ITEM 1. BUSINESS
Overview
Loop Industries 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 Industries owns patented and proprietary technology that depolymerizes no- and low-value waste PET plastic and polyester fiber, including bottles, packaging, carpets, and other textiles of any color, transparency or condition, including waste PET plastic recovered from the ocean that has 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 suitable for use in food-grade packaging, and polyester fiber, thus enabling our customers to meet their sustainability objectives. Loop Industries is contributing to the global movement towards a circular economy by preventing plastic waste and recovering waste plastic for a more sustainable future for all.
Industry Background
We believe there is an increasing demand for action to address the global plastic crisis, which has been characterized by facts provided by leading academic and not-for profit organizations. For example, the University of Georgia reports eight million metric tons of plastic waste flows into our shared oceans every year, and, according to The New Plastics Economy, by 2050 more plastic waste is expected to be present in the ocean than fish (by mass). Couple this information with the global annual market demand for PET plastic and polyester fiber at nearly $130 billion, and the current growth projections from the 2018 IHS Polymer Market Report indicating this will exceed $160 billion by 2022, and the need for governments and consumer brands to take decisive action to stem this global plastic crisis becomes readily apparent.
In the last few years, there are numerous examples of governments in North America and Europe proposing laws and regulations mandating the use of minimum recycled content in packaging underlying the strength of this issue in the marketplace. Plastic pollution continues to be one of the most persistently covered environmental issues by media and local and global environmental non-governmental organizations.
Also, global consumer goods companies have made significant commitments to make the transition to a circular plastic economy, namely:
i.
In January 2018, Danone’s evian® brand bottled spring water committed to a 100% recycled content package by 2025;
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In 2018, Coca-Cola committed to an average recycled content of 50% across its packaging by 2030;
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In October 2018, PepsiCo committed to use an average of 25% recycled plastic in its packaging by 2025; PepsiCo is also aiming to use 50% recycled plastic in its bottles across the European Union by 2030;
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In 2018, L’OCCITANE en Provence committed to a 100% recycled content package by 2025; and
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In March 2019, the L’Oréal Group, a global manufacturer and retailer of natural cosmetics, committed to using 50% recycled or bio-sourced plastic in their packaging by 2025.
We believe these trends indicate that the transformation from a linear to a circular plastic economy is inevitable and underway. This transition is leading to a substantial demand for sustainable products such as Loop™ PET resin and polyester fiber.
Proprietary Technology and Intellectual Property
The power of our technology lies in its ability to use as feedstock what is currently considered waste PET plastic and polyester fiber from landfills, rivers, oceans and natural areas to create new, sustainable, infinitely recyclable Loop™ PET resin and polyester fiber. We believe our technology can deliver a cost-effective and profitable virgin quality PET resin suitable for use in food-grade packaging.
Our Generation I (“GEN I”) technology process yielded purified terephthalic acid (“PTA”) and monoethylene glycol (“MEG”), two common monomers of PET, through depolymerization. While the monomers were of excellent purity and strong yield, we continued to challenge ourselves to drive down costs and eliminate inputs. It was during this process that we realized we could simplify our process and increase yields at a lower cost, namely by eliminating water and chlorinated solvents from the depolymerization process and reducing the number of reagents from five to two, if we shifted from the production of PTA to the production of dimethyl terephthalate (“DMT”), another proven monomer of PET that is far simpler to purify. Since June 2018, when we transitioned to this Generation II (“GEN 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 Industries. We believe that the GEN II technology requires less energy and fewer resource inputs than conventional PET production processes. We also believe it is one of the most environmentally sustainable methods for producing virgin quality food-grade PET plastic in the world.
In connection with the continuing development of our GEN II technology, we continued to invest in our industrial pilot plant. We made capital investments in the pilot plant of $2,439,013 during the year ended February 29, 2020.
To protect our technology, we rely on a combination of patents, trademarks, trade secrets, confidentiality agreements and provisions as well as 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 technology for depolymerizing PET.
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The GEN I portfolio has two issued U.S. patents and a pending 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, allowed patent applications in Australia and Eurasia, and pending patent applications in Argentina, Brazil, Canada, China, Europe, Hong Kong, Israel, India, Japan, Korea, Mexico, and the Philippines, all expected to expire, if granted, on or around July 2036.
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The GEN II technology portfolio has an issued U.S. patent and a pending U.S. application, all expected to expire, if granted, on or around September 2037. Internationally, we also have a PCT application, an allowed application in Bangladesh, and pending non-PCT country applications in Argentina, 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 U.S. 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 2040, if granted.
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. Additionally, due to the impact of the COVID-19 pandemic, we may experience delays in obtaining such permits or approvals. 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 resin 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 resin will be a significant part of our strategy going forward.
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 resin and polyester fiber provides the ideal solution for these brands because Loop™ PET 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.
Loop Industries 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.
In the last two years, we have made a significant number of announcements with some of the world’s leading brands to be supplied from our planned first commercial facility from our joint venture with Indorama Ventures Holdings LP (“Indorama”) in Spartanburg, South Carolina, including:
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Multi-year supply agreement with Danone SA, one of the world’s leading global food and beverage companies. Danone will purchase 100% sustainable and upcycled Loop™ branded PET for use in brands across its portfolio including evian®, Danone’s iconic natural spring water;
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Multi-year supply agreement with PepsiCo, one of the largest purchasers of recycled PET plastic, enabling them to purchase production capacity and incorporate Loop™ PET resin into its product packaging;
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Multi-year supply framework with the Coca-Cola system’s Cross Enterprise Procurement Group to supply 100% recycled and sustainable Loop™ PET resin to authorized Coca-Cola bottlers who enter into supply agreements with us;
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Multi-year supply agreement with L’OCCITANE en Provence to supply 100% recycled and sustainable Loop™ PET resin and incorporate Loop™ PET resin into its product packaging; and
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Multi-year supply agreement with L’Oréal Group, the global leader in the beauty industry, enabling them to purchase production capacity and incorporate Loop™ PET resin into its product packaging.
Turning Waste into Feedstock
To us, waste PET plastic and polyester fiber is feedstock, the materials introduced into our GEN II depolymerization technology to yield PET monomers. Our technology can use plastic bottles and packaging of any color, transparency or condition, carpet, clothing and other polyester textiles that may contain colors, dyes or additives, and even ocean plastics that have been degraded by sun and salt. This is yet another advantage of Loop™ PET over mechanically recycled PET, our ability to use many materials that mechanical 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 certain 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 landfills, rivers, oceans and natural areas by providing a new outlet for what was formerly considered waste.
Commercialization Progress
During the year ended February 29, 2020, we continued executing our corporate strategy where Loop Industries focused on developing two distinct business models for the commercialization of Loop™ PET resin and polyester fiber to customers: 1) from our joint venture with Indorama, and 2) from our Infinite LoopTM greenfield facilities. We continue 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 one of our business models, we announced a joint venture with Indorama to retrofit their existing PET manufacturing facilities. The joint venture was formed with the objective 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 Spartanburg, South Carolina, in the southeastern United States.
Following the decision of the joint venture with Indorama to double the capacity of the planned 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 optimize the total construction cost of the plant. We announced that the commissioning of the plant is expected to take place in the third quarter of calendar 2021. All parties are working diligently towards achieving this timetable although we are monitoring the impact of COVID-19 on the project. as well as the operations of our partners. The commissioning date may be impacted by the COVID-19 pandemic.
We have currently contracted for the sale of the initial 20,700 metric tons expected output of the Spartanburg facility and we continue discussions to contract the additional volume up to its planned increased capacity of 40,000 metric tons.
To drive our Infinite Loop™ business model, which is a key pillar of our commercialization blueprint, we intend to partner with PET polymerization technology providers and EPC companies (Engineering, Procurement, Construction). As Loop Industries’ technology is agnostic to PET polymerization technology, we are also exploring relationships with other partners that provide PET polymerization technology to help us commercialize our Infinite Loop™ solution-a fully integrated and reimagined manufacturing facility for sustainable Loop™ PET 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 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 also changes where and how PET resin production occurs-no longer does PET 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 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 resin and polyester fiber in the marketplace to meet the substantial demand from consumer goods companies.
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 brand value. Our research and development innovation hub in Terrebonne, Québec, 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. On March 9, 2020, we hired Mr. Stephen Champagne as Chief Technology Officer. Mr. Champagne has over 25 years of industrial experience having participated in all project phases from laboratory development through engineering, procurement, and construction, all the way to plant commissioning.
Employees
As at April 30, 2020, we have 53 employees, all of which are located in Terrebonne, Québec, Canada. Due to the COVID-19 pandemic, we have furloughed 31 employees until government restrictions are lifted. We have no collective bargaining agreements with our employees, and we have not experienced any work stoppages. We consider our relations with our employees to be good.
Corporate History
We were originally incorporated in Nevada in March 2010 under the name Radikal Phones Inc., which was changed to First American Group Inc. in October 2010. On June 29, 2015, we completed a reverse acquisition of Loop Holdings, Inc. (“Loop Holdings”) whereby we acquired all of Loop Holdings’ issued and outstanding shares of common stock in a share exchange for approximately 78.1% of our capital stock at the time. The depolymerization business of Loop Holdings became our sole operating business. On June 22, 2015, our board of directors approved a change in the fiscal year end date from September 30 to the last day of February. On
July 21, 2015, we changed our name to Loop Industries, Inc.
Loop Holdings was originally incorporated in Nevada on October 23, 2014. The depolymerization technology underlying our business was originally developed by Hatem Essaddam who sold the technology and related intellectual property rights to Loop Holdings in October 2014, pursuant to an Intellectual Property Assignment Agreement dated October 27, 2014, by and among Hatem Essaddam, Loop Holdings, and Daniel Solomita. The intellectual property acquired pursuant to such Intellectual Property Agreement formed the basis for establishing the GEN I technology that was initially used by us. The GEN I technology has now been superseded by the development of our GEN II technology, which forms the basis for our commercialization into the future. We do not intend to commercialize our GEN I technology.
On May 24, 2016, 9449507 Canada Inc. was organized under the federal laws of Canada and on November 11, 2016 became a wholly-owned subsidiary of Loop Industries, Inc. following the transfer by Mr. Solomita of all of the issued and outstanding shares of common stock of 9449507 Canada Inc. to Loop Industries, Inc. On December 23, 2016,
Canada Inc. changed its legal name to Loop Canada Inc.
On December 31, 2016, 8198381 Canada Inc. entered into a purchase and sale agreement to transfer to Loop Canada Inc., all assets and liabilities it held pertaining to our business of depolymerizing plastics, including employees and operations.
On March 9, 2017, Loop Holdings, our wholly-owned subsidiary, merged with and into Loop Industries, Inc., with Loop Industries, Inc. being the surviving entity as a result of the merger.
On November 20, 2017, Loop Industries, Inc. commenced trading on the Nasdaq Global Market under its new trading symbol, “LOOP.” From April 10, 2017 to November 19, 2017, our common stock was quoted on the OTCQX tier of the OTC Markets Group Inc. under the symbol “LLPP.” From October 29, 2015 through April 7, 2017, our common stock was quoted on the OTCQB tier of the OTC Markets Group Inc. under the stock symbol “LLPP.” From September 26, 2012 to October 28, 2015, our common stock was quoted on the OTCQB tier of the OTC Markets Group Inc. under the stock symbol “FAMG.”
Corporate Information
Our principal executive offices are located at 480 Fernand-Poitras Street, Terrebonne, Québec, Canada J6Y 1Y4. Our telephone number is (450) 951-8555. The information contained on, or that can be accessed through, our website is not a part of this Annual Report on Form 10-K.
Available Information
Our website is www.loopindustries.com, and our investor relations web page can be found at https://www.loopindustries.com/en/investors/home. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available, free of charge, on our investor relations website as soon as reasonably practicable after we file such material electronically with or furnish it to the Securities and Exchange Commission, or the SEC. The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below together with all of the other information included in this Form 10-K before making an investment decision with regard to our securities. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.
