140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474 - 2323
www.pollardbanknote.com
2 0 2 0 A N N U A L R E P O R T
DiMS #1134033
Investor
Relations
Robert Rose
140 Otter Street
t: 204-474-2323
e: winnipeg@pollardbanknote.com
Stock
Exchange Listing
The Toronto Stock Exchange - PBL
Independent
Auditors
KPMG LLP,
Winnipeg, Manitoba
Transfer
Agent
Computershare Trust Company of Canada,
Toronto, Ontario
Toronto-Dominion Bank,
Winnipeg, Manitoba
Bank of Montreal,
Calgary, Alberta
Bankers
Canadian Western Bank,
Edmonton, Alberta
Head Office
Manufacturing
Facilities
140 Otter Street
Winnipeg, Manitoba, R3T 0M8
t: 204-474-2323
f: 204-453-1375
Winnipeg, Manitoba, Canada
1499 Buffalo Place, R3T 1L7
140 Otter Street, R3T 0M8
Barrhead, Alberta, Canada
6203 46th Street, T7N 1A1
Sault Ste. Marie, Ontario, Canada
300-45 White Oak Drive East, P6B 4J7
Ypsilanti, Michigan, USA
775 James L. Hart Parkway, 48197
Council Bluffs, Iowa, USA
504 34th Avenue, 51501
Chatsworth, California, USA
9340 Penfield Avenue, 91311
Adair, Iowa, USA
1000 Flag Road, 50002
Omaha, Nebraska, USA
9335 48th Street, 68152
Macclesfield, U.K.
Calamine Street, SK11 7HU
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard EXECUTIVE CHAIR
Dave Brown 1
Jerry Gray 1,2
Garry Leach 1
John Pollard
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Lead Director
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information
Senior
Management
John Pollard
CO-CHIEF EXECUTIVE OFFICER
Douglas Pollard
CO-CHIEF EXECUTIVE OFFICER
Steven Fingold
EXECUTIVE VICE PRESIDENT, CHARITABLE GAMING
Paul Franzmann
EXECUTIVE VICE PRESIDENT, CORPORATE DEVELOPMENT
Pedro Melo
EXECUTIVE VICE PRESIDENT, INFORMATION TECHNOLOGY
Margaret Proven
EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES
Riva Richard
GENERAL COUNSEL AND EXECUTIVE VICE PRESIDENT,
LEGAL AFFAIRS
Robert Rose
EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
Jennifer Westbury
EXECUTIVE VICE PRESIDENT, SALES AND CUSTOMER
DEVELOPMENT
DiMS #1134033
LETTER TO SHAREHOLDERS
Enclosed please find our 2020 Annual Report. In 2020 Pollard Banknote
achieved record revenue of $414.1 million dollars, a 4.1% increase over 2019
despite the negative impact of COVID-19 on certain of our product lines. Record
net income of $33.8 million was up over 51% from the prior year and our
Adjusted EBITDA increased to record levels of $80.6 million, 34% higher than
2019. Cash flow from operating activities prior to change in non-cash working
capital generated $70.6 million in funds, more than 36% higher than last year. A
number of factors contributed to these record numbers, including continuing
strong performance of our core instant ticket product line and significant growth
in our iLottery operations.
COVID-19
2020 was an unprecedented year due to the impact on our personal and
business lives of the COVID-19 pandemic. None of us could have imagined at
the start of last year what challenges lay ahead of us, and how different our daily
lives and business processes would be. We are tremendously proud of how our
Pollard employees around the globe have stood up and met these challenges.
Our number one focus at all times during this past year was the safety and
protection of our team members, and early in the pandemic Pollard adopted a
comprehensive and aggressive pandemic response protocol.
Extensive
implementation of remote workplace policies, onsite health checks (including
daily temperature screening), mandatory social distancing and use of masks,
restriction of visitors, extensive communication as well as innovative use of
technology were critical. As an example, we continue to utilize such things as
electronic monitoring badges to ensure proper social distancing and rapid
contract tracing when required. All of these tools formed an integral part of our
COVID-19 response.
While some of business units were impacted financially, we were able to ensure
all of our operations remained open and operational in a safe manner at all times,
which is a reflection of the amazing dedication and commitment from our team.
We would like to thank our greater Pollard family for all of their efforts in
supporting our customers and each other in the midst of combatting COVID-19
during this difficult period.
Sales
Our record revenue of $414.1 million is a terrific achievement, given lower
revenue in certain of our product lines due to the negative impact of COVID-19.
Sales of our core product, instant lottery tickets, were strong, reflecting the
underlying growth in sales of this product at retail in 2020.
Our iLottery operations achieved some truly remarkable growth in both the top
and bottom line metrics through a combination of new contracts and organic
growth within our existing contracts. On a combined basis, including both the
revenue that is proportionately consolidated into our Pollard financials and the
underlying revenue from our 50% owned joint venture, we achieved $46.1 million
in sales, compared to $18.9 million last year. Only a portion of that is recorded in
our sales in our financial statements due to the accounting rules surrounding
50% joint ventures, however the underlying revenue growth for Pollard in total
iLottery has been significant.
Income before profit sharing and taxes generated from iLottery have increased
sharply in 2020 due to higher revenue, achieving $20.1 million in the year, up
from $3.4 million in 2019.
Not only have our iLottery operations achieved some notable results within
Pollard, this business unit continues to be the clear market leader in North
America, with five contracts currently operating through our 50% joint venture.
Among those is included a new contract to operate the iLottery operation for the
Province of Alberta in Canada, which went live in the beginning of the fourth
quarter of 2020, and the State of Virginia, which increased the breadth of product
offering on their existing website starting July 1, 2020. Both of these new
operations have exceeded expectations and join our successful Michigan iLottery
operation, which continues to be the North American benchmark for iLottery, as
well as significant contracts with the New Hampshire and North Carolina lotteries.
Consumer demand for instant tickets at retail grew sharply starting in the second
quarter of 2020 and remained at high levels throughout the year. Beginning in
May, retail sales of instant tickets began to register strong growth compared to
the previous year and this growth has continued through the end of the year and
into 2021. While the factors surrounding the pandemic shutdown may have
played a roll in the increased sales, the underlying resilience of the product and
sustained growth throughout all of 2020 and so far in 2021 suggests the growth
is reflective of the strong ongoing consumer interest in this product.
Our overall instant ticket production volumes remained steady during 2020
compared to 2019 as the growth in sales at retail does not translate directly into
similar growth for manufacturers. Retail sales growth was strongest at the higher
price points of $10 and up. This trend did help us to increase our average selling
price, a very important metric, through increased demand for our premium
products and options such as Scratch FX®, pouched products and play features
such as accompanying digital games. Premium products do allow us to improve
our margins and establish important recurring sales product for our lottery
customers.
During the year many of our important contracts were renewed or extended, chief
among them being the Michigan iLottery contract which was extended for an
additional four years from the end of our current contract, taking our contract
term to the summer of 2026. Amongst our instant ticket contract portfolio, we
received multi-year renewals on a number of key customers including Arizona,
Massachusetts, Michigan, and the lotteries of Israel, Finland and Poland, to
name a few. We have a number of our important contracts under long term
commitment and after consideration of available extensions, do not have any
significant contracts expiring in 2021.
Our ancillary lottery products and solutions also achieved a number of important
successes during the year including important sales of our PAC-MAN® themed
instant ticket lottery games in our licensed game product line and the very
successful launch of the contract to manage the Arizona Lottery’s ticket
distribution during the first quarter of 2020. These are good examples of
Pollard’s broad portfolio scope when it comes to servicing the lottery market and
enhances our position of partner of choice to successful lotteries worldwide.
Our charitable gaming and Diamond Game operations were impacted negatively
during the pandemic in 2020. During the second quarter, significant retail
closures were implemented across most of our markets where these products
are sold, significantly reducing our revenue. Many of the bars, restaurants and
bingo halls were reopened at the start to the third quarter and we were very
pleased to see strong consumer demand return, resulting in our revenue
returning to levels seen prior to COVID-19. During the fourth quarter, a number
of important jurisdictions once again implemented retail closures, further
impacting our revenue. As a net result, our charitable gaming and Diamond
game revenue for 2020 declined $23 million compared to 2019, a reduction of
26%. Subsequent to year end most of the jurisdictions allowed their retail outlets
to reopen and we are very pleased to note that consumer demand for our
products has been very strong.
Operations
During 2020 we achieved gross margin of $91.1 million, similar to the amount
earned in 2019. Higher gross margin from lottery, including iLottery operations,
was offset by the reduction of gross margin from charitable gaming and Diamond
Game operations due to the significant revenue reduction as a result of the
negative impact of COVID-19. Our gross margin percentage of 22.0% was lower
than our 2019 gross margin of 22.9% due to the reasons noted.
Administration and selling expenses both declined in 2020 when compared to
last year. Administration expenses were reduced overall $0.3 million versus last
year, or $1.3 million when the increases in acquisition related costs are factored
out. Reduced costs of travel and other related expenditures as a result of
COVID-19 was a key factor in the expense reduction. Similarly, our selling
expenses declined $1.3 million from 2019 reflecting lower travel and other related
marketing expenditures.
In 2020 we invested $18.9 million in capital and intangible expenditures,
continuing to improve our manufacturing efficiencies and build out important
digital assets. The total dollar amount invested was slightly lower than 2019 as
we took a cautious approach during the onset of the pandemic. We anticipate
our capital investment level will return to similar levels incurred in 2019 in the
upcoming year. Upgrades to our finishing lines were undertaken in 2020 to
expand and improve product handling and we continued to invest in upgrades to
our digital product offerings with major expenditures on our PlayOnTM loyalty
solution and ongoing investment in expanding our digital game portfolio.
Acquisitions
Acquisitions remain an important feature within our strategic plan and this past
year witnessed significant developments in growing our product offering and
adding expertise to our company through the completion of a number of
transactions.
On February 3, 2020, Pollard acquired 100% of the equity of mkodo Limited for a
consideration of £7.8 million ($13.4 million) prior to standard working capital
adjustments and potential earn-out payments based on certain EBITDA targets.
mkodo Limited, is a world leader in digital user experience and will allow us to
lever this expertise to help our customers build effective, direct connections with
their player base.
On December 30, 2020, Pollard acquired 100% of the equity of Compliant
Gaming LLC (“Compliant”) for consideration of US$19.0 million ($24.3 million)
prior to standard working capital adjustments and potential earn-out payments
based on certain EBITDA targets. The purchase of Compliant will further bolster
Pollard’s leading presence in the charitable gaming market by providing a new
solution offering for our existing portfolio, as Compliant’s portable, tablet-based
electronic pull-tab product is a strong complement to the Diamond Game kiosk-
based technology.
Subsequent to year-end, on January 14, 2021 Pollard acquired 100% of the
equity of Next Generation Lotteries AS (“NGL”) for consideration of €36.0 million
prior to standard working capital adjustments and certain deferred cash
consideration. Pollard paid €32.0 million ($50.0 million) at closing and the
remaining €4.0 million will be paid upon the achievement of specific gross margin
targets in 2021. Approximately €27.4 million of the purchase price was funded
from the Company’s existing cash resources and availability under its existing
senior credit facilities with an additional €4.6 million of the purchase price
satisfied by the issuance of 233,211 treasury shares.
NGL is a full solution supplier to the lottery industry, including providing a state-
of-the-art retail lotto system and iLottery platform. NGL has a proven track record
in the European iLottery space and in January 2021 was rewarded for its
outstanding products and service by having its largest customer, Loteria de
Catalunya, extend their contract for three more years to 2024. The purchase of
NGL will significantly expand Pollard’s product offering for both retail and iLottery
gaming and will be a strong complement to Pollard’s North American leading joint
venture, NeoPollard Interactive LLC.
Capital
The importance of our conservative approach to the management of capital was
underlined this past year when the uncertainty of the pandemic made the focus
on sustainable cash flow critical. Despite these business challenges, Pollard set
a record for the amount of cash generated from operating activities in 2020 with
$70.6 million, before capital expenditures and investments in working capital, up
36% from 2019. Coupled with our cautious management of expenditures on
capital and intangibles, our organic cashflow allowed us to maintain very low debt
leverage, while at the same time generating significant funds to contribute
significantly to the completion of our acquisitions. Our high cash conversion rate
of our earnings is a hallmark of our business and a cornerstone of our investment
philosophy.
On March 2, 2021, we completed a very successful bought deal offering and
raised approximately $34.5 million, before expenses,
in new equity, a
confirmation that our capital market strategy continues to be successful. These
funds were used to reduce debt incurred to complete our acquisitions and allows
Pollard to remain flexible and nimble regarding other investment opportunities
that we identify in the immediate future.
Conclusion
2020 was a very successful year for Pollard despite the challenges of COVID-19.
A number of financial records were attained, our businesses grew and we
completed a number of very important financial and strategic acquisitions to
enhance our position as partner of choice for the lottery and charitable gaming
markets. 2020 also highlighted the strength and resilience of the markets we
serve, and we believe both the near-term and long-term future looks very
positive.
The most important component of our past and future success are our
employees, now numbering over 2,000 strong, whose tireless determination and
work ethic we believe is unmatched. We are privileged to work with lotteries and
charitable organizations around the world who are focused on raising funds for
so many good causes, so important in these times. 2020 was a year to test all
supply chains and the strength and resolve shown by our supply partners
ensured our supply chains remained open and flexible under very trying
circumstances. Our fellow shareholders continue to support our pursuit of
excellence through their encouragement and allow us to continue to focus on the
long term success of the business. And of course, our Board of Directors provide
us important guidance and leadership to help us attain our strategic vision.
At our Annual General Meeting on May 14th, 2021, Dr. Jerry Gray will be retiring
from our Board of Directors. Jerry has been a vital part of our leadership since
our organization went public as an income trust back in 2005 and over these past
15 years has provided invaluable input, advice and great support to the Pollard
family, our executive team and indeed the entire organization. We would like to
extend our great appreciation and thanks to Jerry for his tremendous service and
all that he has done for Pollard.
To all of you, thank you very much, and together we are excited about the
possibilities before us in 2021.
Douglas Pollard
Co-Chief Executive Officer
John Pollard
Co-Chief Executive Officer
March 31, 2021
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 Executive Vice President of Richardson Financial Group Limited 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 RF Capital Group, Inc.,
Richardson Financial Group and Boyd Group Services Inc.. He graduated from the
University of Manitoba law school and is a Chartered Professional Accountant.
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, 2020
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
March 10, 2021
This management’s discussion and analysis (“MD&A”) of Pollard Banknote Limited (“Pollard”) for the year
ended December 31, 2020, is prepared as at March 10, 2021, and should be read in conjunction with the
accompanying audited financial statements of Pollard and the notes therein as at December 31, 2020.
