31, 2019, International Gamco Inc. and Pollard Games, Inc. were amalgamated. The

amalgamated entity retained the Pollard Games, Inc. legal name.

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, expenses and equity movements of NPI.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

All inter-company balances and transactions, and any unrealized income and expenses arising
from inter-company transactions, have been eliminated.

(b) Business combinations:

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 the fair value of consideration transferred over the fair value of the identifiable net
assets acquired is recorded as goodwill.

Pollard, under certain contractual arrangements, controls cash that is restricted in use. Pollard
records an equal, offsetting liability classified within accounts payable and accrued liabilities.
Restricted cash includes player deposits held for the benefit of Pollard’s iLottery customer, in
addition to funds held for security purposes and certain contractual 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 a customer obtains control of the goods or services. Pollard
determines revenue recognition through the following steps: a) identification of the contract with
a customer, b) identification of the performance obligations in the contract, c) determination of
the transaction price, d) allocation of the transaction price to the performance obligations in the
contract and e) recognition of revenue when Pollard satisfies a performance obligation.

Many of Pollard’s contracts have a single performance obligation, including the sale of instant
tickets and related products, pull-tab (or break-open) tickets, bingo paper, pull-tab vending
machines, ancillary products such as pull-tab counting machines and gaming machines. The
single performance obligation in these contracts is the promise to transfer the individual goods.
Revenue is recognized at a point in time when the customer obtains control of a product, which
typically takes place when legal title and physical possession of the product is transferred to the
customer. These conditions are usually fulfilled upon delivery. However, under certain contracts,
Pollard is compensated for its products based on its customers’ sales of those products at retail.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

Pollard has concluded that control transfers to its customers at delivery of the product to the
customer. As such, recognition of sales under these contracts occurs upon receipt of shipment.
Pollard’s sales under these contracts could vary year over year depending on the timing of
shipments.

Certain Pollard contracts include multiple performance obligations, including license and royalty
sales, iLottery services, loyalty programs, digital and lottery management services, training and
consulting. Where such arrangements exist, the transaction price is allocated to the performance
obligations 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. Revenue is then recognized upon satisfaction of each performance obligation.

Where Pollard provides software and related infrastructure, revenue is recognized over time
based on the relevant measure of progress of the asset being transferred to the customer.

Pollard earns revenue from 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.
Product support services, maintenance and periodic upgrades revenue is recognized over time
as the related services are performed.

Contract liabilities consist 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.

Volume rebates are accrued and recorded as a reduction to sales based on historical experience
and management’s expectations regarding sales volume.

(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 operating capacity.

Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

(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 fair value of the consideration transferred over the
fair value of the identifiable 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.

(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 and related fringes 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 fringes
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, 2019 and 2018

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

5 to 20 years
Term of patent
3 to 15 years or term of license
5 years

Amortization methods, estimated useful lives and residual value are reviewed each annual
reporting date and adjusted prospectively if appropriate.

Trademarks, trade names and brands

Trademarks, trade names and brands have been deemed to have an indefinite life and are not
amortized. For purposes of impairment testing, the fair value of the trademarks, trade names
and brands 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
scientific research and experimental development (“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, 2019 and 2018

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 39 years
Term of lease
2 to 11 years
3 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 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.

(j) 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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

(k) Financial instruments:

Financial assets are initially measured at fair value. On initial recognition, Pollard classifies its
financial assets at either amortized cost, fair value through other comprehensive income
(“FVOCI”) or fair value through profit or loss (“FVTPL”), depending on its business model for
managing the financial assets and the contractual cash flow characteristics of the financial assets.
Financial assets are not reclassified subsequent to their initial recognition, unless Pollard changes
its business model for managing financial assets. Financial liabilities are classified at amortized
cost.

A financial asset is classified as measured at amortized cost if it meets both of the following
conditions: a) the asset is held within a business model whose objective is to hold assets to
collect contractual cash flows and b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the principal
outstanding.

A financial asset is classified as measured at FVOCI if it meets both of the following conditions:
a) it is held within a business model whose objective is achieved by both collecting contractual
cash flows and selling financial assets and b) its contractual terms give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal amount outstanding.

All financial assets not classified as measured at amortized cost or FVOCI are measured at FVTPL.
This includes all derivative financial assets. On initial recognition, Pollard may irrevocably
designate a financial asset that otherwise meets the requirements to be measured at amortized
cost or at FVOCI as FVTPL, if doing so eliminates or significantly reduces an accounting mismatch
that would otherwise arise.

Hedge accounting

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.

From time to time, Pollard enters into hedging arrangements in order to mitigate this exposure
to foreign exchange fluctuations. Pollard determines the existence of an economic relationship
between the hedging instrument and hedged item based on the currency, amount and timing of
their respective cash flows. An assessment is made whether the derivative designated in each
hedging relationship is expected to be and has been effective in offsetting changes in cash flows
of the hedged item using the hypothetical derivative method.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

The fair value of each contract is included on the consolidated balance sheet as either a financial
asset or liability. Changes in fair value are recorded in either other comprehensive income or the
consolidated statement of income, depending on the nature of the hedged item.

If the hedge no longer meets the criteria for hedge accounting or the hedging instrument is sold,
expires, is terminated or is exercised, then hedge accounting is discontinued prospectively. When
hedge accounting for cash flow hedges is discontinued, the amount that has been accumulated
in the hedging reserve remains in equity until, for a hedge of a transaction resulting in recognition
of a non-financial item, it is included in the non-financial item’s cost on its initial recognition or,
for other cash flow hedges, it is reclassified to the consolidated statement of income in the same
period or periods as the hedged expected future cash flows affects income or loss. If the hedged
future cash flows are no longer expected to occur, the amounts that have been accumulated in
the hedging reserve are immediately reclassified to the consolidated statement of income.

