ANNUAL REPORT
2013
Committed to Excellence
À la recherche de l'excellence
2013
RAPPORT ANNUEL
IN ALL SUCCESSFUL BUSINESSES THE KEY TO
SUCCESS RELIES ON MANAGEMENT’S ABILITY TO
MASTER THREE FUNDAMENTALS:
> COMMITMENT TO CUSTOMER
> CLEAR VISION OF GOALS
> CORRECT TIMING OF ACTIONS
OUR SENIOR MANAGEMENT
TEAM KNOWS,
UNDERSTANDS AND LIVES BY THESE PILLARS OF
BUSINESS FUNDAMENTALS.
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
As required by regulators, the purpose of this MD&A is to explain management’s point of view on Imaflex
Inc.’s (the “Parent Company”) past performance and future outlook. This report also provides information to
improve the reader’s understanding of the consolidated financial statements and related notes. Please refer to
the consolidated financial statements for the years ending December 31, 2013 and 2012 when reading this
MD&A. Unless otherwise indicated, all financial data in this document is prepared in accordance with
International Financial Reporting Standards (“IFRS” hereafter) and all amounts are expressed in Canadian
dollars. Differences may occur due to the rounding of amounts for the presentation in thousands of dollars. In
this MD&A we also use financial measures that are not defined by IFRS. Please refer to the section entitled
“Non-IFRS Financial Measures” for a complete description of these measures. The consolidated financial
statements include the accounts of the Company, those of its wholly-owned subsidiary, Imaflex USA, Inc.
(“Imaflex USA”) and its divisions, Canguard Packaging (“Canguard”) and Canslit (“Canslit”). To facilitate the
reading of this report, the terms “Imaflex”, “Company”, “we”, “our”, “us” all refer to Imaflex Inc. together with
its subsidiary. This MD&A is prepared in conformity with National Instrument 51-102 and Form 51-102F1 and
has been approved by the board of directors prior to its release.
FORWARD LOOKING STATEMENTS
From time to time, we make forward-looking statements within the meaning of certain securities laws,
including the “safe harbor” provisions of the Securities Act (Ontario). We may make such statements in this
document, in other filings with Canadian regulators, in reports to shareholders or in other communications.
These forward-looking statements include, among others, statements regarding the business and anticipated
financial performance of the Company. The words “may”, “could”, “should”, “would”, “outlook”, “believe”,
“plan”, “anticipate”, “expect”, “intend”, “objective,” the use of the conditional tense and words and expressions
of similar nature are intended to identify forward-looking statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and
specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking
statements will not be achieved. We caution readers not to place undue reliance on these statements, as a
number of important factors could cause our actual results to differ materially from the beliefs, plans,
objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements.
These factors include, but are not limited to, the length and severity of the current economic downturn,
management of credit, market dynamics, liquidity, funding and operational risks; the strength of the Canadian
and U.S. economies in which we conduct business; the impact of the movement of the Canadian dollar relative
to other currencies, particularly the U.S. dollar; the effects of changes in interest rates; the effects of competition
in the markets in which we operate; our ability to successfully align our organization, resources, and processes;
the availability and price of raw materials; failure to achieve planned growth associated with the U.S. operations
and future sales; changes in accounting policies and methods we use to report our financial condition, including
uncertainties associated with critical accounting assumptions and estimates; operational and infrastructure risks;
other factors may affect future results including, but not limited to, timely development and introduction of new
products and services; changes in tax laws, technological changes, new regulations; the possible impact on our
businesses from public-health emergencies, international conflicts and other developments; and our success in
anticipating and managing the foregoing risks.
We caution our readers that the foregoing list of important factors that may affect future results is not
exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company,
investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
Unless otherwise required by the securities authorities, we do not undertake to update any forward-looking
statement that may be made from time to time by us or on our behalf. The forward-looking statements contained
herein are based on information available as of April 16, 2014.
Fourth Quarter 2013
1
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
COMPANY OVERVIEW
The Company operates in one reportable segment being the development, manufacture and sale of packaging
materials. The results herein include those of Imaflex, located in Montréal (Québec), its divisions Canguard
and Canslit, located in Victoriaville (Québec), and its wholly owned subsidiary, Imaflex USA, located in
Thomasville (North Carolina). All intercompany balances and transactions have been eliminated on
consolidation.
Imaflex and Imaflex USA specialize in the manufacture and sale of custom-made polyethylene films and bags
suited for various packaging needs of our customers. Canguard specializes in the manufacture and sale of
polyethylene garbage bags for both the retail and industrial markets. Canslit specializes in the metallization of
plastic film.
The common shares of the Company are listed for trading on the TSX Venture Exchange under the symbol
“IFX”. The Company’s head office is located in Montréal (Québec).
NON-IFRS FINANCIAL MEASURES
The Company’s management uses a non-IFRS financial measure in this MD&A, namely EBITDA.
Management wishes to specify that in the performance of the Company’s financial results, EBITDA is shown as
“Earnings before interest, taxes, depreciation and amortization”. The reader may refer to the table below for the
reconciliation of the EBITDA used by the Company to its reported net income (loss).
Reconciliation of EBITDA to net income (loss):
($ thousands, except per share data)
Three months ended
Years ended
Net income (loss)
Plus:
Income taxes
Finance expense
Depreciation and amortisation
Change in fair value of derivative
financial instrument
EBITDA
December 31,
2013
$ (184)
December 31,
2012
$ (146)
December 31,
2013
$ 207
December 31,
2012
$ (568)
135
116
330
-
$ 397
195
122
313
(7)
$ 477
469
444
1,222
298
509
1,261
(10)
$ 2,332
(38)
$ 1,462
Basic and diluted EBITDA per share *
$ 0.009
$ 0.011
$ 0.053
$ 0.034
*Basic weighted average number of shares outstanding of 44,201,276 for the quarter ended December 31, 2013
(42,601,276 in 2012) and 43,644,564 for the year ended December 31, 2013 (42,437,341 in 2012). Diluted
weighted average number of shares outstanding of 44,279,934 for the quarter ended December 31, 2013
(42,649,519 in 2012) and 43,714,686 for the year ended December 31, 2013 (42,487,091 in 2012).
While EBITDA is not a standard IFRS measure, management, analysts, investors and others use it as an
indicator of the Company’s financial and operating management and performance. EBITDA should not be
construed as an alternative to net income determined in accordance with IFRS as an indicator of the Company’s
performance. The Company’s method of calculating EBITDA may be different from those used by other
companies.
Fourth Quarter 2013
2
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
BUSINESS OVERVIEW
Imaflex is primarily a provider of polyethylene films to converters, who process film into a finished product.
The converting process involves printing the required information on the film that Imaflex supplies them based
on their end-customer’s needs. Imaflex also manufactures bags that are sold for a variety of uses, including
garbage bags. Additionally, the Company produces specialized metallized film for specific agricultural usage.
Imaflex operates four manufacturing facilities, two of which are located in the Province of Québec, in Montréal
and in Victoriaville, and two others located in Thomasville, North Carolina, in the United States. The four
facilities cover a total area of approximately 22,800 square meters or 228,000 square feet.
MARKET OPPORTUNITY
The North American flexible packaging market is valued at approximately $25 billion. Although this market is
highly fragmented and commoditized in terms of pricing, there are niches within this larger market that offer the
opportunity of increased profitability.
Management believes that four factors will contribute to Imaflex’s long term growth and its ability to properly
position itself within the industry in which it operates.
The first is continued investment in research and development efforts allowing our research teams to develop on
a timely basis new products for highly profitable niche markets as the older niches gradually become price
sensitive with the entry of new participants.
The second is the efficiency of our equipment, and our commitment to sustain this efficiency with the required
capital investments. This will allow us to remain cost competitive in the marketplace.
The third is our access to capital. Being a publicly traded company we have the ability to tap into the equity
markets if the right opportunity comes along. This is in addition to the credit facilities currently provided to the
Company by its banks.
The fourth is our manufacturing presence in both Canada and the United States which confers to the Company a
competitive advantage in terms of logistics, currency, and manufacturing flexibility.
OUTSOURCING
Our industry is capital intensive. Labour is only a minor component in the total cost of production. As a result,
outsourcing production to countries with lower wages would not have a material impact on the cost of
production, especially when factoring in expenses related to freight and duty.
Furthermore, the risks associated with quality and on-time delivery would far outweigh any minimal benefit to
our customers that would be generated by lower labour costs. Accordingly, management does not currently
contemplate the establishment of an outsourcing strategy.
Fourth Quarter 2013
3
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
BUSINESS STRATEGY
Imaflex is focused on providing its customers the highest quality products on a timely basis and at competitive
prices. This strategy has been the backbone of our growth and it has served us well.
Some competitors, experiencing idle operations or producing at below average capacity levels, may attempt to
gain market share through reduced pricing, particularly during difficult economic times.
Imaflex still believes that maintaining its focus on the quality of its products and the excellence of its customer
service remains its best long term strategy, as these two characteristics define our position and reputation in the
market, and this regardless of the fluctuations in the economic cycle.
GROWING CUSTOMER BASE
In our market, it becomes essential to sell value-added products and avoid producing highly commoditized
products generating lower margins. The key to the success of this strategy is to identify and build relationships
with customers having specific needs and eventually develop products that address their customized
specifications. Our sales force’s primary mandate is to find such clients.
In order to accelerate the commercial adoption of its existing US-EPA qualified ultrathin agricultural barrier
films, Imaflex is ensuring that its internal sales organization is technically accomplished and can properly
communicate the competitive advantages of its barrier films.
RISK FACTORS
The Company is involved in a competitive industry and marketplace in which there are a number of
participants. To accommodate and effectively manage future growth, the Company continues to improve its
operational, financial and management information systems, as well as its production procedures and controls.
The Company’s success is largely the result of the continued contributions of its employees and the Company’s
ability to attract and retain qualified management, sales and operational personnel.
The market the Company competes in has historically shown resiliency and growth even at the worst economic
times. The Company’s customers operate predominantly in the food packaging and agriculture markets. This
fact, coupled with the expanding product lines and reliance on newer and faster equipment, should help it
weather the potential volatility caused by uncertainty in the North American economic climate.
Factors which can impact the Company include, but are not limited to: management of credit, market dynamics,
liquidity, funding and operational risks; the strength of the Canadian and U.S. economies in which we conduct
business; the impact of the movement of the Canadian dollar relative to other currencies, particularly the U.S.
dollar; the effects of changes in interest rates; the effects of competition in the markets in which we operate; our
ability to successfully align our organization, resources, and processes; the availability and price of raw
materials; failure to achieve planned growth associated with the U.S. operations; changes in accounting policies
and methods we use to report our financial condition, including uncertainties associated with critical accounting
assumptions and estimates; operational and infrastructure risks; other factors may affect future results including,
but not limited to, timely development and introduction of new products and services; changes in tax laws,
technological changes and new regulations; the possible impact on our businesses from public-health
emergencies, international conflicts and other developments; and our success in anticipating and managing the
foregoing risks.
Fourth Quarter 2013
4
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
GENERAL SITUATION OF THE POLYETHYLENE BLOWN FILM MARKET
Pricing for polyethylene increased slightly in the fourth quarter of 2013 and, as several other competitors have
experienced, continued increases in the upcoming year may negatively impact our results given our limited
ability to immediately pass on price increases to customers.
LOSS OF BUSINESS FROM A SIGNIFICANT CUSTOMER
One of our business strategies has been to limit the purchases of any particular customer to less than 15% of our
revenues. This strategy ensures us that our profitability and financial well-being are not dependent on any one
client.
COMPETITION FROM OTHER COMPANIES
Competition in our market is at the moment quite intense. Nevertheless, because we are dealing in a $25 billion
market; because we have highly skilled teams that are quick to respond to customer needs; because we have a
diversified manufacturing base; and because the bulk of our customers deal in food related products, we believe
that we have a competitive edge. It may not always translate into a greater net profit, but it certainly does
translate into customer loyalty should we decide to match our competitors’ prices.
SEASONALITY OF OPERATIONS
Our operations in Victoriaville and in Thomasville are subject to seasonality as a result of their partial
manufacturing focus in the production of agricultural film products sold to fruit and vegetable growers.
Customer demand in this end-market peaks twice yearly. Inventory is managed in a way to optimize cash flow
while remaining able to react to any market opportunities that present themselves. However, because these
locations also manufacture products that are destined for other markets which are not affected by seasonal
downturns, these two plants are still able to operate all year, albeit at lower capacity levels.
EXPOSURE TO PRODUCT LIABILITY
Due to the nature of its operations, which consist of manufacturing polyethylene films transformed by our
customers for their end-customers, Imaflex’s exposure to product liability is low. Imaflex is not exposed to
liability for personal injury or death arising from negligence in the manufacturing of the films either.