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 years ended December 31, 2020 and 2019. All figures are in millions except for per share amounts.
2
POLLARD BANKNOTE LIMITED
Overview
Pollard Banknote Limited (“Pollard”) is one of the leading providers of products and services to lottery
and charitable gaming industries throughout the world. Management believes Pollard is the largest
provider of instant-win scratch tickets (“instant tickets”) based in Canada and the second largest producer
of instant tickets in the world. In addition, management believes Pollard is also the second largest bingo
paper and pull-tab supplier to the charitable gaming industry in North America and through its 50% joint
venture, the largest supplier of iLottery solutions to the U.S. lottery market.
Pollard produces and provides a comprehensive line of instant tickets and lottery services including:
licensed products, distribution, SureTrack® lottery management system, marketing, iLottery, interactive
digital gaming, including mkodo’s world class game apps, PlayOnTM loyalty programs, retail management
services, ScanACTIVTM, lottery ticket dispensers and play stations and vending machines including
charitable game systems marketed under the Diamond Game and Compliant Gaming 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’s lottery products are sold extensively throughout Canada, the United States and the rest of the
world, wherever applicable laws and regulations authorize their use. Pollard serves over 60 instant ticket
lotteries including a number of the largest lotteries throughout the world. Charitable gaming products
are mostly sold in the United States and Canada where permitted by gaming regulatory authorities.
Pollard serves a highly diversified customer base in the charitable gaming market of over 250 independent
distributors with the majority of revenue generated from repeat business.
Acquisitions
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 £7.8 million ($13.4 million) 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.
On February 6, 2020, Pollard entered into an agreement, approved by the courts, to acquire certain
assets which were being sold under a bankruptcy process. The transaction was subject to certain closing
conditions and closed 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. The total purchase
price, including transportation, disassembly and reassembly, and related costs, was $4.9 million.
On December 30, 2020, Pollard signed and closed a definitive agreement to purchase 100% of the equity
of Compliant Gaming, LLC (“Compliant”) for a purchase price of $19.0 million U.S. dollars ($24.3 million)
prior to standard working capital adjustments and potential future earn-out payments based on certain
EBITDA targets. Compliant is a leading provider of electronic pull-tab gaming systems and products to
the charitable gaming market.
On January 14, 2021, Pollard completed the previously announced acquisition of Next Generation
Lotteries AS (“NGL”). On December 31, 2020, Pollard signed a definitive agreement to acquire 100% of
the equity of NGL for a purchase price of €36.0 million ($56.5 million), prior to standard working capital
adjustments and certain deferred cash considerations, of which €32.0 million ($50.0 million) was paid at
3
the time of closing and the remaining €4.0 million ($6.3 million) of which will be paid upon the
achievement of certain gross margin targets in 2021. The purchase price was funded from existing Pollard
Banknote cash resources and availability under the existing credit facilities for approximately €27.4 million
($43.0 million) and the issuance of treasury shares of Pollard Banknote for approximately €4.6 million
($7.2 million).
Share offering
On February 9, 2021, Pollard announced that it had entered into an agreement with a syndicate of
underwriters to purchase, on a bought deal basis, 812,000 common shares of Pollard at a price of $36.95
per share. Pollard also granted the underwriters an over-allotment option exercisable at any time up to
30 days following the closing of the offering, to purchase up to an additional 121,800 common shares.
The offering, including the full over-allotment, closed on March 2, 2021. The total gross proceeds, prior
to any commissions and offering expenses, from the sale of 933,800 common shares was approximately
$34.5 million.
Pollard used the net proceeds to repay indebtedness under Pollard’s credit facility incurred in the recent
acquisitions of Compliant and NGL.
COVID-19
In March 2020, the World Health Organization declared a global pandemic known as COVID-19. Our
charitable and Diamond Game (“egaming”) businesses were negatively impacted with a large reduction
in sales in the second quarter with the temporary closure of many retail outlets; however, these sales
rebounded to pre-COVID levels in the third quarter with the re-opening of retail outlets. In the later part
of the fourth quarter a number of jurisdictions reenacted temporary retail closures, reducing our revenues
again. Many of these jurisdictions have reopened in early 2021, with consumer demand once again
returning strongly. In addition, Pollard’s main lottery products and services have shown significant
resilience throughout the pandemic, generating substantial cash flows from operating activities during
the year ended December 31, 2020. The extent of the pandemic’s effect on Pollard’s operational and
financial performance will depend on future developments, including the extent and duration of the
pandemic, both of which are uncertain and difficult to predict. As a result, it is not currently possible to
ascertain the overall financial impact on Pollard’s business. Pollard has significant cash resources and
unused credit facility available, which management believes will allow Pollard to support its operations
during the pandemic.
All Pollard facilities are now under some level of health state of emergency, or shelter-in-place order,
restricting business activities, movement of people, size of groups and instituting mandatory quarantine
for travelers. Wherever a shelter-in-place order or state of emergency has been declared, local and
federal authorities have identified, under specific acts, which essential industries remain open and active
until further notice. In all affected jurisdictions, Pollard is classified as an essential government supplier,
which has allowed Pollard to continue to operate throughout the pandemic. As of the date of this MD&A,
all Pollard facilities are operational and our supply chains have remained functional. Pollard is extremely
dedicated to providing a safe workplace in all facilities and is working to curb the spread of the virus
through implementation of extensive safety measures at all locations, including daily temperature checks
and health screening, extensive social distancing, restriction of visitors, work from home policies for
employees capable of doing so and use of electronic monitoring to ensure social distancing.
4
Product line breakdown of revenue
Year ended
December 31,
2020
Year ended
December 31,
2019
Lottery (1) (2)
Charitable (3)
Gaming systems (3)
84.1%
10.4%
5.5%
77.8%
14.2%
8.0%
(1) Includes Fastrak Retail (UK) Limited (“Fastrak”) which was acquired on May 1, 2019.
(2) Includes mkodo Limited (“mkodo”) which was acquired on February 3, 2020.
(3) Effective January 1, 2020, the Oasis egaming division was transferred from International Gamco (Charitable) to Diamond
Game (Gaming Systems), comparative figures have been restated.
Geographic breakdown of revenue
Year ended
December 31,
2020
Year ended
December 31,
2019
61%
19%
20%
60%
21%
19%
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, 2020.
5
SELECTED FINANCIAL INFORMATION
(millions of dollars, except per share information)
Year ended
December 31,
2020
Year ended
December 31,
2019
Year ended
December 31,
2018
Sales
Cost of sales
$414.1
$397.8
$331.9
323.1
306.7
256.2
Gross profit
Gross profit as a % of sales
Administration expenses
Administration expenses as a % of sales
Selling expenses
Selling expenses as a % of sales
(Gain) loss on NPi equity investment
(Gain) loss on NPi as a % of sales
Other income
Other income as a % of sales
91.0
22.0%
40.3
9.7%
14.6
3.5%
(1.6)
(0.4%)
(12.3)
(3.0%)
91.1
22.9%
40.6
10.2%
15.9
4.0%
4.0
1.0%
75.7
22.8%
32.2
9.7%
13.4
4.0%
2.6
0.8%
(2.0)
(0.5%)
(2.2)
(0.7%)
Unrealized foreign exchange (gain) loss
Unrealized foreign exchange (gain) loss
as a % of sales
(1.9)
(3.3)
4.6
(0.5%)
(0.8%)
1.4%
Net income
Net income as a % of sales
Adjusted EBITDA
Adjusted EBITDA as a % of sales
Net income per share (basic)
Net income per share (diluted)
33.3
8.0%
80.6
19.5%
$1.30
$1.28
22.0
5.5%
60.2
15.1%
$0.86
$0.86
14.9
4.5%
48.8
14.7%
$0.58
$0.58
6
December 31,
December 31,
December 31,
2020
2019
2018
Total Assets
Total Non-Current Liabilities
$404.6
$191.3
$352.3
$175.6
$305.6
$142.9
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(millions of dollars)
Net income
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange (gain) loss
Acquisition costs
Severance costs
Contingent consideration fair value
adjustment
Income taxes
Adjusted EBITDA
Lotteries and charitable gaming (1)
Diamond Game (1)
Adjusted EBITDA
Year ended
December 31,
2020
Year ended
December 31,
2019
Year ended
December 31,
2018 (2)
$33.3
$22.0
$14.9
31.5
4.8
(1.9)
2.2
-
(2.1)
12.8
$80.6
$74.2
6.4
$80.6
27.1
6.4
(3.3)
1.2
-
(0.2)
7.0
$60.2
$48.0
12.2
$60.2
18.0
4.2
4.6
0.8
0.4
-
5.9
$48.8
$38.0
10.8
$48.8
(1) Effective January 1, 2020, the Oasis egaming division was transferred from International Gamco (Charitable) to Diamond
Game (Gaming Systems), comparative figures have been restated.
(2) IFRS 16 Leases was implemented effective January 1, 2019. Qualifying leases are 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. Adjusted EBITDA has not been restated for 2018 to reflect IFRS 16’s impact.
7
REVIEW OF OPERATIONS
Financial and operating information has been derived from, and should be read in conjunction with, the
consolidated financial statements of Pollard and the selected financial information disclosed in this MD&A.
ANALYSIS OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 2020
Sales
Product Line Sales
Fiscal 2020
(in millions of dollars)
Lottery,
$348.4
Product Line Sales
Fiscal 2019
(in millions of dollars)
Charitable,
$43.2
Gaming
Systems,
$22.5
Lottery,
$309.4
Charitable,
$56.4
Gaming
Systems,
$32.0
During the year ended December 31, 2020 (“Fiscal 2020” or “2020”), Pollard achieved sales of $414.1
million, compared to $397.8 million in the year ended December 31, 2019 (“Fiscal 2019” or “2019”).
Factors impacting the $16.3 million sales increase were:
Higher sales from Michigan iLottery increased revenue in Fiscal 2020 by $17.1 million. Additionally, higher
ancillary lottery product sales further increased revenue by $10.0 million, primarily due to greater sales
of licensed products. As well, increased sales from digital and loyalty products, including revenue from
mkodo, and distribution services further contributed to the increase in ancillary sales. Partially offsetting
these increases was a decrease in Schafer’s and Fastrak’s merchandising product sales in 2020.
Charitable gaming sales volumes decreased by $13.4 million in 2020. As well, Diamond Game sales
decreased by $9.6 million in 2020 compared to 2019. Our charitable gaming and Diamond Game products
are sold at retail through various bars, veteran organizations and bingo halls, which were closed in the
middle of March in response to the onset of the COVID-19 virus. Many U.S. jurisdictions began to reopen
these retail locations towards the end of the second quarter, however, for the majority of the three
months ended June 30, 2020, our charitable gaming and egaming machine revenue was severely limited.
With the reopening of these locations our charitable gaming and Diamond Game revenues returned to
pre-COVID levels during the third quarter. However, a number of jurisdictions in Canada and the U.S.
once again temporarily shut down retail outlets starting in mid-November. Many of these jurisdictions
began to reopen in January and February 2021.
An increase in the instant ticket average selling price in Fiscal 2020, compared to 2019, increased sales
by $11.0 million. This increase was partially a result of record sales of Pollard’s proprietary Scratch FX®
product in 2020. Partially offsetting this increase, was a slight decrease in instant ticket sales volume in
2020, as compared to 2019, decreased sales by $1.9 million.
8
Sales Breakdown
Fiscal 2020
Sales Breakdown
Fiscal 2019
United
States
61%
International
20%
Canada
19%
United
States
60%
International
19%
Canada
21%
During Fiscal 2020, Pollard generated approximately 71.3% (2019 – 71.8%) of its revenue in U.S. dollars
including a portion of international sales which are priced in U.S. dollars. During Fiscal 2020 the actual
U.S. dollar value was converted to Canadian dollars at an average rate of $1.338 compared to an average
rate of $1.327 during Fiscal 2019. This 0.8% increase in the U.S. dollar value resulted in an approximate
increase of $2.4 million in revenue relative to Fiscal 2019. During 2020 the value of the Canadian dollar
weakened against the Euro resulting in an approximate increase of $0.8 million in revenue relative to
2019.
Cost of sales and gross profit
Cost of sales was $323.1 million in Fiscal 2020 compared to $306.7 million in Fiscal 2019. Cost of sales
was higher as a result of higher ancillary lottery products and services, including the addition of mkodo
in 2020. As well, higher exchange rates on U.S. dollar denominated transactions and increased
amortization and depreciation further increased cost of sales in 2020. These increases to cost of sales
were partially offset by the reduction in charitable and Diamond Game cost of sales due to reduced
revenue, predominately in the second quarter and the second half of the fourth quarter, related to
temporary COVID-19 closures, as well as reduced merchandising product sales in 2020.
Gross profit was $91.0 million (22.0% of sales) in Fiscal 2020 compared to $91.1 million (22.9% of sales)
in Fiscal 2019. This decrease of $0.1 million in gross profit was primarily the result of the significant
reduction in charitable and Diamond Game sales in 2020. In addition, a reduction in Fastrak and Schafer
merchandising product sales further reduced gross profit in Fiscal 2020. These decreases were
substantially offset by the significant increase in Michigan iLottery revenues and the higher instant ticket
average selling price. In addition, higher licensed products sales, as well as increased sales of digital and
loyalty products, further increased gross profit. The lower gross profit percentage was due to the
substantial reduction in charitable and Diamond Game sales, partially offset by increased Michigan
iLottery and licensed product sales.
Administration expenses
Administration expenses decreased to $40.3 million in Fiscal 2020 from $40.6 million in Fiscal 2019. The
decrease of $0.3 million was partially a result of the reduction in travel and conference related costs due
to COVID-19 and lower professional fees. These decreases were partially offset by higher acquisition
costs of $1.0 million, and greater compensation and licensing expenses to support Pollard’s growth
strategies of developing innovative digital products. Additionally, the inclusion of mkodo further increased
administration expenses.
9
Selling expenses
Selling expenses decreased to $14.6 million in Fiscal 2020 from $15.9 million in Fiscal 2019 primarily due
to the reduction in travel related costs due to COVID-19 and lower contract related costs. These decreases
in selling expenses were partially offset by the additions of mkodo and higher compensation costs.
(Gain) loss on equity investment
Pollard’s share of income from its 50% owned iLottery joint venture, NeoPollard Interactive LLC (“NPi”),
increased to $1.6 million in Fiscal 2020 from a loss of $4.0 in Fiscal 2019. This $5.6 million increase was
primarily due to the increase in revenue in 2020. Contracts held by NPi experienced significant organic
growth, in addition to the added sales increase from the Virginia Lottery operation when it went live with
e-Instants on July 1, 2020. In the spring of 2020, NPi was awarded a new contract with Alberta Gaming,
Liquor & Cannabis (“AGLC”), which went live with a limited product launch on September 30, 2020.