(l) Impairment:

Financial assets

Pollard applies the simplified approach to providing for expected credit losses, which requires the
use of the lifetime expected credit loss provision for all accounts receivable. Expected credit
losses are measured as the difference in the present value of the contractual cash flows that are
due under the contract and the cash flows that Pollard expects to receive. The expected cash
flows reflect all available information, including Pollard’s historical experience, the past due
status, and forward-looking macroeconomic factors. Further details are provided in note 26 and
note 27.

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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

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
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.

(m) 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.

(n) 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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

On disposal of a foreign operation, the deferred cumulative amount recognized in OCI relating
to that particular foreign operation is recognized in net income.

(o) 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 five 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.

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 Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

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.

(p) 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 and U.S. state franchise 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.

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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

(q) 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.

(r) Finance costs and finance income:

Finance costs comprise interest expense on borrowings including 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:

Pollard has updated its accounting policies upon adoption of IFRS 16 on January 1, 2019.

At inception of a contract, Pollard assesses whether a contract is, or contains, a lease. A contract
is, or contains, a lease if the contract conveys the right to control the use of an identified asset
for a period of time in exchange for consideration.

Pollard recognizes a right-of-use asset and a lease liability at the lease commencement date. The
right-of-use asset is initially measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before the commencement date, plus any
direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or
to restore the underlying asset or the site on which it is located, less any lease incentives
received.

The right-of-use asset is subsequently depreciated using the straight-line method from the
commencement date to the earlier of the end of the useful life of the right-of-use asset or the
end of the lease term.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Significant accounting policies (continued):

The estimated useful lives of right-of-use assets are determined on the same basis as those of
property, plant and equipment. The right-of-use asset is subsequently measured at cost less any
accumulated depreciation and impairment losses.

The lease liability is initially measured at the present value of the lease payments that are not
paid at the commencement date, discounted using the interest rate implicit in the lease or, if
that rate cannot be readily determined, Pollard’s incremental borrowing rate. Generally, Pollard
uses its incremental borrowing rate as the discount rate.

The lease liability is measured at amortized cost using the effective interest method. It is
remeasured when there is a change in future lease payments arising from a change in an index
or rate, a change in Pollard’s estimate of the amount expected to be payable under a residual
value guarantee, or as appropriate, changes in the assessment of whether a purchase or
extension option is reasonably certain to be exercised or a termination option is reasonably
certain not to be exercised.

In comparative periods, operating leases were not recognized in Pollard’s consolidated statement
of financial position. Payments made were recognized in the statement of income on a straight-
line basis over the term of the lease, while any lease incentive received was recognized as a
reduction of the total lease expense over the term of the lease.

Pollard presents right-of-use assets in “property, plant and equipment” on the statement of
financial position.

Pollard’s leases are for offices, manufacturing facilities, production equipment and office
equipment.

Future accounting standards:

Amendments to IFRS 3 – definition of a business:

In October 2018, the International Accounting Standards Board (“IASB”) issued amendments to IFRS
3 Business Combinations, that seek to clarify whether a transaction results in an asset or a business
acquisition. The amendments include an election to use a concentration test. This is a simplified
assessment that results in an asset acquisition if substantially all of the fair value of the gross assets
is concentrated in a single identifiable asset or a group of similar identifiable assets. The amendments
apply to businesses acquired in annual reporting periods beginning on or after January 1, 2020.
Pollard does not expect the amendments to have a significant impact on the consolidated financial
statements upon adoption.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Acquisitions:

(a) Schafer Systems Inc.:

On October 31, 2018, Pollard Systems Inc., a wholly-owned indirect subsidiary of Pollard,
acquired substantially all of the operating assets and business of Schafer Systems Inc.
(“Schafer”), the leading global provider of lottery ticket dispensers and play stations. Pollard
Systems Inc. was renamed Schafer Systems (2018) Inc. upon completion of the transaction. The
purchase price was funded by proceeds from Pollard’s credit facility and cash on hand. 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 October 31, 2018, the acquisition date.

Total consideration transferred

Net tangible assets acquired:

Accounts receivable
Inventories
Property, plant and equipment
Accounts payable and accrued liabilities
Net tangible assets acquired

Customer relationships
Brand
Patents
Identifiable intangible assets acquired
Goodwill acquired

$
$

30,447

1,042
2,566
5,409
(374)
8,643

11,426
1,013
132
12,571
9,233

The goodwill acquired is largely attributable to the assembled workforce, market share and the
expected synergies and cost savings after integration of the combined businesses. This goodwill
is expected to be deductible for tax purposes.

As at September 30, 2019, the acquisition accounting was finalized.

