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Loop Industries, Inc. - Quarter Report: 2019 November (Form 10-Q)

 

United States
Securities and Exchange Commission
Washington, D.C. 20549
  FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
         
For the quarterly period ended November 30, 2019
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
         
For the transition period from ___________ to __________
 
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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒
 
As at January 8, 2020, there were 39,232,528 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.
 

 
 
 
LOOP INDUSTRIES, INC.
 
TABLE OF CONTENTS
 
 
 
Page No.
PART I . Financial Information
 
 
 
 
3
   
 
 
 
4
   
 
 
 
13
   
 
 
 
14
 
 
 
PART II. Other Information
 
 
 
 
15
   
 
 
 
15
   
 
 
 
15
   
 
 
 
15
   
 
 
 
15
   
 
 
 
15
   
 
 
 
16
 
 
 
 
17
 
 
2
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Loop Industries, Inc.
Three and Nine months ended November 30, 2019
Index to the Unaudited Interim Condensed Consolidated Financial Statements
 
Contents
 
Page(s)
 
 
 
 
F-1
 
 
 
 
F-2
 
 
 
 
F-3
 
 
 
 
F-5
 
 
 
 
F-6
 
 
 
3
 
 
Loop Industries, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
 
November 30,
2019
 
 
February 28,
2019
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 $35,491,491 
 $5,833,390 
Sales tax, tax credits and other receivables (Note 3)
  631,436 
  599,000 
Prepaid expenses
  173,153 
  226,521 
Total current assets
  36,296,080 
  6,658,911 
Investment in a joint venture (Note 8)
  850,000 
  - 
Property, plant and equipment, net (Note 4)
  6,495,389 
  5,371,263 
Intangible assets, net (Note 5)
  206,831 
  127,672 
Total assets
 $43,848,300 
 $12,157,846 
 
    
    
Liabilities and Stockholders' Equity
    
    
Current liabilities
    
    
Accounts payable and accrued liabilities (Notes 7)
 $1,648,165 
 $2,670,233 
Convertible notes (Notes 6 and 10)
  4,926,734 
  5,636,172 
Warrants (Note 10)
  - 
  219,531 
Current portion of long-term debt (Notes 6 and 9)
  52,675 
  53,155 
Total current liabilities
  6,627,574 
  8,579,091 
Long-term debt (Notes 6 and 9)
  904,257 
  952,363 
Total liabilities
  7,531,831 
  9,531,454 
 
    
    
Stockholders' Equity
    
    
Series A Preferred stock, par value $0.0001; 25,000,000 shares authorized; one share issued and outstanding (Note 11)
  - 
  - 
Common stock, par value $0.0001: 250,000,000 shares authorized; 39,232,528 shares issued and outstanding (February 28, 2019 – 33, 805,706) (Note 11)
  3,923 
  3,381 
Additional paid-in capital
  75,290,970 
  38,966,208 
Additional paid-in capital – Warrants (Notes 10 and 11)
  9,700,102 
  757,704 
Additional paid-in capital – Beneficial conversion feature (Note 10)
  1,200,915 
  1,200,915 
Common stock issuable, 1,000,000 shares (Note 11)
  - 
  800,000 
Accumulated deficit
  (49,559,084)
  (38,811,592)
Accumulated other comprehensive loss
  (320,357)
  (290,224)
Total stockholders' equity
  36,316,469 
  2,626,392 
Total liabilities and stockholders' equity
 $43,848,300 
 $12,157,846 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-1
 
 
Loop Industries, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
 
 
 
Three Months Ended November 30
 
 
Nine Months EndedNovember 30
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
Expenses -
    
    
    
    
Research and development, net (Note 12)
  1,278,172 
  792,111 
  3,246,246 
  2,924,483 
General and administrative (Note 12)
  1,825,813 
  1,971,847 
  5,447,056 
  6,721,796 
Depreciation and amortization (Notes 4 and 5)
  219,628 
  155,053 
  585,367 
  366,710 
Interest and other finance costs (Note 15)
  693,027 
  14,883 
  1,817,091 
  41,117 
Interest income
  (171,274)
  - 
  (363,565)
  - 
Foreign exchange loss (gain)
  5,533 
  (20,132)
  15,297 
  (72,404)
Total expenses
  3,850,899 
  2,913,762 
  10,747,492 
  9,981,702 
 
    
    
    
    
Net Loss
  (3,850,899)
  (2,913,762)
  (10,747,492)
  (9,981,702)
 
    
    
    
    
Other comprehensive loss -
    
    
    
    
Foreign currency translation adjustment
  7,552 
  (91,249)
  (30,133)
  (202,838)
Comprehensive Loss
 $(3,843,347)
 $(3,005,011)
 $(10,777,625)
 $(10,184,540)
 
    
    
    
    
Loss per share
    
    
    
    
- Basic and Diluted
 $(0.10)
 $(0.09)
 $(0.29)
 $(0.30)
 
    
    
    
    
Weighted average common shares outstanding
    
    
    
    
- Basic and Diluted
  39,133,627 
  33,805,706 
  37,404,165 
  33,792,293 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-2
 
  
Loop Industries, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
 
 
 
Three Months Ended November 30, 2019
 
 
 
Common stock par value $0.0001
 
 
Preferred stock 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 Loss
 
 
Total Stockholders' Equity
 
Balance, August 31, 2019
  39,032,528 
 $3,903 
  1 
 $- 
 $74,414,197 
 $9,700,102 
 $1,200,915 
  - 
 $(45,708,185)
 $(327,909)
 $39,283,023 
 
    
    
    
    
    
    
    
    
    
    
    
Issuance of common shares for cash, net of share issuance costs (Note 11)
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
Issuance of shares upon the vesting of restricted stock units
  200,000 
  20 
  -
  -
  (20)
  -
  -
  - 
  -
  -
  - 
Issuance of shares upon the cashless exercise of stock options
  - 
  - 
  -
  -
  - 
  -
  -
  -
  -
  -
  - 
Issuance of shares upon exercise of warrants
  - 
  - 
  -
  -
  - 
  - 
  -
  -
  -
    
  - 
Stock options issued (Note 12)
  - 
  - 
  - 
  - 
  549,810 
  - 
  - 
  - 
  - 
  - 
  549,810 
Restricted stock units issued (Note 12)
  - 
  - 
  - 
  - 
  326,983 
  - 
  - 
  - 
  - 
  - 
  326,983 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  7,552 
  7,552 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (3,850,899)
  - 
  (3,850,899)
Balance, November 30, 2019
  39,232,528 
 $3,923 
  1 
 $- 
 $75,290,970 
 $9,700,102 
 $1,200,915 
  - 
 $(49,559,084)
 $(320,357)
 $36,316,469 
 
 
 
Three Months Ended November 30, 2018
 
 
 
Common stock par value $0.0001
 
 
Preferred stock 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 Loss
 
 
Total Stockholders' Equity
 
Balance, August 31, 2018
  33,805,706 
 $3,381 
  1 
 $- 
 $33,156,104 
  - 
  - 
 $800,000 
 $(28,343,121)
 $(280,689)
 $5,335,675 
 
    
    
    
    
    
  
    
    
    
    
    
Stock options issued (Note 12)
  - 
  - 
  - 
  - 
  789,260 
  - 
  - 
  - 
  - 
  - 
  789,260 
Restricted stock units issued (Note 12)
  - 
  - 
  - 
  - 
  181,646 
  - 
  - 
  - 
  - 
  - 
  181,646 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (91,249)
  (91,249)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (2,913,762)
  - 
  (2,913,762)
Balance, November 30, 2018
  33,805,706 
 $3,381 
  1 
 $- 
 $34,127,010 
  - 
  - 
 $800,000 
 $(31,256,883)
 $(371,938)
 $3,301,570 
 
 
F-3
 

 
 
Nine Months Ended November 30, 2019
 
 
 
Common stock par value $0.0001
 
 
Preferred stock 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 Loss
 
 
Total Stockholders' Equity
 
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 
 
    
    
    
    
    
    
    
    
    
    
    
Issuance of common shares for cash, net of share issuance costs (Note 11)
  4,693,567 
  469 
  - 
  - 
  30,359,394 
  8,663,769 
  - 
  - 
  - 
  - 
  39,023,632 
Issuance of shares for legal settlement
  150,000 
  15 
  - 
  - 
  (15)
  - 
  - 
  - 
  - 
  - 
  - 
Issuance of shares upon conversion of Convertible notes (Note 10)
  319,326 
  32 
  - 
  - 
  2,372,549 
  316,929 
  - 
  - 
  - 
  - 
  2,689,510 
Issuance of shares upon the vesting of restricted stock units
  243,932 
  24 
  -
  - 
  799,976 
  -
  -
  (800,000)
  -
  -
  - 
Issuance of shares upon the cashless exercise of stock options
  4,565 
  1 
  -
  -
  (1)
  -
  -
  -
  -
  -
  - 
Issuance of shares upon exercise of warrants
  15,432 
  1 
  -
    
  182,048 
  (38,300)
  -
    
  -
    
  143,749 
Stock options issued (Note 12)
  - 
  - 
  - 
  - 
  1,628,897 
  - 
  - 
  - 
  - 
  - 
  1,628,897 
Restricted stock units issued (Note 12)
  - 
  - 
  - 
  - 
  981,914 
  - 
  - 
  - 
  - 
  - 
  981,914 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (30,133)
  (30,133)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (10,747,492)
  - 
  (10,747,492)
Balance, November 30, 2019
  39,232,528 
 $3,923 
  1 
 $- 
 $75,290,970 
 $9,700,102 
 $1,200,915 
  - 
 $(49,559,084)
 $(320,357)
 $36,316,469 
 
 
 
Nine Months Ended November 30, 2018
 
 
 
Common Stock par value $0.0001
 
 
Preferred Stock 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 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
  18,821 
  2 
  - 
  - 
  (2)
  - 
  - 
  - 
  - 
  - 
  - 
Issuance of shares upon vesting of restricted stock units
  35,797 
  3 
  - 
  - 
  (3)
  - 
  - 
  - 
  - 
  - 
  - 
Stock options issued
  - 
  - 
  - 
  - 
  2,591,263 
  - 
  - 
  - 
  - 
  - 
  2,591,263 
Restricted stock units issued
  - 
  - 
  - 
  - 
  570,782 
  - 
  - 
  - 
  - 
  - 
  570,782 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (202,838)
  (202,838)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (9,981,702)
  - 
  (9,981,702)
Balance, November 30, 2018
  33,805,706 
 $3,381 
  1 
 $- 
 $34,127,010 
  - 
  - 
 $800,000 
 $(31,256,883)
 $(371,938)
 $3,301,570 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-4
 