Other income
Other income increased to $12.3 million in Fiscal 2020 compared to $2.0 million in Fiscal 2019. The
increase of $10.3 million was primarily due to $9.0 million of Canada Emergency Wage Subsidy (“CEWS”)
recognized in 2020. In addition, the reversal of the contingent consideration accrued as part of our mkodo
acquisition increased other income by $2.1 million. These increases were partially offset by the $1.0
million reduction in the EBITDA support agreement in 2020, which expired on June 30, 2020.
Foreign exchange
The net foreign exchange gain was $0.9 million in Fiscal 2020 compared to a net gain of $2.8 million in
Fiscal 2019. The 2020 net foreign exchange gain consisted of a $1.9 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 $1.0 million as a
result of foreign currency denominated accounts receivable collected being converted into Canadian
dollars at unfavorable foreign exchange rates.
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.
Adjusted EBITDA
Adjusted EBITDA increased to $80.6 million in Fiscal 2020 compared to $60.2 million in Fiscal 2019. The
primary reasons for the increase of $20.4 million were the increase in other income (net of the reversal
of the contingent consideration) of $8.4 million, primarily due to the inclusion of $9.0 million in CEWS
support, and the increase in income from our 50% owned iLottery joint venture, NPi, of $5.6 million. In
addition, an increase in gross profit (net of amortization and depreciation) of $4.3 million increased
Adjusted EBITDA. Higher Michigan iLottery revenues and increased sales of ancillary lottery products
contributed to the increase in gross profit, which were partially offset by the reduction in gross profit
from reduced charitable and Diamond Game sales. Also, a decrease in administration expenses (net of
10
acquisition costs) of $1.3 million and lower selling expenses of $1.3 million further increased Adjusted
EBITDA. These increases to Adjusted EBITDA were partially offset by the increase in the realized foreign
exchange loss of $0.5 million.
Interest expense
Interest expense decreased to $4.8 million in Fiscal 2020 from $6.4 million in Fiscal 2019 primarily as a
result of the lower interest rates in 2020.
Amortization and depreciation
Amortization and depreciation, including amortization of intangible assets and depreciation of property
and equipment, totaled $31.5 million during Fiscal 2020 which increased from $27.1 million during Fiscal
2019. The increase of $4.4 million was primarily as a result of higher depreciation and amortization on
new property, plant and equipment and intangible assets, as well as the addition of mkodo, including the
amortization and depreciation relating to the identifiable assets acquired, including intangible assets and
property, plant and equipment.
Income taxes
Income tax expense was $12.8 million in Fiscal 2020, an effective rate of 27.8%, which was higher than
our domestic rate of 27.0% due primarily to non-deductible expenses. Partially offsetting these increases
in effective rate were the lower federal income tax rates in the United States and the non-taxable income
related to the reversal of contingent consideration, related to the acquisition of mkodo.
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.
Net income
Net income was $33.3 million in Fiscal 2020 compared to net income of $22.0 million in Fiscal 2019. The
primary reasons for the increase in net income of $11.3 million were increased income generated from
Michigan iLottery of $11.1 million and the increased contribution from our share of NPi joint venture of
$5.6 million. In addition, the increase in other income of $10.3 million, primarily due to the inclusion of
$9.0 million in CEWS support, further increased net income. In addition, the decrease in selling costs of
$1.3 million and the reduced interest expense of $1.6 million increased net income in 2020. These
increases were partially offset by a decrease in gross profit of $11.2 million, net of Michigan iLottery,
primarily as a result of the significant reductions in charitable gaming and Diamond Game sales. In
addition, the decrease in the foreign exchange gain of $1.9 million and the increase in income taxes of
$5.8 million further reduced net income.
Net income per share (basic and diluted) increased to $1.30 and $1.28 per share respectively in Fiscal
2020 from $0.86 per share in Fiscal 2019.
11
iLottery
Pollard and its iLottery partner, Neogames S.A. (“Neogames”), provide iLottery services to the North
American Lottery market. In 2013, Pollard was awarded an iLottery contract from the Michigan Lottery.
As a result, Pollard entered into a contract with Neogames to provide its technology in return for a 50%
financial interest in the operation. Under IFRS, Pollard recognizes its 50% share in the Michigan Lottery
contract in its consolidated statements of income in revenue and cost of sales.
In 2014 Pollard, in conjunction with Neogames, established NeoPollard Interactive LLC (“NPi”). All iLottery
related customer contracts, excluding the Michigan Lottery iLottery contract, have been awarded to NPi.
Under IFRS, Pollard accounts for its investment in its joint venture, NPi, as an equity investment. Under
the equity method of accounting, Pollard recognizes its share of the income and expenses of NPi
separately as (gain) loss on equity investment.
SELECT iLOTTERY RELATED FINANCIAL INFORMATION
Year ended December 31, 2020
Pollard’s share of
Michigan iLottery
NPi
Combined
Sales
Income before profit share and income
taxes
$33.5
$18.5
$12.6
$1.6
$46.1
$20.1
Year ended December 31, 2019
Pollard’s share of
Michigan iLottery
NPi
Combined
Sales
Income (loss) before profit share and
income taxes
$16.4
$7.4
$2.5
($4.0)
$18.9
$3.4
Sales recorded under Pollard’s share of Michigan iLottery are included in Pollard’s consolidated sales.
During 2020, with the onset of COVID-19, revenues from Pollard’s contract with the Michigan Lottery
increased substantially. Contracts held by NPi also experienced significant organic growth, in addition to
the added sales growth from the Virginia Lottery operation when it went live with e-Instants on July 1,
2020. In the spring of 2020, NPi was awarded a new contract with Alberta Gaming, Liquor & Cannabis
(“AGLC”), which went live with a limited product launch on September 30, 2020.
12
Liquidity and Capital Resources
Cash provided by operating activities
For the year ended December 31, 2020, cash flow provided by operating activities was $59.7 million
compared to $29.3 million in Fiscal 2019. Higher net income before income taxes and after non-cash
adjustments in Fiscal 2020 contributed $85.0 million to the cash provided by operating activities
compared to $69.6 million in Fiscal 2019.
In Fiscal 2020, increases in non-cash working capital used $11.0 million compared to increases in 2019
which used $22.3 million in cash, a $11.3 million difference. In 2020, changes in the non-cash component
of working capital decreased cash flow from operations due primarily to an increase in accounts receivable
and inventory. In 2019, changes in the non-cash component of working capital decreased cash flow from
operations due primarily to an increase in accounts receivable.
Cash used for interest payments decreased to $4.7 million in 2020 as compared to $6.4 million in 2019.
Cash used for pension plan contributions increased to $8.6 million in 2020 as compared to $7.4 million
in 2019. Cash used for income taxes paid was $1.1 million in 2020 compared to $4.0 million in 2019.
Cash used for investing activities
In the year ended December 31, 2020, cash used for investing activities was $61.7 million compared to
$38.3 million in the year ended December 31, 2019. In Fiscal 2020, Pollard used $15.3 million, net of
cash acquired, to purchase mkodo and $24.3 million to purchase Compliant. In addition, Pollard invested
$13.0 million in capital expenditures, $4.9 million to purchase certain charitable gaming assets and $6.0
million on additions to intangible assets. Partially offsetting these uses of cash, Pollard received $1.9
million from our investment in our iLottery joint venture in the year.
In Fiscal 2019, Pollard used $8.5 million, net of cash acquired, to purchase Fastrak. In addition, Pollard
invested $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.
Cash used for financing activities
Cash used for financing activities was $3.9 million in the year ended December 31, 2020, compared to
cash provided by financing activities of $5.6 million in the year ended December 31, 2019.
During Fiscal 2020, Pollard received net proceeds from long-term debt of $5.1 million. This receipt of
cash was offset by $5.1 million of lease principal payments and $4.1 million of dividends paid.
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 and $3.8 million of dividends paid.
As at December 31, 2020, Pollard’s unused committed credit facility was $75.7 million, in addition to $1.9
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.
13
RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2020
SELECTED FINANCIAL INFORMATION
(millions of dollars)
Sales
Cost of sales
Gross profit
Administration expenses
Selling expenses
(Gain) loss on equity investment
Other income
Income from operations
Foreign exchange gain
Interest expense
Income before income taxes
Income taxes:
Current (recovery)
Future
Net income
Adjustments:
Amortization and depreciation
Interest
Unrealized foreign exchange gain
Acquisition costs
Contingent consideration fair value adjustment
Income taxes
Adjusted EBITDA
Lotteries and charitable gaming (1)
Diamond Game (1)
Adjusted EBITDA
Three months ended
December 31, 2020
Three months ended
December 31, 2019
(unaudited)
(unaudited)
$103.7
80.7
23.0
$100.0
78.0
22.0
10.4
3.8
(1.6)
(3.7)
14.1
(3.2)
0.9
16.4
3.0
1.2
4.2
$12.2
7.7
0.9
(3.5)
0.9
(2.1)
4.2
$20.3
$18.2
2.1
$20.3
10.9
4.1
0.7
(0.5)
6.8
(1.0)
1.6
6.2
(0.9)
2.5
1.6
$4.6
7.1
1.6
(1.1)
0.6
(0.2)
1.6
$14.2
$11.2
3.0
$14.2
(1) Effective January 1, 2020, the Oasis egaming division was transferred from International Gamco (Charitable) to Diamond
Game (Gaming Systems), comparative figures have been restated.
14
Sales
During the three months ended December 31, 2020, Pollard achieved sales of $103.7 million, compared
to $100.0 million in the three months ended December 31, 2019. Factors impacting the $3.7 million
sales increase were:
Higher sales from Michigan iLottery increased revenue in the fourth quarter of 2020 by $4.2 million as
compared to the fourth quarter of 2019. Additionally, higher ancillary lottery products and services sales
further increased revenue by $0.4 million in 2020, including increased sales of digital and loyalty products,
revenue from mkodo and higher distribution services sales. Partially offsetting these increases were lower
license product sales and a decrease in Schafer’s and Fastrak’s merchandising product sales in the fourth
quarter of 2020.
Additionally, an increase in the instant ticket average selling price in the quarter compared to the fourth
quarter of 2019 increased sales by $4.6 million. This increase was a result of the positive sales mix in the
quarter, including higher sales of Pollard’s proprietary Scratch FX® product. Partially offsetting this
increase, was a decrease in instant ticket sales volume in the quarter which reduced sales by $2.7 million.
During the fourth quarter, the retail establishments where our charitable gaming products are sold, and
Diamond Game egaming machines are placed, once again temporarily closed in a number of key
jurisdictions due to COVID-19. As a result, when compared to 2019, charitable gaming sales volumes
decreased which reduced sales by $2.2 million and Diamond Game revenue decreased $1.3 million.
During the three months ended December 31, 2020, Pollard generated approximately 70.1% (2019 –
70.9%) 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 2020 the actual U.S. dollar value was converted to Canadian dollars
at an average rate of $1.319, compared to an average rate of $1.314 during the fourth quarter of 2019.
This 0.4% increase in the value of the U.S. dollar resulted in an approximate increase of $0.3 million in
revenue relative to 2019. During the fourth quarter of 2020 the value of the Canadian dollar weakened
against the Euro resulting in an approximate increase of $0.4 million in revenue relative to 2019.
Cost of sales and gross profit
Cost of sales was $80.7 million in the fourth quarter of 2020 compared to $78.0 million in the fourth
quarter of 2019. Cost of sales was higher as a result of higher sales of ancillary lottery products and
services, including the addition of mkodo in 2020. These increases were partially offset by a reduction in
charitable sales and, Fastrak and Schafer merchandising product sales.
Gross profit was $23.0 million (22.2% of sales) in the fourth quarter of 2020 compared to $22.0 million
(22.0% of sales) in the fourth quarter of 2019. This increase in gross profit was primarily the result of
the increase in Michigan iLottery sales and distribution services sales, as well as a result of the higher
instant ticket average selling price. These increases were partially offset by reduced charitable gaming
and merchandising product sales. The gross margin percentage in the fourth quarter of 2020 was higher
than 2019 primarily as a result of increased Michigan iLottery sales and the higher instant ticket average
selling price.
15
Administration expenses
Administration expenses decreased to $10.4 million in the fourth quarter of 2020 compared to $10.9
million in the fourth quarter of 2019. The decrease of $0.5 million was primarily a result of the reduction
in travel and conference related costs due to COVID-19 and lower compensation expenses in the fourth
quarter of 2020 due to the timing of incentive accruals. Partially offsetting these decreases were increased
acquisition costs of $0.3 million and higher compensation and licensing expenses to support Pollard’s
growth strategies of developing innovative digital products. Additionally, the inclusion of mkodo further
increased administration expenses in 2020.
Selling expenses
Selling expenses decreased to $3.8 million in the fourth quarter of 2020 from $4.1 million in the fourth
quarter of 2019. The decrease was primarily due to the reduction in travel related costs due to COVID-
19 and lower contract related costs. These decreases in selling expenses was partially offset by the
addition of mkodo.
(Gain) loss on equity investment
Pollard’s share of income from its 50% owned iLottery joint venture, NPi, increased to $1.6 million in the
fourth quarter of 2020 from a loss of $0.7 in the fourth quarter of 2019. This $2.3 million increase was
primarily due to the increase in revenue. Contracts held by NPi experienced significant organic growth,
in addition to the added sales increase from the Virginia Lottery operation when it went live with e-
Instants on July 1, 2020. In the spring of 2020, NPi was awarded a new contract with AGLC, which went
live with a limited product launch on September 30, 2020.
Other income
Other income increased to $3.7 million in the fourth quarter of 2020 compared to $0.5 million in the
fourth quarter of 2019. This increase of $3.2 million was due in part to $1.4 million of CEWS recognized
in the quarter. In addition, the reversal of the contingent consideration previously accrued with the mkodo
acquisition increased other income by $2.1 million. These increases were partially offset by the $0.5
million reduction in the EBITDA support agreement in 2020, which expired on June 30, 2020.
Foreign exchange
The net foreign exchange gain was $3.2 million in the fourth quarter of 2020 compared to a net gain of
$1.0 million in the fourth quarter of 2019. The 2020 net foreign exchange gain consisted of a $3.5 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 $0.3 million, as a result of foreign currency denominated accounts receivable collected
being converted into Canadian dollars at unfavorable foreign exchanges rates.
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.