The only market segment that exposes the Company to potential product liability claims is the agricultural
market. In this market, proof of negligence in our manufacturing process could entail some form of
compensation in the event that the expected crop yields do not materialize.
Although the likelihood of a claim in this market is low, we are nonetheless covered by a product liability
insurance policy in the amount of $ 25,000,000.
FLUCTUATIONS IN OPERATING RESULTS
It is important to note that profitability may vary from quarter to quarter, irrespective of quarterly sales. This is
due to many factors, including and not limited to: competitive conditions in the businesses in which the
Company participates; general economic conditions and normal business uncertainty; product mix; fluctuations
in foreign currency exchange rates; the availability and costs of raw materials; changes in the Company’s
relationship with its suppliers; and interest rate fluctuations and other changes in borrowing costs.
Fourth Quarter 2013
5
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
EXPOSURE TO INTEREST RATE FLUCTUATIONS
We have not experienced a significant increase in borrowing costs although additional long term financing,
albeit at interest rates reflecting current market conditions, may lead to an increased interest expense. Although
it is possible that a future increase in interest rates will impact our finance expense, payments on our current
outstanding long term debt should offset the increase in interest rates in the medium term.
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
Imaflex’s core operational management team has been stable over the past years and was able to keep key
competencies within the Company. This is because the three founders, who have more than 100 years of
combined experience in management and R & D, were and remain at the core of its management team. As the
Company has grown, it has strengthened its team with the addition of individuals having a variety of
competencies, be it accounting, operations, or engineering.
This has resulted in a work environment that allows for the free exchange of ideas in an effort to ensure that the
Company remains at the forefront of our industry. We are confident that we can retain and, if need be, attract
qualified individuals that will contribute to our quest of building shareholder value.
MANAGEMENT OF GROWTH
Imaflex’s history attests to its management’s ability to create and manage growth and to successfully adapt to
prevailing and continuously changing market conditions. Management believes that future success will also lie
in the ability to properly manage growth whether it comes from new markets and products, acquisitions,
mergers, or a combination of any or all three. This success will depend on the Company’s ability to seek out
new opportunities and to position itself such that it will be able to take advantage of them when they present
themselves. Past decisions have been made bearing this in mind and the Company is now in a better position to
make this happen.
FOREIGN EXCHANGE FLUCTUATIONS
A portion of the Company’s sales and expenses as well as accounts receivable and payable are denominated in
US dollars. A portion of the revenue stream in US dollars acts as a natural hedge to cover expenses
denominated in US dollars. However management continuously monitors the Company’s foreign exchange
exposure. The analysis of the Company’s exposure for the fourth quarter of 2013 has resulted in management
deciding not to hedge the Company’s foreign exchange risk as the impact on the Company’s cash flow is
sufficiently hedged through the Company’s operations.
ENVIRONMENTAL HAZARDS
The Company’s raw materials, processes and finished goods do not have any hazardous implications. However
we do buy a few items which are used in our production equipment such as cooling products which may be
hazardous, but their use and manipulation are controlled. Though these products actually pose very little risk,
they are handled in a manner that fully complies with existing safety regulations.
RESULTS OF OPERATIONS
Sales have continued to show improvements in the fourth quarter of 2013 compared to the same period in 2012.
The sales of mulch film experienced double-digit growth in volume and revenue over the year notwithstanding
the sharp rise in commodity prices. The additional sales generated by the assets acquired in 2012 also
contributed to the improvement. Management made decisions that mitigated the positive effect that this growth
could have had: production costs increased, as much due to the strengthening of the US dollar causing our raw
material costs to increase, as to the increase in production salaries.
Fourth Quarter 2013
6
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
RESULTS OF OPERATIONS (continued)
Administrative and selling expenses also continued to increase in 2013 compared to the same period in 2012.
The mulch film business required investments during 2013, mainly focused on the addition of new leadership,
innovative product developments and creating additional support for the commercialisation of current product
lines. Management anticipates that, driven by economic and environmental needs, the demand for its current
mulch films in 2014 will remain similar to 2013: weather-related seasonal sales fluctuations, increasing raw
material prices and, due to stronger competition, the limited ability to entirely pass on these increases to
customers. To counter these threats, in 2014 Imaflex will focus on accelerating the adoption of its current mulch
films, optimising product recipes and processes to reduce production costs without sacrificing product quality.
($ thousands)
Three months ended
Years ended
Sales
December 31,
2013
$13,866
December 31,
2012
$12,092
December 31,
2013
$56,052
December 31,
2012
$47,269
During the fourth quarter of 2013, sales increased by $ 1,774,000, or 14.7%, compared to 2012. This increase is
mainly explained by additional sales from our operations in the United States, by increased sales of metallized
mulch and packaging film and by a stronger US dollar.
Sales in fiscal 2013 increased by $ 8,783,000, or 18.6%, over fiscal 2012. This increase is mainly the result of
management’s efforts to grow the top line in order to gain new business and fill production capacity.
Management’s success is largely attributable to effectively implementing its recent focus on business
development and the materializing of opportunities that were developed in the past in the markets that were
deemed to be prioritized. The strengthening of the US dollar against the Canadian dollar also contributed to the
increase in reported sales, although to a lesser extent.
($ thousands)
Three months ended
Years ended
Gross Profit ($) before
amortisation of production
equipment
(%)
Amortisation of production
equipment
Gross profit ($)
Gross profit (%)
December 31,
2013
December 31,
2012
December 31,
2013
December 31,
2012
$1,416
$1,555
$6,893
$5,843
10.2%
305
$1,111
8.0%
12.9%
257
$1,298
10.7%
12.3%
1,130
$5,763
10.3%
12.4%
1,039
$4,804
10.2%
Fourth Quarter 2013
7
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
RESULTS OF OPERATIONS (continued)
The gross profit before amortisation of production equipment decreased by $ 139,000 due to a generally higher
cost structure in the fourth quarter of 2013 compared to 2012. This was necessary in order to accommodate
increased production that materialized as well as the increased production that is expected for 2014.
Management believes that efficiency, and consequently profitability, will improve as sales are obtained. The
Company was also negatively impacted by a stronger US dollar that put pressure on the gross margin. In order
to improve its top line, management accepted to temporarily sacrifice profitability. As a percentage of sales, the
gross margin also decreased from 12.9% to 10.2%. Due to new equipment, the amortization of production
equipment increased from $ 257,000 in the fourth quarter of 2012 to $ 305,000 in the fourth quarter of 2013.
The gross profit decreased from $ 1,298,000 in 2012 to $ 1,111,000 in 2013.
In fiscal 2013, the gross margin before the amortisation of production equipment increased by $ 1,050,000,
while as a percentage of sales it remained fairly constant, going from 12.4% in 2012 to 12.3% in 2013. The
increased profitability was attributed to the increase in sales. Profitability would have been much greater had
management chose to delay the costs to enable the Company to position itself as an aggressive player in the
agricultural film market. The medium term benefit of this strategy will benefit the Company via increased
revenues on its existing product line. The potential long term greater benefits of its proprietary products will be
realized in the long run. The purchase of additional machinery over the year increased the depreciation expense
and the gross margin after the amortisation of production equipment increased by $ 959,000, while remaining
fairly stable as a percentage of sales, from 10.2% in 2012 to 10.3% in 2013.
($ thousands)
Three months ended
Years ended
Selling and administrative
As a % of sales
December 31,
2013
December 31,
2012
December 31,
2013
December 31,
2012
$1,316
9.5%
$1,090
9.0%
$5,035
9.0%
$4,266
9.0%
Selling and administrative expenses increased by $226,000 in the fourth quarter of 2013 compared to 2012. As
a percentage of sales, these expenses also increased from 9.0% in 2012 to 9.5% in 2013. This increase is mainly
attributable to an additional management position as well as additional expenses relating to the development of
Imaflex’s new proprietary product. Additional professional services and the increase in sales, generating higher
commission expenses, also explain a portion of the increase.
Over the year, selling and administrative expenses increased by approximately $ 769,000, but remained stable
as a percentage of sales at 9.0%. This is mainly attributable to the additional expenses and professional fees the
Company incurred in order to pursue the development of new products that are to be introduced to the market,
as well as new management, administrative and sales salaries. Higher sales leading to increased commission
expenses also had an impact of approximately $100,000 on selling expenses. To a lesser extent, foreign
exchange and additional professional service fees also contributed to this increase. These expenses permitted
management to continue implementing its strategy in order to build strong foundations for growth.
Fourth Quarter 2013
8
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
RESULTS OF OPERATIONS (continued)
($ thousands)
Three months ended
Years ended
Finance expense
December 31,
2013
December 31,
2012
December 31,
2013
December 31,
2012
$116
$122
$444
$509
During the fourth quarter of 2013, the decrease in the finance expense is mainly attributable to a lower interest
rate paid on short term debt. The Company also decreased the interest payments on long term debt due to
generally lower balances outstanding.
During the twelve month period, the finance expense decreased by approximately $ 65,000, mainly because the
balance outstanding on the Company’s long term debts decreased throughout the year and the overall expense
on short term bank borrowings also decreased due to lower interest rates and a lower average balance
outstanding.
($ thousands)
Three months ended
Years ended
Foreign exchange (gain)/loss
$(302)
December 31,
2013
December 31,
2012
$(94)
December 31,
2013
December 31,
2012
$(529)
$231
For both the three- and twelve-month periods, the foreign exchange gain is due to the appreciation of the US
dollar against the Canadian dollar over the periods. Namely, the important increase over the fourth quarter led
to a sizeable gain in the latter part of the year. An important portion of this gain is due to the foreign exchange
movements on intercompany advances. The depreciation of the US dollar during the twelve month period in
2012 led to a $ 231,000 loss, creating a $ 760,000 swing year over year.
($ thousands)
Income taxes
Three months ended
December 31,
2013
$135
December 31,
2012
$195
As a % of profit before taxes
(275.5)%
396.9%
Years ended
December 31,
2013
$469
69.4%
December 31,
2012
$298
(110.6)%
The provision for income taxes, mainly representing the current and future taxes payable by the Canadian
entity, totaled $ 135,000 for the fourth quarter of 2013. The implied effective rate of (275.5)% is explained by
the fact that the Company incurred, on a consolidated basis, a very low pretax loss which includes a loss
incurred for the US entity for which a taxable benefit is not recorded. In 2012, for reasons similar to the fourth
quarter of 2013, the consolidated pretax income was low in comparison to the income tax provision, which
included mainly the Canadian entity’s tax expense.
The income tax expense recorded for the 2013 fiscal year was $ 469,000 and represents an effective income tax
rate of 69.4%. This effective rate is greater than the Company’s statutory tax rate because no taxable benefit
was recorded for the losses incurred in the US entity. In 2012, the income tax expense was $ 298,000 and
represented (110.6)% of pretax income because the Company incurred a loss before income taxes, although the
Canadian entity generated taxable income.
Fourth Quarter 2013
9
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
RESULTS OF OPERATIONS (continued)
($ thousands,
except per share data)
Net (Loss) / income
Basic and diluted earnings
per share
Three months ended
Years ended
December 31,
2013
$
(184)
December 31,
2012
(146)
$
December 31,
2013
$
207
December 31,
2012
(568)
$
$ (0.004)
$ (0.003)
$ 0.005
$ (0.013)
The increase in operating costs as well as selling and administrative expenses in order to plan for future growth
did put pressure on earnings, however these measures were necessary in order to implement a strategy aimed at
growing the business and developing new markets. The foreign exchange gain partially offset these increases
such that the overall net loss for the quarter was $ 184,000 compared to a net loss of $ 146,000 during the fourth
quarter of 2012.
For the year ended December 31, 2013, the Company’s net profit was $ 207,000 as opposed to a loss of
$ 568,000 in fiscal 2012. The increase in the gross margin, coupled with a decrease in the interest expense and
the foreign exchange gains all had very positive impacts on overall profitability, despite increases in production
costs. These improvements were partially offset by the increase in selling and administrative expenses. The
Company’s top line is headed in the right direction and is following management’s strategy. As new products
are introduced and additional sales generated in all of the Company’s locations, the additional expenses will be
offset by improved profitability. However, these results will not take place immediately.
Financial Position
December 31, 2013 vs. December 31, 2012
From December 31, 2012 to December 31, 2013, the Company’s cash increased by $ 1,002,897 in order to be
able to cover payments that are coming due early in 2014 for the business acquisition. The Company’s short
term assets also increased following the increase in sales, trade and other receivables by $ 131,436 and
inventories by $ 307,764, while prepaid expenses decreased by $ 24,376 for a total increase in short term assets
of $ 1,417,721. Non-current assets increased mainly as a result of continued investments.