 
Loop Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Nine Months Ended November 30
 
 
 
2019
 
 
2018
 
Cash Flows from Operating Activities
 
 
 
 
 
 
Net loss
 $(10,747,492)
 $(9,981,702)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  585,366 
  366,710 
Stock-based compensation expense (Note 12)
  2,610,811 
  3,162,045 
Accrued interest (Note 10)
  313,433 
  - 
Loss on revaluation of warrants (Note 10)
  8,483 
  - 
Debt accretion (Note 10)
  1,584,977 
  - 
Deferred financing costs (Note 10)
  86,212 
  - 
Gain on conversion of convertible notes (Note 10)
  (232,565)
  - 
Loss on revaluation of foreign exchange contracts
  10,881 
  - 
Changes in operating assets and liabilities:
    
    
Sales tax, tax credits and other receivables
  (37,536)
  67,606 
Prepaid expenses
  52,649 
  446,770 
Accounts payable and accrued liabilities
  (1,054,967)
  483,254 
Net cash used in operating activities
  (6,819,748)
  (5,455,317)
 
    
    
Cash Flows from Investing Activities
    
    
Investment in a joint venture (Note 8)
  (850,000)
  - 
Additions to property, plant and equipment (Note 4)
  (1,647,433)
  (1,428,174)
Additions to intangible assets (Note 5)
  (95,488)
  (95,179)
Net cash used in investing activities
  (2,592,921)
  (1,523,353)
 
    
    
Cash Flows from Financing Activities
    
    
Proceeds from sale of common shares (Note 11)
  40,273,751 
  - 
Share issuance costs (Note 11)
  (1,106,370)
  - 
Proceeds from issuance of convertible debt
  - 
  2,450,000 
Convertible debt subscriptions
  - 
  100,000 
Repayment of long-term debt (Note 9)
  (39,506)
  (39,471)
Net cash provided from (used in) financing activities
  39,127,875 
  2,510,529 
 
    
    
Effect of exchange rate changes
  (57,105)
  (53,314)
Net change in cash and cash equivalents
  29,658,101 
  (4,521,455)
Cash and cash equivalents, beginning of period
  5,833,390 
  8,149,713 
Cash and cash equivalents, end of period
 $35,491,491 
 $3,628,258 
 
    
    
Supplemental Disclosure of Cash Flow Information:
    
    
Income tax paid
 $- 
 $- 
Interest paid
 $45,668 
 $41,442 
Interest received
 $363,565 
 $325 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-5
 
 
Loop Industries, Inc.
Three and Nine Months Ended November 30, 2019 and 2018
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
 
1. The Company, Basis of Presentation and Going Concern
 
The Company
 
Loop Industries, Inc. is a technology company who owns patented and proprietary technology that depolymerizes no and low value waste PET plastic and polyester fiber to its base building blocks (monomers). The monomers are filtered, purified and polymerized to create virgin-quality Loop™ branded PET plastic resin and polyester fiber suitable for use in food-grade packaging.
 
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.”
 
Basis of presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Loop Industries, Inc., its wholly-owned subsidiaries and joint venture (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The balance sheet information as at February 28, 2019 is derived from the Company’s audited consolidated financial statements and related notes for the fiscal year ended February 28, 2019, which is included in Item 8 of the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 8, 2019. These unaudited interim condensed consolidated financial statements should be read in conjunction with those financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair statement have been included. Operating results for the three and nine months ended November 30, 2019 are not necessarily indicative of the results that may be expected for the year ending February 28, 2020.
 
Intercompany balances and transactions are eliminated on consolidation.
 
2. Summary of Significant Accounting Policies
 
Use of estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for depreciable lives of property, plant and equipment, intangible assets, analysis of impairments of recorded intangible assets, accruals for potential liabilities and assumptions made in calculating the fair value of stock-based compensation and other stock instruments.
 
Foreign currency translations and transactions
 
The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency of the Company. Assets and liabilities of subsidiaries that have a functional currency other than that of the Company are translated to U.S. dollars at the exchange rate as at the balance sheet date. Income and expenses are translated at the average exchange rate of the period. The resulting translation adjustments are included in other comprehensive income (loss) (“OCI”). As a result, foreign currency exchange fluctuations may impact operating expenses. The Company currently has not engaged in any currency hedging activities.
 
 
F-6
 
 
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.
 
Stock-based compensation
 
The Company periodically issues stock options and restricted stock units to employees and directors. The Company accounts for stock options granted to employees based on the authoritative guidance provided by the FASB wherein the fair value of the award is measured on the grant date and where there are no 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 will be met. Forfeitures on share-based payments are accounted for by recognizing forfeitures as they occur.
 
The Company accounts for stock options granted to non-employees in accordance with the authoritative guidance of the FASB wherein the fair value of the stock 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 Company estimates the fair value of restricted stock unit awards to employees and directors based on the closing market price of its common stock on the date of grant.
 
The fair value of the stock options granted are estimated using the Black-Scholes-Merton Option Pricing (“Black-Scholes”) model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options, and future dividends. Stock-based compensation expense is recorded based on the value derived from the Black-Scholes model and on actual experience. The assumptions used in the Black-Scholes model could materially affect stock-based compensation expense recorded in the current and future periods.
 
Income taxes
 
The Company calculates its provision for income tax on the basis of the tax laws enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income, in accordance with FASB ASC 740, Income Taxes. The Company uses an asset and liability approach for financial accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
 
Research and development expenses
 
Research and development expenses relate primarily to the development, design, testing of preproduction samples, prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the three- and nine-month periods ended November 30, 2019 and 2018 amounted to $1,278,172 and $3,246,246, respectively (2018 - $792,111 and $2,924,483), respectively, and are net of government research and development tax credits and government grants from the federal and provincial taxation authorities accrued and recorded based on qualifying expenditures incurred during the fiscal periods (See Note 3).
 
Net loss per share
 
The Company computes net loss per share in accordance with FASB ASC 260, Earnings Per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. The Company includes common stock issuable in its calculation. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation if their effect is antidilutive.
 
 
F-7
 
 
For the three- and nine-month periods ended November 30, 2019 and 2018, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an antidilutive effect. As at November 30, 2019, the potentially dilutive securities consisted of 1,657,081 outstanding stock options (November 30, 2018 – 2,205,290), 4,219,753 outstanding restricted stock units (November 30, 2018 – 99,498), 5,040,267 outstanding warrants (November 30, 2018 – 140,667) and nil outstanding issuable common stock (November 30, 2018 – 1,000,000).
 
Recently adopted accounting pronouncements
 
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Reform Act on items within accumulated other comprehensive income (loss) ("AOCI") to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update. ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. ASU 2018-02 is applicable beginning March 1, 2019. The adoption of the standard had no impact on the consolidated financial statements of the Company.
 
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this Update are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of the standard had no impact on the consolidated financial statements of the Company.
 
In July 2018, the FASB issued ASU 2018-09, Codification Improvements, which clarify certain amendments to guidance that may have been incorrectly or inconsistently applied by certain entities and includes Amendments to Subtopic 718-740, Compensation – Stock Compensation – Income Taxes. The guidance in paragraph 718-740-35-2, as amended by the amendments in ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, is unclear on whether an entity should recognize excess tax benefits (or tax deficiencies) for compensation expense that is taken on the entity’s tax return. The amendment to paragraph 718-740-35-2 in this Update clarifies that an entity should recognize excess tax benefits in the period in which the amount of deduction is determined. The amendments in this Update are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of the standard had no impact on the consolidated financial statements of the Company.
 
In February 2016, the FASB issued ASU 2016-02, “Leases,” amended in July by ASU 2018-10, “Codification Improvements to Topic 842, Leases,” ASU 2018-11, “Targeted Improvements,” and ASU 2018-20, “Narrow-Scope Improvements for Lessors,” which requires lessees to recognize leases on the balance sheet while continuing to recognize expenses in the income statement in a manner similar to current accounting standards. For lessors, the new standard modifies the classification criteria and the accounting for sales-type and direct financing leases. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing, and uncertainty of cash flows arising from leases. This ASU may either be adopted on a modified retrospective approach at the beginning of the earliest comparative period, or through a cumulative-effect adjustment at the adoption date. This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted these standards effective March 1, 2019. The adoption of the standard had no impact on the consolidated financial statements of the Company. The Company elected to apply the package of practical expedients that allows us not to reassess whether expired or existing contracts contain leases, the classification of these leases and whether previously capitalized initial direct costs would qualify for capitalization under Accounting Standards Codification (or “ASC”) 842. Furthermore, we elected to use hindsight in determining the lease term and assessing impairment of the right-of-use assets.
 
 
F-8
 
 
3. Sales Tax, Tax Credits and Other Receivables
 
Sales tax, research and development tax credits and other receivables as at November 30, 2019 and February 28, 2019 were as follows:
 
 
 
November 30,
2019
 
 
February 28,
2019
 
Sales tax
 $196,065 
 $82,992 
Research and development tax credits
  396,123 
  410,997 
Other receivables
  39,248 
  105,011 
 
 $631,436 
 $599,000 
 
The Company is registered for the Canadian federal and provincial goods and services taxes. As such, the Company is obligated to collect, and is entitled to claim sale taxes paid on its expenses and capital expenditures incurred in Canada.
 
In addition, Loop Canada Inc. is entitled to receive government assistance in the form of refundable and non-refundable research and development tax credits from the federal and provincial taxation authorities, based on qualifying expenditures incurred during the fiscal year. The refundable credits are from the provincial taxation authorities and are not dependent on its ongoing tax status or tax position and accordingly are not considered part of income taxes. The Company records refundable tax credits as a reduction of research and development expenses when the Company can reasonably estimate the amounts and it is more likely than not, they will be received. During the three- and nine-month periods ended November 30, 2019, the Company recorded $56,719 and $164,702, respectively, (2018 – nil and $76,503, respectively) as a reduction of research and development expenses. During the three- and nine-month periods ended November 30, 2019, research and development tax credits received by the Company from taxation authorities amounted to nil and $175,929, respectively (2018 – nil and nil, respectively).
 