16
Adjusted EBITDA
Adjusted EBITDA increased to $20.3 million in the fourth quarter of 2020 compared to $14.2 million in
the fourth quarter of 2019. The primary reasons for the $6.1 million increase in Adjusted EBITDA were
the increase in other income of $1.3 million (net of the reversal of the contingent consideration), primarily
due to the inclusion of $1.4 million in CEWS support, and the increase in our share of income from our
joint venture, NPi, of $2.3 million. In addition, the increase in gross profit of $1.6 million (net of
amortization and depreciation) further increased Adjusted EBITDA. Higher Michigan iLottery revenues
and increased sales of ancillary lottery products contributed to the increase in gross profit, which were
partially offset by the reduction in gross profit from reduced charitable gaming and Diamond Game sales.
Also, lower administration expenses (net of acquisition costs) of $0.8 million and a decrease in selling
expenses of $0.3 million increased Adjusted EBITDA. These increases were partially offset by the higher
realized foreign exchange loss of $0.2 million.
Interest expense
Interest expense decreased to $0.9 million in the fourth quarter of 2020 from $1.6 million in the fourth
quarter of 2019 primarily as a result of the lower interest rates in the fourth quarter of 2020 and the
decrease in long-term debt as compared to the fourth quarter of 2019.
Amortization and depreciation
Amortization and depreciation, including amortization of intangible assets and depreciation of property
and equipment, totaled $7.7 million during the fourth quarter of 2020 which increased from $7.1 million
during the fourth quarter of 2019. The increase was primarily as a result of higher amortization on new
intangible assets and the addition of mkodo, including the amortization and depreciation relating to the
identifiable assets acquired, including intangible assets and property, plant and equipment.
Income taxes
Income tax expense was $4.2 million in the fourth quarter of 2020, an effective rate of 25.5% which was
lower than our domestic rate of 27.0% due primarily to the non-taxable income related to the reversal
of contingent consideration, related to the acquisition of mkodo, the effect of foreign exchange and lower
federal income tax rates in the United States. Partially offsetting these reductions in effective rate was
the non-deductible expenses.
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.
Net income
Net income was $12.2 million in the fourth quarter of 2020 compared to $4.6 million in the fourth quarter
of 2019. The primary reasons for the increase in net income of $7.6 million were increased income
generated from Michigan iLottery of $2.9 million and the increased contribution from our share of NPi
joint venture of $2.3 million. In addition, the increase in other income of $3.2 million was primarily due
to $1.4 million of CEWS recognized in the quarter, and the reversal of the contingent consideration of
$2.1 million. The increase in the foreign exchange gain of $2.2 million, a decrease in administration
expenses of $0.5 million, lower selling costs of $0.3 million and the reduced interest expense of $0.7
17
million further increased net income in 2020. These increases were partially offset by a decrease in gross
profit of $1.9 million, net of Michigan iLottery, primarily as a result of the significant reductions in
charitable gaming and Diamond Game sales, as well as the increase in income taxes of $2.6 million.
Net income per share (basic and diluted) increased to $0.47 per share in the fourth quarter of 2020 from
$0.18 per share in the fourth quarter of 2019.
iLottery
SELECT iLOTTERY RELATED FINANCIAL INFORMATION
Three months ended December 31, 2020
Pollard’s share of
Michigan iLottery
NPi
Combined
Sales
Income before profit share and income
taxes
$8.6
$4.5
$6.1
$1.6
$14.7
$6.1
Three months ended December 31, 2019
Pollard’s share of
Michigan iLottery
NPi
Combined
Sales
Income (loss) before profit share and
income taxes
$4.4
$1.6
$1.2
($0.7)
$5.6
$0.9
During 2020, with the onset of COVID-19, revenues from Pollard’s contract with the Michigan Lottery
increased substantially. Contracts held by NPi also experienced significant organic growth, in addition to
the added sales growth from the Virginia Lottery operation when it went live with e-Instants on July 1,
2020. In the spring of 2020, NPi was awarded a new contract with AGLC, which went live with a limited
product launch on September 30, 2020.
Quarterly Information
(unaudited)
(millions of dollars)
Q4
2020
Q3
2020
Q2
2020
Q1
2020
Q4
2019
Q3
2019
Q2
2019
Q1
2019
Sales
$103.7
$116.7
$91.5
$102.2
$100.0
$103.2
$97.1
$97.5
Adjusted EBITDA
20.3
24.5
19.8
16.0
14.2
16.1
13.6
16.3
Net income (loss)
12.2
13.2
9.2
(1.3)
4.6
4.4
5.0
8.0
Adjusted EBITDA and net income were higher in the fourth quarter of 2020 as a result of higher ancillary
sales, including iLottery.
Sales, Adjusted EBITDA and net income were higher in the third quarter of 2020 as a result of higher
ancillary sales, including iLottery.
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Sales were lower in the second quarter of 2020 as a result of reduced charitable and Diamond Game’s
sales due to the impact of COVID-19 shutdowns.
Net loss for the first quarter of 2020 included a $6.2 million unrealized foreign exchange loss due to the
significant weakening of the Canadian dollar.
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 the 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, 2020, Pollard’s investment in non-cash working capital increased by $11.0 million
compared to December 31, 2019, primarily a result of the increased investment in accounts receivable
and inventories.
December 31, December 31,
2020
2019
Working Capital
Total Assets
Total Non-Current Liabilities
$69.8
$404.6
$191.3
$79.2
$352.3
$175.6
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, 2020, the outstanding letters of guarantee were $0.7 million. The remaining balance
available for drawdown under the credit facility was $75.7 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, depreciation
19
and certain other items (“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As at
December 31, 2020, 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.
Economic Development Canada (“EDC”) Facility
Effective February 28, 2020, Pollard entered into an agreement with EDC to provide a €15.0 million facility
whereby Pollard can issue qualifying letters of credit against the EDC facility. This facility is guaranteed
by a general indemnity from Pollard. As of December 31, 2020, the outstanding letters of credit drawn
on this facility were $11.0 million (€7.0 million).
Outstanding Share Data
As at December 31, 2020, outstanding share data was as follows:
Common shares
25,706,908
As at March 10, 2021, outstanding share data was as follows:
Common shares
26,886,419
On January 14, 2021, 233,211 common shares were issued as a portion of the consideration of Pollard’s
purchase of NGL.
On February 10, 2021, 12,500 common shares were issued through the exercise of stock options.
On March 2, 2021, 933,800 common shares were issued as a result of a share offering.
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. As at December 31, 2020, the total share options issued and
outstanding were 331,250.
20
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
2021
2022
2023
2024
2025 &
thereafter
Long-term debt
$136.6
$2.6
$134.0
-
-
-
Leases
Total
Pension Obligations
$19.4
$6.0
$5.4
$4.4
$1.6
$2.0
$156.0
$8.6
$139.4
$4.4
$1.6
$2.0
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, 2020, the aggregate fair value of the assets of Pollard’s
defined benefit pension plans was $77.4 million and the accrued benefit plan obligations were $113.7
million. Pollard’s total annual funding contribution for its defined pension plans in 2021 is expected to be
approximately $4.9 million, compared to $7.3 million in 2020. Included in the 2020 contributions was
$2.7 million in additional solvency payments. For 2021, Pollard is not required to make 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,
2019 valuation there was a deficit of $13.9 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 $2.7 million in 2021, with the entire deficit being repaid 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. On December 22, 2020, the
Province of Manitoba announced it would temporarily provide funding relief for special payments through
2021. As a result, Pollard notified its plan members that it will defer its special payments for 2021.
Off-Balance Sheet Arrangements
Other than the operating leases described previously, Pollard has no other off-balance sheet
arrangements.
21
Related Party Transactions
Pollard Equities Limited and affiliates
During the year ended December 31, 2020, Pollard paid property rent of $3.4 million (2019 - $3.2 million)
and $0.2 million (2019 - $0.4 million) in plane charter costs to affiliates of Equities.
During the year ended December 31, 2020, Equities paid Pollard $0.07 million (2019 - $0.07 million) for
accounting and administration fees.
At December 31, 2020, Pollard owed Equities and its affiliates $0.5 million (2019 - $0.5 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, 2020, the net book value of the right-
of-use assets was $7.7 million (2019 - $10.8 million) and the present value of the lease liabilities was
$7.9 million (2019 - $11.8 million).
Neogames S.A. and affiliates
During the year ended December 31, 2020, Pollard reimbursed operating costs and paid software
royalties of $9.6 million (2019 - $5.7 million) to its iLottery partner, which are recorded in cost of sales.
At December 31, 2020, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $2.0 million (2019 - $0.1 million) for its share of profits and reimbursement
of operating costs, net of capital investments.
At December 31, 2020, included in restricted cash and accounts payable and accrued liabilities is an
amount owing to Pollard’s iLottery partner of $4.8 million (2019 - $2.6 million) for funds relating to
contractual performance guarantees.
Critical Accounting Policies and Estimates
Described in the notes to Pollard’s 2020 audited consolidated financial statements are the accounting
policies and estimates that Pollard believes are critical to its business. Please refer to note 2 (d) to the
audited consolidated financial statements for the year ended December 31, 2020, for a discussion of the
significant accounting estimates and judgements.
Future Changes in Accounting Policies
Described in the notes to Pollard’s 2020 audited consolidated financial statements are the future
accounting standards that Pollard believes are potentially applicable to its business. Please refer to note
4 in the audited consolidated financial statements for the year ended December 31, 2020 for a summary.
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 10, 2021, which is available under Pollard’s profile on SEDAR
(www.sedar.com).
22
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 $0.2 million for the
year ended December 31, 2020 (2019 - $0.04 million). A 50 basis point strengthening/weakening in the
foreign exchange rate between the Canadian dollar and Euro would decrease/increase the income before
23
income taxes due to changes in operating cashflow by approximately $0.07 million for year ended
December 31, 2020 (2019 - $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, 2020, the amount of financial liabilities denominated in U.S. dollars exceeded the
amount of financial assets denominated in U.S. dollars by approximately $52.6 million (2019 - $27.9
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 $0.3
million (2019 - $0.1 million) for the year ended December 31, 2020.
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign currency
risk. At December 31, 2020, 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 $0.7 million for the year ended December 31, 2020 (2019 - $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, 2020, the unused balance available
for drawdown was $75.7 million (2019 - $69.7 million).
The 2021 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.
Outlook
Lottery sales in the retail marketplace continue to be very strong in early 2021 and show no indication
that this trend will change in the near future. In particular, instant tickets have continued to show
significant year over year growth so far in 2021. Continued retail growth is driven by a number of factors
that don’t necessarily translate directly into similar growth in volumes at the manufacturing level, like
higher retail price points. However, ultimately higher retail sales do translate to positive impacts on
Pollard’s revenue through greater sales in proprietary products such as Scratch FX®, additional ancillary
lottery product revenue, such as interactive digital support or licensed games, as well as positive impacts
on instant ticket volumes. We believe we will continue to benefit from the continued growth in retail
sales of instant lottery tickets going forward.
24
The importance of iLottery as a new revenue source for lotteries was confirmed with its significant growth
during 2020 and we expect this trend to continue. We believe existing iLottery operations will continue
to increase their organic growth through higher penetration of overall lottery sales as well as drawing in
new players to lottery. In addition, greenfield opportunities to initiate new iLottery operations for lotteries
currently not served by this solution, particularly in the United States, will generate new revenue
opportunities. New iLottery opportunities develop slowly however, reflecting the complexity of the
solution and many legislative and operational factors that Lotteries must consider.
The COVID-19 pandemic continues to impact all aspects of our lives and business. While our products
and services have overall shown considerable resilience to these challenges, there are still aspects of our
business that are negatively impacted. In the middle of the fourth quarter of 2020 a number of key
jurisdictions implemented temporary retail shutdowns, which reduced our revenue in the charitable
gaming and Diamond Game businesses. While a number of these jurisdictions reopened in early 2021,
with retail consumer behavior returning strongly, the impact of further closures or other actions brought
on due to COVID-19 remains uncertain. These events could have a negative impact, possibly significant,
on charitable gaming, Diamond Game or other aspects of Pollard’s business. We are unable to quantify
the effect on Pollard’s financial results should ongoing restrictions or closures expand to more parts of
the economy for extended periods of time.
We remain extremely focused on ensuring a safe and healthy environment for all of our staff as our top
priority. Our formal pandemic planning team continues to be proactive in ensuring the safety of all our
staff, and they ensure the most up to date guidance from local health authorities are followed or exceeded
in all instances. Among our continuing policies are extensive remote work from home policies in place
at all our facilities, detailed temperature and health screenings utilized daily, restricted access to our sites
for non-Pollard staff, mandatory mask wearing and the use of electronic contact tracing tools to manage
social distancing. These and other processes are the foundation of our COVID-19 response.
On January 14, 2021 we completed the acquisition of Next Generation Lotteries AS (“NGL”), a full solution
supplier to the lottery industry, including providing a state-of-the-art retail lotto system and iLottery
platform. Both NGL and Compliant Gaming LLC, our December 2020 acquisition, are early in the
integration phase and we are confident of their long term strategic importance to the growth of our
business. We will continue to follow our strategic plan to enhance our current business offerings through
identifying and pursuing other acquisitions.
We will also continue to invest in our business through internal development of additional digital solutions
as well as ensuring sufficient CAPEX to act on our organic growth opportunities and support new
initiatives. Our CAPEX and investments in intangibles were lower in 2020 partly due to a conservative
approach in light of the initial unknown impacts of COVID-19. We expect our expenditures in 2021 to
be higher than 2020 as we continue investing in both short-term and long-term opportunities. Our ability
to convert a significant portion of EBITDA to cash provides a strong internal source of funding. We do
not anticipate qualifying for any significant subsidies under the Canada Emergency Wage Subsidy
program during 2021.
On March 2, 2021, we completed a bought deal offering for 933,800 common shares that raised
approximately $34.5 million, before expenses, with the net proceeds being used to pay down debt
incurred to fund our recent acquisitions, freeing up additional funds to reinvest in our businesses.
The outlook of both the lottery and charitable gaming industries is very positive, and we believe the
positive trends experienced in 2020 will continue in 2021 and beyond. Our strategic plan has guided us
to make the proper investments in our products and solutions to grow our partnership with our existing
25
and new clients. We will ensure the appropriate resources are available to continue to be the partner for
choice for lotteries and charitable gaming organizations around the world.
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 mkodo and Compliant, as they were 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 mkodo and
Compliant, as they were 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, 2020, 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, 2020, is available on SEDAR at
www.sedar.com.
Pollard Banknote Limited
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474-2323
www.Pollardbanknote.com
26
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 10, 2021
ROBERT ROSE
Chief Financial Officer
Consolidated Financial Statements of
POLLARD BANKNOTE
LIMITED
Years ended December 31, 2020 and 2019
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, 2020 and December 31,
2019, 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, 2020 and December 31, 2019, 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our
audit of the financial statements for the year ended December 31, 2020. These matters were addressed in
the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
We have determined the matters described below to be the key audit matters to be communicated in our
auditors’ report.
