Loop Industries, Inc. - Annual Report: 2019 (Form 10-K)

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

 

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended February 28, 2019

 

or

 

For the transition period from ___________ to __________

  Liquidity and capital resources

Commission File No. 000-54768

 

Loop Industries, Inc.

(Exact name of Registrant as specified in its charter)

 

Nevada		27-2094706
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	LOOP	Nasdaq Global Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

 

 

 

 

Large accelerated filer	☐	Accelerated filer		☒
Non-accelerated filer	☐	Smaller reporting company		☒
(Do not check if a smaller reporting company)		Emerging growth company		☐

Yes ☐  No ☒

 

 

 

 

 

LOOP INDUSTRIES, INC.

 

TABLE OF CONTENTS

 

		Page No.
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	17
Item 3.	Legal Proceedings	18
Item 4.	Mine Safety Disclosures	18
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 8.	Financial Statements and Supplementary Data	29
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	30
Item 9A.	Controls and Procedures	30
Item 9B.	Other Information	31
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	32
Item 11.	Executive Compensation	32
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	32
Item 13.	Certain Relationships and Related Transactions, and Director Independence	32
Item 14.	Principal Accounting Fees and Services	32
PART IV
Item 15.	Exhibits and Financial Statement Schedules	33
Item 16	Form 10-K Summary	37
	Signatures	38

 

 

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K of Loop Industries, Inc., a Nevada corporation (the “Company,” “we,” 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.” 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) our status of relationship with partners, (iii) development and protection of our intellectual property and products, (iv) industry competition, (v) our need for and ability to obtain additional funding, (vi) building our manufacturing facility, (vii) and our ability to sell our products in order to generate revenues, (viii) our proposed business model and our ability to execute thereon, (ix) 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 (x) other factors discussed in our subsequent filings with the SEC. 

 

Management has included projections and estimates in this Form 10-K, 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-K, 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.

 

 

PART I

 

As used in this Annual Report on Form 10-K, the following terms are being provided so investors can better understand our business:

 

Depolymerization refers to a chemical process of breaking down polymers into its monomers or smaller oligomers.

 

PET is an acronym for polyethylene terephthalate, which is a plastic resin and a type of polyester showing excellent tensile and impact strength, chemical resistance, clarity, process-ability and reasonable thermal stability. PET is the material which is most commonly used for plastic packaging, including plastic bottles for water, carbonated soft drinks, containers for food and other consumer products, and is usually identified by a number 1, often inside an image of a triangle, on the packaging as well as on polyester fiber for a variety of applications including textiles.

 

 

ITEM 1. BUSINESS

 

Overview

 

Loop Industries, Inc. is a technology and licensing company whose mission is to accelerate the world’s shift toward sustainable plastic and away from our dependence on fossil fuels. Loop owns patented and proprietary technology that depolymerizes no and low value waste PET plastic and polyester fiber, including plastic bottles and packaging, carpet and polyester textile of any color, transparency or condition and even ocean plastics that have been degraded by the sun and salt, to its base building blocks (monomers).  The monomers are filtered, purified and repolymerized to create virgin-quality Loop™ branded PET plastic resin and polyester fiber suitable for use in food-grade packaging to be sold to consumer goods companies to help them meet their sustainability objectives.  Through our customers and production partners, Loop is leading a global movement toward a circular economy by commercializing a leading-edge technology which will ensure plastic stays in the economy for a more sustainable future for all.

 

Industry Background

 

We believe there is an increasing demand for action to address the global plastic crisis, which has been characterized by facts provided by leading academic and not-for profit organizations. For example, the University of Georgia reports eight million metric tons of plastic waste flows into our shared oceans every year, and, according to The New Plastics Economy, by 2050 more plastic waste is expected to be present in the ocean than fish (by mass). Couple this information with the global annual market demand for PET plastic and polyester fiber at nearly $130 billion, and the current growth projections from the 2018 IHS Polymer Market Report indicating this will exceed $160 billion by 2022, and the need for governments and consumer brands to take decisive action to stem this global plastic crisis becomes readily apparent.

 

Examples of actions and trends of 2018 and early 2019 that demonstrate the significance of the plastic crisis:

 

 

 

 

 

 

 

We believe these trends indicate that the transformation from a linear to a circular plastic economy is not only necessary and inevitable, but underway. And that this transition is leading to a substantial demand for sustainable, cost-effective, marketable Loop™ PET plastic resin and polyester fiber.

 

 

Our Technology

 

The power of our technology lies in its ability to divert and recover what is currently considered plastic waste from landfills, rivers, oceans and natural areas for use as feedstock to create new, sustainable, infinitely recyclable Loop™ PET plastic resin and polyester fiber. We believe our technology can deliver a cost-effective and profitable virgin quality PET plastic resin suitable for use in food-grade packaging.

 

Our Generation I technology process yielded polyethylene terephthalate (“PTA”) and monoethylene glycol (“MEG”), two common monomers of PET plastic, through depolymerization. While monomers were of excellent purity and strong yield, we continued to challenge ourselves to drive down cost and eliminate inputs. It was during this process that we realized we could eliminate water and chlorinated solvents from the purification process, reduce the number of reagents from five to two and reduce the number of purification steps from 12 to four, if we shifted from the production of PTA to the production of dimethyl terephthalate (“DMT”), another proven monomer of PET plastic that is far simpler to purify. Since June 2018, when we transitioned to our Generation II technology and our newly built industrial pilot plant, we continue to see consistently high monomer yields, excellent purity and improved conversion costs

 

This shift, from producing the monomer PTA to the monomer DMT was a pivotal moment for Loop. The Generation II technology is more cost-effective, easier to commercialize, more economical for our customers and requires less energy and fewer resource inputs than conventional PET production processes. We believe it to be one of the most environmentally sustainable methods for producing virgin quality food-grade PET plastic in the world.

 

To protect our technology, and in addition to the patents we hold for our Generation I (or “GEN I”) technology, we have patents pending for our Generation II (or “GEN II”) technology in various jurisdictions around the world. On April 9, 2019, the GEN II U.S. patent was formally approved and issued. Freedom to Operate searches have also been conducted that indicate no conflicts with any of our existing patents or applications and we adhere to rigorous internal data and confidentiality controls.

 

Commercialization Progress

 

During the year ended February 28, 2019, we continued executing our corporate strategy where Loop focused on developing three major streams of revenue. These revenue streams are expected to be from the sale of Loop™ PET plastic resin and polyester fiber to customers from our joint venture with Indorama Ventures Limited (“IVL”), license fees from our Waste-to-Resin (“WtR™”) facilities and development fees from the sale and construction of WtR™ facilities around the world.

 

In September 2018, in connection with the first of these streams, we announced a joint venture with IVL to manufacture and commercialize sustainable Loop™ branded PET plastic resin and polyester fiber to meet the growing global demand from beverage and consumer packaged goods companies. The joint venture agreement details the establishment of a 20,700 metric tonnes facility in the southeastern United States. As the 20,700 metric tonnes production capacity is fully subscribed by customers. which include Danone, PepsiCo, and Coca-Cola’s Cross Enterprise Procurement Group, the joint venture is evaluating increasing the capacity of the facility. The facility is expected to commence production in the second half of the calendar year 2020.

 

Also, in the 2019 fiscal year, we secured key partners such as Thyssenkrupp Industrial Solutions(“tkIS”), built our brand and continued to secure the feedstock needed to support our commercial success.

 

Production

 

There are two principal modes planned for commercializing production of Loop™ branded PET plastic resin and polyester fiber. These include the retrofit of existing PET production facilities and the development of greenfield integrated WtR™ facilities around the world, which are described here.

 

In September of 2018, we announced a joint venture with IVL to manufacture and commercialize sustainable Loop™ branded PET plastic resin and polyester fiber to meet the growing global demand from beverage and consumer packaged goods companies. The 50/50 joint venture has an exclusive world-wide license to use our technology to retrofit existing IVL facilities, so each can produce 100% sustainable Loop™ PET plastic resin and polyester fiber. The first facility, in Spartanburg, South Carolina, is anticipated to begin commercial production in the second half of the calendar year 2020 and is expected to produce 20,700 metric tonnes of sustainable Loop™ PET plastic resin and is fully subscribed by leading global consumer brands.

