2 0 2 1 A N N U A L R E P O R T
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474 - 2323
www.pollardbanknote.com
2 0 2 1 A N N U A L R E P O R T
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard 3 EXECUTIVE CHAIR
Dave Brown 1
Lee Meagher1
John Pollard2
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Interim member of the Audit Committee
3 Interim member of the Compensation Committee
and the Governance and Nominating Committee
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information
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
Robert Young
EXECUTIVE VICE PRESIDENT, OPERATIONS
Manufacturing
Facilities
Senior
Management
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
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
LETTER TO SHAREHOLDERS
Enclosed please find our 2021 Annual Report. In 2021 Pollard Banknote
achieved record revenue of $459.0 million, a 10.8% increase over 2020. Net
income of $19.7 million was attained, down 40.8% from the prior year primarily
due to a number of non-operational IFRS accounting charges. Our Adjusted
EBITDA(1) increased to a record level of $84.0 million, 4.2% higher than 2020.
Cash flow from operating activities prior to change in non-cash working capital
remained strong generating $47.3 million.
COVID-19
2021 continued to feel the effects of the COVID-19 pandemic in all aspects of our
lives. We are extremely proud of and thankful for how our Pollard team members
responded to the challenges of the second year of the pandemic while continuing
to provide the highest level of service and support to our customers around the
world. Our focus throughout the year remained on the health and protection of
our work-place including utilizing wide-ranging safety protocols such as extensive
use of remote workplace policies, onsite health checks
including daily
temperature screening, mandatory social distancing and use of masks,
restrictions of visitors and extensive communication. Many of these protocols are
no longer required as we enter 2022 and while cautiously optimistic, we remain
vigilant as we go forward.
Sales
Our 2021 sales achieved a record level of $459.0 million, reflecting very strong
underlying demand for many of our product lines in addition to the positive impact
or our acquisition strategy. Our Combined(1) sales, including our share of revenue
from our 50% joint venture operation NeoPollard Interactive LLC, reached $499.2
million, an amount that doubled in the past 5 years.
Our charitable gaming and Diamond Game operations rebounded strongly from
2020. The majority of the retail establishments where these products are sold
were closed for long periods in 2020, however for much of 2021 the reverse was
true, with most retail locations opened. There were some exceptions in certain
jurisdictions and some restrictions were still in place during the year, however
retail sales venues were mostly open.
Consumer demand for charitable gaming products reached new record levels in
2021, generating very strong levels of revenue for Pollard. Our charitable sales
reached $59.3 million, up 37% from the pandemic reduced revenue in 2020. We
continue to see this strong demand in the early part of 2022 and we expect this
trend to carry on.
(1) See Non-GAAP measures for explanation
In addition to growing demand for traditional printed products such as pull-tabs
and bingo paper, there is a growing trend for increased deployment of electronic
based charitable gaming products such as our Diamond Game and Compliant
branded eGaming systems. Total eGaming systems revenue attained record
levels of $37.8 million in 2021 reflecting a return to pre-pandemic revenue levels
in our traditional Diamond Game product lines and the additional impact of our
acquisition of Compliant Gaming, whose tablet based gaming system utilized in
retail social settings such as bars and restaurants has experienced dramatic
growth since we acquired the business.
Our iLottery operations, managed through our 50% owned joint venture
NeoPollard Interactive LLC, started out 2021 similarly to the end of 2020, with
unprecedented levels of revenue driven by the run up of two very large jackpots
in U.S. draw based games during the fourth quarter of 2020 and first quarter of
2021. The ending of the record double jackpot run in January of 2021, combined
with increased iGaming competition in Michigan, resulted in overall lower
revenue from our Michigan iLottery contract through the rest of the year.
However, continued growth in our other iLottery contracts including the first full
year of expanded product offerings in both Virginia and Alberta more than offset
the lower sales in Michigan. Combined(1) iLottery sales, including our share of
our joint venture revenue, was $66.8 million in 2021, up 45% from $46.1 million
in 2020, reflecting strong organic growth from our existing five iLottery contracts.
No major new iLottery opportunities became available in 2021 but we are actively
working to help additional lottery organizations to get approval to introduce this
important source of funds in 2022 and 2023.
Income before profit sharing and taxes generated from iLottery has increased in
2021, achieving $22.9 million in the year, up from $20.1 million in 2020. Our
iLottery business continues to be the market leader in North America, with five of
the most successful contracts operating through our 50% owned joint venture.
Consumer demand for instant tickets at retail grew significantly throughout 2020
and we saw continued growth during 2021, particularly in North America. While
not as sharp an increase as was witnessed in the earlier part of the pandemic,
retail sales were consistently higher than the already elevated levels from 2020,
underlining the continued strong demand for instant tickets and an important
factor in ultimately increasing our sales.
Our overall instant ticket production volumes increased approximately 3% in
2021 and could have been higher if not for limitations of capacity on our
production lines. The trend to higher price point retail tickets help us to increase
our average selling price, a very important metric, through strong 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.
Throughout 2022 so far we are continuing to see very strong demand for our
products which has led us to expand capacity on one of our instant ticket
production lines by fully staffing the number of shifts available. This is coming on
stream in the first quarter of 2022 and our additional capacity has been
scheduled with increased orders from existing lottery clients.
Within our instant ticket contract portfolio, we were successful with a number of
key contract awards including receiving a ten-year extension of the primary
supply contract with the Ontario Lottery and Gaming Corporation and winning the
primary instant ticket supply contract with the Idaho Lottery. New contracts were
re-won or extensions of existing contracts were awarded with many of our
important lottery customers including Maryland, Iowa, Michigan, and the lotteries
of 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 2022.
An important factor of being partner of choice for the lottery industry is ensuring a
complete portfolio of ancillary products and solutions is available to drive their
success. We continued to enjoy revenue success in such areas as licensed
games, including retro arcade themed games such as Tetris® and PAC-MAN®. In
addition, we have expanded our development revenue with mobile apps and user
interfaces with a number of important lotteries, and our retail merchandising
offering from our newly branded Schafer Retail Solutions+ is providing innovative
ticket distribution solutions in venues never before accessed by the lottery
market.
Operations
In 2021 we achieved a gross margin of $91.1 million, similar to the amount
earned in 2020. Higher gross margin from improved charitable gaming and
eGaming system sales was offset by lower revenue in the higher margin iLottery
operations, margin compression on the instant ticket product line and the impact
of lower margins due to the acquisition of Next Generation Lotteries AS. Our
gross margin percentage of 19.8% was lower than our 2020 gross margin of
22.0% due to the reasons noted.
During the latter half of 2021 our instant ticket production lines were impacted
negatively by supply chain issues including delayed shipments and access to our
direct material inputs as well as increased challenges in staffing to meet the
demand. In addition, we experienced significant inflationary price increases in
our key inputs for instant ticket production including higher costs on paper, ink
and other supplies. As a result, we experienced meaningful margin compression
in our instant ticket business over the last two quarters of 2021. While we
anticipate inflationary input price pressures continuing in 2022, we have a
number of initiatives underway to help mitigate the financial impact including
increasing our capacity to produce greater volume, internal cost reviews and
continued emphasis on improving average selling prices through focus on
innovation and bidding higher prices during the contract renewal process.
Our administration and selling expenses increased when compared to 2020. Last
years these costs were lower due to the impact of COVID-19 which reduced a
number of expenditures
travel and conference related costs.
Administration expenses were $47.2 million, $6.9 million higher than the reduced
2020 amounts primarily due to expenditures related to our acquisition of NGL
and additional investments in resources to develop our digital solutions.
Similarly, our selling expenses increased $2.9 million from 2020 reflecting the
addition of NGL and higher compensation costs.
including
Acquisitions
2021 was a very successful year for strategically important acquisitions. 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, with a small base of
contracts and a very strong retail lotto system and iLottery platform. Our focus in
2021 and for the upcoming year has been upgrading the platform and game
library to ensure it is state of the art and meets all current expectations of the
lottery industry.
And just prior to the start of 2021, 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 further bolstered 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. Since the closing of
the acquisition, Compliant has undergone successful integration with our
Diamond Game operations and worked very closely with our charitable gaming
marketing team. The result has been extremely strong sales and profitable
growth in year one, significantly exceeding our expectations.
Capital
Our capital allocation process remains very conservative, with an emphasis on
ongoing decision making to maximize return on capital while maintain a low debt
level. Our operations continued to produce significant operating cash, generating
$47.3 million, before capital expenditures and drawdowns in working capital. Our
capital expenditures totaled $22.2 million, up significantly from the COVID-19
pandemic impacted 2020. Key investments were made across a number of
businesses including updates to some of our production lines and the addition of
a new innovative digital instant ticket press. We also made significant
investments in our intangible asset portfolio of $12.6 million, focusing on
improvements to our iLottery platform technology and expanded focus on
development of exciting game content across a number of our gaming platforms.
In 2022 we will continue to invest in our underlying production capacity for both
our instant ticket and printed charitable gaming products to help address the
ongoing strong demand in both product lines.
On March 2, 2021, we completed a very successful bought deal offering and
in new equity, a
raised approximately $34.5 million, before expenses,
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
2022 presents us with significant opportunities to grow our business and improve
our financial results. All of our product lines are experiencing extremely high
demand with no indications these trends will change. Instant tickets, charitable
gaming products, eGaming systems and iLottery operations are all faced with
very strong demand from our clients as well as the ultimate retail consumers.
However there are a number of challenges to overcome including pressure on
supply chains, limited ticket production capacity in the short term and significant
inflationary price increases on a number of our key inputs. We are confident that
we will be able to manage these challenges and take advantage of the great
opportunities during 2022.
From a small general printer a few decades ago, Pollard has now grown to an
international success with half a billion dollars in revenue and over 2,100
employees. More importantly, we continue to be viewed as the partner of choice
in the lottery and charitable gaming industries, a term that we are both humbled
by and proud to be associated with. 2021 continued to test all of us as the
second year of the pandemic stretched us as both family members and Pollard
employees. We are very proud of the people we call team members and
honoured to work alongside them.
We would also like to acknowledge the other stakeholders in our extended
Pollard family including: our customers, lottery and charitable organizations from
around the world whose role in generating funds for good causes has never been
more important; our suppliers who, despite the continuing challenges facing
supply chains across all sectors of the economy, are working hard to provide us
the necessary inputs; our shareholders who continue to support us and provide
encouragement to build a successful company; and of course our Board of
Directors, who are always there to provide counsel, advice and leadership in our
quest for excellence.
On March 4, 2021, Garry Leach resigned from our Board of Directors due to
health reasons. Garry had been a Director for our organization for 13 years and
has played an integral role in helping us attain the success Pollard has achieved
over these years. We would like to thank Garry for all of his wisdom and
leadership he has provided to the Board of Directors, management and the entire
team at Pollard.
To all of you, thank you very much for your support, and we are looking forward
to the opportunities ahead of us in 2022.
Douglas Pollard
Co-Chief Executive Officer
John Pollard
Co-Chief Executive Officer
March 31, 2022
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 an Executive Vice-President of Richardson Financial Group Limited and a
Managing Director of RBM Capital Limited (a private investment firm). Previously, he was
Chief Executive Officer of Richardson Capital Limited, the private equity arm of James
Richardson & Sons, Limited, the Corporate Secretary of James Richardson & Sons, Limited,
and a partner in the independent law and accounting firm of Gray & Brown. He also serves
as Independent Chair of the Board of Directors of Boyd Group Services Inc. and as a
Director of RF Capital Group Inc. He has served various Manitoba charities including acting
as director of the Misericordia Hospital and Pavilion Gallery Museum Inc. and as Co-chair of
Major Donors for the Children’s Hospital Foundation Capital Campaign. He graduated from
the University of Manitoba law school and is a Chartered Professional Accountant.
Lee Meagher
Lee Meagher is a Founding Director of CAPWER Inc. In 1997, she founded and served as
the Chief Executive Officer of Scootaround Inc, an international mobility services company,
until it was sold in 2018. She remained Chair of the North American operations until
September 2020. Mrs. Meagher is the past Chair of the St Boniface Hospital Research
Foundation and currently serves on the Board of Directors of Cancer Care Manitoba
Foundation and the Pan Am Clinic Foundation. She has a B.A. from the University of
Manitoba.
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, 2021
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2021
March 9, 2022
This management’s discussion and analysis (“MD&A”) of Pollard Banknote Limited (“Pollard”) for the year
ended December 31, 2021, is prepared as at March 9, 2022, and should be read in conjunction with the
accompanying audited financial statements of Pollard and the notes therein as at December 31, 2021.
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 “EBITDA” is to earnings before interest, income taxes, depreciation, amortization and
purchase accounting amortization. Reference to “Adjusted EBITDA” is to EBITDA before unrealized
foreign exchange gains and losses, and certain non-recurring items including acquisition costs, litigation
settlement costs, contingent consideration fair value adjustments and insurance proceeds (net). 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.