RISKS RELATING TO OUR COMPANY
We have incurred net losses since inception. We expect to continue to incur losses for the foreseeable future and may never achieve or maintain profitability. We have never generated revenue and may never be profitable.
Since our inception in 2010, we have incurred net losses. Our net loss for the year ended February 29, 2020 was $14.51 million. We have five customer agreements signed, we have however earned no revenues to date. We have financed our operations primarily through sales of common stock and incurrence of debt and have devoted substantial efforts to research and development, as well as building our team. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. Although we believe that our business plan has significant profit potential, we may not attain profitable operations and management may not succeed in realizing our business objectives. Our ability to generate revenue depends on our ability to successfully complete the development of our products, obtain the regulatory approvals necessary to commercialize our products and attract additional customers. We expect to incur operating losses in future periods. These losses will occur as we do not have any revenues to offset the expenses associated with our business operations. We may not generate revenues from product sales for the next several years, if ever. If we are not able to develop our business as anticipated, we may not be able to generate revenues or achieve profitability. We cannot guarantee that we will ever be successful in generating revenues in the future. If we are unable to generate revenues, we will not be able to earn profits or continue operations.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Our business was started in October 2014 with the incorporation of Loop Holdings, Inc. and 8198381 Canada Inc., and the acquisition of intellectual property from Hatem Essaddam in October 2014. Our operations to date have been primarily limited to organizing and staffing our company, business planning, raising capital and developing our technology. We have not yet demonstrated the ability to manufacture a commercial-scale product or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history. In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a research focus to a company that is also capable of supporting commercial activities. We may not be successful in such a transition.
There is no history upon which to base any assumption as to the likelihood that we will prove successful, and we can provide investors with no assurance that we will generate any operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will almost certainly fail.
We may not be able to execute our business plan or stay in business without additional funding.
Our ability to generate future operating revenues depends in part on whether we can obtain the financing necessary to implement our business plan. We will likely require additional financing through the issuance of debt and/or equity in order to establish profitable operations, and such financing may not be forthcoming. If we are unable to attract investors to invest in our business, we may not be able to acquire additional financing through debt or equity markets. Even if additional financing is available, it may not be available on terms favorable to us. Our failure to secure additional financing on favorable terms when it becomes required would have an adverse effect on our ability to remain in business.
The global COVID-19 pandemic has adversely affected, and may in the future adversely affect, our business, results of operations and financial condition.
In December 2019, COVID-19 began to impact the population of Wuhan, China. The continued spread of COVID-19 globally could result in a widespread health crisis that could adversely affect the global economy and financial markets. In light of the uncertain and rapidly evolving situation relating to COVID-19, we have taken precautionary measures intended to minimize the risk of COVID-19 to our employees, our customers, and the communities in which we operate, which could negatively impact our business. National, state and local authorities have recommended social distancing and imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business closures. These measures, although intended to protect the population, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. As of the date of this Annual Report on Form 10-K, the COVID-19 outbreak has already begun to cause disruption to our business, including our furloughing a number of employees. Potential financial impacts associated with the COVID-19 outbreak include, but are not limited to, delays in critical development and commercialization activities and potential incremental costs associated with mitigating the effects of the outbreak, furloughs of employees, disruption of supply chains, demand for our product, shipping of raw materials, restrictions on manufacturing, the movement of employees, and a decline in value of assets held by us, including property and equipment. Specifically, the COVID-19 pandemic may have an impact on the operations and the strategies of our first commercial facility from our joint venture with Indorama in Spartanburg, South Carolina. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, the COVID-19 outbreak is ongoing, and its dynamic nature, including uncertainties relating to the ultimate spread of the virus, the severity of the disease, the duration of the outbreak and actions that may be taken by governmental authorities to contain the outbreak or to treat its impact, makes it difficult to accurately forecast any effects on our results of operations for 2021 and beyond.
As a result of COVID-19 and the measures designed to contain the spread of the virus, we may not have the materials or capacity to continue our development efforts according to our schedule. Further, there may be logistics issues, including our ability and to quickly resume operations, if necessary, and transportation demands that may cause further delays. While the disruptions and restrictions on the ability to travel, quarantines, furloughs of employees, and reduced operation of our pilot plant, as well as general limitations on movement are expected to be temporary, the duration of the disruption, and related financial impact, cannot be estimated at this time. Should the distribution continue for an extended period of time, the impact on the development and commercialization of our technology could have a material adverse effect on our results of operations and cash flows.
The macro-economic environment in the United States and abroad has adversely affected, and may in the future adversely affect, our ability to raise capital, which may potentially impact our ability to continue our operations.
We have and, prior to commercialization, will continue to rely on raising funds from investors and/or other sources to support our research and development activities and our operations. Macro-economic conditions in the United States and abroad may result in a tightening of the credit markets and/or less capital available for small public companies, which may make it more difficult to raise capital. Specifically, the outbreak of COVID-19 has caused significant disruptions to the global financial markets, which could increase the cost of capital and adversely impact our ability to raise additional capital, which could negatively affect our liquidity in the future. If we are unable to raise funds as and when we need them, we may be forced to curtail our operations or even cease operating altogether. Therefore, unfavorable macroeconomic conditions, including as a result of COVID-19 and any resulting recession or slowed economic growth, could have a negative impact on us. It is not possible at this time to estimate the impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain.
Our technology may not be successful in developing commercial products.
We and our potential future collaborators may spend many years and dedicate significant financial and other resources developing our technology that may never be successfully commercialized. Our technology may never become successfully commercialized for any of the following reasons:
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We may not be able to secure sufficient funding to progress our technology through development and commercial validation;
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We or our future collaborators may be unable to obtain the requisite regulatory approvals for our technology;
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Competitors may launch competing or more effective technology;
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Our technology may not be commercially successful;
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Current and future collaborators may be unable to fully develop and commercialize products containing our technology or may decide, for whatever reason, not to commercialize such products; and
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We may be unable to secure adequate patent protection in the necessary jurisdictions.
If any of these things were to occur, it could have a material adverse effect on our business and our results of operations.
If we are unable to successfully scale our manufacturing processes, we may not meet customer demand.
To be successful, we will have to scale our manufacturing processes while maintaining high product quality and reliability. If we cannot maintain high product quality on a large scale, our business will be adversely affected. We may encounter difficulties in scaling up production, including problems with the supply of key components. Even if we are successful in developing our manufacturing capability, we do not know whether we will do so in time to satisfy the requirements of our customers. The current manufacturing facility is a pilot plant with limited production capacity used principally for research and development. In order to fully implement our business plan, we will need to scale the operations to a to a larger industrial commercial facility, develop strategic partnerships or find other means to produce greater volumes of finished product.
Decreases in our ability to develop or apply new technology and know-how may affect our competitiveness.
Our success depends partially on our ability to improve production processes and services. We must also introduce new products and services to meet changing customer needs. If we are unable to implement better production processes or to develop new products through research and development or licensing of new technology, we may not be able to remain competitive with other manufacturers. As a result, our business, financial condition or results of operations could be adversely affected.
Disruption at, damage to or destruction of our pilot plant or facilities could impede our ability to continue innovating and refining our technological process, which would harm our business, financial condition and operating results.
Our research and development activities are performed from a single location in Terrebonne, Québec. Our continued innovation activities rely on an uninterrupted and fully functioning pilot plant. Interruptions in operations at this location could result in our inability to provide the most efficient and effective technological solution to our customers. A number of factors could cause interruptions, including, but not limited to, equipment malfunctions or failures, technology malfunctions, work stoppages or slow-downs, damage to or destruction of the facility or regional power shortages. As our equipment ages, it will need to be replaced. Any disruption that impedes our ability to optimize our process in a timely manner could reduce our revenues and materially harm our business.
The plastics manufacturing industry is extremely price-competitive because of the commodity-like nature of PET resin and its correlation to the price of crude oil. If our cost to manufacture recycled PET is not competitive with virgin PET or if the price of oil reduces significantly, it may adversely impact our ability to penetrate the market or be profitable.
The demand for recycled PET has fluctuated with the price of crude oil. If crude oil prices decline, the cost to manufacture recycled PET may become comparatively higher than the cost to manufacture virgin PET. Our ability to penetrate the market will depend in part on the cost of manufacturing virgin PET and if we do not successfully distinguish our product from those of virgin PET manufacturers our entry into the market and our ability to secure customer contracts can be adversely affected.
We are vulnerable to fluctuations in the supply and price of raw materials.
We purchase raw materials and packaging supplies from several sources. While all such materials are available from independent suppliers, raw materials are subject to fluctuations in price and availability attributable to a number of factors, including general economic conditions, commodity price fluctuations, the demand by other industries for the same raw materials and the availability of complementary and substitute materials. The profitability of our business also depends on the availability and proximity of these raw materials to our factories. The choice of raw materials to be used at our facility is determined primarily by the price and availability, the yield loss of lower quality raw materials, and the capabilities of the producer’s production facility. Additionally, the high cost of transportation could favor suppliers located in close proximity to our factories. If the quality of these raw materials is lower, the quality of our product may suffer. Economic and financial factors could impact our suppliers, thereby causing supply shortages. Increases in raw material costs could have a material adverse effect on our business, financial condition or results of operations. Our hedging procedures may be insufficient, and our results could be materially impacted if costs of materials increase. In light of the uncertain and evolving situation relating to the global COVID-19 pandemic, our access to raw materials, the quality and proximity of such materials may be disrupted. We currently cannot predict the impact that the global COVID-19 pandemic will have on our access to raw materials.
The loss of the services of Mr. Daniel Solomita, our President and Chief Executive Officer, and Chairman of the Board of Directors, or our failure to timely identify and retain competent personnel could negatively impact our ability to develop our business.
The development of our business and the marketing of our prospective products will continue to place a significant strain on our limited personnel, management, and other resources. Our future success depends upon the continued services of our executive officers who are developing our business, and on our ability to identify and retain competent consultants and employees with the skills required to execute our business objectives. The loss of the services of Mr. Daniel Solomita or our failure to timely identify and retain competent personnel could negatively impact our ability to develop our business which could adversely affect our financial results and impair our growth.
Our pilot plant must operate under policies, procedures, and controls for the operation of a chemical manufacturing facility as required under various federal, provincial and local regulations and codes. Failure to comply with such regulations and codes may lead to disruption of operations at the pilot plant and the development of our technology, and financial sanctions.
We are subject to health and safety as well as environmental, zoning and any other regulatory requirements to operate our pilot plant, and as our business evolves, we, directly or indirectly through our partners or other related parties, may be subject to additional government regulations. Any failure to comply with ongoing regulatory requirements, as well as discovery of previously unknown problems, may result in, among other things, costly regulatory inspections, fines or remediation plans. If regulatory issues arise, the value of our business and our operating results may be adversely affected.
Additionally, applicable regulations may change, and additional government regulations may be enacted that could impact our business. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, are slow or unable to adopt new requirements or policies, or effect changes to existing requirements, our business may be adversely affected.
Our failure to protect our intellectual property and proprietary technology may significantly impair our competitive advantage.
Our success and ability to compete depends in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection, confidentiality, nondisclosure and nonuse agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and similar proprietary rights.
We may face costly intellectual property infringement claims, the result of which would decrease the amount of cash available to operate and complete our business plan.
We anticipate that, from time to time, we will receive communications from third parties asserting that we are infringing certain patents and other intellectual property rights of others or seeking indemnification against alleged infringement. If anticipated claims arise, we will evaluate their merits. Any claims of infringement brought forth by third parties could result in protracted and costly litigation, damages for infringement, and the necessity of obtaining a license relating to one or more of our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Litigation, which could result in substantial costs to us and diversion of our resources, may be necessary to enforce our patents or other intellectual property rights or to defend us against claimed infringement of the rights of others. Any intellectual property litigation and the failure to obtain necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations.