Bank indebtedness increased by $ 1,334,806 as a result of the cash flow management, although a portion of it
was offset by the increase in the Company’s cash balance. Trade and other payables increased by $ 718,162 due
to the growth the Company experienced. Given the Company was in breach of two financial covenants of its
banking agreement, all long term debt and finance lease obligations were classified as current. However, the
Company did obtain a tolerance for these breaches after December 31, 2013. IFRS requires that a Company
obtain a waiver before the date of the statement of financial position in order to be able to classify debt in
current and non-current liabilities. Nonetheless, having obtained a tolerance, management expects to repay its
debt as it comes due. Excluding the impact of the classification of long term debt as current liabilities, the
current portion of long term debt increased by $ 475,094, mainly due to the inclusion of the balance of sale in
short term liabilities. Accordingly, the non-current portion of long term debt decreased by $ 1,459,425 and
overall long term indebtedness decreased over the period.
Fourth Quarter 2013
10
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
SUMMARY OF QUARTERLY RESULTS
Summary financial data derived from the Company’s unaudited quarterly financial statements and audited
financial statements for each of the eight most recently completed quarters are as follows:
For the quarters ending March, June, September and December ($ thousands, except per share data):
Q4/13 Q3/13 Q2/13 Q1/13 Q4/12 Q3/12 Q2/12 Q1/12
11,818
13,866
(104)
(184)
15,203 14,186
396
12,202
149
11,157
(467)
12,092
(146)
12,797
230
(235)
Sales
Net income
(loss)
Earnings (loss) per share:
Basic and
diluted
(0.004)
(0.005)
0.009
0.005
(0.003)
(0.011)
0.003
(0.002)
It is important to note that profitability may vary from quarter to quarter, irrespective of quarterly sales due to
many factors. These factors include and are not limited to: competitive conditions in the businesses in which
the Company participates; general economic conditions and normal business uncertainty; product mix;
fluctuations in foreign currency rates; the availability and costs of raw materials; changes in the Company’s
relationship with its suppliers; and interest rate fluctuations and other changes in borrowing costs.
LIQUIDITY
Working capital as at December 31, 2013 was $ 143,234 compared to $ 2,303,260 as at December 31, 2012,
mostly due to the fact that all long term debt as well as the balance of sale for the business acquisition were
classified as current liabilities on December 31, 2013. Had long term debt been classified according to the
repayment schedule, working capital would have been $ 1,130,528. The Company’s growth in 2013 required
working capital investments, namely in inventories and trade receivables, which is why bank indebtedness and
trade payables increased as well. Management closely manages capital requirements to ensure sufficient
working capital. The Company obtained a waiver for the breach in covenants as at December 31, 2013 and
therefore although working capital as per the statements of financial position is only $ 143,234, management
does not expect to have any liquidity issues.
Cash Flows from Operating Activities
During the fourth quarter of 2013, cash inflows from operating activities, before changes in working capital and
income tax payments, were $ 14,985, as the net loss of $ 184,395 was offset by adjustments for non-cash items
and items excluded from operating activities totaling $ 199,380. Changes in working capital generated cash
outflows of $ 30,532, mainly due to an important decrease in trade payables, which was offset by decreases in
trade and other receivables and inventory. After the net income taxes paid of $ 9,339, operating activities
generated cash outflows of $ 24,886. In 2012, cash inflows before changes in working capital were $ 362,257.
For the year ended December 31, 2013, net income was $ 206,802 and, after eliminating non-cash items and
cash flow excluded from operating activities, such as the depreciation of non-current assets of $ 1,221,970 and
the unrealized foreign exchange gain of $ 702,800, operating cash flow before movements in working capital
was $ 1,663,277. Movements in working capital consisted of increases in current assets totaling $ 469,528 and
an increase in trade and other payables of $ 613,876 for a total impact on cash flow of $ 144,348. Net of the
payment of income taxes of $ 302,127, operating activities generated cash flows of $ 1,505,498. Cash flow from
operating activities for the year ended 2012 were $ 1,597,601 before movements in working capital. After
considering the changes in working capital and the income taxes paid, operating activities generated cash flows
of $ 1,698,018.
Fourth Quarter 2013
11
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
LIQUIDITY (continued)
Cash Flows from Financing Activities
During the fourth quarter of 2013, cash inflows from financing activities totaled $ 704,226 and represented
short term borrowings of $ 959,293, net of payments on long term debts and capital lease obligations of
$ 130,280 and $ 21,418 respectively, as well as interest payments of $ 103,269. In 2012, cash flow from
financing activities were composed of payments on long term debts of $ 149,776, as well as payments relating
to capital lease obligations and interest, which were offset by a $ 363,706 increase in short-term borrowings.
During the year ended December 31, 2013, the Company made payments of $ 1,114,633 on its long term debts
and $ 45,964 on its finance leases. Moreover, the Company paid $ 393,014 of interest on its borrowings. Cash
flow generated by financing activities represented $ 800,000 through the issuance of shares of the Company and
$ 1,334,806 through additional short term borrowings. In fiscal 2012, the Company repaid $ 739,642 on long
term debt, $ 17,274 on finance leases and paid $ 470,120 in interest on its borrowings. It received $ 485,484
from the issuance of shares and warrants as well as $ 476,628 from short term borrowings.
Cash Flows from Investing Activities
During the fourth quarter of 2013, the Company made payments for property, plant and equipment of
$ 472,626, representing mainly improvements to existing machinery as well as deposits on equipment that is to
be received at a later date. These investments should enable the Company to improve efficiency in the medium
term. In the fourth quarter of 2012, the Company incurred cash outflows for investing activities mainly for
leasehold improvements.
During the year ended December 31, 2013, cash outflow from investing activities totaled $ 1,112,892. Mainly,
the Company improved and upgraded existing machinery in order to increase efficiency. The Company also
invested in leasehold improvements for its premises and made deposits on equipment to be shipped in the next
fiscal year. In 2012, the Company incurred cash outflows related to a business acquisition of $ 989,500 as well
as $ 558,489 related to leasehold improvements and other pieces of equipment.
CONTRACTUAL OBLIGATIONS
The contractual obligations as at December 31, 2013 were as follows:
($ thousands)
Long-term debt
Finance leases
Operating leases
Bank Indebtedness
Total contractual obligations
Total
$ 2,604
111
2,716
7,439
$ 12,870
Payments due by period
1 – 5 years
Less than 1
year
After 5 years
$ 1,647
30
707
7,439
$ 9,823
$ 957
81
1,564
-
$ 2,602
$ -
-
445
-
$ 445
These contractual obligations are sensitive to the fluctuation of interest rates. These obligations are based on
interest rates and foreign exchange rates effective as at December 31, 2013.
Fourth Quarter 2013
12
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
CAPITAL RESOURCES
The Company has an operating line of credit with its bankers to a maximum of $ 8,500,000 bearing interest at a
rate of prime plus 1.85%. The line of credit is secured by trade receivables and inventories. As at December 31,
2013, the Company had drawn $ 7,438,682 on its line of credit ($ 6,103,876 as at December 31, 2012). The
Company’s working capital decreased since December 31, 2012, going from $ 2,303,260 to $ 143,234, mostly
due to the inclusion of all long term debt and the balance of sale on the business acquisition in current liabilities.
Management believes it has sufficient capital to continue operating efficiently through the liquidity available in
its working capital and the liquidity that will be generated by its operations and, given it obtained a tolerance for
having breached its covenants, it does not believe that it will suffer liquidity problems due to the presentation of
its long term debt in current liabilities. One long term loan came to maturity during the year and only one long
term bank loan along with the balance of sale of the business acquisition were outstanding as at December 31,
2013. During the year, the Company managed liquidity in order to match its short term obligations, thus
avoiding potential liquidity issues. In the second quarter of 2013, the Company issued $ 800,000 of shares and
in January of 2014, the Company increased its long term borrowings. These measures were taken in order to
decrease financial risk and avoid any potential liquidity issues.
PROPOSED TRANSACTION
The Company is currently considering a potential business acquisition aimed to increase the Company’s
profitability. There are no agreements currently signed and the Company has no commitment to complete this
transaction. Management is still in the process of determining if the target is a proper fit for the Company’s
operations and any closing is conditional upon obtaining the required financing to complete the transaction.
RELATED PARTY TRANSACTIONS
In the normal course of operations, the Company had routine transactions with related parties. These
transactions are measured at fair value, which is the amount of consideration established and agreed to by the
related parties.
The following table reflects the related party transactions recorded for the periods ended December 31, 2013
and 2012. For additional information, please refer to note 25, Related party transactions of the “Notes to the
consolidated financial statements” for the years ended December 31, 2013 and 2012.
($ thousands)
Three months ended
Years ended
Professional fees
Rent
December 31,
2013
$ 29
$231
December 31,
2012
$101
$218
(a)
(b)
December 31,
2013
December 31,
2012
$305
$795
$359
$798
(a) Professional fees include transactions with Polytechnomics Inc., of which Gerald R. Phelps, Imaflex’s Vice-
President – Operations, is the controlling shareholder and with Philip Nolan, a director of Imaflex, who is also a
partner at Lavery de Billy L.L.P.
(b) Joseph Abbandonato, Imaflex’s President, Chief Executive Officer and Chairman of the Board, is the
controlling shareholder of Roncon Consultants Inc. (“Roncon”). The Company’s production facilities at
Imaflex, Canslit, and Imaflex USA are leased from Roncon and parties related to Roncon under long-term
operating lease agreements (see “Contractual Obligations”).
Fourth Quarter 2013
13
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in note 2, Significant accounting policies of the
consolidated financial statements for the years ended December 31, 2013 and 2012. This note explains the
Company’s accounting policies under IFRS and all changes in accounting policies since the Company’s last
annual financial statements.
FINANCIAL INSTRUMENTS
Please refer to note 22, Financial instruments of the consolidated financial statements for the years ended
December 31, 2013 and 2012 for disclosure on the Company’s financial instruments as well as note 24, Risk
management for a discussion on the risks the Company is exposed to and how they are managed.
As at December 31, 2013, the fair value of the interest rate swap was $ nil (December 31, 2012 – $ 9,745) given
it came to maturity during the year, and a charge to the income statement under other gains and losses was
recorded for all movements in the fair value of the swap since the last reporting period. As at December 31,
2013, the Company is not using any swap, forward or hedge accounting.
During the first quarter of 2013, the Company issued 100,000 options to purchase common shares of the
Company to a provider of professional services. As a continuity of the same service contract, the Company
issued another 100,000 options in the third quarter of 2013. As at December 31, 2013, 300,000 options to
purchase shares of the Company were outstanding, 100,000 at a strike price of $0.125, 100,000 at a strike price
of $ 0.36 and 100,000 at a strike price of $0.40. Of these 300,000 options, 250,000 were exercisable. As at
December 31, 2013, 3,251,274 warrants entitling the owner to purchase common shares at $0.45 were
outstanding. A maximum of 1,000,000 shares can be issued if the balance of sale of the business acquisition is
settled in shares as the implied value of the settlement is USD$ 1 per share.
MANAGEMENT OUTLOOK
During the year, management continued to implement its plan of growing revenues in its legacy business in
order to generate increased profitability to cope with required future investments in product developments:
growing sales and purchasing more efficient equipment to generate more profitability. To date, our results
reflect the partial accomplishment of the plan. The part of the plan that depends on more productive equipment
will be completed as they are received in the first half of 2014.
Management’s decision to effectuate this plan of growing its legacy business is necessitated by the ever
increasing needs of providing the future funds necessary to achieve its objectives of registering the patent and
launching its proprietary product.
OUTSTANDING SHARE DATA
As at the date of this report, the Company had 44,201,276 common shares outstanding (42,601,276 as at
December 31, 2012).
Fourth Quarter 2013
14
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
RISK FACTORS
The Company is involved in a competitive industry and marketplace in which there are a number of
participants. To effectively manage future growth, the Company continues to improve its operational, financial
and management information systems, procedures and controls. The Company’s success is largely the result of
the continued contributions of its employees and the Company’s ability to attract and retain qualified
management, sales and operational personnel.
The $ 25 billion market the Company competes in has historically shown resiliency and growth even at the
worst economic times. The Company’s customers operate predominantly in the food packaging and
agricultural markets. This fact, coupled with the expanding product lines and reliance on newer and faster
equipment should help it weather the potential volatility caused by uncertainty in the North American economic
climate.
Factors which can impact the Company include, but are not limited to: management of credit, market dynamics,
liquidity, funding and operational risks; the strength of the Canadian and U.S. economies in which we conduct
business; the impact of the movement of the Canadian dollar relative to other currencies, particularly the U.S.
dollar; the effects of changes in interest rates; the effects of competition in the markets in which we operate; our
ability to successfully align our organization, resources, and processes; the availability and price of raw
materials; failure to achieve planned growth associated with the U.S. expansion; changes in accounting policies
and methods we use to report our financial condition, including uncertainties associated with critical accounting
assumptions and estimates; operational and infrastructure risks; other factors may affect future results including,
but not limited to, timely development and introduction of new products and services, changes in tax laws,
technological changes, new regulations; the possible impact on our businesses from public-health emergencies,
international conflicts and other developments; and our success in anticipating and managing the foregoing
risks.
