United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended November 30, 2018

 

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to __________

 

Commission File No. 000-54768

  

 

  

Loop Industries, Inc.

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices zip code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of January 8, 2019, there were 33,805,706 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

LOOP INDUSTRIES, INC.

 

TABLE OF CONTENTS

 

			Page No.
PART I . Financial Information
Item 1.	Financial Statements			3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			8
Item 4.	Controls and Procedures			9
PART II. Other Information
Item 1.	Legal Proceedings			10
Item 1A.	Risk Factors			10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			10
Item 3.	Defaults Upon Senior Securities			10
Item 4.	Mine Safety Disclosures			10
Item 5.	Other Information			10
Item 6.	Exhibits			11
	Signatures			12

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Loop Industries, Inc.

Three and nine months ended November 30, 2018

Index to the Condensed Consolidated Financial Statements

 

Contents		Page(s)
Condensed consolidated balance sheets as at November 30, 2018 and February 28, 2018 (Unaudited)		F-1
Condensed consolidated statements of operations and comprehensive loss for the three and nine months ended November 30, 2018 and 2017 (Unaudited)		F-2
Condensed consolidated statement of changes in stockholders’ equity for the nine months ended November 30, 2018 and 2017 (Unaudited)		F-3
Condensed consolidated statement of cash flows for the nine months ended November 30, 2018 and 2017 (Unaudited)		F-4
Notes to the condensed consolidated financial statements		F-5

 

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Loop Industries, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

		November 30, 2018				February 28, 2018
Assets
Current assets
Cash		$	3,528,258			$	8,149,713
Restricted cash			100,000				-
Sales tax, tax credits and other receivables			297,028				364,634
Prepaid expenses			64,803				511,573
Total current assets			3,990,089				9,025,920
Property, plant and equipment, net			5,033,774				4,036,903
Intangible assets, net			404,667				332,740
Total assets		$	9,428,530			$	13,395,563
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities		$	2,568,263			$	1,983,072
Subscription deposits			100,000				-
Convertible notes			2,450,000				-
Current portion of long-term debt			52,628				54,649
Total current liabilities			5,170,891				2,037,721
Long-term debt			956,069				1,033,777
Total liabilities			6,126,960				3,071,498
Stockholders' Equity
Series A Preferred stock par value $0.0001; 25,000,000 shares authorized; one share issued and outstanding			-				-
Common stock par value $0.0001: 250,000,000 shares authorized; 33,805,706 shares issued and outstanding (February 28, 2018 – 33,751,088)			3,381				3,376
Additional paid-in capital			34,127,010				30,964,970
Common stock issuable, 1,000,000 shares			800,000				800,000
Accumulated deficit			(31,256,883	)			(21,275,181	)
Accumulated other comprehensive loss			(371,938	)			(169,100	)
Total stockholders' equity			3,301,570				10,324,065
Total liabilities and stockholders' equity		$	9,428,530			$	13,395,563
Going Concern (Note 1)

 

See accompanying notes to the condensed consolidated financial statements.

 

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Loop Industries, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

			Three Months Ended November 30,								Nine Months Ended November 30,
			2018				2017				2018				2017
Revenue			$	-			$	-			$	-			$	-
Operating Expenses -
Research and development				792,111				3,894,454				2,924,483				5,341,763
General and administrative				1,971,847				2,720,078				6,721,796				4,691,294
Depreciation and amortization				155,053				98,755				366,710				281,016
Interest expense				14,883				-				41,117				-
Foreign exchange (gain) loss				(20,133	)			(9,634	)			(72,404	)			88,634
Total operating expenses				2,913,761				6,703,653				9,981,702				10,402,707
Net Loss				(2,913,761	)			(6,703,653	)			(9,981,702	)			(10,402,707	)
Other comprehensive loss -
Foreign currency translation adjustment				(91,249	)			155,354				(202,838	)			(2,068	)
Comprehensive Loss			$	(3,005,010	)		$	(6,548,299	)		$	(10,184,540	)		$	(10,404,775	)
Loss per share
- Basic and Diluted			$	(0.09	)		$	(0.20	)		$	(0.30	)		$	(0.32	)
Weighted average common shares outstanding
- Basic and Diluted				33,805,706				32,793,181				33,792,293				32,183,343

 

See accompanying notes to the condensed consolidated financial statements.

 

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Loop Industries, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

 