Reference to “Combined sales” is to sales recognized under GAAP plus Pollard’s 50% proportionate share
of NeoPollard Interactive LLC’s (“NPi”) sales, its iLottery joint venture operation. Reference to “Combined
iLottery sales” is to sales recognized under GAAP for Pollard’s 50% proportionate share of its Michigan
Lottery joint iLottery operation plus Pollard’s 50% proportionate share of NeoPollard Interactive LLC’s
(“NPi”) sales, its iLottery joint venture operation.
EBITDA, Adjusted EBITDA, Combined sales and Combined iLottery sales are measures not recognized
under GAAP and do not have a standardized meaning prescribed by GAAP. Therefore, these measures
may not be comparable to similar measures presented by other entities. Investors are cautioned that
EBITDA, Adjusted EBITDA, Combined sales and Combined iLottery sales should not be construed as
alternatives to net income or sales as 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, 2021 and 2020. 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 solutions 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 products and services
including: licensed products, distribution, SureTrack® lottery management system, marketing, iLottery,
game content, interactive digital gaming, including mkodo’s world class game apps, PlayOnTM loyalty
programs, retail management services, ScanACTIVTM, lottery ticket dispensers and play stations, vending
machines and eGaming 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 200 independent
distributors with the majority of revenue generated from repeat business.
Acquisitions
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 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 €4.0 million ($6.3 million) will be paid upon the achievement of
certain gross margin targets in 2021. The purchase price was funded from existing Pollard cash resources
and availability under the existing credit facilities, and the issuance of treasury shares of Pollard for
approximately €4.6 million ($8.0 million).
3
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 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 businesses were negatively impacted with a large reduction in sales in the
second quarter of 2020 with the temporary closure of many retail outlets; however, these sales
rebounded to pre-COVID levels in the third quarter of 2020 with the re-opening of retail outlets. In the
later part of the fourth quarter of 2020, a number of jurisdictions reenacted temporary retail closures,
reducing our revenues again. Many of these jurisdictions re-opened in early 2021, with consumer demand
once again returning strongly, to levels much higher than pre-pandemic, which have continued to date.
In addition, Pollard’s main lottery products and services have shown significant resilience with strong
retail sales growth throughout the pandemic in many jurisdictions, including the U.S., generating
substantial cash flows from operating activities through the years ended December 31, 2020 and
December 31, 2021. 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 continue to follow at a minimum their applicable provincial/state and local public
health authority measures and guidance. 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. Our supply chains, while remaining functional,
are facing pressure and we are seeing inflationary price increases on our instant ticket inputs. We are
also experiencing staffing challenges in areas within our organization. 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 health screening, extensive
social distancing, restriction of visitors, work from home policies for employees capable of doing so,
encouragement of obtaining vaccines and use of electronic monitoring to ensure social distancing.
4
Product line breakdown of revenue
Year ended
December 31,
2021
Year ended
December 31,
2020
Lottery (1) (3)
Charitable
eGaming systems (2)
78.9%
12.9%
8.2%
84.1%
10.4%
5.5%
(1) Includes mkodo Limited (“mkodo”) which was acquired on February 3, 2020.
(2) Includes Compliant Gaming, LLC (“Compliant”) which was acquired on December 30, 2020.
(3) Includes Next Generation Lotteries AS (“NGL”) which was acquired on January 14, 2021.
Geographic breakdown of revenue
Year ended
December 31,
2021
Year ended
December 31,
2020
60%
18%
22%
61%
19%
20%
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, 2021.
5
SELECTED FINANCIAL INFORMATION
(millions of dollars, except per share information)
Year ended
December 31,
2021
Year ended
December 31,
2020
Year ended
December 31,
2019
Sales
Cost of sales
$459.0
$414.1
$397.8
367.9
323.1
306.7
Gross profit
Gross profit as a % of sales
Administration expenses
Administration expenses as a % of sales
Selling expenses
Selling expenses as a % of sales
91.1
19.8%
47.2
10.3%
17.5
3.8%
91.0
22.0%
40.3
9.7%
14.6
3.5%
91.1
22.9%
40.6
10.2%
15.9
4.0%
NPi equity investment (income) loss
(12.3)
(1.6)
4.0
NPi equity investment (income) loss as a
% of sales
(2.7%)
(0.4%)
1.0%
Other (income) expenses
Other (income) expenses as a % of sales
5.2
1.1%
(12.3)
(3.0%)
(2.0)
(0.5%)
Unrealized foreign exchange (gain) loss
Unrealized foreign exchange (gain) loss
as a % of sales
0.3
(1.9)
(3.3)
0.1%
(0.5%)
(0.8%)
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)
19.7
4.3%
84.0
18.3%
$0.74
$0.73
33.3
8.0%
80.6
19.5%
$1.30
$1.28
22.0
5.5%
60.2
15.1%
$0.86
$0.86
6
December 31,
December 31,
December 31,
2021
2020
2019
Total Assets
Total Non-Current Liabilities
$461.4
$163.5
$404.6
$191.3
$352.3
$175.6
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(millions of dollars)
Net income
Adjustments:
Amortization and depreciation
Interest
Income taxes
EBITDA
Unrealized foreign exchange (gain) loss
Acquisition costs
Contingent consideration fair value
adjustment
Litigation settlement cost
Insurance proceeds (net)
Adjusted EBITDA
Lotteries and charitable gaming
eGaming systems
Adjusted EBITDA
Year ended
December 31,
2021
Year ended
December 31,
2020
Year ended
December 31,
2019
$19.7
$33.3
$22.0
31.5
4.8
12.8
82.4
(1.9)
2.2
(2.1)
0.0
0.0
$80.6
$74.2
6.4
$80.6
27.1
6.4
7.0
62.5
(3.3)
1.2
(0.2)
0.0
0.0
$60.2
$48.0
12.2
$60.2
39.5
5.0
7.4
71.6
0.3
1.0
9.6
2.5
(1.0)
$84.0
$64.3
19.7
$84.0
7
REVIEW OF OPERATIONS
Financial and operating information has been derived from, and should be read in conjunction with, the
consolidated financial statements of Pollard and the selected financial information disclosed in this MD&A.
ANALYSIS OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 2021
Sales
Product Line Sales
Fiscal 2021
(in millions of dollars)
Lottery,
$361.9
Product Line Sales
Fiscal 2020
(in millions of dollars)
Charitable,
$59.3
eGaming
Systems,
$37.8
Lottery,
$348.4
Charitable,
$43.2
eGaming
Systems,
$22.5
During the year ended December 31, 2021 (“Fiscal 2021” or “2021”), Pollard achieved sales of $459.0
million, compared to $414.1 million in the year ended December 31, 2020 (“Fiscal 2020” or “2020”).
Factors impacting the $44.9 million sales increase were:
For the majority of 2021, most retail establishments where our charitable gaming products are sold were
open, and Pollard’s sales of pull-tab tickets and related products reached record highs. The growth in
charitable gaming volumes increased sales by $17.6 million in 2021, as compared to 2020 when many
retail establishments were closed for periods of time in response to the onset of COVID-19. eGaming
systems revenue increased $17.6 million as compared to 2020 as a result of the acquisition of Compliant
and having more retail establishments open in 2021, including the re-opening of bingo halls in Ontario
in the third quarter of 2021. In addition, the higher average selling price of charitable games in 2021
further increased sales by $2.5 million.
Higher sales of ancillary lottery products and services increased revenue by $21.6 million in 2021. This
growth was largely as a result of the addition of NGL in 2021. In addition, increases in sales of digital
and loyalty products, and retail merchandising products, also contributed to the higher sales. Higher
instant ticket sales volumes increased sales by $10.4 million in 2021. Also, an increase in the instant
ticket average selling price increased sales by $2.6 million as compared to 2020.
Lower sales from Michigan iLottery decreased revenue in 2021 by $5.1 million, excluding the negative
impact of foreign exchange rates of $1.8 million, as compared to 2020, when Michigan iLottery sales
were at record quarterly highs in the second and third quarters, during the first quarters of the pandemic.
8
Sales Breakdown
Fiscal 2021
Sales Breakdown
Fiscal 2020
United
States
60%
International
22%
Canada
18%
United
States
61%
International
20%
Canada
19%
During Fiscal 2021, Pollard generated approximately 68.3% (2020 – 71.3%) of its revenue in U.S. dollars
including a portion of international sales which are priced in U.S. dollars. During Fiscal 2021 the actual
U.S. dollar value was converted to Canadian dollars at an average rate of $1.254 compared to an average
rate of $1.338 during Fiscal 2020. This 6.3% decrease in the U.S. dollar value resulted in an approximate
decrease of $21.0 million in revenue relative to Fiscal 2020. During 2021 the value of the Canadian dollar
strengthened against the Euro resulting in an approximate decrease of $1.3 million in revenue relative
to 2020.
Cost of sales and gross profit
Cost of sales was $367.9 million in Fiscal 2021 compared to $323.1 million in Fiscal 2020. The increase
of $44.8 million was primarily a result of the increase in charitable gaming sales volumes, as compared
to 2020, and the addition of NGL and Compliant. In addition, higher instant ticket sales volumes and
certain instant ticket production inefficiencies increased cost of sales in 2021. Also adding to cost of sales
in 2021 were increases in raw material costs in the second half of the year, some higher manufacturing
overhead costs and increased amortization and depreciation expenses. Also increased sales of ancillary
lottery products and services further added to cost of sales. Partially offsetting these increases was the
impact of lower exchange rates on U.S. dollar denominated expenses in 2021, of approximately $15.5
million, which decreased cost of sales.
Gross profit increased to $91.1 million (19.8% of sales) in Fiscal 2021 from $91.0 million (22.0% of sales)
in Fiscal 2020. Gross profit increased in 2021 as a result of the significant increase in charitable and
eGaming sales, including the addition of Compliant. In addition, an increase in merchandising product
sales further increased gross profit in 2021. These increases were offset by a number of factors including
lower instant ticket sales margin as a result of a less profitable customer mix, particularly in the second
half of 2021, and increased manufacturing costs. In addition, the decrease in Michigan iLottery gross
profit, lower margin from licensed product sales and the addition of NGL further decreased gross profit
in 2021. The lower gross profit percentage was due to the reduction in higher margin Michigan iLottery
sales, lower margin from licensed product sales and the change in the mix of instant ticket sales to lower
margin customers. As well, the inclusion of NGL had a negative impact on our overall margin percentage.
Administration expenses
Administration expenses increased to $47.2 million in Fiscal 2021 from $40.3 million in Fiscal 2020. The
increase of $6.9 million was primarily a result of the addition of NGL, of $5.2 million, in addition to
increased compensation expenses, including higher incentive costs, to support Pollard’s growth
strategies, particularly our investments in digital products and solutions development. Partially offsetting
these increases was a reduction in professional fees, including acquisition costs, in 2021.
9
Selling expenses
Selling expenses increased to $17.5 million in Fiscal 2021 from $14.6 million in Fiscal 2020 primarily due
to the addition of NGL, as well as higher compensation costs. These increases were partially offset by
the reduction in travel related costs due to the ongoing impact of COVID-19.
Equity investment income
Pollard’s share of income from its 50% owned iLottery joint venture, NPi, increased to $12.3 million in
Fiscal 2021 from $1.6 million in Fiscal 2020. This $10.7 million increase was primarily due to the increase
in revenue in 2021, as compared to 2020. Contracts held by NPi experienced organic growth, in addition
to the added sales increase from the additional offering of eInstants in Virginia starting in the second
half of 2020. Also increasing sales was the launch of the Alberta Gaming, Liquor & Cannabis (“AGLC”)
iLottery platform, which went live with a select product launch on September 30, 2020 and added
additional gaming verticals throughout 2021.
Other (income) expenses
Other expenses were $5.2 million in 2021 compared to $12.3 million of other income in 2020. The change
of $17.5 million was due, in part, to the contingent consideration accrual adjustments, as part of our
Compliant and mkodo acquisitions, which decreased other income by $11.7 million as compared to 2020.
Further reducing other income in 2021, Pollard entered into an agreement for a one-time payment of
$2.5 million to settle all aspects of certain litigation regarding a patent dispute relating to our instant
ticket production. In addition, the $3.6 million reduction in Canada emergency wage subsidy (“CEWS”)
recognized in 2021 as compared to 2020, as well as the elimination of the EBITDA support agreement of
$1.0 million, which expired on June 30, 2020, further reduced other income. Partially offsetting these
negative changes was insurance proceeds, net of expenses recovered, of $1.0 million for an insurance
claim resulting from damage to ancillary production equipment.
Foreign exchange
The net foreign exchange loss was $1.4 million in Fiscal 2021 compared to a net gain of $0.9 million in
Fiscal 2020. The 2021 net foreign exchange loss consisted of a realized foreign exchange loss of $1.1
million as a result of foreign currency denominated accounts receivable collected being converted into
Canadian dollars at unfavorable foreign exchange rates, partially offset by gains on repayment of U.S.
dollar denominated long-term debt, and a $0.3 million unrealized loss.
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.