4. Property, Plant and Equipment
 
 
 
As at November 30, 2019
 
 
 
Cost
 
 
Accumulated depreciation
 
 
Net book value
 
Land
 $267,658 
 $- 
 $267,658 
Building
  1,865,518 
  (114,729)
  1,750,789 
Building Improvements
  695,590 
  (189,644)
  505,946 
Machinery and equipment
  5,143,880 
  (1,251,135)
  3,892,745 
Office equipment and furniture
  137,194 
  (58,943)
  78,251 
 
 $8,109,840 
 $(1,614,451)
 $6,495,389 
 
 
 
As at February 28, 2019
 
 
 
Cost
 
 
Accumulated depreciation
 
 
Net book value
 
Land
 $232,699 
 $- 
 $232,699 
Building
  1,882,665 
  (68,596)
  1,814,069 
Building Improvements
  383,985 
  (119,889)
  264,096 
Machinery and equipment
  3,834,338 
  (841,236)
  2,993,102 
Office equipment and furniture
  117,088 
  (49,791)
  67,297 
 
 $6,450,775 
 $(1,079,512)
 $5,371,263 
 
Depreciation expense for the three- and nine-month periods ended November 30, 2019 amounted to $212,968 and $570,165, respectively (2018 – $135,426 and $309,095, respectively), and is recorded as an operating expense in the consolidated statements of operations and comprehensive loss.
 
 
F-9
 
 
5. Intangible Assets
 
On October 27, 2014, the Company entered into an Intellectual Property Assignment Agreement with Mr. Hatem Essaddam wherein the Company purchased a certain technique and method, which was used to develop the Generation I (“GEN I”) technology, for $445,050 allowing for the depolymerization of polyethylene terephthalate at ambient temperature and atmospheric pressure. The GEN I technology patent portfolio has two issued U.S. patents and an allowed U.S. application, all expected to expire on or around July 2035. Internationally, the Company has issued patents in Taiwan, South Africa, and in the members of the Gulf Cooperation Council, and pending patent applications in Argentina, Australia, Brazil, Canada, China, Eurasia, Europe, Hong Kong, Israel, India, Japan, Korea, Mexico, and the Philippines, all expected to expire, if granted, on or around July 2036.
 
In addition to the $445,050 paid by the Company under the Intellectual Property Assignment Agreement, the Company is required to make four additional payments of CDN$200,000, totaling CDN$800,000, to Mr. Essaddam within sixty (60) days of attaining each of the following milestones:

the average production of 20 metric tons of terephthalic acid by the Company, as a result of the GEN I technology, for 20 operating days;
the average production of 30 metric tons of terephthalic acid by the Company, as a result of the GEN I technology, for 30 operating days;
the average production of 60 metric tons of terephthalic acid by the Company, as a result of the GEN I technology, for 60 operating days;
the average production of 100 metric tons of terephthalic acid by the Company, as a result of the GEN I technology, for 100 operating days.
 
Additionally, the Company is obligated to make royalty payments of up to CDN$25,700,000, based on the GEN I technology, payable as follows:
 
10% of gross profits on the sale of all products derived by the Company from the technology;
10% of any license fee paid to the Company in respect of any licensing or other right to use the technology that was granted to a third party by the Company; and
5% of any royalty or other similar payment made to the Company by a third party to whom a license or sub-license or other right to use the technology has been granted by the Company or by the third party.
 
The Company has no intention of commercializing the GEN I technology at this time.
 
During the year ended February 28, 2019, the Company finalized the development of its next generation technology, referred to as Generation II (“GEN II”), and has filed various patents in jurisdictions around the world. The GEN II U.S. patent issued on April 9, 2019 and is expected to expire on or around September 2037.
 
Concurrent with the GEN II development, in June 2018, the Company transitioned to its newly constructed GEN II industrial pilot plant. The GEN II technology forms the basis for the commercialization of the Company into the future.
 
As a result of the strategic shift away from the GEN I technology, and the development of the GEN II technology during the year ended February 28, 2019, the Company considered the carrying value of its GEN I intangible asset to be impaired and wrote off the remaining balance of the intangible asset, which amounted to $298,694.
 
Amortization expense for the three- and nine-month periods ended November 30, 2019 amounted to $6,660 and $15,202 respectively (2018 - $19,627 and $57,615, respectively), and is recorded as an operating expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
 
 
 
November 30,
2019
 
 
February 28,
2019
 
 
 
 
 
 
 
 
Intangible assets, at cost - beginning of period
 $127,672 
 $533,369 
Intangible assets, accumulated depreciation – beginning of period
  - 
  (200,629)
 
  127,672 
  332,740 
 
    
    
Add: Additions in the period
  95,488 
  153,477 
Deduct: Amortization of intangibles
  (15,202)
  (59,851)
Deduct: Impairment of intangibles
  - 
  (298,694)
Deduct: Foreign exchange effect
  (1,127)
  - 
 
 $206,831 
 $127,672 
 
 
F-10
 
 
6. Fair value of financial instruments
 
The following tables present the fair value of the Company’s financial liabilities as at November 30, 2019 and February 28, 2019:
 
 
 
Fair Value Measurements as at November 30, 2019
 
 
 
Carrying Amount
 
 
Fair Value
 
 
Level in the hierarchy
 
Instruments measured at fair value on a recurring basis:
 $- 
 $- 
  - 
 
    
    
    
Financial liabilities measured at amortized cost:
    
    
    
  Long-term debt
  956,932 
  956,932 
  Level 2
 
  Convertible notes (Second Issuance)
 $4,593,664 
 $4,900,000 
  Level 2
 
 
 
 
Fair Value Measurements at February 28, 2019
 
 
 
Carrying Amount
 
 
Fair Value
 
 
Level in the hierarchy
 
Financial liabilities measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
  Warrants (First Issuance)
 $219,531 
 $219,531 
  Level 3 
 
    
    
    
Financial liabilities measured at amortized cost:
    
    
    
  Long-term debt
  1,005,518 
  1,005,518 
  Level 2 
  Convertible notes (First Issuance)
  2,495,636 
  2,650,000 
  Level 2 
  Convertible notes (Second Issuance)
 $3,126,886 
 $3,150,000 
  Level 2 
 
The Warrants under the First Issuance of Convertible Notes represent a Level 3 in the fair value hierarchy. The Warrants were valued using a Monte Carlo simulation using a volatility of 71.5%. The Company recorded a loss on revaluation from the date of issuance to February 28, 2019 of $65,167.
 
7. Accounts Payable and Accrued Liabilities
 
Accounts payable and accrued liabilities as at November 30, 2019 and February 28, 2019 were as follows:
 
 
 
November 30,
2019
 
 
February 28,
2019
 
Trade accounts payable
 $674,601 
 $1,784,362 
  Accrued liabilities
  973,564 
  885,871 
 
 $1,648,165 
 $2,670,233 
 
8. Joint Venture
 
On September 15, 2018, the Company, through its wholly-owned subsidiary Loop Innovations, LLC, a Delaware limited liability company, entered into a Joint Venture Agreement (the “Agreement”) with Indorama Ventures Holdings LP (“Indorama”), an indirect subsidiary of Indorama Ventures Public Company Limited, to retrofit their existing PET manufacturing facilities. The joint venture will manufacture and commercialize sustainable LoopTM branded PET resin and polyester fiber. The joint venture agreement details the establishment of an initial 20,700 metric tons per year facility. The joint venture decided to double the capacity of the facility to 40,000 metric tons per year thus increasing the engineering work required. Each company has a 50/50 equity interest in Indorama Loop Technologies, LLC (“ILT”), which was specifically formed to operate and execute the joint venture.
 
Under the Agreement, Indorama is contributing manufacturing knowledge and Loop is required to contribute its proprietary science and technology.
 
 
F-11
 
 
Specifically, the Company is contributing an exclusive world-wide royalty-free license to ILT to use its proprietary technology to produce 100% sustainably produced PET resin and polyester fiber.
 
ILT meets the accounting definition of a joint venture where neither party has control of the joint venture entity and both parties have joint control over the decision-making process in ILT. As such, the Company uses the equity method of accounting to account for its share of the investment in ILT. There was no activity in ILT from the date of inception of September 24, 2018 to February 28, 2019 and, as at February 28, 2019, the carrying value of the equity investment was nil. On April 18, 2019 and October 21, 2019, Loop Innovations, LLC, the Company’s wholly owned subsidiary, and Indorama, each contributed cash of $500,000 and $350,000, respectively, to ILT. As there were no other transactions during the nine-month period ended November 30, 2019, the carrying value of the equity investment as at November 30, 2019 was $850,000.
 
9. Long-Term Debt
 
 
 
November 30,
2019
 
 
February 28,
2019
 
Installment loan
 $956,932 
 $1,005,518 
Less current portion
  52,675 
  53,155 
Non-current portion
 $904,257 
 $952,363 
 
Principal repayments due on the Installment loan over the next five years are as follows:
 
Years ending February 28,
 
Amount
 
2020
 $13,169 
2021
  52,675 
2022
  52,675 
2023
  52,675 
2024
  52,675 
Thereafter
  733,063 
Total
 $956,932 
 
Interest paid on the installment loan during the three- and nine-month periods ended November 30, 2019 amounted to $14,778 and $41,840, respectively (2018 - $13,825 and $40,305, respectively). As at November 30, 2019, the Company was in compliance with its financial covenants.
 
10. Convertible Notes
 
First Issuance
 
On November 13, 2018, the Company issued convertible promissory notes (the “November 2018 Notes”), together with related warrants to acquire an additional 50% of the shares issued upon the conversion of the November 2018 Notes (the “November 2018 Warrants”), for an aggregate purchase price of $2,450,000 (the “November 2018 Private Placement”). On January 3, 2019, the Company issued additional convertible promissory notes from this issuance (the “November 2018 Notes”), together with related warrants to acquire an additional 50% of the shares issued upon the conversion of the November 2018 Notes (the “November 2018 Warrants”), for an aggregate purchase price of $200,000 (the “November 2018 Private Placement”). The November 2018 Notes were converted on April 5, 2019.
 