		Nine Months Ended November 30, 2018
		Common stock								Preferred stock
		par value $0.0001								par value $0.0001
		Number of Shares				Amount				Number of Shares				Amount				Additional Paid-in Capital				Common Stock Issuable				Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
Balance, February 28, 2018			33,751,088			$	3,376				1			$	-			$	30,964,970			$	800,000			$	(21,275,181	)		$	(169,100	)		$	10,324,065
Issuance of shares upon cashless exercise of warrants			18,821				2												(2	)															-
Issuance of shares upon vesting of restricted stock units			35,797				3												(3	)															-
Warrants issued for services																			2,591,263																2,591,263
Restricted stock units issued for services																			570,782																570,782
Foreign currency translation																															(202,838	)			(202,838	)
Net loss																											(9,981,702	)							(9,981,702	)
Balance, November 30, 2018			33,805,706			$	3,381				1			$	-			$	34,127,010			$	800,000			$	(31,256,883	)		$	(371,938	)		$	3,301,570
		Nine Months Ended November 30, 2017
		Common stock								Preferred stock
		par value $0.0001								par value $0.0001																				Accumulated
		Number of Shares				Amount				Number of Shares				Amount				Additional Paid-in Capital				Common Stock Issuable				Accumulated Deficit				Other Comprehensive Income (Loss)				Total Stockholders' Equity
Balance, February 28, 2017			31,451,973			$	3,146				1			$	-			$	8,723,390			$	800,000			$	(7,237,803	)		$	(151,211	)		$	2,137,522
Issuance of common shares for cash, net of share issuance costs			1,141,394				114												6,065,262																6,065,376
Warrants issued for services																			5,235,253																5,235,253
Restricted stock units issued for services																			88,664																88,664
Issuance of shares upon exercise of warrant, net of share issuance costs			193,770				19												1,162,997																1,163,016
Issuance of shares upon cashless exercise of warrants			20,000				2												(2	)															-
Foreign currency translation																															2,068				2,068
Net loss																											(10,402,707	)							(10,402,707	)
Balance, November 30, 2017			32,807,137			$	3,281				1			$	-			$	21,275,564			$	800,000			$	(17,640,510	)		$	(149,143	)		$	4,289,192

 

See accompanying notes to the condensed consolidated financial statements.

 

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Loop Industries, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended November 30,
		2018				2017
Cash Flows from Operating Activities
Net loss		$	(9,981,702	)		$	(10,402,707	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			366,710				281,016
Stock-based compensation expense			3,162,045				5,323,917
Changes in operating assets and liabilities:
Sales tax and tax credits receivable			67,606				(2,831	)
Prepaid expenses			446,770				(15,518	)
Accounts payable and accrued liabilities			483,254				1,000,680
Advances from majority stockholder			-				(360,000	)
Net cash used in operating activities			(5,455,317	)			(4,175,443	)
Cash Flows from Investing Activities
Additions to property, plant and equipment			(1,428,174	)			(273,550	)
Additions to intangible assets			(95,179	)			-
Net cash used in investing activities			(1,523,353	)			(273,550	)
Cash Flows from Financing Activities
Proceeds from sales of convertible debt			2,450,000				-
Convertible debt subscriptions			100,000				-
Repayment of long-term debt			(39,471	)			-
Proceeds from sales of common shares and exercise of warrants, net of share issuance costs			-				7,228,393
Repayment of advances from majority stockholder			-				(205,592	)
Net cash (used) provided by financing activities			2,510,529				7,022,801
Effect of exchange rate changes			(53,314	)			(50,527	)
Net change in cash and restricted cash			(4,521,455	)			2,523,281
Cash and restricted cash, beginning of period			8,149,713				916,487
Cash and restricted cash, end of period		$	3,628,258			$	3,439,768
Comprises of:
Cash			3,528,258				3,400,973
Restricted cash			100,000				38,795
			3,628,258				3,439,768
Supplemental Disclosure of Cash Flow Information:
Income tax paid		$	-			$	-
Interest paid		$	41,117			$	-

 

See accompanying notes to the condensed consolidated financial statements.

 

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Loop Industries, Inc.

Three and Nine Months Ended November 30, 2018 and 2017

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of the Company, Basis of Presentation and Going Concern

 

Nature of the Company

 

Loop Industries, Inc. (“Loop” or “the Company”) is a technology company, whose mission is to accelerate the world’s shift toward sustainable plastic and away from our dependence on fossil fuels. Loop’s patented and proprietary technology decouples plastic from fossil fuels by depolymerizing waste polyester plastic and fiber to its base building blocks (monomers). The monomers are then filtered, purified and repolymerized to create virgin-quality polyester plastic that is suitable for use in food-grade packaging.

 

Common shares of the Company are listed on the Nasdaq Global Market under the symbol “LOOP.”

 

Basis of presentation

 

The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The balance sheet information as at February 28, 2018 is derived from the Company’s audited consolidated financial statements and related notes for the fiscal year ended February 28, 2018, which is included in Item 8 of the Company’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 14, 2018. These unaudited interim condensed consolidated financial statements should be read in conjunction with those financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended November 30, 2018 are not necessarily indicative of the results that may be expected for the year ending February 28, 2019.

 

Intercompany balances and transactions are eliminated on consolidation.

 

Going Concern

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the unaudited interim condensed consolidated financial statements, the Company has not yet begun commercial operations and does not yet have a recurring source of revenue. Since inception, the Company has accumulated a deficit of $31.3 million and during the nine months ended November 30, 2018, the Company incurred a net loss of $10.0 million and used cash in operating activities of $5.5 million, which raises substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

As at November 30, 2018, the Company had cash on hand of $3.5 million. Management is evaluating its plans to continue to raise funds, the proceeds from which would be used to finance the start-up of its commercial operations and fund the further development of its ongoing pre-revenue operations. There can be no assurance that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. If the Company does not raise additional financing, it might not be able to comply with the financial covenants related to its long-term debt and the cross-default provisions of the convertible notes.