 

 

As part of the joint venture agreement, the Company anticipates contributing equity to meet its financial obligations under the joint venture agreement with IVL. As at May 2, 2019, the Company has contributed $500,000 to the joint venture. Also, due to increasing market demand from existing and potential customers, and the positive work on the preliminary engineering conducted at the facility, the joint venture is evaluating options to increase the capacity at the plant to 40,000 metric tonnes and the Company anticipates a decision to be made by the second quarter of the fiscal year 2020. If the joint venture decides to expand production capacity, this would increase the Company’s required equity contribution to the joint venture. The Company expects that the additional capacity will be sold to existing and new customers that are currently under negotiation.

 

We are also in the process of identifying additional facilities suitable for retrofit. The partnership with IVL, which we believe to be one of the world’s largest global integrated PET plastic resin manufacturer, helps bring Loop™ PET sustainable plastic resin and polyester fiber to market more quickly and further emboldens the confidence of our customers to sign multi-year supply agreements and term sheets with us.

 

To drive our WtR™ solution, which is a key pillar of our commercialization blueprint, December 2018 saw us enter into a Global Alliance Agreement with Thyssenkrupp Industrial Solutions (“tkIS”) aimed at transforming the future of sustainable PET plastic resin manufacturing by combining our breakthrough depolymerization technology with tkIS’s PET Melt-To-Resin® technology. As one of the world’s leading PET and polyester engineering companies, we believe tkIS is perfectly positioned to help us commercialize our WtR™ solution—a fully integrated and reimagined manufacturing facility for sustainable Loop™ PET plastic resin and polyester fiber.

 

We believe the WtR™ solution will result in a highly scalable recurring revenue licensing model to supply the global demand for 100% sustainable Loop™ PET plastic resin and polyester fiber, allowing us to rapidly penetrate and transform the plastic market and fully capitalize on our disruptive potential to be the leader in the circular economy for PET plastic. This fundamentally changes where and how PET plastic resin production occurs—no longer does PET plastic resin production need to be bound to fossil fuels and fossil fuel infrastructure. WtR™ facilities could be located near large urban centers where feedstock is located, and transportation and logistics costs could be significantly reduced as the distance between feedstock, manufacturing and customer use is collapsed.

 

We believe the proposition for those seeking a turnkey solution to manufacture Loop™ PET plastic resin and polyester fiber, such as chemical companies, waste managers, existing recyclers and even consumer good companies around the world is compelling. We further believe this will create a recurring licensing revenue stream for us while expanding the capacity of Loop™ PET plastic resin and polyester fiber in the marketplace to meet the substantial demand from consumer goods companies.

 

 

 

Supply Agreements with Global Consumer Brands

 

Consumer brands are seeking a solution to their plastic challenge and they are taking bold action. In the past year we have seen major brands make significant commitments to close the loop on their plastic packaging in two ways, by transitioning their packaging to recyclable materials and by incorporating more recycled content into their packaging. We believe Loop™ PET plastic resin and polyester fiber provides the ideal solution for these brands because Loop™ PET plastic resin and polyester fiber is recyclable and contains 100% recycled PET and polyester fiber content with virgin quality suitable for use in food-grade packaging. That means consumer packaged goods companies can now market packaging made from a 100% Loop™ branded PET plastic resin and polyester fiber.

 

As a result, in the 2019 Fiscal year, we delivered a significant number of announcements with some of the world’s leading brands, including:

 

 

 

 

 

 

 

 

 

Loop believes that due to the commitments by large global consumer brands to incorporate more recycled content into their product packaging, the regulatory requirements for minimum recycled content in packaging imposed by governments, the virgin-like quality of Loop™ branded PET and the marketability of Loop™ PET to extoll the sustainability credentials of consumer brands that incorporate Loop™ PET, it will sell its Loop™ branded PET at a premium price relative to virgin PET.

 

 

Turning Waste into Feedstock

 

To us, waste PET plastic and polyester fiber is feedstock, the materials introduced into our Generation II depolymerization technology to yield PET monomers. Our technology can use plastic bottles and packaging of any color, transparency or condition, carpet, clothing and other polyester textiles that may contain colors, dyes or additives, and even ocean plastics that have been degraded by sun and salt. This is yet another distinct advantage of Loop™ PET over mechanically recycled PET, our ability to use materials that nearly all other recyclers do not use. This also means we are creating a new market for materials that have persistently been leaking out of the waste management system and into our shared rivers, oceans and natural areas.

 

We have a dedicated team studying the availability of feedstock to ensure each planned facility can operate continuously. The team has already identified the sources required for our first joint venture facility with IVL and is now focused on signing supply agreements to secure this feedstock for the long term.

 

The team is also conducting a macro-to-micro analysis in the United States, Canada, European Union and Asia to help us evaluate the size and location of our next facilities. The approach includes a fulsome inventory of PET materials introduced into a region, the materials collected (or recycled) in the region and the material loss, or the difference between the material introduced and the material collected. This allows us to identify not only the material traditionally available for recycling, but how material can be effectively diverted from landfill, rivers, oceans and natural areas by providing a new outlet for what was formerly considered waste.

 

Intellectual Property

 

We rely on a combination of patent and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, which are primarily our patents, brand names, product designs and marks.

 

We have two patent groups, referred to as GEN I technology and the GEN II technology, with claims relating to our proprietary technology for depolymerization of PET.

 

 

 

Government Regulation and Approvals

 

As we seek to further develop and commercialize our business, we will be subject to extensive and frequently developing federal, state, provincial and local laws and regulations. Compliance with current and future regulations could increase our operational costs.

 

Our operations require various governmental permits and approvals. We are in the process of obtaining all necessary permits and approvals for the operation of our business; however, any of these permits or approvals may be subject to denial, revocation or modification under various circumstances. Failure to obtain or comply with the conditions of permits and approvals or to have the necessary approvals in place may adversely affect our operations and may subject us to penalties.

 

The use of mechanically recycled PET for food grade applications in India is not permitted, and in Japan and China it is highly inadvisable for a variety of reasons including the perception of contamination from mechanically recycled sources. We believe that means that Loop™ PET plastic resin and polyester fiber has a distinct advantage in these markets, which represent nearly three billion people or approximately 38% of the global population. Since our product is not mechanically recycled PET, we expect that demand from PET manufacturers and global consumer goods companies in these regions for 100% Loop™ branded PET plastic resin and polyester fiber will be a significant part of our strategy going forward.

 

 

 

Employees

 

As at May 2, 2019, we have 34 employees, 33 of which are located in Terrebonne, Quebec, Canada and one located in Toronto, Ontario, Canada. We have no collective bargaining agreements with our employees, and we have not experienced any work stoppages. We consider our relations with our employees to be good.

 

Corporate History

 

We were 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, we completed a reverse acquisition of Loop Holdings, Inc. (“Loop Holdings”) whereby we acquired all of Loop Holdings’ issued and outstanding shares of common stock in a share exchange for approximately 78.1% of the capital stock of our Company at the time. The depolymerization business of Loop Holdings became our sole operating business. On June 22, 2015, our 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, we changed our name to Loop Industries, Inc.

 

Loop Holdings was originally incorporated in Nevada on October 23, 2014. The depolymerization technology underlying our business was originally developed by Hatem Essaddam who sold the technology and related intellectual property rights to Loop Holdings in October 2014, pursuant to an Intellectual Property Assignment Agreement dated October 27, 2014, by and among Hatem Essaddam, Loop Holdings, and Daniel Solomita. The intellectual property acquired pursuant to such Intellectual Property Agreement formed the basis for establishing the GEN I technology that was initially used by the Company. The GEN I technology has now been superseded by the development of the Company’s GEN II technology, which forms the basis for our commercialization into the future. We do not intend to commercialize our GEN I technology.

 

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 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. entered into a purchase and sale agreement to transfer to Loop Canada Inc., all assets and liabilities it held pertaining to our 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 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, our 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, our 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.”

 

Corporate Information

 

Our principal executive offices are located at 480 Fernand-Poitras Street, Terrebonne, Quebec, Canada J6Y 1Y4. Our telephone number is (450) 951-8555. The information contained on, or that can be accessed through, our website is not a part of this Annual Report on Form 10-K.

 

 

Available Information

 

Our website is located at www.loopindustries.com, and our investor relations website is located at https://www.loopindustries.com/en/investors/sec. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available, free of charge, on our investor relations website as soon as reasonably practicable after we file such material electronically with or furnish it to the Securities and Exchange Commission, or the SEC. The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the risks described below together with all of the other information included in this Form 10-K before making an investment decision with regard to our securities. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.

 

 

RISKS RELATING TO OUR COMPANY

 

We have incurred net losses since inception. We expect to continue to incur losses for the foreseeable future and may never achieve or maintain profitability. We have never generated revenue and may never be profitable.