The November 2018 Notes carried an interest rate of 8.00% per annum and had original maturity dates of May 13, 2019 and July 3, 2019 (the “November 2018 Maturity Date”), respectively, upon which date the outstanding principal amount of the November 2018 Notes and all accrued and unpaid interest would automatically convert into shares of the common stock of the Company at the price per share equal to the lesser of (i) $13.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day to the conversion of the November 2018 Notes (the “November 2018 Conversion Price”). The total number of shares of Common Stock to be issued upon automatic conversion at maturity would equal the outstanding principal amount of the November 2018 Notes and all accrued and unpaid interest on the November 2018 Notes, divided by the November 2018 Conversion Price.
 
 
F-12
 
 
The November 2018 Warrants are exercisable for an additional fifty percent (50%) of the shares of Common Stock issued upon the conversion of the November 2018 Notes (the “November 2018 Warrant Shares”). The per share purchase price (the “November 2018 Exercise Price”) for each of the November 2018 Warrant Shares purchasable under the November 2018 Warrants was originally to be equal to the lesser of (i) $15.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day of the conversion of the November 2018 Notes. The November 2018 Warrants were issued upon conversion of the November 2018 Notes. The November 2018 Warrants expire eighteen (18) months from the date of the conversion of the November 2018 Notes (the “November 2018 Expiration Date”). The Investors may exercise the November 2018 Warrants at any time prior to the November 2018 Expiration Date.
 
Due to the variable conversion price, the November 2018 Notes contain characteristics of a variable share-forward sales contracts (“VSF”) under the guidance of ASC 480-10. Management has determined that for the purpose of ‎the accounting for the November 2018 Notes, it is more likely than not that the November 2018 Conversion Price will be below $13.00, resulting in the issuance of a variable number of shares, the November 2018 Notes are classified as a liability, and accounted for at amortized cost.
 
Due to the variable number of warrants to be issued and the variable strike price of the November 2018 Warrants, these do not meet the “fixed-for-fixed” criteria under ASC 815-40. Accordingly, the November 2018 Warrants are classified as a derivative liability, initially measured at fair value and subsequently revalued at fair value through the income statement. The fair value was calculated using a Monte Carlo simulation.
 
The transaction costs related to this issuance were split pro-rata between the November 2018 Notes and the November 2018 Warrants. The portion relating to the November 2018 Notes were deferred and are being amortized over the life of the convertible notes. The portion relating to the November 2018 Warrants was immediately expensed.
 
The aggregate value of the November 2018 Notes and November 2018 Warrants as shown on the consolidated balance sheet are broken down as follows:
 
 
 
November 30,
2019
 
 
February 28,
2019
 
 
Issue Date
 
November 2018 Convertible Notes – Liability
 $- 
 $2,495,636 
 $2,495,636 
Accrued interest – Liability
  - 
  60,793 
  - 
Deferred financing costs
  - 
  (26,557)
  (63,738)
Total
  - 
  2,529,872 
  2,431,898 
 
    
    
    
November 2018 Warrants – Liability
 $- 
 $219,531 
 $154,364 
 
On April 5, 2019, the Company and the Investors that purchased the November 2018 Notes from the Company pursuant to the Note and Warrant Purchase Agreement dated as of November 13, 2018 or January 3, 2019, executed an Amendment, Surrender and Conversion Agreement (“Conversion Agreement”) whereby the parties agreed to convert the November 2018 Notes, and all accrued and unpaid interest, into shares of the common stock of the Company at a newly agreed conversion price per share equal to $8.55 (the “New Conversion Price”), replacing the previous formula which converted the November 2018 Notes and accrued and unpaid interest into shares of the common stock of the Company at the price per share equal to the lesser of (i) $13.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day to the conversion of the November 2018 Notes. The Conversion Agreement stipulates that the interest on the November 2018 Notes would be paid up to and including April 3, 2019. Pursuant to the 2018 Note Purchase Agreement, the Investors also received related warrants to acquire an additional 50% of the shares issued upon the conversion of the November 2018 Notes. As part of the Conversion Agreement, the exercise price of the November 2018 Warrants will also be the New Conversion Price, replacing the previous formula which established the conversion price for the November 2018 Warrants as the lesser of (i) $15.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day of the conversion of the November 2018 Notes. As a result of the Conversion Agreement, the Company issued 319,326 shares of common stock of the Company and issued 159,663 warrants. The November 2018 Warrants expire eighteen (18) months from the date of the conversion of the November 2018 Notes, on October 5, 2020.
 
 
F-13
 
 
The Company recorded an expense upon revaluation of the warrants for the period from March 1, 2019 to April 5, 2019 in the amount of $8,483 (2018 – nil) and is included in operating expenses. The Company recorded accretion interest expense on the November 2018 Notes from March 1, 2019 to April 5, 2019 in the amount of $154,364 and is included in operating expenses. The Company recorded interest expense on the November 2018 Notes for the period from March 1, 2019 to April 3, 2019 in the amount of $19,433 (2018 – nil). The value of the 159,633 warrants issued as part of the conversion was determined using the Black-Scholes pricing formula and amounted to $316,929 and is included in additional paid-in capital – warrants. Also, the conversion of the November 2018 Notes into common stock resulted in a gain of $232,565 and has been offset against operating expenses.
 
Second Issuance
 
On January 15, 2019, the Company issued convertible promissory notes (the “January 2019 Notes”), together with related warrants to acquire an additional 50% of the shares issuable upon the conversion of the January 2019 Notes (the “January 2019 Warrants”), for an aggregate purchase price of $4,500,000 (the “January 2019 Private Placement”). On January 21, 2019, the Company issued additional convertible promissory notes from this issuance, together with related warrants to acquire an additional 50% of the shares issuable upon the conversion of the January 2019 Notes, for an aggregate purchase price of $400,000.
 
The January 2019 Notes carry an interest rate of 8.00% per annum and mature on January 15, 2020 and January 21, 2020 (the “January 2020 Maturity Date”), respectively. At the January 2020 Maturity Date, the outstanding principal amount of the January 2019 Notes shall automatically convert into shares of the common stock of the Company at the price per share equal to $8.10 (the “January 2020 Conversion Price”). The January 2020 Conversion Price may be adjusted in the event that the Company issues common shares in a private sale or offering at a lower price per share than $8.10 within 180 days of the closing date. The lower price would become the new conversion price of the January 2019 Notes, which would impact the number of shares that would be issued. The total number of shares of Common Stock to be issued upon automatic conversion shall equal the outstanding principal amount of the January 2019 Notes divided by the January 2020 Conversion Price.
 
With respect to accrued and unpaid interest at the January 2020 Maturity Date, the Investors have the option of receiving cash or common stock of the Company at that date. Upon the January 2020 Maturity Date, where the Investor elects payment of accrued and unpaid interest on the January 2019 Notes in common stock, the price per share shall be equal to the trading price of the common stock at the close of the market on the date immediately preceding the January 2020 Maturity Date.
 
The January 2019 Warrants are exercisable for an additional fifty percent (50%) of the shares of Common Stock issuable upon the conversion of the January 2019 Notes (the “January 2019 Warrant Shares”). The per share purchase price (the “January 2019 Exercise Price”) for each of the January 2019 Warrant Shares purchasable under the January 2019 Warrants shall be equal to 115% of the January 2020 Conversion Price. The January 2019 Warrants will be calculated and issued upon the closing date of the January 2019 Notes, based upon the initial $8.10 conversion price. As such, the Company issued 302,469 warrants at the closing dates of the January 2019 Notes. If the Investor elects to take accrued and unpaid interest on the January 2019 Notes in common stock, additional warrants will be issued to acquire 50% of the shares issued in connection with the accrued and unpaid interest (also referred to as the “January 2019 Warrants”). The January 2019 Warrants expire twenty-four (24) months from the date of their issuance (the “January 2019 Expiration Date”). The Investors may exercise the January 2019 Warrants at any time prior to the January 2019 Expiration Date.
 
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. The BCF related to the issuance of the January 2019 Notes was recorded at the issuance date. The BCF was measured using the intrinsic value method and is shown as a discount to the carrying amount of the convertible note and is credited to additional paid-in capital. The intrinsic value of the BCF at the issuance date of the January 2019 Notes was determined to be $1,200,915.
 
In connection with the January 2019 Warrants issued along with the January 2019 Notes, they meet the requirements of the scope exemptions in ASC 815-10-15-74 and are thus classified as equity upon issuance. The Company determined the fair value of the warrants using the Black-Scholes pricing formula and is recognized as a discount on the carrying amount of the January 2019 Notes and is credited to additional paid-in capital. The fair value of the warrants at the issuance date was determined to be $757,704.
 
 
F-14
 
 
The allocated fair values of the BCF and the warrants was recorded as a debt discount from the face amount of the January 2019 Notes and such discount is being accreted over the expected term of the January 2019 Notes and is charged to interest expense.
 
The aggregate values of the January 2019 Warrants, the January 2019 Notes and the related BCF are as follows:
 
 
 
November 30,
2019
 
 
February 28,
2019
 
 
Issue Date
 
January 2019 Convertible Notes – Liability
 $4,593,664 
 $3,126,886 
 $2,941,381 
Accrued interest – Liability
  343,011 
  49,011 
  - 
Deferred financing costs
  (9,941)
  (69,597)
  (79,539)
 
  4,926,734 
  3,106,300 
  2,861,842 
 
    
    
    
January 2019 Beneficial Conversion Option – Equity
  1,200,915 
  1,200,915 
  1,200,915 
 
    
    
    
January 2019 Warrants – Equity
 $719,404 
 $757,704 
 $757,704 
 
The transaction costs relating to this issuance were split pro-rata between the January 2019 Notes, the BCF and the January 2019 Warrants. The portion relating to the January 2019 Notes were deferred and are being amortized over the life of the January 2019 Notes. The portion relating to the BCF and the January 2019 Warrants were recorded as share issuance expenses and offset against additional paid-in capital.
 
The Company recorded accretion interest expense on the January 2019 Notes for the three- and nine-month periods ended November 30, 2019 of $549,090 and $1,584,977, respectively (2018 – nil and nil, respectively) and is included in operating expenses. The Company also recorded interest expense on the January 2019 Notes for the three- and nine-month periods ended November 30, 2019 in the amount of $98,000 and $313,433, respectively (2018 – nil and nil, respectively). The Company also recorded amortization of deferred finance costs for the three- and nine-month periods ended November 30, 2019 in the amount of $19,885 and $86,212, respectively (2018 – nil and nil, respectively).
 