10
Adjusted EBITDA
Adjusted EBITDA increased to $84.0 million in Fiscal 2021 compared to $80.6 million in Fiscal 2020. The
primary reasons for the increase of $3.4 million were the increase in our share of income from our joint
venture, NPi, of $10.7 million in 2021 and the increase in gross profit (net of amortization and
depreciation) of $8.1 million. Gross profit (net of amortization and depreciation) increased with the
rebound in sales of charitable gaming and eGaming, including the addition of Compliant, in 2021. These
increases in net gross profit were partially offset by lower Michigan iLottery revenues and decreased
instant ticket margins.
Partially offsetting these increases in Adjusted EBITDA were the higher administration expenses (net of
acquisition costs) of $8.1 million, the decrease in other income (net of contingent consideration, legal
settlement and insurance proceeds (net)) of $4.3 million, primarily due to the reduction in CEWS support
in 2021, and an increase in selling expenses of $2.9 million.
Interest expense
Interest expense increased to $5.0 million in Fiscal 2021 from $4.8 million in Fiscal 2020 primarily as a
result of the interest accretion on the discounted contingent consideration liability of $1.5 million, related
to the Compliant purchase, and an increase in average long-term debt in 2021. These increases were
almost completely offset by lower interest rates.
Amortization and depreciation
Amortization and depreciation, including amortization of intangible assets and depreciation of property
and equipment, totaled $39.5 million during Fiscal 2021 which increased from $31.5 million during Fiscal
2020. The increase of $8.0 million was primarily as a result of the additions of Compliant and NGL,
including the amortization and depreciation relating to the identifiable assets acquired, including
intangible assets and property, plant and equipment and an increase in depreciation related to leased
properties.
Income taxes
Income tax expense was $7.4 million in Fiscal 2021, an effective rate of 27.4%, which was higher than
our domestic rate of 27.0% due primarily to non-deductible amounts. Partially offsetting these increases
in effective rate were the lower federal income tax rates in the United States.
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.
11
Net income
Net income was $19.7 million in Fiscal 2021 compared to net income of $33.3 million in Fiscal 2020. The
reason for the decrease in net income of $13.6 million was the increase in other expenses of $17.5
million, including the contingent consideration accrual adjustments of $11.7 million and the reduction of
CEWS support of $3.6 million. Also decreasing net income were the increase in administration expenses
of $6.9 million, higher selling costs of $2.9 million and the increase in the net foreign exchange loss of
$2.3 million. These decreases in net income were partially offset by the increased share of income from
our 50% owned iLottery joint venture, NPi, of $10.7 million and the decrease in income tax expense of
$5.4 million.
Net income per share (basic and diluted) decreased to $0.74 and $0.73 per share, respectively, in Fiscal
2021 from $1.30 and $1.28 per share, respectively, in Fiscal 2020.
12
iLottery
Pollard and its iLottery partner, Neogames U.S. LLP (“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 sales 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 equity investment income.
SELECT iLOTTERY RELATED FINANCIAL INFORMATION
(millions of dollars)
Q4
2021
Q3
2021
Q2
2021
Q1
2021
Q4
2020
Q3
2020
Q2
2020
Q1
2020
Sales – Pollard’s share
Michigan iLottery
NPi
$5.6
10.5
$5.9
9.8
$6.8
9.9
$8.4
9.9
$8.6
6.1
$9.5
3.1
$10.3
2.2
$5.1
1.2
Combined iLottery sales
$16.1
$15.7
$16.7
$18.3
$14.7
$12.6
$12.5
$6.3
Income (loss) before income taxes – Pollard’s share
Michigan iLottery
NPi
$1.8
3.2
$2.0
2.6
$2.8
2.5
$4.0
4.0
$4.5
1.6
$5.4
0.8
$6.5
(0.3)
$2.1
(0.5)
Combined income before
income taxes – Pollard’s
share
$5.0
$4.6
$5.3
$8.0
$6.1
$6.2
$6.2
$1.6
Beginning in the second quarter of 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 sales increase from the Virginia Lottery operation which added e-
Instants on July 1, 2020. As well, NPi’s contract with Alberta Gaming, Liquor & Cannabis (“AGLC”), went
live with a limited product launch on September 30, 2020, with additional gaming verticals launching
throughout 2021. The substantial jackpots for POWERBALL® and Mega Millions® awarded in the latter
half of January 2021 further increased sales significantly in the fourth quarter of 2020 and the first quarter
of 2021.
Sales and income before income taxes from our Michigan iLottery operation declined starting in the
second quarter of 2021 due to increased online gaming competition, the lower exchange rate on U.S.
dollar denominated sales and new pricing coming into effect with our four-year contract extension,
starting at the beginning of 2021.
13
Liquidity and Capital Resources
Cash provided by operating activities
For the year ended December 31, 2021, cash flow provided by operating activities was $56.5 million
compared to $59.7 million in Fiscal 2020.
In Fiscal 2021, decreases in non-cash working capital provided $9.3 million compared to increases in
2020 which used $11.0 million in cash, a $20.3 million difference. In 2021, changes in the non-cash
component of working capital increased cash flow from operations due primarily to an increase in
accounts payable and accrued liabilities, and a decrease in inventories. 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 inventories.
Cash used for interest payments decreased to $3.5 million in 2021 as compared to $4.7 million in 2020.
Cash used for pension plan contributions decreased to $7.2 million in 2021 as compared to $8.6 million
in 2020. Cash used for income taxes paid was $21.1 million in 2021 compared to $1.1 million in 2020.
Income tax payments in 2021 included the final installments for the 2020 tax year and installments for
2021.
Cash used for investing activities
For the year ended December 31, 2021, cash used for investing activities was $60.6 million compared to
$61.7 million in the year ended December 31, 2020. In Fiscal 2021, Pollard used $38.1 million, net of
cash acquired and debt assumed, to purchase NGL. In addition, Pollard used $22.2 million on capital
expenditures and $12.6 million on additions to intangible assets. Partially offsetting these uses of cash
was $12.6 million Pollard received from our investment in our iLottery joint venture in the year.
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.
Cash provided by financing activities
Cash provided by financing activities was $6.4 million in the year ended December 31, 2021, compared
to cash used for financing activities of $3.9 million in the year ended December 31, 2020.
During Fiscal 2021, Pollard received net proceeds from a share issuance of $32.8 million. This receipt of
cash was partially offset by $15.4 million of long-term debt repayments, $6.2 million of lease principal
payments and $4.3 million of dividends.
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.
As at December 31, 2021, Pollard’s unused committed credit facility was $116.8 million, in addition to
$3.5 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.
14
RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2021
SELECTED FINANCIAL INFORMATION
(millions of dollars, except per share amounts)
Three months ended
December 31, 2021
Three months ended
December 31, 2020
(unaudited)
(unaudited)
Sales
Cost of sales
Gross profit
Administration expenses
Selling expenses
Equity investment income
Other (income) expenses
Income from operations
Foreign exchange gain
Interest expense
Income before income taxes
Income taxes:
Current
Deferred (reduction)
Net income
Adjustments:
Amortization and depreciation
Interest
Income taxes
EBITDA
Unrealized foreign exchange (gain) loss
Acquisition costs
Contingent consideration fair value adjustment
Insurance proceeds (net)
Adjusted EBITDA
Lotteries and charitable gaming
eGaming systems
Adjusted EBITDA
$116.5
95.8
20.7
11.9
5.0
(3.2)
2.3
4.7
(0.1)
1.6
3.2
1.0
(3.0)
(2.0)
$5.2
10.8
1.6
(2.0)
$103.7
80.7
23.0
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
4.2
$15.6
$25.0
0.6
0.0
3.5
(1.0)
$18.7
$12.3
6.4
$18.7
(3.5)
0.9
(2.1)
0.0
$20.3
$18.2
2.1
$20.3
Net income per share (basic and diluted)
$0.19
$0.47
15
Sales
During the three months ended December 31, 2021, Pollard achieved sales of $116.5 million, compared
to $103.7 million in the three months ended December 31, 2020. Factors impacting the $12.8 million
sales increase were:
Higher sales of ancillary lottery products and services increased revenue in the fourth quarter of 2021,
as compared to the fourth quarter of 2020, by $8.1 million. This increase was primarily from the addition
of NGL, as well as increased sales of digital and retail merchandising products. A higher instant ticket
average selling price increased sales by a further $3.4 million in the quarter, including certain freight
recoveries. Partially offsetting these increases was slightly lower instant ticket sales volume decreased
sales by $0.5 million in the quarter.
eGaming systems revenue increased $4.9 million, as compared to 2020, predominately as a result of the
acquisition of Compliant and the impact of the Ontario market re-opening bingo halls. Higher charitable
gaming volumes increased sales by $2.1 million in the fourth quarter of 2021 as Pollard’s sales of pull-
tab tickets and related products remained high, due to strong customer demand. In addition, the higher
average selling price of charitable games in 2021 further increased sales by $1.6 million.
Lower sales from Michigan iLottery decreased revenue in the fourth quarter of 2021 by $2.8 million
excluding the negative impact of foreign exchange rates of $0.2 million, as compared to 2020.
During the three months ended December 31, 2021, Pollard generated approximately 65.6% (2020 –
70.1%) 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 2021 the actual U.S. dollar value was converted to Canadian dollars
at an average rate of $1.263, compared to an average rate of $1.319 during the fourth quarter of 2020.
This 4.2% decrease in the value of the U.S. dollar resulted in an approximate decrease of $3.4 million in
revenue relative to 2020. During the fourth quarter of 2021 the value of the Canadian dollar strengthened
against the Euro resulting in an approximate decrease of $0.6 million in revenue relative to 2020.
Cost of sales and gross profit
Cost of sales was $95.8 million in the fourth quarter of 2021 compared to $80.7 million in the fourth
quarter of 2020. The increase of $15.1 million was primarily a result of the instant ticket sales mix and
certain instant ticket production inefficiencies in 2021. Also contributing to the higher cost of sales were
increases in raw material costs in the quarter, higher manufacturing overhead expenses, the increase in
amortization and depreciation expenses and increased freight costs. In addition, higher sales of charitable
gaming products, and the addition of NGL, further added to the increase in cost of sales in 2021. Partially
offsetting these increases was the impact of lower exchange rates on U.S. dollar denominated expenses
in the fourth quarter of 2021 which decreased cost of sales.
Gross profit was $20.7 million (17.8% of sales) in the fourth quarter of 2021 compared to $23.0 million
(22.2% of sales) in the fourth quarter of 2020. This decrease in gross profit was primarily the result of
lower instant ticket sales margin because of a less profitable customer mix in the fourth quarter of 2021
and increased costs. In addition, the decrease in Michigan iLottery sales in comparison to the fourth
quarter of 2020, also reduced gross profit in 2021. These decreases were partially offset by the increases
in gross profit from higher eGaming systems and charitable sales. The lower gross profit percentage was
due, in part, to the reduction in higher margin Michigan iLottery sales and the mix of instant ticket sales
having a negative impact on our overall margin percentage, partially offset by the increase in eGaming
16
sales. In addition, the inflationary impact of higher costs for our instant ticket direct material inputs
further reduced our gross margin percentage.
Administration expenses
Administration expenses increased to $11.9 million in the fourth quarter of 2021 compared to $10.4
million in the fourth quarter of 2020. The increase of $1.5 million was primarily a result of the addition
of NGL, in addition to increased compensation costs, including incentive accruals, to support Pollard’s
growth strategies, particularly in our digital solutions areas. Partially offsetting these increases was a
reduction in professional fees, including acquisition costs, in 2021.
Selling expenses
Selling expenses increased to $5.0 million in the fourth quarter of 2021 from $3.8 million in the fourth
quarter of 2020. The increase was primarily due to the addition of NGL and higher compensation costs,
including incentive accruals.
Equity investment income
Pollard’s share of income from its 50% owned iLottery joint venture, NPi, increased to $3.2 million in the
fourth quarter of 2021 from $1.6 in the fourth quarter of 2020. This $1.6 million increase was primarily
due to the increase in revenue, as a result of significant organic growth, plus higher sales from additional
gaming verticals going live in 2021 with AGLC’s content offering.
Other (income) expenses
Other expenses were $2.3 million in the fourth quarter of 2021 compared to other income of $3.7 million
in the fourth quarter of 2020. This change of $6.0 million was primarily due to the contingent
consideration accrual adjustments, as part of our Compliant and mkodo acquisitions, which increased
other expenses by $5.6 million, as well as the reduction in CEWS recognized in the fourth quarter of
2021, as compared to 2020, of $1.6 million. Partially offsetting these negative changes was insurance
proceeds, net of expenses recovered, of $1.0 million for a claim resulting from damage to ancillary
production equipment.
Foreign exchange
The net foreign exchange gain was $0.1 million in the fourth quarter of 2021 compared to a net gain of
$3.2 million in the fourth quarter of 2020. The 2021 net foreign exchange gain consisted of a realized
foreign exchange gain of $0.7 million, as a result of foreign currency denominated accounts payable
being settled at favorable foreign exchanges rates. The realized foreign exchange gain was partially offset
by the $0.6 million unrealized loss primarily as a result of the reversal of prior unrealized gains on U.S.
dollar denominated accounts payable and long-term debt recognized previously.