 

Since our inception in 2010, we have incurred net losses. Our net loss for the year ended February 28, 2019 was 

$17.5 million. We have four customer agreements signed and we have earned no revenues to date. We have financed our operations primarily through sales of common stock and incurrence of debt and have devoted substantial efforts to research and development, as well as building our team. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. Although we believe that our business plan has significant profit potential, we may not attain profitable operations and management may not succeed in realizing our business objectives. Our ability to generate revenue depends on our ability to successfully complete the development of our products, obtain the regulatory approvals necessary to commercialize our products and attract additional customers. We expect to incur operating losses in future periods. These losses will occur as we do not have any revenues to offset the expenses associated with our business operations. We may not generate revenues from product sales for the next several years, if ever. If we are not able to develop our business as anticipated, we may not be able to generate revenues or achieve profitability. We cannot guarantee that we will ever be successful in generating revenues in the future. If we are unable to generate revenues, we will not be able to earn profits or continue operations.

 

Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

 

Our business was started in October 2014 with the incorporation of Loop Holdings, Inc. and 8198381 Canada Inc., and the acquisition of intellectual property from Hatem Essaddam in October 2014. Our operations to date have been primarily limited to organizing and staffing our company, business planning, raising capital and developing our technology. We have not yet demonstrated the ability to manufacture a commercial-scale product or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a research focus to a company that is also capable of supporting commercial activities. We may not be successful in such a transition.

 

There is no history upon which to base any assumption as to the likelihood that we will prove successful, and we can provide investors with no assurance that we will generate any operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will almost certainly fail.

 

 

We may not be able to execute our business plan or stay in business without additional funding.

 

Our ability to generate future operating revenues depends in part on whether we can obtain the financing necessary to implement our business plan. We will likely require additional financing through the issuance of debt and/or equity in order to establish profitable operations, and such financing may not be forthcoming. If we are unable to attract investors to invest in our business, we may not be able to acquire additional financing through debt or equity markets. Even if additional financing is available, it may not be available on terms favorable to us. Our failure to secure additional financing on favorable terms when it becomes required would have an adverse effect on our ability to remain in business.

 

Our technology may not be successful in developing commercial products.

 

We and our potential future collaborators may spend many years and dedicate significant financial and other resources developing our technology that may never be successfully commercialized. Our technology may never become successfully commercialized for any of the following reasons:

 

 

If any of these things were to occur, it could have a material adverse effect on our business and our results of operations.

 

If we are unable to successfully scale our manufacturing processes, we may not meet customer demand.

 

To be successful, we will have to successfully scale our manufacturing processes while maintaining high product quality and reliability. If we cannot maintain high product quality on a large scale, our business will be adversely affected. We may encounter difficulties in scaling up production, including problems with the supply of key components. Even if we are successful in developing our manufacturing capability, we do not know whether we will do so in time to satisfy the requirements of our customers. The current manufacturing facility is a pilot plant with limited production capacity. In order to fully implement our business plan, we will need to move the operations to a larger facility, develop strategic partnerships or find other means to produce greater volumes of finished product.

 

Decreases in our ability to develop or apply new technology and know-how may affect our competitiveness.

 

Our success depends partially on our ability to improve production processes and services. We must also introduce new products and services to meet changing customer needs. If we are unable to implement better production processes or to develop new products through research and development or licensing of new technology, we may not be able to remain competitive with other manufacturers. As a result, our business, financial condition or results of operations could be adversely affected.

 

Disruption at, damage to or destruction of our pilot plant or facilities could impede our ability to continue innovating and refining our technological process, which would harm our business, financial condition and operating results.

 

Our research and development activities are performed from a single location in Terrebonne, Quebec. Our continued innovation activities rely on an uninterrupted and fully functioning pilot plant. Interruptions in operations at this location could result in our inability to provide the most efficient and effective technological solution to our customers. A number of factors could cause interruptions, including, but not limited to, equipment malfunctions or failures, technology malfunctions, work stoppages or slow-downs, damage to or destruction of the facility or regional power shortages. As our equipment ages, it will need to be replaced. Any disruption that impedes our ability to optimize our process in a timely manner could reduce our revenues and materially harm our business.

 

 

 

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. If our cost to manufacture recycled PET is not competitive with virgin PET or if the price of oil reduces significantly, it may adversely impact our ability to penetrate the market or be profitable.

 

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.

 

We are vulnerable to fluctuations in the supply and price of raw materials.

 

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.

 

The loss of the services of Mr. Daniel Solomita, our President and Chief Executive Officer, Chairman of the Board of Directors, and majority stockholder, or our failure to timely identify and retain competent personnel could negatively impact our ability to develop our business.

 

The development of our business and the marketing of our prospective products will continue to place a significant strain on our limited personnel, management, and other resources. Our future success depends upon the continued services of our executive officers who are developing our business, and on our ability to identify and retain competent consultants and employees with the skills required to execute our business objectives. The loss of the services of Mr. Daniel Solomita or our failure to timely identify and retain competent personnel could negatively impact our ability to develop our business which could adversely affect our financial results and impair our growth.

 

Our pilot plant continues to be modernized and we have not yet fully implemented all policies, procedures, and controls for the operation of a chemical manufacturing facility as required under various federal, provincial and local regulations and codes.

 

We are subject to health and safety as well as environmental, zoning and any other regulatory requirements to operate our pilot plant, and as our business evolves, we, directly or indirectly through our partners or other related parties, may be subject to additional government regulations. Any failure to comply with ongoing regulatory requirements, as well as discovery of previously unknown problems, may result in, among other things, costly regulatory inspections, fines or remediation plans. If regulatory issues arise, the value of our business and our operating results may be adversely affected.

 

Additionally, applicable regulations may change, and additional government regulations may be enacted that could impact our business. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, are slow or unable to adopt new requirements or policies, or effect changes to existing requirements, our business may be adversely affected.

 

 

Our failure to protect our intellectual property and proprietary technology may significantly impair our competitive advantage.

 

Our success and ability to compete depends in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection, confidentiality, nondisclosure and nonuse agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and similar proprietary rights.

 

We may face costly intellectual property infringement claims, the result of which would decrease the amount of cash available to operate and complete our business plan.

 

We anticipate that, from time to time, we will receive communications from third parties asserting that we are infringing certain patents and other intellectual property rights of others or seeking indemnification against alleged infringement. If anticipated claims arise, we will evaluate their merits. Any claims of infringement brought forth by third parties could result in protracted and costly litigation, damages for infringement, and the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Litigation, which could result in substantial costs to us and diversion of our resources, may be necessary to enforce our patents or other intellectual property rights or to defend us against claimed infringement of the rights of others. Any intellectual property litigation and the failure to obtain necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations. 

 

We rely in part on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could harm our business.

 

We rely on trade secrets to protect some of our technology and proprietary information, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. Litigating a claim that a third party had illegally obtained and used our trade secrets would be expensive and time consuming, and the outcome would be unpredictable. Moreover, if our competitors independently develop similar knowledge, methods and know-how, it will be difficult for us to enforce our rights and our business could be harmed.

 

We have identified material weaknesses in our internal control over financial reporting and if we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and the price of our common stock.

 

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to include an internal control report with our Annual Report on Form 10-K. This report must include management’s assessment of the effectiveness of our internal control over financial reporting as at the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. 

 

We have identified material weaknesses in our internal controls over financial reporting in connection with the audits of Fiscal 2017 and Fiscal 2018. As at February 28, 2017, we identified a material weakness relating primarily to the lack of formalized procedures around financial reporting. In the third quarter of Fiscal 2018, we identified a material weakness relating to the accounting for stock-based compensation, which contributed to the restatement of the previously issued 2017 annual consolidated financial statements and of our first and second quarter consolidated financial statements for fiscal 2018.

 

We have taken steps to remediate the issues that contributed to the material weaknesses and while we believe that these efforts have improved our internal control over financial reporting, see Item 9A. “Controls and Procedures,” there can be no assurance that the adjustments will ensure that we identify or avoid a material weakness in the future. Further, we may not be able to remediate a future material weakness in a timely manner and our management may be required to devote significant time and expense to remediate any such material weakness.

 

 

The process of designing and implementing internal control over financial reporting required to comply with Section 404 of the Sarbanes-Oxley Act is time consuming, costly and complicated. If during the evaluation and testing process, we identify one or more other material weaknesses in our internal control over financial reporting or determine that existing material weaknesses have not been remediated, our management will be unable to assert that our internal control over financial reporting is effective. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates could impact our results of operations.

