Notes to the Condensed Consolidated
Financial Statements
(Unaudited)
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 suitable for use in food-grade packaging and
polyester fiber.
On
November 20, 2017, Loop Industries commenced trading on the NASDAQ
Global Market under its new trading symbol, “LOOP.”
From April 10, 2017 to November 19, 2017, our common
stock was quoted on the OTCQX tier of the OTC Markets
Group Inc. under the symbol “LLPP.”
Basis of presentation
The
accompanying unaudited interim condensed consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles in the United States of America (“US
GAAP”) and applicable rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”) regarding
interim financial reporting. Certain information and note
disclosures included in these unaudited interim condensed
consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in
the Company’s Annual Report on Form 10-K for the fiscal year
ended February 29, 2020, filed with the SEC on May 5, 2020. The
unaudited interim condensed consolidated financial statements
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. The
condensed consolidated balance sheet as of February 29, 2020,
included herein, was derived from the audited financial statements
as of that date, but does not include all disclosures including
certain notes required by GAAP on an annual reporting basis. In the
opinion of management, the accompanying unaudited interim condensed
consolidated financial statements present fairly the financial
position, results of operations, comprehensive loss and cash flows
for the interim periods. The results for the three- and nine-month
periods ended November 30, 2020 are not necessarily indicative of
the results to be expected for any subsequent quarter, the fiscal
year ending February 28, 2021, or any other period.
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 intangible assets, accruals
for potential liabilities and assumptions made in calculating the
fair value of stock-based compensation and other equity
instruments.
The
COVID-19 pandemic has disrupted business operations for us and our
customers, suppliers, vendors and other parties with whom we do
business, and such disruptions are expected to continue for an
indefinite period of time. The uncertain duration of these measures
has had and may continue to have an effect on our development and
commercialization efforts. In particular, as previously disclosed,
the situation in the United States and the continued travel
restrictions and quarantine requirements between Canada and the
United States have caused disruptions in our timetable of our joint
venture with Indorama in the development of our Spartanburg
facility and commercialization of our technology.
Although
the Company continues to monitor the situation and may adjust the
Company’s current policies as more information and public
health guidance become available, the COVID-19 pandemic 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 assess whether there will be further
impact on the development and commercialization of the
Company’s technology which could have a material adverse
effect on the Company’s results of operations and cash
flows.
Foreign currency translations and transactions
The
accompanying unaudited condensed consolidated financial statements
are presented in U.S. dollars, the reporting currency of the
Company. Assets and liabilities of subsidiaries that have a
functional currency other than that of the Company are translated
to U.S. dollars at the exchange rate as at the balance sheet date.
Income and expenses are translated at the average exchange rate of
the period. The resulting translation adjustments are included in
other comprehensive income (loss) (“OCI”). As a result,
foreign currency exchange fluctuations may impact operating
expenses. The Company currently has not engaged in any currency
hedging activities.
For
transactions and balances, monetary assets and liabilities
denominated in foreign currencies are translated into the
functional currency of the entity at the prevailing exchange rate
at the reporting date. Non-monetary assets and liabilities, and
revenue and expense items denominated in foreign currencies are
translated into the functional currency using the exchange rate
prevailing at the dates of the respective transactions. Foreign
exchange gains and losses resulting from the settlement of such
transactions are recognized in the consolidated statements of
operations and comprehensive loss, except for gains or losses
arising from the translation of intercompany balances denominated
in foreign currencies that forms part in the net investment in the
subsidiary which are included in OCI.
Stock-based compensation
The
Company periodically issues stock options, warrants and restricted
stock units to employees and non-employees in non-capital raising
transactions for services and financing expenses. The Company
accounts for stock options granted to employees based on the
authoritative guidance provided by the FASB wherein the fair value
of the award is measured on the grant date and where there are no
performance conditions, recognized as compensation expense on the
straight-line basis over the vesting period and where performance
conditions exist, recognize compensation expense when it becomes
probable that the performance condition will be met. Forfeitures on
share-based payments are accounted for by recognizing forfeitures
as they occur.
The
Company accounts for stock options and warrants granted to
non-employees in accordance with the authoritative guidance of the
FASB wherein the fair value of the stock compensation is based upon
the measurement date determined as the earlier of the date at which
either a) a commitment is reached with the counterparty
for performance or b) the counterparty completes its
performance.
The
Company estimates the fair value of restricted stock unit awards to
employees and directors based on the closing market price of its
common stock on the date of grant.
