Loop Industries, Inc. - Quarter Report: 2018 May (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

or

Commission File No. 000-54768

480 Fernand-Poitras Terrebonne, Québec, Canada J6Y 1Y4

(Address of principal executive offices zip code)

Registrant’s telephone number, including area code (450) 951-8555

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As at June 22, 2018, there were 33,805,706 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

LOOP INDUSTRIES, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Loop Industries, Inc.

Three months ended May 31, 2018

Index to the Condensed Consolidated Financial Statements

Loop Industries, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Loop Industries, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Loop Industries, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Loop Industries, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

Loop Industries, Inc.

Three Months Ended May 31, 2018 and 2017

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. The Company, Basis of Presentation and Going Concern

The Company

Loop Industries, Inc. (“Loop Industries” or the “Company”) was originally incorporated in Nevada in March 2010 under the name Radikal Phones Inc., which was changed to First American Group Inc. in October 2010. On June 29, 2015, Loop Industries, Inc. (then known as First American Group) completed a reverse acquisition of Loop Holdings, Inc. (“Loop Holdings”), whereby the Company acquired all of its outstanding shares of common stock in a share exchange for approximately 78.1% of the capital of the Company at the time. The depolymerization business of Loop Holdings became its sole operating business. On June 22, 2015, the Board of Directors approved a change in the fiscal year end date from September 30 to the last day of February. On July 21, 2015, the Company changed its name to Loop Industries, Inc.

Loop Holdings was originally incorporated in Nevada on October 23, 2014. The depolymerization technology underlying Loop Industries’ business was originally developed by Hatem Essaddam who sold the technology and related intellectual property rights to Loop Industries in October 2014, pursuant to an Intellectual Property Assignment Agreement dated October 27, 2014, by and among Hatem Essaddam, Loop Holdings and Daniel Solomita.

On May 24, 2016, 9449507 Canada Inc. was organized under the federal laws of Canada and on November 11, 2016 became a wholly-owned subsidiary of Loop Industries, Inc. following the transfer of all of its issues and outstanding shares of common stock by Mr. Solomita of all of the issued and outstanding shares of common stock of 9449507 Canada Inc. to Loop Industries, Inc. On December 23, 2016, 9449507 Canada Inc. changed its legal name to Loop Canada Inc.

On December 31, 2016, 8198381 Canada Inc. (“819 Canada”) entered into a purchase and sale agreement to transfer to Loop Canada Inc., all assets and liabilities it held pertaining to its business of depolymerizing plastics, including employees and operations.

On March 9, 2017, Loop Holdings, a wholly-owned subsidiary of the Company, merged with and into Loop Industries, Inc., with Loop Industries, Inc. being the surviving entity as a result of the merger.

On September 1, 2017, 9449710 Canada Inc. was incorporated to assist in the depolymerization business and is a wholly-owned subsidiary of Loop Canada Inc.

On November 20, 2017, Loop Industries Inc. commenced trading on the NASDAQ Global Market under its new trading symbol, “LOOP.” From April 10, 2017 to November 19, 2017, the Company’s common stock was quoted on the OTCQX tier of the OTC Markets Group Inc. under the symbol “LLPP.” From October 29, 2015 through April 7, 2017, the Company’s common stock was quoted on the OTCQB tier of the OTC Markets Group Inc. under the stock symbol “LLPP.” From September 26, 2012 to October 28, 2015, our common stock was quoted on the OTCQB tier of the OTC Markets Group Inc. under the stock symbol “FAMG.”

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements of Loop Industries, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The balance sheet information as at February 28, 2018 is derived from the Company’s audited consolidated financial statements and related notes for the fiscal year ended February 28, 2018, which is included in Item 8 of the Company’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 14, 2018. These unaudited interim condensed consolidated financial statements should be read in conjunction with those financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended May 31, 2018 are not necessarily indicative of the results that may be expected for the year ending February 28, 2019.