 

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.

 

We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business.

 

We cannot predict with certainty the cost of defense, of prosecution or of the ultimate outcome of litigation and other proceedings filed by or against us, including penalties or other civil or criminal sanctions, or remedies or damage awards, and adverse results in any litigation and other proceedings may materially harm our business. Litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, international trade, commercial arrangements, product liability, environmental, health and safety, joint venture agreements, labor and employment or other harms resulting from the actions of individuals or entities outside of our control. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that are subject to third-party patents or other third-party intellectual property rights.

 

 

RISKS ASSOCIATED WITH OUR SECURITIES

 

The issuance of common stock upon conversion of our November 2018 Convertible Notes and our January 2019 Convertible Notes, and specifically the floating conversion price feature of our November 2018 Convertible Notes, could require us to issue a substantially greater number of shares, which may adversely affect the market price of our common stock and cause dilution to our existing stockholders.

 

Our November 2018 Convertible Notes and our January 2019 Convertible Notes are convertible into shares of our common stock under certain circumstances as described under “Recent Developments” herein. Upon conversion of the November 2018 Convertible Notes and the January 2019 Convertible Notes, in accordance with their terms, we will be required to deliver shares of our common stock to their holders. Our stockholders will experience dilution in their ownership percentage of common stock upon our issuance of common stock in connection with the conversion of the November 2018 Convertible Notes and the January 2019 Convertible Notes. Because the number of shares we will be required to issue upon conversion of the November 2018 Convertible Notes is subject to a floating conversion price that is not subject to a floor, the number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our common stock, which decrease could cause substantial dilution to our existing stockholders. Any such issuances of common stock will result in immediate dilution to the interests of other stockholders. Further, any sales in the public market of any shares of common stock issued upon conversion or hedging or arbitrage trading activity that develops due to the potential conversion of the November 2018 Convertible Notes or of the January 2019 Convertible Notes could adversely affect prevailing market prices of our common stock.

 

Raising additional funds may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies.

 

If we raise additional funds through equity offerings or offerings of equity-linked securities, including warrants or convertible debt securities, our existing stockholders may experience significant dilution, and the terms of such securities may include liquidation or other preferences that may adversely affect the rights of our stockholders. Debt financings, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities, including covenants limiting or restricting our ability to incur additional debt, dispose of assets or incur capital expenditures. We may also incur ongoing interest expense and be required to grant a security interest in our assets in connection with any debt issuance. If we raise additional funds through strategic partnerships or licensing agreements with third parties, we may have to relinquish valuable rights to our technologies or grant licenses on terms that are not favorable to us.

 

Trading volume in our stock can fluctuate and an active trading market for our common stock may not be available on a consistent basis to provide stockholders with adequate liquidity. Our stock price may be volatile, and our stockholders could incur significant investment losses.

 

The trading price for our common stock will be affected by a number of factors, including:

 

 

 

As a result of these factors, our stockholders may not be able to resell their shares at, or above, their purchase price. In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. Any negative change in the public’s perception of the prospects of companies in our industry could depress our stock price regardless of our results of operations. These factors may have a material adverse effect on the market price and liquidity of our common stock and affect our ability to obtain required financing.

 

Our President and Chief Executive Officer and Chairman of the Board of Directors, Mr. Daniel Solomita, beneficially owns a majority of our capital stock, and accordingly, has control over stockholder matters, our business and management.

 

As at May 2, 2019, Mr. Daniel Solomita, our President and Chief Executive Officer, Chairman of the Board of Directors, and majority stockholder, beneficially owns 18,600,000 shares of common stock, or 53.3% of our issued and outstanding shares of common stock and also holds one share of Series A Preferred Stock. The one share of Series A Preferred Stock issued to Mr. Solomita holds a majority of the total voting power so long as Mr. Solomita holds not less than 7.5% of the issued and outstanding shares of our common stock, assuring that Mr. Solomita retains control even if his presently-held 53.3% of the issued and outstanding shares of our common stock is diluted to a level below a majority.

 

Additionally, the one share of Series A Preferred Stock issued to Mr. Solomita contains protective provisions, which precludes us from taking certain actions without Mr. Solomita’s (or that of any person to whom the one share of Series A Preferred Stock is transferred) approval. More specifically, so long as any shares of Series A Preferred Stock are outstanding, we are not permitted to take certain actions without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a separate class, including for example and without limitation, amending our articles of incorporation, changing or modifying the rights of the Series A Preferred Stock, including increasing or decreasing the number of authorized shares of Series A Preferred Stock, increasing or decreasing the size of the board of directors or remove the director appointed by the holders of our Series A Preferred Stock and declaring or paying any dividend or other distribution.

 

Moreover, because of the significant ownership position held by our insiders, new investors may not be able to effect a change in our business or management, and therefore, stockholders would have no recourse as a result of decisions made by management.

 

In addition, sales of significant amounts of shares held by Mr. Solomita, or the prospect of these sales, could adversely affect the market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

 

Anti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of our company.

 

Though not now, we may in the future become subject to Nevada’s control share law. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and it does business in Nevada or through an affiliated corporation. The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the company in the election of directors: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more. The ability to exercise such voting power may be direct or indirect, as well as individual or in association with others.

 

The effect of the control share law is that the acquiring person, and those acting in association with it, obtains only such voting rights in the control shares as are conferred by a resolution of the stockholders of the Company, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to strip voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law.

 

 

If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor of approval of voting rights, is entitled to demand fair value for such stockholder’s shares.

 

In addition to the control share law, Nevada has a business combination law which prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after the “interested stockholder” first becomes an “interested stockholder,” unless the company’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the company, or (ii) an affiliate or associate of the company and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the company. The definition of the term “combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the company’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the company and its other stockholders.

 

The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of us from doing so if it cannot obtain the approval of our board of directors.  

 

Because we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their shares unless they sell them.

 

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. Stockholders may not be able to sell shares when desired. Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.

 

The recently passed comprehensive tax reform bill could adversely affect our business and financial results.

 

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (“TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a "worldwide" system of taxation to a territorial system. The impact of enactment of U.S. tax reform was recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Treasury Department on several provisions including the computation of the transition tax. We continue to examine the impact this tax reform legislation may have on our business and we urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES

 

On January 26, 2018, we completed the purchase of the land and building housing our pilot plant and corporate offices located at 480 Fernand-Poitras, Terrebonne, Québec, Canada J6Y 1Y4. The 22,042 square foot facility includes 4,080 square feet for our executive offices and 17,962 square feet for our innovation and operational activities. We believe that our existing facilities are adequate for our current needs.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

On January 27, 2017, two individuals (“Plaintiffs”), filed a claim against us in the Los Angeles Superior Court (“Court”), seeking damages for breach of implied covenant of good faith and fair dealing, breach of contract, and promissory fraud, asserting entitlement to shares of our common stock. On February 25, 2019, we and the Plaintiffs entered into a settlement agreement and release (“Settlement Agreement”), which sets forth the parties’ agreement in principle for settlement. Through the Settlement Agreement, we, Plaintiffs and certain other parties to the Settlement Agreement agreed to mutual releases of any and all claims.

 

Pursuant to the terms of the Settlement Agreement, without agreeing that any of the Plaintiffs’ claims have merit, we agreed to issue to the Plaintiffs 150,000 shares of our common stock (“Plaintiff Common Shares”) and 500,000 warrants exercisable for shares of our common stock (“Plaintiff Warrants”). The Plaintiff Common Shares will be restricted upon issuance, but within 180 days following the date of the Settlement Agreement, we have agreed to file and use its reasonable best efforts to have declared effective a registration statement to register the Plaintiff Common Shares and the shares of the Company’s common stock underlying the Plaintiff Warrants. We also agreed to maintain such registration statement for 2 years from the date of effectiveness unless the Plaintiffs sell or otherwise transfer the shares covered by such registration statement prior to the two-year anniversary. 300,000 of the Plaintiff Warrants are exercisable for shares of our common stock at an exercise price of $12.00 per share for a period of 24 months following the date of the Settlement Agreement. The remaining 200,000 Plaintiff Warrants are exercisable for shares of our common stock at an exercise price of $11.00 per share for a period of 24 months, but in the event the Company’s 5-day average trading price during any period in the first 18 months following the date of the Settlement Agreement is above $11 per share, then the exercise term of such warrants shall automatically be reduced to 18 months instead of 24 months.