Evaluation of intangible assets acquired in the mkodo Limited and Compliant Gaming, LLC
acquisitions
Description of the matter
We draw attention to Notes 2(d), 3(b), 5(a) and 5(c) to the financial statements. On February 3, 2020, the
Entity acquired mkodo Limited (mkodo) for total consideration of $17,447 thousand, which is net of cash
acquired and debt assumed.
KPMG LLP 1900 - 360 Main Street Winnipeg MB R3C 3Z3Telephone (204) 957-1770 Fax (204) 957-0808 www.kpmg.ca © 2020 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. On December 30, 2020, the Entity acquired Compliant Gaming, LLC (Compliant) for total consideration of
$29,588 thousand. In connection with the mkodo transaction, the Entity recorded customer relationships,
technology and brand and in connection with the Compliant transaction, the Entity recorded customer
relationships, game library and software (collectively, the “intangible assets”). The acquisition date fair value
for the mkodo intangible assets was $8,127 thousand. The acquisition date fair value for the Compliant
intangible assets was $17,389 thousand. The Entity’s significant assumptions used in determining the
acquisition date fair value for the intangible assets include:
projected revenue growth rates;
projected gross profit;
the discount rates.
Why the matter is a key audit matter
We identified the evaluation of the acquisition date fair value of the intangible assets acquired in the mkodo
and Compliant transactions as a key audit matter. We identified this as a key audit matter because
significant auditor judgment was required in evaluating the audit evidence obtained relating to the significant
assumptions noted above. The estimated fair value of the intangible assets acquired is sensitive to possible
changes to these significant assumptions.
How the matter was addressed in the audit
The primary procedures we performed to address this key audit matter included the following:
To assess the Entity’s projected revenue growth rates and projected gross profit, we compared the
assumptions to mkodo’s and Compliant’s historical actual results. We also considered the Entity’s expected
synergies and cost savings after integration.
We involved valuation professionals with specialized skills and knowledge, who evaluated the discount
rates by comparing them to discount rate ranges that were independently developed using publicly available
information for comparable entities.
Evaluation of the goodwill impairment analysis for cash generating units
Description of the matter
We draw attention to Notes 2(d), 3(l) and 10 to the financial statements. The goodwill balance as of
December 31, 2020 was $89,276 thousand related to the Lotteries, Charitable gaming, Diamond Game
and Retail cash generating units and groups of cash generating units (CGUs). The Entity performs goodwill
impairment testing at least on an annual basis. This requires an estimation of the recoverable amount of
each CGU based on the greater of the “value in use” or “fair value less costs to sell” of the CGU. The
determination of each of these amounts require the Entity to make significant estimates and assumptions
which include projected revenue and discount rates.
Why the matter is a key audit matter
We identified the evaluation of the goodwill impairment analysis for the CGUs as a key audit matter. This
matter represented an area of significant risk of misstatement given the magnitude of the goodwill balance.
This matter required significant auditor judgment in evaluating the results of our audit procedures due to
the high degree of estimation uncertainty involved in the Entity’s estimates and assumptions.
How the matter was addressed in the audit
The primary procedures we performed to address this key audit matter included the following:
We compared the Entity’s historical revenue estimates to actual results to assess the Entity’s ability to
accurately project revenue assumptions.
We evaluated the Entity’s projected revenue assumptions by comparing those assumptions to the Entity’s
expected growth rates. We took into account changes in conditions and events affecting each CGU to
assess the adjustments or lack of adjustments made in arriving at projected revenue.
We involved valuation professionals with specialized skills and knowledge to assist in assessing the
discount rates used in the estimated recoverable amounts, by comparing them to discount rate ranges that
were independently developed using publicly available information for comparable entities.
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 2020”.
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.
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 2020” 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 10, 2021
Pollard Banknote Limited
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
Assets
Current assets
Cash
Restricted cash
Accounts receivable
Inventories (note 6)
Prepaid expenses and deposits
Income tax receivable
Total current assets
Non-current assets
Property, plant and equipment (note 7)
Equity investment (note 9)
Goodwill (note 10)
Intangible assets (note 11)
Deferred income taxes (note 12)
Total non-current assets
December 31,
2020
December 31,
2019
$
$
1,888
19,058
66,037
46,620
6,707
338
140,648
96,396
881
89,276
74,146
3,220
263,919
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
Total assets
$
404,567
$
352,265
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 8)
Total current liabilities
Non-current liabilities
Long-term debt (note 13)
Other non-current liabilities
Pension liability (note 14)
Lease liabilities (note 8)
Deferred income taxes (note 12)
Total non-current liabilities
Shareholders’ equity
Share capital (note 15)
Reserves
Retained earnings
Total shareholders’ equity
Commitments and contingencies (note 16)
Subsequent events (note 28)
December 31,
2020
December 31,
2019
$
59,433
1,028
4,941
379
5,109
70,890
$
47,368
1,025
641
–
4,375
53,409
131,080
1,322
36,370
11,832
10,690
191,294
109,007
2,563
30,813
142,383
127,295
337
26,547
11,554
9,839
175,572
108,642
5,705
8,937
123,284
Total liabilities and shareholders’ equity
$
404,567
$
352,265
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
(Gain) loss on equity investment (note 9)
Other income (note 18)
Income from operations
Finance costs (note 19)
Finance income (note 19)
Income before income taxes
Income taxes (note 12)
Current
Deferred
2020
2019
$
414,134
$
397,839
323,089
91,045
40,311
14,644
(1,587)
(12,364)
50,041
10,924
(7,025)
46,142
10,955
1,899
12,854
306,733
91,106
40,625
15,912
3,942
(1,987)
32,614
7,544
(3,931)
29,001
2,136
4,848
6,984
Net income
Net income per share (basic) (note 20)
Net income per share (diluted) (note 20)
$
$
$
33,288
$
22,017
1.30 $
1.28
$
0.86
0.86
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
$
33,288
$
22,017
2020
2019
Other comprehensive loss:
Items that are or may be reclassified to profit and loss
Foreign currency translation differences – foreign
operations
Items that will never be reclassified to profit and loss
Defined benefit plans remeasurements, net of
income tax (note 12 & note 14)
Other comprehensive loss
Comprehensive income
See accompanying notes to consolidated financial statements.
(3,142)
(6,993)
(7,649)
(10,791)
(5,409)
(12,402)
$
22,497
$
9,615
Pollard Banknote Limited
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)
Year ended December 31, 2020
Share
capital
Translation
reserve
Retained
earnings
Total
equity
Balance at December 31, 2019
$
108,642
5,705
8,937
123,284
Net income
Other comprehensive loss
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax (note 12 & note 14)
Total other comprehensive loss
Total comprehensive income (loss)
Issue of common shares (note 15)
$
$
Share based compensation
Dividends (note 15)
–
–
–
–
–
365
–
–
–
33,288
33,288
(3,142)
–
(3,142)
–
(7,649)
(7,649)
(3,142)
(3,142)
(7,649)
25,639
(10,791)
22,497
–
–
–
(67)
409
298
409
(4,105)
(4,105)
Balance at December 31, 2020
$
109,007
2,563
30,813
142,383
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
Total other comprehensive loss
Total comprehensive income (loss)
$
$
Issue of common shares
Share based compensation
Dividends
–
–
–
–
–
37
–
–
–
22,017
22,017
(6,993)
–
(6,993)
–
(5,409)
(5,409)
(6,993)
(6,993)
(5,409)
16,608
(12,402)
9,615
–
–
–
(18)
114
19
114
(4,102)
(4,102)
Balance at December 31, 2019
$
108,642
5,705
8,937
123,284
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Years ended December 31
Cash increase (decrease)
Operating activities
Net income
Adjustments
Income taxes
Amortization and depreciation
Interest expense
Unrealized foreign exchange gain
Loss (gain) on equity investment (note 9)
Pension expense (note 14)
Contract liabilities
Contingent consideration (note 18)
Interest paid
Income tax paid
Pension contributions
Change in non-cash operating working capital
(note 22)
Investing activities
Additions to property, plant and equipment (note 7)
Acquisition of Fastrak Retail (UK) Limited
Acquisition of mkodo Limited (note 5)
Acquisition of Compliant Gaming, LLC (note 5)
Charitable gaming asset purchase (note 5)
Proceeds from sale of equipment
Equity (investment) distribution (note 9)
Additions to intangible assets (note 11)
Financing activities
Proceeds from issue of share capital
Net proceeds from long-term debt (note 13)
Change in other non-current liabilities
Deferred financing charges paid (note 13)
Lease principal payments
Dividends paid
Foreign exchange gain (loss) on cash held in foreign currency
Change in cash
Cash, beginning of year
Cash, end of year
See accompanying notes to consolidated financial statements.
2020
2019
$
33,288
$
22,017
12,854
31,467
4,841
(1,894)
(1,587)
8,145
–
(2,137)
(4,713)
(1,053)
(8,587)
(10,973)
59,651
(12,957)
–
(15,349)
(24,349)
(4,895)
–
1,860
(5,978)
(61,668)
298
5,055
32
(128)
(5,098)
(4,102)
(3,943)
400
(5,560)
7,448
6,984
27,138
6,415
(3,361)
3,942
6,476
(43)
(192)
(6,372)
(3,988)
(7,413)
(22,308)
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
$
1,888
$
7,448
Pollard Banknote Limited
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
1.
Reporting entity:
Pollard Banknote Limited (“Pollard”) was incorporated under the laws of Canada on March 26, 2010.
The address of Pollard’s registered office is 140 Otter Street, Winnipeg, Manitoba, Canada, R3T 0M8.
The consolidated financial statements of Pollard as at and for the year ended December 31, 2020,
comprise Pollard, Pollard’s subsidiaries and its interest in other entities. Pollard is primarily involved
in the manufacture and sale of lottery and charitable gaming products.
The controlling entity of Pollard is Pollard Equities Limited (“Equities”), a privately held company.
Equities owned approximately 67.3% of Pollard’s outstanding shares as at December 31, 2020.
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 10, 2021, 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.
The contingent consideration liability is recognized at the present value of the expected
payments to be made under the agreement.
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, 2020 and 2019
2. Basis of preparation (continued):
(c) COVID-19:
In March 2020, the World Health Organization declared a global pandemic known as COVID-19.
Our charitable and Diamond Game (“egaming”) businesses were negatively impacted with a large
reduction in sales in the second quarter with the temporary closure of many retail outlets;
however, these sales rebounded to pre-COVID levels in the third quarter with the re-opening of
retail outlets. In the later part of the fourth quarter a number of jurisdictions reenacted temporary
retail closures, reducing our revenues again. Many of these jurisdictions have reopened in early
2021, with consumer demand once again returning. In addition, Pollard’s main lottery products
and services have generated substantial cash flows from operating activities during the year
ended December 31, 2020. The extent of the pandemic’s effect on Pollard’s operational and
financial performance will depend on future developments, including the extent and duration of
the pandemic, both of which are uncertain and difficult to predict. As a result, it is not currently
possible to ascertain the overall financial impact on Pollard’s business. Pollard has cash resources
and unused credit facility available, which management believes will allow Pollard to support its
operations during the pandemic.
All Pollard facilities are now under some level of health state of emergency, or shelter-in-place
order, restricting business activities, movement of people, size of groups and instituting
mandatory quarantine for travelers. Wherever a shelter-in-place order or state of emergency has
been declared, local and federal authorities have identified, under specific acts, which essential
industries remain open and active until further notice. In all affected jurisdictions, Pollard is
classified as an essential government supplier, which has allowed Pollard to continue to operate
throughout the pandemic. As of the date of the consolidated financial statements, all Pollard
facilities are operational. Pollard is extremely dedicated to providing a safe workplace in all
facilities and is working to curb the spread of the virus through implementation of extensive
safety measures at all locations, including daily temperature checks and health screening,
extensive social distancing, restriction of visitors, work from home policies for employees capable
of doing so and use of electronic monitoring to ensure social distancing.
(d) Use of estimates and judgments:
The preparation of the consolidated financial statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets, liabilities, income and expenses.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates
are recognized prospectively. Actual results may differ from these estimates.
Information about judgments, assumptions and estimation uncertainties that have a significant
risk of resulting in a material adjustment within the next period are as follows:
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
2. Basis of preparation (continued):
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”), or groups of CGUs, to which goodwill is allocated. Estimating value in use requires
Pollard to make estimates of the expected future cash flows from the CGUs, or groups of CGUs,
to which goodwill is allocated. Pollard also chooses suitable discount rates 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 CGUs 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 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.
Further details are provided in note 8.
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 and assumptions
are used to calculate the fair value of these assets and liabilities. Changes to assumptions could
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
2. Basis of preparation (continued):
significantly impact the fair values of certain assets, such as intangible assets. Pollard’s
significant assumptions used in determining the acquisition date fair value of intangible assets
include projected revenue and related gross profit, discount rates and projected revenue
growth rates.
3.
Significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements.
(a) Principles of consolidation:
These consolidated financial statements include the accounts of Pollard and all its subsidiaries.
Subsidiaries are entities which are under Pollard’s control, where control is defined as the power
to govern financial and operating policies of an entity so as to obtain benefits from its activities.
Pollard holds 100% of the voting rights in, and therefore controls, its subsidiaries.
Significant subsidiaries:
Percent Ownership Interest
December 31, 2020
December 31, 2019
Pollard Holdings, Inc.
Pollard (U.S.) Ltd.
Pollard Games, Inc.
Pollard iLottery Inc.
Diamond Game Enterprises
Diamond Game Enterprises Canada ULC
Schafer Systems (2018) Inc.
Fastrak Retail (UK) Limited
mkodo Limited
Compliant Gaming, LLC
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
–
–
All inter-company balances and transactions, and any unrealized income and expenses arising
from inter-company transactions, have been eliminated.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
(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 and equity instruments given, 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.
As at January 1, 2020, Pollard applied the 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.
(c) Restricted cash:
Pollard, under certain contractual arrangements, controls cash that is restricted in use. Pollard
records an equal liability classified within accounts payable and accrued liabilities. Restricted cash
includes player deposits held for the benefit of one of Pollard’s iLottery customers, 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
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
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 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. Any
amounts recognized as revenue but not yet billed to the customer are recorded as contract assets
and included within accounts receivable.
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. Labour costs associated with performing routine
maintenance on participating gaming machines is expensed as incurred and included in cost of
sales.
Contract liabilities consist of customer advances for services to be rendered in the future and is
recognized as income in future periods.
Volume rebates are accrued and recorded as a reduction to sales based on historical experience
and management’s expectations regarding future sales volumes.