(b) Fastrak Retail (UK) Limited:

On May 1, 2019, Pollard acquired 100% of the common shares of Fastrak, a leading provider of
lottery ticket dispensers, lottery play points and other retail merchandising products based in the
United Kingdom. The purchase price was funded by proceeds from Pollard’s credit facility and
cash on hand. 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 May 1, 2019, 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, 2019 and 2018

Acquisitions (continued):

Cash paid, net of cash acquired of $1,213
Contingent consideration
Total consideration transferred

Additional net tangible assets acquired:

Accounts receivable
Inventories
Prepaid expenses and deposits
Property, plant and equipment
Income taxes receivable
Accounts payable and accrued liabilities
Lease liabilities
Deferred income tax liability
Net tangible assets acquired (excluding cash)

Customer relationships
Brand
Patents
Identifiable intangible assets acquired
Goodwill acquired

$
8,038
504
8,542
$

$
$

2,418
885
177
1,646
128
(2,121)
(402)
(997)
1,734

3,770
457
342
4,569
2,239

The goodwill acquired is largely attributable to the assembled workforce, market share and the
expected synergies and cost savings after integration of Fastrak with Pollard. This goodwill is not
expected to be deductible for tax purposes. The fair values of identifiable assets and liabilities
acquired are preliminary and are subject to change if new information becomes available.

Acquisition costs related to the Fastrak purchase in the twelve months ended December 31,
2019, were $457. These costs were included in administration expenses.

During the period between May 1, 2019 and December 31, 2019, Fastrak generated revenues of
approximately $7,435 and net income of $13, after depreciation and amortization of the fair
values of identifiable assets acquired, which have been recorded in the consolidated financial
statements.

If Fastrak had been acquired on January 1, 2019, incremental revenue of $3,203 and net loss of
$441, after depreciation and amortization of the fair values of identifiable assets acquired, would
have been recognized in the twelve months ended December 31, 2019.

Contingent consideration, based on achievement of certain revenue and earnings before interest,
taxes, depreciation and amortization (“EBITDA”) targets, may be paid to the vendor. The revenue
earn-out target is based on achievement of certain sales volumes to one customer during the
period 2019 through 2023. The maximum potential payment under the revenue-based earn-out

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Acquisitions (continued):

is £2 million. Pollard believes the likelihood of future revenue earn-out payments is low, and as
such, has not accrued a liability for the revenue earn-out.

The EBITDA earn-out is based on Fastrak’s achievement of certain EBITDA targets during the
period 2019 through 2021. The potential payment under the EBITDA earn-out is unlimited.
Pollard initially accrued $504 relating to the EBTIDA earn-out upon acquisition. Subsequent to
December 31, 2019, payment under the EBITDA earn-out was made to the vendor in the amount
of $312. Pollard believes the likelihood of additional future EBITDA earn-out payments is low,
and as such, reversed the remaining accrual of $192 through other income. As a result, Pollard
has no liability accrued for the EBITDA earn-out as at December 31, 2019.

Inventories:

Raw materials
Work-in-process
Finished goods

December 31,
2019

December 31,
2018

17,957
1,726
22,857

18,537
2,861
23,955

42,540

45,353

During 2019, Pollard recorded inventory write-downs of $580 representing an increase in the
obsolescence reserves and write-downs of $46 due to changes in foreign exchange rates.

During 2018, Pollard recorded inventory write-downs of $302 representing an increase in the
obsolescence reserves and reversal of previous write-downs of $53 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, 2019 and 2018

Property, plant and equipment:

Cost

Land Buildings

Leasehold
improve-
ments

Equipment

Furniture,
fixture and
computers

Assets in
progress &
spare parts Total

Balance at January 1, 2018

803

12,156

3,527

157,800

6,830

2,352

183,468

Acquisitions

881

7,496

–

3,832

–

225

12,434

Additions/net transfers

Disposals

Effect of movements in

exchange rates
Balance at December 31,

–

195

–

145

1,460

6,549

510

6,376

15,090

–

(65)

2,269

–

(65)

2,605

2018

$ 1,731

19,992

5,061

170,385

7,366

8,997

213,532

Recognition of right-of-
use assets on initial
application of IFRS 16 –
January 1, 2019

Acquisitions

Additions/net transfers*

Disposals

Effect of movements in

exchange rates
Balance at December 31,

–

17,750

–

132

–

321

2,684

–

128

1,170

247

–

17,096

(1,361)

397

453

–

18,279

1,647

(382)

20,098

–

(1,361)

(39)

(557)

(40)

(1,184)

(28)

(120)

(1,968)

2019

$ 1,692

40,190

5,396

186,238

8,216

8,495

250,227

*Included within additions/net transfers is $1,097 of machine costs previously classified as inventory, which were
reclassified to property, plant and equipment during 2019. Also included within additions/net transfers, within the
buildings asset class, is $1,761 of right-of-use lease asset additions.

Accumulated
depreciation

Land Buildings

Leasehold
improve-
ments

Furniture,
fixture and
computers

Assets in
progress &
spare parts Total

Equipment

Balance at January 1, 2018

Depreciation for the year

Disposals

Effect of movements in

exchange rates
Balance at December 31,

2018

Depreciation for the year

Disposals

Effect of movements in

exchange rates
Balance at December 31,

2019

–

5,281

2,150

117,335

4,383 –

129,149

444

–

5,727

5,265

–

242

–

11,129

233 –

12,048

(47)

– –

(47)

691

9 –

776

2,466

129,108

4,625 –

141,926

391

–

12,376

433 –

18,465

(1,343) –

–

(1,343)

(72)

(43)

(600)

(10) –

(725)

10,920

2,814

139,541

5,048 –

158,323

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

Property, plant and equipment (continued):

Carrying amounts

Land Buildings

Leasehold
improve-
ments

Equipment

Furniture,
fixture and
computers

Assets in
progress &
spare parts Total

At December 31, 2018

$ 1,731

14,265

At December 31, 2019

$ 1,692

29,270

2,595

2,582

41,277

46,697

2,741

3,168

8,997

71,606

8,495

91,904

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,
2019

December 31,
2018

1,164
3,997
(3,942)
(58)