We rely in part on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could harm our business.
We rely on trade secrets to protect some of our technology and proprietary information, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. Litigating a claim that a third party had illegally obtained and used our trade secrets would be expensive and time consuming, and the outcome would be unpredictable. Moreover, if our competitors independently develop similar knowledge, methods and know-how, it will be difficult for us to enforce our rights and our business could be harmed.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and the price of our common stock.
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to include an internal control report with our Annual Report on Form 10-K. This report must include management’s assessment of the effectiveness of our internal control over financial reporting as at the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified.
The process of designing and implementing internal control over financial reporting required to comply with Section 404 of the Sarbanes-Oxley Act is time consuming, costly and complicated. If during the evaluation and testing process, we identify one or more other material weaknesses in our internal control over financial reporting or determine that existing material weaknesses have not been remediated, our management will be unable to assert that our internal control over financial reporting is effective. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed. If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
The COVID-19 pandemic has not had a significant impact on the design and effectiveness of the Company’s internal controls over financial reporting.
We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates could impact our results of operations.
We operate mainly through two entities, Loop Industries, Inc., which is a Nevada corporation and has a U.S. dollar functional currency, and our wholly-owned subsidiary, Loop Canada Inc. (“Loop Canada”), which is based in Terrebonne, Québec, Canada and has a Canadian dollar functional currency. Our reporting currency is the U.S. dollar.
We mainly finance our operations through the sale and issuance of shares of common stock of Loop Industries, Inc. in U.S. dollars while our operations are concentrated in our wholly-owned subsidiary, Loop Canada. Accordingly, we are exposed to foreign exchange risk as we maintain bank accounts in U.S. dollars and a significant portion of our operational costs (including payroll, site costs, costs of locally sourced supplies and income taxes) are denominated in Canadian dollars.
Significant fluctuations in U.S. dollar to Canadian dollar exchange rates could materially affect our result of operations, cash position and funding requirements. To the extent that fluctuations in currency exchange rates cause our results of operations to differ materially from our expectations or the expectations of our investors, the trading price of our common stock could be adversely affected.
From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. As part of our risk management program, we may enter into foreign exchange forward contracts to lock in the exchange rates for future foreign currency transactions, which is intended to reduce the variability of our operating costs and future cash flows denominated in currencies that differs from our functional currencies. We do not enter into these contracts for trading purposes or speculation, and our management believes all such contracts are entered into as hedges of underlying transactions. Nonetheless, these instruments involve costs and have risks of their own in the form of transaction costs, credit requirements and counterparty risk. If our hedging program is not successful, or if we change our hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates. Any hedging technique we implement may fail to be effective. If our hedging activities are not effective, changes in currency exchange rates may have a more significant impact on the trading price of our common stock.
We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business.
We cannot predict with certainty the cost of defense, of prosecution or of the ultimate outcome of litigation and other proceedings filed by or against us, including penalties or other civil or criminal sanctions, or remedies or damage awards, and adverse results in any litigation and other proceedings may materially harm our business. Litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, international trade, commercial arrangements, product liability, environmental, health and safety, joint venture agreements, labor and employment or other harms resulting from the actions of individuals or entities outside of our control. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that are subject to third-party patents or other third-party intellectual property rights.
RISKS ASSOCIATED WITH OUR SECURITIES
Raising additional funds may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies.
If we raise additional funds through equity offerings or offerings of equity-linked securities, including warrants or convertible debt securities, our existing stockholders may experience significant dilution, and the terms of such securities may include liquidation or other preferences that may adversely affect the rights of our stockholders. Debt financings, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities, including covenants limiting or restricting our ability to incur additional debt, dispose of assets or incur capital expenditures. We may also incur ongoing interest expense and be required to grant a security interest in our assets in connection with any debt issuance. If we raise additional funds through strategic partnerships or licensing agreements with third parties, we may have to relinquish valuable rights to our technologies or grant licenses on terms that are not favorable to us.
Trading volume in our stock can fluctuate and an active trading market for our common stock may not be available on a consistent basis to provide stockholders with adequate liquidity. Our stock price may be volatile, and our stockholders could incur significant investment losses.
The trading price for our common stock will be affected by a number of factors, including:
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any change in the status of our Nasdaq listing;
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the need for near-term financing to continue operations;
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reported progress in our efforts to develop and commercialize our technology, relative to investor expectations;
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general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;
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volatility in the financial and credit markets, including the recent volatility due, in part, to the current COVID-19 outbreak;
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future issuances and/or sales of our securities;
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announcements or the absence of announcements by us, or our competitors, regarding collaborations, new products, significant contracts, commercial relationships or capital commitments;
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commencement of, or involvement in, litigation;
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any major change in our board of directors or management;
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changes in governmental regulations or in the status of our regulatory approvals;
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announcements related to patents issued to us or our competitors and to litigation involving our intellectual property;
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a lack of, or limited, or negative industry or security analyst coverage;
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uncertainty regarding our ability to secure additional cash resources with which to operate our business;
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short-selling or similar activities by third parties; and
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other factors described elsewhere in these Risk Factors.
As a result of these factors, our stockholders may not be able to resell their shares at, or above, their purchase price. In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. Any negative change in the public’s perception of the prospects of companies in our industry could depress our stock price regardless of our results of operations. These factors may have a material adverse effect on the market price and liquidity of our common stock and affect our ability to obtain required financing.
Our President and Chief Executive Officer and Chairman of the Board of Directors, Mr. Daniel Solomita, beneficially owns a majority of the total voting power of our capital stock, and accordingly, has control over stockholder matters, our business and management.
As at April 30, 2020, Mr. Daniel Solomita, our President and Chief Executive Officer, Chairman of the Board of Directors, and controlling shareholder, beneficially owns 18,800,000 shares of common stock, or 47.1% of our issued and outstanding shares of common stock and also holds one share of Series A Preferred Stock. The one share of Series A Preferred Stock issued to Mr. Solomita holds a majority of the total voting power so long as Mr. Solomita holds not less than 7.5% of the issued and outstanding shares of our common stock, assuring Mr. Solomita of control of the Company in the event that his ownership of the issued and outstanding shares of our common stock is diluted to a level below a majority. Currently, Mr. Solomita’s beneficial ownership of 18,800,000 shares of common stock and 1 share of Series A Preferred Stock provides him with 77.8% 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 us from taking certain actions without Mr. Solomita’s (or that of any person to whom the one share of Series A Preferred Stock is transferred) approval. More specifically, so long as any shares of Series A Preferred Stock are outstanding, we are not permitted to take certain actions without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a separate class, including for example and without limitation, amending our articles of incorporation, changing or modifying the rights of the Series A Preferred Stock, including increasing or decreasing the number of authorized shares of Series A Preferred Stock, increasing or decreasing the size of the board of directors or remove the director appointed by the holders of our Series A Preferred Stock and declaring or paying any dividend or other distribution.
Moreover, because of the significant ownership position held by our insiders, new investors may not be able to effect a change in our business or management, and therefore, stockholders would have no recourse as a result of decisions made by management.
In addition, sales of significant amounts of shares held by Mr. Solomita, or the prospect of these sales, could adversely affect the market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Anti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of our company.
Though not now, we may in the future become subject to Nevada’s control share law. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and it does business in Nevada or through an affiliated corporation. The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the company in the election of directors: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more. The ability to exercise such voting power may be direct or indirect, as well as individual or in association with others.
The effect of the control share law is that the acquiring person, and those acting in association with it, obtains only such voting rights in the control shares as are conferred by a resolution of our stockholders, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to strip voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law.
If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor of approval of voting rights, is entitled to demand fair value for such stockholder’s shares.
In addition to the control share law, Nevada has a business combination law which prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after the “interested stockholder” first becomes an “interested stockholder,” unless the company’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the company, or (ii) an affiliate or associate of the company and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the company. The definition of the term “combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the company’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the company and its other stockholders.
The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of us from doing so if it cannot obtain the approval of our board of directors.
Because we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. Stockholders may not be able to sell shares when desired. Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.
The December 22, 2017 comprehensive tax reform bill could adversely affect our business and financial results.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (“TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a "worldwide" system of taxation to a territorial system. The impact of enactment of U.S. tax reform was recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Treasury Department on several provisions including the computation of the transition tax. We continue to examine the impact this tax reform legislation may have on our business and we urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.
ITEM 2.
ITEM 2. PROPERTIES
On January 26, 2018, we completed the purchase of the land and building housing our pilot plant and corporate offices located at 480 Fernand-Poitras, Terrebonne, Québec, Canada J6Y 1Y4. The 22,042 square foot facility includes 4,080 square feet for our executive offices and 17,962 square feet for our innovation and operational activities. We believe that our existing facilities are adequate for our current needs.
ITEM 3.
ITEM 3. 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 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the section captioned “Executive Officers” contained in our proxy statement for the 2020 annual meeting of stockholders, to be filed with the Commission pursuant to Regulation 14A, not later than 120 days after February 29, 2020.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock is currently traded on the Nasdaq Global Market under the symbol “LOOP.” From April 10, 2017 to November 19, 2017, our common stock was quoted on the OTCQX tier of the OTC Markets Group Inc. under the symbol “LLPP.” From October 29, 2015 through April 7, 2017, our common stock was quoted on the OTCQB tier of the OTC Markets Group Inc. under the stock symbol “LLPP.” From September 26, 2012 to October 28, 2015, our common stock was quoted on the OTCQB tier of the OTC Markets Group Inc. under the stock symbol “FAMG.”
Holders
As at April 30, 2020, there were 39,916,905 shares of common stock issued and outstanding (excluding shares of common stock issuable upon conversion or conversion into shares of common stock of all of our currently outstanding Series A Preferred Stock) held by approximately 65 stockholders of record. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future. There are no restrictions in our Articles of Incorporation or By-laws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
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we would not be able to pay our debts as they become due in the usual course of business; or
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our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under our Articles of Incorporation.
Recent Sales of Unregistered Securities and Use of Proceeds
On February 21, 2020, upon the receipt of the first of three potential disbursements pursuant to our agreement with Investissement Québec for a financing facility, we issued a warrant to acquire 15,153 shares of common stock at a strike price of $11.00 per share, representing a value of 10% of the disbursement. We received gross proceeds of $1,645,122 (CDN$2,209,234) and paid $34,254 (CDN$46,000) in transaction costs. The proceeds were used to finance capital expenses incurred for the expansion of our pilot plant.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during the year ended February 29, 2020.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Pursuant to SEC Release No. 33-8876, we are permitted to use the scaled disclosure requirements applicable to a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, and therefore, we are not required to provide the information called for by this Item.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information and any forward-looking statements should be read in conjunction with “Risk Factors” discussed elsewhere in this Report. Please refer to the Cautionary Note Regarding Forward-Looking Statements on page 4.
Introduction
Loop Industries 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 Industries owns patented and proprietary technology that depolymerizes no- and low-value waste PET plastic and polyester fiber, including bottles, packaging, carpets, and other textiles of any color, transparency or condition, including waste PET plastic recovered from the ocean that has 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 suitable for use in food-grade packaging, and polyester fiber, thus enabling our customers to meet their sustainability objectives. Loop Industries is contributing to the global movement towards a circular economy by preventing plastic waste and recovering waste plastic for a more sustainable future for all.
Plan of Operation
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, Québec, 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 year ended February 29, 2020, we continued executing our corporate strategy where Loop Industries focused on developing distinct business models for the commercialization of Loop™ PET resin and polyester fiber to customers: 1) from our joint venture with Indorama, and 2) from our Infinite Loop™ greenfield facilities. We are continuing to develop the engineering of the Infinite Loop™ platform and we have increased our focus on the development of Infinite Loop™ projects in Europe and in North America.
In September of 2018, in connection with one of our business models, 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 Spartanburg, South Carolina.