11. Stockholders’ Equity
 
Series A Preferred Stock
 
Mr. Solomita’s amended employment agreement July 13, 2018 provides that the Company shall issue to Mr. Solomita one share of the Company’s Series A Preferred Stock in exchange for Mr. Solomita agreeing not to terminate his employment with the Company for a period of five years from the date of the agreement. The agreement effectively provides Mr. Solomita with a “change of control” provision over the Company in the event that his ownership of the issued and outstanding shares of common stock of the Company is diluted to less than a majority. In order to issue Mr. Solomita his one share of Series A Preferred Stock under the amendment, the Company created a “blank check” preferred stock. Subsequently, the board of directors of the Company approved a Certificate of Designation creating the Series A Preferred Stock. Subsequently, the Company issued one share of Series A Preferred Stock to Mr. Solomita.
 
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 common stock of the Company, assuring Mr. Solomita of control of the Company in the event that his ownership of the issued and outstanding shares of common stock of the Company is diluted to a level below a majority. Currently, Mr. Solomita’s ownership of 18,800,000 shares of common stock and 1 share of Series A Preferred Stock provides him with 78.1% of the voting control of the Company.
 
Additionally, the one share of Series A Preferred Stock issued to Mr. Solomita contains protective provisions, which precludes the Company 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, the Company shall not, 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:
 
 
F-15
 
 
(a) 
amend the Articles of Incorporation or, unless approved by the Board of Directors, including by the Series A Director, amend the Company’s Bylaws;
 
(b) 
change or modify the rights, preferences or other terms of the Series A Preferred Stock, or increase or decrease the number of authorized shares of Series A Preferred Stock;
 
(c) 
reclassify or recapitalize any outstanding equity securities, or, unless approved by the Board of Directors, including by the Series A Director, authorize or issue, or undertake an obligation to authorize or issue, any equity securities or any debt securities convertible into or exercisable for any equity securities (other than the issuance of stock-options or securities under any employee option or benefit plan);
 
(d) 
authorize or effect any transaction constituting a Deemed Liquidation (as defined in this subparagraph) under the Articles, or any other merger or consolidation of the Company;
 
(e) 
increase or decrease the size of the Board of Directors as provided in the Bylaws of the Company or remove the Series A Director (unless approved by the Board of Directors, including the Series A Director);
 
(f) 
declare or pay any dividends or make any other distribution with respect to any class or series of capital stock (unless approved by the Board of Directors, including the Series A Director);
 
(g) 
redeem, repurchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any outstanding shares of capital stock (other than the repurchase of shares of common stock from employees, consultants or other service providers pursuant to agreements approved by the Board of Directors under which the Company has the option to repurchase such shares at no greater than original cost upon the occurrence of certain events, such as the termination of employment) (unless approved by the Board of Directors, including the Series A Director);
 
(h) 
create or amend any stock option plan of the Company, if any (other than amendments that do not require approval of the stockholders under the terms of the plan or applicable law) or approve any new equity incentive plan;
 
(i) 
replace the President and/or Chief Executive Officer of the Company (unless approved by the Board of Directors, including the Series A Director);
 
(j) 
transfer assets to any subsidiary or other affiliated entity (unless approved by the Board of Directors, including the Series A Director);
 
(k) 
issue, or cause any subsidiary of the Company to issue, any indebtedness or debt security, other than trade accounts payable and/or letters of credit, performance bonds or other similar credit support incurred in the ordinary course of business, or amend, renew, increase or otherwise alter in any material respect the terms of any indebtedness previously approved or required to be approved by the holders of the Series A Preferred Stock (unless approved by the Board of Directors, including the Series A Director);
 
(l) 
modify or change the nature of the Company’s business;
 
(m) 
acquire, or cause a Subsidiary of the Company to acquire, in any transaction or series of related transactions, the stock or any material assets of another person, or enter into any joint venture with any other person (unless approved by the Board of Directors, including the Series A Director); or
 
(n) 
sell, transfer, license, lease or otherwise dispose of, in any transaction or series of related transactions, any material assets of the Company or any Subsidiary outside the ordinary course of business (unless approved by the Board of Directors, including the Series A Director).
 
 
F-16
 
 
Common Stock
 
For the period ended November 30, 2019
 
Number of shares
 
 
Amount
 
Balance, February 28, 2019
  33,805,706 
 $3,381
 
Issuance of shares for cash
  4,693,567 
  469 
Issuance of shares upon vesting of restricted stock units
  243,932 
  24 
Issuance of shares upon the cashless exercise of stock options
  4,565 
  1 
Issuance of shares upon the exercise of warrants
  15,432 
  1 
Issuance of shares upon settlement of legal matter
  150,000 
  15 
Issuance of shares upon conversion of Convertible notes
  319,326 
  32 
Balance, November 30, 2019
  39,232,528 
 $3,923 
 
 
For the period ended November 30, 2018
 
Number of shares
 
 
Amount
 
Balance, February 28, 2018
  33,751,088 
 $3,376 
Cashless exercise of stock options
  18,821 
  2 
Issuance of shares upon vesting of restricted stock units
  35,797 
  3 
Balance, November 30, 2018
  33,805,706 
 $3,381 
 
During the nine months ended November 30, 2019, the Company recorded the following common stock transactions:
 
(i)
On March 1, 2019, the Company sold 600,000 shares of its common stock at an offering price of $8.55 per share in a registered direct offering, for gross proceeds of $5,130,000;
(ii)
On March 8, 2019 and March 11, 2019, the Company issued 150,000 shares of its common stock in settlement of a legal matter;
(iii)
On April 9, 2019, the Company converted Convertible notes with a face value of $2,650,000 plus accrued interest of $80,241 at a conversion price of $8.55, into 319,326 common shares.
(iv)
On June 14, 2019, the Company sold 4,093,567 shares of its common stock at an offering price of $8.55 per share in a registered direct offering, for gross proceeds of $35,000,000;
(v)
On June 21, 2019, the Company issued 7,043 shares of common stock upon the vesting of restricted stock units related to an employee.
(vi)
On July 2, 2019 and July 3, 2019, the Company issued 23,547 shares of common stock upon the vesting of restricted stock units related to current and former Directors.
(vii)
On July 12, 2019, the Company issued 4,565 shares of common stock upon the cashless exercise of stock options related to an employee.
(viii)
On July 15, 2019, the Company issued 13,342 shares of common stock upon the vesting of restricted stock units related to a former Director.
(ix)
On July 17, 2019, the Company issued 15,432 shares of common stock upon the exercise of warrants.
(x)
On October 15, 2019, the Company issued 200,000 shares of common stock upon the vesting of restricted stock units related to the President and Chief Executive Officer.
 
During the nine months ended November 30, 2018, the Company recorded the following common stock transactions:
 
(i)
the Company issued 18,821 shares of common stock upon the cashless exercise of stock options.
(ii)
the Company issued 35,797 shares of common stock upon the vesting of restricted stock units.
 
 
F-17
 
 
12. Share-based Payments
 
Stock Options
 
The following tables summarize the continuity of the Company’s stock options during the nine-month periods ended November 30:
 
 
 
2019
 
 
2018
 
 
 
Number of stock options
 
 
Weighted average exercise price
 
 
Number of stock options
 
 
Weighted average exercise price
 
Outstanding, beginning of period
  1,962,400 
 $7.53 
  2,374,581 
 $7.99 
Granted
  - 
  - 
  13,209 
  11.52 
Exercised
  (5,000)
  0.80 
  (20,000)
  0.80 
Forfeited
  (39,902)
  9.67 
  (100,000)
  5.25 
Expired
  (260,417)
  13.59 
  (62,500)
  4.80 
Outstanding, end of period
  1,657,081 
 $6.55 
  2,205,290 
 $8.29 
Exercisable, end of period
  1,007,498 
 $6.38 
  1,065,414 
 $7.60 
 
 
 
2019
 
 
2018
 
Exercise price
 
Number of stock options outstanding
 
 
Weighted average remaining life (yrs.)
 
 
Number of stock options outstanding
 
 
Weighted average remaining life (yrs.)
 
$0.80
  577,081 
  6.00 
  582,081 
  7.00 
$3.00
  - 
  - 
  - 
  - 
$5.25
  380,000 
  7.74 
  380,000 
  8.74 
$8.75
  - 
  - 
  - 
  - 
$11.52
  - 
  - 
  13,209 
  9.61 
$12.00
  700,000 
  7.79 
  700,000 
  8.79 
$13.49
  - 
  - 
  250,000 
  8.88 
$13.89
  - 
  - 
  280,000 
  0.07 
Outstanding, end of period
  1,657,081 
  7.16 
  2,205,290 
  7.22 
Exercisable, end of period
  1,007,498 
  7.11 
  1,065,414 
  7.62 
 
The Company applies the fair value method of accounting for stock-based compensation awards granted. Fair value is calculated based on a Black-Scholes option pricing model. The following table shows key inputs into the valuation model for the nine months ended November 30:
 
 
 
2018
 
Exercise price
 $11.52 
Risk-free interest rate
  2.82%
Expected dividend yield
  0%
Expected volatility
  78%
Expected life
  6.5 years 
 
There were no new issuances of stock options for the nine-month period ended November 30, 2019.
 
During the three- and nine-month periods ended November 30, 2019, stock-based compensation expense attributable to stock options amounted to $549,810 and $1,628,897, respectively (2018 - $789,260 and $2,591,263, respectively), and is included in operating expenses.
 
 
F-18
 
 
Restricted Stock Units
 
The following table summarizes the continuity of the restricted stock units (“RSUs”) during the nine-month periods ended November 30, 2019 and 2018:
 
 
 
2019
 
 
2018
 
 
 
Number of units
 
 
Weighted average fair value price
 
 
Number of units
 
 
Weighted average fair value price
 
Outstanding, beginning of period
  402,868 
 $8.77 
  34,102 
 $13.00 
Granted
  4,114,567 
  1.06 
  102,818 
  11.54 
Issued as common stock
  (243,932)
  2.52 
  (35,797)
  13.06 
Forfeited
  (53,750)
  9.82 
  (1,625)
  12.31 
Outstanding, end of period
  4,219,753 
 $1.60 
  99,498 
 $11.48 
Outstanding vested, end of period
  831,684 
 $1.19 
  - 
 $- 
 
The Company applies the fair value method of accounting for awards granted through the issuance of restricted stock units. Fair value is calculated based on the closing share price at grant date multiplied by the number of restricted stock unit awards granted.
 