1,161

877
2,842
(2,631)
76

1,164

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:

Balance, beginning of year
Acquisition of Fastrak (note 6)
Acquisition of Gamco
Acquisition of Schafer (note 6)
Effects of movements in exchange rates

Balance, end of year

December 31,
2019

December 31,
2018

69,667 $
2,239
–
–
(1,913)

69,993 $

51,768
–
5,884
9,233
2,782

69,667

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

10. Goodwill (continued):

Impairment assessment methodology

Pollard performs its annual goodwill impairment test as at December 31. Goodwill has been allocated
as follows to Pollard’s CGUs:

Lotteries
American Games
Diamond Game
Gamco
Schafer
Fastrak

Total

December 31,
2019

December 31,
2018

30,816 $

6,678
14,991
6,220
9,128
2,160

69,993 $

30,816
7,012
15,741
6,513
9,585
–

69,667

Goodwill allocated to the American Games, Diamond Game, Gamco, Schafer and Fastrak CGUs are
subject to foreign exchange revaluation.

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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

10. Goodwill (continued):

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:

Lotteries
American Games
Diamond Game
Gamco
Schafer
Fastrak

Growth rates

12.0%
12.0%
15.0%
12.0%
14.7%
16.0%

Growth rates are based on estimated sustainable long-term growth rates of the CGUs. A terminal
value of 2% was applied in the value in use calculations for all of the above 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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

11. Intangible assets:

Cost

Customer
assets

Patents

Trademarks

Deferred
development

Computer
software
and
licenses

Total

Balance at January 1, 2018

28,991

5,696

Acquisitions

15,484

167

2,641

1,539

1,210

12,004

50,542

–

579

17,769

Additions (net of investment

tax credits)

Additions – internally
developed (net of
investment tax credits)

Effect of movements in

exchange rates

–

742

–

429

678

1,849

–

1,769

–

323

–

5,296

460

2,598

Balance at December 31, 2018

46,244

6,651

4,503

1,639

19,017

78,054

Asset reclassifications*

Acquisitions

Additions (net of investment

tax credits)

Additions – internally
developed (net of
investment tax credits)**

Effect of movements in

exchange rates

–

3,770

(662)

361

–

160

–

457

–

662

–

479

–

4,588

664

154

7,841

7,995

(1,379)

(63)

(222)

–

(389)

(2,053)

Balance at December 31, 2019

48,635

6,447

4,763

1,793

27,610

89,248

Accumulated amortization

Customer
assets

Patents

Trademarks

Deferred
development

Computer
software
and
licenses

Total

Balance at January 1, 2018

15,070

4,908

Amortization for the year

3,152

204

Effect of movements in

exchange rates

120

Balance at December 31, 2018

18,342

5,118

Asset reclassifications*

Amortization for the year

Effect of movements in

exchange rates

–

4,294

(62)

167

(184)

(13)

Balance at December 31, 2019

22,452

5,210

–

1,210

1,608

22,796

–

1,555

4,947

225

1,246

3,262

27,968

–

102

2,823

7,386

–

(116)

(313)

1,348

6,031

35,041

*During 2019, $662 of costs previously capitalized as intangible assets within the patents asset class were
reclassified to the computer software and licenses asset class. Related amortization of $62 was also reclassified
between patents and computer software and licenses.

**Included within additions – internally developed (net of investment tax credits) is $106 of software costs
previously classified as inventory, which were reclassified to intangible assets during 2019.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

11. Intangible assets (continued):

Carrying amounts

Customer
assets

Patents

Trademarks

Deferred
development

Computer
software
and
licenses

Total

At December 31, 2018
At December 31, 2019

$
27,902
$ 26,183

1,533
1,237

4,503
4,763

393

445

15,755
21,579

50,086
54,207

Amortization of intangible assets in 2019 of $7,386 (2018 – $4,947), was included in cost of sales.

As at December 31, 2019, the weighted average remaining useful life of customer assets was 8.9
years.

12. Income taxes:

Income tax expense

Current
Deferred

Total

2019

2,136
4,848

6,984

2018

5,175
742

5,917

Income tax recognized in other comprehensive income (loss)

Amount
before
tax

Tax
benefit

2019
Amount
net of tax

Amount
before
tax

Tax
expense

2018
Amount
net of tax

Defined benefit plans
remeasurements
gain (loss)

(7,300)

1,891

(5,409) $

3,695

(975)

2,720

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

12. Income taxes (continued):

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

Other items

Effect of non-taxable items related to

foreign exchange

2019

2018

27.0%

(2.2%)

1.8%

(0.5%)

22,017
6,984

29,001
7,829

(632)

527

(162)

27.0%

(2.5%)

2.7%

(2.4%)

2018

14,852
5,917

20,769
5,608

(508)

553

(500)

(2.0%)

(578)

3.7%

764

24.1% $

6,984

28.5% $

5,917

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

2019

2018

2019

2018

2019

2018

Property, plant and
equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign

exchange (gains)
and losses
Unused tax losses
Contract liabilities
Other

–
2,253
228
9,070

487
994
45
301

23 $

2,954
259
7,409

(12,375)
(5,913)
–
(1,377)

(9,319) $
(6,067)
(57)
(1,227)

(12,375)
(3,660)
228
7,693

(9,296)
(3,113)
202
6,182

1,126
2,153
56
101

(655)
–
(247)
(275)

(874)
–
(272)
(22)