Intercompany balances and transactions are eliminated on consolidation.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the unaudited condensed consolidated financial statements, the Company has not yet begun commercial operations and does not yet have a recurring source of revenue. Since inception, the Company has accumulated a deficit of $24.8 million and during the three months ended May 31, 2018, the Company incurred a net loss of $3.5 million and used cash in operations of $2.2 million, which raises substantial doubt about the Company’s ability to continue as a going concern.

At the current stage of its development, Loop is a pre-revenue company, with its ongoing operations being financed by raising new equity capital. To date, the Company has been successful in raising capital to finance its ongoing operations.

As at May 31, 2018, the Company had cash on hand of $5.4 million. Management is evaluating its plans to continue to raise financing, the proceeds from which would be used to finance the start-up of its commercial operations and fund the further development of its ongoing pre-revenue operations. There can be no assurance that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.

The accompanying unaudited condensed consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Company were unable to realize its assets and discharge its liabilities as a going concern in the normal course of operations. Such adjustments could be material.

2. Summary of Significant Accounting Policies

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for depreciable lives of property, plant and equipment, intangible assets, analysis of impairments of recorded intangible assets, accruals for potential liabilities and assumptions made in calculating the fair value of stock-based compensation and other stock instruments.

Foreign currency translations and transactions

The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency of the Company. Assets and liabilities of subsidiaries that have a functional currency other than that of the Company are translated to U.S. dollars at the exchange rate as at the balance sheet date. Income and expenses are translated at the average exchange rate of the period. The resulting translation adjustments are included in other comprehensive income (loss) (“OCI”). As a result, foreign currency exchange fluctuations may impact operating expenses. The Company currently has not engaged in any currency hedging activities.

The following table summarizes the exchange rates used:

Expenditures are translated at the average exchange rate for the period presented.

Sales tax and tax credits receivable

The Company is registered for the Canadian federal and provincial goods and services taxes. As such, the Company is obligated to collect, and is entitled to claim sale taxes paid on its expenses and capital expenditures incurred in Canada. As at May 31, 2018 and February 28, 2018, the computed net recoverable sale taxes amounted to $201,588 and $177,903, respectively.

Research and development expenses

Research and development expenses relate primarily to the development, design, testing of preproduction samples, prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the three months ended May 31, 2018 and 2017 amounted to $1.1 million and $0.5 million, respectively.

Net earnings (loss) per share

The Company computes net loss per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. The Company includes common stock issuable in its calculation. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation if their effect is antidilutive.

For the three months ended May 31, 2018 and 2017, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an antidilutive effect. The potentially dilutive securities consisted of 2,395,248 and 1,860,455 outstanding warrants as at May 31, 2018 and May 31, 2017, respectively.

Recently issued accounting pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. On August 12, 2015, the FASB delayed the required implementation to fiscal years beginning after December 15, 2017 but now permitted organizations, such as the Company to adopt earlier. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU will also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as at the date of adoption. The Company has adopted ASU 2014-09 on March 1, 2018 on a full retrospective basis and its adoption did not have any impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, which will significantly change practice for all entities. The targeted amendments to existing guidance are expected to include:

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Management is currently evaluating the impact of this Statement on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Reform Act on items within accumulated other comprehensive income (loss) ("AOCI") to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update. ASU 2018-02 is effective for the Company beginning January 1, 2019 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company does not expect that ASU 2018-02 will have an impact on its consolidated financial statements.

3. Property, Plant and Equipment, Net

Depreciation expense is recorded as an operating expense in the unaudited condensed consolidated statements of operations and comprehensive loss and amounted to $85 thousand and $75 thousands for the three months ended May 31, 2018 and 2017, respectively.

4. Intangible Assets, Net

Amortization expense is recorded as an operating expense in the consolidated statements of operations and comprehensive loss and amounted to $16 thousand for the three months ended May 31, 2018 and 2017.

5. Credit Facility and Long-Term Debt

Interest paid on the instalment loan during the three months ended May 31, 2018 amounted to $12,913 (2017 – nil). As at May 31, 2018, the Company was in compliance with its financial covenants.

