Infineon
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 Committed to Excellence MANAGEMENT DISCUSSION AND ANALYSIS PREFACE This Management Discussion and Analysis (MD&A) comments on Imaflex Inc.’s (the “Parent Company”) operations, financial performance, financial condition, future outlook and other matters for the three-month periods and years ended December 31, 2018 and 2017. Unless otherwise indicated, the terms “Imaflex”, “Company”, “Corporation”, “we”, “our”, and “us” all refer to Imaflex Inc., together with its divisions Canguard Packaging and Canslit, along with its wholly owned subsidiary, Imaflex USA Inc. All intercompany balances and transactions have been eliminated on consolidation. This MD&A also provides information to improve the reader’s understanding of the accompanying audited consolidated financial statements and related notes. It should be read together with our audited consolidated financial statements for the years ended December 31, 2018 and 2017. Unless otherwise indicated, all financial data in this document was prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and all amounts in tables are expressed in thousands of Canadian dollars unless otherwise indicated. Differences may occur due to rounding of amounts. 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. This MD&A was reviewed by Imaflex’s Audit Committee and approved by the Board of Directors on April 17, 2019. Disclosure contained within it is current to that date, unless otherwise indicated. Additional information on Imaflex is available on our website at www.imaflex.com and on SEDAR at www.sedar.com. FORWARD LOOKING STATEMENTS From time to time, we make forward-looking statements within the meaning of Canadian 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 an 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; and other factors that 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 17, 2019. Annual Report – December 31, 2018 1 MANAGEMENT DISCUSSION AND ANALYSIS COMPANY OVERVIEW lmaflex is focused on the development and manufacturing of innovative solutions for the flexible packaging and agricultural markets. The Company's flexible packaging products are largely used to protect and preserve and consist primarily of polyethylene (plastic) films and bags, and metalized films. Our polyethylene films are mainly sold to printers known as "converters", who process the film into a finished product to meet their end-customer needs. Additionally, our films are sold directly to customers to protect and market their own products, or bought by distributors for re-sale. Our agricultural films are finished products, predominantly sold directly to end-users by lmaflex. They are available in a variety of formats and include both metalized and non-metalized films. Our portfolio includes common mulch and fumigant barrier films, which are also available in a compostable plastic, as well as innovative crop protection films, that add pest/weed control and/or accelerated growth benefits beyond those provided by our common mulch films. Imaflex operates three manufacturing facilities. Two are located in the province of Quebec, including Montreal (Imaflex Inc.) and Victoriaville (Canguard and Canslit), and one is located in Thomasville, North Carolina, USA (Imaflex USA). The Company also has a warehouse in Thomasville. The four facilities cover a total area of approximately 23,412 square meters or 252,000 square feet. lmaflex and lmaflex USA specialize in the manufacturing and sale of custom-made polyethylene films and bags, along with non-metalized agricultural films. Canguard specializes in the manufacturing and sale of polyethylene garbage bags, while Canslit specializes in the metallization of plastic film. We believe that our manufacturing presence in both Canada and the United States provides a competitive advantage in terms of logistics, currency, manufacturing flexibility and cost leadership. The common shares of the Parent Company, Imaflex Inc., are listed on the TSX Venture Exchange under the symbol “IFX”. The Company’s head office is located in Montréal (Québec). GROWTH STRATEGY Imaflex’s history attests to its management’s ability to successfully adapt to prevailing and continuously changing market conditions. Management believes that success will also lie in the ability to properly manage future 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. Management believes the following initiatives will contribute to Imaflex’s long term growth: Strengthen and Grow the Core We will continue to strengthen the core flexible packaging business. This includes revenue growth and margin expansion through higher production volumes geared towards the most profitable markets and products, along with a focus on lean operations (minimizing scrap, reducing production set-up times, etc.). In addition to growing organically, we will also consider strategic acquisitions that make sense in terms of complementary fit, cost and ease of integration. Grow the Agriculture Business We will continue to build-out our agriculture business, driving awareness and exposure for our advanced crop protection products, particularly our unique film, Shine N’ Ripe XL and our patented film, ADVASEAL® (under development). Our crop protection films are mulch films surface coated with either metallic aluminum and/or chemical/biological active substances aimed to protect plants from disease transmitting insects, to limit the growth of soil borne pests and weeds and/or to accelerate the growth and yield of plants. Shine N’ Ripe XL Shine N’ Ripe XL is a long-lasting, heavy-duty, highly-reflective metalized mulch film designed specifically to fight citrus greening (HLB), a bacterial disease transmitted by the Asian Citrus Psyllid (ACP). HLB has devastated the global citrus industry, causing deformed off-flavored fruits, low yields and inevitably early tree death. Common insecticides have proven to be ineffective in preventing HLB infestation in newly planted citrus groves. Annual Report – December 31, 2018 2 MANAGEMENT DISCUSSION AND ANALYSIS GROWTH STRATEGY (continued) Grow the Agriculture Business (continued) Shine N' Ripe XL’s unique ability to reflect up to 80% of solar ultraviolet (UV) light repels the ACP and hence helps deter HLB infestation in young citrus trees. In addition, Shine N' Ripe XL significantly increases tree growth and yield by providing more sunlight to the lower tree parts, usually hidden in the canopy’s shadow. Importantly, Shine N' Ripe XL also significantly suppresses weeds and reduces water and fertilizer consumption compared to traditional growing methods. The film’s proprietary anti-corrosion coating has also been shown to maintain its initial high UV reflectivity for at least 3 years, making it one of the most environmentally-friendly and economically-viable tools for coping with citrus greening. In a multi-year trial conducted by the Florida Research Centre for Agricultural Sustainability (FLARES), they repeatedly found that Shine N’ Ripe XL demonstrated clear benefits over conventional production practices. In their January 2018 Florida Citrus Show presentation, FLARES reported that although approximately four years had passed since the trial began, trees planted with Shine N’ Ripe XL continued to show less impact from the citrus greening disease (“HLB”) versus other treatments. As well, material on-going benefits continued in crop yields, resulting in a significantly shorter pay-back time for citrus growers. In both year three and year four, crops using Imaflex’s film remained the only ones in the comparative group with a positive net return on invested capital. This ensued despite the higher initial investment costs for land preparation and installation associated with the metalized film’s use. ADVASEAL® Today, agricultural films are used in the growing of fresh fruits and vegetables worldwide to cover soil treated with fumigants - volatile and toxic pesticides, which are essential for providing a pest and weed free (disinfested) soil for the undisturbed growth of new crop seedlings. ADVASEAL®, which is currently under development, simplifies the soil disinfestation process, making it safer, more environmentally-friendly and cost effective by releasing modern non-volatile crop protection products under controlled conditions from a coated plastic mulch, replacing the need for spraying. ADVASEAL® will contain all the active ingredients, including a herbicide (HSM) to control weeds, fungicides to control soil borne pathogens, and a nematicide to control nematodes (pre-plant) for soil disinfestation to replace hazardous fumigants and conventional pesticide spray emissions. The catalyst to activate the release of these ingredients from the film is water. When the film is applied to the moist soil, they are released, replacing the spray application currently being used by growers. The underlying technology is patent protected in the top 20 major vegetable and fruit producing countries worldwide until 2032. ADVASEAL® is safe to transport, store and handle and its application is emission-free, eliminating the risk of inhalation and environmental damage present with the spray drift of fumigants and herbicides under current agricultural practices. In addition to being environmentally friendly, management estimates that ADVASEAL® will provide significant savings to growers depending on the crop and fumigants currently being used. ADVASEAL® permits the precise application of a low dose of crop protection products, improving crop quality and yields. Management estimates that ADVASEAL® will reduce the chemicals required by up to 95% and eliminate many of the costly work steps currently being used. Collectively, this puts Imaflex in a good position to capture market share worldwide as ADVASEAL® is commercialized. Maintain focus on Research and Development We will maintain our focus on enhancing the customer value proposition, while developing new capabilities and leading-edge products for highly profitable niche markets. This will help support the build-out of our core flexible packaging product portfolio. The Company’s research teams use the fields in which they have core-competencies in order to identify innovative improvements and solutions where chemicals and polymers can offer added-value. Maintain Efficiency of Equipment Finally, we will focus on the efficiency of our equipment, making the required capital investments to maintain, upgrade and expand into new areas. Our commitment to make the required investments, and our ability to deliver customized solutions, on-time and at competitive prices should help to drive revenue and margin expansion, while allowing us to remain competitive in the marketplace. Annual Report – December 31, 2018 3 MANAGEMENT DISCUSSION AND ANALYSIS MARKET OVERVIEW The North American flexible packaging market is valued at approximately US $29 billion. Although this market is highly fragmented and commoditized in terms of pricing, there are niches within the larger space that offer the opportunity for increased profitability. In 2018, Imaflex was once again ranked in the top 100 North American film and sheet manufacturers by sales. The total addressable global agriculture mulch film market, excluding silage and green house films, is valued at approximately US $3.5 billion. The Company has and continues to develop innovative and proprietary solutions for this important market. Going forward, Imaflex hopes to capture a much larger share of the agriculture film market due to its next generation crop protection and yield enhancement products, Shine N’ Ripe XL and ADVASEAL®. Management believes the value of the global addressable market for an active ingredient release film like ADVASEAL® will be much larger than that for traditional mulch films. In the US alone, the Company estimates that approximately 130 million pounds of mulch film is being used, resulting in an estimated total addressable market for ADVASEAL® of approximately US $750 million. With growing concerns over the scarcity of resources, the environment, lower crop yields due to disease, and a rising global population, the Company believes that the macro-environment is also working in its favour. Sustainability and intelligent farming are becoming increasingly important. SHINE N’ RIPE XL BUILD-OUT In 2017, a major international citrus producer began using Shine N’ Ripe XL, leading to multi-million dollars in citrus film sales for the year. These purchases followed initial field trials by the grower and other multi-year independent studies, all of which confirmed the biological, environmental and economic benefits associated with using the film. In the first