The
fair value of the stock options granted are estimated using the
Black-Scholes-Merton Option Pricing (“Black-Scholes”)
model, which uses certain assumptions related to risk-free interest
rates, expected volatility, expected life of the stock options, and
future dividends. Stock-based compensation expense is recorded
based on the value derived from the Black-Scholes model and on
actual experience. The assumptions used in the Black-Scholes model
could materially affect stock-based compensation expense recorded
in the current and future periods.
Income taxes
The
Company calculates its provision for income tax on the basis of the
tax laws enacted at the balance sheet date in the countries where
the Company and its subsidiaries operate and generate taxable
income, in accordance with FASB ASC 740, Income Taxes. The Company uses an asset
and liability approach for financial accounting and reporting for
income taxes that allows recognition and measurement of deferred
tax assets based upon the likelihood of realization of tax benefits
in future years. Under the asset and liability approach, deferred
taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before
the Company is able to realize their benefits, or that future
deductibility is uncertain. The Company’s policy is to
recognize interest and/or penalties related to income tax matters
in income tax expense.
Research and development expenses
Research
and development expenses relate primarily to the development,
design, testing of preproduction samples, prototypes and models,
compensation, and consulting fees, and are expensed as incurred.
Starting in the current quarter, machinery and equipment purchases
related to the pilot plant which is now dedicated solely to
research and development activities with no alternative use are
also expensed as incurred. Total research and development costs
recorded during the three- and nine-month periods ended November
30, 2020 amounted to $6,724,283 and $10,504,093 (2019 –
$1,278,172 and $3,246,246), respectively, and are net of government
research and development tax credits and government grants from the
federal and provincial taxation authorities accrued and recorded
based on qualifying expenditures incurred during the fiscal
periods.
Net earnings (loss) per share
The
Company computes net loss per share in accordance with FASB ASC
260, Earnings Per Share.
Basic earnings (loss) per share is computed by dividing the net
income (loss) applicable to common stockholders by the weighted
average number of shares of common stock outstanding during the
year. The Company includes common stock issuable in its
calculation. Diluted earnings (loss) per share is computed by
dividing the net income (loss) applicable to common stockholders by
the weighted average number of common shares outstanding plus the
number of additional common shares that would have been outstanding
if all dilutive potential common shares had been issued, using the
treasury stock method. Potential common shares are excluded from
the computation if their effect is antidilutive.
For the
three- and nine-month periods ended November 30, 2020 and 2019, the
calculations of basic and diluted loss per share are the same
because potential dilutive securities would have an antidilutive
effect. As at November 30, 2020, the potentially dilutive
securities consisted of 1,590,470 outstanding stock options
(November 30, 2019 – 1,657,081), 4,171,609 outstanding
restricted stock units (November 30, 2019 – 4,219,753) and
4,693,802 outstanding warrants (November 30, 2019 –
5,040,267).
Recently adopted accounting pronouncements
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. The adoption
of the standard had no impact on the consolidated financial
statements of the Company.
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, 2020. 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, 2020. The adoption of
the standard had no impact on the consolidated financial statements
of the Company. The Company elected to apply the package of
practical expedients that allows us not to reassess whether expired
or existing contracts contain leases, the classification of these
leases and whether previously capitalized initial direct costs
would qualify for capitalization under Accounting Standards
Codification (or “ASC”) 842. Furthermore, we
elected to use hindsight in determining the lease term and
assessing impairment of the right-of-use assets.
Recently issued accounting pronouncements not yet
adopted
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.
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.
3. Sales Tax, Tax Credits and Other Receivables
Sales
tax, research and development tax credits and other receivables as
at November 30, 2020 and February 29, 2020 were as
follows:
|
|
|
Sales
tax
|
$669,966
|
$180 971
|
Research and
development tax credits
|
390,885
|
447,843
|
Other
receivables
|
121,256
|
35,730
|
|
$1,182,107
|
$664,544
|
4. Prepaid Expenses and Deposits
Prepaid
expenses and deposits as at November 30, 2020 and February 29, 2020
were as follows:
|
|
|
Deposits on
machinery and equipment
|
$747,250
|
$-
|
Insurance
|
427,013
|
61,891
|
Other prepaid
expenses
|
56,179
|
79,335
|
|
$1,230,442
|
$141,226
|
Non-refundable
cash deposits on machinery and equipment that will be used in
research and development activities will be expensed, and
classified as research and development expenses, in the period the
equipment is received and placed into use.