 

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

 

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2. Summary of Significant Accounting Policies

 

Use of estimates

 

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

 

Foreign currency translations and transactions

 

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

 

The following table summarizes the exchange rates used:

 

		Three Months Ended November 30,								Nine Months Ended November 30,
		2018				2017				2018				2017
Period‑end Canadian $: US dollar exchange rate		$	0.75			$	0.78			$	0.75			$	0.78
Average period Canadian $: US dollar exchange rate		$	0.77			$	0.77			$	0.77			$	0.77

 

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

 

Sales tax and tax credits receivable

 

The Company is registered for the Canadian federal and provincial goods and services taxes. As such, the Company is obligated to collect, and is entitled to claim sales taxes paid on its expenses and capital expenditures incurred in Canada. As at November 30, 2018 and February 28, 2018, the computed recoverable sales taxes amounted to $63,709 and $177,903, respectively.

 

Research and development expenses

 

Research and development expenses relate primarily to the development, design, testing of preproduction samples, prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the three and nine months ended November 30, 2018 amounted to $0.8 million and $2.9 million, respectively (2017 – $3.9 million and $5.3 million, respectively).

 

Net earnings (loss) per share

 

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

 

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For the three and nine months ended November 30, 2018 and 2017, the calculations of basic and diluted loss per share are the same as potential dilutive securities would have an antidilutive effect. The potentially dilutive securities consisted of 2,345,957 outstanding warrants, 99,498 restricted stock units and 1,000,000 shares issuable to our CEO per his employment agreement (Note 6) as at November 30, 2018 (2017 – 2,684,582, 34,102 and 1,000,000, respectively).

 

Recently adopted accounting pronouncements

 

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

 

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

 

	1.	Equity investments that do not result in consolidation and are not accounted for under the equity method would be measured at fair value through net income, unless they qualify for the proposed practicability exception for investments that do not have readily determinable fair values.
	2.	Changes in instrument‑specific credit risk for financial liabilities that are measured under the fair value option would be recognized in other comprehensive income.
	3.	Entities would make the assessment of the realizability of a deferred tax asset (“DTA”) related to an available‑for‑sale (“AFS”) debt security in combination with the entity’s other DTAs. The guidance would eliminate one method that is currently acceptable for assessing the realizability of DTAs related to AFS debt securities. That is, an entity would no longer be able to consider its intent and ability to hold debt securities with unrealized losses until recovery.
	4.	Disclosure of the fair value of financial instruments measured at amortized cost would no longer be required for entities that are not public business entities.

 

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this Statement has not had an impact on the Company’s consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting, which amends the guidance in Topic 718 to clarify when a change to the terms or conditions of a share-based payment award requires the application of the guidance in Topic 718. The amendments provide that an entity shall account for the effects of a modification of a share-based payment award unless all the following conditions are met:

 

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	a.	The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.
	b.	The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.
	c.	The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

 

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The company adopted ASU 2017-09 on March 1, 2018. The adoption of the standard had no impact on the consolidated financial statements.

 

Recently issued accounting pronouncements

 

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

 

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 Company does not expect that ASU 2018-07 will have an impact on its consolidated financial statements.

 

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 Company does not expect that this update will have an impact on its consolidated financial statements.

 

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3. Property, Plant and Equipment, Net

 

		Estimated			November 30,				February 28,
		Useful Life			2018				2018
		(years)
Building		30			$	1,863,982			$	1,935,423
Land		indefinite				230,390				239,239
Building improvements		5				380,174				377,253
Machinery and equipment		3 – 8				3,380,317				2,189,195
Office equipment and furniture		8				115,925				101,756
Property, plant and equipment, gross						5,970,788				4,842,866
Less: accumulated depreciation						(937,014	)			(805,963	)
Property, plant and equipment, net					$	5,033,774			$	4,036,903

 

Depreciation expense is recorded as an operating expense in the unaudited interim condensed consolidated statements of operations and comprehensive loss and amounted to $135 thousand and $309 thousand for the three and nine months ended November 30, 2018 (2017 – $83 thousand and $233 thousand, respectively).

 

4. Intangible Assets, Net

 

		Estimated			November 30,				February 28,
		Useful Life			2018				2018
		(years)
Intellectual property		7			$	662,870			$	533,369
Less: accumulated amortization						(258,203	)			(200,629	)
Intangible assets, net					$	404,667			$	332,740

 

Amortization expense is recorded as an operating expense in the consolidated statements of operations and comprehensive loss and amounted to $20 thousand and $58 thousand for the three and nine months ended November 30, 2018, respectively (2017 – $16 thousand and $48 thousand, respectively).

 

5. Long‑Term Debt

 

		November 30, 2018				February 28, 2018
Instalment loan		$	1,008,697			$	1,088,426
Less current portion			52,628				54,649
Non-current portion		$	956,069			$	1,033,777

 

Interest paid on the instalment loan during the three and nine months ended November 30, 2018 amounted to $15 thousand and $41 thousand respectively (2017 – nil). As at November 30, 2018, the Company was in compliance with its financial covenants.

 

6. Related Party Transactions

 

Advances from majority stockholder

 

Mr. Daniel Solomita, or companies controlled by him, previously made advances to the Company, which were unsecured, non‑interest bearing with no formal terms of repayment. During the nine months ended November 30, 2017, the Company repaid to Mr. Solomita or companies controlled by him, as applicable, an aggregate amount of $250 thousand. A balance of $73 thousand was due as at November 30, 2017. Additionally, accrued compensation due to Mr. Solomita of $360 thousand was paid during the nine months ended November 30, 2017.