Following the decision of the joint venture with Indorama to double the capacity of the planned 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. We have currently contracted for the sale of the initial 20,700 metric tons expected output of the Spartanburg facility and we continue discussions to contract the additional volume up to its planned increased capacity of 40,000 metric tons.
As part of the joint venture agreement to establish the facility to produce 40,000 metric tons, we are committed to contribute its equity share for the costs under the joint venture agreement to construct the facility. As at April 30, 2020, we have contributed $1,500,000 to the joint venture.
On March 25, 2020, due to the COVID-19 pandemic, the Québec provincial government issued an order that all non-essential business and commercial activity in the province is required to shut down until April 13 and the order provides exemptions that allow us to continue reduced operations at the pilot plant and we have been continuing work with our joint venture partner, Indorama, and our engineering partner, to oversee the engineering for the Spartanburg joint venture facility and pursue our plans for the commercialization of our technology. We have made arrangements for certain employees to work remotely to support these engineering activities. The government has recently announced that we can re-start complete operations on May 11.
The Québec provincial government order has not significantly impacted our ability to work to advance this project to date and the commercialization plan for commissioning of the planned Spartanburg facility is currently unchanged. However, the planned timing may potentially be affected by the COVID-19 pandemic. We are monitoring the potential impact of the pandemic on the global economy and capital markets, as well as on the operations of our partners who are critical to achieving the anticipated commissioning date of the facility scheduled for the third quarter of the calendar year 2021. Both Loop and our partners are fully committed to the joint venture and are working diligently on the commercialization plan.
We, through our wholly-owned subsidiary Loop Innovations, LLC, a Delaware limited liability company, entered into a Joint Venture Agreement (the “Agreement”), as stated above, with Indorama, to manufacture and commercialize sustainable PET resin and polyester fiber to meet the growing global demand from beverage and consumer packaged goods companies. Each company has 50/50 equity interest in Indorama Loop Technologies, LLC (“ILT”), which was specifically formed to operate and execute the joint venture.
This partnership brings together Indorama’s manufacturing footprint and Loop Industries’ proprietary science and technology to become a supplier in the ‘circular’ economy for 100% sustainable and recycled PET resin and polyester fiber.
We are contributing to the 50/50 joint venture an exclusive world-wide royalty-free license to use its proprietary technology to produce 100% sustainably produced PET resin and polyester fiber in addition to its equity cash contribution.
To drive our Infinite Loop™ business model, which is a key pillar of our commercialization blueprint, we intend to partner with PET polymerization technology providers and EPC companies (Engineering, Procurement, Construction). As Loop Industries’ technology is agnostic to PET polymerization technology, we are also exploring other partners that provide PET polymerization technology to help us commercialize our Infinite Loop™ solution-a fully integrated and reimagined manufacturing facility for sustainable Loop™ PET 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 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 also fundamentally changes where and how PET resin production occurs-no longer does PET 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 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 resin and polyester fiber in the marketplace to meet the substantial demand from consumer goods companies.
Consumer brands are seeking a solution to their plastic challenge, and they are taking bold action. In the past year, we have seen major brands make significant commitments to close the loop on their plastic packaging in two ways, by transitioning their packaging to recyclable materials and by incorporating more recycled content into their packaging. We believe Loop™ PET resin and polyester fiber provides the ideal solution for these brands because Loop™ PET resin and polyester fiber contains 100% recycled PET and polyester fiber content. The Loop™ PET resin and polyester fiber is virgin quality suitable for use in food-grade packaging. That means consumer packaged goods companies can now market packaging made from a 100% Loop™ branded PET resin and polyester fiber.
Loop Industries 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.
Results of Operations
Fourth Quarter Ended February 29, 2020
The following table summarizes our operating results for the three-month periods ended February 29, 2020 and February 28, 2019, in U.S. Dollars.
The net loss for the three-month period ended February 29, 2020 decreased $3.80 million to $3.76 million, as compared to the net loss for the three-month period ended February 28, 2019 which was $7.55 million. The decrease is primarily due to decreased general and administrative expenses of $4.36 million, a decrease in impairment of intangible assets of $0.30 million, an increase in interest income of $0.14 million, partially offset by higher research and development expenses of $0.95 million and by higher depreciation and amortization of $0.11 million.
Research and development expenses for the three-month period ended February 29, 2020 amounted to $1.47 million compared to $0.52 million for the three-month period ended February 28, 2019, representing an increase of $0.95 million, or $0.89 million excluding stock-based compensation. The increase of $0.89 million was primarily attributable to higher employee related expenses of $0.63 million, higher spending for purchases and consumables of $0.15 million and higher professional fees of $0.06 million. The increase in non-cash stock-based compensation expense of $0.06 million is mainly attributable to the timing of certain stock awards provided to employees.
General and administrative expenses for the three-month period ended February 29, 2020 amounted to $1.77 million compared to $6.13 million for the three-month period ended February 28, 2019, representing a decrease of $4.36 million, or $0.29 million excluding stock-based compensation and the legal settlement. The decrease of $4.36 million was primarily due to a legal settlement expense which amounted to $4.04 million for the three-month period ended February 28, 2019 compared to nil for the three-month period ended February 29, 2020. Other variances were attributable to lower employee related expenses of $0.23 million, lower legal, accounting and other professional fees of $0.41 million offset by higher Directors’ and Officers’ insurance expenses of $0.24 million. Stock-based compensation expense for the three-month period ended February 29, 2020 amounted to $0.55 million compared to $0.58 million for the three-month period ended February 28, 2019, representing a decrease of $0.03 million. The decrease was mainly attributable to lower stock awards provided to executives.
Depreciation and amortization for the three-month period ended February 29, 2020 totaled $0.25 million compared to $0.14 million for the three-month period ended February 28, 2019, representing an increase of $0.11 million. The increase is mainly attributable to an increase in the amount of fixed assets held at our pilot plant and corporate offices. Impairment of intangible assets for the three-month period ended February 29, 2020 was nil compared to $0.30 million for the three-month period ended February 28, 2019, representing a decrease of $0.30 million. The increase is entirely attributable to the write-off of the remaining intangible asset balance of the GEN I technology of $0.30 million in the three-month period ended February 28, 2019.
Interest and other finance costs for the three-month period ended February 29, 2020 totaled $0.41 million compared to $0.43 for the three-month period ended February 28, 2019, representing a decrease of $0.02 million. The decrease is mainly attributable to a decrease in interest expense relating to the convertible notes converted during the year in the amount of $0.06 million offset by an increase in accretion expense also relating to the convertible notes converted during the year in the amount of $0.04 million.
Fiscal Year Ended February 29, 2020
The following table summarizes our operating results for the years ended February 29, 2020 and February 28, 2019, in U.S. Dollars.
The net loss for the year ended February 29, 2020 decreased by $3.03 million, to $14.51 million, as compared to the net loss for the year ended February 28, 2019 which was $17.54 million. The decrease is primarily explained by lower general and administrative expenses of $5.64 million, an increase in interest income of $0.50 million and a decrease of impairment of intangible assets of $0.30 million offset by an increase in research and development expenses of $1.27 million, an increase in interest and other finance costs of $1.76 million, an increase in depreciation and amortization of $0.33 million and an increase in foreign exchange of $0.05 million.
Research and development expenses for year ended February 29, 2020 amounted to $4.72 million compared to $3.45 million for the year ended February 28, 2019, representing an increase of $1.27 million, or $1.18 million excluding stock-based compensation. The increase of $1.18 million was primarily attributable to higher employee related expenses of $1.01 million, increased purchases and consumables of $0.21 million, higher travel costs of $0.06 and higher facilities costs of $0.05 offset by lower professional fees of $0.30 million. The increase in non-cash stock-based compensation expense of $0.09 million was attributable to the timing of certain stock awards provided to employees.
General and administrative expenses for the year ended February 29, 2020 totaled $7.22 million compared to $12.85 million for the year ended February 28, 2019, representing a decrease of $5.64 million, or $0.99 million excluding stock-based compensation and the legal settlement. The decrease of $5.64 million was primarily attributable to a legal settlement expense which amounted to nil for the year ended February 29, 2020 compared to $4.04 million for the year ended February 28, 2019. Other variances were attributable to lower legal fees of $2.04 million offset by higher Directors’ and Officers’ insurance expenses of $0.4 million, higher employee related expenses of $0.27 million as well as higher accounting and other professional fees of $0.27 million. Stock-based compensation expense for the year ended February 29, 2020 amounted to $2.22 million compared to $2.82 million for the year ended February 28, 2019, representing a decrease of $0.61 million. The decrease was mainly attributable to lower stock awards provided to executives.
Depreciation and amortization for the year ended February 29, 2020 totaled $0.83 million compared to $0.50 million for the year ended February 28, 2019, representing an increase of $0.33 million. The increase is mainly attributable to an increase in the amount of fixed assets held at our pilot plant and corporate offices. Impairment of intangible assets for the year ended February 29, 2020 was nil compared to $0.30 million for the year ended February 28, 2019, representing a decrease of $0.3 million. The decrease is mainly attributable to the write-off of the remaining intangible asset balance of the GEN I technology of $0.3 in the year ended February 28, 2019.
Interest and other finance costs for the year ended February 29, 2020 totaled $2.22 million compared to $0.47 million for the year ended February 28, 2019, representing an increase of $1.76 million. The increase is mainly attributable to an increase in accretion expense related to convertible notes of $1.76 million and increased interest expense also relating to the convertible notes issued during the year of $0.26 million offset by a gain on conversion related to the convertible notes of $0.23 million and a decreased expense for revaluation of financial instruments of $0.03 million.
LIQUIDITY AND CAPITAL RESOURCES
We are a development stage company with no revenues, and our ongoing operations and commercialization plans are being financed by raising new equity and debt capital. To date, we have been successful in raising capital to finance our ongoing operations, reflecting the potential for commercializing our branded resin and the progress made to date in implementing our business plans. As at February 29, 2020, we had cash and cash equivalents on hand of $33.72 million.
Although we continue to be in a good liquidity position with cash and cash equivalents on hand of $33.72 million, in light of the current global COVID-19 pandemic, our liquidity position may change, including the inability to raise new equity and debt, disruption in completing repayments or disbursements to our creditors. Management continues to be positive about our growth strategy and is evaluating our financing plans to continue to raise capital to finance the start-up of commercial operations and continue to fund the further development of our ongoing operations.
As reflected in the accompanying consolidated financial statements, we are a development stage company, we have not yet begun commercial operations and we do not have any sources of revenue. During the year ended February 29, 2020, we incurred a net loss of $14.51 million, used cash in operations of $9.10 million and had an accumulated deficit as at February 29, 2020 of $53.32 million, all of these factors raise substantial doubt about our ability to continue as a going concern. There can be no assurance that any future financing will be available or, if available, that it will be on terms that are satisfactory to us.
As at February 29, 2020, we have a long-term debt obligation to a Canadian bank in connection with the purchase, in the year ended February 28, 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 $1,042,520 (CDN$1,400,000) 20-year term instalment loan (the “Loan”), from a Canadian bank. The Loan bears interest at the bank’s Canadian prime rate plus 1.5%. By agreement, the Loan is repayable in monthly payments of $4,344 (CDN$5,833) plus interest, until January 2021, at which time it will be subject to renewal. It includes an option allowing for the prepayment of the Loan without penalty.
We also have a long-term debt obligation to Investissement Québec in connection with a financing facility equal to 63.45% of all eligible expenses incurred for the expansion of its Pilot Plant up to a maximum of $3,425,423 (CDN$4,600,000). We received the first disbursement in the amount of $ 1,645,122 (CDN$2,209,234) on February 21, 2020. There is a 36-month moratorium on both capital and interest repayments 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 bears interest at 2.36%. We have also agreed to issue to Investissement Québec warrants to purchase shares of our common stock in an amount equal to 10% of each disbursement up to a maximum aggregate amount of $342,542 (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 us without penalty. On February 21, 2020, upon the receipt of the first disbursement under this facility, we issued a warrant to purchase 15,153 shares of common stock at a price of $11.00 to Investissement Québec.