Additional information relating to our Company, including our Annual Report, can be found on SEDAR at
www.sedar.com.
(s) Joseph Abbandonato
Joseph Abbandonato
President and Chief Executive Officer
(s) Giancarlo Santella
Giancarlo Santella, CPA, CA
Corporate Controller
April 16, 2014
Fourth Quarter 2013
15
Consolidated Financial Statements of
IMAFLEX INC.
Years ended December 31, 2013 and 2012
1
Independent Auditor’s Report
To the Shareholders of
Imaflex Inc.
Raymond Chabot Grant Thornton LLP
Suite 2000
National Bank Tower
600 De La Gauchetière Street West
Montréal, Quebec H3B 4L8
Telephone: 514-878-2691
Fax: 514-878-2127
www.rcgt.com
We have audited the accompanying consolidated financial statements of Imaflex Inc., which
comprise the consolidated statement of financial position as at December 31, 2013 and the
consolidated statements of comprehensive income (loss), changes in equity and cash flows for
the year then ended, and a summary of significant accounting policies and other explanatory
information.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards (IFRS) and
for such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on
our audit. We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
including the assessment of the risks of material misstatement of the
auditor’s judgment,
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of
internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates
the entity’s
Member of Grant Thornton International Ltd
2
made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate
to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Imaflex Inc. as at December 31, 2013 and its financial performance and its
cash flows for the year then ended in accordance with International Financial Reporting
Standards (IFRS).
Other matters
The consolidated financial statements of Imaflex Inc. as at and for
the year ended
December 31, 2012 were audited by another auditor who expressed an unmodified opinion on
those statements on April 16, 2013.
Montreal
April 16, 2014
1 CPA auditor, CA public accountancy permit No. A105359
Consolidated statements of comprehensive income (loss)
for the years ended
(in Canadian dollars)
December 31,
2013
2012
Revenues
Cost of sales
Gross profit
Expenses:
Selling
Administrative
Finance costs
Other gains and losses
Other
(Note 5.1)
$ 56,051,618
50,288,863
5,762,755
$ 47,268,941
42,464,524
4,804,417
(Note 8)
(Note 9)
1,384,124
3,650,636
443,708
(538,588)
147,288
5,087,168
1,207,676
3,058,410
509,179
192,768
106,137
5,074,170
Income (loss) before income taxes
675,587
(269,753)
Income taxes
(Note 10)
468,785
298,458
NET INCOME (LOSS)
206,802
(568,211)
Other comprehensive income (loss), net of income taxes
Item that will be reclassified subsequently to net income (loss)
Exchange differences on translating foreign operations
142,811
(72,013)
COMPREHENSIVE INCOME (LOSS)
$
349,613
$(640,224)
Earnings (loss) per share
Basic and diluted
(Note 11)
$
0.005
$ (0.013)
The accompanying notes are an integral part of these consolidated financial statements and note 6 presents
additional information on consolidated comprehensive income (loss)
4
Consolidated statements of financial position
As at
(in Canadian dollars)
Assets
Current assets
Cash
Trade and other receivables
Inventories
Prepaid expenses
Total current assets
Non-current assets
Property, plant and equipment
Intangible assets
Other receivables
Total non-current assets
Total assets
Liabilities and equity
Current liabilities
December 31,
2013
December 31,
2012
(Note 12)
(Note 13)
(Note 14)
(Note 15)
(Note 12)
$ 1,129,891
8,876,749
7,183,738
88,801
17,279,179
$ 126,994
8,745,313
6,875,974
113,177
15,861,458
16,131,997
713,030
321,038
17,166,065
15,493,915
640,920
-
16,134,835
$ 34,445,244
$ 31,996,293
Bank indebtedness
Trade and other payables
Derivative financial instrument
Current tax liabilities
Long-term debt, current portion
Finance lease obligations, current portion
Total current liabilities
Non-current liabilities
Long-term debt
Deferred tax liabilities
Finance lease obligations
Total non-current liabilities
Total liabilities
Equity
Share capital
Reserves
Retained earnings
Total equity
(Note 17)
(Note 16)
(Note 17)
(Notes 17, 18)
(Note 17)
(Note 10)
(Notes 17, 18)
7,438,682
6,851,670
-
255,757
2,489,179
100,657
17,135,945
-
1,353,259
-
1,353,259
6,103,876
6,133,508
9,745
173,268
1,101,425
36,376
13,558,198
2,372,085
1,269,090
25,263
3,666,438
18,489,204
17,224,636
(Note 19)
9,368,452
833,548
5,754,040
15,956,040
8,568,452
655,967
5,547,238
14,771,657
Total liabilities and equity
$ 34,445,244
$ 31,996,293
Operating lease commitments (Note 23.3)
The accompanying notes are an integral part of these consolidated financial statements.
(s) Joseph Abbandonato
Joseph Abbandonato
Director
(s) Gilles Émond
Gilles Émond
Director
5
Consolidated statements of changes in equity
For the years ended December 31, 2013 and 2012
(in Canadian dollars)
Share
capital (a)
$ 8,092,323
Share-based
compensation
$ 332,899
Reserves
Accumulated
foreign
currency
translation Warrants
$ (101,116)
$ 236,842
Other
$ 250,000
Total
Reserves
$ 718,625
Retained
earnings
$ 6,115,449 $ 14,926,397
Total
-
-
-
-
-
-
-
(72,013)
(72,013)
-
-
-
-
-
-
-
(568,211)
(568,211)
(72,013)
(72,013)
-
(568,211)
(72,013)
(640,224)
476,129
$ 8,568,452
-
$ 332,899
-
$ (173,129)
259,355
$ 496,197
(250,000)
-
$
9,355
$ 655,967
-
$ 5,547,238
485,484
$ 14,771,657
-
-
-
-
-
-
-
142,811
142,811
800,000
-
$9,368,452
-
34,770
$ 367,669
-
-
$ (30,318)
-
-
-
-
-
$ 496,197
$
-
-
-
-
-
-
-
206,802
206,802
142,811
142,811
-
206,802
142,811
349,613
-
34,770
$ 833,548
-
-
$ 5,754,040
800,000
34,770
$ 15,956,040
Balance at January 1, 2012
Net loss for the year
Exchange differences on translating
foreign operations
Comprehensive loss for the year
Transactions with owners:
Issuance of share capital and
warrants (Note 19)
Balance at December 31, 2012
Net income for the year
Exchange differences on translating
foreign operations
Comprehensive income for the year
Transactions with owners:
Issuance of share capital (Note 19)
Share-based compensation (Note 20)
Balance at December 31, 2013
(a) Additional detail of share capital is provided in Note 19
The accompanying notes are an integral part of these consolidated financial statements.
6
Consolidated statements of cash flows
for the years ended
(in Canadian dollars)
Operating activities:
Net income (loss) for the year
Income tax expense
Change in fair value of derivative financial instrument
Depreciation and amortisation of non-current assets
Finance costs
Share-based compensation
Unrealized foreign exchange (gain) loss
Net changes in working capital
(Increase) decrease in trade and other receivables
(Increase) decrease in inventories
Decrease (increase) in prepaid expenses
Increase (decrease) in trade and other payables
Cash generated by operations
Net income taxes paid
Net cash generated by operating activities
December 31,
2013
2012
$ 206,802
468,785
(9,958)
1,221,970
443,708
34,770
(702,800)
1,663,277
(374,940)
(123,853)
29,265
613,876
144,348
1,807,625
(302,127)
1,505,498
$ (568,211)
298,458
(38,441)
1,261,483
509,179
-
135,133
1,597,601
228,238
291,745
(101,174)
(52,512)
366,297
1,963,898
(265,880)
1,698,018
Investing activities:
Business acquisition (Note 26)
Payments for property, plant and equipment and intangible assets
Net cash used in investing activities
-
(1,112,892)
(1,112,892)
(989,500)
(558,489)
(1,547,989)
Financing activities:
Increase in bank indebtedness
Interest paid
Repayment of long-term debt
Issuance of share capital and warrants (Note 19)
Repayment of finance leases
Net cash generated by (used in) financing activities
Net increase (decrease) in cash
Cash, beginning of the year
Effects of foreign exchange differences on cash
Cash, end of the year
Non cash transactions (Note 21)
1,334,806
(393,014)
(1,114,633)
800,000
(45,964)
581,195
476,628
(470,120)
(739,642)
485,484
(17,274)
(264,924)
973,801
(114,895)
126,994
29,096
243,808
(1,919)
$ 1,129,891
$ 126,994
The accompanying notes are an integral part of these consolidated financial statements.
7
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
1. General information
Imaflex Inc. (“the Parent Company”) is incorporated under the Canada Business Corporations Act. Its
registered office and headquarters are located at 5710 Notre-Dame Street West, Montreal, Quebec, Canada.
The principal activities of the Parent Company and its subsidiary (together referred to as the “Company”)
consist in the manufacture and sale of products for the flexible packaging industry, including polyethylene
film and bags, as well as the metallization of plastic film for the plasticulture and packaging industries. The
common shares of the Parent Company are listed for trading on the TSX Venture Exchange under the
symbol “IFX”.
2. Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these
consolidated financial statements.
2.1 Basis of presentation and statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) in effect on December 31, 2013. The consolidated financial statements were
approved by the board of directors and authorized for issue on April 16, 2014.
2.2 Basis of measurement
The consolidated financial statements have been prepared using the historical cost basis except for certain
derivative financial instruments for which the measurement basis is detailed in the respective accounting
policy.
2.3 Changes in accounting policies
Presentation of items of other comprehensive income (loss)
Effective January 1, 2013, Amended IAS 1 – Presentation of Financial Statements, requires entities to group
items presented in other comprehensive income (loss) (“OCI”) into those that, in accordance with other
IFRS, will be reclassified subsequently to net income (loss) and those that will not be reclassified
subsequently to net income (loss) when specific conditions are met. The existing option to present items of
OCI either before tax or net of tax remains unchanged; however, if items are presented before tax then
amended IAS 1 requires that tax related to each of the two groups of OCI be shown separately. The
application of this amendment did not have a significant impact on the Company’s financial statements.
During the year, the Company also decided to reclassify the interest paid shown in the consolidated
statements of cash flows from operating activities to financing activities (including comparative
information).
Consolidation
Effective January 1, 2013, IFRS 10 – Consolidated Financial Statements and IFRS 12 – Disclosure of
Interests in Other Entities provide a single consolidated model that identifies control as the basis for
consolidation for all types of entities. IFRS 10 replaces IAS 27 – Consolidated and Separate Financial
Statements and SIC-12 – Consolidation – Special Purpose Entities. IFRS 12 combines, enhances and
replaces the disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated
structured entities. As a consequence of these new IFRS disclosure requirements, the IASB also issued
amended and retitled IAS 27 – Separate Financial Statements. IAS 28 – Investments in Associates and Joint
Ventures has been amended to include joint ventures in its scope and to address the changes in IFRS 10 to
IFRS 12. These new standards had no impact on the Company’s consolidated financial statements.
8
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
2. Significant accounting policies (continued)
2.3 Changes in accounting policies (continued)
Fair value measurements
Effective January 1, 2013, IFRS 13 – Fair Value Measurement clarifies the definition of fair value and
provides related guidance and enhanced disclosure about fair value measurements. IFRS 13 applies when
other IFRS standards require or permit fair value measurements. It does not introduce any new requirements
to measure an asset or a liability at fair value, change what is measured at fair value in IFRS standards or
address how to present changes in fair value. The new requirements apply prospectively. The application of
this new standard had no impact on the Company’s current fair value measurement accounting practices.
Impairment of assets
In May 2013, the IASB issued amendments to IAS 36 – Impairment of assets requiring additional
disclosures about the recoverable amount of impaired non-financial assets if that amount is based on fair
value less costs to sell. These amendments are effective for annual periods beginning on or after January 1,
2014 with early adoption permitted. The Company early adopted this amendment.
Offsetting Financial Assets and Financial Liabilities and the related disclosures
New disclosure requirements, set out in Disclosures-Offsetting Financial Assets and Financial Liabilities as
amendments to IFRS 7, are intended to help investors and other users better assess the effects or potential
effects of offsetting arrangements on a company’s statement of financial position. These amendments are
effective for annual reporting periods beginning on or after January 1, 2013. The application of IFRS 7 did
not have a material impact on amounts reported in the Company’s consolidated financial statements.
2.4 Basis of consolidation
The consolidated financial statements include the accounts of the Parent Company and its subsidiary Imaflex
USA Inc. (“Imaflex USA”), a wholly owned entity, which both have a reporting period of December 31.