During the three- and nine-month periods ended November 30, 2019, stock-based compensation attributable to RSUs amounted to $326,983 and $981,914, respectively (2018 - $181,646 and $570,782, respectively), and is included in operating expenses.
 
During the three- and nine-month periods ended November 30, 2019, stock-based compensation included in research and development expenses amounted to $311,353 and $941,142, respectively (2018 - $249,548 and $910,004, respectively), and in General and administrative expenses amounted to $565,440 and $1,669,669, respectively (2018 - $721,358 and $2,252,041, respectively).
 
13. Equity Incentive Plan
 
On July 6, 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”). The Plan permits the granting of warrants, stock options, stock appreciation rights and restricted stock units to employees, directors and consultants of the Company. A total of 3,000,000 shares of common stock were initially reserved for issuance under the Plan at July 6, 2017, with annual automatic share reserve increases, as defined in the Plan, amounting to the lessor of (i) 1,500,000 shares, (ii) 5% of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) or such number of shares determined by the Administrator of the Plan, effective March 1, 2018. The Plan is administered by the Board of Directors who designates eligible participants to be included under the Plan, the number of awards granted, the share price pursuant to the awards and the vesting conditions and period. The awards, when granted, will have an exercise price of no less than the estimated fair value of shares at the date of grant and a life not exceeding 10 years from the grant date. However, where a participant, at the time of the grant, owns stock representing more than 10% of the voting power of the Company, the life of the options shall not exceed 5 years.
 
The following table summarizes the continuity of the Company’s Equity Incentive Plan units during the nine-month periods ended November 30, 2019 and 2018:
 
 
 
2019
 
 
2018
 
 
 
Number of units
 
 
Number of units
 
Outstanding, beginning of period
  3,223,516 
  1,735,898 
Share reserve increase
  2,000,000 
  1,500,000 
Units granted
  (4,114,567)
  (116,027)
Units forfeited
  93,652 
  101,625 
Units expired
  260,417 
  50,000 
Outstanding, end of period
  1,463,018 
  3,271,496 
 
 
F-19
 
 
14. Warrants
 
The following table summarizes the continuity of warrants during the nine-month periods ended November 30, 2019 and 2018:
 
 
 
2019
 
 
 2018
 
 
 
Number of warrants
 
 
Weighted average exercise price
 
 
Number of warrants
 
 
Weighted average exercise price
 
Outstanding, beginning of period
  802,469 
 $10.74 
  140,667 
 $12.00 
Issued
  4,253,230 
  10.91 
  - 
  - 
Exercised
  (15,432)
  9.32 
  - 
  - 
Expired
  - 
  - 
  - 
  - 
Outstanding, end of period
  5,040,267 
 $10.89 
  140,667 
 $12.00 
 
The expiration dates of the warrants outstanding as at November 30, 2019 are as follows:
 
 
 
2019
 
 
 
Number of warrants
 
 
Weighted average exercise price
 
August 25, 2020
  200,000 
 $11.00 
October 5, 2020
  159,663 
  8.55 
January 15, 2021
  277,778 
  9.32 
January 21, 2021
  9,259 
  9.32 
February 25, 2021
  300,000 
  12.00 
June 14, 2022
  4,093,567 
  11.00 
Outstanding, end of period
  5,040,267 
 $10.89 
 
15. Interest and Other Finance Costs
 
Interest and other finance costs for the three- and nine-month periods ended November 30, 2019 and 2018 are as follows:
 
 
 
Three Months Ended November 30
 
 
Nine Months Ended November 30
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
  Interest on long-term debt
 $14,778 
 $13,825 
 $41,840 
 $40,305 
  Interest on convertible notes
  98,000 
  - 
  313,433 
  - 
  Accretion expense
  549,090 
  - 
  1,584,977 
  - 
  Amortization of deferred finance costs
  19,885 
  - 
  86,212 
  - 
  Revaluation of warrants
  - 
  - 
  8,483 
  - 
  Loss on revaluation of foreign exchange contracts
  10,881 
  - 
  10,881 
  - 
  Gain on conversion of November 2018 Notes
  - 
  - 
  (232,565)
  - 
  Other
  393 
  1,058 
  3,830 
  812 
 
 $693,027 
 $14,883 
 $1,817,091 
 $41,117 
 
 
F-20
 
 
16. Commitments
 
The Company has entered into multi-year supply agreements with PepsiCo, Coca-Cola’s Cross Enterprise Procurement Group, Danone SA and L’OCCITANE en Provence that will enable them to purchase production capacity from the Company’s joint venture facility with Indorama in the United States and incorporate Loop™ PET resin into its product packaging.
 
On July 24, 2019, the Company signed an agreement with Investissement Quebec providing it with a financing facility equal to 63.45% of all eligible expenses incurred for the expansion of its Pilot Plant up to a maximum CDN$4,600,000. There is a 36-month moratorium on both capital and interest repayments beginning as of the first disbursement date. At the end of the 36-month moratorium, capital and interest will be repayable in 84 monthly installments. The loan will bear interest at 2.36%. The Company has also agreed to issue to Investissement Quebec warrants to purchase common shares of the Company in an amount equal to 10% of each disbursement up to a maximum aggregate amount of CDN$460,000. The warrants will be issued at a price per share equal to the higher of (i) $11.00 per share and (ii) the ten-day weighted average closing price of Loop Industries’ shares of Common Stock on the Nasdaq stock market for the 10 days prior to the issue of the warrants. The warrants can be exercised immediately upon grant and will have a term of three years from the date of issuance. The loan can be repaid at any time by the Company without penalty. No disbursements have yet been made under the agreement.
 
 
 
 
 
F-21
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following information and any forward-looking statements should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q, including those risks identified in the “Risk Factors” section of our most recent Annual Report on Form 10-K.
 
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q of Loop Industries, Inc., a Nevada corporation (the “Company”, “we”, “Loop” or “our”), contains “forward-looking statements,” as defined in the United States Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, ability to improve and expand our capabilities, competition, expected activities and expenditures as we pursue our business plan, the adequacy of our available cash resources, regulatory compliance, plans for future growth and future operations, the size of our addressable market, market trends, and the effectiveness of the Company’s internal control over financial reporting. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from the predictions discussed in these forward-looking statements. The economic environment within which we operate could materially affect our actual results. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” included in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and the description of material changes thereto, if any, included in our Quarterly Reports on Form 10-Q or subsequent filings with the SEC. Additional factors that could materially affect these forward-looking statements and/or predictions include, among other things: (i) commercialization of our technology and products, (ii) 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) 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-Q, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the SEC or otherwise publicly available.
 
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as at the date of this Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
 
We caution readers not to place undue reliance on any such forward-looking statements, which speak only as at the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
 
4
 
 
Introduction
 
Loop Industries, Inc. is a technology company whose mission is to accelerate the world’s shift toward sustainable PET plastic and polyester fiber 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, carpets and textiles 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 polymerized to create virgin-quality Loop™ branded PET resin and polyester fiber suitable for use in food-grade packaging, thus enabling our customers to meet their sustainability objectives. Loop is contributing to the global movement toward a circular economy by raising awareness about the importance of preventing and recovering waste plastic from the environment to ensure plastic stays in the economy for a more sustainable future for all.
 
Proprietary Technology and Intellectual Property
 
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 high 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. We believe that the Generation II technology requires less energy and fewer resource inputs than conventional PET production processes. We also 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, 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 families, referred to as GEN I technology and the GEN II technology, with claims relating to our proprietary technology for depolymerization of PET.
 
The GEN I portfolio has two issued U.S. patents and an allowed U.S. application, all expected to expire on or around July 2035. Internationally, we also have issued patents in Taiwan, South Africa and in the members of the Gulf Cooperation Council, and pending patent applications in Argentina, Australia, Brazil, Canada, China, Eurasia, Europe, Hong Kong, Israel, India, Japan, Korea, Mexico, and the Philippines, all expected to expire, if granted, on or around July 2036 if granted.
 
The GEN II technology portfolio has an issued U.S. patent and a pending U.S. application, all expected to expire on or around September 2037; as well as a PCT application and non-PCT country applications in Argentina, Bangladesh, Bolivia, Bhutan, members of the Gulf Cooperation Council, Iraq, Pakistan, Taiwan, Uruguay, and Venezuela, all expected to expire on or around September 2038 if granted. An additional aspect of the GEN II technology is claimed in a U.S. application, a PCT application, and non-PCT country applications in Argentina, Bangladesh, Bolivia, members of the Gulf Cooperation Council, Pakistan, Taiwan, and Uruguay, all expected to expire on or around June 2039 if granted. Additionally, we have two pending provisional applications directed to further additional aspects of the GEN II technology. Any patents that would ultimately grant from these provisional applications would be expected to expire no earlier than 2039, if granted.
 
 
5
 
 
In connection with the continued transitioned to its newly constructed GEN II industrial pilot plant. the Company made capital asset investments of $1,647,433 during the nine months ended November 30, 2019.
 
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 certain countries 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. 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.
 
Prospective Future Growth
 
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 to push forward the development of our technology. We are investing in building a strong management team to integrate best in class processes and practices while maintaining our entrepreneurial culture.
 
During the three months ended November 30, 2019, we continued executing our corporate strategy where Loop focused on developing two major streams of revenue. These revenue streams are expected to be from the sale of Loop™ PET resin and polyester fiber to customers from our joint venture with Indorama Ventures Holdings LP (“Indorama”) and from our Waste to Resin (“WtRTM”) greenfield facilities, which were recently rebranded to Infinite LoopTM. We are continuing to develop the engineering of the Infinite LoopTM platform and we have increased our focus on the development of Infinite LoopTM projects in Europe and in North America.
 
In September 2018, in connection with the first of these streams, we announced a joint venture with Indorama to retrofit their existing PET manufacturing facilities. The joint venture was formed to manufacture and commercialize sustainable Loop™ PET 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 an initial 20,700 metric tons per year facility in the southeastern United States (Spartanburg, South Carolina).
 
Following the decision of the joint venture with Indorama Ventures Holdings LP to double the capacity of the Spartanburg plant due to customer demand to 40,000 metric tons per year as disclosed in our 10-Q for the period ended August 31, 2019, we identified a number of enhancements to the plant design to improve  the operability and lower the total construction cost of the plant.  The additional engineering is underway and management anticipates it will be completed by the end of this calendar quarter and as a result, the commissioning of the facility is anticipated to occur in the third quarter of the calendar year 2021.
 