5. Property, Plant and Equipment
|
|
|
|
Accumulated
depreciation, write-down and impairment
|
|
Building
|
$1,912,138
|
$(181,308)
|
$1,730,830
|
Land
|
236,360
|
-
|
236,360
|
Building and land
improvements
|
1,602,766
|
(379,164)
|
1,223,602
|
Machinery and
equipment
|
6,514,252
|
(6,514,252)
|
-
|
Office equipment
and furniture
|
260,220
|
(95,602)
|
164,618
|
Balances, end of
period
|
$10,525,736
|
$(7,170,326)
|
$3,355,410
|
|
|
|
|
Accumulated
depreciation, write-down and impairment
|
|
Building
|
$1,846,070
|
$(128,911)
|
$1,717,159
|
Land
|
264,868
|
-
|
264,868
|
Building and land
improvements
|
733,884
|
(214,068)
|
519,816
|
Machinery and
equipment
|
6,085,195
|
(1,426,465)
|
4,658,730
|
Office equipment
and furniture
|
162,466
|
(62,785)
|
99,681
|
Balances, end of
period
|
$9,092,483
|
$(1,832,229)
|
$7,260,254
|
Depreciation
expense for the three- and nine-month periods ended November 30,
2020 amounted to $93,006 and $624,189, respectively (2019 –
$212,968 and $570,165, respectively), and is recorded as an expense
in the consolidated statements of operations and comprehensive
loss.
During
the three- and nine-month periods ended November 30, 2020, the
Company recorded write-down and impairment expenses of $5,034,606
and 5,043,120, respectively (2019 – nil and $22,985). In the
quarter ended November 30, 2020, the Company’s management
made the decision to convert its pilot plant to exclusively a
demonstration and training facility for our future Infinite
Loop™ manufacturing facilities, therefore foregoing any
alternative future use of its machinery and equipment assets
contained within the pilot plant. As such, the carrying value of
the machinery and equipment was written off resulting in an expense
of $5,034,606 being recognized in the three-month period ended
November 30, 2020. With the decision to dedicate the demonstration
and training facility to research and development, the accounting
for future costs associated with these activities are considered in
scope of ASC 730, Research and Development Costs, and will be
recognized as a research and development expense in the
consolidated statements of operations and comprehensive loss in the
period they are incurred. During the three-month period ended
November 30, 2020, the Company purchased $2,325,540 of machinery
and equipment associated with its ongoing research and development
activities, which have no future alternative use and as such, were
recognized as research and development expenses in the consolidated
statements of operations and comprehensive loss. See Note 13 for
components of research and development expenses.
6. Intangible Assets
|
|
|
|
|
|
Intangible assets,
at cost - beginning of period
|
$225,174
|
$127,672
|
Intangible assets,
accumulated depreciation – beginning of period
|
(22,311)
|
-
|
|
202,863
|
127,672
|
|
|
|
Additions in the
period
|
452,758
|
99,972
|
Amortization of
intangibles
|
(30,165)
|
(22,631)
|
Foreign exchange
effect – increase (decrease)
|
6,133
|
(2,150)
|
|
$631,589
|
$202,863
|
Amortization
expense for the three- and nine-month periods ended November 30,
2020 amounted to $11,301 and $30,165, respectively (2019 - $6,660
and $15,202, respectively), and is recorded as an expense in the
unaudited condensed consolidated statements of operations and
comprehensive loss.