(168)
994
(202)
26

252
2,153
(216)
79

Tax assets (liabilities)

13,378

14,081 $

(20,842)

(17,838) $

(7,464)

(3,757)

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

12. Income taxes (continued):

Movement in temporary differences during the year

January 1,
2019

Recognized
in profit or
loss

Acquisitions

Recognized in
other
comprehensive
income

Balance
December 31,
2019

Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange

(gains) and losses

Unused tax losses
Contract liabilities
Other

(9,296)
(3,113)
202
6,182

252
2,094
57
(135)

(2,942)
310
26
(365)

(435)
(1,100)
(259)
161

(137)
(857)
–
–

–
–
–
–

–
–
–
1,891

(12,375)
(3,660)
228
7,708

–
–
–
–

(183)
994
(202)
26

Tax assets (liabilities)

(3,757)

(4,604)

(994)

1,891

(7,464)

Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange

losses

Unused tax losses
Contract liabilities
Other*

January 1,
2018

Recognized
in profit or
loss

(7,714)
(1,397)
432
6,250

(406)
(477)
(71)
(536)

Acquisitions

(1,176)
(1,239)
(159)
1,443

90
1,855
182
(96)

162
239
(125)

–

–
–
–

(39)

Recognized in
other
comprehensive
income

Balance
December 31,
2018

–
–
–
(975)

–
–
–
–

(9,296)
(3,113)
202
6,182

252
2,094
57
(135)

Tax assets (liabilities)

(398)

(1,214)

(1,170)

(975)

(3,757)

* January 1, 2018 figure includes the impact of the transitional adjustment booked to opening
deficit upon adoption of IFRS 15 of $123.

Recognized in the consolidated statements of comprehensive income as follows:

Deferred income tax expense
Finance income (loss)

2019

4,848
(244)

4,604

2018

742
472

1,214

Amounts included in finance income (loss) relate to unrealized foreign exchange.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

13. Long-term debt:

Credit facility, interest of 4.02% to 4.32%, payable

monthly, maturing 2022

Equipment debt
Equipment lease

Deferred financing charges, net of amortization

Less current portion

December 31,
2019

December 31,
2018

127,820
–
–

(525)

116,177
4
36

(421)

127,295

115,796

–

(40)

127,295

115,756

Credit facility

Deferred
financing

Equipment
debt

Equipment
lease

Total

Balance at January 1, 2019

116,177

(421)

115,796

Net proceeds (payments)
Payment of deferred financing

charges

Total changes from financing

cash flows

14,361

–

(4)

(36)

14,321

–

(450)

–

(450)

14,361

(450)

(4)

(36)

13,871

Effect of movements in

exchange rates

Amortization of deferred

financing charges

Total other changes

(2,718)

–

(2,718)

–

346

Balance at December 31, 2019

127,820

(525)

–

(2,718)

–

346

–

(2,372)

–

127,295

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

13. Long-term debt (continued):

Credit facility

Deferred
financing

Equipment
debt

Equipment
lease

Total

Balance at January 1, 2018

83,972

(253)

189

647

84,555

Net proceeds (payments)
Payment of deferred financing

charges

Total changes from financing

cash flows

28,705

–

(187)

(640)

27,878

–

(561)

–

(561)

28,705

(561)

(187)

(640)

27,317

Effect of movements in

exchange rates

Amortization of deferred

financing charges

Total other changes

3,500

–

3,500

–

393

Balance at December 31, 2018

116,177

(421)

–

3,531

393

3,924

115,796

Credit facility

Effective December 31, 2019, Pollard renewed its credit facility. The credit facility provides loans of
up to $190,000 for its Canadian operations and US$14,000 for its U.S. subsidiaries. The credit facility
also includes an accordion feature which can increase the facility by $35,000. The borrowings for the
Canadian operations can be denominated in Canadian or U.S. dollars, to a maximum of $190,000
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,
2019, the outstanding letters of guarantee drawn under the credit facility were $10,704 (2018 –
$1,337).

Included in the total credit facility balance is a U.S. dollar denominated balance of US$36,400 (2018
– US$43,600).

Under the terms and conditions of the credit facility agreement Pollard is required to maintain certain
financial covenants including debt to income before interest, income taxes, amortization, depreciation
and certain other items (“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As at
December 31, 2019, Pollard is in compliance with all financial covenants.

As of December 31, 2019, Pollard had unused credit facility available of $69,676 (2018 – $58,860).

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

13. Long-term debt (continued):

Pollard’s credit facility is secured by a first security interest in all of the present and after acquired
property of Pollard. Under the terms of the agreement the facility is committed for a three-year
period, renewable December 31, 2022. Principal payments are not required until maturity. The facility
can be prepaid without penalties.

14. Pension liability:

December 31,
2019

December 31,
2018

Fair value of benefit plan assets
Present value of benefit plan obligations

Net pension liability

65,481 $
(92,028)

52,946
(73,303)

(26,547) $

(20,357)

Pollard sponsors non-contributory defined benefit plans providing pension benefits to its employees.
Pollard has four defined benefit 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. Two of the plans of the U.S. subsidiaries require valuations annually with the last
valuations being as of January 1, 2019. One of the Canadian plans of Pollard currently requires
valuation every year with the last valuation as of December 31, 2018. Pollard’s other Canadian plan’s
valuation was as of January 1, 2017. Pollard’s U.S. subsidiaries also maintain five defined contribution
plans. The pension expense for these defined contribution plans is the annual funding contribution
by the subsidiaries.