 

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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. The employment agreement is for an indefinite term.

 

The Company and Mr. Solomita entered into an amendment and restatement of the employment agreement on July 13, 2018. 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 deemed retroactively effective to March 1, 2018. For the three and nine months ended November 30, 2018, compensation expense for the Company’s CEO amounted to $172 thousand and $522 thousand, respectively, inclusive of the retroactive adjustment in accordance with the employment agreement as amended and restated on July 13, 2018. For the three and nine months ended November 30, 2017, compensation expense was $45 thousand and $135 thousand, respectively.

 

In addition, the employment agreement provided for a long-term incentive grant of 4,000,000 shares of the Company’s common stock, upon the achievement of certain 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. The restricted stock units vest upon the achievement of applicable performance milestones. During the nine months ended November 30, 2018 and 2017, no milestones became probable of being met and, accordingly, the Company did not record any compensation expense in relation to the restricted stock units. As at November 30, 2018, one out of the four milestones was met.

 

7. Stockholders’ Equity

 

Common Stock

 

For the nine months ended November 30, 2018		Number of shares				Amount
Balance, February 28, 2018			33,751,088			$	3,376
Cashless exercise of warrants			18,821				2
Issuance of shares upon vesting of restricted stock units			35,797				3
Balance, November 30, 2018			33,805,706			$	3,381

 

During the nine months ended November 30, 2018, the Company issued 18,821 shares of common stock upon the cashless exercise of 20,000 warrants and 35,797 shares of common stock upon issuance of restricted stock units.

 

During the nine months ended November 30, 2017, the Company sold, under a private placement, 1,123,266 shares of its common stock at an offering price of $5.25 and 18,128 of its common stock at an offering price of $12.00, resulting in proceeds to the Company of $6,114,724. During the nine months ended November 30, 2017, the Company issued 20,000 shares of common stock upon the cashless exercise of 22,919 warrants and 193,770 shares of its common stock upon the exercise of warrants at an offering price of $6.00 per share, resulting in proceeds of $1,163,016.

 

8. Stock-based Compensation Plans

 

Equity Incentive Plan

 

On July 6, 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”). A total of 3,000,000 shares of common stock were reserved for issuance under the Plan with annual automatic share reserve increases 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. 1,264,102 units were issued under the plan in the year ended February 28, 2018 and the balance of units available for issuance under the Plan at February 28, 2018 was 1,735,898.

 

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At November 30, 2018, total number of shares available for issuance, net of shares issued, forfeited and expired amounted to 3,271,496. The table below summarizes activity in the number of shares available for issuance under the Plan for the nine months ended November 30, 2018:

 

For the nine months ended November 30, 2018		Number of units available for issuance
Balance, February 28, 2018			1,735,898
Automatic share reserve increase			1,500,000
Units granted			(116,027	)
Units forfeited			101,625
Units expired			50,000
Balance, November 30, 2018			3,271,496

 

Warrants

 

The following table summarizes the continuity of the Company’s warrants during the nine months ended November 30:

 

		2018								2017
		Number of warrants				Weighted average exercise price				Number of warrants				Weighted average exercise price
Outstanding, beginning of period			2,515,248			$	8.21				1,647,670			$	2.91
Granted			13,209				11.52				2,310,000				9.23
Exercised			(20,000	)			0.80				(213,770	)			5.52
Forfeited			(100,000	)			5.25				(515,418	)			4.95
Expired			(62,500	)			4.80				(543,900	)			5.86
Outstanding, end of period			2,345,957			$	8.44				2,684,582			$	7.16
Exercisable, end of period			1,206,081			$	8.15				966,250			$	4.90

 

The following table summarizes information concerning outstanding warrants as at November 30:

 

				2018								2017
Exercise price				Number of warrants outstanding				Weighted average remaining life				Number of warrants outstanding				Weighted average remaining life
$	0.80				582,081				7.00				912,082				6.21
$	3.00				-				-				12,500				0.50
$	5.25				380,000				8.74				530,000				9.74
$	11.52				13,209				9.61				-				-
$	12.00				840,667				7.34				700,000				9.79
$	13.49				250,000				8.88				250,000				9.88
$	13.89				280,000				0.07				280,000				9.94
Outstanding, end of period					2,345,957				6.79				2,684,582				7.51
Exercisable, end of period					1,206,081				6.74				966,250				7.54

 

Warrants were valued using the Black-Scholes pricing model. The following table shows key inputs into the valuation model for the nine months ended November 30:

 

		2018				2017
Exercise price		$	11.52			$	5.25 to 13.89
Risk-free interest rate			2.82%			1.46 to 2.15%
Expected dividend yield			0%				0%
Expected volatility			78%			80% to 94%
Expected life		6.5 years				3 to 6 years

 

During the three and nine months ended November 30, 2018, an expense of $0.8 million and $2.6 million, respectively (2017 – $4.3 million and $5.2 million, respectively) was recorded in the condensed consolidated statement of operations in relation to warrants.