7. Fair value of financial instruments
The
following tables present the fair value of the Company’s
financial (assets) liabilities as at November 30, 2020 and February
29, 2020:
|
Fair Value
Measurements as at November 30, 2020
|
|
|
|
|
Instruments
measured at fair value on a recurring basis:
|
|
|
|
Foreign exchange
contracts
|
$(25,797)
|
$(25,797)
|
Level
2
|
|
|
|
|
Instruments
measured at amortized cost:
|
|
|
|
Long-term
debt
|
$2,390,366
|
$2,400,897
|
Level
2
|
|
Fair Value
Measurements at February 29, 2020
|
|
|
|
|
Instruments
measured at fair value on a recurring basis:
|
|
|
|
Foreign exchange
contracts
|
$26,840
|
$26,840
|
Level
2
|
|
|
|
|
Instruments
measured at amortized cost:
|
|
|
|
Long-term
debt
|
$2,290,152
|
$2,291,109
|
Level
2
|
8. Accounts Payable and
Accrued Liabilities
Accounts
payable and accrued liabilities as at November 30, 2020 and
February 29, 2020 were as follows:
|
|
|
Trade accounts
payable
|
$1,514,881
|
$814,081
|
Accrued engineering
fees
|
686,061
|
-
|
Accrued employee
compensation and payroll taxes
|
678,925
|
873,242
|
Accrued
professional fees
|
676,153
|
133,038
|
Accrued cost of
machinery and equipment
|
415,522
|
92,126
|
Other accrued
liabilities
|
116,605
|
170,211
|
|
$4,088,147
|
$2,082,698
|
9. 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 “Joint
Venture Agreement”) with Indorama Ventures Holdings LP, USA,
an indirect subsidiary of Indorama Ventures Public Company Limited,
to manufacture and commercialize sustainable polyester resin. Each
company has a 50/50 equity interest in Indorama Loop Technologies,
LLC (“ILT”), which was specifically formed to operate
and execute the joint venture.
Under
the Joint Venture Agreement, Indorama Ventures is contributing
manufacturing knowledge and Loop Industries is required to
contribute its proprietary science and technology. Specifically,
the Company is contributing an exclusive world-wide royalty-free
license to ILT to use its proprietary technology to produce 100%
sustainably produced PET resin and polyester fiber.
ILT
meets the accounting definition of a joint venture where neither
party has control of the joint venture entity and both parties
have joint control over the decision-making process in ILT. As
such, the Company uses the equity method of accounting to account
for its share of the investment in ILT. There were no operations in
ILT from the date of inception of September 24, 2018 to November
30, 2020 and, as at November 30, 2020, the carrying value of the
equity investment was $1,500,000, which is the total of the cash
contributions we have made to ILT. During the three- and nine-month
periods ended November 30, 2020, we made contributions to ILT of
nil and $650,000 respectively (2019 – $350,000 and $850,000).
These contributions to ILT, which have been matched by Indorama
Ventures, were used to fund engineering design costs which have
been capitalized in ILT.
The joint venture made a decision in July that due to the COVID-19
situation it would delay work on the project. Since then, no
expenditures have been incurred by the joint
venture.
10. Long-Term Debt
|
|
|
Investissement
Québec financing facility:
|
|
|
Principal
amount
|
$1,703,998
|
$1,645,122
|
Unamortized
discount
|
(272,036)
|
(289,852)
|
Accrued
interest
|
31,549
|
958
|
Total
Investissement Québec financing facility
|
1,463,511
|
1,356,228
|
Term
loan
|
|
|
Principal
amount
|
926,855
|
933,924
|
Less: current
portion
|
(53,992)
|
(52,126)
|
Total term loan,
net of current portion
|
872,863
|
881,798
|
Long-term debt, net
of current portion
|
$2,336,374
|
$2,238,026
|
Investissement Québec financing facility
On
February 21, 2020, the Company received $1,703,998 (CDN$2,209,234)
from Investissement Québec as the first disbursement of our
financing facility, out of a maximum of $3,548,014 (CDN$4,600,000)
(the “Financing Facility”). The loan bears interest at
2.36% and there is a 36-month moratorium on both capital and
interest repayments starting on the date of the first disbursement,
after which capital and interest is repayable in 84 monthly
installments. The Company
established the fair value of the loan for the first disbursement
at $1,354,408 based on a discount rate of 5.45%, which reflected a
debt discount of $290,714. The discount rate used was based on the
external financing from a Canadian bank. The Company, under the loan
agreement, was required to pay fees representing 1% of the loan
amount, $35,480 (CDN$46,000) to Investissment Québec which we
deferred and recorded as a reduction of the Financing Facility.
Debt discount and deferred financing expenses are amortized to
“Interest and other financial expenses” in
our Consolidated
Statements of Operations and Comprehensive Loss. The Company recorded interest
expense on the Investissement Québec loan for the three- and
nine-month periods ended November 30, 2020 in the amount of $10,003
and $28,816 respectively (2019 – nil and nil) and an
accretion expense of $9,387 and $27,045 respectively (2019 –
nil and nil).