6. Related Party Transactions

Advances from majority stockholder

Mr. Daniel Solomita, or companies controlled by him, previously made advances to the Company, which were unsecured, non-interest bearing with no formal terms of repayment. During the three months ended May 31, 2017, the Company repaid to Mr. Solomita or companies controlled by him, as applicable, an aggregate amount of $278,472. Additionally, accrued compensation due to Mr. Solomita of $324,844 was repaid during the three months ended May 31, 2017. Accrued compensation of $35,156 was due to Mr. Solomita as at May 31, 2017.

Employment Agreement

On June 29, 2015, the Company entered into an employment agreement with Mr. Daniel Solomita, the Company’s President and Chief Executive Officer for an indefinite term. For the three months ended May 31, 2018, compensation expense for the Company’s CEO amounted to $47 thousand (2017 – $45 thousand).

In addition, pursuant to the employment agreement with Mr. Solomita, 4 million performance incentive shares of the Company’s common stock are issuable in tranches of one million shares each if certain milestones are met.

During the three months ended May 31, 2018 and 2017, no additional milestone had been met and accordingly, the Company did not record any compensation expense in relation to the performance incentive shares.

7. Stockholders’ Equity

Common Stock

During the three months ended May 31, 2018, the Company issued 18,821 shares of common stock upon the cashless exercise of 20,000 warrants and 35,797 shares of common stock upon issuance of restricted stock units.

During the three months ended May 31, 2017, the Company sold 1,123,266 shares of its common stock at an offering price of $5.25, resulting in net proceeds to the Company of $5,897,188. The shares issued to investors were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the private offering safe harbor provision of Rule 506 Regulation D.

8. Stock-based Compensation Plans

Equity Incentive Plan

On July 6, 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”). A total of 3,000,000 shares of common stock was reserved for issuance under the Plan with an automatic share reserve increase, effective March 1, 2018.

On March 1, 2018, in accordance with the provisions of the Plan, the number of shares available for issuance increased by 1,500,000 shares, resulting in 3,211,448 shares available for issuance.

Warrants

The following table summarizes the continuity of the Company’s warrants during the three months ended May 31:

The following table summarizes information concerning outstanding warrants as at May 31:

Warrants were valued using the Black-Scholes pricing model. The following table shows key inputs into the valuation model for the three months ended May 31:

During the three months ended May 31, 2018, an expense of $1.0 million (2017 – $0.2 million) was recorded in the condensed consolidated statement of operations in relation to warrants.

Restricted Stock Units

The following table summarizes the continuity of the restricted stock units (“RSUs”) during the three months ended May 31:

During the three months ended May 31, 2018, an expense of $0.2 million (2017 – $nil) was recorded in the condensed consolidated statement of operations in relation to RSUs.