Imaflex Inc. is the Company’s ultimate parent. The Parent Company controls a subsidiary if it is exposed, or
has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those
returns through its power over the subsidiary. All intercompany transactions and balances are eliminated on
consolidation.
As at December 31, 2013 and 2012, Imaflex USA, the Company’s wholly owned subsidiary, manufactured
flexible packaging and plastic film out of its two North Carolina, USA, plants.
2.5 Business combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a
business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair
values of the assets transferred by the Company, liabilities incurred by the Company to the former owners of
the acquiree and the equity interests issued by the Company in exchange for control of the acquiree.
Acquisition-related costs are generally recognised in net income (loss) as incurred. At the acquisition date,
the identifiable assets acquired and the liabilities assumed are recognised at their fair value.
9
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
2. Significant accounting policies (continued)
2.5 Business combinations (continued)
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-
controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the
acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets
acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-
controlling interests in the acquiree and, if applicable, the fair value of the acquirer's previously held interest
in the acquiree, the excess is recognised immediately in profit or loss as a bargain purchase gain.
2.6 Foreign currencies
The functional currency is the currency of the primary economic environment in which an entity operates.
The financial statements of the Parent Company and its subsidiary that are consolidated into the Company’s
financial statements are prepared in their individual functional currency. The consolidated financial
statements are expressed in Canadian dollars (“CAD”), which is also the functional currency of the Parent
Company as well as the Company’s presentation currency.
The assets and liabilities of the Company’s foreign subsidiary, Imaflex USA, whose functional currency is
the US dollar (“USD”), are translated at the exchange rate in effect at the date of the consolidated statement
of financial position. Revenues and expenses are translated at monthly average exchange rates over the
reporting period. Exchange gains or losses arising from the translation of Imaflex USA’s financial
statements are recognised as accumulated foreign currency translation within Reserves.
In preparing the financial statements of the individual entities, transactions in currencies other than the
entity’s functional currency are recorded at the average exchange rate during the year. If exchange rates
fluctuated significantly within these periods, exchange rates in effect on the date of the transactions are used.
Monetary items denominated in foreign currencies are translated at the exchange rate prevailing at the end of
the reporting period. Non-monetary items carried at fair value that are denominated in foreign currencies are
translated at the rate prevailing at the date when the fair value was determined.
2.7 Revenue recognition
Revenues are generated almost exclusively from the sale of goods. Revenue is measured at the fair value of
the consideration received or receivable, net of estimated returns, rebates and discounts, and is recognised
when all the following conditions are satisfied:
The Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
The Company retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the Company; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue is recognised in accordance with the terms of sale, generally when received by external customers.
10
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
2. Significant accounting policies (continued)
2.8 Income Tax
Income tax expense comprises both current and deferred tax. Current tax is based on taxable income for the
year. Taxable income differs from net income as reported in the consolidated statement of comprehensive
income (loss) because of items of revenue or expense that are taxable or deductible in other years and items
that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that
have been enacted or substantively enacted at the reporting period.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in
the consolidated statements of financial position and the corresponding tax basis used in the computation of
taxable income. Deferred tax liabilities are generally recognised for all taxable temporary differences.
Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is
probable that future taxable income will be available against which the underlying tax loss or deductible
temporary difference can be utilized.
Deferred tax assets and liabilities are calculated using the tax rates and laws enacted or substantially enacted
at the reporting date and which are expected to apply in the period in which the liability is settled or the asset
realized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax
assets against current tax liabilities, when they relate to income taxes levied by the same taxation authority
and when the Company intends to settle its current tax assets and liabilities on a net basis.
Current and deferred taxes are recognised as an expense or income in net income (loss), except when they
relate to items that are recognised outside net income (loss) (whether in other comprehensive income or
directly in equity), in which case the tax is also recognised outside net income (loss).
2.9 Earnings per share
Earnings per share are calculated by dividing net income available for common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings per share is calculated by
taking into consideration potentially issuable shares that would have a dilutive effect on earnings per share.
2.10 Financial assets and financial liabilities
Financial assets and financial liabilities are recognised when the Company becomes a party to the
contractual provisions of the instrument. On initial recognition, financial instruments are measured at fair
value adjusted for transaction costs except if directly attributable to the acquisition of financial assets or
liabilities at fair value through profit or loss, in which case they are recognised immediately in net income
(loss).
Financial assets
For the purposes of subsequent measurement, financial assets are classified, upon initial recognition, in the
different categories depending on their nature and purpose.
The Company’s cash as well as trade and other receivables (excluding sales taxes) are classified as loans and
receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. After initial recognition, these are measured at amortised cost using
the effective interest method, less any impairment. Discounting is omitted where the effect of discounting is
immaterial.
11
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
2. Significant accounting policies (continued)
2.10 Financial assets and financial liabilities (continued)
Impairment of financial assets
Financial assets are assessed for indications of impairment at least at each reporting period. Financial assets
are considered to be impaired when there is objective evidence that, as a result of one or more events that
occurred after the initial recognition of the financial asset, the estimated future cash flows of the asset have
been affected.
Trade and other receivables that are assessed not to be impaired individually are, in addition, assessed for
impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could
include past experience of collecting payments, an increase in the number of delayed payments in the
portfolio past the average credit period, as well as observable changes in economic conditions that correlate
with default on receivables.
The carrying amount for most financial assets is reduced by the impairment loss directly. For trade
receivables, the carrying amount is reduced through the use of an allowance account. When a trade
receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries
of amounts previously written off are credited against the allowance account. Changes in the carrying
amount of the allowance account are recognised in profit or loss. The expense relating to the allowance for
doubtful accounts is recognised in Administrative expenses in the statement of comprehensive income (loss).
Financial liabilities
For the purpose of subsequent measurement, financial liabilities are classified in the following categories,
upon initial recognition:
at fair value through profit and loss (“FVTPL “)
at amortised cost
Financial liabilities are measured subsequently at amortised cost using the effective interest rate method,
except for financial liabilities designated at FVTPL, which are subsequently carried at fair value with gains
and losses recognised in net income (loss). Discounting is omitted where the effect of discounting is
immaterial. All derivative financial instruments that are not designated as hedging instruments are accounted
for at FVTPL.
The Company’s bank indebtedness, trade and other payables (excluding employee benefits) and long-term
debt are classified as financial liabilities measured at amortised cost. All interest-related charges are
recognised in the consolidated statement of comprehensive income (loss) under Finance costs.
The Company derecognises financial liabilities when, and only when, the Company’s obligations are
extinguished, discharged, cancelled or expired.
Derivative Financial Instruments
The Company may use derivative financial instruments to manage financial risk, namely it previously used
an interest rate swap to manage interest rate risk. However, the Company does not use derivative financial
instruments for speculative or trading purposes. The interest rate swap was initially recognised at fair value
at the date the derivative contract was entered into and was subsequently remeasured to fair value at the end
of each reporting period. The resulting gain or loss is recognised in net income (loss) immediately. At the
reporting date, the interest rate swap came to maturity, but for comparative information, the derivative
financial instrument is recognised as a financial asset when it has a positive fair value and as a financial
liability when it has a negative fair value.
12
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
2. Significant accounting policies (continued)
2.11 Inventories
Inventories are stated at the lower of cost and net realizable value. Costs, including raw materials and an
appropriate portion of fixed and variable overhead expenses, are assigned to inventories by the method most
appropriate to the particular class of inventory, being valued on a first-in-first-out basis. Net realizable value
represents the estimated selling price for inventories less all estimated costs of completion necessary to make
the sale and estimated selling expenses.
2.12 Property, plant and equipment
Production equipment, office equipment and computer equipment are stated at cost, including any costs
directly attributable to bringing the assets to the location and condition necessary for it to be capable of
operating in the manner intended by the Company’s management, less accumulated depreciation and
accumulated impairment losses.
Depreciation is recognised so as to write down the cost of assets less their residual values over their useful
lives, as outlined below, using the straight-line method. The estimated useful lives, residual values and
depreciation method are reviewed and adjusted, if necessary, at each reporting date, with the effect of any
changes in estimate accounted for on a prospective basis.
Asset
Production equipment
Office equipment
Computer equipment
Period
20 years
5 years
3 years
Leasehold improvements are amortised on a straight-line basis over the lesser of the terms of the leases or
their useful lives (5 years).
An item of property, plant and equipment is derecognised upon disposal or when no future economic
benefits are expected to arise from the continued use of the asset. The gain or loss arising from the disposal
or retirement of an item of property, plant and equipment is determined as the difference between the sales
proceeds and the carrying amount of the asset and is recognised in net income (loss), with Other gains and
losses in the consolidated statement of comprehensive of income (loss).
2.13 Leased assets
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and
rewards of ownership to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are initially recognised as assets of the Company at their fair value at the
inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding
liability to the lessor is included in the consolidated statement of financial position as a finance lease
obligation. Leases are initially recognised on the date from which the Company is entitled to exercise its
right to use the leased asset, referred to as the commencement of the lease term, which corresponds to the
date on which the equipment is received. Assets held under finance leases are depreciated over their
expected useful lives on the same basis as owned assets (between 3 and 5 years) or, where shorter, the term
of the relevant lease.
Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to
achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised
immediately in net income (loss). Contingent rentals are recognised as expenses in the periods in which they
are incurred.
13
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
2. Significant accounting policies (continued)
2.13 Leased assets (continued)
Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except
where another systematic basis is more representative of the time pattern in which economic benefits from
the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an
expense in the period in which they are incurred.
2.14 Intangible assets
Intangible assets acquired in a business combination and recognised separately from goodwill are initially
recognised at their fair value at the acquisition date, which is regarded as their cost. Subsequent to initial
recognition, intangible assets acquired in a business combination are reported at cost less accumulated
amortisation and accumulated impairment losses.
An intangible asset is derecognised on disposal, or when no future economic benefits are expected from its
use or disposal. Gains or losses arising from the derecognition of an intangible asset, measured as the
difference between the net disposal proceeds and the carrying amount of the asset, are recognised in net
income (loss) when the asset is derecognised. The amortisation of intangible assets, if any, is recognised in
Administrative expenses in the consolidated statement of comprehensive income (loss) over the useful life of
the intangible asset. Customer relationships are amortised on a straight-line basis over 8 years and internally
developed patents are amortised as of the moment they can be used over the life of the patent (20 years).
2.15 Impairment of property, plant and equipment and intangible assets other than goodwill
At each reporting date, or sooner if there is an indication that an asset may be impaired, the Company
reviews the carrying amounts of its property, plant and equipment and intangible assets, to determine
whether there is any indication that they have suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.
When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell and value in use. 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 for which
the estimates of future cash flows have not been adjusted.
If the recoverable amount of an assets is estimated to be less than their carrying amount, the carrying amount
is reduced to the recoverable amount. An impairment loss is recognised immediately in net income (loss),
unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a
revaluation decrease.
When an impairment loss subsequently reverses, the carrying amount of the assets is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognised for the asset in prior
years. A reversal of an impairment loss is recognised immediately in net income (loss), unless the relevant
asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a
revaluation increase.
14
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
2. Significant accounting policies (continued)
2.16 Goodwill
Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of
the business less accumulated impairment losses, if any.
For the purposes of impairment testing, goodwill is allocated to each of the Company's cash-generating units
or groups of cash-generating units that is expected to benefit from the synergies of the combination.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more
frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-
generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying
amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the
carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in net
income (loss) in the consolidated statement of comprehensive income (loss). An impairment loss recognised
for goodwill is not reversed in subsequent periods.
2.17 Provisions
Provisions are recognised when the Company has a present obligation, legal or constructive, as a result of a
past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate
can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of
the consideration required to settle the present obligation based on the most reliable evidence available at the
reporting date, taking into account the risks and uncertainties surrounding the obligation.
2.18 Share-based compensation
The Company uses equity-settled share-based compensation plans for its employees and for one consultant.
None of the Company’s plans are cash-settled. Equity-settled share-based compensation is measured at the
fair value of the services received at the grant date indirectly by reference to the fair value of the equity
instruments granted, estimated using the Black-Scholes option pricing model.
The fair value determined at the grant date of the equity-settled share-based compensation is expensed over
the vesting period with a corresponding increase in Reserves.
2.19 Share capital and reserves
Share capital represents the nominal value of shares that have been issued. Proceeds from the issuance of
units consisting of shares and purchase warrants are allocated based on the relative fair values of each
instrument. The fair value of the shares is based on the TSX share price at the time of the issuance and the
fair value of the warrants is determined using a Black & Scholes valuation model.
Reserves include the following:
Share-based compensation (see 2.18);
Accumulated foreign currency translation (see 2.6);
Warrants – comprises the value of outstanding and expired warrants.
Upon the exercise of options and warrants, the proceeds received less the transaction costs attributable to the
limit of the nominal value of shares issued are credited to share capital.