Pollard expects to contribute approximately $6,474 to its defined benefit plans in 2020. Included in
the 2020 estimated contributions is $1,643 in additional solvency payments.

The benefit plan assets are held in trust and are invested as follows:

Equities
Bonds
Cash and cash equivalents

December 31,
2019

December 31,
2018

61.0%
36.6%
2.4%

100.0%

62.0%
35.8%
2.2%

100.0%

Information about Pollard’s defined benefit plans, in aggregate, is as follows:

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

14. Pension liability (continued):

Benefit plan assets

Fair value, beginning of year
Expected return on plan assets
Employer contributions
Benefits paid
Remeasurement gains (losses)
Effect of movements in exchange rates

Fair value, end of year

Accrued benefit plan obligations

Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Remeasurement (gains) losses
Effect of movements in exchange rates

Balance, end of year

Net pension liability

2019

2018

52,946
2,163
6,310
(2,281)
6,689
(346)

50,506
1,788
4,720
(1,548)
(3,024)
504

65,481

52,946

2019

2018

73,303
4,656
2,858
(2,281)
13,948
(456)

73,465
4,839
2,512
(1,548)
(6,790)
825

92,028

73,303

(26,547) $

(20,357)

The total net cost for Pollard’s defined benefit and defined contribution pension plans recognized in
cost of sales is as follows:

2019

2018

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

4,656
2,858
(8,852)

7,059

5,721

755

Net pension plans cost

6,476

4,839
2,512
1,236

(2,655)

5,932

517

6,449

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

14. Pension liability (continued):

Actuarial assumptions

The principal actuarial assumptions used in measuring at the reporting date are as follows:

Discount rate
Rate of compensation increase

2019

2018

3.1% to 3.7%
0% to 3.0%

3.9% to 4.6%
0% to 3.0%

Assumptions regarding future mortality have been based on published statistics and mortality tables.
As of December 31, 2019, Pollard used CPM2014 Private Sector projected CPM-B mortality table for
its Canadian subsidiary’s pension plans and the Pri-2012 mortality tables using scale MP-2019 for its
U.S. subsidiary’s pension plans. As of December 31, 2018, Pollard used CPM2014 Private Sector
projected CPM-B mortality table for its Canadian subsidiary’s pension plans and the RP-2018 healthy
mortality tables for its U.S. subsidiary’s pension plans.

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 (1% movement)
Future mortality (one year)

$
$
$

(17,138) $
$
$

2,462
1,372

22,936
(2,258)
(1,321)

Increase

Decrease

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

14. Pension liability (continued):

Remeasurements

Remeasurement gains (losses) arising on plan

assets

6,689

(3,024)

2019

2018

Remeasurement (gains) losses arising on plan

liabilities from:

Demographic assumptions
Financial assumptions
Experience adjustments

Remeasurement (gains) losses arising on plan

liabilities

(232) $

14,240
(60)

23
(8,601)
1,788

13,948

(6,790)

Remeasurements recognized in other comprehensive income

Amount accumulated in deficit, beginning of year
Recognized during the year, net of income tax

(16,673)
(5,409)

(19,393)
2,720

Amount accumulated in retained earnings, end of year $

(22,082)

(16,673)

2019

2018

15. Share capital:

Authorized

Unlimited common shares
Unlimited preferred shares

Issued
Balance at January 1, 2018
Issuance of common shares
Stock option exercise
Balance at December 31, 2018

Stock option exercise

Amount

23,543,158
2,070,000
12,500
25,625,658
10,000

73,209
35,351
45
108,605
37

Balance at December 31, 2019

25,635,658

108,642

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

15. Share capital (continued):

Ownership restrictions:

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.

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, share capital and retained earnings,
but excludes reserves. The Board of Directors regularly monitors the levels of debt, equity and
dividends.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

15. Share capital (continued):

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, 2019, Pollard is in compliance with all financial covenants.

There were no other changes in Pollard’s approach to capital management during the current period.

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 5, 2019, a dividend of $0.04 per share was declared, payable on January 15, 2020, to
the shareholders of record on December 31, 2019.

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.

Options have been granted on four grant dates, with the exercise price being the common share
price on the exercise price determination date. All of the outstanding options have seven year terms,
vesting 25% per year over the first four years.

Option grant date

November 8,
2019

April 24,
2017

October 3,
2016

March 10,
2014

Fair value at grant date
Number of options granted
Share price
Exercise price

Exercise price determination date
Expected volatility
Option life (expected weighted

average life)

Risk-free interest rate (based on
Canadian government bonds)

$
$

5.13 $

150,000

20.70 $
20.70 $

November 7,
2019
31.3%

2.27
125,000
10.00
10.00
April 21,
2017
29.3%

$
$

1.87
25,000
8.12
8.12
September
30, 2016
30.7%

0.82
100,000
3.63
3.63
March 7,
2014
33.7%

4.75 years
1.5% to
1.6%

4.75 years
0.6% to
0.7%

4.75 years
1.7% to
2.1%

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:

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

15. Share capital (continued):

2019

2018

Number

Weighted
average
exercise price

Number

Weighted
average
exercise price

Balance, beginning of year
Granted during the year
Exercised during the year

237,500 $
150,000 $
(10,000) $

7.46
20.70
3.63

250,000 $
–

7.26
$ –
(12,500) $ 3.63

Balance, end of year

377,500 $

12.82

237,500

7.46

As of December 31, 2019, no share options had expired. Of the 377,500 options outstanding at
December 31, 2019, 121,250 were exercisable.