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.
17
Adjusted EBITDA
Adjusted EBITDA decreased to $18.7 million in the fourth quarter of 2021 compared to $20.3 million in
the fourth quarter of 2020. The primary reasons for the $1.6 million decrease in Adjusted EBITDA were
the higher administration expenses (net of acquisition costs) of $2.4 million, an increase in selling
expenses of $1.2 million and a decrease in other income (net of contingent consideration, legal settlement
and insurance proceeds (net)) of $1.4 million, primarily as a result of lower CEWS support of $1.6 million
in 2021. These decreases were partially offset by the increase in our share of income from our 50%
owned iLottery joint venture, NPi, of $1.6 million, the increase in the realized foreign exchange gain of
$1.0 million and the increase in gross profit (net of amortization and depreciation) of $0.8 million, net of
the inflationary impact of higher instant ticket direct material input costs.
Interest expense
Interest expense increased to $1.6 million in the fourth quarter of 2021 from $0.9 million in the fourth
quarter of 2020 primarily as a result of the interest accretion on the discounted contingent consideration
liability of $0.8 million, related to the Compliant purchase, and an increase in average long-term debt in
2021. These increases were partially offset by lower interest rates.
Amortization and depreciation
Amortization and depreciation, including amortization of intangible assets and depreciation of property
and equipment, totaled $10.8 million during the fourth quarter of 2021 which increased from $7.7 million
during the fourth quarter of 2020. The increase of $3.1 million was primarily a result of the additions of
Compliant and NGL, including the amortization and depreciation relating to the identifiable assets
acquired, including intangible assets and property, plant and equipment.
Income taxes
Income tax recovery was $2.0 million in the fourth quarter of 2021, an effective rate of (60.6%) which
was differed from our domestic rate of 27.0% due primarily due to the recognition of tax losses not
previously valued.
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.
Net income
Net income was $5.2 million in the fourth quarter of 2021 compared to $12.2 million in the fourth quarter
of 2020. The primary reason for the decrease in net income of $7.0 million was the increase in other
expenses of $6.0 million. This increase in other expenses includes the change in contingent consideration
accrual adjustments of $5.6 million and the reduction of CEWS support of $1.6 million, partially offset by
insurance proceeds, net of expenses recovered, of $1.0 million. Also decreasing net income were the
decrease in the net foreign exchange gain of $3.1 million, the decrease in gross profit of $2.3 million
(including the inflationary impact of higher instant ticket direct material input costs), the increase in
administration expenses of $1.5 million and the increase in selling expense of $1.2 million. These
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decreases in net income were partially offset by the increase in our share of income from our joint
venture, NPi, of $1.6 million and a decrease in income taxes of $6.2 million.
Net income per share (basic and diluted) decreased to $0.19 per share in the fourth quarter of 2021 from
$0.47 per share in the fourth quarter of 2020.
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, 2021, Pollard’s investment in non-cash working capital decreased by $9.3 million
compared to December 31, 2020, primarily a result of the increase in accounts payable and accrued
liabilities, and a decrease in inventories.
December 31, December 31,
2021
2020
Working Capital
Total Assets
Total Non-Current Liabilities
$62.2
$461.4
$163.5
$69.8
$404.6
$191.3
Credit Facility
Pollard’s credit facility was renewed effective December 31, 2021. The credit facility provides loans of
up to $215.0 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 $215.0 million Canadian equivalent. The credit facility also includes an accordion feature which can
increase the facility by $50.0 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, 2021, the outstanding letters of guarantee were $0.1 million. The remaining balance
available for drawdown under the credit facility was $116.8 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
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and certain other items (“Adjusted EBITDA”) ratios and certain debt service coverage ratios. As at
December 31, 2021, 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 four-year period, renewable
December 31, 2025. 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, 2021, the outstanding letters of credit drawn
on this facility were $10.5 million (€7.3 million).
Outstanding Share Data
As at December 31, 2021 and March 9, 2022, outstanding share data was as follows:
Common shares
26,917,669
On January 14, 2021, 233,211 common shares were issued as a portion of the consideration of Pollard’s
purchase of NGL.
On March 2, 2021, 933,800 common shares were issued as a result of a share offering.
In the year ended December 31, 2021, 43,750 commons shares were issued through the exercise of
stock options.
Share Options
Under the Pollard Banknote Limited Stock Option Plan the Board of Directors has the authority to grant
options to purchase common shares to eligible persons and to determine the applicable terms. The
aggregate maximum number of common shares available for issuance from Pollard’s treasury under the
Option Plan is 2,354,315 common shares. As at December 31, 2021, the total share options issued and
outstanding were 312,500.
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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
2022
2023
2024
2025
2026 &
thereafter
Long-term debt
Leases
$124.2
$17.9
$2.1
$6.9
$2.1
$5.5
$2.1
$2.5
117.9
$1.8
-
$1.2
Total
$142.1
$9.0
$7.6
$4.6
$119.7
$1.2
Pension Obligations
Pollard sponsors four non-contributory defined benefit pension plans, of which three are final pay plans
and one is a flat benefit plan. As of December 31, 2021, the aggregate fair value of the assets of Pollard’s
defined benefit pension plans was $88.3 million and the accrued benefit plan obligations were $110.9
million. Pollard’s total annual funding contribution for its defined pension plans in 2022 is expected to be
approximately $5.2 million, compared to $5.7 million in 2021.
Off-Balance Sheet Arrangements
Other than the operating leases described previously, Pollard has no other off-balance sheet
arrangements.
Related Party Transactions
Pollard Equities Limited and affiliates
During the year ended December 31, 2021, Pollard paid property rent of $3.3 million (2020 - $3.4 million)
and $0.1 million (2020 - $0.2 million) in plane charter costs to affiliates of Equities.
During the year ended December 31, 2021, Equities paid Pollard $0.07 million (2020 - $0.07 million) for
accounting and administration fees.
At December 31, 2021, Pollard owed Equities and its affiliates $nil (2020 - $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, 2021, the net book value of the right-of-
use assets was $6.6 million (2020 - $7.7 million) and the present value of the lease liabilities was $6.8
million (2020 - $7.9 million).
Neogames S.A. and affiliates
During the year ended December 31, 2021, Pollard reimbursed its share of operating costs and paid
software royalties of $13.4 million (2020 - $9.6 million) to its iLottery partner, which are recorded in cost
of sales.
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At December 31, 2021, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $2.2 million (2020 - $2.0 million) for its share of profits and reimbursement
of operating costs, net of capital investments.
At December 31, 2021, included in restricted cash and accounts payable and accrued liabilities is an
amount owing to Pollard’s iLottery partner of $4.8 million (2020 - $4.8 million) for funds relating to
contractual performance guarantees.
Critical Accounting Policies and Estimates
Described in the notes to Pollard’s 2021 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, 2021, for a discussion of the
significant accounting estimates and judgements.
Future Changes in Accounting Policies
Described in the notes to Pollard’s 2021 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, 2021 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 9, 2022, which is available under Pollard’s profile on SEDAR
(www.sedar.com).
Financial Instruments
Pollard is exposed to financial risks that arise from fluctuations in interest rates and foreign exchange
rates and the degree of volatility of these rates, liquidity risk and credit risk. Pollard uses financial
instruments, from time to time, to manage these risks.
Pollard’s risk management policies are established to identify and analyze the risks, to set appropriate risk
limits and controls to monitor risks and adherence to limits. The Audit Committee oversees how
management monitors compliance with Pollard’s risk management policies and procedures. The Audit
Committee is assisted in its oversight role by Internal Audit, who undertakes regular reviews of risk
management controls and utilizes the annual risk assessment process as the basis for the annual internal
audit plan.
Risk Exposure
Currency risk
Pollard sells a significant portion of its products and services to customers in the United States and to
international customers where sales are denominated in U.S. dollars. In addition, a significant portion of
its cost inputs are denominated in U.S. dollars. Pollard also generates revenue in currencies other than
Canadian and U.S. dollars, primarily in Euros.
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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 $0.1 million for the
year ended December 31, 2021 (2020 - $0.2 million). A 50 basis point strengthening/weakening in the
foreign exchange rate between the Canadian dollar and Euro would decrease/increase the income before
income taxes due to changes in operating cashflow by approximately $0.05 million for year ended
December 31, 2021 (2020 - $0.07 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, 2021, the amount of financial liabilities denominated in U.S. dollars exceeded the
amount of financial assets denominated in U.S. dollars by approximately $29.0 million (2020 - $52.6
million). A 50 basis point weakening/strengthening in the value of the Canadian dollar relative to the
U.S. dollar would result in a decrease/increase in income before income taxes of approximately $0.1
million (2020 - $0.3 million) for the year ended December 31, 2021.
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign currency
risk. At December 31, 2021, Pollard had no outstanding foreign currency contracts.
Interest rate risk
A 50 basis point decrease/increase in interest rates would result in an increase/decrease in income before
income taxes of $0.6 million for the year ended December 31, 2021 (2020 - $0.7 million).
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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 $215.0 million for its Canadian operations
and up to US$14.0 million for its U.S. subsidiaries. At December 31, 2021, the unused balance available
for drawdown was $116.8 million (2020 - $75.7 million).
The 2022 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
Retail sales of instant tickets are continuing at the high level we witnessed in 2021, particularly in the
U.S., and we believe this level of consumer demand will continue. Higher retail sales do not directly
translate necessarily into proportionate growth at the manufacturing level, however we are seeing strong
demand from our customers for more product. Our production schedule through the remainder of the
first quarter and through the second quarter is very busy, with volumes at levels higher than our average
production in 2021.
In the short term, production capacity is somewhat fixed and can fluctuate based on the run size of
games and other factors. We are currently expanding our instant ticket productive capacity by staffing
two additional shifts on our second press in our Ypsilanti Michigan facility and expect to have additional
capacity available. Higher capacity is expected to help ease some of the inefficiencies of producing close
to capacity and help us meet some of this additional demand.
In the latter half of 2021 our production and sales mix was skewed to a greater mix of lower value
product relative to traditional expectations for that time period. Looking forward at our current
scheduling, later in the first quarter and into the second quarter, we are expecting that mix of work to
return to more historic levels of higher valued work including higher use of proprietary products such as
Scratch FX®. Timing of shipments can impact the timing of the revenue recognition.
Inflation will be a challenge, particularly in our instant ticket product line, with higher costs already
starting in the second half of 2021. Additional cost increases have been identified already for 2022 and
there can be no guarantee there won’t be further cost headwinds. The specific technical nature of our
raw material inputs makes it more difficult to switch out to alternative inputs. Although the long-term
nature of our instant ticket contracts is beneficial, these contracts do not allow for explicit price increases
to recover higher costs.
A number of initiatives are underway to help mitigate the financial impact of the inflationary price
increases including increasing capacity and volume of instant tickets, internal cost reviews and continued
focus on improving our average selling prices through focus on innovation and selling proprietary
products at higher margins.
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Our NGL operation remains in its development stage as we continue to invest resources to improve its
suite of solutions. The facility management side of the operations traditionally has much higher sales in
the fourth quarter and as such, we expect more normalized operating results for the next three quarters
relative to the fourth quarter.
Our charitable gaming and eGaming businesses remain very strong with continued levels of high
consumer demand. We have been able to increase our selling prices to offset inflationary costs increases
within our charitable gaming product lines. The current demand for our products outstrips our ability to
produce, particularly in our pull-tab product line. In the short term it is challenging to increase capacity,
primarily because it is reliant on additional staffing which is difficult to recruit in the current environment,
however we continue to pursue all avenues to help increase our production capabilities. Our tablet based
eGaming business also continues to grow as new and improved game content, and expanded sites, are
expected to continue through 2022. We expect charitable gaming, including eGaming, to be an important
contributor to our financial success in 2022.
We continue to expect some challenges in the supply chain relating to transportation, both in terms of
shipping our goods to customers and receipt of supplier inputs. This may impact the timing of revenue
recognition as well as driving some inefficiencies in our manufacturing, however we don’t expect this to
cause material impacts in the short term.
We continue to invest in and be an active thought leader in the iLottery space. Our existing operations
through our NPi joint venture, including our Michigan contract, are the market leaders in the U.S. Growth
is expected in the NPi operation based on the ongoing development of our newer contracts in Alberta
and Virginia. While it is difficult to estimate when the next formal opportunity for a new iLottery operation
in the U.S. or internationally will occur, we are confident that more lotteries will avail themselves of this
opportunity and provide a critical growth opportunity for Pollard.
While many of the restrictions related to COVID-19 have been or are being lifted throughout the world,
changes to these trends could still have a negative impact on our business, including but not limited to
facility closures and retail shutdowns. We remain focused on monitoring the external issues potentially
impacting our business and ensure we are providing a healthy and safe environment for our team
members, including a number of programs offering encouragement for all employees to be vaccinated.