 

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Restricted Stock Units

 

The following table summarizes the continuity of the restricted stock units (“RSUs”) during the three months ended November 30:

 

		2018				2017
		Number of RSUs				Number of RSUs
Outstanding, beginning of period			34,102				-
Granted			102,818				34,102
Vested			(35,797	)			-
Forfeited			(1,625	)			-
Outstanding, end of period			99,498				34,102
Weighted average remaining life (in years)			1.96				0.50

 

During the three and nine months ended November 30, 2018, an expense of $0.2 million and $0.6 million, respectively (2017 – $0.1 million and $0.1 million, respectively) was recorded in the condensed consolidated statement of operations in relation to RSUs.

 

9. Convertible notes

 

On November 13, 2018, the Company issued convertible promissory notes (the “Notes”), together with related warrants to acquire an additional 50% of the shares issued upon the conversion of the Notes (the “Warrants”), for an aggregate purchase price of approximately $2.45 million (the “Private Placement”). The Company expects to use the net proceeds of the Private Placement for general corporate and working capital purposes.

 

The notes carry an interest rate of 8.00% per annum and mature on May 13, 2019 (the “Maturity Date”), upon which date the outstanding principal amount of the 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 Notes (the “Conversion Price”). The total number of shares of Common Stock to be issued upon automatic conversion shall equal the outstanding principal amount of the Note and all accrued and unpaid interest on this Note, divided by the Conversion Price.

 

The Warrants are exercisable for an additional fifty percent (50%) of the shares of Common Stock issued upon the conversion of the Notes (the “Warrant Shares”). The per share purchase price (the “Exercise Price”) for each of the Warrant Shares purchasable under the 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 Notes. Each Warrant expires eighteen (18) months from the date of the conversion of the Notes (the “Expiration Date”). The Investors may exercise the Warrants at any time prior to the Expiration Date.

 

Due to the variable conversion price, the Notes contain characteristics of a variable share-forward sales contracts (“VSF”) under the guidance of ASC 480-10. Although management cannot predict future movements in the share price, it has concluded, for the purpose of ‎the accounting for the convertible notes, that it is more likely than not that the Conversion Price will be below $13.00, resulting in the issuance of a variable number of shares, the 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 Warrants, these do not meet the “fixed-for-fixed” criteria under ASC 815-40. Accordingly, the 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 Notes and Warrants is broken down as follows as at November 30:

 

		2018				2017
Convertible notes			2,308,969				-
Warrants			141,031				-
Total			2,450,000				-

 

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The Notes contain a prepayment option which would allow the Company to repay in cash the principal balance of the Notes and all accrued and unpaid interest at any date prior to the Maturity Date. In the occasion that the Company would exercise the prepayment option, no warrants would be issued.

 

The Company is currently authorized by its Board of Directors (the “Board”) to raise up to $5.0 million through the issuance of convertible debt with the same conditions as described above. As at November 30, 2018, the Company has received $0.1 million of subscriptions for additional convertible debt to be issued. These funds are accounted for as restricted cash.

 

10. Joint venture

 

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 Holdings LP, USA, an indirect subsidiary of Indorama Ventures Public Company Limited, on September 24, 2018 to form a 50:50 joint venture limited liability company by the name of Indorama Loop Technologies, LLC (“ILT”).

 

The intention is for ILT to manufacture polyester resin for beverage and consumer packaged goods companies and will, using the Company’s technology, manufacture Loop branded resin. Pursuant to the Agreement, the Company has also committed to provide an initial capital contribution to ILT of $0.5 million by January 22, 2019. There was no activity in ILT from the date of inception of September 24, 2018 to November 30, 2018, with the exception of the Company’s contribution of an exclusive worldwide royalty-free license to use its proprietary technology. The Company has equity-accounted for its investment in ILT for the quarter ended November 30, 2018, which given the limited activities, had no impact on the consolidated financial statements.

 

In October 2018, the Company entered into a multi-year agreement with PepsiCo that will enable it to purchase production capacity from the Company’s joint venture facility with IVL in the United States and incorporate Loop™ PET resin, into its product packaging by early 2020.

  

11. Contingencies

 

In connection with a claim filed against the Company by two individuals (the “Plaintiffs”), in the Los Angeles Superior Court, seeking damages for breach of implied covenant of good faith and fair dealing, and promissory fraud, asserting entitlement to two million shares of our common stock the Plaintiffs filed a motion to further amend their complaint., The motion was granted on July 25, 2018 which has delayed the trial date from September 12, 2018 to May 8, 2019 in the Los Angeles Superior Court. Management believes that this case lacks merit and intends to continue to defend it vigorously. As such, no amounts have been provided for in the consolidated financial statements with respect to this claim. In the event that the court decided in favor of the Plaintiffs, the Company may have to issue an additional two million shares of its common stock from treasury, causing dilution for existing shareholders of the Company. Additionally, the Company may have to reimburse the Plaintiffs legal fees for which management does not currently have an estimate.

 

12. Subsequent events

 

On January 3, 2019, the Company issued additional convertible promissory notes (the “Notes”), together with related warrants (the “Warrants”) to acquire 50% of the shares issued upon the conversion of the Notes for an aggregate purchase price of $0.2 million. The Notes and Warrants have identical characteristics to the convertible promissory notes and attached warrants described in note 9 above.