 

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 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information required by this item is incorporated by reference from the section captioned “Executive Officers” contained in our proxy statement for the 2019 annual meeting of stockholders, to be filed with the Commission pursuant to Regulation 14A, not later than 120 days after February 28, 2019.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information for Common Stock

 

Our common stock is currently traded on the Nasdaq Global Market under the symbol “LOOP.” From April 10, 2017 to November 19, 2017, our 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, our 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.”

 

Holders

 

As at May 2, 2019, there were 34,875,032 shares of common stock issued and outstanding (excluding shares of common stock issuable upon conversion or conversion into shares of common stock of all of our currently outstanding Series A Preferred Stock and exercise of our warrants) held by approximately 78 stockholders of record. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

 

Dividends

 

We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future. There are no restrictions in our Articles of Incorporation or By-laws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

 

 

 

Recent Sales of Unregistered Securities and Use of Proceeds

 

During the year ended February 28, 2019, we issued:

 

 

 

Purchases of Equity Securities by the Registrant and Affiliated Purchasers

 

We did not purchase any of our shares of common stock or other securities during the year ended February 28, 2019.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Pursuant to SEC Release No. 33-8876, we are permitted to use the scaled disclosure requirements applicable to a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, and therefore, we are not required to provide the information called for by this Item.

 

 

ITEM 7. 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 “Risk Factors” discussed elsewhere in this Report. Please refer to the Cautionary Note Regarding Forward-Looking Statements on page 4.

 

Introduction

 

Loop Industries, Inc. 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. Loop’s patented and proprietary technology decouples plastic from fossil fuels by depolymerizing waste polyester plastic and fiber to its base building blocks (monomers). The resulting monomers are then polymerized into virgin-quality PET plastic that meets FDA requirements for use in food-grade plastic packaging, such as water and soda bottles, and polyester fiber for textile applications.

 

Loop’s technology allows for low value and no value waste PET plastic and polyester fibers such as carpets and clothing to be upcycled into high value PET/polyester packaging for consumer goods companies. The Company’s zero energy depolymerization technology specifically targets PET/polyester, allowing for the removal of all waste impurities, such as colors/dyes, labels and non-PET plastic waste. The Company believes this provides it with an innovative technology to help achieve our mission.

 

Loop’s 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.

 

Plan of Operation

 

During the year ended February 28, 2019, we continued executing our corporate strategy where Loop focused on developing three major streams of revenue. These revenue streams are expected to be from the sale of Loop™ PET plastic resin and polyester fiber to customers from our joint venture with Indorama Ventures Limited (“IVL”), license fees from our Waste-to-Resin (“WtR™”) facilities and development fees from the sale and construction of WtR™ facilities around the world. In September of 2018, in connection with the first of these streams, we announced a joint venture with IVL to manufacture and commercialize sustainable Loop™ branded PET plastic resin and polyester fiber to meet the growing global demand from beverage and consumer packaged goods companies. The 50/50 joint venture has an exclusive world-wide license to use our technology to retrofit existing IVL facilities, so each can produce 100% sustainable Loop™ PET plastic resin and polyester fiber. The first facility, in Spartanburg, South Carolina, is anticipated to begin commercial production in the second half of the calendar year 2020 and is expected to produce 20,700 metric tonnes of sustainable Loop™ PET plastic resin and is fully subscribed by leading global consumer brands. As part of the joint venture agreement to establish the facility to produce 20,700 metric tonnes, the Company is committed to contribute its equity share of the costs under the joint venture agreement to construct the facility. As at May 2, 2019, the Company has contributed $500,000 to the joint venture. Also, due to increasing market demand from existing and potential customers, as well as the positive work on the preliminary engineering work conducted at the facility, the joint venture is evaluating options to increase the capacity at the plant to 40,000 metric tonnes and anticipates a decision to be made by the second quarter of the fiscal year 2020. This would entail increasing the Company’s equity contribution.

 

The Company, through its wholly-owned subsidiary Loop Innovations, LLC, a Delaware limited liability company, entered into a Joint Venture Agreement (the “Agreement”), as stated above, with Indorama Ventures Holdings LP, USA, an indirect subsidiary of Indorama Ventures Public Company Limited, to manufacture and commercialize sustainable polyester resin to meet the growing global demand from beverage and consumer packaged goods companies. Each company will have 50/50 equity interest in Loop Indorama Technologies, LLC (“ILT”), which was specifically formed to operate and execute the joint venture.

 

 

This partnership brings together Indorama Venture’s manufacturing footprint and Loop’s proprietary science and technology to become a supplier in the ‘circular’ economy for 100% sustainable and recycled PET resin and polyester fiber. 

The Company is contributing to the 50/50 joint venture an exclusive world-wide royalty-free license to use its proprietary technology to produce 100% sustainably produced PET resin and polyester fiber.

 

The Company expects to record its first commercial revenues from the joint venture in the second half of the calendar year 2020.

 

We believe the proposition for those seeking a turnkey solution to manufacture Loop™ PET plastic resin and polyester fiber, such as chemical companies, waste managers, existing recyclers and consumer good companies around the world is compelling. We further believe this will create a recurring licensing revenue stream for us while expanding the capacity of Loop™ PET plastic resin and polyester fiber in the marketplace to meet the substantial demand from consumer goods companies.

 

Consumer brands are seeking a solution to their plastic challenge, and they are taking bold action. In the past year we have seen major brands make significant commitments to close the loop on their plastic packaging in two ways, by transitioning their packaging to recyclable materials and by incorporating more recycled content into their packaging. We believe Loop™ PET plastic resin and polyester fiber provides the ideal solution for these brands because Loop™ PET plastic resin and polyester fiber contains 100% recycled PET and polyester fiber content. The Loop™ PET plastic resin and polyester fiber is virgin quality suitable for use in food-grade packaging. That means consumer packaged goods companies can now market packaging made from a 100% Loop™ branded PET plastic resin and polyester fiber. As a result, in fiscal 2019 we delivered a significant number of announcements regarding our partnership / engagement with some of the world’s leading brands.

 

We plan to continue to allocate available capital to strengthen our intellectual property portfolio, build a core competency in managing strategic relationships and continue enhancing our Loop brand value. Our research and development innovation hub in Terrebonne, Quebec, Canada will continue optimizing our current technology as well as innovate into new areas of sustainability. We are investing in building a strong management team to integrate best in class processes and practices while maintaining our entrepreneurial culture.

 

Results of Operations

 

The following table summarizes our operating results for the three-month periods ended February 28, 2019 and 2018, in U.S. Dollars.

 

	Three Months Ended February 28,
	2019	2018	Change
Revenues	$-	$-	$-
Operating expenses
Research and development
Stock based compensation	250,251	479,816	(229,565)
Other research and development	273,815	873,199	(559,384)
Total research and development	524,066	1,353,015	(828,949)
General and administrative
Stock-based compensation	575,240	743,580	(168,340)
Legal settlement	4,041,627	-	4,041,627
Other general and administrative	1,514,203	1,425,749	88,454
Total general and administrative	6,131,070	2,169,329	3,961,741
Depreciation and amortization	136,285	86,160	50,125
Impairment of intangible assets	298,694	-	298,694
Interest and other finance costs	425,964	5,125	420,839
Foreign exchange loss (gain)	38,632	21,042	17,590
Total operating expenses	7,554,711	3,634,671	3,920,040
Net loss	$(7,554,711)	$(3,634,671)	$(3,920,040)

 

 

Fourth Quarter Ended February 28, 2019

 

The net loss for the three-month period ended February 28, 2019 increased $3.9 million to $7.5 million, as compared to the net loss for the three-month period ended February 28, 2018 which was $3.6 million.  The increase is primarily due to increased general and administrative expenses of $4.0 million, an increase in depreciation and amortization and impairment of intangible assets of $0.3 million, an increase in interest and other finance costs of $0.4 million, offset by lower research and development expenses of $0.8 million.

 

Research and development expenses for the three-month period ended February 28, 2019 amounted to $0.5 million compared to $1.4 million for the three-month period ended February 28, 2018, representing a decrease of $0.8 million, or $0.6 million excluding stock-based compensation. The decrease of $0.6 million was primarily attributable to lower employee related expenses of $0.1 million, lower professional fees of $0.2 million and by lower spending for purchases and consumables of $0.3 million. The decrease in non-cash stock-based compensation expense of $0.2 million is mainly attributable to the termination of an individual whose vesting of stock options ceased upon termination.