We generate strong cash flow and have a high conversion ratio of converting EBITDA to cash and we
expect this to continue. With our renewed bank facility in place as of December 31, 2021, available
liquidity is very significant and combined with our strong operating cashflow, we are confident we will
have the internal resources to invest in the growth of our current business, devote capital to new
opportunities, including acquisition prospects, as well as maintaining our very conservative debt
management policy.
Going into 2022 most of our key business units are experiencing very strong demand for their products.
We believe this demand will translate into ongoing growth opportunities for Pollard. There do exist some
headwinds in 2022, particularly in the instant ticket market due to inflationary price increases in our key
inputs. Our ability to increase volumes in ticket production is a critical factor in offsetting these cost
increases. In addition, the very strong growth in the charitable gaming and eGaming product lines will
also provide a significant offset to the margin pressures on the instant ticket business. Our strategy of
having a very broad product portfolio to help balance our operating results has proven to be very
beneficial as we move into 2022.
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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 NGL, as it was acquired not more than 365 days before the end of the financial period to
which this MD&A relates.
Internal Controls over Financial Reporting
Under National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,”
issuers are required to document the conclusions of the Certifying Officers regarding the design and
effectiveness of the internal controls over financial reporting. Management used the Internal Control –
Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO 2013) as the control framework in designing its internal controls over financial
reporting. Pollard’s management, with the participation of the Certifying Officers of Pollard, has
concluded that the internal controls over financial reporting as defined in National Instrument 52-109 are
designed appropriately and are effective at providing reasonable assurance of achieving the financial
reporting objectives.
Pollard has limited its design of ICFR to exclude controls, policies and procedures of NGL, as it was
acquired not more than 365 days before the end of the financial period to which this MD&A relates.
No changes were made in Pollard’s internal control over financial reporting during the year ended
December 31, 2021, 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, 2021, 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 9, 2022
ROBERT ROSE
Chief Financial Officer
Consolidated Financial Statements of
POLLARD BANKNOTE
LIMITED
Years ended December 31, 2021 and 2020
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, 2021 and December 31,
2020, 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, 2021 and December 31, 2020, 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, 2021. 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 Next Generation Lotteries AS acquisition
Description of the matter
We draw attention to Notes 2(d), 3(b), 5(c) to the financial statements. On January 14, 2021, the Entity
acquired Next Generation Lotteries AS (NGL) for total consideration of $48,745 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 KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee.KPMG Canada provides services to KPMG LLP. The Entity recorded technology and game library in connection with the NGL transaction (collectively, the
“intangible assets”). The acquisition date fair value for the NGL intangible assets was $25,637 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 NGL
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 NGL’s historical actual results. We also considered the Entity’s revenue synergies and cost
savings after integration of NGL with Pollard.
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, 2021 was $108,175 thousand related to the Lotteries, Charitable gaming, eGaming systems
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 2021”.
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 2021” 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 Austin Abas.
Winnipeg, Canada
March 9, 2022
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
Long-term receivables
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
Total assets
December 31,
2021
December 31,
2020
$
$
3,517
19,237
73,351
45,008
7,576
4,477
153,166
584
104,590
585
108,175
94,305
–
308,239
1,888
19,058
65,208
46,620
6,707
338
139,819
829
96,396
881
89,276
74,146
3,220
264,748
$
461,405
$
404,567
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
Current portion lease liabilities (note 8)
Contract liabilities (note 17)
Total current liabilities
Non-current liabilities
Lease liabilities (note 8)
Deferred income taxes (note 12)
Long-term debt (note 13)
Other non-current liabilities
Pension liability (note 14)
Total non-current liabilities
Shareholders’ equity
Share capital (note 15)
Reserves
Retained earnings
Total shareholders’ equity
Commitments and contingencies (note 16)
December 31,
2021
December 31,
2020
$
$
81,306
1,077
194
6,151
2,242
90,970
10,419
11,112
115,130
4,276
22,541
163,478
149,849
(1,579)
58,687
206,957
59,433
1,028
4,941
5,109
379
70,890
11,832
10,690
131,080
1,322
36,370
191,294
109,007
2,563
30,813
142,383
Total liabilities and shareholders’ equity
$
461,405
$
404,567
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
Equity investment income (note 9)
Other (income) expenses (note 18)
Income from operations
Finance costs (note 19)
Finance income (note 19)
Income before income taxes
Income taxes (note 12)
Current
Deferred (reduction)
2021
2020
$
459,014
$
414,134
367,912
91,102
47,214
17,538
(12,336)
5,169
33,517
7,234
(832)
27,115
14,247
(6,833)
7,414
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
Net income
Net income per share (basic) (note 20)
Net income per share (diluted) (note 20)
$
$
$
19,701
$
33,288
0.74 $
0.73
$
1.30
1.28
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
$
19,701
$
33,288
2021
2020
Other comprehensive income (loss):
Items that are or may be reclassified to profit and loss
Foreign currency translation differences – foreign
operations
Items that will never be reclassified to profit and loss
(4,142)
(3,142)
Defined benefit plans remeasurements, net of
income tax (note 12 & note 14)
Other comprehensive income (loss)
12,111
7,969
(7,649)
(10,791)
Comprehensive income
$
27,670
$
22,497
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)
Year ended December 31, 2021
Share
capital
Translation
reserve
Retained
earnings
Balance at December 31, 2020
$
109,007
2,563
Net income
Other comprehensive income (loss)
Foreign currency translation differences –
foreign operations
Defined benefit plans remeasurements, net
of income tax (note 12 & note 14)
Total other comprehensive income (loss)
Total comprehensive income (loss)
Issue of common shares (note 15)
$
$
$
Issue of common shares related to acquisition of
Next Generation Lotteries AS (note 5)
Share based compensation
Dividends (note 15)
–
–
–
–
–
32,844
7,998
–
–
30,813
19,701
–
Total
equity
142,383
19,701
(4,142)
–
(4,142)
–
12,111
12,111
(4,142)
(4,142)
–
–
–
–
12,111
31,812
(81)
–
449
7,969
27,670
32,763
7,998
449
(4,306)
(4,306)
Balance at December 31, 2021
$
149,849
(1,579)
58,687
206,957
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
–
–
–
–
–
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
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
Equity investment income (note 9)
Pension expense (note 14)
Contingent consideration adjustment (note 18)
Interest paid
Income tax paid
Pension contribution
Change in non-cash operating working capital
(note 22)
Investing activities
Additions to property, plant and equipment (note 7)
Acquisition of mkodo Limited (note 5)
Acquisition of Compliant Gaming, LLC (note 5)
Acquisition of Next Generation Lotteries AS (note 5)
Charitable gaming asset purchase
Equity distribution (note 9)
Additions to intangible assets (note 11)
Financing activities
Proceeds from issue of share capital
Net borrowings (repayments) of long-term debt (note 13)
Change in other non-current liabilities
Lease principal payments
Deferred financing charges paid (note 13)
Dividends paid
Foreign exchange gain (loss) on cash held in foreign currency
Change in cash position
Cash position, beginning of year
2021
2020
$
19,701
$
33,288
7,414
39,554
4,980
251
(12,336)
9,947
9,550
(3,539)
(21,068)
(7,189)
9,272
56,537
(22,226)
–
(289)
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)
(38,083)
–
–
12,613
(12,604)
(60,589)
32,763
(15,350)
90
(6,227)
(650)
(4,257)
6,369
(688)
1,629
1,888
(4,895)
1,860
(5,978)
(61,668)
298
5,055
32
(5,098)
(128)
(4,102)
(3,943)
400
(5,560)
7,448
Cash position, end of year
$
3,517
$
1,888
See accompanying notes to consolidated financial statements.
Pollard Banknote Limited
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
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, 2021,
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 and solutions.
The controlling entity of Pollard is Pollard Equities Limited (“Equities”), a privately held company.
Equities owned approximately 64.3% of Pollard’s outstanding shares as at December 31, 2021.
The operations of Next Generation Lotteries AS (“NGL”), acquired during the first quarter of 2021,
are included in the consolidated financial statements from January 14, 2021. Further details are
provided in note 5.
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 9, 2022, 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.
Certain comparative figures for the prior period have been reclassified to conform to the
presentation adopted in the current period.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
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 businesses were negatively impacted with a large reduction
in sales in the second quarter of 2020 with the temporary closure of many retail outlets; however,
these sales rebounded to pre-COVID levels in the third quarter of 2020 with the re-opening of
retail outlets. In the later part of the fourth quarter of 2020, a number of jurisdictions reenacted
temporary retail closures, reducing our revenues again. Many of these jurisdictions re-opened in
early 2021, with consumer demand once again returning strongly, to levels much higher than
pre-pandemic, which have continued to date. In addition, Pollard’s main lottery products and
services have shown significant resilience with strong retail sales growth throughout the
pandemic in many jurisdictions, including the U.S., generating substantial cash flows from
operating activities through the years ended December 31, 2020 and December 31, 2021. 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 continue to follow at a minimum their applicable provincial/state and local
public health authority measures and guidance. 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. Our supply chains, while remaining functional, are facing
pressure and we are seeing inflationary price increases on our instant ticket inputs. We are also
experiencing staffing challenges in areas within our organization. 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, encouragement of obtaining vaccines 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
2. Basis of preparation (continued):
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates
are recognized prospectively. Actual results may differ from these estimates.
Information about judgments, assumptions and estimation uncertainties that have a significant
risk of resulting in a material adjustment within the next period are as follows:
Impairment of goodwill:
Pollard determines whether goodwill is impaired at least on an annual basis. This requires an
estimation of the “value in use” or “fair value less costs to sell” of the cash-generating units
(“CGUs”), 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
2. Basis of preparation (continued):
Acquisition accounting:
For acquisition accounting purposes, all identifiable assets and liabilities acquired in a business
combination are recognized at fair value at the date of acquisition. Estimates and assumptions
are used to calculate the fair value of these assets and liabilities. Changes to assumptions could
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, 2021
December 31, 2020
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
Next Generation Lotteries AS
Next Generation Lotteries GmbH
100
100
100
100
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, 2021 and 2020
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.
Pollard performs a concentration test to clarify whether a transaction results in an asset or a
business acquisition. 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
Many of Pollard’s contracts have a single performance obligation, including the sale of instant
tickets and related products, pull-tab (or break-open) tickets, bingo paper, pull-tab vending
machines, ancillary products such as pull-tab counting machines and gaming machines. The
single performance obligation in these contracts is the promise to transfer the individual goods.
Revenue is recognized at a point in time when the customer obtains control of a product, which
typically takes place when legal title and physical possession of the product is transferred to the
customer. These conditions are usually fulfilled upon delivery. However, under certain contracts,
Pollard is compensated for its products based on its customers’ sales of those products at retail.
Pollard 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.
Pollard applies bill and hold sales accounting when products are held on behalf of customers
provided all of the following conditions are met as of the reporting date: a) there is a substantive
reason for the arrangement, b) the goods are separately identified as belonging to the customer,
c) Pollard is no longer able to use the goods or direct the goods to another customer, and d) the
goods are currently ready for physical transfer to the customer.
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
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,
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
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.
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. Pollard expects to maintain these assets indefinitely and therefore finite useful lives
cannot be determined. For purposes of impairment testing, the fair value of the trademarks,
trade names and brands are tested for impairment on an annual basis.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
(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.
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
Furniture, fixtures and computers
Rate
10 to 39 years
Term of lease
2 to 11 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
(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 50% share of the income and expenses
and equity movements of the entity accounted for under the equity method of accounting.
(j) Investment in joint operation:
A joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement. Joint control is the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require consent of both parties.
The consolidated financial statements include Pollard’s interest in the Michigan Lottery iLottery
joint operations: its assets, including its 50% share of any assets held jointly; its liabilities,
including its 50% share of any liabilities incurred jointly and its 50% 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 or FVTPL.
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
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
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.
A financial liability is classified as measured at FVTPL if it is classified as held-for-trading, a
derivative, contingent consideration or it is designated as such on initial recognition.
All financial liabilities not measured at FVTPL are classified as measured at amortized cost.
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
(l)
Impairment:
Financial assets
Pollard applies the simplified approach to providing for expected credit losses, which requires the
use of the lifetime expected credit loss provision for all accounts receivable. Expected credit
losses are measured as the difference in the present value of the contractual cash flows that are
due under the contract and the cash flows that Pollard expects to receive. The expected cash
flows reflect all available information, including Pollard’s historical experience, the past due
status, and forward-looking macroeconomic factors. Further details are provided in note 26 and
note 27.
Non-financial assets
The carrying amount of Pollard’s non-financial assets, other than inventories and deferred income
tax assets, are reviewed at each reporting date to determine whether there is an indication that
an asset may be impaired. If any such indication exists, or when the annual impairment testing
for an asset is required, Pollard estimates the asset’s recoverable amount. For goodwill the
recoverable amount is estimated as of December 31 each year. An impairment loss is recognized
if the carrying amount of an asset, or its related CGU, 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
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.