quarter of 2018, Imaflex saw some timing delays in citrus film sales, largely due to major storms in the southeastern USA in late 2017. In the second quarter of 2018 orders resumed, however overall sales for 2018 were muted year-over-year. Sales fluctuations are not unusual when a product and customer network is being built out. The Corporation is actively pursuing new citrus film users and has a number of trials underway. Imaflex is currently the only company with independent, long-term field trials showing that its long-lasting metalized film effectively reduces the early onset of citrus greening, while also accelerating tree growth and increasing yield. Due to these successes and trials underway with new growers, Imaflex is optimistic it will see a further broadening of its customer base and revenue expansion going forward. ADVASEAL® COMMERCIALIZATION Imaflex has successfully completed the design of the coating line, customized for the cost effective production of ADVASEAL®. As for the active ingredients to be used with the film, faced with merger and acquisition activity amongst crop protection companies and the resulting delays in obtaining supply commitments, the Corporation decided to go directly to the same manufacturers in Asia supplying them. Although all the registered active ingredients were eventually sourced, Imaflex experienced unusually long delays obtaining the necessary import permits due to the recent partial U.S. federal government shutdown. As a result, the chemicals were not received in time for the spring 2019 growing season. All of the active ingredients have now been received and we are cautiously optimistic field tests will be completed by year-end 2019. Imaflex has identified a potential manufacturer (coater) capable of supplying sufficient quantities of ADVASEAL® for upcoming efficacy field trials. The contract manufacturer is a multi-national technology leader staffed with qualified chemists, process engineers and production technicians that are adept at working with chemicals and developing new products. Numerous trials have taken place at their facility and we are increasingly confident they will be able to provide coated film for upcoming efficacy field trials. The manufacturer has also obtained the required regulatory approval to work with the active ingredients associated with ADVASEAL®. Annual Report – December 31, 2018 4 MANAGEMENT DISCUSSION AND ANALYSIS ADVASEAL® COMMERCIALIZATION (continued) The efficacy studies are required by the US Environmental Protection Agency (EPA) for the exclusive registration of ADVASEAL®. Management believes the efficacy field trials and the pesticide registration process will be positive as the generic active ingredients to be used with ADVASEAL are effectively used by growers today. As well, the Company previously received EPA approval of its herbicidal active ingredient release film, ADVASEAL® HSM. COMPETITIVE ENVIRONMENT Although competition is high in all of our markets, Imaflex operates in a multi-billion dollar industry with a multitude of product opportunities. Flexible packaging alone is used in almost every consumer product market to protect and preserve. Additionally, many of the Company’s customers deal in food related products, which is somewhat recession resistant. Imaflex believes it has a competitive edge since it is recognized as being an industry leader in the development of innovative solutions. The Company focuses on offering customers unique high quality products on a timely basis and at competitive prices. A key strength of ours is the ability to take on smaller orders with short lead times. Collectively, this helps create customer loyalty. 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. This strategy has been the backbone of our growth and it has served us well. We employ a staff of chemical & polymer engineers and a chemist, which allows us to develop unique solutions. In our markets, we believe it is essential to sell value-added products and avoid producing highly commoditized offerings generating lower margins. The key to this strategy is identifying and building relationships with customers having specific needs and eventually developing products that address them. Our sales force is mandated to seek out such clients and the Company works to ensure its sales team is technically accomplished and equipped to properly communicate the advantages of all products. EMPLOYEES AND CORPORATE OFFICE Imaflex currently employs approximately 252 people in North America, including those at our corporate head office located in Montreal, Canada. The Company currently has no unionized employees. OUTSOURCING Our industry is capital intensive and labour is only a minor component in the total cost of production. As a result, outsourcing our manufacturing to countries with lower wages would not have a material impact on costs, especially when factoring in expenses related to freight and duty. Furthermore, the risks associated with relinquishing our control over quality and delays in delivery deadlines would far outweigh any minimal benefit that would be generated by lower labour costs. However, in the effort of eliminating bottlenecks in our production process when our capacity usage is very high, management may consider the use of third-party (toll) manufacturers for certain activities in order to meet all production deadlines and ensure the best service to our customers. NON-IFRS FINANCIAL MEASURES The Company’s management uses a non-IFRS financial measure in this MD&A, namely EBITDA, to assess its performance. EBITDA is determined 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. Annual Report – December 31, 2018 5 MANAGEMENT DISCUSSION AND ANALYSIS NON-IFRS FINANCIAL MEASURES (continued) Reconciliation of EBITDA to net income: ($ thousands, except per share data) Net income Plus: Income taxes Finance costs Depreciation and amortization EBITDA Basic EBITDA per share * Diluted EBITDA per share * Three months ended December 31, Years ended December 31, 2018 2017 2018 2017 $ 556 $ 761 $ 3,550 $ 3,762 411 170 657 $ 1,794 $ 0.04 $ 0.04 225 154 617 $ 1,757 $ 0.04 $ 0.03 1,477 571 2,201 $ 7,799 $ 0.16 $ 0.15 1,386 572 2,091 $ 7,811 $ 0.16 $ 0.15 *Basic weighted average number of shares outstanding of 50,013,637 for the three-month period ended December 31, 2018 (49,744,072 in 2017) and 49,915,829 for the year ended December 31, 2018 (49,740,007 in 2017). Diluted weighted average number of shares outstanding of 51,031,396 for the three-month period ended December 31, 2018 (51,185,931 in 2017) and 51,067,300 for the year ended December 31, 2018 (51,023,356 in 2017). 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 and accordingly it should not be considered in isolation. 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 overall market the Company competes in has historically shown resiliency and growth, even during difficult economic times. The Company’s customers predominantly operate in the food packaging and agriculture markets, which is somewhat resilient to recessionary and seasonal pressures. This fact, coupled with expanding product lines and introduction of newer and faster equipment, should help it weather any 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 from 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. Annual Report – December 31, 2018 6 MANAGEMENT DISCUSSION AND ANALYSIS GENERAL SITUATION OF THE POLYETHYLENE BLOWN FILM MARKET – RESIN PRICING Despite routine monthly fluctuations, 2018 resin prices were down overall and pricing remained flat for the first quarter of 2019. The prevailing sentiment of resin buyers for the remainder of 2019 is for moderate downward pressure on pricing, due largely to expected capacity increases from new plants coming on stream. This said, any supply chain disruptions would allow resin producers to raise prices. Since Imaflex does not have major long term contracts with its customers, resin price fluctuations are typically passed along to them. LOSS OF BUSINESS FROM A SIGNIFICANT CUSTOMER One of our business practices has been to limit the purchases by any particular customer to less than 10% of our revenues. This strategy helps ensure that our profitability and financial well-being are not dependent on any one client. COMPETITION FROM OTHER COMPANIES Imaflex operates in the highly competitive multi-billion dollar flexible packaging and agricultural film markets. This said, we believe the Company has a competitive edge over the competition due to our highly skilled teams that are quick to respond to customer needs, a diversified manufacturing base and the fact that the bulk of our customers deal in food related products which are less subject to recessionary and seasonal pressures. It may not always translate into greater net profit, but it should result in customer loyalty if we decide to match our competitors’ prices. SEASONALITY OF OPERATIONS Some products produced at our Victoriaville and Thomasville facilities are subject to some seasonality as a result of the plant’s partial manufacturing focus on the production of agriculture film for fruit and vegetable growers. 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, they are not overly affected by seasonal downturns. EXPOSURE TO PRODUCT LIABILITY Due to the nature of our operations, which consist primarily of manufacturing polyethylene film for converters, who process film into a finished product 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 agriculture space. 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; planned plant shutdowns for preventative maintenance affecting production levels; and interest rate fluctuations and other changes in borrowing costs. Annual Report – December 31, 2018 7 MANAGEMENT DISCUSSION AND ANALYSIS EXPOSURE TO INTEREST RATE FLUCTUATIONS The Company’s borrowings which bear interest at a variable rate have some interest rate risk. Management assesses its exposure to interest rate fluctuations and decides whether it may be favourable to enter into contracts to hedge this risk based on expectation of future movements and the available economic data. Interest rate hikes, including those seen in recent quarters, may affect the Company’s future cost of borrowing. However, for the moment, management is not hedging any of its interest rate exposure and expects this exposure to lessen as the outstanding balance of its long term borrowings decreases. ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL Imaflex’s core operational management team has been stable over the past years and the Company was able to keep key competencies within the firm. This includes its three founders, who have more than 100 years of combined experience in management and research and development. As Imaflex has grown, it has also strengthened its team, adding individuals having a variety of competencies, such as accounting, operations, or engineering. Management promotes a work environment that allows for the free exchange of ideas in an effort to ensure that the Company remains at the forefront of its industry. Management is confident that it can retain and, if need be, attract qualified individuals that will contribute to its on-going goal of building shareholder value. FOREIGN EXCHANGE FLUCTUATIONS Some 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 US denominated expenses. Imaflex can also borrow funds on its line of credit in US dollars. The Company has increased its debt in US dollars in order to obtain additional revenues in US dollars. As this additional US business fully materializes, the Company’s exposure to foreign currency should be managed naturally. Management continuously assesses its exposure to such risk and the Company does not currently use any financial instruments to hedge its foreign currency position. 