9. Contingencies

In April 2018, depositions were held in connection with a claim filed against the Company by two individuals, in the Los Angeles Superior Court, seeking damages for breach of implied covenant of good faith and fair dealing, and promissory fraud, asserting entitlement to two million shares of our common stock. The Company filed a motion for summary judgement on May 30, 2018 to dismiss all claims, which motion will be heard on August 13, 2018. The case is currently set for trial on September 12, 2018 in the Los Angeles Superior Court. Management believes that this case lacks merit and intends to continue to defend it vigorously. No amounts have been provided for in the consolidated financial statements with respect to this claim. Management has not yet determined what effect this lawsuit will have on its financial position or results of operations. 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information and any forward-looking statements should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q, including those risks identified in the “Risk Factors” section of our most recent Annual Report on Form 10-K.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q of Loop Industries, Inc., a Nevada corporation (the “Company”, “we”, “Loop” or “our”), contains “forward-looking statements,” as defined in the United States Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, ability to improve and expand our capabilities, competition, expected activities and expenditures as we pursue our business plan, the adequacy of our available cash resources, regulatory compliance, plans for future growth and future operations, the size of our addressable market, market trends, and the effectiveness of the Company’s internal control over financial reporting. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from the predictions discussed in these forward-looking statements. The economic environment within which we operate could materially affect our actual results. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” included in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the description of material changes thereto, if any, included in our Quarterly Reports on Form 10-Q or subsequent filings with the SEC. Additional factors that could materially affect these forward-looking statements and/or predictions include, among other things: (i) commercialization of our technology and products, (ii) development and protection of our intellectual property and products, (iii) our need for and ability to obtain additional financing, (iv) industry competition, (v) regulatory and other legal compliance, (vi) the exercise of the control over us by Mr. Daniel Solomita, our President and Chief Executive Officer, Chairman of the Board of Directors, and majority stockholder, (vii) other factors over which we have little or no control, (viii) our ability to remedy our material weaknesses in internal control over financial reporting, (ix) our ability to continue as a going concern, (x) whether the reassessment of our internal controls over financial reporting could lead us to conclude that there were deficiencies in its internal control over financial reporting that constitute material weaknesses, (xi) adverse effects on the Company’s business and operations as a result of increased regulatory, media or financial reporting issues and practices, rumors or otherwise and (xii) other factors discussed in our subsequent filings with the SEC.

Management has included projections and estimates in this Form 10-Q, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the SEC or otherwise publicly available.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as at the date of this Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as at the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Introduction

Loop Industries, Inc. (“Loop”, “our”) is an innovative technology company focused on sustainability. Our mission is to accelerate the world’s shift toward sustainable plastic and away from its dependence on fossil fuels, essentially enabling a truly circular economy.

Loop’s patented technology decouples the production of PET/Polyester plastic from fossil fuels by depolymerizing waste PET plastic and polyester fiber into its base building blocks. The monomers are then re-polymerized into virgin-quality PET plastic that meets FDA requirements for use in food-grade plastic packaging such as water and soda bottles. Our monomers can also be re-polymerized to produce polyester fiber for textile applications.

Our technology uses waste PET plastics such as water bottles, soda bottles, consumer packaging, carpets, polyester textiles and industrial waste as feedstock to process. These feedstocks are available through municipal triage centers, industrial recycling and landfill reclamation projects.

Loop’s technology allows for low value and no value waste PET plastics to be upcycled into high value PET packaging for consumer goods companies. Our low energy depolymerization technology specifically targets PET/Polyester plastic allowing for the removal of all impurities, such as colors/dyes, labels and all organic and inorganic waste.

Prospective Future Growth

During the last three years, we have positioned Loop to be a leader in sustainability and the circular economy. We built our pilot plant in Terrebonne, Canada to optimize and showcase our proprietary depolymerization technology. We completed the expansion of our pilot plant to increase its capacity and demonstrate continuous operations and we also announced the successful activation of our breakthrough Generation II and the world’s first integrated waste to Loop™ PET resin manufacturing technology concept as we move into our next phase of commercialization.

We are developing plans to commercialize our technology in collaboration with multinational supply chain management companies and to manufacture Loop™ branded PET resin.

Our goal is to negotiate contracts with global consumer goods companies for the sale of Loop™ branded resin,and enable them to achieve their timeline and stated goals for sustainability.

We are continuing to invest in further optimizing our technology and developing our organizational strength and depth. Our research and development innovation hub in Terrebonne, Canada will continue optimizing our current technology as well as innovating into new areas of sustainability.

Results of Operations

The following table summarizes our operating results for the three months ended May 31, 2018 and 2017.

First Quarter Ended May 31, 2018

Net loss for the three months ended May 31, 2018 increased $2.0 million to $3.5 million compared to the same period last year, primarily due to increased research and development costs of $0.6 million as well as increased general and administrative expenses of $1.5 million.

Research and development expenses for the three months ended May 31, 2018 amounted to $1.1 million, representing an increase of $0.6 million compared to the same period in fiscal 2017. The increase in research and development expenses was driven primarily by higher non-cash stock-based compensation expense of $0.4 million and higher compensation expense of $0.2 million resulting from the increased number of employees.