 

General and administrative expenses for the three-month period ended February 28, 2019 amounted to $6.1 million compared to $2.2 million for the three-month period ended February 28, 2018, representing an increase of $4.0 million, or $0.1 million excluding stock-based compensation and the legal settlement. The increase of $4.0 million was primarily due to the legal settlement expense which amounted to $4.0 million compared to nil for the three-month period ended February 28, 2018. Other variances were attributable to higher employee related expenses of $0.4 million associated with an increased number of employees, offset by lower legal, accounting and other professional fees of $0.1 million and by lower other general operating expenses of $0.2 million. Stock-based compensation expense for the three-month period ended February 28, 2019 amounted to $0.6 million compared to $0.8 million for the three-month period ended February 28, 2018, representing an increase of $0.2 million. The decrease was mainly attributable the timing of certain stock awards provided to executives.

 

Depreciation and amortization for the three-month period ended February 28, 2019 totaled $0.14 million compared to $0.09 million for the three-month period ended February 28, 2018, representing an increase of $0.05 million. The increase is mainly attributable to an increase in the amount of fixed assets held at the Company’s pilot plant and corporate offices. Impairment of intangible assets for the three-month period ended February 28, 2019 totaled $0.3 million compared to nil for the three-month period ended February 28, 2018, representing an increase of $0.3 million. The increase is entirely attributable to the write-off of the remaining intangible asset balance of the GEN I technology of $0.3 million.

 

Interest and other finance costs for the year three-month period ended February 28, 2019 totaled $0.4 million compared to a negligible amount for the three-month period ended February 28, 2018, representing an increase of $0.4 million. The increase is mainly attributable to an increase in interest expense relating to the convertible notes issued during the year in the amount of $0.1 million, an increase in accretion expense also relating to the convertible notes issued during the year in the amount of $0.2 million, an increase in the amortization of deferred financing costs also related to the convertible notes issued during the year in the amount of $0.05 million and an increase in the revaluation expense of the November 2018 Warrants in the amount of $0.07 million.

 

 

The following table summarizes our operating results for the years ended February 28, 2019 and 2018, in U.S. Dollars.

 

	Years Ended February 28,
	2019	2018	$ Change
Revenues	$-	$-	$-
Operating expenses
Research and development
Stock-based compensation	1,160,254	3,601,336	(2,441,082)
Other research and development	2,288,293	3,093,442	(805,149)
Total research and development	3,448,547	6,694,778	(3,246,231)
General and administrative
Stock-based compensation	2,824,902	2,945,978	(121,076)
Legal settlement	4,041,627	-	4,041,627
Other general and administrative	5,986,336	3,914,645	2,071,691
Total general and administrative	12,852,865	6,860,623	5,992,242
Depreciation and amortization	502,996	367,176	135,820
Impairment of intangible assets	298,694	-	298,694
Interest and other finance costs	467,082	5,125	461,957
Foreign exchange loss (gain)	(33,773)	109,676	(143,449)
Total operating expenses	17,536,411	14,037,378	3,499,033
Net loss	$(17,536,411)	$(14,037,378)	$(3,499,033)

 

Fiscal Year Ended February 28, 2019 

 

The net loss for the year ended February 28, 2019 increased by $3.5 million, to $17.5 million, as compared to the net loss for the year ended February 28, 2018 which was $14.0 million. The increase is primarily explained by higher general and administrative expenses of $6.0 million, an increase in depreciation and amortization and impairment of intangible assets of $0.4 million, an increase in interest and other finance costs of $0.5 million, offset by lower research and development expenses of $3.3 million and foreign exchange of $0.1 million.

 

Research and development expenses for year ended February 28, 2019 amounted to $3.5 million compared to $6.7 million for the year ended February 28, 2018, representing a decrease of $3.2 million, or $0.8 million excluding stock-based compensation. The decrease of $0.8 million was primarily attributable to lower employee related expenses of $0.2 million as well as lower professional fees of $0.6 million. The decrease in non-cash stock-based compensation expense of $2.4 million was attributable to a one-time charge in the prior year corresponding to stock options that fully vested upon their issuance in the third quarter of fiscal 2018.

 

General and administrative expenses for the year ended February 28, 2019 totaled $12.9 million compared to $6.9 million for the year ended February 28, 2018, representing an increase of $6.0 million, or $2.1 million excluding stock-based compensation and the legal settlement. The increase of $6.0 million was primarily attributable to the legal settlement expense which amounted to $4.0 million compared to nil for the three-month period ended February 28, 2018. Other variances were attributable to higher employee related expenses of $1.0 million as well as higher legal fees of $1.0 million, which was related to the defense and subsequent settlement of litigation that had been brought against the Company, and to higher Directors’ and Officers’ insurance of $0.3 million. Stock-based compensation expense for the year ended February 28, 2019 amounted to $2.8 million compared to $2.9 million for the year ended February 28, 2018, representing a decrease of $0.1 million. The decrease was mainly attributable to the timing of certain stock awards provided to executives.

 

Depreciation and amortization for the year ended February 28, 2019 totaled $0.5 million compared to $0.4 million for the year ended February 28, 2018, representing an increase of $0.1 million. The increase is mainly attributable to an increase in the amount of fixed assets held at the Company’s pilot plant and corporate offices. Impairment of intangible assets for the year ended February 28, 2019 totaled $0.3 million compared to nil for the year ended February 28, 2018, representing an increase of $0.3 million. The increase is mainly attributable to the write-off of the remaining intangible asset balance of the GEN I technology of $0.3 million and a $0.1 million increase due to additions of capital assets in the pilot plant for research and development.

 

Interest and other finance costs for the year ended February 28, 2019 totaled $0.5 million compared to a negligible amount for the year ended February 28, 2018, representing an increase of $0.5 million. The increase is mainly attributable to increased interest costs on the long-term debt, which was used to acquire the land and building of our pilot plant and executive offices, in the amount of $0.05 million, an increase in interest expense relating to the convertible notes issued during the year in the amount of $0.1 million, an increase in accretion expense also relating to the convertible notes issued during the year in the amount of $0.2 million, an increase in the amortization of deferred financing costs also related to the convertible notes issued during the year in the amount of $0.05 million and an increase in the revaluation expense of the November 2018 Warrants in the amount of $0.07 million.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 Loop is a development stage company with no revenues, and our ongoing operations are being financed by raising new equity and debt capital. To date, we have been successful in raising capital to finance our ongoing operations, reflecting the potential for commercializing our branded resin and the progress made to date in implementing our business plans. As at February 28, 2019, we had cash on hand of $5.8 million. Subsequent to the year end, on March 1, 2019, we completed a registered direct offering for net proceeds of approximately $4.2 million.

 

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

 

As reflected in the accompanying consolidated financial statements, we are a development stage company, we have not yet begun commercial operations and we do not have any sources of revenue. During the year ended February 28, 2019, we incurred a net loss of $17.5 million, used cash in operations of $7.6 million and had an accumulated deficit as at February 28, 2019 of $38,811,592, all of these factors raise substantial doubt about our 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 us.

 

As at February 28, 2019, we have a long-term debt obligation to a Canadian bank in connection with the purchase, in Fiscal 2018, of the land and building where our pilot plant and corporate offices are located at 480 Fernand-Poitras, Terrebonne, Québec, Canada J6Y 1Y4. On January 24, 2018, the Company obtained a CDN$1,400,000 20-year term instalment loan (the “Loan”), from a Canadian bank. The Loan bears interest at the bank’s Canadian prime rate plus 1.5%. By agreement, the Loan is repayable in monthly payments of CDN $5,833 plus interest, until January 2021, at which time it will be subject to renewal. It includes an option allowing for the prepayment of the Loan without penalty.

 

Flow of Funds

 

Summary of Cash Flows

 

A summary of cash flows for the years ended February 28, 2019, 2018 and 2017 was as follows:

 

	Years Ended February 28
	2019	2018	2017
Net cash used in operating activities	$(7,562,487)	$(6,391,486)	$(2,833,490)
Net cash used in investing activities	(2,046,119)	(2,798,372)	(513,022)
Net cash provided by financing activities	7,328,024	16,504,451	3,986,016
Effect of exchange rate changes on cash	(35,741)	(81,367)	(145,603)
Net (decrease) increase in cash	$(2,316,323)	$7,233,226	$493,901

 

Net Cash Used in Operating Activities

 

During the year ended February 28, 2019, we used $7.6 million in operations compared to $6.4 million during the year ended February 28, 2018 and $2.8 million during the year ended February 28, 2017. The increase over each year is mainly due to increased operating expenses as we move to the next phase of commercialization.