15
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
3. Future accounting changes
Certain new standards as well as amendments and improvements to existing standards have been published
by the IASB but are not yet effective and have not been adopted early by the Company. Management
anticipates that all of the relevant pronouncements will be adopted in the first reporting date following the
date of application. The information on new standards as well as amendments and improvements to existing
standards that may impact the Company’s consolidated financial statements are as follows:
Financial instruments
The IASB aims to replace IAS 39 – Financial Instruments: Recognition and Measurement in its entirety
with IFRS 9. To date, the chapters relating to recognition, classification, measurement and derecognition of
financial assets and liabilities as well as the chapter relating to hedge accounting have been published. The
chapter relating to impairment methodology is still being developed. In November 2013, the IASB decided
to defer the implementation of IFRS 9 to a date to be announced. Management has yet to assess the impact
of this new standard on the Company’s consolidated financial statements and does not expect to implement
IFRS 9 until it has been completed and its overall impact can be assessed.
Other new standards and interpretations have been issued but are not expected to have a material impact on
the Company’s consolidated financial statements.
4. Critical accounting judgments and key sources of estimation uncertainty
The preparation of these consolidated financial statements in conformity with IFRS and the application of
the Company’s accounting policies described in note 2, required management to make judgments, estimates
and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based on historical experience and other factors that
are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised if the revision affects only that period,
or in the period of the revision and future periods if the revision affects both current and future periods.
4.1 Critical judgments in applying accounting policies
The following are the critical judgments, apart from those involving estimations, that management has made
in the process of applying the Company's accounting policies and that have the most significant effect on the
amounts recognised in the consolidated financial statements.
Cash-generating units
Management has identified only one cash-generating unit (“CGU”) for the Company. Revenue generated by
the Company’s various product lines and facilities are generated through a single sales force whose ability to
cross sell products influences the level of sale for each product line. Management has determined that the
cash flows of the Company’s production facilities are closely interrelated and not independent.
16
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
4. Critical accounting judgments and key sources of estimation uncertainty (continued)
4.2 Key sources of estimation uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation
uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities within the next financial year.
Allowance for doubtful accounts
The Company analyzes its trade receivables on an account by account basis and on a portfolio basis. Any
impairment recognised on these assets is based on historical experience and management’s best estimate of
the recoverability of the account receivable.
Inventory
The Company estimates the net realizable values of inventories taking into account the most reliable
evidence available at each reporting date. This assessment is based on management’s knowledge of the
market and experience regarding obsolescence and valuation of inventory.
Useful lives of depreciable assets
The Company reviews the estimated useful lives of property, plant and equipment and intangible assets other
than goodwill at the end of each annual reporting period in order to ensure that the amortisation method used
is appropriate.
Impairment of long-lived assets
The Company performs impairment tests on its long-lived assets by comparing the carrying amount of the
assets to their recoverable amount, which is calculated as the higher of the asset’s fair value less costs to sell
and its value in use. Value in use is calculated based on a discounted cash flow analysis, which requires the
use of estimates of future cash flow and discount rates. The Company uses judgment to determine whether it
identifies any triggering event that may indicate that the long-lived assets have been impaired.
Income taxes
Management uses estimates in determining the appropriate rates and amounts in recording deferred income
taxes, giving consideration to timing and probability of realization. Actual taxes could significantly vary
from these estimates as a result of a variety of factors including future events, changes in income tax laws or
the outcome of reviews by tax authorities and related appeals. The resolution of these uncertainties and the
associated final taxes payable may result in adjustments to the Company’s deferred and current tax assets
and liabilities.
Warrants and share-based compensation
The Company issues from time to time equity instruments, comprised of options to purchase common shares
as well as common shares and warrants. The Company uses the Black and Scholes pricing model in order to
determine the value of these instruments or how proceeds are allocated between the instruments. These
methods require estimates based on market inputs.
17
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
5. Segment information
The Company operates in one reportable segment, comprising the development, manufacture and sale of
flexible packaging material in the form of film or bags, for various uses.
5.1 Revenues by geographical end market
The Company’s revenues by geographical end market are as follows:
Canada
United States
Other
Total
Year ended
December 31,
2013
December 31,
2012
$ 22,254,188
33,515,234
282,196
$ 56,051,618
$ 24,179,722
22,803,435
285,784
$ 47,268,941
5.2 Property, plant and equipment and intangible assets per geographic location
Canada
United States
Total
December 31,
2013
December 31,
2012
$ 6,244,399
10,600,628
$ 16,845,027
$ 6,214,416
9,920,419
$ 16,134,835
6. Additional information on the consolidated statements of comprehensive income (loss)
The Company’s consolidated statement of comprehensive income (loss) includes depreciation of production
equipment of $ 1,130,509 for the year ended December 31, 2013 ($ 1,039,086 in 2012) classified in Cost of
sales. Depreciation of other property, plant and equipment and amortisation of intangible assets amounting
to $ 91,461 for the year ended December 31, 2013 ($ 222,397 in 2012) is included in Administrative
expenses.
The Company’s consolidated statement of comprehensive income (loss) includes salaries paid to its
employees of $ 6,417,472 for the year ended December 31, 2013 ($ 5,643,441 in 2012) classified in Cost of
sales. Administrative expenses include salaries paid to employees of $ 1,138,766 for the year ended
December 31, 2013 ($ 986,030 in 2012) and Selling expenses include salaries paid to employees of
$ 428,361 for the year ended December 31, 2013 ($ 360,178 in 2012).
7. Employee benefits
The Company contributes to state-run pension plans, employment insurance, group insurance and social
security for its employees. The costs incurred for the employee benefits noted above amounted to
$ 1,909,847 during the year ended December 31, 2013 ($ 1,594,401 in 2012). These payments are expensed
as incurred and the Company does not recognise any gains or losses subsequent to the payment of these
benefits. These transactions do not result in any asset or liability on the consolidated statement of financial
position.
The Company also offers a defined contribution employee benefit plan to its employees located in North
Carolina, USA. For the year ended December 31, 2013, the Company contributed $ 14,458 to this plan
($ 11,851 in 2012).
18
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
8. Finance costs
Interest on bank indebtedness and long term debt
Interest on obligations under finance leases
9. Other gains and losses
Year ended
December 31,
2013
December 31,
2012
$ 437,816
5,892
$ 505,559
3,620
$ 443,708
$ 509,179
Year ended
December 31,
2013
December 31,
2012
Foreign exchange (gain) loss
Change in fair value of derivative financial instrument
$ (528,630)
(9,958)
$ 231,209
(38,441)
$ (538,588)
$ 192,768
10. Income taxes
10.1 Income tax recognised in net income (loss)
Year ended
December 31,
2013
December 31,
2012
Income tax expense comprises:
Current tax expense in respect of the current year
Adjustments recognised in the current year relating
to prior years
Deferred tax expense relating to the origination and
reversal of temporary differences
Total income tax expense
$ 335,410
$ 227,704
49,206
61,057
84,169
$ 468,785
9,697
$ 298,458
10.2 Reconciliation between the income tax expense and the statutory income tax rate
Year ended
December 31,
2013
December 31,
2012
Income (loss) before income taxes
$ 675,587
$ (269,753)
Income tax expense (recovery) calculated at 26.9%
Permanent differences
Effect of unrecognised benefit of Imaflex USA’s
losses
Effect of different tax rates of subsidiaries operating in
other jurisdictions
Other
181,733
(79,803)
(72,564)
53,409
479,424
374,570
(148,745)
36,176
(102,247)
45,290
Income tax expense recognised in net income (loss)
$ 468,785
$ 298,458
The tax rate used for the 2013 reconciliation above is the corporate tax rate of 26.9% (26.9% in 2012)
payable by corporate entities in Quebec, Canada on taxable income under tax law in those jurisdictions.
19
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
10. Income taxes (continued)
10.3 Deferred tax balances
2013
Assets
Non-capital losses
Finance leases
Inventory
Other assets
Liabilities
Opening
balance
Recognised
in income
(loss)
Adjustment
to prior year
balance
Closing
balance
$ 2,438,833
10,251
-
7,221
2,456,305
$ 15,729
5,732
223,932
83,694
329,087
$ -
-
-
(565)
(565)
$ 2,454,562
15,983
223,932
90,350
2,784,827
Advance
Property, plant and equipment
Investment tax credits
-
(3,718,976)
(6,419)
(3,725,395)
(80,516)
(334,699)
(242)
(415,457)
-
1,485
1,281
2,766
(80,516)
(4,052,190)
(5,380)
(4,138,086)
Deferred tax liabilities
$(1,269,090)
$ (86,370)
$ 2,201
$(1,353,259)
Opening
balance
Recognised
in income
(loss)
Adjustment
to prior year
balance
Closing
balance
2012
Assets
Non-capital losses
Finance leases
Financing costs
Intangible assets
Liabilities
$ 1,057,664
11,007
-
7,157
1,075,828
$ 1,381,169
(756)
565
(501)
1,380,477
$ -
-
-
-
-
$ 2,438,833
10,251
565
6,656
2,456,305
Property, plant and equipment
Investment tax credits
(2,319,251)
(15,970)
(2,335,221)
(1,394,833)
9,551
(1,385,282)
(4,892)
-
(4,892)
(3,718,976)
(6,419)
(3,725,395)
Deferred tax liabilities
$(1,259,393)
$ (4,805)
$ (4,892)
$(1,269,090)
20
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
10. Income taxes (continued)
10.4 Unrecognised deferred tax assets
The Company's subsidiary, Imaflex USA, has non-capital losses available to carry forward to reduce future
taxable income of $ 16,868,259 in 2013 and $ 13,470,882 in 2012 for part of which a deferred tax asset has
not been recognised ($ 4,124,059 in 2013 and $ 2,565,541 in 2012) that expire as follows:
Expiring in
December 31,
2013
December 31,
2012
2025
2026
2027
2028
2029
2030
2031
2032
2033
$ 92,212
1,545,505
1,062,363
2,293,963
2,484,960
3,646,675
1,556,659
2,207,521
1,978,401
$16,868,259
$ 86,256
1,445,678
993,743
2,145,791
2,324,452
3,301,393
1,456,112
1,717,457
-
$13,470,882
Additionally, the Company has not recognised a deferred tax asset on its Canadian capital losses in the
amount of $ 128,288 which can be used indefinitely.
11. Earnings (loss) per share
Year ended
December 31,
2013
December 31,
2012
Income (loss) for basic and diluted earnings (loss) per
share
$ 206,802
$ (568,211)
Weighted average number of common shares
outstanding
Dilutive effect of share purchase options
Diluted weighted average common shares outstanding
43,644,564
70,122
43,714,686
42,437,341
-
42,437,341
Basic and diluted earnings/(loss) per common share
$ 0.005
$ (0.013)
21
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
12. Trade and other receivables
Trade receivables
Allowance for doubtful accounts
Other receivables
Total receivables
Non-current other receivables
December 31,
2013
December 31,
2012
$ 9,322,425
(620,539)
8,701,886
$ 8,933,296
(570,400)
8,362,896
495,901
9,197,787
321,038
382,417
8,745,313
-
Current trade and other receivables
$ 8,876,749
$ 8,745,313
Movement in the allowance for doubtful accounts
Year ended
December 31,
2013
December 31,
2012
Balance, beginning of year
Release of allowance for doubtful accounts
Impairment losses and adjustments recognised on
trade receivables
Amounts written off during the year as uncollectible
Foreign exchange
Balance, end of year
$ (570,400)
55,000
$ (527,876)
397,741
(78,433)
-
(26,706)
$ (620,539)
(473,083)
30,935
1,883
$ (570,400)
Credit risk
Credit risk is the risk that a counterparty fails to discharge an obligation to the Company. The Company’s
maximum exposure to credit risk is limited to the carrying amount the financial assets, net of any provisions
for losses recorded on the Company’s consolidated statements of financial position.
Credit risk management
Credit risk associated with cash is substantially mitigated by ensuring that these financial assets are
primarily placed with major American and Canadian financial institutions that have been accorded grade
ratings by a primary rating agency and qualify as creditworthy counterparties. The Company performs an
ongoing review and evaluation of the possible risks associated with cash.
For trade receivables, the Company uses an external credit service to assess the potential customer’s credit
quality and uses this information to define the allowed credit limits by customer. The Company uses Export
Development Canada to insure trade receivables. As at December 31 2013, $ 4,069,180 ($ 4,009,259 as at
December 31, 2012) of the total trade receivables are insured. The Company’s management considers that
all receivables that are not impaired or past due for each reporting dates are of good credit quality.