(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,
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
the cost of work-in-process and finished goods, which Pollard manufactures, also includes an
appropriate share of production overheads based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion.
(f) Goodwill:
Goodwill is comprised of the excess sale price over the underlying carrying amount of the net
assets sold as at August 5, 2005, as part of the 26.7% of Pollard sold in conjunction with the
Initial Public Offering (“IPO”) and the excess fair value of the consideration transferred over the
fair value of the identifiable net assets acquired of Pollard’s subsidiaries.
(g) Intangible assets:
Expenditures related to internally generated intangible assets are recognized as intangible assets
only if Pollard can demonstrate that the 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.
Deferred development
Deferred development consists of the cost of materials, direct labour and related employee
benefits that are directly attributable to preparing the asset for its intended use and applicable
borrowing costs incurred in respect of qualifying assets. Other development expenditures are
expensed as incurred.
Capitalized development expenditures are measured at cost less investment tax credits (including
scientific research and experimental development (“SR&ED”) credits), accumulated amortization
and accumulated impairment losses.
Computer software and licenses
Computer software consists of the cost of acquiring, developing and implementing these systems.
Development and implementation costs include third party costs as well as direct labour and
related employee benefits 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
Capitalized computer software costs and licenses are measured at cost less investment tax credits
(including SR&ED credits), 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.
Intangible assets, with finite useful lives, are amortized, on a straight-line basis, over their
estimated useful lives as follows:
Asset
Customer assets
Patents
Computer software and licenses
Deferred development
Rate
7 to 20 years
Term of patent
3 to 15 years or term of license
5 years
Amortization methods, estimated useful lives and residual values are reviewed each annual
reporting date and adjusted prospectively if appropriate.
The carrying value of finite useful life intangibles are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable.
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 tested for impairment on an annual basis.
(h) Property, plant and equipment:
Property, plant and equipment (“PP&E”) are stated at cost less investment tax credits (including
SR&ED credits), accumulated depreciation and accumulated impairment losses. Cost includes
expenditures that are directly attributable to the acquisition of the asset. The cost of self-
constructed assets includes the cost of materials, direct labour and related employee benefits,
other costs directly attributable to bringing the assets to working condition for their intended use
and borrowing costs incurred in respect to qualifying assets.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
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.
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 agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require consent of both parties.
The consolidated financial statements include Pollard’s share of the income and expenses and
equity movements of the entity accounted for under the equity method of accounting.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
(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.
(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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
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.
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
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, or group of CGUs, exceeds its estimated
recoverable amount.
The recoverable amount of an asset, CGU, or group of CGUs 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, CGU, or group of
CGUs. Pollard calculates fair values using appropriate valuation techniques, which are generally
based on a forecast of expected future cash flows for intangible assets, and on a replacement
cost approach, an income-based approach and/or a market-based approach for property, plant
and equipment. These valuations are closely related to the assumptions made by management
about the future return on the related assets and the discount rate applied.
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 or groups of CGUs are allocated first to reduce the carrying amount of any goodwill
allocated, and then to reduce the carrying amounts of the other assets in the CGU or group of
CGUs 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 shares are classified as equity. Incremental costs directly attributable to the issue of
common shares are recognized as a deduction from equity, net of any tax effects.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
(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.
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.
Entities are permitted to make an accounting policy election when accounting for share-based
payment awards that could be accounted for as having been either forfeited or cancelled. Pollard
has elected to treat such circumstances as forfeitures of awards. Refer to note 15.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
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’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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
(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.
(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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
3.
Significant accounting policies (continued):
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to be received under it. If Pollard has a
contract that is onerous, the present obligation under the contract shall be recognized and
measured as a provision.
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 comprises interest expense on borrowings including amortization of deferred
financing costs, interest expense on lease liabilities, accretion of contingent consideration, 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:
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, 2020 and 2019
3.
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.
Pollard presents right-of-use assets in “property, plant and equipment” on the statement of
financial position.
Pollard accounts for short-term and low value leases by applying the recognition exemption
available under IFRS 16.
Pollard’s leases are for offices, manufacturing facilities, production equipment and office
equipment.
(t) Government Grants and Disclosure of Government Assistance:
Government subsidies are recognized on an accrual basis when there is reasonable assurance
that Pollard will comply with the conditions required to qualify for the subsidy and that the
collection of the subsidy is also reasonably assured. Government subsidies are recognized on the
consolidated statements of income as an item included within other income over the periods in
which the expense that the subsidy is intended to offset are recognized.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
4.
Future accounting standards:
(a) Amendments to IAS 1 – classification of liabilities as current or non-current:
In January 2020, the International Accounting Standards Board (“IASB”) issued amendments to
IAS 1 Presentation of Financial Statements to clarify the classification of liabilities as current or
non-current. For the purposes of non-current classification, the amendments removed the
requirement for a right to defer settlement or roll over a liability for at least twelve months to be
unconditional. The amendments are effective for annual periods beginning on or after January
1, 2023. Pollard is currently assessing the impact of the amendment on its consolidated financial
statements.
(b) Amendments to IAS 16 – proceeds before intended use:
In May 2020, the IASB issued Property, Plant and Equipment Proceeds before Intended Use
(Amendments to IAS 16). The amendments provide guidance on the accounting for sale proceeds
and related production costs for items a company produces and sells in the process of making
an item of property, plant and equipment available for its intended use. The amendments are
effective for annual periods beginning on or after January 1, 2022. Pollard is currently assessing
the impact of the amendment on its consolidated financial statements.
(c) Amendments to IAS 37 – cost of fulfilling a contract:
In May 2020, the IASB issued Onerous Contracts – Cost of Fulfilling a Contract (Amendments to
IAS 37). The amendments address the fact that IAS 37 does not specify which costs are included
as a cost of fulfilling a contract when determining whether a contract is onerous. The
amendments clarify that costs of fulfilling a contract comprise both the incremental costs and an
allocation of direct costs. The amendments are effective for annual periods beginning on or after
January 1, 2022. Pollard is currently assessing the impact of the amendment on its consolidated
financial statements.
(d) Amendments to IFRS 9 – interest rate benchmark reform:
In August 2020, the IASB finalized its response to the ongoing reform of inter-bank offered rates
and other interest rate benchmarks by issuing a package of amendments to IFRS standards. The
amendments mainly relate to changes to contractual cash flows and clarify that a company will
not have to derecognize the carrying amount of financial instruments for changes required by
the reform, but will instead update the effective interest rate to reflect the changes to the
alternative benchmark rate. The amendments are effective for annual periods beginning on or
after January 1, 2021. Pollard is currently assessing the impact of the amendment on its
consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
5.
Acquisitions:
(a) mkodo Limited:
On February 3, 2020, Pollard acquired 100% of the share capital of mkodo Limited (“mkodo”), a
provider of digital apps and user interfaces for the lottery and gaming industry worldwide. 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 February 3, 2020, the acquisition date.
Cash paid, net of cash acquired of $1,300 and debt assumed of $723
Contingent consideration
Total consideration
$
15,349
2,098
17,447
$
Accounts receivable
Deferred income tax asset
Prepaid expenses and deposits
Property, plant and equipment
Income taxes receivable
Accounts payable and accrued liabilities
Contract liabilities
Lease liabilities
Deferred income tax liability
Net tangible assets acquired (excluding cash acquired and debt assumed)
Customer relationships
Technology
Brand
Identifiable intangible assets acquired
Goodwill acquired
$
$
$
$
$
2,479
305
102
1,429
427
(653)
(273)
(1,125)
(1,380)
1,311
4,670
2,064
1,393
8,127
8,009
The goodwill acquired is largely attributable to the assembled workforce, market share and the
expected synergies and cost savings after integration of mkodo with Pollard. This goodwill is not
expected to be deductible for tax purposes.
During the measurement period, new information regarding completion status of a customer
contract, as at the acquisition date, became available. An adjustment to the preliminary purchase
price allocation was required, resulting in a $737 decrease in revenues in excess of billings,
classified within accounts receivable, a $559 increase in identifiable intangible assets acquired, a
$94 increase in the deferred income tax liability, a $126 increase in the deferred tax asset and
an increase of $146 to goodwill.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
5.
Acquisitions (continued):
Acquisition costs related to the mkodo purchase in the year ended December 31, 2020, were
$151. These costs were included in administration expenses.
During the period between February 3, 2020 and December 31, 2020, mkodo generated revenues
of approximately $5,619 and a net loss of $1,616, after depreciation and amortization of the fair
values of identifiable assets acquired, which have been recorded in the consolidated financial
statements.
If mkodo had been acquired on January 1, 2020, incremental revenue of $633 and net income
of $126, after depreciation and amortization of the fair values of identifiable assets acquired,
would have been recognized in the year ended December 31, 2020.
Contingent consideration, based on achievement of certain earnings before interest, taxes,
depreciation and amortization (“EBITDA”) targets, was estimated and accrued as at the
acquisition date. The earn-out is based on mkodo’s achievement of certain EBITDA targets during
2020 and 2021. The potential payment under the earn-out is unlimited. As at December 31,
2020, Pollard reassessed mkodo’s progress towards achievement of both the 2020 and 2021
EBITDA targets, and determined that it is unlikely that these targets will be achieved. As such,
Pollard adjusted the contingent consideration liability relating to the EBITDA earn-out in the last
quarter of 2020 to nil.
As at December 31, 2020, the acquisition accounting was finalized.
(b) Charitable gaming asset purchase:
On February 6, 2020, Pollard entered into an agreement, approved by the courts, to acquire
certain assets which were being sold under a bankruptcy process. The transaction was subject
to certain closing conditions and closed 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. The total purchase price, including transportation, disassembly and
reassembly, and related costs, was $4,895.
(c) Compliant Gaming, LLC:
On December 30, 2020, Pollard acquired 100% of the equity of Complaint Gaming, LLC
(“Compliant”), a leading provider of electronic pull-tab gaming systems and products to the
charitable gaming market. 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 December 30, 2020, 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, 2020 and 2019
5.
Acquisitions (continued):
Cash paid
Contingent consideration
Total consideration
Accounts receivable
Prepaid expenses and deposits
Property, plant and equipment
Accounts payable and accrued liabilities
Contract liabilities
Net tangible assets acquired
Customer relationships
Game Library
Software
Identifiable intangible assets acquired
Goodwill acquired
$
24,349
5,239
29,588
$
$
$
$
$
$
46
44
453
(155)
(110)
278
13,084
2,907
1,398
17,389
11,921
The goodwill acquired is largely attributable to the assembled workforce, market share and the
expected revenue synergies and cost savings after integration of Compliant with Pollard. This
goodwill is 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
during the measurement period.
Acquisition costs related to the Compliant purchase in the year ended December 31, 2020, were
$124. These costs were included in administration expenses.
If Compliant had been acquired on January 1, 2020, incremental revenue of $4,105 and net
income of $399, after depreciation and amortization of the fair values of identifiable assets
acquired, would have been recognized in the year ended December 31, 2020.
Contingent consideration, based on achievement of certain earnings before interest, taxes,
depreciation and amortization (“EBITDA”) targets, may be paid to the vendor. The earn-out is
based on Compliant’s achievement of certain EBITDA targets during 2021 and 2022. The
potential payment under the earn-out is unlimited. As at December 31, 2020, Pollard has accrued
$4,232 within current liabilities and $1,007 within non-current liabilities relating to the contingent
consideration.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
6.
Inventories:
Raw materials
Work-in-process
Finished goods
December 31,
2020
December 31,
2019
$
$
$
16,756
2,209
27,655
17,957
1,726
22,857
46,620
$
42,540
During 2020, Pollard recorded inventory write-downs of $704 representing an increase in the
obsolescence reserves and write-downs of $8 due to changes in foreign exchange rates.
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.
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, 2020 and 2019
7.
Property, plant and equipment:
Cost
Land Buildings
Leasehold
improve-
ments
Furniture,
fixtures and
computers
Assets in
progress &
spare parts Total
Equipment
$ 1,731
19,992
5,061
170,385
7,366
8,997
213,532
Balance at January 1, 2019
Recognition of right-of-
use assets on initial
application of IFRS 16 –
January 1, 2019
–
17,750
–
132
Acquisitions
–
321
128
1,170
Additions/net transfers*
–
2,684
Disposals
–
–
247
–
17,096
(1,361)
397
28
453
–
–
–
18,279
1,647
(382)
20,098
–
(1,361)
Effect of movements in
exchange rates
Balance at December 31,
(39)
(557)
(40)
(1,184)
(28)
(120)
(1,968)
2019
$ 1,692
40,190
5,396
186,238
8,216
8,495
250,227
Acquisitions (note 5)
–
1,125
150
562
45
–
1,882
Additions/net transfers
464
5,495
Disposals
–
–
744
–
13,865
682
1,868
23,118
(866)
–
–
(866)
Effect of movements in
exchange rates
Balance at December 31,
(24)
(440)
(40)
(1,027)
(27)
(133)
(1,691)
2020
$ 2,132
46,370
6,250
198,772
8,916
10,230
272,670
*Included within additions/net transfers in 2019 is $1,097 of machine costs previously classified as inventory, which
were reclassified to property, plant and equipment during 2019.
Accumulated
depreciation
Land Buildings
Leasehold
improve-
ments
Furniture,
fixtures and
computers
Assets in
progress &
spare parts Total
Equipment
Balance at January 1, 2019
$
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2019
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2020
$
$
–
–
–
–
–
–
–
–
–
5,727
5,265
–
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
5,667
–
504
–
13,055
370 –
19,596
(866) –
–
(866)
(123)
(26)
(620)
(10) –
(779)
16,464
3,292
151,110
5,408 –
176,274
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
7. 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, 2019
$ 1,692
29,270
At December 31, 2020
$ 2,132
29,906
2,582
2,958
46,697
47,662
3,168
8,495
91,904
3,508
10,230
96,396
8.
Leases:
Pollard’s leases are for offices, manufacturing facilities, production equipment and office equipment.
Pollard presents right-of-use assets in “property, plant and equipment” on the condensed
consolidated statement of financial position. The following tables present continuity schedules of
Pollard’s right-of-use assets by asset class:
Buildings
Equipment
Balance at January 1, 2019
$
Acquisitions
Additions
Depreciation
Effect of movements in
exchange rates
Balance at December 31, 2019 $
Acquisitions (note 5)
Additions
Depreciation
Effect of movements in
exchange rates
17,750
322
1,756
(4,492)
(104)
15,232
1,125
5,071
(5,050)
(269)
Balance at December 31, 2020 $
16,109
132
100
–
(72)
(18)
142
–
180
(138)
(6)
178
Furniture,
fixtures and
computers
397
–
5
(178)
Total
18,279
422
1,761
(4,742)
(9)
(131)
215
–
–
(215)
–
–
15,589
1,125
5,251
(5,403)
(275)
16,287
Pollard’s total cash outflows, principal and interest relating to its lease obligations classified under
IFRS 16 Leases for the year ended December 31, 2020 were $5,752 (2019 – $5,039).