Flow of Funds
Summary of Cash Flows
A summary of cash flows for the years ended February 29, 2020, and February 28, 2019 and 2018 was as follows:
Net Cash Used in Operating Activities
During the year ended February 29, 2020, we used $9.10 million in operations compared to $7.56 million during the year ended February 28, 2019 and $6.39 million during the year ended February 28, 2018. The increase over each year is mainly due to increased operating expenses as we move to the next phase of commercialization.
Net Cash Used in Investing Activities
During the year ended February 29, 2020, we used $3.39 million in investing activities. We made capital asset investments of $2.54 million of which $2.44 million was mainly attributable to the expansion and additions to our pilot plant and executive offices in Terrebonne, Canada. We also invested $0.1 million in our intellectual property as we developed, during the year ended February 29, 2020, our next generation GEN II technology and filed various patents in various jurisdictions around the world which await approval. During the year ended February 29, 2020 we made capital contributions to our joint venture with Indorama for a total of $0.85 million.
Net Cash Provided by Financing Activities
During the year ended February 29, 2020, we raised $40.46 million mainly through two separate registered direct offerings of common stock, in the net amounts of $34.60 million and $4.20 million, respectively. We also made payments totaling $0.05 million against our long-term debt, representing the loan agreement we entered into during the year ended February 28, 2018 to purchase the land and building of our pilot plant and executive offices. During the year ended February 28, 2019, we raised $7.38 million through the issuance of convertible debt and $15.69 million through the sale of additional common stock and the exercise of warrants in the year ended February 28, 2018.
During the year ended February 29, 2020, we paid a total of $312,000 in interest in connection with convertible notes (2019 - nil; 2018 - nil) that were converted during the year.
On February 21, 2020, we received $1,645,122 (CDN$2,209,234) in connection with the credit facility from Investissement Québec to finance capital expenses incurred for the expansion of our pilot plant. There is a 36-month moratorium on both capital and interest repayments beginning on the date of receipt of the funds.
On January 24, 2018, in connection with the purchase of land and the building, we obtained a credit facility from a Canadian bank in the amount of $1,042,520 (CDN$1,400,000). The Loan bears interest at the bank’s Canadian prime rate plus 1.5%. By agreement, the Loan is repayable in monthly payments of $4,344 (CDN $5,833) plus interest, until January 2021, at which time it will be subject be renewal. It includes an option allowing for the prepayment of the Loan without penalty. Interest paid amounted to $56,482 during the year ended February 29, 2020 (2019 - $50,040; 2018 - 5,125). The credit facility is secured by a first ranking hypothec of Loop Canada Inc.’s bank accounts, receivables, inventory, incorporeal rights and property, plant and equipment. In addition, Loop Industries, Inc., Loop Canada Inc.’s parent company, has guaranteed the credit facility and has provided a postponement of any payments that may be made on intercompany loan amounts owed by Loop Canada Inc. to Loop Industries, Inc. The terms of the credit facility require that we comply with certain financial covenants. As at February 29, 2020 and February 28, 2019, we were in compliance with its financial covenants.
OFF-BALANCE SHEET ARRANGEMENTS
As at February 29, 2020, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
As at February 29, 2020, we did not have any significant lease obligations to third parties.
OUTLOOK
In connection with the upcoming fiscal year ending February 28, 2021, we will continue to monitor the potential impacts of COVID-19 on our business. We intend to continue to execute our corporate strategy. We believe we must execute on several areas of our operational strategic plan, namely:
●
Protecting our intellectual property;
●
Continuing to upgrade our pilot plant to ensure the highest quality of sustainable Loop™ PET resin and polyester fiber is produced at the facility;
●
Identifying and securing feedstock to ensure our facilities can operate continuously and efficiently;
●
With our joint venture with Indorama, complete the engineering work associated with the Spartanburg facility and proceed with construction;
●
Continuing to execute brand and other partnerships and/or commercial agreements with customers; and
●
Continuing to drive the development of our Infinite Loop™ solution, which we believe is a key pillar of our ambition to sell our technology to potential commercial partners.
Risks that may affect our ability to execute on this strategy include, but are not limited to, those listed under “Risk Factors” elsewhere in this Annual Report.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for depreciable lives of property, plant and equipment, intangible assets, analysis of impairments of long-lived assets and intangibles, accruals for potential liabilities and assumptions made in calculating the fair value of stock-based compensation and the fair value of convertible notes and related warrants.
Intangible assets
Intangible assets are recorded at cost and are amortized over their estimated useful lives, unless the useful life is indefinite, using the straight-line method over 7 years.
The Company reviews the carrying value of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying amount of an intangible asset might not be recoverable, or a change in the remaining useful life of an intangible asset. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. If the carrying value of assets is determined not to be recoverable, the Company records an impairment loss equal to the excess of the carrying value over the fair value of the assets. The Company’s estimate of fair value is based on the best information available, in the absence of quoted market prices. The Company generally calculates fair value as the present value of estimated future cash flows that the Company expects to generate from the asset. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.
Stock-Based Compensation
We periodically issue stock options and restricted stock units to employees and directors as part of their compensation. We account for stock options and restricted stock units granted to employees and directors based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) wherein the fair value of the award is measured on the grant date and where there are 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 has been met.
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 our stock option grants is determined using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Convertible notes
Distinguishing Liabilities from Equity Instruments Issued
The Company applies the guidance in ASC Topic 480 to determine the classification of financial instruments issued. The Company first determines if the instruments should be classified as liabilities under this guidance based on the redemption features, if mandatorily redeemable or not, and the method of redemption, if in cash, a variable number of shares or a fixed number of shares.
If the terms proved that an instrument is mandatorily redeemable in cash, or the holder can compel a settlement in cash, or will be settled in a variable number of shares predominantly based on a fixed monetary amount, the instrument is generally classified as a liability. Instruments that are settled by issuing a fixed number of shares are generally classified as equity instruments.
In some cases, the instruments issued contain settlement features that differ depending upon the prevailing price of the Company’s shares at the date of settlement. Depending on the share price, the instrument will be settled either in a manner consistent with ASC Topic 480 liability treatment, by issuing a variable number of shares based on a fixed monetary amount, or in a manner consistent with ASC Topic 480 treatment for an equity instrument, by issuing a fixed number of shares if the share price is above or below certain levels. In these cases, the Company assesses the likelihood of the various possible settlement outcomes at the inception of the instrument. The classification of the instrument is based on the outcome that is more likely than not to occur. Factors that the Company considers in evaluating the likelihood of the outcomes include:
●
The terms of the instrument, including its maturity date and the formula for adjustments to the range;
●
The volatility of the Company’s stock;
●
The relationship between the price of the Company’s stock on the inception date and fixed prices or ranges the low and high end of the original range; and
●
Historical and expected dividend levels.
When warrants or similar instruments are issued, the Company applies the guidance in ASC Topic 815 to determine if the warrants should be classified as equity instruments or as derivative instruments. Generally, warrants that are both indexed to the Company’s own stock and that would be classified as equity instruments are not classified as derivative instruments under this guidance. A key element to consider in determining if a warrant would be considered indexed to the Company’s own stock is if the warrants settlement amount is equal to the difference between the fair value of a fixed number of equity shares and a fixed monetary amount. This criterion is sometimes known as the “fixed-for fixed” criteria. In cases where the fixed for fixed criteria are not met, the warrants are classified as derivative instruments.
Convertible liabilities are also assessed to determine if they contain a beneficial conversion feature. A beneficial conversion feature (“BCF”) of a convertible note is normally characterized as the convertible portion feature that provides a rate of conversion that is below market value or “in-the-money” when issued. A BCF related to the issuance of a convertible note is recorded as equity at its intrinsic value at the issue date.
Initial measurement
Instruments are initially measured at fair value. If multiple instruments are issued together, the aggregate proceeds are allocated first to derivative instruments or any instrument that will be subsequently accounted for at fair value and the remainder is allocated to the various instruments based on their relative fair value.
Subsequent measurement
Instruments initially classified as liabilities are subsequently measured at the present value of the amount to be paid, either in cash or by issuing a variable number of shares based on a fixed monetary amount, and at settlement, accruing interest cost using the rate implicit at inception.
Derivative instruments are recorded at fair value at each reporting period and the variations in fair value are recorded in the consolidated statements of operations and comprehensive loss.
Deferred financing costs and other transaction costs
Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized as a component of interest expense over the terms of the respective financing agreements, including convertible notes, on a straight-line basis. Unamortized deferred financing fees are expensed in full when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful. Deferred financing fees are deducted from their related liabilities on the balance sheet.
Transaction costs associated with the equity portion of convertible notes are reflected as a charge to deficit or as a reduction of accumulated paid-in-capital. The cost of issuing equity is reflected as a reduction of accumulated paid-in-capital.
Foreign Currency Translations and Transactions
The accompanying consolidated financial statements are presented in U.S. dollars, the functional currency of the Company. Assets and liabilities of subsidiaries that have a functional currency other than that of the Company are translated to U.S. dollars at the exchange rate as at the balance sheet date. Income and expenses are translated at the average exchange rate of the period. The resulting translation adjustments are included in other comprehensive income and loss (“OCI”). As a result, foreign currency exchange fluctuations may impact operating expenses.
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.
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.
The following table summarizes the exchange rates used:
Expenditures are translated at the average exchange rate for the period presented.
See Notes to the consolidated financial statements included elsewhere in this Form 10-K for management’s discussion of recently issued accounting pronouncements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to SEC Release No. 33-8876, we are permitted to use the scaled disclosure requirements applicable to a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, and therefore, we are not required to provide the information called for by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Loop Industries, Inc.
February 29, 2020
Index to the Consolidated Financial Statements
Loop Industries, Inc.
Consolidated Balance Sheets
(in United States dollars)
See accompanying notes to the consolidated financial statements.
Loop Industries, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in United States dollars)
See accompanying notes to the consolidated financial statements.
Loop Industries, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
For the Years Ended February 29, 2020, February 28, 2019 and February 28, 2018
(in United States dollars)
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
Loop Industries, Inc.
Consolidated Statements of Cash Flows
(in United States dollars)
See accompanying notes to the consolidated financial statements.
Loop Industries, Inc.
February 29, 2020, February 28, 2019 and February 28,
Notes to the Consolidated Financial Statements
(in United States dollars except where otherwise indicated)
1. The Company and Basis of Presentation
The Company
Loop Industries, Inc. (the “Company,” “Loop Industries,” “we,” or “our”) is a technology company that 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 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
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) and comprise the consolidated financial position and results of operations of Loop Industries, Inc. and its subsidiaries, Loop Innovations, LLC and Loop Canada Inc. All subsidiaries are, either directly or indirectly, wholly-owned subsidiaries of Loop Industries, Inc. (collectively, the “Company”). The Company also owns, through Loop Innovations, LLC, a 50% interest in a joint venture, Indorama Loop Technologies, LLC, which is accounted for under the equity method.
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 at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for depreciable lives of property, plant and equipment, intangible assets, analysis of impairments of long-lived assets and intangibles, accruals for potential liabilities and assumptions made in calculating the fair value of stock-based compensation and the fair value of convertible notes and related warrants.
Fair value of financial instruments
The Company applies Financial Accounting Standards Board (“FASB”) Codification (“ASC”) 820, Fair Value Measurement, which defines fair value and establishes a framework for measuring fair value and making disclosures about fair value measurements. FASB ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of financial instruments and the characteristics specific to them. Financial instruments with readily available quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
There are three levels within the hierarchy that may be used to measure fair value:
Level 1-
A quoted price in an active market for identical assets or liabilities.
Level 2-
Significant pricing inputs are observable inputs, which are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources.
Level
Significant pricing inputs are unobservable inputs, which are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values.
The fair value of cash and accounts payable and accrued liabilities approximate their carrying values due to their short-term maturity.