(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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
(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. Further details are provided in
note 15.
Deferred director compensation
Deferred director compensation is comprised of cash-settled share-based payments. Deferred
Share Units (“DSU”) are granted to eligible directors at the fair value of the common shares at
the grant date. The DSUs earn notional dividends, equivalent to actual dividends declared on
Pollard’s shares. Right to payment of the outstanding DSUs is deferred until termination,
retirement or death. The liability associated with the DSUs is recalculated at each reporting date
and at settlement. Any change in the fair value of the liability is recognized as an expense within
administration expenses in the consolidated statements of income.
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
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
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.
(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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
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.
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
(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.
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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
3.
Significant accounting policies (continued):
(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.
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 of a liability for at least twelve months to
be unconditional. The 2020 amendments also clarify how a company classifies a liability that
includes a counterparty conversion option. The amendments are effective for annual periods
beginning on or after January 1, 2024. Pollard is currently assessing the impact of the amendment
on the 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 does not expect the
amendments to have a significant impact on the consolidated financial statements upon adoption.
(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 does not expect the amendments to have a significant impact on the
consolidated financial statements upon adoption.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
4.
Future accounting standards (continued):
(d) Amendments to IAS 1 and IFRS Practice Statement 2 – disclosure initiative – accounting policies:
In February 2021, the IASB issued Disclosure Initiative – Accounting Policies (Amendments to
IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements). The amendments help
companies provide useful accounting policy disclosures. The key amendments include requiring
companies to disclose their material accounting policies rather than significant accounting
policies, clarifying that accounting policies related to immaterial transactions, other events or
conditions are themselves immaterial and as such need not be disclosed and clarifying that not
all accounting policies that relate to material transactions, other events or conditions are
themselves material to a company’s financial statements. The amendments are effective for
annual periods beginning on or after January 1, 2023. Pollard is currently assessing the impact
of the amendment on the consolidated financial statements.
(e) Amendments to IAS 12 – deferred tax related to assets and liabilities arising from a single
transaction:
In May 2021, the IASB issued Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12). The amendments narrow the scope of the initial
recognition exemption (“IRE”) so that it does not apply to transactions that give rise to equal
and offsetting temporary differences. As a result, companies will need to recognize a deferred
tax asset and a deferred tax liability for temporary differences arising on initial recognition of a
lease and a decommissioning provision. The amendments are effective for annual periods
beginning on or after January 1, 2023. Pollard is currently assessing the impact of the
amendment on the 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, 2021 and 2020
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
deductible for tax purposes.
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 was unlimited. Pollard reassessed
progress towards achievement of these EBITDA targets as at December 31, 2020, and December
31, 2021, and determined that they have not been achieved. As such, Pollard has not accrued
any amounts relating to this contingent consideration liability in 2020 or 2021.
As at December 31, 2020, the acquisition accounting was finalized.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
5.
Acquisitions (continued):
(b) Compliant Gaming, LLC:
On December 30, 2020, Pollard acquired 100% of the equity of Compliant 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.
Cash paid
Final working capital payment
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
289
5,249
29,887
$
$
$
$
$
$
46
44
453
(155)
(110)
278
13,137
2,907
1,398
17,442
12,167
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.
During the measurement period, the closing working capital amount was finalized. Adjustments
to the purchase price and purchase price allocation were required, resulting in a $289 increase
in cash paid, a $10 increase in contingent consideration, a $53 increase in the customer
relationships and a $246 increase to goodwill.
Acquisition costs related to the Compliant purchase in the year ended December 31, 2021, were
$61 (2020 – $124). These costs were included in administration expenses.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
5.
Acquisitions (continued):
Contingent consideration, based on achievement of certain earnings before interest, income
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 over two twelve-month
periods. The potential payment under the earn-out is unlimited. During the year ended December
31, 2021, Pollard reassessed Compliant’s progress towards achievement of the EBITDA targets,
which resulted in an adjustment to increase the fair value of the liability by $9,550. This increase
is due to Compliant achieving stronger EBITDA during the earn-out period relative to original
expectations. Pollard has also recorded accretion expense of $1,543 during 2021 on this
contingent consideration.
As at December 31, 2021, Pollard has accrued $12,421 within current liabilities and $3,921 within
non-current liabilities relating to the contingent consideration.
The acquisition accounting was finalized during the fourth quarter of 2021.
(c) Next Generation Lotteries AS:
On January 14, 2021, Pollard acquired 100% of the equity of Next Generation Lotteries AS
(“NGL”), a leading provider of lottery management and iLottery technology. 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 January 14,
2021, the acquisition date.
Cash paid, net of cash acquired of $9,015 and debt assumed of $2,382
Purchase price payable
Issuance of common shares
Total consideration
$
38,083
2,664
7,998
48,745
$
Accounts receivable
Inventories
Prepaid expenses and deposits
Property, plant and equipment
Income tax receivable
Deferred tax liability
Accounts payable and accrued liabilities
Lease liabilities
Net tangible assets acquired
Technology
Game library
Identifiable intangible assets acquired
Goodwill acquired
$
$
$
$
$
6,145
1,096
896
5,116
1,119
(6,460)
(3,342)
(1,835)
2,735
22,653
2,984
25,637
20,373
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
5.
Acquisitions (continued):
The goodwill acquired is largely attributable to the assembled workforce and the expected
revenue synergies and cost savings after integration of NGL with Pollard. This goodwill is not
expected to be deductible for tax purposes.
During the measurement period, new information became available regarding the existence and
valuation of certain receivables, prepaid expenses, right of use assets and lease liabilities, the
valuation of share consideration and the ability to utilize the future tax recoverable recognized
as at the acquisition date. Adjustments to the preliminary purchase price allocation were required,
resulting in a $544 increase to the cash paid, a $846 increase to the value of the common shares
issued, a $545 increase in accounts receivable, a $106 decrease in prepaid expenses, a $1,835
increase in property, plant and equipment, a $735 increase in deferred tax liability, a $1,835
increase in lease liabilities and a $1,686 increase to goodwill.
During the measurement period, the closing working capital amount was finalized. Adjustments
to the purchase price and purchase price allocation were required, resulting in a $8 increase in
cash paid, a $1 increase in accounts receivable and a $7 increase to goodwill.
Acquisition costs related to the NGL purchase in the year ended December 31, 2021, were $898.
These costs were included in administration expenses.
If NGL had been acquired on January 1, 2021, incremental revenue of $405 and net loss of $658,
after depreciation and amortization of the fair values of identifiable net assets acquired, would
have been recognized in the year ended December 31, 2021.
Included in the purchase agreement is the opportunity for contingent consideration, based on
achievement of certain contribution margin targets during 2021. The maximum amount of
contingent consideration payable is $5,880 (€4,000). As at December 31, 2021, Pollard has not
accrued any amounts relating to this contingent consideration as the contribution margin targets
are currently not expected to be met.
The acquisition accounting was finalized during the fourth quarter of 2021.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
6.
Inventories:
Raw materials
Work-in-process
Finished goods
December 31,
2021
December 31,
2020
$
$
$
21,678
2,270
21,060
16,756
2,209
27,655
45,008
$
46,620
During 2021, Pollard recorded inventory write-downs of $656 representing an increase in the
obsolescence reserves and write-downs of $23 due to changes in foreign exchange rates.
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.
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, 2021 and 2020
7.
Property, plant and equipment:
Cost
Land Buildings
Leasehold
improve-
ments
Furniture,
fixtures and
computers
Assets in
progress &
spare parts Total
Equipment
Balance at January 1, 2020
$ 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
Acquisitions (note 5)
–
1,474
Additions/net transfers
–
4,783
Disposals
–
(547)
–
57
–
2,930
14,120
712
839
–
5,116
6,720
26,519
(1,614)
(20)
–
(2,181)
Effect of movements in
exchange rates
Balance at December 31,
(3)
(280)
(11)
(271)
(75)
(6)
(646)
2021
$ 2,129
51,800
6,296
213,937
10,372
16,944
301,478
Accumulated
depreciation
Land Buildings
Leasehold
improve-
ments
Furniture,
fixtures and
computers
Assets in
progress &
spare parts Total
Equipment
Balance at January 1, 2020
$
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2020
Depreciation for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31,
2021
$
$
–
–
–
–
–
–
–
–
–
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
6,845
(503)
476
14,842
705 –
22,868
–
(1,614)
(17) –
(2,134)
(40)
(7)
(64)
(9) –
(120)
22,766
3,761
164,274
6,087 –
196,888
Carrying amounts
Land Buildings
ments Equipment
Leasehold
improve-
Furniture,
fixture and
computers
Assets in
progress &
spare parts Total
At December 31, 2020
$ 2,132
29,906
At December 31, 2021
$ 2,129
29,034
2,958
2,535
47,662
49,663
3,508
10,230
96,396
4,285
16,944
104,590
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
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 consolidated statement
of financial position. The following tables present continuity schedules of Pollard’s right-of-use assets
by asset class:
Buildings
Equipment
Furniture,
fixtures and
computers
Balance at January 1, 2020
$
Acquisitions (note 5)
Additions
Depreciation
Effect of movements in
exchange rates
Balance at December 31, 2020 $
Acquisitions (note 5)
Additions
Depreciation
Effect of movements in
exchange rates
Balance at December 31, 2021 $
15,232
1,125
5,071
(5,050)
(269)
16,109
1,225
4,245
(5,910)
(179)
15,490
142
–
180
(138)
(6)
178
610
–
(522)
(28)
238
215
–
–
(215)
–
–
–
–
–
–
–
Total
15,589
1,125
5,251
(5,403)
(275)
16,287
1,835
4,245
(6,432)
(207)
15,728
Pollard’s total cash outflows, principal and interest relating to its lease obligations classified under
IFRS 16 Leases for the year ended December 31, 2021 were $6,792 (2020 – $5,752).
Pollard’s interest expenses incurred relating to its lease obligations classified under IFRS 16 Leases
for the year ended December 31, 2021 were $565 (2020 – $654).
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, 2021 and 2020
8.
Leases (continued):
2022
2023
2024
2025
2026 and thereafter
Total undiscounted cash flows
Discounting
Total discounted cash flows
Less: current portion lease liabilities
Lease liabilities
9. Equity investment:
NeoPollard Interactive, LLC (“NPi”)
$
$
$
$
6,559
5,402
2,395
1,795
1,186
17,337
(767)
16,570
(6,151)
10,419
Pollard, in conjunction with NeoGames U.S., LLP, operates NPi. The entity was established to provide
iLottery services in the United States and Canada, excluding the State of Michigan.
Interest in joint venture
Balance, beginning of year
Investment distribution
Equity income
Effects of movements in exchange rates
Balance, end of year
Current assets
Non-current assets
Total
Current liabilities
Non-current liabilities
Total
Net assets – 100%
Attributable to Pollard – 50%
December 31,
2021
December 31,
2020
$
881
(12,613)
12,336
(19)
585
$
1,161
(1,860)
1,587
(7)
881
December 31,
2021
December 31,
2020
29,435
1,932
31,367
29,835
362
30,197
1,170
585
$
$
$
$
$
$
15,098
2,268
17,366
15,279
325
15,604
1,762
881
$
$
$
$
$
$
$
$
At December 31, 2021, included in the current assets of NPi is restricted cash relating to amounts
held on behalf of iLottery customers of $11,512 (2020 – $7,200). There is an offsetting liability
included in current liabilities.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
9. Equity investment (continued):
Revenue – 100%
Revenue – attributable to Pollard – 50%
Comprehensive income – 100%
Comprehensive income – attributable to Pollard(1)
$
$
$
$
2021
80,395
40,198
22,196
12,336
$
$
$
$
2020
25,214
12,607
619
1,587
(1) Comprehensive income attributable to Pollard is greater than 50% due to services provided to NPi by Pollard. Pollard’s share of
these transactions is eliminated upon consolidation.
Michigan iLottery
Pollard and NeoGames U.S., LLP 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 50% share of any assets held jointly, its liabilities, including its 50% share of
any liabilities incurred jointly and its 50% share of revenue and expenses.
10. Goodwill:
Balance, beginning of year
Acquisition of mkodo (note 5)
Acquisition of Compliant (note 5)
Acquisition of NGL (note 5)
Effects of movements in exchange rates
December 31,
2021
December 31,
2020
$
89,276 $
–
246
20,373
(1,720)
69,993
8,009
11,921
–
(647)
Balance, end of year
$
108,175 $
89,276
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(1)
Charitable gaming
eGaming systems(2)
Retail
Total
December 31,
2021
December 31,
2020
$
$
57,802 $
12,581
26,741
11,051
108,175 $
38,921
12,630
26,601
11,124
89,276
(1) NGL was added to the Lotteries CGU upon acquisition on January 14, 2021.
(2) Compliant was added to the eGaming systems CGU upon acquisition on December 30, 2020.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
10. Goodwill (continued):
For each acquisition an assessment is performed to determine if the acquired entity should be its
own CGU or become part of an existing CGU.