 

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

 

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

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

Investors and others should note that we announce material financial information to our investors using our investor relations web site (http://www.loopindustries.com/en/investors/home), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our members and the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the United States ("U.S.") social media channels listed on our investor relations web site. The information contained on, or that can be accessed through, our website and social media channels is not a part of this Quarterly Report on Form 10-Q.

 

Introduction

 

Loop Industries, Inc. (“Loop” or “the Company”) is a technology company, whose mission is to accelerate the world’s shift toward sustainable plastic and away from our dependence on fossil fuels. Loop’s patented and proprietary technology decouples plastic from fossil fuels by depolymerizing waste polyester plastic and fiber to its base building blocks (monomers). The monomers are then filtered, purified and repolymerized to create virgin-quality polyester plastic suitable for use in food-grade packaging.

 

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Common shares of the Company are listed on the Nasdaq Global Market under the symbol “LOOP.”

 

Prospective Future Growth

 

The annual global demand for polyester is estimated at 70 million metric tons¹ (approximately 154 billion pounds) and is expected to grow 4% annually in the near term¹. This represents a total addressable market of approximately $130 billion today¹. We expect to help address this demand by commercializing our science and technology in collaboration with multinational supply chain management and manufacturing companies and to manufacture Loop™ branded PET resin.

   

During the last three years, we believe we have positioned Loop to be a leader in sustainability and the circular economy. We built our pilot plant in Terrebonne, Canada to optimize and showcase our proprietary depolymerization technology and completed the expansion of our pilot plant to increase its capacity and demonstrate continuous operations and we continue to pursue options to finance our growth strategy. Reader may refer to the liquidity and capital resources section below.

 

In June 2018, we activated our breakthrough Generation II technology that we believe is significantly more streamlined and efficient with reduced energy use that eliminates water in the production of dimethyl terephthalate. We also engaged engineering partners to complete the design of the world’s first integrated waste-to-Loop™ PET resin manufacturing facility to upcycle waste PET and polyester fiber into virgin quality Loop PET resin and polyester fiber. These new world-class manufacturing facilities will use our Generation II technology and production processes and provide what we believe to be a fully integrated start-to-finish process to commercialize our innovative science and technology.

 

In September 2018, we reached a significant milestone in our global commercialization plan when we announced the creation of a joint-venture with Indorama Ventures Public Company Limited (IVL) to manufacture and commercialize sustainable polyester resin to meet the growing global demand from beverage and consumer packaged goods companies. This joint-venture brings together IVL’s world-class manufacturing footprint and our proprietary science and technology with a goal of becoming a reliable world leader in the circular economy for sustainable and recycled PET resin and polyester fiber. The 50:50 joint-venture has an exclusive world-wide license to use our technology to retrofit existing facilities to produce sustainably produced PET resin and polyester fiber with plans to begin commercial production in the first quarter of 2020. This partnership is a key strategic step in our global commercialization plan and is focused on retrofitting existing Polyester and PET manufacturing facilities. Additional details on this joint-venture can be found in the accompanying condensed consolidated financial statements (note 10).

 

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

 

In October 2018, the Company entered into a multi-year agreement with PepsiCo that will enable it to purchase production capacity from the Company’s joint venture facility with IVL in the United States and incorporate Loop™ PET resin, which is 100% recycled material, into its product packaging by early 2020. As one of the largest purchasers of recycled PET plastic in the consumer goods space, PepsiCo has identified Loop™ PET resin as a commercially viable technology to expand the amount of recycled content in its product packaging and help meet its sustainability ambitions and consumer needs. This agreement aligns with PepsiCo’s Performance with Purpose vision and highlights the company’s commitment to adopt different and creative approaches to the challenges of plastics and waste. The deal will also include a marketing and communications plan to raise awareness of the importance of recycling, sustainability and the circular economy.

 

On November 29, 2018 the Company entered into a multi-year supply framework with certain members of the Coca-Cola Cross Enterprise Procurement Group to supply 100% recycled and sustainable Loop™ PET plastic from our joint venture facility with IVL in the United States to authorized Coca-Cola bottlers who enter into supply agreements with the company.

 

______________ 

¹ Source: PET Polymer IHS Report (2018).

 

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On December 19, 2018 we announced an agreement with thyssenkrupp Industrial Solutions’ division, Uhde Inventa-Fischer GmbH, a leading global polyester technology provider and polyester plant engineering firm, this strategic alliance is expected to shape the future of PET and Polyester manufacturing. The Global Alliance Agreement advances the integration of our respective technologies intended to provide a turn-key industrial solution for license to manufacturing companies seeking a commercially viable technology to produce sustainable PET and polyester plastic.

 

We are continuing to invest in developing our organizational strength and depth. On December 20, 2018 we announced the appointment of Nelson Gentiletti to the position of Chief Operating and Chief Financial Officer, an experienced and well recognized public company CFO, Mr. Gentiletti will be responsible for all of Loop's corporate functions. He will also draw upon his strong background‎ in operations management and business development to support the Company in the rollout of the recently announced joint venture with Indorama Ventures and the development of Waste-to-Resin plants.

 

Our research and development innovation hub in Terrebonne, Canada will continue optimizing our current technology as well as innovating into new areas of sustainability.

 

Results of Operations

 

The following table summarizes our operating results for the three months ended November 30, 2018 and 2017.