 

Net Cash Used in Investing Activities

 

During the year ended February 28, 2019, we made capital asset investments of $2.1 million of which $1.9 million was mainly attributable to the expansion and additions to our pilot plant and executive offices in Terrebonne, Canada. We also invested $0.2 million in our intellectual property as we developed, during the year ended February 28, 2019, our next generation GEN II technology and filed various patents in various jurisdictions around the world which await approval.

 

Net Cash Provided by Financing Activities

 

During the year ended February 28, 2019, we raised $7.3 million mainly through the sale of two separate issuances of convertible notes, in the gross amounts of $2.7 million and $4.9 million, respectively. We also made payments totaling $0.1 million against our long-term debt, representing the loan agreement we entered into during the year ended February 28, 2018 to purchase the land and building of our pilot plant and executive offices. During the year ended February 28, 2018, we raised $15.7 million through the sale of additional common stock and the exercise of warrants.

 

On January 24, 2018, in connection with the purchase of land and the building, Company obtained a credit facility from a Canadian bank in the amount of CDN$1,400,000. The Loan bears interest at the bank’s Canadian prime rate plus 1.5%. By agreement, the Loan is repayable in monthly payments of CDN $5,833 plus interest, until January 2021, at which time it will be subject be renewal. It includes an option allowing for the prepayment of the Loan without penalty. Interest paid amounted to $54,040 during the year ended February 28, 2019 (2018 - $5,125; 2017 - nil). The credit facility is secured by a first ranking hypothec of Loop Canada Inc.’s bank accounts, receivables, inventory, incorporeal rights and property, plant and equipment. In addition, Loop Industries, Inc., Loop Canada Inc.’s parent company, has guaranteed the credit facility and has provided a postponement of any payments that may be made on intercompany loan amounts owed by Loop Canada Inc. to Loop Industries, Inc. The terms of the credit facility require the Company to comply with certain financial covenants. As at February 28, 2019 and 2018, the Company was in compliance with its financial covenants.

 

 

OUTLOOK

 

In connection with the upcoming fiscal year ending February 28, 2020, we intend to continue to execute our corporate strategy. We believe we must execute on several areas of our operational strategic plan, namely:

Risks that may affect our ability to execute on this strategy include, but are not limited to, those listed under “Risk Factors” elsewhere in this Annual Report.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As at February 28, 2019, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

 

As at February 28, 2019, we did not have any significant lease obligations to third parties.

 

As at February 28, 2019, we have a long-term debt obligation to a Canadian bank in connection with the purchase, in Fiscal 2018, of the land and building where our pilot plant and corporate offices are located at 480 Fernand-Poitras, Terrebonne, Québec, Canada J6Y 1Y4. On January 24, 2018, the Company obtained a CDN$1,400,000 20-year term instalment loan (the “Loan”), from a Canadian bank. The Loan bears interest at the bank’s Canadian prime rate plus 1.5%. By agreement, the Loan is repayable in monthly payments of CDN $5,833 plus interest, until January 2021, at which time it will be subject be renewal. It includes an option allowing for the prepayment of the Loan without penalty.

 

 

CRITICAL 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 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 the fair value of convertible notes and related warrants.

 

Intangible assets

 

Intangible assets are recorded at cost and are amortized over their estimated useful lives, unless the useful life is indefinite, using the straight-line method over 7 years.

 

The Company reviews intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. If the carrying value of assets is determined not to be recoverable, the Company records an impairment loss equal to the excess of the carrying value over the fair value of the assets. The Company’s estimate of fair value is based on the best information available, in the absence of quoted market prices. The Company generally calculates fair value as the present value of estimated future cash flows that the Company expects to generate from the asset using an undiscounted cash flow income approach as described above. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.

 

Stock-Based Compensation

 

We periodically issue stock options to employees and non-employees in non-capital raising transactions for services and financing costs. We account for stock options granted to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) wherein the fair value of the award is measured on the grant date and where there are not performance conditions, recognized as compensation expense on the straight-line basis over the vesting period and where performance conditions exist, recognize compensation expense when it becomes probable that the performance condition has been met.

 

We account for stock options granted to non-employees in accordance with the authoritative guidance of the FASB wherein the fair value of the stock-based compensation is based upon the measurement date determined as the earlier of the date at which either a) a commitment is reached with the counterparty for performance or b) the counterparty completes its performance.

 

The fair value of our stock option grants is determined using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

 

 

Convertible notes

 

Distinguishing Liabilities from Equity Instruments Issued

The Company applies the guidance in ASC Topic 480 to determine the classification of financial instruments issued. The Company first determines if the instruments should be classified as liabilities under this guidance based on the redemption features, if mandatorily redeemable or not, and the method of redemption, if in cash, a variable number of shares or a fixed number of shares.

 

If the terms proved that an instrument is mandatorily redeemable in cash, or the holder can compel a settlement in cash, or will be settled in a variable number of shares predominantly based on a fixed monetary amount, the instrument is generally classified as a liability. Instruments that are settled by issuing a fixed number of shares are generally classified as equity instruments.

 

In some cases, the instruments issued contain settlement features that differ depending upon the prevailing price of the Company’s shares at the date of settlement. Depending on the share price, the instrument will be settled either in a manner consistent with ASC Topic 480 liability treatment, by issuing a variable number of shares based on a fixed monetary amount, or in a manner consistent with ASC Topic 480 treatment for an equity instrument, by issuing a fixed number of shares if the share price is above or below certain levels. In these cases, the Company assesses the likelihood of the various possible settlement outcomes at the inception of the instrument. The classification of the instrument is based on the outcome that is more likely than not to occur. Factors that the Company considers in evaluating the likelihood of the outcomes include:

 

When warrants or similar instruments are issued, the Company applies the guidance in ASC Topic 815 to determine if the warrants should be classified as equity instruments or as derivative instruments. Generally, warrants that are both indexed to the Company’s own stock and that would be classified as equity instruments are not classified as derivative instruments under this guidance. A key element to consider in determining if a warrant would be considered indexed to the Company’s own stock is if the warrants settlement amount is equal to the difference between the fair value of a fixed number of equity shares and a fixed monetary amount. This criterion is sometimes known as the “fixed-for fixed” criteria. In cases where the fixed for fixed criteria are not met, the warrants are classified as derivative instruments.

 

Convertible liabilities are also assessed to determine if they contain a beneficial conversion feature. A beneficial conversion feature (“BCF”) of a convertible note is normally characterized as the convertible portion feature that provides a rate of conversion that is below market value or “in-the-money” when issued. A BCF related to the issuance of a convertible note is recorded as equity at its intrinsic value at the issue date.

 

Initial measurement

Instruments are initially measured at fair value. If multiple instruments are issued together, the aggregate proceeds are allocated first to derivative instruments or any instrument that will be subsequently accounted for at fair value and the remainder is to the allocated to the various instruments based on their relative fair value.

 

Subsequent measurement

Instruments initially classified as liabilities are subsequently measured at the present value of the amount to be paid, either in cash or by issuing a variable number of shares based on a fixed monetary amount, and at settlement, accruing interest cost using the rate implicit at inception.

 

Derivative instruments are recorded at fair value at each reporting period and the variations in fair value are recorded in the consolidated statements of operations and comprehensive loss.

 

Deferred financing costs and other transaction costs

 

Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized as a component of interest expense over the terms of the respective financing agreements, including convertible notes, on a straight-line basis. Unamortized deferred financing fees are expensed in full when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful. Deferred financing fees are deducted from their related liabilities on the balance sheet.

Transaction costs associated with the equity portion of convertible notes are reflected as a charge to deficit or as a reduction of accumulated paid-in-capital. The cost of issuing equity is reflected as a reduction of accumulated paid-in-capital.

Foreign Currency Translations and Transactions

 

The accompanying consolidated financial statements are presented in U.S. dollars, the functional 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 and loss (“OCI”). As a result, foreign currency exchange fluctuations may impact operating expenses. The Company currently has not engaged in any currency hedging activities.

 

For transactions and balances, monetary assets and liabilities denominated in foreign currencies are translated into the functional currency of the entity at the prevailing exchange rate at the reporting date. Non-monetary assets and liabilities, and revenue and expense items denominated in foreign currencies are translated into the functional currency using the exchange rate prevailing at the dates of the respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated statements of operations and comprehensive loss, except for gains or losses arising from the translation of intercompany balances denominated in foreign currencies that forms part in the net investment in the subsidiary which are included in OCI.

 

The Company currently has not engaged in any currency hedging activities.