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 handling are controlled. Though these products actually pose little risk, they are handled in a manner that fully complies with existing safety regulations. RESULTS OF OPERATIONS Fiscal 2018 revenue was down versus 2017, largely due to reduced sales volumes in the first half of 2018, particularly citrus films. This said, profitability was positively impacted by favourable movements in foreign exchange and lower selling and administrative expenses. As a result, EBITDA was unchanged year-over-year, while net income came in at $3.6 million for calendar 2018, versus $3.8 million in 2017. ($ thousands) Three months ended December 31, 2018 2017 Years ended December 31, 2018 2017 Sales $22,472 $21,395 $86,332 $88,297 Revenues were $22.5 million for the fourth quarter of 2018, up 5.0% from $21.4 million in 2017. The increase was driven by higher sales volumes, improvements to product mix and favourable movements in foreign exchange. Citrus film sales totaled $1.4 million for the quarter, versus $1.5 million in the corresponding period of 2017. Annual Report – December 31, 2018 8 MANAGEMENT DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS (continued) Sales for the year ended December 31, 2018 stood at $86.3 million, versus $88.3 million for calendar 2017. The decrease was largely due to lower sales volumes in the first half of 2018, particularly citrus film, partially offset by improvements to product mix. Citrus film sales totaled $2.8 million for calendar 2018, as compared to $6.4 million in the prior year. At the end of 2018, the Corporation had $1.8 million of citrus film orders in its sales pipeline. ($ thousands) Gross Profit ($) before amortization of production equipment Gross Profit before amortization of production equipment (%) Amortization of production equipment Gross profit ($) Gross profit (%) Three months ended December 31, 2018 2017 Years ended December 31, 2018 2017 $2,361 $3,468 $12,684 $15,767 10.5% 16.2% 14.7% 17.9% 589 $1,772 7.9% 459 $3,009 14.1% 1,920 $10,764 12.5% 1,774 $13,993 15.8% Quarterly gross profit before the amortization of production equipment was $2.4 million or 10.5% of sales for the quarter, versus $3.5 million and 16.2% of sales in 2017. Including amortization of production equipment, the quarterly gross profit was $1.8 million or 7.9% of sales, versus $3.0 million and 14.1% of sales in 2017. The decrease was largely due to product pricing, stemming predominantly from a reduction in resin prices. Industry wide, resin price decreases are normally reflected immediately in customer pricing, while increases usually take approximately 30 days to be priced in. As such, the effect of a resin price decrease is that an immediate opportunity loss is incurred with respect to resin inventory previously purchased when resin prices were higher. For fiscal 2018, the gross profit before amortization of production equipment stood at $12.7 million or 14.7% of sales, down from $15.8 million and 17.9% of sales in the prior year. Including amortization expenses, the gross profit was $10.8 million or 12.5% of sales in 2018, versus $14.0 million and 15.8% of sales in 2017. The reduced year-to-date gross profit, before and after amortization, was largely due to less sales of higher margin citrus films in 2018. ($ thousands) Selling and administrative As a % of sales Three months ended December 31, 2018 2017 Years ended December 31, 2018 $1,490 6.6% $1,884 8.8% $6,493 7.5% 2017 $7,084 8.0% Selling and administrative expenses were $1.5 million or 6.6% of sales in the fourth quarter of 2018, down from $1.9 million and 8.8% of sales in 2017. The year-over-year expense decrease was largely due to lower professional service fees in 2018 and a one-time customer credit loss in 2017. For the year ended December 31, 2018, selling and administrative expenses totaled $6.5 million or 7.5% of sales, down from $7.1 million and 8.0% of sales in 2017. The expense decrease versus 2017 was largely due to the lower 2018 sales base. ($ thousands) Three months ended December 31, 2018 2017 Years ended December 31, 2018 Finance costs $170 $154 $571 2017 $572 Annual Report – December 31, 2018 9 MANAGEMENT DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS (continued) Year-over-year finance costs were up slightly for the quarter ended December 31, 2018, largely due to increased debt levels, including greater usage of the Company’s line of credit, and higher 2018 interest rates. For fiscal 2018, year-over- year finance costs remained essentially in-line, with debt repayments and the capitalization of interest on new borrowings offsetting higher 2018 interest rates. ($ thousands) Three months ended December 31, 2018 2017 Years ended December 31, 2018 2017 Foreign exchange (gains)/losses $(886) $(39) ($1,340) $1,085 A stronger year-over-year appreciation of the US dollar against the Canadian dollar resulted in a foreign exchange gain of $0.9 million in the fourth quarter of 2018, up from a slight gain of $39 thousand dollars in 2017. For the year ended December 31, 2018, the appreciation of the US dollar against the Canadian dollar resulted in a foreign exchange gain of $1.3 million. Conversely, in the prior year Imaflex recorded a foreign exchange loss of $1.1 million as a result of unfavourable currency fluctuations. Collectively, this generated a positive year-over-year variance of $2.4 million. The majority of these foreign exchange gains and losses are non-cash impacting and relate to intercompany balances for which Imaflex can control the time of settlement. ($ thousands) Three months ended December 31, 2018 2017 Years ended December 31, 2018 Income taxes As a % of income before taxes $411 42.5% $225 22.8% $1,477 29.4% 2017 $1,386 26.9% Income tax expenses totaled $0.4 million for the fourth quarter of 2018, up from $0.2 million in 2017. The income tax expense as a percentage of income before taxes also increased year-over-year, growing from 22.8% in 2017 to 42.5% in 2018. Calendar 2018 income taxes came in at $1.5 million for the year, up from $1.4 million in 2017. The income tax expense as a percentage of income before taxes was 29.4% for 2018, up from 26.9% in 2017. The Corporation’s statutory tax rate was 26.7% in 2018. ($ thousands, except per share data) Net income Basic earnings per share Diluted earnings per share Three months ended December 31, 2018 2017 Years ended December 31, 2018 $556 $0.01 $0.01 $761 $0.02 $0.01 $3,550 $0.07 $0.07 2017 $3,762 $0.08 $0.07 The Corporation realized net income of $0.6 million in the fourth quarter of 2018, down from $0.8 million in 2017. For calendar 2018 and 2017, net income stood at $3.6 million and $3.8 million respectively. Year-over-year net income for both the quarter and calendar year was down largely as a result of the lower gross profits and higher taxes in 2018. This was partially offset by favourable currency fluctuations and lower selling and administrative expenses. SUMMARY OF QUARTERLY RESULTS Summary financial data derived from the Company’s unaudited quarterly financial statements for each of the eight most recently completed quarters are as follows: Annual Report – December 31, 2018 10 MANAGEMENT DISCUSSION AND ANALYSIS SUMMARY OF QUARTERLY RESULTS (continued) For the quarters ending March, June, September and December ($ thousands, except per share data): Revenues Q4/18 Q1/17 $22,472 $21,316 $21,927 $20,617 $21,395 $20,791 $24,055 $22,056 Q1/18 Q4/17 Q2/17 Q3/17 Q2/18 Q3/18 Net income (loss) 556 594 727 1,673 761 556 1,300 1,145 Earnings (loss) per share Basic Diluted 0.011 0.011 0.012 0.012 0.015 0.014 0.034 0.033 0.015 0.015 0.011 0.011 0.026 0.026 0.023 0.023 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; planned plant shutdowns for preventative maintenance affecting production levels; along with interest rate fluctuations and other changes in borrowing costs. FINANCIAL POSITION December 31, 2018 vs. December 31, 2017 Working Capital strengthened, growing from $9.2 million as at December 31, 2017, to $11.0 million as at December 31, 2018. The improvement was largely due to a $2.6 million year-over-year increase in inventories to meet heightened sales expectations for both our core flexible packaging and agriculture products, along with higher trade and other receivables of $3.5 million. This was partially offset by a $3.3 million increase in bank debt, including short-term borrowings to buy equipment, and trade and other payables were higher by $1.5 million. LIQUIDITY Cash Flows from Operating Activities Before movements in working capital and income taxes paid, Imaflex generated $1.0 million of cash flows from operating activities during the fourth quarter of 2018, down from $1.7 million in 2017. The decrease was largely due to year-over- year movements in foreign exchange and the lower profit in 2018. Overall movements in working capital were relatively flat for the fourth quarter of 2018, with Imaflex recording $46 thousand of cash outflows, versus $0.3 million of inflows in the corresponding prior year quarter. Including movements in working capital and taxes paid, the net cash generated by operating activities totaled $0.6 million in the fourth quarter of 2018, down from $1.8 million in 2017. For fiscal 2018, net cash generated by operating activities, before movements in working capital and income taxes paid, totaled $6.7 million, down from $8.9 million in 2017. The $2.2 million year-over-year decrease is largely explained by a $2.1 million outflow due to movements in foreign exchange. Net cash generated from operating activities including movements in working capital and taxes paid stood at $1.1 million for fiscal 2018, down from $3.3 million in 2017. The decrease was due to the aforementioned movements in foreign exchange, and $1.1 million more taxes paid in 2018, partially offset by favourable year-over-year movements in working capital of $1.1 million versus 2017. Cash Flows from Investing Activities During the fourth quarter of 2018, Imaflex contributed $1.5 million towards capital assets, up from $0.5 million in the corresponding prior-year period, largely due to the purchase of additional equipment for the Corporation’s US operations. For fiscal 2018, capital investments totaled $3.7 million, up from $2.4 million in the prior year. The majority of cash used for investing activities during fiscal 2018 went towards the purchase of additional equipment for Imaflex’s US operations, Annual Report – December 31, 2018 11 MANAGEMENT DISCUSSION AND ANALYSIS Cash Flows from Investing Activities (continued) including the purchase of a new 5-layer coextruder. These investments are aimed at improving the Company’s production capacity and capabilities in order to generate heightened sales and profitability. Cash Flows from Financing Activities Cash flows generated from financing activities totaled $0.9 million for the fourth quarter of 2018, up from net cash outflows of $1.3 million in the corresponding prior year quarter. The $2.2 million improvement over 2017 is largely due to a $2.6 million variation in short term borrowings largely relating to the Corporation’s line of credit, along with a $1.3 million increase in finance leases, partially offset by higher repayments of long-term debt of $1.4 million. For fiscal 2018, Imaflex generated $2.8 million of cash flows from financing activities, as compared to cash outflows of $0.9 million in 2017. The $3.7 million net year-over-year improvement is largely due to a $2.3 million increase in the Corporation’s line of credit, and a $1.3 million increase in finance leases relating largely to the purchase of a new coextruder. CONTRACTUAL OBLIGATIONS The contractual obligations as at December 31, 2018 were as follows: ($ thousands) Payments due by period Bank indebtedness Short-term borrowings Long-term debt Finance leases* Operating Leases Total contractual obligations Total 8,114 804 $ 3,933 311 4,669 $ 17,831 Less than 1 year 8,114 804 $ 1,602 104 1,194 $ 11,818 1 to 5 years - After 5 years - $ 2,273 207 3,294 $ 5,774 $ 58 - 181 $ 239 *Finance leases exclude $1.3 million of interim advances for equipment related to the Company’s previously announced equipment leasing facility. A payment schedule will be determined upon receipt of equipment. These contractual obligations are sensitive to the fluctuation of interest rates. They are based on interest rates and foreign exchange rates effective as at December 31, 2018. CAPITAL RESOURCES The Company’s $12 million operating line of credit, which is secured by trade receivables and inventories, bears interest at a premium of 0.40% over the Canadian prime rate. As at December 31, 2018, Imaflex was using approximately $ 8.1 million on its line of credit ($5.8 million as at December 31, 2017) and had cash outstanding of $0.3 million ($0.1 million as at December 31, 2017). Working capital strengthened year-over-year, coming in at $11.0 million as at December 31, 2018, up from $9.2 million as at December 31, 2017. The Company controls its financial leverage, ensuring that its borrowings reflect the asset base against which the funds are borrowed as well as the profitability that is generated through the operations. The Company has sufficient capital to fund its operations and to further grow the business in the near future. EQUIPMENT LEASING FACILITY In 2018, Imaflex entered into an equipment leasing facility of up to CDN $10.0 million with a leading global financial institution to fund business expansion. Upon delivery of equipment to Imaflex, the specific lease will be repayable in 60 equal monthly