General and administrative expenses for the three months ended May 31, 2018 increased $1.5 million to $2.4 million as compared to the same period in fiscal 2017. The increase was primarily due to higher employee related expenses of $0.6 million, comprised mainly of non-cash stock-based compensation expense, in addition to higher legal fees related to legal proceedings and commercialization efforts, and consulting and accounting fees of $0.8 million.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Going Concern Assumption

At the current stage of its development, Loop is a pre-revenue company, and its ongoing operations are being financed by raising new equity capital. To date, the Company has been successful in raising capital to finance its ongoing operations at successively higher valuations, reflecting investors’ belief in the potential for commercializing the Company’s branded resin and the progress made to date in implementing its business plans. As at May 31, 2018, the Company had cash on hand of $5.4 million.

Management continues to be positive about its growth strategy and is evaluating its financing plans to continue to raise capital to finance the start-up of commercial operations and continue to fund the further development of its ongoing operations.

As reflected in the accompanying consolidated financial statements, the Company has not yet begun commercial operations and does not yet have a recurring source of revenue. Since inception, the Company has accumulated a deficit of $24.8 million and during the three months ended May 31, 2018, the Company incurred a net loss of $3.5 million and used cash in operations of $2.2 million, which raises substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.

Flow of Funds

Summary of Cash Flows

A summary of cash flows for the three months ended May 31, 2018 and 2017 was as follows:

Net Cash Used in Operating Activities

During the three months ended May 31, 2018, we used $2.2 million in operations compared to $1.0 million, the year prior. The increase is mainly due to increased operating expenses previously itemized as we move to the next phase of commercialization.

Net Cash Used in Investing Activities

During the three months ended May 31, 2018, the Company made capital asset investments of $0.6 million, primarily in connection with the expansion of our pilot plant.

Net Cash (Used) Provided by Financing Activities

During the three months ended May 31, 2018, we repaid $14 thousand of our long-term debt. During the three months ended May 31, 2017, we raised $5.9 million through the sale of additional common stock and the exercise of warrants.

Off-Balance Sheet Arrangements

As at May 31, 2018, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to risks associated with currency fluctuations and changes in foreign currency exchange rates as well as fluctuations in the supply and price of raw materials and commodity prices. 

Foreign Currency Exchange Risk

We operate mainly through two entities, Loop Industries, Inc., which is a Nevada corporation and has a U.S. dollar functional currency, and our wholly-owned subsidiary, Loop Canada Inc. (“Loop Canada”), which is based in Terrebonne, Québec, Canada and has a Canadian dollar functional currency. Our reporting currency is the U.S. dollar.

We mainly finance our operations through the sale and issuance of shares of common stock of Loop Industries, Inc. in U.S. dollars while our operations are concentrated in our wholly-owned subsidiary, Loop Canada. Accordingly, we are exposed to foreign exchange risk as we maintain bank accounts in U.S. dollars and a significant portion of our operational costs (including payroll, site costs, costs of locally sourced supplies and income taxes) are denominated in Canadian dollars.

Significant fluctuations in U.S. dollar to Canadian dollar exchange rates could materially affect our result of operations, cash position and funding requirements. To the extent that fluctuations in currency exchange rates cause our results of operations to differ materially from our expectations or the expectations of our investors, the trading price of our common stock could be adversely affected.

From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. As part of our risk management program, we may enter into foreign exchange forward contracts to lock in the exchange rates for future foreign currency transactions, which is intended to reduce the variability of our operating costs and future cash flows denominated in currencies that differs from our functional currencies. We do not enter into these contracts for trading purposes or speculation, and our management believes all such contracts are entered into as hedges of underlying transactions. Nonetheless, these instruments involve costs and have risks of their own in the form of transaction costs, credit requirements and counterparty risk. If our hedging program is not successful, or if we change our hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates. Any hedging technique we implement may fail to be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on the trading price of our common stock.