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 $354,801 (CDN$460,000). The exercise price of the
warrants is 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. In connection the first disbursement of the
Financing Facility, the Company issued a warrant (“First
Disbursement Warrant”) to acquire 15,153 shares of common
stock at a strike price of $11.00 per share to Investissement
Québec. The Company determined the fair value of the warrants
using the Black-Scholes pricing formula. The fair value of the
First Disbursement Warrant was determined to be $77,954 and is
included in “Additional paid-in capital –
Warrants” in our Condensed Consolidated Balance Sheets. The
First Disbursement Warrant remains outstanding as at November 30,
2020.
The
remaining amount available under the financing facility is
$1,844,015 (CDN$2,390,766) to be received in a maximum of two
additional disbursements.
Term loan
On
January 24, 2018, the Company obtained a $1,079,830 (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 $4,499 (CDN$5,833) plus interest, until January
2021, at which time the monthly repayment amount and interest rate
will be subject to renewal. It includes an option allowing for the
prepayment of the Loan without penalty. In January 2021, the
Company and the Canadian bank agreed to maintain the same repayment
amount and interest rate until January 2022. During the three- and
nine-month periods ended November 30, 2020, we repaid $13,497 and
$32,781 respectively (2019 – $13,168 and $39,506) on the
principal balance of the Loan and interest paid amounted to $9,172
and $29,102 and (2019 - $14,778 and $41,840). The terms of the
credit facility require the Company to comply with certain
financial covenants. As at November 30, 2020 and 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:
Years
ending
|
|
February 28,
2021
|
$13,498
|
February 28,
2022
|
53,992
|
February 28,
2023
|
53,992
|
February 29,
2024
|
297,416
|
February 28,
2025
|
297,416
|
Thereafter
|
1,901,043
|
Total
|
$2,617,355
|
11.
Related
Party Transactions
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 which 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
(“RSUs”) covering 4,000,000 shares of the
Company’s common stock while the performance milestones
remained the same. The grant of the restricted stock units became
effective 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.
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.
As at
November 30, 2020, 3,600,000 (2019 – 3,800,000) of Mr.
Solomita’s RSUs were outstanding of which 600,000 were vested
(2019 – 800,000). The vested units are settled annually in
tranches of 200,000 units. During the three- and nine-month periods
ended November 30, 2020 and November 30, 2019, no outstanding
milestones were probable of being met based on the authoritative guidance
provided by the FASB and, accordingly, the Company did not record
any additional compensation expense. When a milestone becomes
probable, the corresponding expense will be valued based on the
grant date fair value on April 30, 2020, the date of the last
modification of Mr. Solomita’s employment agreement. The
closing price of the Company’s common stock on the Nasdaq on
April 30, 2020 was $7.74 per share.
12. Stockholders’ Equity
Common Stock
For
the period ended November 30, 2020
|
|
|
Balance, February
29, 2020
|
39,910,774
|
$3,992
|
Issuance of shares
for cash
|
2,087,000
|
209
|
Issuance of shares
upon the exercise of warrants
|
190,529
|
19
|
Issuance of shares
upon settlement of restricted stock units
|
224,436
|
22
|
Balance, November
30, 2020
|
42,412,739
|
$4,242
|
For
the period ended November 30, 2019
|
|
|
Balance, February
28, 2019
|
33,805,706
|
$3,381
|
Issuance of shares
for cash
|
4,693,567
|
469
|
Issuance of shares
upon vesting of restricted stock units
|
243,932
|
24
|
Issuance of shares
upon the cashless exercise of stock options
|
4,565
|
1
|
Issuance of shares
upon the exercise of warrants
|
15,432
|
1
|
Issuance of shares
upon settlement of legal matter
|
150,000
|
15
|
Issuance of shares
upon conversion of Convertible notes
|
319,326
|
32
|
Balance, November
30, 2019
|
39,232,528
|
$3,923
|
During
the nine months ended November 30, 2020, the Company recorded the
following common stock transaction:
(i)
|
On
September 23, 2020 and October 1, 2020, the Company sold 1,880,000
and 207,000 shares, respectively of its common stock at an offering
price of $12.75 per share in a registered direct offering, for
total gross proceeds of $26,609,250.
|
(ii)
|
The
company issued 192,529 shares of its common stock upon the exercise
of warrants.
|
(iii)
|
On
October 15, 2020, the Company issued 200,000 shares of common stock
to settle restricted stock units related to the President and Chief
Executive Officer.
|
(iv)
|
The
Company issued 24,436 shares of its common stock to settle
restricted stock units that vested in the period.