 

The following table summarizes the exchange rates used:

 

	Years Ended February 28
	2019	2018	2017
Period end Canadian $: US Dollar exchange rate	$0.76	$0.78	$0.75
Average period Canadian $: US Dollar exchange rate	$0.76	$0.78	$0.76

 

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

  

See Notes to the consolidated financial statements included elsewhere in this Form 10-K for management’s discussion of recently issued accounting pronouncements.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Pursuant to SEC Release No. 33-8876, we are permitted to use the scaled disclosure requirements applicable to a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, and therefore, we are not required to provide the information called for by this Item.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Loop Industries, Inc.

February 28, 2019

Index to the Consolidated Financial Statements

 

Contents	Page(s)
Reports of Independent Registered Public Accounting Firms	F-1
Consolidated balance sheets as at February 28, 2019 and 2018	F-4
Consolidated statements of operations and comprehensive loss for the years ended February 28, 2019 and 2018	F-5
Consolidated statement of changes in stockholders’ equity for the years ended February 28, 2019 and 2018	F-6
Consolidated statement of cash flows for the years ended February 28, 2019 and 2018	F-8
Notes to the consolidated financial statements	F-9

 

 

 

 

 

 

Loop Industries, Inc.

Consolidated Balance Sheets

(in United States dollars)

 

	As at February 28,
	2019	2018
Assets
Current assets
Cash	$5,833,390	$8,149,713
Sales tax, tax credits and other receivables (Note 2)	599,000	364,634
Prepaid expenses	226,521	511,573
Total current assets	6,658,911	9,025,920
Property, plant and equipment, net (Note 3)	5,371,263	4,036,903
Intangible assets, net (Note 4)	127,672	332,740
Total assets	$12,157,846	$13,395,563
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities	$2,670,233	$1,983,072
Convertible notes (Note 7)	5,636,172	-
Warrants (Note 7)	219,531	-
Current portion of long-term debt (Note 6)	53,155	54,649
Total current liabilities	8,579,091	2,037,721
Long-term debt (Note 6)	952,363	1,033,777
Total liabilities	9,531,454	3,071,498
Contingencies (Note 15)
Stockholders' Equity
Series A Preferred stock par value $0.0001; 25,000,000 shares authorized; one share issued and outstanding (Note 9)	-	-
Common stock par value $0.0001; 250,000,000 shares authorized; 33,805,706 shares issued and outstanding (2018 – 33,751,088) (Note 9)	3,381	3,376
Additional paid-in capital (Note 10)	38,966,208	30,964,970
Additional paid-in capital – Warrants (Note 7)	757,704	-
Additional paid-in capital - Beneficial conversion feature (Note 7)	1,200,915	-
Common stock issuable, 1,000,000 shares (Note 8)	800,000	800,000
Accumulated deficit	(38,811,592)	(21,275,181)
Accumulated other comprehensive loss	(290,224)	(169,100)
Total stockholders' equity	2,626,392	10,324,065
Total liabilities and stockholders' equity	$12,157,846	$13,395,563
Going Concern (Note 1)

See accompanying notes to the consolidated financial statements.

 

 

Loop Industries, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in United States dollars)

 

	Years Ended February 28,
	2019	2018	2017
Revenue	$-	$-	$-
Operating Expenses -
Research and development (Note 2)	3,448,547	6,694,778	1,454,440
General and administrative	8,811,237	6,860,623	2,280,281
Legal settlement (Note15)	4,041,627	-	-
Depreciation and amortization (Notes 3 and 4)	502,997	367,176	397,445
Impairment of intangible assets (Note 4)	298,694	-	-
Interest and other finance costs (Note 7)	467,082	5,125	-
Foreign exchange loss (gain)	(33,773)	109,676	(18,165)
Total operating expenses	17,536,411	14,037,378	4,114,001
Net loss	(17,536,411)	(14,037,378)	(4,114,001)
Other comprehensive loss -
Foreign currency translation adjustment	(121,124)	(17,889)	(157,142)
Comprehensive loss	$(17,657,535)	$(14,055,267)	$(4,271,143)
Loss per share
Basic and diluted	$(0.52)	$(0.43)	$(0.13)
Weighted average common shares outstanding
Basic and diluted	33,795,600	32,642,741	31,102,004

 

See accompanying notes to the consolidated financial statements.

 

 

Loop Industries, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

For the Years Ended February 28, 2019, 2018 and 2017

(in United States dollars)

 

 

	Common stock		Preferred stock
	par value $0.0001		par value $0.0001
	Number of Shares	Amount	Number of Shares	Amount	Additional Paid-in Capital	Additional Paid-in Capital-Warrants	Additional Paid-in Capital- Beneficial Conversion Feature	Common Stock Issuable	Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)	Total Stockholders' Equity
Balance, February 29, 2016	29,910,800	$2,992	1	$-	$3,918,356	$-	$-	$614,001	$(3,123,802)	$5,931	$1,417,478
Issuance of common shares for cash	1,275,340	128	-	-	3,825,888	-	-	-	-	-	3,826,016
Reclassification of common shares issuable to shares outstanding	204,667	20	-	-	613,981	-	-	(614,001)	-	-	-
Warrants issued for services			-	-	135,673	-	-	-	-	-	135,673
Cancellation of shares issued for services and as a settlement	(200,000)	(20)	-	-	20	-	-	-	-	-	-
Issuance of common shares upon exercise of warrants for cash	200,000	20	-	-	159,980	-	-	-	-	-	160,000
Issuance of shares for services	23,166	2	-	-	69,496	-	-	-	-	-	69,498
Issuance of shares upon cashless exercise of warrants	38,000	4	-	-	(4)	-	-	-	-	-	-
Fair value of issuable shares for services-officer	-	-	-	-	-	-	-	800,000	-	-	800,000
Foreign currency translation	-	-	-	-	-	-	-	-	-	(157,142)	(157,142)
Net loss	-	-	-	-	-	-	-	-	(4,114,001)	-	(4,114,001)
Balance, February 28, 2017	31,451,973	3,146	1	-	8,723,390	-	-	800,000	(7,237,803)	(151,211)	2,137,522
Issuance of common shares for cash, net of share issuance costs	1,829,061	183	-	-	14,052,298	-	-	-	-	-	14,052,481
Stock options issued for services (Note 10)	-	-	-	-	6,281,319	-	-	-	-	-	6,281,319
Restricted stock units issued for services (Note 10)	-	-	-	-	265,994	-	-	-	-	-	265,994
Issuance of shares upon exercise of warrants for cash (Note 9)	355,020	35	-	-	1,641,981	-	-	-	-	-	1,642,016
Issuance of shares upon cashless exercise of warrants (Note 9)	115,034	12	-	-	(12)	-	-	-	-	-	-
Foreign currency translation	-	-	-	-		-	-	-	-	(17,889)	(17,889)
Net loss	-	-	-	-		-	-	-	(14,037,378)	-	(14,037,378)

 

 

	Common stock par value $0.0001		Preferred stock par value $0.0001
	Number of Shares	par value $0.0001	Number of Shares	Amount	Additional Paid-in Capital	Additional Paid-in Capital-Warrants	Additional Paid-in Capital- Beneficial Conversion Feature	Common Stock Issuable	Accumulated Deficit	Accumulated Other Comprehensive Income (Loss)	Total Stockholders' Equity
Balance, February 28, 2018	33,751,088	3,376	1	-	30,964,970	-	-	800,000	(21,275,181)	(169,100)	10,324,065
Issuance of shares upon cashless exercise of warrants (Note 9)	18,821	2	-	-	(2)	-	-	-	-	-	-
Issuance of shares upon vesting of restricted stock units (Note 9)	35,797	3	-	-	(3)	-	-	-	-	-	-
Stock options issued for services (Note 10)	-	-	-	-	3,176,786	-	-	-	-	-	3,176,786
Restricted stock units issued for services (Note 10	-	-	-		808,374	-	-	-	-	-	808,374
Legal settlement (Note 15)	-	-	-	-	4,041,627	-	-	-	-	-	4,041,627
Issuance of Convertible notes (Note 7)	-	-	-	-	(25,544)	757,704	1,200,915	-	-	-	1,933,075
Foreign currency translation	-	-	-	-	-	-	-	-	-	(121,124)	(121,124)
Net loss	-	-	-	-	-	-	-	-	(17,536,411)		(17,536,411)
Balance, February 28, 2019	33,805,706	$3,381	1	$-	$38,966,208	757,704	1,200,915	$800,000	$(38,811,592)	$(290,224)	$2,626,392