installments, with the applicable interest rate being locked in at time of equipment delivery. At the end of the 60-month period, Imaflex will own the equipment. This financing allows the Corporation to increase its scale, broaden its capabilities and drive revenue and margin expansion at attractive terms. Annual Report – December 31, 2018 12 MANAGEMENT DISCUSSION AND ANALYSIS PROPOSED TRANSACTION The Company is not currently contemplating any business acquisition or merger. RELATED PARTY TRANSACTIONS In the normal course of operations, the Company had routine transactions with related parties. These transactions are measured at fair value, which is the amount of consideration established and agreed to by the related parties. The following table reflects the related party transactions recorded for the periods ended December 31, 2018 and 2017. For additional information, please refer to note 24, Related party transactions of the “Notes to the consolidated financial statements” for the years ended December 31, 2018 and 2017. ($ thousands) Three months ended December 31, 2018 2017 Years ended December 31, 2018 2017 Professional fees and key management personnel services Rent Remuneration (a) (b) (c) $ 19 $ 336 $ 252 $ 78 $ 216 $ 284 $ 216 $ 256 $ 975 $ 1,142 $ 868 $ 1,113 (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”). (c) Includes salaries, benefits and fees paid to key management personnel and directors. CRITICAL ACCOUNTING POLICIES The Company’s significant accounting policies, including the Company’s accounting policies under IFRS, are disclosed in note 2, Significant accounting policies of the consolidated financial statements for the years ended December 31, 2018 and 2017. On January 1, 2018 the Company adopted IFRS 9 and 15, as explained in note 2.18 of the consolidated financial statements for the year ended December 31, 2018. FINANCIAL INSTRUMENTS Please refer to note 21, Financial instruments of the consolidated financial statements for the years ended December 31, 2018 and 2017 for disclosure on the Company’s financial instruments as well as note 23, Risk management for a discussion on the risks the Company is exposed to and how they are managed. As at December 31, 2018, the Company was not using any swap, forward or hedge accounting and there were no warrants outstanding. As at December 31, 2018, 2,625,000 options to purchase shares of the Company were outstanding at a weighted average strike price of $0.520 of which 2,400,000 were exercisable. As at December 31, 2017, 2,525,000 options to purchase shares of the Company were outstanding at a weighted average strike price of $0.489 of which 1,937,500 were exercisable. Annual Report – December 31, 2018 13 MANAGEMENT DISCUSSION AND ANALYSIS MANAGEMENT OUTLOOK Business fundamentals for 2019, are expected to remain stable in a competitive market. Overall growth will be supported by investments we have made to increase our production capacity and capabilities. Assembly and installation of the new 5-layer coextruder is well underway and the Corporation continues to expect it to be operational around the end of the second quarter of 2019. Although we are expecting higher sales volumes for 2019, the total impact on revenues may be moderated due to a possible reduction in resin prices. Since the Corporation does not have major long term contracts, resin price fluctuations are passed along to customers. With respect to our citrus film, Shine N’ Ripe XL, we have a number of trials underway with new growers. These trials are progressing well, and we are hopeful it will result in a broadened customer base and heightened sales going forward. Concerning ADVASEAL®, all of the active ingredients required for the film have now been received and we remain cautiously optimistic field tests will be completed by year-end 2019. OUTSTANDING SHARE DATA As at December 31, 2018, the Company had 50,013,637 common shares outstanding, compared to 49,863,637 as at December 31, 2017. Additional information relating to our Company, including our quarterly and Annual Reports, can be found on SEDAR at www.sedar.com. (s) Joe Abbandonato Joe Abbandonato President and Chief Executive Officer (s) Giancarlo Santella Giancarlo Santella, CPA, CA Chief Financial Officer April 17, 2019 For investor information, contact JOHN RIPPLINGER Vice President Corporate Affairs johnr@imaflex.com T: 514.935.5710 ext. 157 | F: 514.935.0264 5710 Notre-Dame West Montreal, Quebec, Canada H4C 1V2 T: 514.935.5710 | F: 514.935.0264 www.imaflex.com Annual Report – December 31, 2018 14 Consolidated Financial Statements of   IMAFLEX INC.  Years ended December 31, 2018 and 2017  1   Independent Auditor's Report To the Shareholders of Imaflex Inc. Opinion We have audited the consolidated financial statements of Imaflex Inc. (hereafter ''the Company''), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of comprehensive income, the consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditor’s responsibilities for the audit of the consolidated financial statements" section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Information other than the consolidated financial statements and the auditor’s report thereon Management is responsible for the other information. The other information comprises the Management's Discussion and Analysis, and the information, other than the consolidated financial statements and our auditor's report thereon, included in the Annual Report. Raymond Chabot Grant Thornton LLP Suite 2000 National Bank Tower 600 De La Gauchetière Street West Montréal, Quebec H3B 4L8 T 514-878-2691 Member of Grant Thornton International Ltd rcgt.com 3 Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management's Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of this auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the 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. In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. 4 As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: – Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; – Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control; – Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; – Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern; – Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; – Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 5 We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Antonia Psyharis. Montréal April 17, 2019 ___________________________________ 1 CPA auditor, CA public accountancy permit no. A119564 Consolidated statements of comprehensive income  (in Canadian dollars)  for the years ended  Revenues  Cost of sales  Gross profit  Expenses:  Selling   Administrative  Finance costs  Foreign exchange (gains) losses  Other  Income before income taxes  Income taxes  NET INCOME  (Note 5.1) (Note 8) December 31,            2018            2017  $   86,332,093  75,568,464  10,763,629    $   88,296,683 74,303,446 13,993,237 1,605,374  4,887,531  571,487  (1,340,813)  13,266  5,736,845  1,633,851  5,450,359 572,427 1,084,810 102,988 8,844,435 5,026,784  5,148,802 (Note 9) 1,476,852  1,386,462 3,549,932  3,762,340 Other comprehensive income  Item that will be reclassified subsequently to net income  Exchange differences on translating foreign operations  263,803  (217,994) COMPREHENSIVE INCOME    $  3,813,735    $   3,544,346  Earnings per share  Basic  Diluted   (Note 10) $      $      0.071  0.070    $     $   0.076 0.074 The accompanying notes are an integral part of these consolidated financial statements and note 6 presents  additional information on consolidated comprehensive income.  6                                                                                                       Consolidated statements of financial position  (in Canadian dollars) As at  Assets  Current assets  Cash  Trade and other receivables  Inventories  Prepaid expenses  Total current assets  Non‐current assets  Property, plant and equipment  Intangible assets  Total non‐current assets  Total assets  Liabilities and equity   Current liabilities  December 31,    2018  December 31, 2017 (Note 11) (Note 12) $  310,874  15,922,044  14,656,483  220,500  31,109,901  $  87,140 12,384,001 12,076,464 521,625 25,069,230 (Note 13) (Note 14) 21,183,335  1,345,038  22,528,373   18,591,573 1,395,557 19,987,130 $  53,638,274  $  45,056,360 Bank indebtedness and short‐term borrowings Trade and other payables  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 16) (Note 15) (Note 16) (Notes 16, 17) (Note 16) (Note 9) (Notes 16, 17) 8,918,137  9,190,309  498,463  1,432,505  89,517  20,128,931  2,138,759  1,468,329  1,478,906  5,085,994  5,827,182 7,702,182 868,999 1,250,481 194,684 15,843,528 3,094,886 1,410,786 280,378 4,786,050 25,214,925  20,629,578 (Note 18) (Note 19) 11,875,023  2,268,171  14,280,155  28,423,349  11,815,023 1,881,536 10,730,223 24,426,782 Total liabilities and equity  $  53,638,274  $  45,056,360 Non‐cancellable operating lease commitments (Note 22.3)  The accompanying notes are an integral part of these consolidated financial statements.  (s) Joseph Abbandonato  Joseph Abbandonato  Director  (s) Mario Settino  Mario Settino  Director  7                                                                                                 Consolidated statements of changes in equity  For the years ended December 31, 2018 and 2017  (in Canadian dollars)   Reserves  Share capital (a) $ 11,765,023 Share‐based  compensation $ 755,829 ‐ ‐ ‐ ‐ ‐ ‐ Accumulated  foreign  currency  translation  $  682,820 ‐ (217,994)  (217,994) 50,000 ‐ ‐ 195,707 ‐  ‐ Warrants  $ 465,174  Total  reserves  $ 1,903,823 Retained  earnings  $   6,967,883 Total  $ 20,636,729 ‐  ‐  ‐  ‐  ‐  ‐ 3,762,340 3,762,340 (217,994) (217,994) ‐  3,762,340 (217,994) 3,544,346 ‐ 195,707 ‐  ‐ 50,000 195,707 $11,815,023 $ 951,536 $  464,826  $ 465,174    $  1,881,536  $ 10,730,223  $ 24,426,782 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 263,803  263,803 ‐  ‐    ‐  ‐ 3,549,932 3,549,932 263,803  263,803 ‐  3,549,932 263,803  3,813,735 60,000 ‐ $11,875,023 ‐ 122,832 $ 1,074,368 ‐ ‐ $  728,629 ‐  ‐  $ 465,174  ‐ 122,832 $ 2,268,171 ‐ ‐ $ 14,280,155 60,000 122,832 $ 28,423,349 Balance at January 1, 2017  Net income for the year  Exchange differences on translating  foreign operations  Comprehensive income for the year  Transactions with owners:  Issuance of share capital (Note 18)  Share‐based compensation (Note 19)  Balance at December 31, 2017 and  January 1, 2018  Net income for the year  Exchange differences on translating  foreign operations  Comprehensive income for the year  Transactions with owners:  Issuance of share capital (Note 18)  Share‐based compensation (Note 19)  Balance at December 31, 2018  (a) Additional detail of share capital is provided in Note 18  The accompanying notes are an integral part of these consolidated financial statements. 8                                                      Consolidated statements of cash flows  (in Canadian dollars) for the years ended  Operating activities:  Net income for the year   Income tax expense  Depreciation and amortisation of non‐current assets Write‐off of property, plant and equipment  Finance costs  Share‐based compensation  Unrealized foreign exchange (gain) loss  Net changes in working capital  Increase in trade and other receivables  Increase in inventories    Decrease (increase) in prepaid expenses  Increase (decrease) in trade and other payables Cash generated by operating activities  Net income taxes paid  Net cash generated by operating activities  Investing activities:  Payments for property, plant and equipment Payments for intangible assets  Net cash used in investing activities  Financing activities:  Net change in bank indebtedness  Interest paid  Increase in short‐term borrowings  Increase in long‐term debt  Repayment of long‐term debt  Net proceeds from issuance of share capital Increase in finance leases  Repayment of finance leases  Net cash generated by (used in) financing activities Net increase in cash  Cash, beginning of the year  Effects of foreign exchange differences on cash Cash, end of the year  Non‐cash transactions (Note 20)  December 31,  2018  2017  $ 3,549,932  1,476,852  2,201,037  ‐  571,487  122,832  (1,239,319)  6,682,821  (3,251,978)  (2,105,325)  304,371  1,293,777  (3,759,155)  2,923,666  (1,789,845)  1,133,821  $  3,762,340 1,386,462 2,091,413 22,855 572,427 195,707 838,742 8,869,946 (1,271,657) (2,245,638) (389,222) (925,628) (4,832,145) 4,037,801 (709,382) 3,328,419 (3,692,883)  ‐  (3,692,883)  (2,350,073) (50,301) (2,400,374) 2,268,100  (574,237)  804,419  1,761,200  (2,629,503)  60,000  1,288,400  (200,813)  2,777,566  774,912 (562,727) ‐ 250,000 (1,204,574) 50,000 ‐ (212,288) (904,677) 218,504  23,368 87,140  5,230  68,100 (4,328) $  310,874  $      87,140 The accompanying notes are an integral part of these consolidated financial statements.  