|
During
the nine months ended November 30, 2019, the Company recorded the
following common stock transactions:
(i)
|
On
March 1, 2019, the Company sold 600,000 shares of its common stock
at an offering price of $8.55 per share in a registered direct
offering, for gross proceeds of $5,130,000.
|
(ii)
|
On
March 8, 2019 and March 11, 2019, the Company issued 150,000 shares
of its common stock in settlement of a legal matter.
|
(iii)
|
On
April 9, 2019, the Company converted Convertible notes with a face
value of $2,650,000 plus accrued interest of $80,241 at a
conversion price of $8.55, into 319,326 common shares.
|
(iv)
|
On June
14, 2019, the Company sold 4,093,567 shares of its common stock at
an offering price of $8.55 per share in a registered direct
offering, for gross proceeds of $35,000,000.
|
(v)
|
On June
21, 2019, the Company issued 7,043 shares of common stock upon the
vesting of restricted stock units related to an
employee.
|
(vi)
|
On July
2, 2019 and July 3, 2019, the Company issued 23,547 shares of
common stock upon the vesting of restricted stock units related to
current and former Directors.
|
(vii)
|
On July
12, 2019, the Company issued 4,565 shares of common stock upon the
cashless exercise of stock options related to an
employee.
|
(viii)
|
On July
15, 2019, the Company issued 13,342 shares of common stock upon the
vesting of restricted stock units related to a former
Director.
|
(ix)
|
On July
17, 2019, the Company issued 15,432 shares of common stock upon the
exercise of warrants.
|
(x)
|
On
October 15, 2019, the Company issued 200,000 shares of common stock
to settle restricted stock units related to the President and Chief
Executive Officer.
|
13. Research and development expenses
Research
and development expenses for the three months ended November 30,
2020 and 2019 were as follows:
|
|
|
External
engineering
|
$2,224,910
|
$33,131
|
Machinery and
equipment expenditures
|
2,325,540
|
-
|
Employee
compensation
|
1,214,434
|
973,679
|
Pilot plant
operating expenses
|
399,031
|
166,753
|
Other
|
110,368
|
104,610
|
|
$6,274,283
|
$1,278,173
|
Research
and development expenses for the nine months ended November 30,
2020 and 2019 were as follows:
|
|
|
External
engineering
|
$3,241,959
|
$83,462
|
Employee
compensation
|
3,094,151
|
2,453,743
|
Machinery and
equipment expenditures
|
2,325,540
|
-
|
Pilot plant
operating expenses
|
1,537,271
|
456,942
|
Other
|
305,172
|
252,099
|
|
$10,504,093
|
$3,246,246
|
14. Share-based Payments
Stock Options
During
the three- and nine-month period ended November 30, 2020, the
Company granted 3,389 stock options (2019 – nil) with a
weighted average exercise price of $8.78 (2019 – nil), no
stock options were forfeited (2019 – 39,902; weighted average
exercise price: $9.67) or exercised (2019 – 5,000; weighted
average exercise price: $0.80) and no stock options expired (2019
– 260,417; weighted average exercise price:
$13.59).
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:
|
|
|
Exercise
price
|
$8.78
|
$-
|
Risk-free interest
rate
|
1.05%
|
-
|
Expected dividend
yield
|
0.00%
|
-
|
Expected
volatility
|
75.95%
|
-
|
Expected
life
|
|
-
|
The
total number of stock options outstanding as at November 30, 2020
was 1,587,081 (2019 – 1,657,081) with a weighted average
exercise price of $6.81 (2019 - $6.55), of which 1,132,498 were
exercisable (2019 – 1,007,498) with a weighted average
exercise price of $7.12 (2019 – $6.38).
During
the three- and nine-month periods ended November 30, 2020,
stock-based compensation expense attributable to stock options
amounted to $551,720 and $1,662,155 respectively (2019 - to
$549,810 and $1,628,897) and is included in expenses.
Restricted Stock Units
The
Company applies the fair value method of accounting for awards
granted through the issuance of restricted stock units. Fair value
is calculated based on the closing share price at grant date
multiplied by the number of restricted stock unit awards
granted.
During
the three-month period ended November 30, 2020, the Company granted
57,859 restricted stock units (“RSUs”) (2019 –
nil) with a weighted average fair value of $12.96 (2019 –
nil), settled 200,000 RSUs (2019 – 200,000) with a weighted
average fair value of $0.80 (2019 – $0.80) and no RSUs were
forfeited (2019 – nil).