We have currently contracted for the sale of the initial 20,700 metric tons expected output of the Spartanburg facility and we are in discussion to contract the additional volume up to its increased capacity of 40,000 metric tons.
 
During the three months ended November 30, 2019, the Company and L'OCCITANE en Provence, a global manufacturer and retailer of natural beauty and well-being products, announced that they are expanding their supply agreement to accelerate L’OCCITANE en Provence’s transition to 100% sustainable PET plastic in all its bottles. Loop Industries and L'OCCITANE en Provence's supply agreement for Loop™ branded 100% sustainable PET plastic resin was to be supplied from Loop's first European PET manufacturing facility. With the expanded supply agreement, Loop will begin supplying its sustainable PET resin to L'OCCITANE en Provence from its joint venture manufacturing facility with Indorama in Spartanburg, South Carolina.
 
 
6
 
 
To drive our Infinite Loop business model, 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 tkISs PET Melt-To-Resin® technology. As one of the worlds leading PET and polyester engineering companies, we believe tkIS is perfectly positioned to help us commercialize our Infinite Loop™ solutiona fully integrated and reimagined manufacturing facility for sustainable Loop PET plastic resin and polyester fiber. During the nine months ended November 30, 2019, the Company and tkIS continued the process of developing this fully integrated and reimagined manufacturing facility for sustainable Loop PET plastic resin and polyester fiber.
 
We believe the Infinite Loop solution will result in a highly scalable 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 occursno longer does PET plastic resin production need to be bound to fossil fuels and fossil fuel infrastructure. Infinite Loop 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 that once the first facilities are operational it may create the possibility of licensing the technology to create a recurring 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 years 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 will be able to market packaging made from a 100% Loop™ branded PET plastic resin and polyester fiber.
 
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 be able to sell its Loop™ branded PET at a premium price relative to virgin and mechanically recycled PET.
 
 
7
 
 
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 PET 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 advantage of Loop™ PET over mechanically recycled PET, our ability to use materials that nearly all other recyclers cannot 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 are identifying the availability of feedstock to ensure each planned facility can operate continuously. We have identified the sources required for our first joint venture facility with Indorama and are now focusing on signing supply agreements to secure this feedstock for the long term.
 
The team is also studying markets 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.
  
 
8
 
 
Results of Operations
 
Third Quarter Ended November 30, 2019
 
The following table summarizes our operating results for the three-month periods ended November 30, 2019 and 2018, in U.S. Dollars.
 
 
 
    Three Months Ended November 30
 
 
 
2019
 
 
2018
 
 
$ Change
 
Revenues
 $- 
 $- 
 $- 
 
    
    
    
Research and development
    
    
    
   Stock-based compensation
  311,353 
  249,548 
  61,805 
   Other research and development
  966,819 
  542,563 
  424,256 
       Total research and development
  1,278,172 
  792,111 
  486,061 
 
    
    
    
General and administrative
    
    
    
   Stock-based compensation
  565,440 
  721,358 
  (155,918)
   Other general and administrative
  1,260,373 
  1,250,489 
  9,884 
       Total general and administrative
  1,825,813 
  1,971,847 
  (146,034)
 
    
    
    
Depreciation and amortization
  219,628 
  155,053 
  64,575 
Interest and other finance costs
  693,027 
  14,883 
  678,144 
Interest income
  (171,274)
  - 
  (171,274)
Foreign exchange (gain) loss
  5,533 
  (20,132)
  25,665 
Total operating expenses
  3,850,899 
  2,913,762 
  937,137 
Net loss
 $(3,850,899)
 $(2,913,762)
 $(937,137)
 
The net loss for the three-month period ended November 30, 2019 increased $0.94 million to $3.85 million, as compared to the net loss for the three-month period ended November 30, 2018 which was $2.91 million. The increase of $0.94 million is primarily attributable to an increase in interest and other finance costs of $0.68 million, an increase in research and development expenses of $0.49 million, an increase in depreciation and amortization expenses of $0.06 million and an increase in foreign exchange loss of $0.03 million, partially offset by lower general and administrative expenses of $0.15 million, and by an increase in interest income of $0.17 million.
 
Research and development expenses for the three-month period ended November 30, 2019 amounted to $1.28 million compared to $0.79 million for the three-month period ended November 30, 2018, representing an increase of $0.49 million, or representing an increase of $0.42 million excluding stock-based compensation. The increase of $0.42 million was primarily attributable to by higher employee compensation costs of $0.38, by higher purchases and freight costs of $0.08 million, by higher facilities costs of $0.02 million, by higher equipment rental costs of $0.02 and by higher license fees of $0.03 million, offset by lower legal and professional fees of $0.07 million and by higher research and development tax credits of $0.06 million. The increase in non-cash stock-based compensation expense of $0.06 million is mainly attributable to the timing of stock awards provided to certain employees.
 
General and administrative expenses for the three-month period ended November 30, 2019 amounted to $1.83 million compared to $1.97 million for the three-month period ended November 30, 2018, representing a decrease of $0.14 million, or an increase of $0.01 million excluding stock-based compensation. The increase of $0.01 million was mainly attributable to higher employee compensation costs of $0.15 million and by higher commercial insurance expenses of $0.08 million, offset by lower legal and professional fees of $0.20 million. Stock-based compensation expense for the three-month period ended November 30, 2019 amounted to $0.57 million compared to $0.72 million for the three-month period ended November 30, 2018, representing a decrease of $0.15 million, which was mainly attributable to lower stock awards provided to executives.
 
Depreciation and amortization for the three-month period ended November 30, 2019 totaled $0.22 million compared to $0.16 million for the three-month period ended November 30, 2018, representing an increase of $0.06 million. This increase is mainly attributable to the addition of fixed assets at the Company’s pilot plant and corporate offices.
 
Interest and other finance costs for the three-month period ended November 30, 2019 totaled $0.69 million compared to $0.01 million the three-month period ended November 30, 2018, representing an increase of $0.68 million. The increase is mainly attributable to an increase in accretion expense of $0.55 million, an increase in interest expense of $0.10 million and by an increase in amortization of deferred financing costs of $0.02 million.
 
 
9
 
 
Nine Months Ended November 30, 2019
 
The following table summarizes our operating results for the nine-month periods ended November 30, 2019 and 2018, in U.S. Dollars.
 
 
 
Nine Months Ended November 30
 
 
 
2019
 
 
2018
 
 
$ Change
 
Revenues
 $- 
 $- 
 $- 

    
    
    
Research and development
    
    
    
   Stock-based compensation
  941,142 
  910,004 
  31,138 
   Other research and development
  2,305,104 
  2,014,479 
  290,625 
       Total research and development
  3,246,246 
  2,924,483 
  321,763 
 
    
    
    
General and administrative
    
    
    
   Stock-based compensation
  1,669,669 
  2,252,041 
  (582,372)
   Other general and administrative
  3,777,387 
  4,469,755 
  (692,368)
       Total general and administrative
  5,447,056 
  6,721,796 
  (1,274,740)
 
    
    
    
Depreciation and amortization
  585,367 
  366,710 
  218,657 
Interest and other finance costs
  1,817,091 
  41,117 
  1,775,974 
Interest income
  (363,565)
  - 
  (363,565)
Foreign exchange (gain) loss
  15,297 
  (72,404)
  87,701 
Total operating expenses
  10,747,492 
  9,981,702 
  765,790 
Net loss
 $(10,747,492)
 $(9,981,702)
 $(765,790)
 
The net loss for the nine-month period ended November 30, 2019 increased by $0.77 million to $10.75 million, as compared to the net loss for the nine-month period ended November 30, 2018 which was $9.98 million. The increase of $0.77 million is primarily due to an increase in interest and other finance costs of $1.77 million, an increase in research and development expenses of $0.32 million, , an increase in depreciation and amortization of $0.22 million and an increase in the foreign exchange loss of $0.09 million, partially offset by lower general and administrative expenses of $1.27 million and an increase in interest income of $0.36 million.
 
Research and development expenses for the nine-month period ended November 30, 2019 amounted to $3.24 million compared to $2.92 million for the nine-month period ended November 30, 2018, representing an increase of $0.32 million, or representing an increase of $0.29 million excluding stock-based compensation. The increase of $0.29 million was primarily attributable to higher employee compensation costs of $0.55 million, by higher facilities costs of $0.04 million, by higher purchases and freight costs of $0.07 million, by higher license fees of $0.03 million, by higher repairs and maintenance costs of $0.02 million, and by higher meals, travel and entertainment expenses of $0.04 million, offset by lower legal and professional fees of $0.36 million and by higher research and development tax credits of $0.16 million. The decrease in non-cash stock-based compensation expense of $0.03 million is mainly attributable to the timing of stock awards provided to certain employees.
 
General and administrative expenses for the nine-month period ended November 30, 2019 amounted to $5.45 million compared to $6.72 million for the nine-month period ended November 30, 2018, representing a decrease of $1.27 million, or a decrease of $0.69 million excluding stock-based compensation. The decrease of $0.69 million was mainly attributable to lower legal and professional fees of $1.36 million, offset by higher employee compensation costs of $0.50 million and by higher commercial insurance expenses totaling $0.17 million. Stock-based compensation expense for the nine-month period ended November 30, 2019 amounted to $1.67 million compared to $2.25 million for the nine-month period ended November 30, 2018, representing a decrease of $0.58 million, which was mainly attributable lower stock awards provided to executives.
Depreciation and amortization for the nine-month period ended November 30, 2019 totaled $0.59 million compared to $0.37 million for the nine-month period ended November 30, 2018, representing an increase of $0.22 million. This increase is mainly attributable to the addition of fixed assets at the Company’s pilot plant and corporate offices.
 