9                                                         Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  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 agriculture 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, 2018. The consolidated financial statements were approved by the  board of directors and authorized for issue on April 17, 2019.  2.2 Basis of measurement  The consolidated financial statements have been prepared using the historical cost basis.  2.3 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, 2018 and 2017, Imaflex USA, the Company’s wholly owned subsidiary, manufactured flexible  packaging and plastic film out of its two North Carolina, USA plants.  2.4 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  respective  functional  currencies.  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.  10                                     Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  2. Significant accounting policies (continued)  2.4 Foreign currencies (continued)  In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s  functional currency are recorded at the exchange rates in effect on the date of the transactions. Monetary items  denominated  in  foreign  currencies  are  translated  at  the  exchange  rate  prevailing  at  the  end  of  the  reporting  period.  Resulting  gains  and  losses  on  foreign  exchange  are  recorded  in  the  consolidated  statement  of  comprehensive income.  The  foreign  exchange  gains  and  losses  arising  on  inter‐company  monetary  non‐trade  advances  totalling  US$4,000,000, for which settlement is determined to be neither planned nor likely in the foreseeable future and  are  therefore  accounted  for  as  forming  part  of  the  Company’s  net  investment  in  its  foreign  subsidiary,  are  recognized in Accumulated foreign currency translation within reserves. The foreign exchange gains or losses on  trade  receivables  and  other  monetary  advances  continue  to  be  included  in  Other  gains  and  losses  in  the  consolidated statement of comprehensive income.  2.5 Revenue recognition  Revenues are generated almost exclusively from the sale of goods. Revenue is recognized when the control of a  product is transferred to a customer, which is typically when the customer takes possession of the goods, and  there are no other performance obligations to be completed under the contract.  Revenue is measured based on the consideration that has been agreed upon by all parties and that the Company  expects to be entitled to receive from the customer, net of variable considerations, including all returns, rebates  and discounts agreed to by all parties concerned and the information available relative to each customer.  Revenue recognition is based on the following steps:       identification of the contract with the customer;  identification of the performance obligations in the contract;  determination of the transaction price;  allocation of the transaction price to the performance obligations in the contract; and  recognition of revenue when the Company satisfies a performance obligation.  2.6 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 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.    11                               Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  2. Significant accounting policies (continued)  2.6 Income Tax (continued)  Deferred tax assets and liabilities are calculated using the tax rates and laws enacted or substantively 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, except when they relate to  items that are recognised outside net income (whether in other comprehensive income or directly in equity), in  which case the tax is also recognised outside net income.  2.7 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.  2.8 Financial assets and financial liabilities  Financial assets and liabilities are recognized when the Company becomes party to the contractual provisions of  the financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from  the  financial  asset  expire,  or  when  the  financial  asset  and  all  substantial  risks  and  rewards  are  transferred.  A  financial liability is derecognized when it is extinguished, discharged, cancelled or expired.  Classification and initial measurement of financial assets  Financial  assets  are  classified,  at  initial  recognition,  as  subsequently  measured  at  amortized  cost,  fair  value  through earnings, or fair value through other comprehensive income.  The classification of financial assets at initial recognition depends on the financial asset's contractual cash flow  characteristics and the Company's business model for managing them. With the exception of trade receivables  that  do  not  contain  a  significant  financing  component,  the  Company  initially  measures  financial  assets  at  fair  value plus, in the case of financial assets not a fair value through earnings, transaction costs. Transaction costs  directly attributable to the acquisition of financial assets or financial liabilities at fair value through earnings are  recognized immediately in earnings. Trade receivables that do not contain a significant financing component are  measured at the transaction price determined in accordance with IFRS 15.  Subsequent measurement  After initial recognition, cash and trade and other receivables (excluding sales taxes) are measured at amortized  cost  using  the  effective  interest  method.  The  expense  relating  to  the  allowance  for  expected  credit  loss  is  recognized in earnings in Administrative expenses in the statement of comprehensive income.  Impairment of financial assets  The Company recognizes a loss allowance for expected credit losses arising from financial assets. The amount of  expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition  of the respective financial instrument.  12                                   Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  2. Significant accounting policies (continued)  2.8 Financial assets and financial liabilities (continued)  The Company applies a simplified approach for calculating expected credit losses for trade and other receivables  (excluding  sales  taxes).    The  Company  recognizes  a  loss  allowance  based  on  lifetime  expected  credit  losses  at  each  reporting  date.  These  are  the  expected  shortfalls  in contractual  cash  flows,  considering the potential  for  default  at  any  point  during  the  life  of  the  financial  instrument.  In  calculating,  the  Company  uses  its  historical  experience, external indicators and forward‐looking information to calculate the expected credit losses using a  provision matrix. Note 11 provides a detailed analysis of how the impairment requirements of IFRS 9 are applied.  Classification and measurement of financial liabilities  The  Company’s  financial  liabilities  include  bank  indebtedness  and  short‐term  borrowings,  trade  and  other  payables  (excluding  employee  benefits),  and  long‐term  debt.    Financial  liabilities  are  initially  measured  at  fair  value, and, where applicable, adjusted for transaction costs. Subsequently, financial liabilities are measured at  amortized cost using the effective interest method.  All interest related charges for financial liabilities measured at amortized cost are recognized in the consolidated  statement of comprehensive income under Finance costs.  2.9 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.  2.10 Property, plant and equipment  The Company’s building, land, 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  them  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  Land  Building  Production equipment  Office equipment  Computer equipment  Period  Indefinite  20 years  10 ‐ 20 years  5 years  3 years  13                                               Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  2. Significant accounting policies (continued)  2.10 Property, plant and equipment (continued)  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,  in  Other  in  the  consolidated  statement of comprehensive income.  2.11 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 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. Contingent rental payments are recognised as expenses in the periods in which they  are incurred.  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  rental  payments  arising  under  operating  leases  are  recognised  as  an  expense in the period in which they are incurred.  2.12 Intangible assets other than goodwill  Customer relationships 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.  When  intangible  assets  are  purchased  separately,  as  it  was  the case for patents, the cost comprises the purchase price and any directly attributable cost of preparing the  asset for its intended use. When intangible assets are internally developed, as is the case with the Company’s  internally  developed  patents,  the  cost  comprises  the  directly  attributable  costs  in  the  development  phase  necessary to create, produce and prepare the patent for the Company to be able to operate it for its intended  use.   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 when the  asset is derecognised. The amortisation of intangible assets, if any, is recognised in Administrative expenses in  the  consolidated  statement  of  comprehensive  income  over  the  useful  life  of  the  intangible  asset.  Customer  relationships  are  amortised  on  a  straight‐line  basis  over 8  years  and patents  are  amortised  as  of  the  moment  they can be used over the life of the patent (14 years).  14                       Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  2. Significant accounting policies (continued)  2.13 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 the 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.  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 assets in prior years.  A reversal of an impairment loss is recognised immediately in net income.  2.14 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  group of cash‐generating units that are 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  in  the  consolidated  statement  of  comprehensive  income.  An  impairment  loss  recognised  for  goodwill  is  not  reversed in subsequent periods.  2.15 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.  15                                   Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  2. Significant accounting policies (continued)  2.16 Share‐based compensation  The Company uses equity‐settled share‐based compensation plans for its employees and consultants. 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.  2.17 Share capital and reserves  Share capital represents the amount received upon issuance of shares, net of transaction costs. 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 2.16);    Accumulated foreign currency translation (see 2.4);   Warrants – comprises the value of outstanding and expired warrants;  Upon  the  exercise  of  options  and  warrants,  the  proceeds  received  less  the  transaction  costs  are  credited  to  share capital.  2.18 Adoption of new accounting standards  IFRS 9 – Financial Instruments  The Company has adopted IFRS 9 with date of initial application of January 1, 2018, and applied retroactively  with  restatement  of  comparative  periods.  IFRS  9  replaced  IAS  39  –  Financial  Instruments:  Recognition  and  Measurement  and  includes  a  revised  model  for  the  classification  and  measurement  of  financial  assets  and  liabilities, a forward‐looking ‘expected loss’ impairment model and a reformed approach to hedge‐accounting.  There was no material impact to the Company’s consolidated financial statements as a result of adopting IFRS 9,  with the exception of financial assets that were classified as Loans and Receivables that are now classified in the  amortized cost category and applied retroactively with restatement of comparative periods.  IFRS 15 ‐ Revenue from Contracts with Customers  The Company has adopted IFRS 15 with date of initial application of January 1, 2018. IFRS 15 replaced IAS 11 –  Construction Contracts and IAS 18 – Revenue as well as other revenue‐related interpretations and established a  new five‐step control‐based revenue recognition model based on the transfer of promised goods and services to  customers  at  a  point  in  time  or  over  time,  provides  new  and  more  detailed  guidance  on  specific  topics  and  provides additional requirements on the disclosures about revenue in the consolidated financial statements.  