Convertible notes
Distinguishing Liabilities from Equity Instruments Issued
The Company applies the guidance in ASC Topic 480 to determine the classification of financial instruments issued. The Company first determines if the instruments should be classified as liabilities under this guidance based on the redemption features, if mandatorily redeemable or not, and the method of redemption, if in cash, a variable number of shares or a fixed number of shares.
If the terms proved that an instrument is mandatorily redeemable in cash, or the holder can compel a settlement in cash, or will be settled in a variable number of shares predominantly based on a fixed monetary amount, the instrument is generally classified as a liability. Instruments that are settled by issuing a fixed number of shares are generally classified as equity instruments.
In some cases, the instruments issued contain settlement features that differ depending upon the prevailing price of the Company’s shares at the date of settlement. Depending on the share price, the instrument will be settled either in a manner consistent with ASC Topic 480 liability treatment, by issuing a variable number of shares based on a fixed monetary amount, or in a manner consistent with ASC Topic 480 treatment for an equity instrument, by issuing a fixed number of shares if the share price is above or below certain levels. In these cases, the Company assesses the likelihood of the various possible settlement outcomes at the inception of the instrument. The classification of the instrument is based on the outcome that is more likely than not to occur. Factors that the Company considers in evaluating the likelihood of the outcomes include:
●
The terms of the instrument, including its maturity date and the formula for adjustments to the range.
●
The volatility of the Company’s stock.
●
The relationship between the price of the Company’s stock on the inception date and fixed prices or ranges the low and high end of the original range.
●
Historical and expected dividend levels.
When warrants or similar instruments are issued, the Company applies the guidance in ASC Topic 815 to determine if the warrants should be classified as equity instruments or as derivative instruments. Generally, warrants that are both indexed to the Company’s own stock and that would be classified as equity instruments are not classified as derivative instruments under this guidance. A key element to consider in determining if a warrant would be considered indexed to the Company’s own stock is if the warrants settlement amount is equal to the difference between the fair value of a fixed number of equity shares and a fixed monetary amount. This criterion is sometimes known as the “fixed-for fixed” criteria. In cases where the fixed for fixed criteria are not met, the warrants are classified as derivative instruments.
Convertible liabilities are also assessed to determine if they contain a beneficial conversion feature. A beneficial conversion feature (“BCF”) of a convertible note is normally characterized as the convertible portion feature that provides a rate of conversion that is below market value or “in-the-money” when issued. A BCF related to the issuance of a convertible note is recorded at is intrinsic value at the issue date.
Initial measurement
Instruments are initially measured at fair value. If multiple instruments are issued together, the aggregate proceeds are allocated first to derivative instruments or any instrument that will be subsequently accounted for at fair value and the remainder is allocated to the various instruments based on their relative fair value.
Subsequent measurement
Instruments initially classified as liabilities are subsequently measured at the present value of the amount to be paid, either in cash or by issuing a variable number of shares based on a fixed monetary amount, and at settlement, accruing interest cost using the rate implicit at inception.
Derivative instruments are recorded at fair value at each reporting period and the variations in fair value recorded in income.
Government grants
US GAAP for profit-oriented entities does not define government grants; nor is there specific guidance applicable to government grants. Under the Company’s accounting policy for government grants and consistent with non-authoritative guidance, grants are recognized on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.
Grants that relate to the acquisition of an asset are recognized as a reduction of the cost of the asset and in the statement of operations and comprehensive loss as the asset is depreciated or amortized.
A grant that is compensation for expenses or losses already incurred, or for which there are no future related costs, is recognized in the statement of operations and comprehensive loss in the period in which it becomes receivable.
Low-interest loans or interest-free loans from a government are initially measured at fair value and interest expense is recognized on the loan subsequently under the effective interest method, with the difference recognized as a government grant
Deferred financing costs and other transaction costs
Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized as a component of interest expense over the terms of the respective financing agreements, including convertible notes, on a straight-line basis. Unamortized deferred financing fees are expensed in full when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful. Deferred financing fees related to the liability portion of Convertible Notes are deducted from their related liabilities on the balance sheet.
Transaction costs associated with the equity portion of convertible notes are reflected as a charge to deficit or as a reduction of accumulated paid-in-capital. The cost of issuing equity is reflected as a reduction of accumulated paid-in-capital.
Foreign currency translations and transactions
The accompanying consolidated financial statements are presented in U.S. dollars, the functional currency of the Company. Assets and liabilities of subsidiaries that have a functional currency other than that of the Company are translated to U.S. dollars at the exchange rate as at the balance sheet date. Income and expenses are translated at the average exchange rate of the period. The resulting translation adjustments are included in other comprehensive income and loss (“OCI”). As a result, foreign currency exchange fluctuations may impact operating expenses. The Company currently has not engaged in any currency hedging activities.
For transactions and balances, monetary assets and liabilities denominated in foreign currencies are translated into the functional currency of the entity at the prevailing exchange rate at the reporting date. Non-monetary assets and liabilities, and revenue and expense items denominated in foreign currencies are translated into the functional currency using the exchange rate prevailing at the dates of the respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated statements of operations and comprehensive loss, except for gains or losses arising from the translation of intercompany balances denominated in foreign currencies that forms part in the net investment in the subsidiary which are included in OCI.
Property, plant and equipment
Property, plant and equipment are recorded at cost and are amortized over their estimated useful lives, unless the useful life is indefinite, using the straight-line method over the following periods:
Building
years
Land
Indefinite
Office equipment and furniture
years
Machinery and equipment
3-8 years
Building improvements
years
Costs related to repairs and maintenance of property, plant and equipment are expensed in the period in which they are incurred. Upon sale or disposal, the Company writes off the cost of the asset and the related amount of accumulated depreciation. The resulting gain or loss is included in the consolidated statement of operations and comprehensive loss.
Management reviews the carrying values of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group might not be recoverable. Assets are grouped at the lowest level for which identifiable cash flows are largely independent when testing for, and measuring for, impairment. In performing its review of recoverability, the Company estimates the future cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset or asset group, an impairment loss is recognized in the consolidated statements of operations. Measurement of the impairment loss is based on the excess of the carrying amount of the asset or asset group over the fair value calculated using discounted expected future cash flows. As at February 29, 2020, and February 28, 2019 and 2018, the Company determined that there were no indicators of impairment and therefore, did not recognize any impairment of its property, plant and equipment.
Intangible assets
Intangible assets are recorded at cost and are amortized over their estimated useful lives, unless the useful life is indefinite, using the straight-line method over 7 years.
The Company reviews the carrying value of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying amount of an intangible asset might not be recoverable, or a change in the remaining useful life of an intangible asset. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. If the carrying value of assets is determined not to be recoverable, the Company records an impairment loss equal to the excess of the carrying value over the fair value of the assets. The Company’s estimate of fair value is based on the best information available, in the absence of quoted market prices. The Company generally calculates fair value as the present value of estimated future cash flows that the Company expects to generate from the asset. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.
Stock-based compensation
The Company periodically issues stock options and restricted stock units to employees and directors as part of their compensation. The Company accounts for stock options and restricted stock units granted to employees and directors 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 been met. Forfeitures on share-based payments are accounted for by recognizing forfeitures as they occur.
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 years ended February 29, 2020, February 28, 2019 and February 28, 2018 amounted to $4.72 million,$3.45 million and $6.69 million, respectively, and are net of government research and development tax credits and government grants from the federal and provincial taxation authorities accrued and recorded during the year based on qualifying expenditures incurred during the fiscal year.
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.
For the years ended February 29, 2020, February 28, 2019 and February 28, 2018, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an antidilutive effect. As at February 29, 2020, the potentially dilutive securities consisted of 1,587,081 outstanding stock options (2019 -1,962,400; 2018 - 2,374,581), 4,218,802 outstanding restricted stock units (2019 - 402,868; 2018- 34,102), 5,059,331 outstanding warrants (2019 - 802,469; 2018 - 140,667) and nil outstanding issuable common stock (2019 - 1,000,000; 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. The Company adopted ASU 2018-02 on March 1, 2019 and include its effects in the current fiscal year. 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 through a cumulative-effect adjustment at the adoption date. The adoption of the standard had no impact on the consolidated financial statements of the Company.
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses”. This ASU added a new impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. We are still evaluating the impact of this accounting guidance on our results of operations and financial position.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are still evaluating the impact of this accounting guidance on our results of operations and financial position.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which removes specific exceptions to the general principles in ASC 740, “Income Taxes,” and clarifies certain aspects of the existing guidance. This update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption being permitted as of the beginning of an interim or annual reporting period. All amendments to this ASU must be adopted in the same period on a prospective basis, with certain exceptions. We are still evaluating the impact of this accounting guidance on our results of operations and financial position.
3. Sales Tax, Tax Credits and Other Receivables
Sales tax, research and development tax credits and other receivables as at February 29, 2020 and February 28, 2019 were as follows:
The Company is registered for the Canadian federal and provincial goods and services taxes. As such, the Company is obligated to collect from third parties, and is entitled to claim sales 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 year ended February 29, 2020, the Company recorded $221,603, (2019 - $305,592; 2018 - 221,202) as a reduction of research and development expenses. During the year ended February 29,2020, research and development tax credits received by the Company from taxation authorities amounted to $175,929 (2019 - nil; 2018 - nil).
Research and development expenses are also presented net of eligible government grants from the federal and provincial taxation authorities. Government grants received during the year ended February 29, 2020 amounted to nil (2019 - $73,581; 2018 - $4,000) and government grants receivable at February 29, 2020 amounted to nil (2019 - nil; 2018 - $73,581).
The Company is also eligible for non-refundable research and development tax credits from the federal taxation authorities which can be used as a reduction of income tax expense in any given year to the extent the Company has taxable income. The Company has not had taxable income since inception and has not been able to use these non-refundable federal research and development tax credits. During the year ended February 29, 2020, the Company was eligible for non-cash research and development tax credits in the amount of $251,019 (2019 - $255,975; 2018 - $248,690). These non-cash tax credits, which have an unlimited carry forward period are not recognized in the Company’s consolidated financial statements.
4. Property, Plant and Equipment
Depreciation expense is recorded as an operating expense in the consolidated statements of operations and comprehensive loss and amounted to $807,800 for the year ended February 29, 2020 (2019 - $443,146; 2018 - $303,597).
During the year ended February 29, 2020, the Company recorded a government grant in connection with the financing facility received from Investissement Québec as a reduction in the cost of fixed assets for a total of $179,522 (2019 - nil; 2018 - nil). More details on the Investissement Québec financing facility can be found in note 9, Long-Term Debt.
5. Intangible Assets
During the year ending February 29, 2020, the Company finalized the development of its next Generation II (“GEN II”) technology and filed various patents in jurisdictions around the world. On April 9, 2019, the first GEN II U.S. patent was issued. The GEN II technology portfolio has an issued U.S. patent and a pending U.S. application, all expected to expire, if granted, on or around September 2037. Internationally, the GEN II technology portfolio also has a PCT application, an allowed application in Bangladesh, and pending non-PCT country applications in Argentina, 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. Additional aspects of the GEN II technology are 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 2040, if granted.
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 its GEN I intangible asset, which amounted to $298,694.
Amortization expense is recorded as an operating expense in the consolidated statements of operations and comprehensive loss and amounted to $22,631 for the year ended February 29, 2020 (2019 - $59,851; 2018 - $63,579).
6. Fair value of financial instruments
The following table presents the fair value of the Company’s financial liabilities and warrants at February 29, 2020 and February 28, 2019:
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 February 29, 2020 and February 28, 2019 were as follows:
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 is expected to 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 agreed 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. Equity funding of the JV is also split on a 50/50 basis.
Under the Agreement, Indorama is required to contribute manufacturing knowledge and the Company is required to contribute its proprietary science and technology. Specifically, the Company will contribute an exclusive world-wide royalty-free license for ILT to use its proprietary technology to produce 100% sustainably produced PET resin and polyester fiber in addition to its cash contributions.