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.
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
eGaming systems
Retail
12.0%
12.0%
21.0%
14.7%
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
10. Goodwill (continued):
Growth rates
Growth rates are based on estimated sustainable long-term growth rates of the CGUs and groups of
CGUs. A terminal value growth rate 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.
11. Intangible assets:
Cost
Customer
assets
Patents
Trademarks
and brands
Deferred
development
Computer
software
and
licenses
Total
Balance at January 1, 2020
$
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)
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
Acquisitions (note 5)
Additions (net of investment tax
credits)
Additions – internally developed
(net of investment tax
credits)
Disposals
Effect of movements in
exchange rates
53
–
–
–
–
128
–
–
–
17
–
(446)
(299)
(10)
(42)
–
–
–
–
–
25,637
25,690
36
181
12,423
12,423
–
(446)
(2,056)
(2,407)
Balance at December 31, 2021
$
65,691
6,970
5,597
1,793
75,217
155,268
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
11. Intangible assets (continued):
Accumulated amortization
Customer
assets
Patents
Trademarks
and brands
Deferred
development
Computer
software
and
licenses
Total
Balance at January 1, 2020
$
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)
–
–
(185)
(445)
Balance at December 31, 2020
$
27,156
5,380
–
1,468
11,677
45,681
6,027
177
–
120
9,045
15,369
Amortization for the year
Effect of movements in
exchange rates
Balance at December 31, 2021
$
33,162
5,556
(21)
(1)
–
–
–
(65)
(87)
1,588
20,657
60,963
Carrying amounts
Customer
assets
Patents
Trademarks
and brands
Deferred
development
Computer
software
and
licenses
Total
At December 31, 2020
At December 31, 2021
$ 38,781
$ 32,529
1,472
1,414
6,068
5,597
325
205
27,500
54,560
74,146
94,305
Amortization of intangible assets in 2021 of $15,369 (2020 – $11,085), was included in cost of sales.
As at December 31, 2021, the weighted average remaining useful life of customer assets was 7.2
years and the weighted average remaining useful life of computer software and licenses was 6.0
years.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
12. Income taxes:
Income tax expense
Current
Deferred (reduction)
Total
2021
14,247
(6,833)
7,414
$
$
2020
10,955
1,899
12,854
$
$
Income tax recognized in other comprehensive income (loss)
Amount
before
tax
Tax
expense
2021
Amount
net of tax
Amount
before
tax
Tax
benefit
2020
Amount
net of tax
Defined benefit plans
remeasurements
gain (loss)
$
16,580
(4,469)
12,111 $
(10,283)
2,634
(7,649)
Reconciliation of effective tax rate
Net income for the year
Total income tax expense
Income before income taxes
Income tax using Pollard's domestic tax rate
Effect of tax rates in foreign jurisdictions
Non-deductible amounts
Non-deductible items relating to
acquisitions
Other items
Effect of non-taxable items related to
foreign exchange
2021
2021
2020
$
$
19,701
7,414
27,115
7,321
$
$
27.0%
(1,041)
(1.4%)
295
0.8%
249
313
277
0.3%
0.8%
0.3%
27.0%
(3.8%)
1.1%
0.9%
1.2%
1.0%
2020
33,288
12,854
46,142
12,458
(641)
387
134
384
132
27.4%
$
7,414
27.8% $
12,854
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
12. Income taxes (continued):
Deferred income tax assets and liabilities
Recognized deferred income tax assets and liabilities
Deferred income tax assets and liabilities are attributable to the following:
Assets
Liabilities
Net
2021
2020
2021
2020
2021
2020
$
Property, plant and
equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign
exchange (gains)
and losses
Unused tax losses
Contract liabilities
Other
–
3,826
466
7,411
108
3,696
–
698
– $
1,613
272
11,579
(14,935)
(10,794)
–
(780)
(14,360) $
(6,207)
–
(1,500)
(14,935)
(6,968)
466
6,631
(14,360)
(4,594)
272
10,079
204
1,370
–
634
(488)
–
(270)
(50)
(564)
–
(411)
(100)
(380)
3,696
(270)
648
(360)
1,370
(411)
534
Tax assets (liabilities)
$
16,205
15,672 $
(27,317)
(23,142) $
(11,112)
(7,470)
Movement in temporary differences during the year
January 1,
2021
Recognized
in net income
(loss)
Recognized in
other
comprehensive loss
Balance
December 31,
2021
Acquisitions
Property, plant and equipment
Intangible assets
Inventories
Employee benefits
Unrealized foreign exchange
$
(14,360)
(4,594)
272
10,079
gains
Unused tax losses
Contract liabilities
Other
(360)
1,370
(411)
534
(575)
3,665
194
1,021
(20)
2,326
141
114
–
(6,039)
–
–
–
–
–
–
–
–
–
(4,469)
–
–
–
–
(14,935)
(6,968)
466
6,631
(380)
3,696
(270)
648
Tax assets (liabilities)
$
(7,470)
6,866
(6,039)
(4,469)
(11,112)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
12. Income taxes (continued):
January 1,
2020
Recognized
in net income
(loss)
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
(263)
(177)
376
(209)
508
Acquisitions
–
(1,076)
–
–
–
–
–
–
Tax assets (liabilities)
$
(7,464)
(1,564)
(1,076)
Recognized in the consolidated statements of comprehensive income (loss) as follows:
Deferred (reduction)
Finance income
2021
(6,833)
(33)
(6,866)
$
$
$
$
Amounts included in finance income relate to unrealized foreign exchange.
As at December 31, 2021, Pollard had $96,184 in unused tax losses for which no deferred tax asset
has been recognized, arising from the acquisition of NGL.
Recognized in
other
comprehensive
income
Balance
December 31,
2020
–
–
–
2,634
–
–
–
–
2,634
(14,360)
(4,594)
272
10,079
(360)
1,370
(411)
534
(7,470)
2020
1,899
(335)
1,564
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
13. Long-term debt:
Credit facility, interest of 1.6% to 2.7%, payable
monthly, maturing 2025
Deferred financing charges, net of amortization
December 31,
2021
December 31,
2020
$
$
115,804
$
131,365
(674)
(285)
115,130
$
131,080
Balance at January 1, 2021
$
Net 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
Credit facility Deferred financing
Total
131,365
(15,350)
–
(285)
–
(650)
131,080
(15,350)
(650)
(15,350)
(650)
(16,000)
(211)
–
(211)
–
261
261
(211)
261
(50)
Balance at December 31, 2021
$
115,804
(674)
115,130
Credit facility Deferred financing
Total
Balance at January 1, 2020
$
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
127,820
5,055
–
5,055
(1,510)
–
(1,510)
(525)
–
(128)
(128)
–
368
368
127,295
5,055
(128)
4,927
(1,510)
368
(1,142)
Balance at December 31, 2020
$
131,365
(285)
131,080
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
13. Long-term debt (continued):
(a) Credit facility:
Effective December 31, 2021, Pollard renewed its credit facility. The credit facility provides loans of
up to $215,000 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 $50,000. The borrowings for the
Canadian operations can be denominated in Canadian or U.S. dollars, to a maximum of $215,000
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,
2021, the outstanding letters of guarantee drawn under the credit facility were $126 (2020 – $712).
Included in the total credit facility balance is a U.S. dollar denominated balance of US$35,400 (2020
– US$55,900). As of December 31, 2021, Pollard had unused credit facility available of $116,822
(2020 – $75,745).
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, 2021, 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 four-year period,
renewable December 31, 2025. 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, 2021, the outstanding letters of credit
drawn on this facility were $10,526 (€7,315).
14. Pension liability:
December 31,
2021
December 31,
2020
Fair value of benefit plan assets
Present value of benefit plan obligations
Net pension liability
$
$
88,324 $
(110,865)
77,351
(113,721)
(22,541) $
(36,370)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
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, 2021. One of the Canadian plans of Pollard currently requires
valuation every year with the last valuation as of December 31, 2020. Pollard’s other Canadian plan’s
valuation was as of January 1, 2021. Pollard’s subsidiaries also maintain three defined contribution
plans. The pension expense for these defined contribution plans is the annual funding contribution
by the subsidiaries.
Pollard expects to contribute approximately $5,219 to its defined benefit plans in 2022.
The benefit plan assets are held in trust and are invested as follows:
Equities
Bonds
Cash and cash equivalents
December 31,
2021
December 31,
2020
67.5%
30.1%
2.4%
100.0%
62.6%
35.9%
1.5%
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
2021
2020
$
$
77,351
1,978
5,650
(4,037)
7,404
(22)
65,481
2,137
7,309
(2,791)
5,460
(245)
Fair value, end of year
$
88,324
$
77,351
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
14. Pension liability (continued):
Accrued benefit plan obligations
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Remeasurement (gains) losses
Effect of movements in exchange rates
Balance, end of year
Net pension liability
2021
2020
$
$
$
$
113,721
7,563
2,837
(4,037)
(9,176)
(43)
92,028
6,115
2,878
(2,791)
15,743
(252)
110,865
$
113,721
(22,541) $
(36,370)
The total net cost for Pollard’s defined benefit and defined contribution pension plans recognized in
cost of sales is as follows:
2021
2020
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
$
$
7,563
2,837
(9,382)
7,975
8,993
954
Net pension plans expense
$
9,947
$
6,115
2,878
(7,597)
5,906
7,302
843
8,145
Actuarial assumptions
The principal actuarial assumptions used in measuring at the reporting date are as follows:
Discount rate
Rate of compensation increase
2021
2020
2.6% to 3.1%
0% to 3.0%
2.2% to 3.1%
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, 2021 and 2020
14. Pension liability (continued):
Assumptions regarding future mortality have been based on published statistics and mortality tables.
As of December 31, 2021, 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-2021 for its
U.S. subsidiary’s pension plans. 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.
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)
$
$
$
(18,519) $
$
$
2,959
1,604
27,575
(2,736)
(1,613)
Increase
Decrease
Remeasurements
Remeasurement gains arising on plan assets
Remeasurement gains (losses) arising on plan liabilities
from:
Demographic assumptions
Financial assumptions
Experience adjustments
$
$
2021
2020
7,404
$
5,460
(247) $
11,515
(2,092)
70
(13,996)
(1,817)
Remeasurement gains (losses) arising on plan liabilities
$
9,176
$
(15,743)
Net remeasurement gains (losses) on defined benefit
plans
$
16,580
$
(10,283)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
14. Pension liability (continued):
Remeasurements recognized in other comprehensive income
2021
2020
Losses accumulated in retained earnings, beginning of
year
$
(29,731) $
(22,082)
Remeasurement gain (loss) recognized during the
year, net of income tax
12,111
(7,649)
Losses accumulated in retained earnings, end of year
$
(17,620) $
(29,731)
15. Share capital:
Authorized
Unlimited common shares
Unlimited preferred shares
Issued
Balance at January 1, 2020
Stock option exercise
Balance at December 31, 2020
Issue of common shares
Acquisition of NGL (note 5)
Stock option exercises
Shares
Amount
25,635,658
71,250
$
25,706,908
933,800
233,211
43,750
108,642
365
109,007
32,405
7,998
439
Balance at December 31, 2021
26,917,669
$
149,849
Issue of common shares:
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 Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
15. Share capital (continued):
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 10, 2021, a dividend of $0.04 per share was declared, paid on January 14, 2022, to
the shareholders of record on December 31, 2021.
Ownership restrictions:
The holders of the common shares are entitled to one vote in respect to each common share held,
subject to the Board of Directors ability to take constraint actions when a person, or group of persons
acting in concert acquires, agrees to acquire, holds, beneficially owns or controls, either directly or
indirectly, a number of shares equal to or in excess of 5% of the common shares (on a non-diluted
basis) issued and outstanding (“Ownership Threshold”). The Board of Directors, in its sole discretion,
can take the following constraint actions:
• place a stop transfer on all or any of the common shares believed to be in excess of the
Ownership Threshold;
•
•
suspend all voting and/or dividend rights on all or any of common share held believed to be
in excess of the Ownership Threshold;
apply to a court seeking an injunction to prevent a person from acquiring, holding, owning,
controlling and/or directing, directly or indirectly, common shares in excess of the Ownership
Threshold; and/or
• make application to the relevant securities commission to effect a cease trading order or
such similar restriction, until the person no longer controls common shares equal to or in
excess of the Ownership Threshold.
In addition, if a Gaming Regulatory Authority has determined that ownership by a holder of common
shares is inconsistent with its declared policies, the Board of Directors is entitled to take constraint
action against such shareholder. Any person who controls common shares equal to or in excess of
the Ownership Threshold, may be required to file an application, be investigated and have suitability
as a shareholder determined by a Gaming Regulatory Authority, if such Gaming Regulatory Authority
has reason to believe such ownership would otherwise be inconsistent with its declared policies.