Trade receivables past due but not impaired
Trade receivables disclosed above include amounts that are past due at the end of the reporting period but
not impaired, because the amounts are still considered recoverable based on the Company’s analysis of
reimbursements. In situations where the Company believes there may be increased credit risk, netting
agreements are signed in order to be able to settle any payables to the same customer on a net basis. At the
end of the reporting period, there were $ 1,841,664 of past due trade receivables that were not impaired
($ 1,951,000 in 2012). Of that amount, $ 826,141 was over 90 days ($ 832,016 as at December 31, 2012).
22
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
12. Trade and other receivables (continued)
Aging of total receivables
Current
31 days to 60 days
61 days to 90 days
Over 90 days
Total
13. Inventories
Raw materials and supplies
Finished goods
Work in process
Total
Year ended
December 31,
2013
December 31,
2012
$ 3,756,814
3,325,812
1,139,164
975,997
$ 9,197,787
$ 3,501,492
3,161,599
1,118,984
963,238
$ 8,745,313
December 31,
2013
December 31,
2012
$ 4,233,033
2,603,107
347,598
$ 7,183,738
$ 3,997,193
2,771,312
107,469
$ 6,875,974
The cost of inventories recognised as an expense during the year was $ 33,145,289 ($ 27,286,421 in 2012).
There were no write-downs of inventory recognised in the fiscal year ended on December 31, 2013 or 2012.
14. Property, plant and equipment
Production
equipment
Leasehold
improvements
Office
equipment
Computer
equipment
Equipment
under
finance
lease
Total
At cost,
January 1, 2012
Additions
Business acquisition
Foreign exchange
$ 36,378,217
849,775
1,088,450
(231,301)
December 31, 2012
Additions
Foreign exchange
38,085,141
1,010,681
895,742
$1,325,393
308,714
-
(8,698)
1,625,409
77,645
38,141
$ 41,300
-
-
(308)
40,992
-
959
$ 384,993
-
-
(257)
384,736
6,325
797
$ 70,500
37,633
-
(264)
107,869
83,290
2,568
$ 38,200,403
1,196,122
1,088,450
(240,828)
40,244,147
1,177,941
938,207
December 31, 2013
$ 39,991,564
$1,741,195
$ 41,951
$391,858
$ 193,727
$ 42,360,295
Accumulated depreciation
January 1, 2012
Depreciation expense
Foreign exchange
$(21,969,122)
(1,039,086)
72,406
$ (1,234,540)
(100,424)
5,224
$ (27,747)
(9,036)
308
$(321,891)
(63,007)
162
$ (44,650)
(18,839)
10
$(23,597,950)
(1,230,392)
78,110
December 31, 2012
Depreciation expense
Foreign exchange
(22,935,802)
(1,100,789)
(273,885)
(1,329,740)
(47,204)
(18,758)
(36,475)
(4,518)
(958)
(384,736)
(1,054)
(796)
(63,479)
(29,720)
(384)
(24,750,232)
(1,183,285)
(294,781)
December 31, 2013
$(24,310,476)
$ (1,395,702)
$ (41,951)
$(386,586)
$ (93,583)
$(26,228,298)
23
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
14. Property, plant and equipment (continued)
Net book value, as at
December 31, 2012
$ 15,149,339
$ 295,669
$ 4,517
$ -
$ 44,390
$ 15,493,915
December 31, 2013
$ 15,681,088
$ 345,493
$
-
$ 5,272
$ 100,144
$ 16,131,997
The Company’s production equipment with a carrying amount of approximately $ 3,800,000 (approximately
$ 7,000,000 as at December 31, 2012) is pledged as collateral for the Company’s operating line of credit and
long-term debt. The Company has a contractual commitment to acquire production equipment of $ 587,107,
through a finance lease, in 2014. Details are provided in Note 18.
15. Intangible assets
Goodwill
Customer
relationships
Patent costs
Total
January 1, 2012
Additions (Note 26)
Amortisation
Foreign exchange
December 31, 2012
Additions
Amortisation
Foreign exchange
$
-
371,513
-
2,028
373,541
-
-
25,794
$
-
296,850
(31,091)
1,620
267,379
-
(38,685)
17,264
$
$
-
-
-
-
-
67,737
-
-
-
668,363
(31,091)
3,648
640,920
67,737
(38,685)
43,058
December 31, 2013
$ 399,335
$ 245,958
$ 67,737
$ 713,030
16. Trade and other payables
Trade payables
Other payables and accrued liabilities
December 31,
2013
December 31,
2012
$ 5,184,430
1,667,240
$ 6,851,670
$ 4,820,870
1,312,638
$ 6,133,508
24
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
17. Credit facilities
Bank indebtedness (a)
Long term debt
Loan, bearing interest at the lender’s base rate (5.00% as at
December 31, 2013) plus 0.25%, repayable in monthly principal
installments of $43,460 to September 2016, secured by production
equipment. (b)
Loan (US$ 460,714), bearing interest at the 30-day LIBOR rate,
reset monthly, plus 1.24%.
Subordinated debt, not interest-bearing, repayed in full during the
course of 2013 (c)
Balance of purchase price on business acquisition (US$ 991,913 as
at December 31, 2013, US$ 942,714 as at December 31, 2012) (d)
Total long term debt
Finance leases (Note 18) (b)
Total borrowings
Current
Bank indebtedness
Long-term debt, current portion
Finance leases
Non-current
Long-term debt
Finance leases
Total borrowings
December 31,
2013
December 31,
2012
$ 7,438,682
$ 6,103,876
1,434,180
1,912,240
-
-
458,364
165,000
1,054,999
2,489,179
937,906
3,473,510
100,657
61,639
10,028,518
9,639,025
7,438,682
2,489,179
100,657
10,028,518
-
-
-
6,103,876
1,101,425
36,376
7,241,677
2,372,085
25,263
2,397,348
$ 10,028,518
$ 9,639,025
Interest on long-term debt amounted to $ 154,251 for the year ended December 31, 2013 ($ 191,870 in
2012).
(a) The Company has an operating line of credit with its bankers to a maximum of $8,500,000, bearing
interest at prime plus 1.85% (4.85% effective interest rate at December 31, 2013). The line of credit is
secured by trade receivables and inventories. The line of credit may be reviewed periodically by the
bank and is repayable on demand. The operating line of credit is subject to working capital, debt to
equity, fixed coverage and interest bearing debt to EBITDA covenants (as defined in the lending
agreement). As at December 31, 2013, the Company had drawn $ 7,438,682 ($ 6,103,876 as at
December 31, 2012) on its line of credit and was not in compliance with two financial covenants.
Subsequently to year-end, the Company obtained a waiver from its financial institution confirming
tolerance for this breach of covenants until January 1, 2015.
25
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
17. Credit facilities (continued)
(b) As at December 31, 2013, the Company was in breach of the interest bearing debt to EBITDA and
minimum EBITDA covenants under its operating line of credit (see (a)). All of the Company’s credit
agreements, with the exception of the balance of purchase price on business acquisition, include cross
default provisions which give the right to the creditor to demand repayment of the loan prior to the
scheduled maturity. As such, the balance of bank loans and finance lease obligations were reclassified as
current as at December 31, 2013.
(c) On December 5, 2011, the Company received a subordinated loan of $165,000 from a significant
shareholder and officer of the Company pursuant to the Company’s agreement with a creditor. This loan
was repaid in full during the course of 2013.
(d) During the year ended December 31, 2012, the Company completed a business acquisition and assumed
a non-interest bearing balance of purchase price which was recorded at the discounted value of $894,096
(USD$904,584). This debt was reimbursed on February 26, 2014. The initially recorded discounted
value is recorded at amortised cost using the effective interest method with an effective rate of 5.2%.
The aggregate scheduled repayment of long term debt is as follows, without taking in consideration the right
of repayment on demand :
Not later than one year
Later than one year and not later than five years
$ 1,576,519
912,660
$ 2,489,179
18. Obligations under finance leases
The Company has entered into certain finance lease agreements. Finance lease payments are as follows,
without taking into consideration the right of repayment on demand (Note 17 (b)) :
Not later than one year
Later than one year and not later than five years
Later than five years
Total minimum lease payments
Less amount representing interest at approximately 6.4%
Present value of minimum lease payments
$ 30,447
80,733
-
111,180
(10,523)
100,657
During the year ended December 31, 2013, the Company signed a non-cancellable finance lease agreement
for production equipment worth $ 587,107 that is expected to be received in the first quarter of 2014. As part
of this lease agreement, the Company also entered into a demand promissory note, under which terms it
assumes the liability for any funds disbursed on its behalf. This promissory note, provided that the Company
is in compliance with all the provisions of the agreements entered into, will be converted to the lease on the
commencement of the lease term. Based on the terms of the promissory note and the present probability of
having to assume any liability under the demand promissory note, no amounts were recognised in the
consolidated financial statements as at December 31, 2013, except for the recording of a deposit totalling
$ 118,999 relating to this lease that was paid during the year ended December 31, 2013 and included under
the caption Property, plant and equipment in the consolidated statement of financial position.
26
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
19. Share capital
The Company’s outstanding share capital consists of an unlimited number of common shares, voting,
participating, without par value. At December 31, 2013, there were 44,201,276 common shares outstanding
(42,601,276 common shares at December 31, 2012).
During the year ended December 31, 2013, the Company issued, through a non-brokered private placement,
1,600,000 common shares for total cash proceeds of $ 800,000.
During the year ended December 31, 2012, the Company issued, through a non-brokered private placement,
1,935,485 Units for proceeds of $ 735,484, of which $ 250,000 had been received in 2011 in contemplation
of this transaction. Each Unit is comprised of one common share and one common share purchase warrant
entitling its holder to acquire one additional common share at a price of $ 0.45 per share until February 1,
2015.
Each share issued was attributed a value of $ 0.246 and each warrant issued was attributed a value of
$ 0.134. Of the $ 250,000 received in 2011 and included in Other reserves as at December 31, 2011,
$ 161,842 was reclassed to share capital and $ 88,158 was reclassed to warrants. Of the $ 485,484 received
in 2012, $ 314,287 was attributed to the shares issued and $ 171,197 was attributed to the warrants issued.
As at December 31, 2013, 3,251,274 warrants entitling the owner to purchase common shares at $0.45 per
share were outstanding.
20. Share-based compensation
Pursuant to the Stock Option Plan (the “Plan”) of the Company, 3,735,000 of the common shares are
reserved for options. The Plan provides that the term of the options shall be fixed by directors. Officers and
employees of the Company are eligible to receive options. Options are granted at an exercise price of not
less than the fair value of the Company’s shares on the date the options are granted. Options may be
exercisable for a period no longer than five (5) years and the exercise price must be paid in full upon
exercise of the option.
On January 15, 2013, the Company granted 100,000 options to acquire common shares to a counterparty
who is not an employee for services rendered. These options vest in 4 tranches, the first vesting immediately
at issuance, and the others vesting at every following quarter. Share-based compensation expense relating to
this issuance amounted to $ 20,182 during the year ended December 31, 2013.
On July 15, 2013, the Company granted 100,000 options to acquire common shares to a counterparty who is
not an employee for services rendered as agreed to in a contract entered into on January 15, 2013. These
options vest in 4 tranches, the first vesting immediately at issuance, and the others vesting at every following
quarter. Share-based compensation expense relating to this issuance amounted to $ 14,588 during the year
ended December 31, 2013.
27
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
20. Share-based compensation (continued)
The following are the assumptions used in order to value the options as well as general information on each
outstanding option grant:
Fair value assumptions
July 15, 2013
grant
January 15, 2013
grant
May 27, 2011
grant
Outstanding as at January 1, 2012 and
December 31, 2012
Granted in 2013
Outstanding as at December 31, 2013
Exercisable as at December 31, 2013
Exercisable as at December 31, 2012
Remaining life of options
Expected life of options
Expiry
Expected share price volatility
Dividend yield
Risk free rate
Exercise price
Share price on grant date
-
100,000
100,000
50,000
-
1.54 years
-
100,000
100,000
100,000
-
1.04 years
From 0.99 to 1.37 years From 0.99 to 1.37 years
January 15, 2015
134.8% to 191.1 %
0%
1.18%
$0.36
$0.32
July 15, 2015
106.54% to 125.9%
0%
1.27%
$ 0.40
$ 0.40
100,000
-
100,000
100,000
100,000
2.41 years
2.5 years
May 27, 2016
172.86%
0%
1.67%
$0.125
$0.125
Expected volatility was calculated using the average closing price change of the Company’s shares on the
TSX over the expected life of the options.
21. Non-cash transactions
During the year ended December 31, 2013, the Company financed the acquisition of certain operating assets
by entering into finance leases for an amount totalling $ 83,290. The Company also financed the acquisition
of equipment by issuing a credit note for goods shipped for approximately $ 50,000.
During the year ended December 31, 2012, the Company financed the acquisition of equipment through the
issuance of a credit note of $600,000, decreasing its trade receivables. The Company also financed the
business acquisition completed in 2012 by assuming debt towards the sellers for $894,096 and the Company
acquired production and office equipment through capital leases. The amount of capital leases entered into
during the year totaled $37,633.