16. Commitments and contingencies:

Pollard and certain subsidiaries rent premises and equipment under long-term leases. The majority
of these leases have been classified as right-of-use assets under IFRS 16 Leases, effective January
1, 2019. Refer to note 3. The following is a schedule by fiscal year of rental payment commitments
outstanding:

2020
2021
2022
2023
2024

5,473
4,474
4,021
3,147
937

Pollard is contingently liable for outstanding letters of guarantee in the amount of $10,704 at
December 31, 2019 (2018 – $1,337). 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. During 2019, Pollard entered into a new lease. The base rental
rate is approximately US$375, which is based on the current market value as determined through
independent appraisal.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

16. Commitments and contingencies (continued):

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 its lease for an additional five year term) for annual rent of $313 per year. The rental
rate was based on current market value as determined through independent appraisal. 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.

On September 12, 2018, Pollard entered into a lease arrangement for land and building in Lansing,
Michigan. The lease commences upon occupancy of space after construction completion, expected
in 2020. The lease has a seven year term, with options for two consecutive five year extensions.
Annual rent for the lease is approximately $380 per year.

On February 6, 2020, Pollard Games, Inc. entered into an agreement, approved by the courts, to
acquire certain fixed assets and intellectual property for a purchase price of $3,766 which were being
sold under a bankruptcy process. The transaction is subject to certain closing conditions and is
expected to close on March 20, 2020. These assets had previously been used in the operation of a
business producing pull-tab tickets for the lottery and charitable gaming business.

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 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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

17. Revenue and contract balances:

In the following tables, revenue from contracts with customers is disaggregated by geographical
segment and product line:

Revenue – geographical segment

Year ended December 31, 2019

Canada
United States
International

Total

Lotteries and
charitable
gaming

Diamond Game

Total

71,883
222,559
77,484

9,879
16,034
–

81,762
238,593
77,484

371,926

25,913

397,839

Revenue – geographical segment

Year ended December 31, 2018

Canada
United States
International

Total

Lotteries and
charitable
gaming

Diamond Game

Total

65,750
170,643
69,369

11,343
14,763
–

77,093
185,406
69,369

305,762

26,106

331,868

Revenue – product lines

Year ended December 31, 2019

Lotteries and
charitable
gaming

Diamond Game

Total

Lottery
Charitable
Gaming systems

$ 309,452
62,474
–

–
–
25,913

309,452
62,474
25,913

Total

371,926

25,913

397,839

Revenue – product lines

Year ended December 31, 2018

Lotteries and
charitable
gaming

Diamond Game

Total

Lottery
Charitable
Gaming systems

250,580
55,182
–

$ –
–
26,106

250,580
55,182
26,106

Total

305,762

$ 26,106

331,868

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

17. Revenue and contract balances (continued):

The following tables provide information about receivables, contract assets, and contract liabilities
from contracts with customers:

Contract balances

December 31,
2019

December 31,

2018

Trade receivables, which are included in accounts

receivable

50,730

27,061

Contract assets, which are included in accounts

receivable

Contract liabilities

3,491

–

3,128

857

Contract liabilities

Balance, beginning of year
Increases due to cash received
Revenue recognized during the year

Balance, end of year

Less current portion

18. Other expenses:

Year ended
December 31,
2019

Year ended
December 31,
2018

857 $
–
(857)

–

1,491
982
(1,616)

857

(814)

2018

2,631
(2,000)
(167)

Loss on equity investment (note 9)
EBITDA support agreement income
Other expenses (income)

2019

3,942
(2,000)
13

1,955

464

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

18. Other expenses (continued):

EBITDA support agreement

One of Pollard’s subsidiaries, Diamond Game, previously entered into an EBITDA support agreement
with Amaya Inc. pursuant to which, subject to certain terms and conditions, Amaya Inc. will pay
Diamond Game each year for up to five years from July 1, 2015, an amount equal to the shortfall, if
any, between (i) Diamond Game’s EBITDA directly or indirectly derived from the deployment of
Diamond Game’s products at certain entertainment centers or in connection with Diamond Game’s
relationship with a certain customer, and (ii) $2,000. This agreement remains in effect after the
acquisition of Diamond Game’s common shares by Pollard.

19. Finance costs and finance income:

Finance costs

Foreign exchange loss
Interest

Finance income

Foreign exchange gain

20. Net income per share:

2019

1,129
6,415

7,544

2019

3,931

2018

5,593
4,243

9,836

2018

881

2019

2018

Net income attributable to shareholders for basic

and diluted net income per share

22,017

14,852

Weighted average number of shares (basic)
Weighted average impact of share options

25,632,645
252,705

25,439,952
247,397

Weighted average number of shares (diluted)

25,885,350

25,687,349

Net income per share (basic)

Net income per share (diluted)

0.86

0.58

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

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

2019

116,277
18,609
2,838
755
5,721

2018

100,622
16,760
2,010
517
5,932

144,200

125,841

22. Supplementary cash flow information:

Change in non-cash operating working capital:

Accounts receivable
Inventories
Prepaid expenses and deposits
Income taxes
Accounts payable and accrued liabilities
Contract liabilities

23. Related party transactions:

Pollard Equities Limited and affiliates

2019

2018

(21,573) $
756
(607)
(742)
464
(798)

14,002
(7,799)
(509)
(531)
(1,222)
56

(22,500) $

3,997

During the year ended December 31, 2019, Pollard paid property rent of $3,238 (2018 – $3,187) and
$436 (2018 – $528) in plane charter costs to affiliates of Equities. In addition, during the year, Pollard
paid Equities $nil (2018 – $421) interest on Pollard’s subordinated debt.