16                                       Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  2. Significant accounting policies (continued)  2.18 Adoption of new accounting standards (continued)  The  Company  has  applied  IFRS  15  using  the  modified  retrospective  method  of  adoption  and  as  a  result  comparative  information  has  not  been  restated  and  continues  to  be  reported  under  IAS  11  and  IAS  18.  The  adoption of IFRS 15 did not result in any transition adjustment as of January 1, 2018.  The Company did not make any changes to the presentation of its consolidated financial statements following  the adoption of IFRS 15.  3. Future accounting changes  Certain new standards as well as amendments and improvements to existing standards have been published by  the International Accounting Standards Board (“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:  Leases  In January 2016, the IASB published IFRS 16 – Leases, which will replace the existing standard IAS 17 – Leases  and related interpretations. This IFRS eliminates the classification as an operating lease and requires lessees to  recognise  a  right‐of‐use  asset  and  a  lease  obligation  in  the  statement  of  financial  position  for  all  leases  with  exemptions  permitted  for  short‐term  leases  and  leases  of  low  value  assets.  In  addition,  IFRS  16  changes  the  definition of a lease, sets requirements on how to account for the asset and liability, including complexities such  as  non‐lease  elements,  variable  lease  payments  and  options  periods,  changes  the  accounting  for  sale  and  leaseback  arrangements,  largely  retains  IAS  17’s  approach  to  lessor  accounting and  introduces  new disclosure  requirements. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019 with early  application permitted in certain circumstances.  Management is finalizing its assessment of the impact of the adoption of this standard, but has identified facility  leases, vehicle leases and certain equipment leases that were previously accounted for as operating leases for  which  a  lease  obligation  will  be  recorded  following  the  adoption  of  IFRS  16.    The  Company  expects  to  use  a  modified retrospective approach under which prior periods presented will not be restated and the cumulative  impact  effect  of  the  adoption  of  IFRS  16  will  be  reflected  as  an  adjustment  to  the  retained  earnings  as  at  January 1, 2019.  While management continues to evaluate the impact of IFRS 16 on our consolidated financial statements, we  expect the right‐of‐use asset to be approximately $4,000,000, the increase lease obligation to be approximately  $4,400,000 and the adjustment to retained earnings to be approximately $400,000.  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.  17                             Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  4. Critical accounting judgments and key sources of estimation uncertainty (continued)  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.  4.2 Key sources of estimation uncertainty  The  following  are  the  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 expected credit losses  During  each  reporting  period,  the  Company  makes  an  assessment  of  whether  trade  accounts  receivable  are  collectible from customers. Accordingly, management establishes an allowance for estimated losses arising from  non‐payment. The Company’s allowance for expected credit loss reflects expected credit losses using a provision  matrix model, supplemented by an allowance for individually impaired trade receivables. The provision matrix is  based on the Company’s historic credit loss experience, adjusted for any change in risk of the trade receivable  population based on credit monitoring indicators, and expectations of general economic conditions that might  affect  the  collection  of  trade  receivables.  The  provision  matrix  applies  fixed  provision  rates  depending  on  the  number of days that a trade receivable is past due, with higher rates applied the longer a balance is past due.  Refer to Note 11 for more information regarding the allowance for expected credit losses.  Useful lives of depreciable and amortisable 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  depreciation  and  amortisation methods used are appropriate.  Impairment of long‐lived assets  If required, 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.  18                                 Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  4. Critical accounting judgments and key sources of estimation uncertainty (continued)  4.2 Key sources of estimation uncertainty (continued)  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 equity instruments from time to time, which are comprised of options to purchase common  shares  as  well  as  common  shares  and  warrants  (units).  The  Company  uses  the  Black‐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.  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,  2018 December 31,  2017  $ 30,718,578 55,350,220 263,295 $ 86,332,093 $ 29,709,160  58,375,728  211,795  $ 88,296,683  5.2 Property, plant and equipment and intangible assets per geographic location  Canada   United States  Total  December 31, 2018 December 31,  2017  $    9,197,143 13,331,230 $  22,528,373 $    7,909,095  12,078,035  $  19,987,130  19                                                   Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  6. Additional information on the consolidated statements of comprehensive income  The  Company’s  consolidated  statements  of  comprehensive  income  include  depreciation  of  production  equipment of $1,920,732 for the year ended December 31, 2018 ($1,773,921 in 2017) classified in Cost of sales.  Depreciation  of  other  property,  plant  and  equipment  and  amortisation  of  intangible  assets  amounting  to  $280,305 for the year ended December 31, 2018 ($317,492 in 2017) is included in Administrative expenses.  The  Company’s  consolidated  statements  of  comprehensive  income  include  salaries  paid  to  its  employees  of  $9,865,338 for the year ended December 31, 2018 ($9,414,435 in 2017) classified in Cost of sales. Administrative  expenses include salaries paid to employees of $1,841,908 for the year ended December 31, 2018 ($1,746,402 in  2017)  and  Selling  expenses  include  salaries  paid  to  employees  of  $405,393  for  the  year  ended  December  31,  2018 ($470,505 in 2017).  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 $2,538,987  during the year ended December 31, 2018 ($2,576,398 in 2017). These payments are expensed as incurred and  the Company does not recognise any gains or losses subsequent to the payment of these benefits.  The  Company  also  offers  a  defined  contribution  employee  benefit  plan  to  its  employees  located  in  North  Carolina,  USA.  For  the  year  ended  December  31,  2018,  the  Company  contributed  $27,477  to  this  plan  ($31,582 in 2017).  8. Finance costs  Interest on bank indebtedness and long‐term debt  Interest on finance lease obligations  Capitalized interest  9. Income taxes  9.1 Income tax recognised in net income  Year ended December 31,   2018 December 31,  2017  $   590,866 27,821 (47,200) $   571,487 $   540,488  31,939  ‐  $   572,427  Year ended December 31,   2018 December 31,  2017  Income tax expense comprises:    Current tax expense    Deferred tax expense relating to the origination and  reversal of temporary differences  Total income tax expense  $  1,419,309 $  1,267,169  57,543  $  1,476,852 119,293  $ 1,386,462  20                                                     Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  9. Income taxes (continued)  9.2 Reconciliation between the income tax expense and the statutory income tax rate (continued)  9.2 Reconciliation between the income tax expense and the statutory income tax rate Year ended December 31,   2018 December 31,  2017  Income before income taxes  $ 5,026,785 $ 5,148,802  Income tax expense calculated at 26.7%  (26.8% in 2017) Permanent differences  Effect of unrecognised benefit of Imaflex USA’s losses Effect of different tax rates of subsidiaries operating in  other jurisdictions  Other  1,342,152 (102,820) ‐ 14,978  222,542 1,379,879  80,127  ‐  (9,447)  (64,097)  Income tax expense recognised in net income $ 1,476,852 $ 1,386,462  The tax rate used for the 2018 reconciliation above is the corporate tax rate of 26.7% (26.8% in 2017) payable by  corporate entities in Quebec, Canada on taxable income under tax law in those jurisdictions.  9.3  Deferred tax balances  2018  Assets  Non‐capital losses  Inventory  Advance  Other assets  Liabilities  Finance leases  Property, plant and equipment  Advance  Investment tax credits  Opening balance Recognised in income  Closing balance  $  1,217,286 111,379 51,303 132,900 1,512,868 (71,785)  (2,845,355) ‐ (6,514) (2,923,654) $      29,262 805 (51,303) (54,955) (76,191) 14,472 13,208 (15,546) 6,514 18,648 $  1,246,548  112,184  ‐  77,945  1,436,677  (57,313)  (2,832,147)  (15,546)  ‐  (2,905,006)  Deferred tax liabilities  $(1,410,786)  $     (57,543)  $(1,468,329)  21                                                                                                                                                 Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  9. Income taxes (continued)  9.3  Deferred tax balances (continued)  2017  Assets  Non‐capital losses  Advance  Inventory  Other assets  Liabilities  Finance leases  Property, plant and equipment  Investment tax credits  Opening balance Recognised in income  Closing balance  $ 2,422,003 36,489 207,646 273,221 2,939,359 ‐ (4,217,393) (13,459) (4,230,852) $  (1,204,717) 14,814 (96,267) (140,321) (1,426,491) (71,785) 1,372,038 6,945 1,307,198 $  1,217,286  51,303  111,379  132,900  1,512,868  (71,785)  (2,845,355)  (6,514)  (2,923,654)  Deferred tax liabilities  $(1,291,493) $      (119,293) $(1,410,786)  9.4 Unrecognised deferred tax assets  The  Company's  subsidiary,  Imaflex  USA,  has  non‐capital  losses  available  to  carry  forward  to  reduce  future  taxable income of $26,042,515 in 2018 and $23,366,963 in 2017, for part of which a deferred tax asset has not  been recognised ($4,743,231 in 2018 and $4,157,115 in 2017), that expire as follows:  Expiring in  December 31,   2018  December 31,   2017 2026  2027  2028  2029  2030  2031  2032  2033  2034  2035  2036  1,393,466  1,362,613  2,942,294  3,187,272  4,677,317  1,996,610  2,802,966  2,806,851  2,560,552  1,473,699  838,875  $26,042,515  803,890 932,408 2,172,071 2,548,797 4,233,862 2,096,673 2,904,447 2,894,894 2,558,608 1,404,350 816,963 $23,366,963 22                                                                                                             Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  10. Earnings per share  Year ended December 31,  2018 December 31,  2017  Net income for basic and diluted earnings per share $ 3,549,932 $ 3,762,340  Weighted average number of common shares  outstanding   Dilutive effect of share purchase options  Diluted weighted average common shares outstanding 49,915,829 1,151,471 51,067,300 49,740,007  1,283,349  51,023,356  Basic earnings per common share  Diluted earnings per common share  $   0.071 $   0.070 $   0.076  $   0.074  200,000 stock options outstanding as at December 31, 2018 were not included in the calculation of earnings per  share because they were antidilutive (200,000 in 2017).  11. Trade and other receivables  Trade receivables   Allowance for expected credit losses  Other receivables  Total trade and other receivables  Movement in the allowance for expected credit losses  Balance, beginning of year  Expected credit losses losses recognised on trade  receivables  Release of allowance for expected credit losses Account write‐offs during the year  Foreign exchange  Balance, end of year  December 31, 2018 December 31,  2017  $ 15,874,079 (584,410) 15,289,669 $ 13,164,807  (1,125,559)  12,039,248  632,375 $ 15,922,044 344,753  $ 12,384,001  Year ended December 31, 2018 December 31,  2017  $ (1,125,559) $ (757,497)  (21,827) 47,284 561,189 (45,497) $ (584,410) (445,468)  50,000  ‐  27,406  $ (1,125,559)  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 of the financial assets, net of any provisions  for losses recorded on the Company’s consolidated statements of financial position.  