28
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
22. Financial instruments
22.1 Fair value and classification of financial instruments
Carrying amount and fair value
December 31,
December 31,
2012
2013
$ 1,129,891
8,848,549
$ 126,994
8,745,313
7,438,682
6,780,724
2,489,179
6,103,876
6,133,508
3,473,510
-
9,745
100,657
61,639
Financial assets
Loans and receivables
Cash
Trade and other receivables (1)
Financial liabilities
Financial liabilities, at amortised cost
Bank indebtedness
Trade and other payables (2)
Long term debt
Designated at FVTPL
Derivative financial instrument
Other liabilities
Finance lease obligations
(1) Excludes sales taxes
(2) Excludes employee benefits
Fair value estimates are made as of the date of the consolidated statement of financial position, using
available information about the financial instrument. These estimates are subjective in nature and often
cannot be determined with precision.
The following methods and assumptions were used to determine the estimated fair value of each class of
financial instruments:
The fair value of cash, trade and other receivables, trade and other payables and the balance of
purchase price on business acquisition approximates their respective carrying amounts as at the date
of the consolidated statement of financial position because of the short-term maturity of those
instruments.
The fair value of bank indebtedness, long-term debts and finance lease obligations, which mainly
bear interest at floating rates, is estimated using a discounted cash flows approach, which discounts
the contractual cash flows using discount rates derived from observable market interest rates of
similar loans with similar risks.
The fair value of derivative financial instruments is estimated using observable interest rates
corresponding to the maturity of the contract.
The Company ensures, to the extent possible, that its valuation techniques and assumptions incorporate all
factors that market participants would consider in setting a price and that it is consistent with accepted
economic methods for pricing financial instruments.
29
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
22. Financial instruments (continued)
22.2 Fair value hierarchy
The Company categorizes its financial instruments into a three-level fair value measurement hierarchy as
follows:
Level–1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level–2 - valuation techniques based on inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices);
Level–3 - valuation techniques using inputs for the asset or liability that are not based on observable market
data (unobservable inputs).
As at December 31, 2013 and 2012, the fair values of bank indebtedness, other long-term debt and finance
lease obligations are categorised as Level 2. As at December 31, 2012, the fair value of derivative financial
instruments was categorised as Level 2.
23. Operating lease arrangements
23.1 Leasing arrangements
The Company leases its premises for manufacturing locations from related parties under operating leases.
Rent is paid monthly and there are no restrictions imposed on the Company under these leasing
arrangements. There is no contingent lease under those leasing agreements and no sublease payments
received by the Company. The leases expire at various dates to August 2020, and include renewal
provisions.
23.2 Payments recognised as an expense
Lease payments for premises
Vehicles
Office equipment
23.3 Non-cancellable operating lease commitments
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Year ended
December 31,
2013
December 31,
2012
$ 803,666
34,248
8,406
$ 850,967
21,105
6,702
Year ended
December 31,
2013
December 31,
2012
$
706,514
1,564,079
445,117
$ 2,715,710
$ 844,530
1,920,125
668,287
$ 3,432,942
30
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
24. Risk management
24.1 Capital management
The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its growth while at
the same time taking a conservative approach towards financial leverage and financial risk.
The Company’s capital is composed of net debt and shareholders’ equity. Net debt consists of interest-
bearing debt less cash. The Company’s primary uses of capital are to finance increases in non-cash working
capital and capital expenditures for capacity expansion and integration.
The Company’s primary measure to monitor financial leverage is Debt to Earnings before Interest, Taxes,
Depreciation and Amortization (“EBITDA”).
Credit facility arrangements require that the Company meet certain financial ratios at fixed points in time.
The financial covenants are, as at December 31, 2013:
- Working capital ratio, defined as current assets divided by current liabilities greater than or equal to
1.10:1.00;
- Debt to equity ratio, defined as total debt excluding deferred taxes divided by equity of less than or equal
to 2.50:1.00;
- Interest bearing debt divided by EBITDA ratio (as defined) less than or equal to 4.00:1.00;
- To maintain a minimum EBITDA (as defined) of $ 1,900,000 for the fiscal year ended December 31,
2013.
As at December 31, 2013, the Company was not in compliance with two of these covenants. Subsequently to
year-end, the Company obtained a waiver from its financial institution confirming tolerance for this breach
of covenants until January 1, 2015.
24.2 Foreign currency risk management
The Company’s Canadian operations face foreign currency risk as a result of a significant portion of the
costs of raw material for these sales being in USD. The Company’s sales in USD act as a hedge against this
risk, mitigating the risk.
The Company also faces foreign currency risk through its foreign subsidiary Imaflex USA, whose functional
currency is the USD. Imaflex does not specifically hedge this foreign currency risk.
The Company also has a portion of its long term debt in USD. The majority of the cash flows generated by
the assets financed by these borrowings in USD are in USD.
The Company’s management has decided not to hedge its foreign currency risks. The decision of whether or
not to hedge its foreign currency risk is determined by the Company’s net exposure, expected movements in
the main currencies in which the Company transacts, important changes in the mix of currencies in which
the Company transacts, the expected net cash flow in foreign currencies as well as availability of derivative
financial instruments or additional debt in foreign currency at reasonable terms.
31
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
24. Risk management (continued)
The following is the Company’s financial assets and liabilities denominated in USD in its consolidated
statement of financial position:
Cash
Trade receivables
Trade payables
Derivative financial instrument
Long term debt
Gross financial position exposure
December 31,
2013
$ 1,062,082
4,529,975
(4,511,646)
-
(1,096,276)
$ (15,865)
December 31,
2012
$ 103,181
4,273,373
(4,110,600)
(9,745)
(1,419,921)
$ (1,163,712)
A 5% appreciation of the Canadian dollar against the USD would impact its financial position by $ 793 as at
December 31, 2013 (December 31, 2012 - $ 58,186). Conversely a 5% depreciation of the Canadian dollar
against the USD would have the opposite effect. Management estimates that every $ 0.01 appreciation of the
USD against the Canadian dollar would have a negative impact on the Company’s result of approximately
$ 30,000. Every $ 0.01 depreciation of the USD against the Canadian dollar would have the opposite effect.
24.3 Interest rate risk management
The Company’s exposure to interest rate fluctuations is with respect to its short-term and long-term
financing, which bear interest at floating rates.
At the reporting date, the carrying value of the Company’s interest-bearing financial liabilities was as
follows:
Variable rate instruments
Financial liabilities
Derivative financial instrument
Interest rate swap
Gross financial position exposure
Sensitivity analysis
December 31,
2013
December 31,
2012
$ 8,872,862
$ 8,474,538
-
$ 8,872,862
9,745
$ 8,484,283
The Company is exposed to interest rate risk with respect to its variable rate non-derivative financial
instruments and its interest rate swap. A 100 basis point increase in interest rates at the reporting date would
result in an increase in income for the year ended December 31, 2014 of approximately $ 86,335 ($ 78,166
for 2013 as at December 31, 2012). Conversely a decrease would have the opposite effect.
32
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
24. Risk management (continued)
24.4 Liquidity risk management
Liquidity risk, the risk that the Company will not be able to meet its financial obligations as they fall due, is
managed through the Company’s capital structure and financial leverage. The Company obtains financing
through a mix of share issuance on the capital markets and borrowing from financial institutions. An
analysis of financial leverage is used to determine the required mix between the different sources of liquidity
offered to the Company while keeping an acceptable risk level in the Company’s leverage.
The Company ensures that it maintains sufficient cash flow to pay its obligations within the next 12 months.
Cash flows generated from operations are matched to the liquidity required to meet its financial obligations
for the sources of financing used to generate that cash flow.
The Company has an operating line of credit of up to $8,500,000, of which an amount of $7,438,682 was
utilized as at December 31, 2013. Borrowings under the Company’s operating line of credit bear interest at
the bank’s prime rate plus 1.85%. In order to ensure that this line of credit is sufficient to fund the
Company’s obligations, management follows the movements in the collateral against which the line of credit
is given.
As at December 31, 2013, the carrying amount and undiscounted contractual cash flows for the Company's
financial liabilities are as follows:
Non-derivative financial
liabilities
Bank indebtedness
Long term debt
Interest on borrowings (1)
Finance leases (2)
Trade payables
Balance of purchase price
Carrying
amount
Contractual
cash flow
1 year or less
2-5 years More than 5
years
$7,438,682
1,434,180
-
100,657
6,851,670
1,054,999
$ 7,438,682 $ 7,438,682
521,520
62,730
30,447
6,851,670
1,063,600
1,434,180
106,619
111,180
6,851,670
1,063,600
$ -
912,660
43,889
80,733
-
-
$16,880,188
$17,005,931
$15,968,649
$ 1,037 ,282
$ -
-
-
-
-
-
$ -
(1) The interest on the long term debt is based on prevailing interest rates at the date of the consolidated
statement of financial position.
(2) The contractual cash flow for finance leases includes the interest on the borrowings.
33
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
25. Related party transactions
Transactions with related parties
During the year, in the normal course of business, the Company had routine transactions with entities owned
by shareholders of the Company and with the Company’s directors and entities in which they hold an
interest. These transactions are measured at fair value, which is the amount of consideration established and
agreed to by the related parties. Details of these transactions not disclosed elsewhere in these consolidated
financial statements, are as follows:
Rent
Professional fees
Year ended
December 31,
2013
$ 794,769
305,225
$ 1,099,994
December 31,
2012
$ 798,475
358,572
$ 1,157,047
Rent is paid on the first day of the month for the current month.
As at December 31, 2013, there was an amount of $ 159,492 recorded as payable to related parties for
professional fees ($ 186,886 as at December 31, 2012).
Compensation of key management personnel
The table below details the compensation paid to the key members of management, which include the
Company’s chief executive officer, the vice-president of operations, the vice president of marketing and
innovation, the production director and the corporate controller.
Year ended
December 31,
2013
$ 527,066
160,866
5,365
13,627
29,009
$ 735,933
December 31,
2012
$ 422,103
171,686
3,467
9,050
22,667
$ 628,973
Salaries
Management fees
Short-term employee benefits
Post-employment benefits – State-run plans
Other benefits
26. Business acquisition
On February 29, 2012, Imaflex USA acquired the operations of a North Carolina-based converter enabling
partial vertical integration of its activities for a total consideration of $ 1,883,596 (USD$ 1,903,584). This
acquisition benefits from synergies from the greater usage of the Company’s extrusion equipment in its
Thomasville, North Carolina plant as well as lower production costs for the acquired business.
The acquisition is comprised of an immediate cash payment of $ 989,500 (USD$ 1,000,000), a non-interest
bearing balance of purchase price which was recorded at the discounted value of $ 894,096 (USD$ 904,584),
payable on February 28, 2014, accounted for using the effective interest method. The balance of purchase
price can be settled in cash or through the issuance of shares of the Company at a fixed value of USD$ 1 per
share at the option of the seller. The balance of purchase price was recorded as a liability.
The purchase price was as follows:
Immediate cash payment
Balance of purchase price
$ 989,500
894,096
$1,883,596
34
Notes to the consolidated financial statements
for the years ended December 31, 2013 and 2012
26. Business acquisition (continued)
The final allocation of the purchase price to net assets acquired is as follows:
Accounts receivable
Inventory
Production equipment
Customer relationships
Goodwill
Debt related to equipment
Accounts payable
$ 573,574
330,076
1,088,450
296,850
371,513
(50,806)
(726,061)
$1,883,596
Based on the seller’s past history in collecting accounts receivable, all acquired accounts receivable were
expected to be collected. The Asset Purchase Agreement (“APA”) provides for a deduction from the balance
of purchase price for any material amount of uncollectable accounts receivable. Based on the open orders on
hand, the inventory was expected to be realizable in its entirety. The production equipment includes all the
equipment that the seller was using at its production facility.
The customer relationships represent the value of the seller’s current business relationships which are
expected to continue after the acquisition date. During the year, following the finalization of the analysis of
the useful life of the customer relationships, the Company revised the carrying value initially recognised at
$ 272,036 (USD$ 274,923). During the year, the Company recorded amortisation of customer relationships
of $ 31,091.
Goodwill includes the value of the assembled workforce, the current organization of the plant for which the
Company did not have to incur any additional expenses and the synergies that can be created through the
combination of the production assets through cost savings. The goodwill was recorded at an amount of
$ 371,513 (USD$ 375,456) and was included in intangible assets in the consolidated statement of financial
position. The goodwill did not have any tax impact at closing or on the reported income tax expense.
The Company did not have access to the information required to determine what sales or net income would
have been had the transaction taken place on January 1, 2012. During the year ended December 31, 2012,
the acquired business generated sales of $ 4,930,957 and a net income of $ 557,378.
35