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 $850,000, respectively, to ILT. As there were no other transactions during the year ended February 29, 2020, the carrying value of the equity investment as at February 28, 2019 was $850,000.
9. Long-Term Debt
Investissement Québec financing facility
On July 24, 2019, the Company signed an agreement with Investissement Québec 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 of $3,425,423 (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 bears interest at 2.36%. The Company, under the loan agreement, is required to pay fees representing 1% of the loan amount, $34,254 (CDN$46,000), to IQ. The Company has also agreed to issue to Investissement Québec warrants to purchase shares of common stock of the Company in an amount equal to 10% of each disbursement up to a maximum aggregate amount of $342,542 (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. On February 21, 2020, the Company received $1,645,122 (CDN$2,209,234) based on its first claim made with Investissement Québec and issued a warrant to acquire 15,153 shares of common stock at a strike price of $11.00 per share to Investissement Québec in connection therewith. This was the first and only disbursement of the financing facility received as at February 29, 2020.
The financing facility is composed of three elements: the loan, the warrants and the interest discount. Stock warrants are freestanding instruments that provide the right to acquire/purchase a company’s stock at some point in the future. Because warrants are freestanding instruments (even if issued along with debt or some other instruments), they must be recorded separately. The warrants meet the requirements of the scope exemption 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. The fair value of the warrants was determined to be $77,954.
The Company believes that the terms of the debt on a stand-alone basis are not representative of market given the risk-free interest rate of the loan which was based on the rate of a 10-year Canadian Bond at the time of the agreement. US GAAP for profit-oriented entities does not define government grants; nor is there specific guidance applicable to government grants. However, US practice may look to other sources of non-authoritative guidance. Under the Company’s accounting policy for government grants, low-interest loans or interest-free loans from a government are initially measured at fair value and interest expense is recognized on the loan subsequently under the effective interest method, with the difference recognized as a government grant and recognized on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. The government grant portion of the first disbursement was recorded as a reduction of fixed assets.
The allocated fair values of the government grant and the warrants is recorded in the financial statements as a debt discount from the face amount of the loan and such discount is amortized over the expected term of the convertible note and is charged to interest expense.
The company established the fair value of the loan for the portion drawn on February 20, 2020 at $1,354,408 based on a discount rate of 5.45%. The discount rate used was based on the external financing from a Canadian bank.
Even if ASC 470-20-25-2 specifies that the entity issues debt with equity-classified stock purchase warrants, it uses the relative fair value method at time of issuance to allocate the consideration received to the debt and the warrants. Because the total fair value of the debt and the warrants are less than the cash received, the Company believes that the With and Without Method shall be used. The debt and warrants that are separately valued are recorded at their respective fair values and the excess of the total transaction proceeds over the sum of those fair value amounts is allocated to the remaining component, i.e. the government grant.
The financing facility is secured by a principal hypothec in the amount of $3,425,423 (CDN$4,600,000) and an additional hypothec in the amount of $685,085 (CDN$920,000) over the universality of its present and future, tangible and intangible movable property, excluding however all intellectual property. This hypothec is subordinate to all other hypothecs published on June 21, 2019 except for any hypothecs that the Company may have granted to a shareholder, a related person or related company, an insurer, a tenant, or a supplier.
The aggregate value of the Investissement Québec financing facility as shown on the consolidated balance sheet is broken down as follows:
The Company recorded interest expense on the Investissement Québec loan from the issue date to February 29, 2020 in the amount of $968 (2019 - nil; 2018 - nil) and an accretion expense of $872 (2019 - nil; 2018 - nil).
Term loan
On January 24, 2018, the Company obtained a credit facility, consisting of a $37,233 (CDN$50,000) credit card facility and a $1,042,520 (CDN$1,400,000) 20-year term instalment loan (the “Loan”), from a Canadian bank. The Loan bears interest at the bank’s Canadian prime rate plus 1.5%. By agreement, the Loan is repayable in monthly payments of $4,344 (CDN$5,833) plus interest, until January 2021, at which time it will be subject to renewal. It includes an option allowing for the prepayment of the Loan without penalty. Interest paid amounted to $56,482 during the year ended February 29, 2020 (2019 - $54,040; 2018 - $5,125).
The credit facility is secured by a first ranking hypothec of Loop Canada Inc.’s bank accounts, receivables, inventory, incorporeal rights and property, plant and equipment. In addition, Loop Industries, Inc., Loop Canada Inc.’s parent company, has guaranteed the credit facility and has provided a postponement of any payments that may be made on intercompany loan amounts owed by Loop Canada Inc. to Loop Industries, Inc. The terms of the credit facility require the Company to comply with certain financial covenants. As at February 29, 2020 and February 28, 2019, the Company was in compliance with its financial covenants.
Principal repayments due on the Company’s long-term debt over the next five years are as follows:
10. Convertible Notes
First Issuance
On November 13, 2018, the Company issued convertible 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 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 Company used the net proceeds of the November 2018 Private Placement for general corporate and working capital purposes. 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 initial 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 shall 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 shall 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.
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 shall 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 will be 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 aggregate value of the November 2018 Notes and November 2018 Warrants as shown on the consolidated balance sheet are broken down as follows:
The transaction costs relating 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.
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.
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 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 notes from this issuance (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 $400,000 (the “January 2019 Private Placement”). The Company used the net proceeds of the January 2019 Private Placement for general corporate and working capital purposes.
The January 2019 Notes carried an interest rate of 8.00% per annum and had initial maturity dates of 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. The January 2019 Notes were converted at the January 2020 Maturity Date with no adjustment to the January 2020 Conversion Price.
With respect to accrued and unpaid interest at the January 2020 Maturity Date, the Investors had 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. On the January 2020 Maturity Date, $312,000 in accrued interest was paid in cash and a value of $80,000 was paid in common stock (7,820 shares).
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 elected to take accrued and unpaid interest on the January 2019 Notes in common stock, additional warrants would 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”). Upon conversion, 3,911 additional warrants were issued in connection with accrued interest paid in common stock. 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. A BCF related to the issuance of a convertible note is recorded at the issue date. With the conversion feature on the January 2019 Notes being “in the money”, the beneficial conversion feature is measured using the intrinsic value method and is shown as a discount on the carrying amount of the convertible note and is credited to additional paid-in capital. The intrinsic value of the beneficial conversion feature at the issue 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 shown as a discount on the carrying amount of the convertible note and is credited to additional paid-in capital. The fair value of the warrants at the issue date was determined to be $757,704. The fair value of the additional warrants issued in connection with accrued interest paid in stock was also calculated using the Black-Scholes and amounted to $7,744.
The allocated fair values of the beneficial conversion feature and the warrants is recorded in the financial statements as a debt discount from the face amount of the convertible note and such discount is amortized over the expected term of the convertible note and is charged to interest expense.
The aggregate values of the beneficial conversion feature, the January 2019 Warrants and the January 2019 Notes are broken down as follows:
The Company recorded accretion expense during the year ended February 29, 2020 of $1,773,114 (2019 - $185,505; 2018 - nil) and is included in operating expenses. The Company recorded interest expense on the January 2019 Notes for the year ended February 29, 2020 in the amount of $342,989 (2019 - $49,011; 2018 - nil).
The transaction costs relating to this issuance were split pro-rata between the January 2019 Notes, the beneficial conversion feature and the January 2019 Warrants. The portion relating to the January 2019 Notes were deferred and are being amortized over the life of the convertible notes. The portion relating to the beneficial conversion feature and January 2019 Warrants were recorded as share issuance expenses and offset against paid-in capital. Upon conversion of the notes, the liability portion and $80,000 in accrued interest were reversed to equity (common stock $61,28 and additional paid-in capital $4,979,939) and the BCF was reversed to additional paid-in capital.
11. Related Party Transactions
Advances from controlling stockholder
Mr. Daniel Solomita, the Company’s controlling stockholder and CEO, and companies controlled by him, previously made advances to the Company totaling $278,472 as at February 28, 2017. The advances were unsecured, non-interest bearing with no formal terms of repayment. Also, as at February 28, 2017, accrued compensation totaling $360,000 was owed to Mr. Solomita. During the year ended February 28, 2018, the Company paid to Mr. Solomita or companies controlled by him, as applicable, an aggregate amount of $638,472. As at February 29, 2020 and February 28, 2019, no amounts were owed to Mr. Solomita or to companies controlled by him.
Employment Agreement
On June 29, 2015, the Company entered into an employment agreement with Mr. Daniel Solomita, the Company’s President and Chief Executive Officer (“CEO”). The employment agreement is for an indefinite term.
On July 13, 2018, the Company and Mr. Solomita entered into an amendment and restatement of the employment agreement. The amended and restated employment agreement provides for an increase in Mr. Solomita’s base salary and eligibility to participate in an annual cash bonus subject to performance measures. Mr. Solomita’s base salary and bonus opportunity are retroactive effective to March 1, 2018.
In addition, the employment agreement provided for a long-term incentive grant of 4,000,000 shares of the Company’s common stock, in tranches of one million shares each, upon the achievement of four performance milestones. This was modified to provide a grant of 4,000,000 restricted stock units covering 4,000,000 shares of the Company’s common stock while the performance milestones remained the same. The Company’s board of directors approved the grant of the restricted stock units, effective and contingent upon approval by the Company’s shareholders at the Company’s 2019 annual meeting, of an increase in the number of shares available for grant under the Plan. Such approval was granted by the Company’s shareholders at the Company’s 2019 annual meeting. The restricted stock units vest upon the achievement of applicable performance milestones, as follows:
i)
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company’s securities are listed on an exchange or the OTCQX tier of the OTC Markets;
ii)
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company executes a contract for a minimum quantity of 25,000 M/T of PTA/EG or a PET;
iii)
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company’s first full-scale production facility is in commercial operation; and
iv)
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company’s second full-scale production facility is in commercial operation.
During the year ended February 28, 2017, it became probable that the first milestone would be met. Accordingly, 1,000,000 performance incentive shares of common stock with a fair value of $800,000 were earned and are issuable to Mr. Solomita. This amount was reflected as stock-based compensation expense during the year ended February 28, 2017 based on the grant date fair value. The 1,000,000 performance incentive shares of common stock have been replaced by restricted stock units and are issuable to Mr. Solomita, 200,000 of which were settled in October 2019. During the years ended February 29, 2020, February 28, 2019 and February 28, 2018, no other milestones became probable of being met and, accordingly, the Company did not record any additional compensation expense.
12. Stockholders’ Equity
Series A Preferred Stock
Mr. Solomita’s amended employment agreement of February 15, 2016 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 77.8% 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:
(a)
amend the Articles of Incorporation or, unless approved by the Board of Directors, including by the Series A Director, amend the Company’s By-laws;
(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 By-laws 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).
Common Stock
During the year ended February 29, 2020, 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 July 17, 2019, the Company issued 15,432 shares of common stock upon the exercise of warrants;
(vi)
On January 16, 2020 and January 21, 2020, the Company converted convertible notes with a face value of $4,900,000 at a conversion price of $8.10 plus $80,000 of accrued interest at a conversion price of $10.23 into a total of 612,758 shares of common stock;
(vii)
The Company issued 244,884 shares of common stock, in aggregate, upon the vesting of restricted stock units related to employees and Directors; and
(viii)
The Company issued 69,101 shares of common stock, in aggregate, upon the cashless exercise of stock options related to employees;
During the year ended February 28, 2019, 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 related to employees; and
(ii)
the Company issued 35,797 shares of common stock upon the vesting of restricted stock units related to employees and Directors.
13. Share-Based Payments
Stock Options
The following tables summarizes the continuity of the Company’s stock options during the years ended February 29, 2020 and February 28, 2019:
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 principal components of the pricing model were as follows:
There were no new issuances of stock options for the year ended February 29, 2020.