23                                                                             Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  11. Trade and other receivables (continued)  Credit risk management  Credit  risk  associated  with  cash  is  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. Moreover, the Company uses  credit insurance to mitigate credit risk. As at December 31, 2018, $8,280,051 ($5,967,129 as at December 31,  2017) of the total trade receivables are insured. The Company’s management considers that all receivables that  are not impaired for each reporting date are of good credit quality.  Expected credit losses  The  Company’s  allowance  for  expected  credit  losses  reflects  expected  credit  losses  using  a  provision  matrix  model, supplemented by an allowance for individually impaired trade receivables. The provision matrix is based  on  the  Company’s  historic  credit  loss  experience,  adjusted  for  any  change  in  risk  of  the  trade  receivable  population based on credit monitoring indicators, and expectations of general economic conditions that might  affect  the  collection  of  trade  receivables.  The  provision  matrix  applies  fixed  provision  rates  depending  on  the  number of days that a trade receivable is past due, with higher rates applied the longer a balance is past due.  Trade  receivables  outstanding  longer  than  the  agreed  upon  payment  terms  are  considered  past  due.  The  Company  determines  its  allowance  for  individually  impaired  trade  receivables  by  considering  a  number  of  factors, including notices of liquidation, information provided by credit monitoring services, the length of time  trade  receivables  are  past  due,  the  customer’s  current  ability  to  pay  its  obligation  to  the  Company,  the  customer’s history of paying balances when they are past due, historical results and the condition of the general  economy and the industry as a whole. After considering the factors above, at December 31, 2018, the Company  has  determined  there  is  no  significant  increase  or  decrease  in  its  trade  receivable  credit  risk  since  its  initial  recognition.  The  Company writes  off  trade  receivables  when  they  are  determined  to  be  uncollectible  and  any  payments  subsequently  received  on  such  trade  receivables  are  credited  to  the  allowance  for  expected  credit  loss.  12. Inventories  Raw materials and supplies  Finished goods  Work in process  Total  December 31, 2018 December 31,  2017 $ 8,913,092 5,298,178 445,213 $ 14,656,483 $ 6,851,440 4,212,889 1,012,135 $ 12,076,464 The cost of inventories recognised as an expense during the year was $69,525,363 ($68,458,873 in 2017). There  were no write‐downs of inventory recognised in the fiscal year ended on December 31, 2018 or 2017.  24                                 Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  13. Property, plant and equipment  Cost  January 1, 2017  Additions  Write‐off  Foreign exchange  December 31, 2017  Additions  Foreign exchange  Land  Building  Production  equipment  Leasehold  improvements Office  equipment Computer  equipment  Equipment  under  finance lease  Total  $ 23,020  ‐  ‐  (1,512)    $ 114,827  ‐  ‐  (7,543)    $ 47,456,220 2,013,853 (28,780) (1,354,132) 21,508  ‐  1,881  107,284  ‐  9,381  48,087,161 2,492,775 1,743,346 $ 2,217,021 330,130 ‐ (64,811) 2,482,340 247,698 97,275 $ 45,846 ‐ ‐ (1,231) 44,615 ‐ 1,531 $ 510,728  6,090  ‐  (2,483)  $ 1,079,946 309,989 ‐ (61,416) $ 51,447,608 2,660,062 (28,780) (1,493,128) 514,335  6,435  3,089  1,328,519 945,975 76,387 52,585,762 3,692,883 1,932,890 December 31, 2018  $ 23,389      $ 116,665    $ 52,323,282 $2,827,313 $ 46,146 $523,859  $ 2,350,881 $ 58,211,535 Accumulated depreciation   January 1, 2017  Depreciation expense  Write‐off  Foreign exchange  December 31, 2017  Depreciation expense  Foreign exchange  December 31, 2018  Net book value, as at  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  (3,023)  (5,842)  394  (8,471)  (5,840)  (1,040)  (29,908,733) (1,678,450) 5,925 589,827 (30,991,431) (1,826,649) (831,286) (1,970,452) (184,801) ‐ 48,955 (2,106,298) (160,146) (71,676) (45,846) ‐ ‐ 1,231 (44,615) ‐ (1,531) (458,184)  (36,142)  ‐  1,993  (492,333)  (23,347)  (3,162)  (275,662) (88,217) ‐ 12,838 (351,041) (86,988) (22,346) (32,661,900) (1,993,452) 5,925 655,238 (33,994,189) (2,102,970) (931,041)   $    (15,351)    $(33,649,366) $ (2,338,120) $ (46,146) $(518,842)  $ (460,375) $(37,028,200) December 31, 2017  $ 21,508  $ 98,813    $ 17,095,730 $   376,042 December 31, 2018  $ 23,389      $ 101,314    $ 18,673,916 $   489,193 $  $  ‐ ‐ $    22,002  $ 977,478 $ 18,591,573 $    5,017   $ 1,890,506 $ 21,183,335 A  portion  of  the  Company’s  production  equipment  with  a  carrying  amount  of  approximately  $ 18,400,000  (approximately $17,700,000 as at December 31, 2017) is pledged as collateral for the Company’s long‐term debt.  14. Intangible assets  January 1, 2017  Additions  Amortisation  Foreign exchange  December 31, 2017  Amortisation  Foreign exchange  Goodwill    $  504,124  ‐  ‐  (33,115)  Customer  relationships  Patents  Total  $  159,445 ‐ (48,674) (8,845) $      821,608 50,301 (49,287) ‐ $ 1,485,177  50,301  (97,961)  (41,960)  471,009  ‐  41,189  101,926 (48,603) 6,359 822,622 (49,464) ‐ 1,395,557  (98,067)  47,548  December 31, 2018  $ 512,198  $ 59,682 $  773,158 $ 1,345,038  25                                                                                                                                                                                                                                                                                                                                                                                                   Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  15. Trade and other payables  Trade payables  Other payables and accrued liabilities  16. Borrowings  Bank indebtedness (a)  Short‐term borrowings (b)  December 31, 2018 December 31,  2017  $ 6,950,121 2,240,188 $ 9,190,309 $ 5,604,791  2,097,391  $ 7,702,182  December 31, 2018 December 31,  2017 $  8,113,718 $  5,827,182 804,419 ‐ Total bank indebtedness and short term borrowings $  8,918,137 $  5,827,182 Long‐term debt  Loan, bearing interest at the lender’s base rate minus 0.5%  (effective rate of 5.55% as at December 31, 2018, 4.80% as at  December 31, 2017), secured by production equipment having a  net book value of approximately $7,000,000. (c)  Loan, bearing interest at the lender’s base rate plus 0.67%,  (effective rate of 6.72% as at December 31, 2018, 5.97% as at  December 31, 2017) secured by the same production equipment  as the loan above. (d)  Loan (US$730,334, US$1,325,123 as at December 31, 2017),  bearing interest at the US prime rate, reset monthly, plus 3.00%  (effective rate of 8.50% as at December 31, 2018, 7.50% in 2017)  secured by the production equipment of the subsidiary having a  net book value of approximately $10,700,000 and a corporate  guarantee from the Parent Company. (e)   Loan, bearing interest at the lender’s base rate minus 1.0%,  (effective rate of 5.05% as at December 31, 2018) secured by  production equipment having a net book value of approximately  $700,000. (f)  Total long‐term debt  Finance leases (Note 17)   Total borrowings  Current  Bank indebtedness  Short‐term borrowings  Long‐term debt, current portion  Finance lease obligations, current portion  1,905,850   2,433,000 250,000 250,000 1,007,244 1,662,367 408,170   ‐ 3,571,264 4,345,367 1,568,423 475,062 14,057,824 10,647,611 $   8,113,718 804,419 1,432,505 89,517 10,440,159 $   5,827,182 ‐ 1,250,481 194,684 7,272,347 26                                                                   Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  16. Borrowings (continued)  Non‐current  Long‐term debt  Finance lease obligations  Total borrowings  December 31, 2018 December 31,  2017 2,138,759 1,478,906 3,617,665 3,094,886 280,378 3,375,264 $ 14,057,824 $ 10,647,611 The  interest  expense  on  long‐term  debt  amounted  to  $260,440  for  the  year  ended  December 31,  2018  ($279,452 in 2017).  (a) The  Company  has  an  operating  line  of  credit  with  its  bankers  for  a  maximum  of  $12,000,000,  bearing  interest  at  prime  plus  0.40%  as  at  December  31,  2018  (0.75%  as  at  December  31,  2017)    for  an  effective  interest rate of 4.35% at December 31, 2018 (3.95% as at December 31, 2017).  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 and minimum  EBITDA covenants (as defined in the lending agreement), all of which were respected as at December 31,  2018  and  2017  and  during  the  years  ended  December  31,  2018  and  2017.  As  at  December  31,  2018,  the  Company had drawn $8,113,718 ($5,827,182 as at December 31, 2017) on the line of credit.  (b) The  Company  borrowed  by  way  of  a  three‐month  bankers’  acceptance  at  an  annualized  rate  of  2.32%  to  make  a  down  payment  on  a  piece  of  equipment.  This  down  payment  is  guaranteed  by  a  letter  of  credit  issued by the supplier’s financial institution. Once the equipment is received, it is expected that the bankers’  acceptance will be transferred to the lease amount.  (c) The  loan  is  repayable  in  monthly  instalments  of  $40,550  until  November  2022  and  bears  interest  at  the  lender’s  base  rate  less  0.50%  (effective  rate  of  5.55%  as  of  December  31,  2018  and  4.80%  as  at  December 31, 2017).  (d) The  loan  is  repayable  in  one  instalment  of  $3,630  in  May  2019  followed  by  71  monthly  instalments  of  $3,470 until April 2025 and bears interest at 0.67% over the lender’s base rate for an effective rate of 6.72%  as  December  31,  2018  (5.97%  as  at  December  2017).  This  loan  is  secured  by  the  same  production  equipment as the loan detailed in (c).  (e) This loan is repayable in 20 equal quarterly instalments through January 2020 and bears interest at a rate of  3.00%  over  the  US  prime  rate  for  an  effective  rate  of  8.50%  as  at  December  31,  2018  (7.50%  as  at  December 31,  2017).  This  loan  was  recorded  at  the  effective  interest  rate  method,  net  of  all  incremental  transaction  costs  directly  attributable  to  the  transaction.  This  loan  is  subject  to  certain  covenants.  As  at  December 31, 2018 and 2017 and during the years ended Deember 31, 2018 and 2017, the Company was in  compliance with all covenants related to this loan.  (f) The Company borrowed $500,000 to finance the purchase of equipment purchased in 2017. The loan bears  interest at the lender’s base rate minus 1.0% (for an effective rate of 5.05% as at December 31, 2018) and is  repayable in one instalment of $8,530 followed by 59 monthly instalments of $8,330 and matures in January  2023.  During  the  year  ended  December  31,  2018,  the  Company  received  an  amount  of  $1,261,200  to  finance  the  purchase of production equipment. This amount was reimbursed in full with no penalty during the course of the  year.  27                               Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  16. Borrowings (continued)  The aggregate scheduled repayment of long‐term debt is as follows:  Not later than one year  Later than one year and not later than five years Later than 5 years  $ 1,432,505 2,083,239 55,520 $ 3,571,264 The changes in the Company’s liabilities arising from borrowings can be classified as follows:  Balance as of January 1, 2017  Cash flows:  Proceeds  Repayments  Non‐cash:  New finance leases  Amortization of debt  issuance costs  Foreign exchange and other  Balance as of December 31, 2017  Cash flows:  Proceeds  Repayments  Non‐cash:  Short‐term  borrowings  Long‐term  borrowings  $ 5,052,270  $ 5,483,801  Finance Leases  $ 392,714  Total  $ 10,928,785  5,700,000  (4,895,242)  250,000  (1,204,574)  ‐  (212,288)  5,950,000  (6,312,104)  ‐  ‐  309,989  309,989  (29,846)  (4,875)  (178,985)  ‐  (15,353)  (4,875)  (224,184)  5,827,182  4,345,367  475,062  10,647,611  6,572,519  (3,500,000)  1,761,200  (2,629,503)  1,288,400  (200,813)  9,622,119  (6,330,316)  New finance leases  Amortization of debt  issuance costs  Foreign exchange and other  ‐  18,436  ‐  (4,875)  99,075  ‐  ‐  5,774  ‐  (4,875)  123,285  Balance as of December 31, 2018  $ 8,918,137  $ 3,571,264  $ 1,568,423  $ 14,057,824  17.  