 

		Three Months Ended November 30,
		2018				2017				$ Change
Revenues		$	-			$	-			$	-
Operating expenses
Research and development
Stock-based compensation			249,548				2,899,435				(2,649,887	)
Other research and development			542,563				995,019				(452,456	)
Total research and development			792,111				3,894,454				(3,102,343	)
General and administrative
Stock-based compensation			718,976				1,504,110				(785,134	)
Other general and administrative			1,252,871				1,215,968				36,903
Total general and administrative			1,971,847				2,720,078				(748,231	)
Depreciation and amortization			155,053				98,755				56,298
Interest expense			14,883				-				14,883
Foreign exchange (gain) loss			(20,133	)			(9,634	)			(10,499	)
Total operating expenses			2,913,761				6,703,653				(3,789,892	)
Net loss		$	(2,913,761	)		$	(6,703,653	)		$	3,789,892

 

Net loss for the three months ended November 30, 2018 decreased $3.8 million to $2.9 million compared to the same period last year, primarily due to decreased research and development expenses of $3.1 million.

 

General and administrative expenses decreased by $0.7 million and amounted to $2.0 million compared to $2.7 million for the three months ended November 30, 2018 and 2017, respectively. The decrease was primarily due to lower employee related costs including non-cash stock-based compensation of $0.6 million and professional fees of $0.1 million.

 

Research and development expenses for the three months ended November 30, 2018 decreased $3.1 million to $0.8 million as compared to the same period last year. The decrease was primarily due to lower employee related expenses of $2.7 million resulting from lower non-cash stock-based compensation expense, in addition to lower engineering fees of $0.4 million related to completion of initial process design and development.

 

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The following table summarizes our operating results for the nine months ended November 30, 2018 and 2017.

 

		Nine Months Ended November 30,
		2018				2017				$ Change
Revenues		$	-			$	-			$	-
Operating expenses
Research and development
Stock-based compensation			910,004				3,121,520				(2,211,516	)
Other research and development			2,014,479				2,220,243				(205,764	)
Total research and development			2,924,483				5,341,763				(2,417,280	)
General and administrative
Stock-based compensation			2,249,662				2,202,399				47,263
Other general and administrative			4,472,134				2,488,895				1,983,239
Total general and administrative			6,721,796				4,691,294				2,030,502
Depreciation and amortization			366,710				281,016				85,694
Interest expense			41,117				-				41,117
Foreign exchange (gain) loss			(72,404	)			88,634				(161,038	)
Total operating expenses			9,981,702				10,402,707				(421,005	)
Net loss		$	(9,981,702	)		$	(10,402,707	)		$	421,005

 

Net loss for the nine months ended November 30, 2018 decreased $0.4 million to $10.0 million compared to the same period last year, primarily due to decreased research and development costs of $2.4 million as well as increased general and administrative expenses of $2.0 million.

 

Research and development expenses for the nine months ended November 30, 2018 decreased $2.4 million to $2.9 million compared to the same period last year. The decrease in research and development expenses was driven primarily by lower non-cash stock-based compensation expense of $2.2 million and lower engineering fees of $0.4 million resulting from process design and development efforts.

 

General and administrative expenses for the nine months ended November 30, 2018 increased $2.0 million to $6.7 million as compared to the same period last year. The increase was primarily due to higher employee related expenses of $0.7 million, comprised mainly of non-cash stock-based compensation expense as well as higher compensation expense related to the increased number of employees and a retroactive compensation adjustment associated with the amended employment agreement of the Company’s CEO. Other elements explaining the increase include higher legal fees related to legal proceedings and commercialization efforts, and consulting, accounting and public company related fees of $1.1 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity and Going Concern Assumption

 

At the current stage of our development, we are a pre-revenue company, and our ongoing operations are being financed by raising new capital. As at November 30, 2018, we had cash on hand of $3.5 million.

 

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

 

The company issued on November 13, 2018 convertible notes in the aggregate principal amount of $2.45 million and related warrants to acquire an additional 50% of the shares issued upon the exercise of the notes. The notes bear interest at a rate of 8% per annum and mature on May 13, 2019. The financing provides additional short-term liquidity while the Company actively pursues long term options to finance its growth strategy and the startup of large scale commercial operations pursuant to its announced joint venture with Indorama Ventures.

 

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As reflected in the accompanying consolidated financial statements, we have not yet begun commercial operations and do not yet have a recurring source of revenue. Since inception, we have accumulated a deficit of $31.3 million and during the nine months ended November 30, 2018, we incurred a net loss of $10.0 million and used cash in operations of $5.5 million, which raises 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. If the Company doesn’t raise additional financing, it might not be able to comply with the financial covenants related to its long-term debt and the cross-default provisions of the convertible notes.

 

Flow of Funds

 

Summary of Cash Flows

 

A summary of cash flows for the nine months ended November 30, 2018 and 2017 was as follows:

 

		Nine Months Ended November 30,
		2018				2017
Net cash used in operating activities		$	(5,455,317	)		$	(4,175,443	)
Net cash used in investing activities			(1,523,353	)			(273,550	)
Net cash (used) provided by financing activities			2,510,529				7,022,801
Effect of exchange rate changes on cash			(53,314	)			(50,527	)
Net (decrease) increase in cash		$	(4,521,455	)		$	2,523,281

 

Net Cash Used in Operating Activities

 

During the nine months ended November 30, 2018, we used $5.5 million in operations compared to $4.2 million, the year prior. The increase is mainly due to increased operating expenses previously itemized as we move to the next phase of commercialization.