Pollard’s interest expenses incurred relating to its lease obligations classified under IFRS 16 Leases
for the year ended December 31, 2020 were $654 (2019 – $662).
The following is a schedule of lease payment commitments outstanding relating to lease obligations
classified under IFRS 16:
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
8.
Leases (continued):
2021
2022
2023
2024
2025 and thereafter
Total undiscounted cash flows
Discounting
Total discounted cash flows
Less: current portion lease liabilities
Lease liabilities
9. Equity investment:
$
$
$
$
5,740
5,275
4,228
1,431
1,946
18,620
(1,679)
16,941
(5,109)
11,832
Interest in joint venture
Balance, beginning of year
Investment (distribution)
Equity income (loss)
Effects of movements in exchange rates
Balance, end of year
December 31,
2020
December 31,
2019
$
$
$
1,161
(1,860)
1,587
(7)
881
$
1,164
3,997
(3,942)
(58)
1,161
Pollard, in conjunction with NeoGames US, LLP, operates NeoPollard Interactive (“NPi”). The entity
was established to provide iLottery services in the United States and Canada, excluding the State of
Michigan.
Pollard and Neogames S.A. 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 Retail (UK) Limited
Acquisition of mkodo (note 5)
Acquisition of Compliant (note 5)
Effects of movements in exchange rates
Balance, end of year
December 31,
2020
December 31,
2019
$
$
69,993 $
–
8,009
11,921
(647)
69,667
2,239
–
–
(1,913)
89,276 $
69,993
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
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 and groups of CGUs:
Lotteries
Charitable gaming
Diamond Game
Retail
Total
December 31,
2020
December 31,
2019
$
$
38,921 $
12,630
26,601
11,124
89,276 $
30,816
12,898
14,991
11,288
69,993
For each CGU, or group of CGUs, 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
trends and expected future performance.
The calculation of value in use for the CGUs, or groups of 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, 2020 and 2019
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, and groups of
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 and groups of CGUs described above were as follows:
Lotteries
Charitable Gaming
Diamond Game
Retail
Growth rates
12.0%
12.0%
15.0%
14.7%
Growth rates are based on estimated sustainable long-term growth rates of the CGUs, and groups
of CGUs. A terminal value of 2% was applied in the value in use calculations for all of the above
CGUs and groups of CGUs.
Management believes that any reasonable possible change in any of the key assumptions on which
the recoverable amounts of the CGUs, or groups of CGUs, 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, 2020 and 2019
11. Intangible assets:
Cost
Customer
assets
Patents
Trademarks
and brands
Deferred
development
Computer
software
and
licenses
Total
Balance at January 1, 2019
$
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
–
(662)
3,770
361
–
457
–
160
25
–
–
–
(1,379)
(63)
(222)
Balance at December 31, 2019
$
48,635
6,447
Acquisitions (note 5)
17,754
–
4,763
1,393
Additions (net of investment
tax credits)
Additions – internally
developed (net of
investment tax credits)
Effect of movements in
exchange rates
–
413
(19)
–
–
(452)
(8)
–
(69)
–
–
–
154
–
662
–
479
–
4,588
664
7,841
7,995
(389)
(2,053)
1,793
27,610
89,248
–
–
–
–
6,369
25,516
30
424
5,554
5,554
(386)
(915)
Balance at December 31, 2020
$
65,937
6,852
6,068
1,793
39,177
119,827
*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.
Accumulated amortization
Customer
assets
Patents
Trademarks
and brands
Deferred
development
Computer
software
and
licenses
Total
Balance at January 1, 2019
$
18,342
5,118
Asset reclassifications
–
(62)
–
–
1,246
3,262
27,968
–
62
–
Amortization for the year
4,294
167
–
102
2,823
7,386
Effect of movements in
exchange rates
(184)
(13)
–
–
(116)
(313)
Balance at December 31, 2019
$
22,452
5,210
–
1,348
6,031
35,041
Amortization for the year
4,956
178
–
120
5,831
11,085
Effect of movements in
exchange rates
(252)
(8)
Balance at December 31, 2020
$
27,156
5,380
–
–
–
(185)
(445)
1,468
11,677
45,681
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
11. Intangible assets (continued):
Carrying amounts
Customer
assets
Patents
Trademarks
and brands
Deferred
development
Computer
software
and
licenses
Total
At December 31, 2019
At December 31, 2020
$ 26,183
$ 38,781
1,237
1,472
4,763
6,068
445
325
21,579
27,500
54,207
74,146
Amortization of intangible assets in 2020 of $11,085 (2019 – $7,386), was included in cost of sales.
As at December 31, 2020, the weighted average remaining useful life of customer assets was 8.0
years and the weighted average remaining useful life of computer software and licenses was 5.4
years.
12. Income taxes:
Income tax expense
Current
Deferred
Total
2020
10,955
1,899
12,854
$
$
$
$
2019
2,136
4,848
6,984
Income tax recognized in other comprehensive loss
Amount
before
tax
Tax
benefit
2020
Amount
net of tax
Amount
before
tax
Tax
expense
2019
Amount
net of tax
Defined benefit plans
remeasurements
loss
$
(10,397)
2,748
(7,649) $
(7,300)
1,891
(5,409)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
12. Income taxes (continued):
Reconciliation of effective tax rate
2020
2020
2019
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
Non-deductible items relating to
acquisitions
Other items
Effect of non-taxable items related to
foreign exchange
$
$
27.0%
(1.4%)
0.8%
0.3%
0.8%
0.3%
33,288
12,854
46,142
12,458
(641)
387
134
384
$
$
27.0%
(2.2%)
0.7%
1.1%
(0.5%)
132
(2.0%)
2019
22,017
6,984
29,001
7,829
(632)
198
329
(162)
(578)
27.8%
$
12,854
24.1% $
6,984
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
2020
2019
2020
2019
2020
2019
$
Property, plant and
equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign
exchange (gains)
and losses
Unused tax losses
Contract liabilities
Other
–
1,612
272
11,582
202
1,370
–
634
– $
2,253
228
9,070
(14,360)
(6,207)
–
(1,500)
(12,375) $
(5,913)
–
(1,377)
(14,360)
(4,595)
272
10,082
(12,375)
(3,660)
228
7,693
487
994
45
301
(564)
–
(411)
(100)
(655)
–
(247)
(275)
(362)
1,370
(411)
534
(168)
994
(202)
26
Tax assets (liabilities)
$
15,672
13,378 $ (23,142)
(20,842) $
(7,470)
(7,464)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
12. Income taxes (continued):
Movement in temporary differences during the year
January 1,
2020
Recognized
in profit or
loss
Acquisitions
Recognized in
other
comprehensive
income
Balance
December 31,
2020
Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange gains
Unused tax losses
Contract liabilities
Other
$
(12,375)
(3,660)
228
7,708
(183)
994
(202)
26
(1,985)
142
44
(377)
(177)
376
(209)
508
–
(1,076)
–
–
–
–
–
–
–
–
–
2,748
–
–
–
–
(14,360)
(4,594)
272
10,079
(360)
1,370
(411)
534
Tax assets (liabilities)
$
(7,464)
(1,678)
(1,076)
2,748
(7,470)
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)
Recognized in the consolidated statements of comprehensive income as follows:
Deferred income tax expense
Finance loss
2020
1,899
(221)
1,678
$
$
2019
4,848
(244)
4,604
$
$
Amounts included in finance 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, 2020 and 2019
13. Long-term debt:
Credit facility, interest of 1.9% to 4.2%, payable
monthly, maturing 2022
Deferred financing charges, net of amortization
December 31,
2020
December 31,
2019
$
$
131,365
$
127,820
(285)
(525)
131,080
$
127,295
Credit facility
Deferred
financing
Equipment
debt
Equipment
lease
Total
Balance at January 1, 2020
$
127,820
(525)
Net proceeds
Payment of deferred financing
charges
Total changes from financing
cash flows
Effect of movements in
exchange rates
Amortization of deferred
financing charges
Total other changes
5,055
–
–
(128)
5,055
(128)
(1,510)
–
(1,510)
–
368
368
Balance at December 31, 2020
$
131,365
(285)
–
–
–
–
–
–
–
–
–
127,295
–
–
–
5,055
(128)
4,927
–
(1,510)
–
–
368
(1,142)
–
131,080
Balance at January 1, 2019
$
116,177
(421)
4
36
115,796
Credit facility
Deferred
financing
Equipment
debt
Equipment
lease
Total
Net proceeds (payments)
Payment of deferred financing
charges
Total changes from financing
cash flows
Effect of movements in
exchange rates
Amortization of deferred
financing charges
Total other changes
14,361
–
(4)
(36)
14,321
–
(450)
–
–
(450)
14,361
(450)
(4)
(36)
13,871
(2,718)
–
(2,718)
–
346
346
–
–
–
–
–
(2,718)
–
–
346
(2,372)
–
127,295
Balance at December 31, 2019
$
127,820
(525)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
13. Long-term debt (continued):
(a) 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,
2020, the outstanding letters of guarantee drawn under the credit facility were $712 (2019 –
$10,704).
Included in the total credit facility balance is a U.S. dollar denominated balance of US$55,900 (2019
– US$36,400). As of December 31, 2020, Pollard had unused credit facility available of $75,745 (2019
– $69,676).
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, 2020, 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.
(b) Economic Development Canada (“EDC”) facility:
Effective February 28, 2020, Pollard entered into an agreement with EDC to provide a €15,000 facility
whereby Pollard can issue qualifying letters of credit against the EDC facility. The facility is guaranteed
by a general indemnity from Pollard. As of December 31, 2020, the outstanding letters of credit
drawn on this facility were $10,960 (€7,048).
14. Pension liability:
December 31,
2020
December 31,
2019
Fair value of benefit plan assets
Present value of benefit plan obligations
Net pension liability
$
$
77,351 $
(113,721))
65,481
(92,028)
(36,370) $
(26,547)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
14. Pension liability (continued):
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, 2020. One of the Canadian plans of Pollard currently requires
valuation every year with the last valuation as of December 31, 2019. 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 $4,850 to its defined benefit plans in 2021.
The benefit plan assets are held in trust and are invested as follows:
Equities
Bonds
Cash and cash equivalents
December 31,
2020
December 31,
2019
62.6%
35.9%
1.5%
100.0%
61.0%
36.6%
2.4%
100.0%
Information about Pollard’s defined benefit plans, in aggregate, is as follows:
Benefit plan assets
Fair value, beginning of year
Expected return on plan assets
Employer contributions
Benefits paid
Remeasurement gains
Effect of movements in exchange rates
Fair value, end of year
2020
2019
$
$
$
65,481
2,137
7,309
(2,791)
5,460
(245)
52,946
2,163
6,310
(2,281)
6,689
(346)
77,351
$
65,481
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
14. Pension liability (continued):
Accrued benefit plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Remeasurement losses
Effect of movements in exchange rates
Balance, end of year
Net pension liability
2020
2019
$
$
$
$
92,028
6,115
2,878
(2,791)
15,743
(252)
73,303
4,656
2,858
(2,281)
13,948
(456)
113,721
$
92,028
(36,370) $
(26,547)
The total net cost for Pollard’s defined benefit and defined contribution pension plans recognized in
cost of sales is as follows:
2020
2019
Net defined benefit plans expense
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 expense
Defined contribution plans expense
$
$
6,115
2,878
(7,597)
5,906
7,302
843
Net pension plans expense
$
8,145
$
4,656
2,858
(8,852)
7,059
5,721
755
6,476
Actuarial assumptions
The principal actuarial assumptions used in measuring at the reporting date are as follows:
Discount rate
Rate of compensation increase
2020
2019
2.2% to 3.1%
0% to 3.0%
3.1% to 3.7%
0% to 3.0%
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
14. Pension liability (continued):
Assumptions regarding future mortality have been based on published statistics and mortality tables.
As of December 31, 2020, 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-2020 for its
U.S. subsidiary’s pension plans. 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.
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)
Remeasurements
Remeasurement gains arising on plan assets
Remeasurement losses (gains) arising on plan
liabilities from:
Demographic assumptions
Financial assumptions
Experience adjustments
Remeasurement losses arising on plan liabilities
Increase
Decrease
(21,833) $
$
$
3,028
1,713
29,460
(2,815)
(1,722)
2020
5,460
$
2019
6,689
(70) $
13,996
1,817
(232)
14,240
(60)
15,743
$
13,948
$
$
$
$
$
$
Remeasurements recognized in other comprehensive income
2020
2019
Losses accumulated in retained earnings, beginning
of year
$
(22,082)
$
(16,673)
Remeasurement losses recognized during the year,
net of income tax
(7,649)
(5,409)
Losses accumulated in retained earnings, end of year
$
(29,731)
$
(22,082)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
15. Share capital:
Authorized
Unlimited common shares
Unlimited preferred shares
Issued
Balance at January 1, 2019
Stock option exercise
Balance at December 31, 2019
Stock option exercises
Shares
Amount
25,625,658
10,000
$
25,635,658
71,250
108,605
37
108,642
365
Balance at December 31, 2020
25,706,908
$
109,007
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
15. Share capital (continued):
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 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, 2020, Pollard is in compliance with all financial covenants.
There were no 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 9, 2020, a dividend of $0.04 per share was declared, paid on January 15, 2021, to the
shareholders of record on December 31, 2020.
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.
Changes in the number of options outstanding during the years ended December 31, 2020, and 2019
were as follows:
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
15. Share Capital (continued):
2020
2019
Number
Weighted
average
exercise price
Number
Weighted
average
exercise price
Balance, beginning of year
Granted
Forfeited
Exercised
377,500 $
50,000 $
(25,000) $
(71,250) $
12.82
20.98
20.70
4.19
237,500 $
150,000 $
7.46
20.70
–
$ –
(10,000) $ 3.63
Balance, end of year
331,250 $
15.31
377,500 $ 12.82
As of December 31, 2020, no share options had expired. Options have been granted on six 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.
Exercise
price
Number
outstanding
$ 3.63
$ 8.12
$ 10.00
$ 20.70
$ 18.31
$ 23.65
12,500
25,000
118,750
125,000
25,000
25,000
331,250
2020
Remaining
time to
exercise
Number
exercisable
Number
outstanding
0.19 years
2.76 years
3.32 years
5.86 years
6.21 years –
6.87 years –
12,500
25,000
93,750
31,250
77,500
25,000
125,000
150,000
–
–
2019
Remaining
time to
exercise
1.19 years
3.76 years
4.32 years
6.86 years
–
–
Number
exercisable
77,500
18,750
62,500
–
–
–
162,500
377,500
158,750
During the year ended December 31, 2020, the following share options were granted:
Option grant date
March 16, 2020
November 12, 2020
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)
$
$
$
4.38
25,000
18.31
18.31
March 13, 2020
32.1%
4.75 years
$
$
$
6.21
25,000
23.65
23.65
November 11, 2020
33.9%
4.75 years
0.6% to 0.7%
0.3% to 0.4%
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
15. Share Capital (continued):
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.