During the year ended February 29, 2020, stock-based compensation expense attributable to stock options amounted to $2,178,948 (2019 - $3,176,786; 2018 - $6,281,319) and is included in operating expenses.
Restricted Stock Units
The following table summarizes the continuity of the restricted stock units (“RSUs”) during the years February 29, 2020 and February 28, 2019:
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 closing share price at grant date multiplied by the number of restricted stock unit awards granted.
During the year ended February 29, 2020, stock-based compensation attributable to RSUs amounted to $1,290,443 (2019 - $808,374; 2018 -$265,994) and is included in operating expenses.
14. 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. A discretionary share reserve increase of 500,000 shares was approved at the 2019 Annual Meeting of Stockholders held on June 27, 2019. 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 years ended February 29, 2020 and February 28, 2019:
15. Warrants
The expiration dates of the warrants outstanding as at February 29, 2020 are as follows:
16. Income Taxes
The components of the Company’s loss before taxes are summarized below:
A reconciliation from the statutory U.S. income tax rate and the Company’s effective income tax rate, as computed on loss before taxes, is as follows:
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. tax reform”) that lowers the statutory tax rate on U.S. earnings to 21%, taxes historic foreign earnings at a reduced rate of tax, establishes a territorial tax system and enacts new taxes associated with global operations.
The impact of enactment of U.S. tax reform was recorded on a provisional basis as the legislation provides for additional guidance to be issued by the U.S. Treasury Department on several provisions including the computation of the transition tax. The Company’s Controlled Foreign Corporations (“CFCs”) were deficit earnings & profits corporations, as such no income was recognized by Loop Industries during the year ended February 28, 2018. No further inclusions were made thereafter based on guidance issued. Additional guidance may be issued after February 29, 2020 and any resulting effects will be recorded at that time.
Additionally, as part of tax reform, the U.S. has enacted a minimum tax on foreign earnings (“global intangible low-taxed income”). The Company has not made an accrual for the deferred tax aspects of this provision as Loop Industries’ CFCs have suffered net tested losses.
With the enactment of U.S. tax reform, we recorded, for the year ended February 28, 2018, tax expense of $876,812 to reflect the revaluation of deferred taxes. For the years ended February 28, 2019 and February 29, 2020, we finalized our provisional estimate of the enactment of U.S. tax reform without additional tax expense.
On March 27, the US government signed the Coronavirus Aid, Relief and Economic Security (“CARES”) Act into law, a $2 trillion relief package to provide support to individuals, businesses and government organizations during the COVID-19 pandemic. The income tax provisions contained in the CARES Act are not likely to have an impact for the Company.
The Company has net operating loss carry forwards of approximately 2020 - $16,074,873 (2019 - $14,473,810) for U.S. Federal income tax purposes expiring between 2035 and 2037, post 2018 net operating losses may be carried forward indefinitely. The Company has net operating loss carry forwards for Canadian Federal and Québec tax purposes of approximately 2020 - $14,670,709 (CDN$19,701,295) and 2019 - $7,495,099 (CDN$10,065,169), expiring between 2037 and 2040. Realization of future tax assets is dependent on future earnings, the timing and amount of which are uncertain. Accordingly, the net future tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $2,896,093 and $3,270,369, respectively, for the years ended February 29, 2020 and 2019. The Company has provided a full valuation allowance on the deferred tax assets as a result of the uncertainty regarding the probability of its realization.
The Company has approximately $3,258,598 (CDN$4,375,971), 2019 - $3,477,574 (CDN$4,670,034) of research and development expenditures for Canadian Federal and Québec provincial purposes that are available to reduce taxable income in future years and have an unlimited carry forward period, the benefit of which has not been reflected in these financial statements. Research and development expenditures are subject to audit by the taxation authorities and accordingly, these amounts may vary.
The tax effect of temporary differences between US GAAP accounting and federal income tax accounting creating deferred income tax assets and liabilities were as follows:
Assessment of the amount of value assigned to the Company's deferred tax assets under the applicable accounting
rules is judgmental. The Company is required to consider all available positive and negative evidence in evaluating the likelihood that the Company will be able to realize the benefit of its deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is an element of judgment involved. Realization of the Company's deferred tax assets is dependent on generating sufficient taxable income in future periods. Management does not believe that it is more likely than not that future taxable income will be sufficient to allow it to recover substantially all of the value assigned to its deferred tax assets. Accordingly, the Company has provided for a valuation allowance of the Company's deferred tax asset.
The tax years subject to examination by major tax jurisdiction include the years 2016 and forward by the U.S. Internal Revenue Service and most state jurisdictions, and the years 2016 and forward for the Canadian jurisdiction.
17. Interest and Other Finance Costs
Interest and other finance costs for the years ended February 29, 2020, February 28, 2019 and February 28, 2018 are as follows:
18. Legal Settlement
On January 27, 2017, two individuals (“Plaintiffs”), filed a claim against the Company in the Los Angeles Superior Court (“Court”), seeking damages for breach of implied covenant of good faith and fair dealing, breach of contract, and promissory fraud, asserting entitlement to shares of the Company’s common stock. On February 25, 2019, the Company and the Plaintiffs entered into a settlement agreement and release (“Settlement Agreement”), which sets forth the parties’ agreement in principle for settlement. Through the Settlement Agreement, Plaintiffs, the Company and certain other parties to the Settlement Agreement agreed to mutual releases of any and all claims.
Pursuant to the terms of the Settlement Agreement, without agreeing that any of the Plaintiffs’ claims have merit, the Company agreed to issue to the Plaintiffs 150,000 shares of the Company’s common stock (“Plaintiff Common Shares”) and 500,000 warrants exercisable for shares of the Company’s common stock (“Plaintiff Warrants”). The Plaintiff Common Shares will be restricted upon issuance, but within 180 days following the date of the Settlement Agreement, the Company has agreed to file and use its reasonable best efforts to have declared effective a registration statement to register the Plaintiff Common Shares and the shares of the Company’s common stock underlying the Plaintiff Warrants. The Company also agreed to maintain such registration statement for 2 years from the date of effectiveness unless the Plaintiffs sell or otherwise transfer the shares covered by such registration statement prior to the two-year anniversary. 300,000 of the Plaintiff Warrants are exercisable for shares of the Company’s common stock at an exercise price of $12.00 per share for a period of 24 months following the date of the Settlement Agreement. The remaining 200,000 Plaintiff Warrants are exercisable for shares of the Company’s common stock at an exercise price of $11.00 per share for a period of 24 months, but in the event the Company’s 5-day average trading price during any period in the first 18 months following the date of the Settlement Agreement is above $11 per share, then the exercise term of such warrants shall automatically be reduced to 18 months instead of 24 months.
In connection with the legal settlement, the Company recorded an expense in the amount of $4,041,627, based on the fair value of the Plaintiff Common Shares and Plaintiff Warrants that were issued on February 25, 2019, under the terms of the Settlement Agreement.
19. Commitments
The Company has entered into multi-year supply agreements with PepsiCo, Coca-Cola’s Cross Enterprise Procurement Group, Danone SA, L’OCCITANE en Provence and L’Oréal that will enable them to purchase Loop™ PET resin from the Company’s joint venture facility with Indorama in the United States.
20. Subsequent Event
Potential impact of the COVID-19 pandemic
The Company announced on March 25, 2020, that due to the COVID-19 pandemic the Québec provincial government issued an order that all non-essential business and commercial activity in the province is required to shut down until April 13 and has since been extended it to May 4. The order provides exemptions that allow the Company to continue reduced operations at the pilot plant.
Capital contribution to the joint venture
On March 13, 2020, Loop Innovations, LLC, a wholly-owned subsidiary of Loop Industries, Inc. contributed $650,000 to Indorama Loop Technologies, LLC, the joint venture with Indorama.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer, we are responsible for conducting an evaluation of the effectiveness of the design and operation of our internal controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as at the end of the fiscal year covered by this report. Disclosure controls and procedures means that the material information required to be included in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this assessment, management determined that the Company’s disclosure controls and procedures over financial reporting as of February 29, 2020 were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP in the United States of America and includes those policies and procedures that:
●
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
●
Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
●
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our Chief Executive Officer and Chief Financial Officer have performed an evaluation of our internal control over financial reporting under the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective at February 29, 2020. Based on this assessment, management determined that the Company’s internal control over financial reporting as of February 29, 2020 was effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal year that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal controls over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item concerning our directors is incorporated by reference to the information set forth in the section titled “Election of Directors” in our Proxy Statement. Information required by this item concerning our executive officers is incorporated by reference to the information set forth in the section entitled “Executive Officers” in our Proxy Statement. Information required by this item concerning our audit committee and our security holder director nomination procedures is incorporated by reference to the information set forth in the section entitled “Corporate Governance” in our Proxy Statement. Information regarding Section 16 reporting compliance is incorporated by reference to the information set forth in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.
Our Board of Directors adopted a Code of Ethics for all of our directors, officers and employees on January 25, 2017. A copy of our Code of Ethics is available under Corporate Governance Documents in the Investors section of our website, and via the following hyperlink: https://www.loopindustries.com/en/investors/corporate-governance. To date, there have been no waivers under our Code of Ethics. We will post waivers, if and when granted, of our Code of Ethics on our website at www.loopindustries.com. The information contained on, or that can be accessed through, our website is not a part of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding director’s compensation table and compensation risk management disclosures are incorporated by reference to the information set forth in the section titled “Corporate Governance” in our Proxy Statement. All other information required by this item regarding executive compensation is incorporated by reference to the information set forth in the section titled “Executive Compensation” in our Proxy Statement.
Employment Agreement
On April 30, 2020, the Company and Mr. Solomita entered into an amendment of Mr. Solomita’s employment agreement. The amendment clarified the milestones consistent with the shift in the Company’s business from the production of terephthalate to the production of dimethyl terephthalate, another proven monomer of PET plastic that is far simpler to purify.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference to the information set forth in the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation” in our Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
It is the policy of the Board that all transactions required to be reported pursuant to Item 404 of Regulation S-K be subject to approval by the Audit Committee of the Board. In furtherance of relevant Nasdaq rules and our commitment to corporate governance, the charter of the Audit Committee provides that the Audit Committee shall review and approve any proposed related party transactions including, transactions required to be reported pursuant to Item 404 of Regulation S-K for potential conflict of interest situations. The Audit Committee reviews the material facts of all transactions that require the committee’s approval and either approves or disapproves of the transaction. In determining whether to approve a transaction, the Audit Committee will take into account, among other factors it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances.
The additional information required by this item regarding director independence, certain relationships and related party transactions is incorporated by reference to the information set forth in the sections titled “Transactions with Related Persons” and “Corporate Governance” in our Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this section is incorporated by reference from the information in the section entitled “Ratification of Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(1) Financial Statements
The response to this portion of Item 15 is set forth under Item 8 above.
(2) Financial Statement Schedules.
All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto set forth under Item 8 above.
(3) Exhibits.
The following Exhibits, as required by Item 601 of Regulation SK, are attached or incorporated by reference, as stated below.
for
Exhibit Index
________
† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and this exhibit has been submitted separately to the SEC.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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: May 4, 2020
By:
/s/ Daniel Solomita
Name:
Daniel Solomita
Title:
Chief Executive Officer, President, and Director
(principal executive officer)
Date: May 4, 2020
By:
/s/ Nelson Gentiletti
Name:
Nelson Gentiletti
Title:
Chief Operating Officer and Chief Financial Officer (principal accounting officer and principal financial officer), Secretary and Treasurer
Date: May 4, 2020
By:
/s/ Sidney Horn
Name:
Sidney Horn
Title:
Director
Date: May 4, 2020
By:
/s/ Jay Stubina
Name:
Jay Stubina
Title:
Director
Date: May 4, 2020
By:
/s/ Andrew Lapham
Name:
Andrew Lapham
Title:
Director
Date: May 4, 2020
By:
/s/ Laurence Sellyn
Name:
Laurence Sellyn
Title:
Lead Director