 

Net Cash Used in Investing Activities

 

During the nine months ended November 30, 2018, the Company made capital asset investments of $1.5 million, primarily in connection with the expansion of our pilot plant.

 

Net Cash (Used) Provided by Financing Activities

 

During the nine months ended November 30, 2018, we issued $2.5 million of convertible debt, received $0.1 in subscription deposits and repaid $39 thousand of our long-term debt. During the nine months ended November 30, 2017, we raised $7.2 million through the sale of additional common stock and the exercise of warrants and repaid $0.2 million in advances from majority stockholder.

 

Off-Balance Sheet Arrangements

 

As at November 30, 2018, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

Foreign Currency Exchange Risk

 

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

 

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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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

A. Evaluation of Disclosure Controls and Procedures

 

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

 

Our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures and internal controls over financial reporting were effective as at November 30, 2018. During the second quarter, we completed the remediation of our previously reported material weakness disclosed in our Annual Report on Form 10-K, filed on May 14, 2018, and in our Quarterly report on Form 10-Q, filed on July 3, 2018. The material weakness related to our accounting for stock-based compensation. Management has expanded its in-house expertise on accounting for stock-based compensation, as well as engaged an external advisor to advise on more complex stock-based compensation arrangements.

 

B. Changes in Internal Control over Financial Reporting

 

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

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On January 27, 2017, a claim was filed against us by two individuals (the “Plaintiffs”), in the Los Angeles Superior Court, seeking damages for breach of contract, breach of implied covenant of good faith and fair dealing, and promissory fraud, asserting entitlement to two million shares of our common stock in connection with an alleged oral agreement for consulting services. The Plaintiffs filed a motion to further amend their complaint, which was granted on July 25, 2018 and which has delayed the trial date from September 12, 2018 to May 8, 2019 in the Los Angeles Superior Court. Although the plaintiffs are seeking two million shares of the Company’s common stock, punitive damages and attorneys’ fees, the Company is currently unable to estimate the amount or dollar range of potential loss or recovery, if any, which might result if the final determination of this matter is favorable or unfavorable. We believe that this case lacks merit and intend to continue to defend it vigorously. In the event that the court decided in favor of the Plaintiffs, the Company may have to issue an additional two million shares of its common stock from treasury, causing dilution for existing shareholders of the Company. Additionally, the Company may have to reimburse the Plaintiffs legal fees for which management does not currently have an estimate.

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

We are subject to various risks and uncertainties in the course of our business. Risk factors relating to us are set forth under “Risk Factors” in our Annual Report on Form 10-K, filed on May 14, 2018 and below. Other than as set forth below, no material changes to such risk factors have occurred during the nine months ended November 30, 2018.

 

Although our financial statements have been prepared on a going concern basis, we must raise additional capital to fund our operations in order to continue as a going concern.

 

Our consolidated financial statements for the quarter ended November 30, 2018 includes going concern disclosures, indicating that our current liquidity position raises substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.

 

In order to have sufficient cash to fund our operations, we will need to raise additional equity or debt capital in order to continue as a going concern and we cannot provide any assurance that we will be successful in doing so.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

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

 

Exhibit Index

 

				Incorporated by Reference
Number		Description		Form		File No.		Filing Date		Exhibit No.
3.1		Articles of Incorporation, as amended to date		10-K		000-54768		May 30, 2017		3.1
3.2		By-laws, as amended to date		8-K		000-54768		April 10, 2018		3.1
10.1		Amended and restated Employment Agreement, dated July 13, 2018, by and between Loop Industries, Inc. and Daniel Solomita.		8-K		000-54768		July 13, 2018		10.4
10.2		Limited Liability Company Agreement, dated September 24, 2018 by and between the Company, Indorama Ventures Holdings LP and other parties thereto		8-K		001-38301		September 28, 2018		10.1
10.3		License Agreement, dated September 24, 2018 by and between the Company and Indorama Loop Technologies, LLC		8-K		001-38301		September 28, 2018		10.2
10.4		Marketing Agreement, dated September 24, 2018 by and between the Company and Indorama Loop Technologies, LLC		8-K		001-38301		September 28, 2018		10.3
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.						Filed herewith
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.						Filed herewith
32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.						Furnished herewith
32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.						Furnished herewith
101.INS		XBRL Instance Document						Filed herewith
101.SCH		XBRL Taxonomy Extension Schema Document						Filed herewith
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document						Filed herewith
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document						Filed herewith
101.LAB		XBRL Taxonomy Extension Label Linkbase Document						Filed herewith
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document						Filed herewith

 

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SIGNATURES

 

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

 

Date: January 9, 2019	By:	/s/ Daniel Solomita
	Name:	Daniel Solomita
	Title:	Chief Executive Officer, President, and Director (principal executive officer)
Date: January 9, 2019	By:	/s/ Nelson Gentiletti
	Name:	Nelson Gentiletti
	Title:	Chief Operating Officer and Chief Financial Officer (principal accounting officer and principal financial officer)

 

 

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