16. Commitments and contingencies:
Pollard rents premises and equipment under long-term leases. The following is a schedule of
undiscounted lease payment commitments outstanding relating to short-term and low value leases
to which Pollard has applied the recognition exemption available under IFRS 16 Leases:
2021
2022
2023
2024
2025 and thereafter
$
300
121
112
111
88
Pollard is contingently liable for outstanding letters of guarantee in the amount of $11,672 at
December 31, 2020 (2019 – $10,704). These letters of guarantee 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 new lease
covers the period from January 2019 to December 2023. The base rental rate is approximately
US$375, which is based on the current market value as determined through an independent
appraisal.
Also in 2008, Pollard entered into a lease with an affiliate of Equities for a manufacturing facility in
Winnipeg, Manitoba. The lease was for a 12 year 6 month period, ending March 31, 2021, at an
annual base rate of approximately $2,453. In 2015, Pollard agreed to exercise its renewal clause.
The renewal covers the period from April 2021 to September 2023 with an approximate annual lease
rate of $2,400, including an annual amortization of a leasehold improvement allowance of
approximately $1,000. The total leasehold allowance is $2,500. The base rental rate was based on
current market value as determined through an 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 an independent appraisal. The sale
value was determined through an independent appraisal. During 2016, Pollard exercised its option
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
16. Commitments and contingencies (continued):
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 an independent appraisal.
Pollard is involved in litigation and claims associated with operations, the aggregate amounts of which
are not determinable. While it is not possible to estimate the outcome of the proceedings,
management is of the opinion that any resulting settlements would not materially affect the financial
position of Pollard. Should a loss occur on resolution of these claims, such loss would be accounted
for as a charge to income in the period in which the settlement occurs.
Pollard 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.
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, 2020
Canada
United States
International
Total
Lotteries and
charitable
gaming
Diamond Game
Total
$
75,219
231,971
84,391
$
4,157
18,396
–
$
79,376
250,367
84,391
$
391,581
$
22,553
$
414,134
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
17. Revenue and contract balances (continued):
Revenue – geographical segment
Year ended December 31, 2019 (1)
Canada
United States
International
Total
Lotteries and
charitable
gaming
Diamond Game
Total
$
$
71,883
216,480
77,484
$
9,879
22,113
–
81,762
238,593
77,484
$
365,847
$
31,992
$
397,839
Revenue – product lines
Year ended December 31, 2020
Lotteries and
charitable
gaming
Diamond Game
Total
Lottery
Charitable
Gaming systems
$ 348,359
43,222
–
$
–
–
22,553
$
348,359
43,222
22,553
Total
$
391,581
$
22,553
$
414,134
Revenue – product lines
Year ended December 31, 2019 (1)
Lotteries and
charitable
gaming
Diamond Game
Total
Lottery
Charitable
Gaming systems
$
309,453
56,394
–
$ –
–
31,992
$
309,453
56,394
31,992
Total
$
365,847
$ 31,992
$
397,839
(1) Effective January 1, 2020, the Oasis egaming division was transferred from International Gamco (Charitable) to Diamond Game
(Gaming Systems), comparative figures have been restated.
The following tables provide information about receivables, contract assets, and contract liabilities
from contracts with customers:
Contract balances
December 31,
2020
December 31,
2019
Trade receivables, which are included in accounts
receivable
$
56,376
$
50,730
Contract assets, which are included in accounts
receivable
Contract liabilities
6,643
379
3,491
–
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
17. Revenue and contract balances (continued):
Contract liabilities
Balance, beginning of year
Acquisition
Increases due to cash received
Revenue recognized during the year
Effect of movement in exchange rates
Balance, end of year
Less current portion
18. Other income:
Year ended
December 31,
2020
Year ended
December 31,
2019
$ –
388
1,872
(1,886)
5
$ 857
–
–
(857)
–
379
–
(379)
–
$ –
$ –
EBITDA support agreement income
Canada emergency wage subsidy (“CEWS”)
Reversal of contingent consideration (note 5)
Other (income) expenses
$
2020
(1,000)
(8,984)
(2,137)
(243)
$
2019
(2,000)
–
(192)
205
$
(12,364)
$
(1,987)
Canada emergency wage subsidy
Pollard has elected to account for CEWS earned in 2020 within other income on the consolidated
statements of income. As a portion of Pollard’s labour expenses are capitalized in inventory, the
amount recorded within other income is net of an adjustment of $166 to defer the wage subsidy
income recognition for the portion of the subsidy that can be attributed to capitalized labour for
inventory that had not been sold as at December 31, 2020.
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 expired on June 30, 2020.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
19. Finance costs and finance income:
Finance costs
Foreign exchange loss
Interest
Finance income
Foreign exchange gain
20. Net income per share:
2020
6,083
4,841
$
10,924
$
2020
7,025
7,025
$
$
$
$
$
$
2019
1,129
6,415
7,544
2019
3,931
3,931
2020
2019
Net income attributable to shareholders for basic
and diluted net income per share
$
33,288
$
22,017
Weighted average number of shares (basic)
Weighted average impact of share options
25,644,487
379,287
25,632,645
252,705
Weighted average number of shares (diluted)
26,023,774
25,885,350
Net income per share (basic)
Net income per share (diluted)
21. Personnel expenses:
Wages and salaries
Benefits and government payroll remittances
Profit share
Expenses related to defined contribution plans
Expenses related to defined benefit plans
$
$
$
1.30
1.28
$
$
0.86
0.86
$
2020
124,618
20,147
5,740
992
7,301
2019
116,277
18,609
2,838
755
5,721
$
158,798
$
144,200
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
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
2020
2019
$
(6,558) $
(4,753)
196
(718)
869
(9)
(21,573)
756
(607)
(742)
656
(798)
$
(10,973) $
(22,308)
23. Related party transactions:
Pollard Equities Limited and affiliates
During the year ended December 31, 2020, Pollard paid property rent of $3,420 (2019 – $3,238) and
$208 (2019 – $436) in plane charter costs to affiliates of Equities.
During the year, Equities paid Pollard $72 (2019 – $72) for accounting and administration fees.
At December 31, 2020, included in accounts payable and accrued liabilities is an amount owing to
Equities and its affiliates for rent, expenses and other items of $454 (2019 – $456).
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, 2020, the net book value of the right-of-use assets was $7,715
(2019 - $10,803) and the present value of the lease liabilities was $7,887 (2019 - $11,787).
Neogames S.A. and affiliates
During the year ended December 31, 2020, Pollard reimbursed operating costs and paid software
royalties of $9,627 (2019 – $5,728) to its iLottery partner, which are recorded in cost of sales.
At December 31, 2020, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $2,027 (2019 – $134) for its share of profits and reimbursement of
operating costs, net of capital investments.
At December 31, 2020, included in restricted cash and accounts payable and accrued liabilities is an
amount owing to Pollard’s iLottery partner of $4,803 (2019 - $2,600) for funds relating to contractual
performance guarantees.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
23. Related party transactions (continued):
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
2020
3,355
48
790
$
4,193
$
2019
3,370
15
614
3,999
$
$
As at December 31, 2020, key management personnel of Pollard, as a group, beneficially owned or
exercised control or direction over 17,473,408 common shares of Pollard.
24. Sales to major customers:
For the year ended December 31, 2020, sales to one customer amounted to 15.9 percent of
consolidated sales. In 2019, sales to one customer amounted to 11.2 percent of consolidated sales
and 10.1 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.
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
25. Segmented information (continued):
Year ended December 31, 2020
Lotteries and
charitable
gaming
Diamond Game
Total
Revenues from external customers
Operating costs and expenses
Earnings (loss) before income taxes
Total assets
$
391,581
344,092
47,489
346,364
$
22,553
23,900
(1,347)
58,203
$
414,134
367,992
46,142
404,567
Year ended December 31, 2019 (1)
Lotteries and
charitable
gaming
Diamond Game
Total
Revenues from external customers
Operating costs and expenses
Earnings before income taxes
Total assets
$
365,847
341,321
24,526
290,023
$
31,992
27,517
4,475
62,242
$
397,839
368,838
29,001
352,265
(1) Effective January 1, 2020, the Oasis egaming division was transferred from International Gamco (Charitable) to Diamond Game
(Gaming Systems), comparative figures have been restated.
Property, plant and equipment and goodwill:
Canada
U.S.
U.K.
26. Financial instruments:
December 31,
2020
December 31,
2019
$
$
$
74,535
98,580
12,557
76,774
81,663
3,460
185,672
$
161,897
The fair value of a financial instrument is the estimated amount that Pollard would receive or pay to
terminate the instrument agreement at the reporting date.
The following methods and assumptions were used to estimate the fair value of each type of financial
instrument by reference to various market value data and other valuation techniques as appropriate.
The fair values of accounts receivable, accounts payable and accrued liabilities and dividends payable
approximate their carrying values given their short-term maturities.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
26. Financial instruments (continued):
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, 2020, the cash and restricted cash recorded at fair value was classified as level
one of the fair value hierarchy, and the contingent consideration recorded at fair value was classified
as level three of the fair value hierarchy. The fair value of the contingent consideration is calculated
as the present value of the expected future payments, discounted using a risk-adjusted discount
rate. A change to the expected future payments or discount rate would impact the fair value of the
contingent consideration.
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 Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
27. Financial risk management (continued):
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,
2020
December 31,
2019
$
$
$
61,355
2,913
1,946
(177)
50,093
2,708
4,600
(188)
66,037
$
57,213
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.
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,
2020:
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
27. Financial risk management (continued):
Total
2021
2022
2023
2024
2025 &
thereafter
Long-term debt
Leases
$
$
136,601
19,352
2,618
6,040
133,983
5,396
–
4,340
–
1,542
–
2,034
155,953
8,658
139,379
4,340
1,542
2,034
Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due. The 2021 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 $169 for the
year ended December 31, 2020 (2019 – $36). 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 $72 for year ended
December 31, 2020 (2019 – $81).
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, 2020, the amount
of financial liabilities denominated in U.S. dollars exceeded the amount of financial assets
denominated in U.S. dollars by approximately $52,626 (2019 – $27,949).
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 $263 for the year
ended December 31, 2020 (2019 – $140).
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 Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2020 and 2019
27. Financial risk management (continued):
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign
currency risk. At December 31, 2020, and 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 $656 for the year ended December 31, 2020 (2019 – $639).
28. Subsequent events:
(a) Next Generation Lotteries AS
On January 14, 2021, Pollard completed the previously announced acquisition of Next Generation
Lotteries AS (“NGL”). On December 31, 2020, Pollard signed a definitive agreement to acquire 100%
of the equity of NGL for a purchase price of €36,000 ($56,500), prior to standard working capital
adjustments and certain deferred cash considerations, of which €32,000 ($50,000) was paid at the
time of closing and the remaining €4,000 ($6,300) of which will be paid upon the achievement of
certain gross margin targets in 2021. The purchase price was funded from existing Pollard Banknote
cash resources and availability under the existing senior credit facilities for approximately €27,400
($43,000) and the issuance of treasury shares of Pollard Banknote for approximately €4,600 ($7,200).
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.
(b) Share offering
On February 9, 2021, Pollard announced that it had entered into an agreement with a syndicate of
underwriters to purchase, on a bought deal basis, 812,000 common shares of Pollard at a price of
$36.95 per share. Pollard also granted the underwriters an over-allotment option exercisable at any
time up to 30 days following the closing of the offering, to purchase up to an additional 121,800
common shares. The offering, including the full over-allotment, closed on March 2, 2021. The total
gross proceeds, prior to any commissions and offering expenses, from the sale of 933,800 common
shares was approximately $34,504.
Pollard used the net proceeds to repay indebtedness under Pollard’s credit facility incurred in the
recent acquisitions of Compliant and NGL.
Investor
Relations
Robert Rose
140 Otter Street
t: 204-474-2323
e: winnipeg@pollardbanknote.com
Stock
Exchange Listing
The Toronto Stock Exchange - PBL
Independent
Auditors
KPMG LLP,
Winnipeg, Manitoba
Transfer
Agent
Computershare Trust Company of Canada,
Toronto, Ontario
Toronto-Dominion Bank,
Winnipeg, Manitoba
Bank of Montreal,
Calgary, Alberta
Bankers
Canadian Western Bank,
Edmonton, Alberta
Head Office
Manufacturing
Facilities
140 Otter Street
Winnipeg, Manitoba, R3T 0M8
t: 204-474-2323
f: 204-453-1375
Winnipeg, Manitoba, Canada
1499 Buffalo Place, R3T 1L7
140 Otter Street, R3T 0M8
Barrhead, Alberta, Canada
6203 46th Street, T7N 1A1
Sault Ste. Marie, Ontario, Canada
300-45 White Oak Drive East, P6B 4J7
Ypsilanti, Michigan, USA
775 James L. Hart Parkway, 48197
Council Bluffs, Iowa, USA
504 34th Avenue, 51501
Chatsworth, California, USA
9340 Penfield Avenue, 91311
Adair, Iowa, USA
1000 Flag Road, 50002
Omaha, Nebraska, USA
9335 48th Street, 68152
Macclesfield, U.K.
Calamine Street, SK11 7HU
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard EXECUTIVE CHAIR
Dave Brown 1
Jerry Gray 1,2
Garry Leach 1
John Pollard
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Lead Director
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information
Senior
Management
John Pollard
CO-CHIEF EXECUTIVE OFFICER
Douglas Pollard
CO-CHIEF EXECUTIVE OFFICER
Steven Fingold
EXECUTIVE VICE PRESIDENT, CHARITABLE GAMING
Paul Franzmann
EXECUTIVE VICE PRESIDENT, CORPORATE DEVELOPMENT
Pedro Melo
EXECUTIVE VICE PRESIDENT, INFORMATION TECHNOLOGY
Margaret Proven
EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES
Riva Richard
GENERAL COUNSEL AND EXECUTIVE VICE PRESIDENT,
LEGAL AFFAIRS
Robert Rose
EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
Jennifer Westbury
EXECUTIVE VICE PRESIDENT, SALES AND CUSTOMER
DEVELOPMENT
DiMS #1134033
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474 - 2323
www.pollardbanknote.com
2 0 2 0 A N N U A L R E P O R T
DiMS #1134033