Commodity Price Risk

The plastics manufacturing industry is extremely price competitive because of the commodity like nature of PET resin and its correlation to the price of crude oil. The demand for recycled PET has fluctuated with the price of crude oil. If crude oil prices decline, the cost to manufacture recycled PET may become comparatively higher than the cost to manufacture virgin PET. Our ability to penetrate the market will depend in part on the cost of manufacturing virgin PET and if we do not successfully distinguish our product from those of virgin PET manufacturers our entry into the market and our ability to secure customer contracts can be adversely affected.

Raw Material Price Risk

We purchase raw materials and packaging supplies from several sources. While all such materials are available from independent suppliers, raw materials are subject to fluctuations in price and availability attributable to a number of factors, including general economic conditions, commodity price fluctuations, the demand by other industries for the same raw materials and the availability of complementary and substitute materials. The profitability of our business also depends on the availability and proximity of these raw materials to our factories. The choice of raw materials to be used at our facility is determined primarily by the price and availability, the yield loss of lower quality raw materials, and the capabilities of the producer’s production facility. Additionally, the high cost of transportation could favor suppliers located in close proximity to our factories. If the quality of these raw materials is lower, the quality of our product may suffer. Economic and financial factors could impact our suppliers, thereby causing supply shortages. Increases in raw material costs could have a material adverse effect on our business, financial condition or results of operations. Our hedging procedures may be insufficient and our results could be materially impacted if costs of materials increase.

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of our Disclosure Controls and Procedures

A. Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

As a result of the material weakness disclosed in our Annual Report on Form 10-K, filed on May 14, 2018 in connection with stock-based compensation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures and internal controls over financial reporting were not effective as at May 31, 2018. During the quarter, we continued to work on our remediation plan, however we could not perform remediation testing as that there were no warrants granted during the period.

B. Changes in Internal Control over Financial Reporting

There were no other changes in our internal control over financial reporting during our most recent quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On January 27, 2017, a claim was filed against us by two individuals, in the Los Angeles Superior Court, seeking damages for breach of contract, breach of implied covenant of good faith and fair dealing, and promissory fraud, asserting entitlement to two million shares of our common stock in connection with an alleged oral agreement for consulting services. The Company filed a motion for summary judgement on May 30, 2018 to dismiss all claims, which motion will be heard on August 13, 2018. The case is currently set for trial on September 12, 2018 in the Los Angeles Superior Court. Although the plaintiffs are seeking two million shares of the Company’s common stock, punitive damages and attorneys’ fees, the Company is currently unable to estimate the amount or dollar range of potential loss or recovery, if any, which might result if the final determination of this matter is favorable or unfavorable. We believe that this case lacks merit and intend to continue to defend it vigorously. We have not yet determined what effect this lawsuit will have on our financial position or results of operations. 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Except as noted above, we are not presently a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

It is possible that we may expend financial and managerial resources in the defense of our intellectual property rights in the future if we believe that our rights have been violated. It is also possible that we may expend financial and managerial resources to defend against claims that our products and services infringe upon the intellectual property rights of third parties.

ITEM 1A. RISK FACTORS

We are subject to various risks and uncertainties in the course of our business. Risk factors relating to us are set forth under “Risk Factors” in our Annual Report on Form 10-K, filed on May 14, 2018. No material changes to such risk factors have occurred during the three months ended May 31, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 21, 2018, we issued 18,821 shares of our common stock upon the cashless exercise of 20,000 warrants with an exercise price of $0.80. The shares and the warrants were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. On May 31, 2018, we issued 35,797 shares of our common stock upon the vesting of 35,797 restricted stock units pursuant to the 2017 Equity Incentive Plan.

ITEM 3. defaults upon senior securities

None.

ITEM 4. mine safety disclosures

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following Exhibits, as required by Item 601 of Regulation SK, are attached or incorporated by reference, as stated below.

Exhibit Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.