Obligations under finance leases  The Company has entered into certain finance lease agreements. Finance lease payments are due as follows:  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 6.1% Present value of minimum lease payments  Less the long‐term portion  Current portion of obligations under finance leases $  103,933 1,495,163 ‐ 1,599,096 (30,673) 1,568,423 (1,478,906) $  89,517 28                                                                                                                Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  17.  Obligations under finance leases (continued)  During the year ended December 31, 2018, the Company received $1,288,400 under a finance lease agreement  for interim payments made to a supplier for a piece of machinery. Interim payments under the lease agreement  bear interest at a variable rate of prime plus 0.25% (effective rate of 4.20% as at December 31, 2018). The lease  reimbursement schedule will be determined once the equipment is received and no reimbursements have been  agreed upon as at December 31, 2018. The lease inception date will be the date when the Company will be able  to use the equipment leased.  During the year ended December 31, 2017 the Company financed the acquisition of production equipment for  an amount of $309,989 by entering into finance leases.  18. Share capital  The  Company’s  authorized  share  capital  consists  of  an  unlimited  number  of  common  shares,  voting,  participating,  without  par  value.  At  December  31,  2018,  there  were  50,013,637  common  shares  outstanding  (49,863,637 common shares at December 31, 2017).  During the year ended December 31, 2018, the Company issued 150,000 shares for cash consideration totaling  $60,000  following  the  exercise  of  options  that  were  issued  in  2016.  As  at  December  31,  2018,  there  were  no  warrants outstanding.  During the year ended December 31, 2017, the Company issued 125,000 shares for cash consideration totaling  $50,000  following  the  exercise  of  options  that  were  issued  in  2016.  As  at  December  31,  2017,  there  were  no  warrants outstanding.  19. Share‐based compensation  Pursuant to the Stock Option Plan (the “Plan”) of the Company, 4,973,860 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.  During the year ended December 31, 2018, the Company granted 250,000 options to directors of the Company  to acquire an equal amount of shares at $0.76 for a period of 5 years. These options vest in 4 tranches over 18  months, the first vesting at issuance and the other tranches vest at 6‐month intervals.  During  the  year  ended  December  31,  2017,  the  Company  granted  50,000  options  to  an  employee  to  acquire  shares  at  $1.03  for  a  period  of  5  years  and  150,000  options  to  an  employee  to  purchase  shares  at  a  price  of  $1.11. These options vest in 4 tranches over 18 months, the first vesting at issuance and the other tranches vest  at 6‐month intervals.  The expense relating to the issue of option grants totalled $122,832 for the year ended December 31, 2018 and  $195,707 for the year ended December 31, 2017.  29                                       Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  19. 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  29/11/2018  29/11/2017 22/06/2017 06/09/2016 21/06/2016  16/06/2015 Total  Outstanding as at 01/01/2017  Issued  Exercised  Outstanding as at 31/12/2017  Exercised  Issued  Outstanding as at 31/12/2018  Exercisable as at 31/12/2017  Exercisable as at 31/12/2018  Remaining life of options (yrs)  Expected life of options (yrs)  Expiry  Expected share price volatility  Dividend yield  Fair value assumptions  (125,000)(1)  1,175,000  (150,000)(2)  1,300,000  ‐  ‐ 150,000 ‐ 150,000 ‐ ‐ 150,000 37,500 112,500 3.92 2.5 to 3.25 ‐ ‐  50,000 ‐  ‐ ‐  50,000 ‐  ‐ ‐  ‐  ‐ 250,000  1,025,000  50,000 250,000  850,000  25,000 ‐  1,025,000   50,000 62,500  2.48  3.48 4.92  2.75 to 3.5  2.5 to 3.25 2.5 to 3.25  29/11/2023  29/11/2022 22/06/2022 06/09/2021 21/06/2021  75.95% ‐  82.15%  0%  500,000 ‐ ‐ 500,000 ‐ ‐ 500,000 375,000 500,000 2.69 2.5 to 3.25 67.14% ‐   70.41%  0%  79.13% ‐  80.17% 0% 80.01% ‐  83.03% 0% 76.59% ‐  79.60% 0% Risk free rate  2.23%  1.62% 1.15% 0.51% 0.50%  Exercise price  Share price on grant date  Fair value of option at grant  $ 0.76  $ 0.76  $ 0.35  $ 1.11 $ 1.11 $ 0.57 $ 1.03 $ 1.03 $ 0.53 $ 0.42 $ 0.42 $ 0.21 $ 0.40  $ 0.40  $ 0.21  (1) The fair value of the common shares at the exercise date was $1.00 per share.  (2) The fair value of the common shares at the exercise date was $0.88 per share.  2,450,000  200,000  (125,000) 2,525,000  (150,000) 250,000  2,625,000  1,937,500  2,400,000  650,000 ‐ ‐ 650,000 ‐ ‐ 650,000 650,000 650,000 1.46 2.75 to 3.5 15/06/2020 83.19% ‐ 98.85% 0% 0.55% to  0.65% $ 0.52 $ 0.52 $ 0.30 The 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.  20. Non‐cash transactions  During the year ended December 31, 2017, the Company financed the acquisition of a chiller of a value totalling  $263,950 and plant equipment of a value of $46,039 by entering into finance leases. Additional information on  finance leases is provided in note 17.  30                                                                                       Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  21. Financial instruments  21.1 Fair value and classification of financial instruments  Carrying amount and fair value December 31,  December 31, 2017 2018 $      310,874 15,293,902 15,604,776 $      87,140 12,045,694 12,132,834 8,113,718 804,419 8,029,262 3,571,264 20,518,663 5,827,182 ‐ 6,693,995 4,345,367 16,866,544 Financial assets  Amortised cost  Cash  Trade and other receivables (1)   Financial liabilities  Financial liabilities, at amortised cost  Bank indebtedness  Short‐term borrowings  Trade and other payables (2)  Long‐term debt  (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,  bank  indebtedness,  short‐term  borrowings  and  trade  and  other  payables  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  long‐term  debt,  which  mainly  bears  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  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.  21.2 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;  31                                   Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  21. Financial instruments (continued)  21.2 Fair value hierarchy (continued)  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 (as prices) or indirectly (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, 2018 and 2017, the fair values of long‐term debt are categorised as Level 2.  22. Operating lease arrangements  22.1 Leasing arrangements  The Company leases its premises for manufacturing 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  rent  under  those  leasing  agreements  and  no  sublease  payments  received  by  the  Company.    The  leases expire at various dates to May 2024, and include renewal provisions.  22.2 Payments recognised as an expense  Year ended December 31,  2018 December 31,   2017  $  975,471 43,973 22,054 $    867,766  35,311  16,679  Year ended December 31,  2018 December 31,  2017  $  1,194,608 3,293,847 180,814 $ 4,669,269 $  908,312  2,870,414  1,295,841  $ 5,074,567  Lease payments for premises  Vehicles  Office equipment  22.3 Non‐cancellable operating lease commitments  Not later than 1 year  Later than 1 year and not later than 5 years  Later than 5 years  23. Risk management  23.1 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.  32                                               Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  23. Risk management (continued)  23.1 Capital management (continued)  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, 2018:  ‐  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 taxes divided by equity and deferred taxes less intangible  assets 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;  ‐ Fixed charge coverage ratio calculated on a yearly basis equal to or greater than 1.10:1.00;  ‐ To maintain a minimum EBITDA (as defined) of $3,100,000 for the fiscal year ended December 31, 2018.  23.2 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 following is a summary of the Company’s financial assets and liabilities that are denominated in USD, which  is in a currency other than the Company’s functional currency:  Cash  Trade receivables  Trade payables   Bank indebtedness  Net financial position exposure  $ December 31, 2018 6,481 4,408,143 (3,233,428) (946,707) 234,489 $  $  December 31,  2017 1,195 3,527,502 (2,439,700) (312,580) $     776,417 A $0.05 appreciation of the Canadian dollar against the USD would increase its financial position by $48,568 as  at December 31, 2018 (a decrease of $22,700  as at December 31, 2017).  Conversely a $0.05 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 $2,527. Every $0.01 depreciation of the USD against the Canadian dollar would have the opposite  effect.  23.3 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.  33                                     Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  23. Risk management (continued)  23.3 Interest rate risk management (continued)  At the reporting date, the carrying value of the Company’s interest‐bearing financial liabilities was as follows:  Variable rate instruments  Financial liabilities   Gross financial position exposure  Sensitivity analysis  December 31, 2018 December 31,  2017 $ 12,973,383 $ 12,973,383 $ 10,172,549 $ 10,172,549 A 100 basis point increase in interest rates at the reporting date would result in a decrease in income for the  year  ended  December  31,  2018  of  approximately  $117,000  ($ 115,000  for  2017).  Conversely  a  decrease  in  interest rates would have the opposite effect.  23.4 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 borrowings 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  $12,000,000,  of  which  an  amount  of  $8,113,718  was  utilized as at December 31, 2018. Borrowings under the Company’s operating line of credit bear interest at the  bank’s prime rate plus 0.40%. In order to ensure that this line of credit is sufficient to fund the Company’s cash  requirements, management follows the movements in the collateral against which the line of credit is given.  As  at  December  31,  2018,  the  carrying  amount  and  undiscounted  contractual  cash  flows  for  the  Company's  liabilities are as follows:  Carrying  amount  Contractual  cash flow  1 year or less 2‐5 years  More than 5  Bank indebtedness  Short‐term borrowings  Long‐term debt (1)  Finance leases (2)  Trade and other payables (3)  $ 8,113,718 804,419 3,571,264 1,568,423 8,029,262 $ 8,113,718 804,419 3,932,764 310,696 8,029,262 $ 8,113,718 804,419 1,601,584 103,933 8,029,262 $                  ‐  ‐  2,273,026  206,763  ‐  years  $             ‐ ‐ 58,154 ‐ ‐ $22,087,086 $21,190,859 $18,652,916 $ 2,479,789    $   58,154 (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. The finance lease for  which  the  reimbursement  schedule  has  yet  to  be  agreed  to  (Note  17)  has  not  has  not  been  included  in  the  contractual cash flow.  (3) Excludes employee benefits  34                                         Notes to the consolidated financial statements  for the years ended December 31, 2018 and 2017  24. Related party transactions  Entities in which key management personnel has an interest  During the year, in the normal course of business, the Company had routine transactions with entities owned by  shareholders and key management personnel of the Company. 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:  Transactions for the year  ended  Amounts owing as at  Non‐secured commitments  as at  December 31,  2018 December 31,  2017 December 31,  2018 December 31,  2017  December 31,  2018 December 31,  2017 $     975,471 146,628 $     867,766 149,691 $ ‐ 12,689 $              ‐   $ 6,605,537 ‐ 12,689  $ 4,990,249 ‐ 69,351 134,298 69,351 134,298  ‐ ‐ $  1,191,450 $  1,151,755 $ 82,040 $ 146,987  $ 6,605,537 $ 4,990,249 Entities owned by key management  personnel or their family  members  Rent  Key management personnel services  Entities over which key management  personnel have significant  influence  Professional services  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 marketing and innovation, the production director, the  vice president of corporate affairs, the chief financial officer and members of the board of directors.  Salaries  Director’s fees  Short‐term employee benefits  Post‐employment benefits – State‐run plans  Share‐based compensation  Other benefits  Year ended December 31,  2018 $ 915,840 41,000 13,101 14,788 112,193 44,972 $ 1,141,894 December 31,  2017 $    859,122 40,250 13,405 14,990 139,589 45,441 $ 1,112,797 35                               

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