During the year, Equities paid Pollard $72 (2018 – $72) for accounting and administration fees.

At December 31, 2019, included in accounts payable and accrued liabilities is an amount owing to
Equities and its affiliates for rent, expenses and other items of $456 (2018 – $560). Included within
property, plant and equipment and lease liabilities on the consolidated statement of financial position
are right-of-use assets and corresponding liabilities for premises leased to Pollard from Equities. As
at December 31, 2019, the net book value of the right-of-use assets was $10,803 and the present
value of the lease liabilities was $11,787.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

23. Related party transactions (continued):

Neogames S.à r.l. and affiliates

During the year ended December 31, 2019, Pollard reimbursed operating costs and paid software
royalties of $5,728 (2018 – $3,321) to its iLottery partner, which are recorded in cost of sales.

At December 31, 2019, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $134 (2018 – $940) for reimbursement of operating costs and capital
expenditures, and its share of operating profits.

At December 31, 2019, included in restricted cash and accounts payable and accrued liabilities is an
amount owing to Pollard’s iLottery partner of $2,600 (2018 - $1,566) for funds relating to contractual
performance guarantees.

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.

Key management personnel compensation comprised:

Wages, salaries and benefits
Profit share
Expenses related to defined benefit plans

2019

3,370
15
614

3,999

2018

3,267
20
619

3,906

As at December 31, 2019, the Directors and Named Executive Officers of Pollard, as a group,
beneficially owned or exercised control or direction over 17,439,058 common shares of Pollard.

24. Sales to major customers:

For the year ended December 31, 2019, sales to one customer amounted to 11.2 percent of
consolidated sales and 10.1 percent to a second customer. In 2018, sales to one customer amounted
to 12.7 percent of consolidated sales and 11.1 percent to a second customer.

25. Segmented information:

Pollard has two reportable segments: Lotteries and charitable gaming and Diamond Game, which are
Pollard’s strategic business units.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

25. Segmented information (continued):

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 Lotteries and charitable gaming segment derives its revenues from the manufacture of instant
tickets and related products. The Diamond Game segment derives its revenues from the development
of game systems.

Revenues from external customers
Operating costs and expenses
Earnings before income taxes
Total assets

Year ended December 31, 2019

Lotteries and
charitable
gaming

Diamond Game

Total

371,926
345,929
25,997
292,456

25,913
22,909
3,004
59,809

397,839
368,838
29,001
352,265

Year ended December 31, 2018

Lotteries and
charitable
gaming

Diamond Game

Total

305,762
288,673
17,089
242,692

26,106
22,426
3,680
62,908

331,868
311,099
20,769
305,600

Property, plant and equipment and goodwill:

Canada
U.S.
U.K.

26. Financial instruments:

December 31,
2019

December 31,
2018

76,774
81,663
3,460

66,227
75,046
–

161,897

141,273

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.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

26. Financial instruments (continued):

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 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, 2019, 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, 2019 and 2018

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 losses:

Current
Past due for 1 to 60 days
Past due for more than 60 days
Less: Allowance for losses

December 31,
2019

December 31,
2018

50,093
2,708
4,600
(188)

30,929
2,647
1,289
(190)

57,213

34,675

Pollard has applied the expected credit loss model in evaluating the credit risk associated with its
accounts receivable. As part of this analysis, Pollard has grouped its customers into two tranches:
government lottery organizations and charitable gaming distribution networks. For sales to
government lottery organizations, Pollard has assessed the loss allowance at zero based on the
nature of the customer organizations, and no history of losses, collection issues, or significantly
overdue receivables, as well as other customer-specific and forward-looking macroeconomic factors.
Pollard has performed the same assessment for charitable gaming distribution network customers,
resulting in the provision of a loss allowance, as shown in the table above.

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

27. Financial risk management (continued):

Liquidity risk

Liquidity risk is the risk that Pollard will not be able to meet its financial obligations as they fall due.

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,
2019:

Long-term debt
Leases

Total

2020

2021

2022

2023

2024

146,060
18,052

5,386
5,473

6,427
4,474

134,247
4,021

–
3,147

–
937

164,112

10,859

10,901

138,268

3,147

937

Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due. The 2020 requirements for capital expenditures, working capital and dividends
are expected to be financed from cash flow provided by operating activities and the unused portion
of Pollard’s 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 by approximately $36 for year
ended December 31, 2019 (2018 – $23). 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 $81 for year ended December
31, 2019 (2018 – $75).

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, 2019, the amount
of financial liabilities denominated in U.S. dollars exceeded the amount of financial assets
denominated in U.S. dollars by approximately $27,949 (2018 – $36,147).

Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2019 and 2018

27. Financial risk management (continued):

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 $140 for the year
ended December 31, 2019 (2018 – $181).

Pollard utilizes a number of strategies to mitigate its exposure to currency risk. Five 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, 2019, 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 $639 for the year ended December 31, 2019 (2018 – $581).

28. Subsequent event:

On February 3, 2020, Pollard completed the previously announced acquisition of mkodo Limited
(“mkodo”). On December 6, 2019, Pollard signed a definitive agreement to purchase 100% of the
equity of mkodo for a purchase price of $13,416 prior to standard working capital adjustments and
potential future earn-out payments based on certain EBITDA targets. mkodo is a leading provider of
digital apps and user interfaces for the lottery and gaming industry. 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.