 
10
 
 
Interest and other finance costs for the nine-month period ended November 30, 2019 totaled $1.82 million compared to $0.04 million the nine-month period ended November 30, 2018, representing an increase of $1.78 million. The increase is mainly attributable to an increase in accretion expense of $1.58 million, an increase in interest expense of $0.31 million and by an increase in amortization of deferred financing costs of $0.09 million, offset by a gain on conversion of the November 2018 Notes of $0.23 million.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
 
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 November 30, 2019, the Company had cash on hand of $35.5 million. On May 29, 2019, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with Northern Private Capital Fund I Limited Partnership (“Northern Capital”) pursuant to which the Company has issued to Northern Capital in a registered direct offering (“Offering”) an aggregate of 4,093,567 shares of the Company’s common stock at a per share purchase price of $8.55 per share, for aggregate net proceeds of approximately $34.6 million, after deducting offering expenses payable by the Company of approximately $400,000. Concurrently with the Offering and pursuant to the Purchase Agreement, the Company issued to Northern Capital options to purchase up to an additional 4,093,567 shares of the Company’s common stock at an exercise price of $11.00 per share, which vested on December 15, 2019, and are exercisable for three years following the closing date of the Offering and which would result in further total net proceeds of approximately $45 million. The proceeds from the Offering will be used to finance the start-up of its joint venture commercial operations, which is estimated to be between $15,000,000 and $20,000,000, and further fund the development of its technology and new technologies and its ongoing pre-revenue operations.
 
On February 27, 2019, Loop Industries, Inc. entered into a Securities Purchase Agreement with a single institutional investor, pursuant to which the Company agreed to issue and sell to the Purchaser, in a registered direct offering (“Offering”), an aggregate of 600,000 shares (“Shares”) of the Company’s common stock at a per share purchase price of $8.55 per share, for aggregate net proceeds of approximately $4.2 million, after deducting placement agent fees and estimated offering expenses payable by the Company of approximately $0.9 million. The Offering closed on March 1, 2019. The Company intends to use the net proceeds from the Offering for general corporate purposes and working capital.
 
As at November 30, 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 installment loan (the Loan), from a Canadian bank. The Loan bears interest at the banks 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.
 
On July 24, 2019, the Company executed an agreement with Investissement Quebec providing it with a financing from which we can draw a total equal to 63.45% of all eligible expenses incurred for the expansion of our Pilot Plant up to a maximum CDN$4,600,000. There is a 36-month moratorium on both capital and interest repayments beginning as of the first disbursement date. At the end of the 36-month moratorium, capital and interest will be repayable in 84 monthly installments. The loan will bear interest at 2.36%. The Company has also agreed to issue to Investissement Quebec warrants convertible into common shares in an amount equal to 10% of each disbursement up to a maximum aggregate amount of CDN$460,000. The warrants will be issued at a price per share equal to the higher of (i) $11.00 per share and (ii) the ten-day weighted average closing price of Loop Industries’ shares of Common Stock on the Nasdaq stock market for the 10 days prior to the issue of the warrants. The warrants can be exercised immediately upon grant and will have a term of three years from the date of issuance. The loan can be repaid at any time by the Company without penalty. No disbursements have yet been made under the agreement.
 
 
11
 
 
Flow of Funds
 
Summary of Cash Flows
 
A summary of cash flows for the nine-month period ended November 30, 2019 and 2018 was as follows:
 
 
 
Nine Months Ended November 30
 
 
 
2019
 
 
2018
 
Net cash used in operating activities
 $(6,819,748)
 $(5,455,317)
Net cash used in investing activities
  (2,592,921)
  (1,523,353)
Net cash provided from (used in) financing activities
  39,127,875 
  2,510,529 
Effect of exchange rate changes on cash and cash equivalents
  (57,105)
  (53,314)
Net increase (decrease) in cash and cash equivalents
 $29,658,101 
 $(4,521,455)
 
Net Cash Used in Operating Activities
 
During the nine months ended November 30, 2019, we used $6.8 million in operations compared to $5.5 million during the nine months ended November 30, 2018. The Company continued to invest in research and development on its existing technologies and new technologies, particularly on the evolution of its GEN II technology as the Company moves to the next phase of commercialization.
 
Net Cash Used in Investing Activities
 
During the nine months ended November 30, 2019, the Company made investments of $1.7 million in property, plant and equipment as compared to $1.4 million for the nine months ended November 30, 2018, primarily in connection with the upgrade of its GEN II industrial pilot plant.
 
During the nine months ended November 30, 2019, the Company made investments in intangible assets of $0.09 million as compared to $0.09 million for the nine months ended November 30, 2018, particularly in its GEN II patent technology in the United States and around the world.
 
During the nine months ended November 30, 2019, the Company also made its initial contribution of $850,000 to Indorama Loop Technologies, LLC, the joint venture with Indorama Ventures Holdings LP, USA.
 
Net Cash Provided from (Used in) Financing Activities
 
During the nine months ended November 30, 2019, we raised net proceeds of $39.2 million through the sale of common stock.
 
As at November 30, 2019, the Company was in compliance with its financial covenants.
 
Off-Balance Sheet Arrangements
 
As at November 30, 2019, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
 
As at November 30, 2019, we did not have any significant lease obligations to third parties.
 
 
12
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are subject to risks associated with currency fluctuations and changes in foreign currency exchange rates as well as fluctuations in the supply and price of raw materials and commodity prices. 
 
Foreign Currency Exchange Risk
 
We operate mainly through two entities, Loop Industries, Inc., which is a Nevada corporation and has a U.S. dollar functional currency, and our wholly-owned subsidiary, Loop Canada Inc. (“Loop Canada”), which is based in Terrebonne, Québec, Canada and has a Canadian dollar functional currency. Our reporting currency is the U.S. dollar.
 
We mainly finance our operations through the sale and issuance of shares of common stock and debt 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 the U.S. dollar to the Canadian dollar exchange rates could materially affect our result of operations, cash position and funding requirements. To the extent that fluctuations in currency exchange rates cause our results of operations to differ materially from our expectations or the expectations of our investors, the trading price of our common stock could be adversely affected.
 
From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. As part of our risk management program, we may enter into foreign exchange forward contracts to lock in the exchange rates for future foreign currency transactions, which is intended to reduce the variability of our operating costs and future cash flows denominated in currencies that differs from our functional currencies. We do not enter into these contracts for trading purposes or speculation, and our management believes all such contracts are entered into as hedges of underlying transactions. Nonetheless, these instruments involve costs and have risks of their own in the form of transaction costs, credit requirements and counterparty risk. If our hedging program is not successful, or if we change our hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates. Any hedging technique we implement may fail to be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on the trading price of our common stock.
 
Commodity Price Risk
 
The plastics manufacturing industry is extremely price competitive because of the commodity like nature of PET resin and its correlation to the price of crude oil. The demand for recycled PET has fluctuated with the price of crude oil. If crude oil prices decline, the cost to manufacture recycled PET may become comparatively higher than the cost to manufacture virgin PET. Our ability to penetrate the market will depend in part on the cost of manufacturing virgin PET and if we do not successfully distinguish our product from those of virgin PET manufacturers, our entry into the market and our ability to secure customer contracts can be adversely affected.
 
Raw Material Price Risk
 
We purchase raw materials and packaging supplies from several sources. While all such materials are available from independent suppliers, raw materials are subject to fluctuations in price and availability attributable to a number of factors, including general economic conditions, commodity price fluctuations, the demand by other industries for the same raw materials and the availability of complementary and substitute materials. The profitability of our business also depends on the availability and proximity of these raw materials to our factories. The choice of raw materials to be used at our facility is determined primarily by the price and availability, the yield loss of lower quality raw materials, and the capabilities of the producer’s production facility. Additionally, the high cost of transportation could favor suppliers located in close proximity to our factories. If the quality of these raw materials is lower, the quality of our product may suffer. Economic and financial factors could impact our suppliers, thereby causing supply shortages. Increases in raw material costs could have a material adverse effect on our business, financial condition or results of operations. Our hedging procedures may be insufficient, and our results could be materially impacted if costs of materials increase.
 
 
13
 
 
ITEM 4. CONTROLS AND PROCEDURES
 
Management’s Evaluation of our Disclosure Controls and Procedures
 
A.
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
 
As of the end of the period covered by this Quarterly Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of November 30, 2019.
 
B.
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the quarter ended November 30, 2019 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
14
 
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are not presently a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
 
It is possible that we may expend financial and managerial resources in the defense of our intellectual property rights in the future if we believe that our rights have been violated. It is also possible that we may expend financial and managerial resources to defend against claims that our products and services infringe upon the intellectual property rights of third parties.
 
ITEM 1A. RISK FACTORS
 
We are subject to various risks and uncertainties in the course of our business. Risk factors relating to us are set forth under “Risk Factors” in our Annual Report on Form 10-K, filed on May 3, 2019. No material changes to such risk factors have occurred during the nine months ended November 30, 2019.
  
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5. OTHER INFORMATION
 
None.
 
 
15
 
 
ITEM 6. EXHIBITS
 
The following Exhibits, as required by Item 601 of Regulation SK, are attached or incorporated by reference, as stated below.
Exhibit Index
 
 
 
 
Incorporated by Reference
 
 
Number
 
Description
 
Form
 
File No.
 
Filing Date
 
Exhibit No.
 
Form of Amendment No. 1 to the January 15, 2019 Note Purchase Agreement, dated April 4, 2019.
 
8-K
 
001-38301
 
10-Apr-19
 
4.1
 
Form of Amendment to 2019 Warrant, dated April 4, 2019.
 
8-K
 
001-38301
 
10-Apr-19
 
4.2
 
Form of Amendment and Conversion Agreement, dated April 5, 2019.
 
8-K
 
001-38301
 
10-Apr-19
 
4.3
 
Form of Amendment to November 2018 Warrant, dated April 8, 2019.
 
8-K
 
001-38301
 
10-Apr-19
 
4.4
24.1
 
Power of Attorney (contained on signature page to the previously filed Annual Report on Form 10-K)
 
10-K
 
000-54768
 
08-May-19
 
24.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
Filed herewith
 
 
 
 
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
Filed herewith
 
 
 
 
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
Furnished herewith
 
 
 
 
 
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
Furnished herewith
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
Filed herewith
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
Filed herewith
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
Filed herewith
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
Filed herewith
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
Filed herewith
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
Filed herewith
 
 
 
 
 
 
16
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
 
Date: January 9, 2020
By:
/s/ Daniel Solomita
 
 
Name:
Daniel Solomita
 
 
Title:
President and Chief Executive Officer, and Director (Principal Executive Officer)
 
 
 
 
 
Date: January 9, 2020
By:
/s/ Nelson Gentiletti
 
 
Name:
Nelson Gentiletti
 
 
Title:
Chief Financial Officer and Treasurer (Principal Accounting Officer and Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
17