The shareholder must pay all the costs of the investigation incurred by any such Gaming Regulatory
Authority.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
15. Share capital (continued):
Capital management:
Pollard’s objectives in managing capital are to maintain a strong capital base so as to maintain
investor, creditor and market confidence and to sustain future development of the business. Pollard
also strives to maintain an optimal capital structure to reduce the overall cost of capital.
In the management of capital, Pollard includes long-term debt, 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, 2021, Pollard is in compliance with all financial covenants.
There were no changes in Pollard’s approach to capital management during the current period.
Share based compensation:
Under the Pollard Banknote Limited Stock Option Plan the Board of Directors has the authority to
grant options to purchase common shares to eligible persons and to determine the applicable terms.
The aggregate maximum number of common shares available for issuance from Pollard’s treasury
under the Option Plan is 2,354,315 common shares.
Changes in the number of options outstanding during the years ended December 31, 2021, and 2020
were as follows:
2021
2020
Number
Weighted
average
exercise price
Number
Weighted
average
exercise price
Balance, beginning of year
Granted
Forfeited
Exercised
331,250 $
25,000 $
$
–
(43,750) $
15.31
61.13
–
8.18
377,500 $
50,000 $
(25,000) $
(71,250) $
Balance, end of year
312,500 $
19.98
331,250 $
12.82
20.98
20.70
4.19
15.31
As of December 31, 2021, no share options had expired. Options have been granted on seven 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
15. Share capital (continued):
Exercise
price
Number
outstanding
2021
Remaining
time to
exercise
Number
exercisable
Number
outstanding
2020
Remaining
time to
exercise
Number
exercisable
$ 3.63
$ 8.12
$ 10.00
$ 20.70
$ 18.31
$ 23.65
$ 61.13
–
25,000
87,500
125,000
25,000
25,000
25,000
312,500
–
–
1.76 years
2.32 years
4.86 years
5.21 years
5.87 years
6.42 years –
25,000
87,500
62,500
6,250
6,250
12,500
25,000
118,750
125,000
25,000
25,000
–
12,500
25,000
93,750
31,250
0.19 years
2.76 years
3.32 years
5.86 years
6.21 years –
6.87 years –
–
–
187,500
331,250
162,500
During the year ended December 31, 2021, the following share options were granted:
Option grant date
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)
$
$
$
May 31, 2021
18.98
25,000
61.13
61.13
May 28, 2021
37.7%
4.75 years
0.7% to 0.9%
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:
2022
2023
2024
2025
2026 and thereafter
$
348
75
73
38
10
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
16. Commitments and contingencies (continued):
Pollard is contingently liable for outstanding letters of guarantee in the amount of $10,652 at
December 31, 2021 (2020 – $11,672). These letters of guarantee are secured as disclosed in note
13.
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, 2021
Canada
United States
International
Total
Lotteries and
charitable
gaming
eGaming
systems
$
81,143
238,464
101,612
$
3,275 $
34,520
–
Total
84,418
272,984
101,612
$
421,219
$
37,795 $
459,014
Revenue – geographical segment
Year ended December 31, 2020
Canada
United States
International
Total
Lotteries and
charitable
gaming
$
75,219
231,971
84,391
eGaming
systems
$
4,157 $
18,396
–
Total
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, 2021 and 2020
17. Revenue and contract balances (continued):
Revenue – product lines
Year ended December 31, 2021
Lottery
Charitable
eGaming systems
Total
Lotteries and
charitable
gaming
361,881
59,338
–
$
eGaming
systems
$
–
–
$
37,795
Total
361,881
59,338
37,795
$
421,219
$
37,795
$
459,014
Revenue – product lines
Year ended December 31, 2020
Lottery
Charitable
eGaming systems
Total
Lotteries and
charitable
gaming
eGaming
systems
Total
$
348,359
43,222
–
$
–
–
22,553
$
348,359
43,222
22,553
$
391,581
$
22,553
$
414,134
The following tables provide information about receivables, contract assets, and contract liabilities
from contracts with customers:
Contract balances
December 31,
2021
December 31,
2020
Trade receivables, which are included in accounts
receivable and long-term receivables
$
64,552
$
56,376
Contract assets, which are included in accounts
receivable
Contract liabilities
4,467
2,242
6,643
379
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
Year ended
December 31,
2021
Year ended
December 31,
2020
$
379
$ –
–
5,738
(3,869)
(6)
388
1,872
(1,886)
5
2,242
379
(2,242)
(379)
$ –
$ –
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
18. Other (income) expenses:
Canada emergency wage subsidy (“CEWS”)
EBITDA support agreement income
Litigation settlement
Contingent consideration fair value adjustment
$
(note 5)
Insurance proceeds (net)
Other income
2021
$
(5,425)
–
2,520
9,550
(952)
(524)
2020
(8,984)
(1,000)
–
(2,137)
–
(243)
$
5,169
$
(12,364)
Canada emergency wage subsidy
Pollard has elected to account for CEWS earned 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 $nil (2020 – $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, 2021.
Litigation Settlement
On June 15, 2021, Pollard entered into an agreement for a one-time payment of $2,520 to settle all
aspects of a litigation related to a patent dispute relating to Pollard’s instant ticket production.
19. Finance costs and finance income:
Finance costs
Foreign exchange loss
Interest
Finance income
Foreign exchange gain
2021
2,254
4,980
$
2020
6,083
4,841
7,234
$
10,924
2021
832
832
$
$
2020
7,025
7,025
$
$
$
$
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
20. Net income per share:
2021
2020
Net income attributable to shareholders for basic
and diluted net income per share
$
19,701
$
33,288
Weighted average number of shares (basic)
Weighted average impact of share options
26,743,919
313,696
25,644,487
379,287
Weighted average number of shares (diluted)
27,057,615
26,023,774
Net income per share (basic)
Net income per share (diluted)
21. Personnel expenses:
Wages and salaries
Benefits and government payroll remittances
Profit share
Deferred director compensation
Expenses related to defined contribution plans
Expenses related to defined benefit plans
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
$
$
$
0.74
0.73
$
$
1.30
1.28
$
2021
140,548
23,974
5,202
43
954
8,993
2020
124,618
20,295
5,740
–
843
7,302
$
179,714
$
158,798
2021
2020
$
(1,351) $
2,628
(474)
(914)
7,509
1,874
(6,558)
(4,753)
196
(718)
869
(9)
$
9,272
$
(10,973)
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
23. Related party transactions:
Pollard Equities Limited and affiliates
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 was 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 for an additional five year term, which was exercised in 2016. The sale value was
determined through an independent appraisal. During 2021, Pollard entered into a new lease for the
same property for a five year term (with an option to renew for an additional five year term) for
annual rent of $404 per year. The rental rates charged were based on current market value at the
time of the leases and extension, as determined through an independent appraisal.
During the year ended December 31, 2021, Pollard paid property rent of $3,326 (2020 – $3,420) and
$139 (2020 – $208) in plane charter costs to affiliates of Equities.
During the year, Equities paid Pollard $72 (2020 – $72) for accounting and administration fees.
At December 31, 2021, included in accounts payable and accrued liabilities is an amount owing to
Equities and its affiliates for rent, expenses and other items of $nil (2020 – $454).
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, 2021, the net book value of the right-of-use assets was $6,601
(2020 - $7,715) and the present value of the lease liabilities was $6,770 (2020 - $7,887).
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
23. Related party transactions (continued):
NeoGames U.S., LLP and affiliates
During the year ended December 31, 2021, Pollard reimbursed its share of operating costs and paid
software royalties of $13,368 (2020 – $9,627) to its iLottery partner, which are recorded in cost of
sales.
At December 31, 2021, included in accounts payable and accrued liabilities is a net amount owing to
Pollard’s iLottery partner of $2,176 (2020 – $2,027) for its share of profits and reimbursement of
operating costs, net of capital investments.
At December 31, 2021, included in restricted cash and accounts payable and accrued liabilities is an
amount owing to Pollard’s iLottery partner of $4,784 (2020 - $4,803) for funds relating to contractual
performance guarantees.
Key management personnel
Key management personnel are those having authority and responsibility for planning, directing and
controlling the activities of the company. The Board of Directors and the Executive Committee are
considered key management personnel.
Key management personnel compensation comprised:
Wages, salaries and benefits
Deferred director compensation
Expenses related to defined benefit plans
2021
4,315
43
869
$
5,227
$
2020
3,403
–
790
4,193
$
$
As at December 31, 2021, key management personnel of Pollard, as a group, beneficially owned or
exercised control or direction over 17,456,038 common shares of Pollard.
24. Sales to major customers:
For the year ended December 31, 2021, sales to one customer amounted to 13.5 percent of
consolidated sales. In 2020, sales to one customer amounted to 15.9 percent of consolidated sales.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
25. Segmented information:
Pollard has two reportable segments: Lotteries and charitable gaming, and eGaming systems 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 eGaming systems segment derives its revenues from the
development of game systems.
Year ended December 31, 2021
Lotteries and
charitable
gaming
eGaming
systems(1)
Total
Revenues from external customers
Operating costs and expenses
Income (loss) before income taxes
Total assets
$
421,219
392,661
28,558
390,411
$
37,795
39,238
(1,443)
70,994
$
459,014
431,899
27,115
461,405
(1)
Included in the results of eGaming systems are adjustments to increase the fair value and recognize accretion expense on the
contingent consideration liability recognized upon acquisition of Compliant Gaming, LLC, resulting in an increase in operating
costs and a decrease in income before income taxes of $11,093.
Year ended December 31, 2020
Lotteries and
charitable
gaming
Revenues from external customers
Operating costs and expenses
Income (loss) before income taxes
Total assets
$
391,581
344,092
47,489
346,364
$
eGaming
systems
22,553
23,900
(1,347)
58,203
Total
$
414,134
367,992
46,142
404,567
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
25. Segmented information (continued):
Property, plant and equipment, intangibles and
goodwill:
Canada
United States
International
26. Financial instruments:
December 31,
2021
December 31,
2020
$
$
$
93,935
140,802
72,333
89,155
146,584
24,079
307,070
$
259,818
The fair value of a financial instrument is the estimated amount that Pollard would receive or pay to
terminate the instrument agreement at the reporting date.
The following methods and assumptions were used to estimate the fair value of each type of financial
instrument by reference to various market value data and other valuation techniques as appropriate.
The fair values of accounts receivable, accounts payable and accrued liabilities and dividends payable
approximate their carrying values given their short-term maturities.
The fair value of the long-term debt approximates the carrying value due to the variable interest rate
of the debt.
The fair value of the 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
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
26. Financial instruments (continued):
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, 2021, 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’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
Less: long-term receivables
December 31,
2021
December 31,
2020
$
$
$
$
67,766
4,127
2,452
(410)
73,935
$
(584)
73,351
$
62,184
2,913
1,117
(177)
66,037
(829)
65,208
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
27. Financial risk management (continued):
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,
2021:
Total
2022
2023
2024
2025
2026 &
thereafter
Long-term debt
Leases
$
124,212
17,881
2,102
6,907
2,102
5,477
2,102
2,468
117,906
1,833
–
1,196
$
142,093
9,009
7,579
4,570
119,739
1,196
Pollard’s approach is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due. The 2022 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.
Pollard Banknote Limited
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except for share amounts)
Years ended December 31, 2021 and 2020
27. Financial risk management (continued):
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 $111 for the
year ended December 31, 2021 (2020 – $169). 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 $57 for year ended
December 31, 2021 (2020 – $72).
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, 2021, the amount
of financial liabilities denominated in U.S. dollars exceeded the amount of financial assets
denominated in U.S. dollars by approximately $28,965 (2020 – $52,626).
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 $145 for the year
ended December 31, 2021 (2020 – $263).
Pollard utilizes a number of strategies to mitigate its exposure to currency risk. Five manufacturing
facilities are located in the U.S. and a significant amount of cost inputs for all production facilities are
denominated in U.S. dollars, offsetting a large portion of the U.S. dollar revenue in a natural hedge.
Pollard also uses financial hedges, including foreign currency contracts, to help manage foreign
currency risk. At December 31, 2021, and at December 31, 2020, 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 $579 for the year ended December 31, 2021 (2020 – $656).
The Board
of Directors
of Pollard
Banknote
Limited
Gordon Pollard 3 EXECUTIVE CHAIR
Dave Brown 1
Lee Meagher1
John Pollard2
Douglas Pollard
1 Member of the Audit Committee, Compensation Committee
and the Governance and Nominating Committee
2 Interim member of the Audit Committee
3 Interim member of the Compensation Committee
and the Governance and Nominating Committee
Letter to Shareholders
Board of Directors
Management's Discussion and Analysis
Pollard Banknote Limited
Consolidated Financial Statements
of Pollard Banknote Limited
CONTENTS
Corporate Information
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
Robert Young
EXECUTIVE VICE PRESIDENT, OPERATIONS
Manufacturing
Facilities
Senior
Management
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
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
2 0 2 1 A N N U A L R E P O R T
140 Otter Street
Winnipeg, Manitoba R3T 0M8
(204) 474 - 2323
www.pollardbanknote.com
2 0 2 1 A N N U A L R E P O R T