During
the nine-month period ended November 30, 2020, the Company granted
180,232 RSUs (2019 – 4,114,567) with a weighted average fair
value of $10.18 (2019 – $1.06), settled 224,436 RSUs (2019
– 243,932) with a weighted average fair value of $1.78 (2019
– 2.52) and 2,989 RSUs were forfeited (2019 – 53,750)
with a weighted average fair value of $8.78 (2019 –
$9.82).
The
total number of RSUs outstanding as at November 30, 2020 was
4,171,609 (2019 – 4,219,753), of which 691,327 were vested
(2019 – 831,684).
During
the three- and nine-month periods ended November 30, 2020,
stock-based compensation expense attributable to RSUs amounted to
$345,274 and $1,028,152 respectively (2019 - $326,983 and $981,914)
and is included in expenses.
During
the three- and nine-month periods ended November 30, 2020 and
November 30, 2019, stock-based compensation included in research
and development expenses amounted to $350,393 and $1,054,682
respectively (2019 – $311,353 and $941,142), and in general
and administrative expenses amounted to $546,601 and $1,720,067
respectively (2019 - $565,440 and $1,669,669).
15. 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. In March 2020, the Board of
Directors elected to waive the annual share reserve increase for
the fiscal year ending February 28, 2021. The Plan is administered
by the Board of Directors who designates eligible participants to
be included under the Plan, the number of awards granted, the share
price pursuant to the awards and the vesting conditions and period.
The awards, when granted, will have an exercise price of no less
than the estimated fair value of shares at the date of grant and a
life not exceeding 10 years from the grant date. However, where a
participant, at the time of the grant, owns stock representing more
than 10% of the voting power of the Company, the life of the
options shall not exceed 5 years.
The
following table summarizes the continuity of the Company’s
Equity Incentive Plan units during the nine-month periods ended
November 30, 2020 and 2019:
|
|
|
|
|
|
Outstanding,
beginning of period
|
1,300,518
|
3,223,516
|
Share reserve
increase
|
-
|
2,000,000
|
Units
granted
|
(183,621)
|
(4,114,567)
|
Units
forfeited
|
2,989
|
93,652
|
Units
expired
|
-
|
260,417
|
Outstanding, end of
period
|
1,119,886
|
1,463,018
|
16. Warrants
During
the three-month period ended November 30, 2020 159,664 warrants
were exercised at the price of $8.55 per share and 30,864 warrants
were exercised at the price of $9.32 per share. No warrants were
granted, were forfeited nor expired in the three-month period ended
November 30, 2020.
During
the three-month period ended November 30, 2019, no warrants were
granted, were forfeited, were exercised nor expired.
During
the nine-month period ended November 30, 2020, the Company issued,
in exchange for consulting services, a warrant to purchase 25,000
shares of our common stock at the price of $9.43 per share expiring
May 12, 2022 and warrants to issue 200,000 shares of our common
stock with an exercise price of $11.00 expired. During the
nine-month periods ended November 30, 2020, 159,664 warrants were
exercised at the price of $8.55 per share and 30,864 warrants were
exercised at the price of $9.32 per share. No warrants were
forfeited in the nine-month period ended November 30,
2020.
During
the nine-month period ended November 30, 2019, the Company issued a
warrant to purchase 159,663 shares of our common stock at the price
of $8.55 per share expiring October 5, 2020 as well as a warrant to
purchase 4,093,567 shares of our common stock at the price of
$11.00 per share expiring June 14, 2022. During the nine-month
period ended November 30, 2019, 15,432 shares of our common stock
were issued upon the exercise of a warrant with an exercise price
of $9.32. No warrants were forfeited, and no warrants expired in
the nine-month period ended November 30, 2019.
17. Interest and Other Finance Costs
Interest
and other finance costs for the three- and nine-month periods ended
November 30, 2020 and 2019 are as follows:
|
Three Months Ended
November 30
|
Nine Months Ended
November 30
|
|
|
|
|
|
Interest
on long-term debt
|
$19,185
|
$14,778
|
$57,917
|
$41,840
|
Interest
on convertible notes
|
-
|
98,000
|
-
|
313,433
|
Accretion
expense
|
9,387
|
549,090
|
27,044
|
1,584,977
|
Amortization
of deferred finance costs
|
-
|
19,885
|
-
|
86,212
|
Loss
(gain) on revaluation of foreign exchange contracts
|
(70,427)
|
10,881
|
(58,945)
|
10,881
|
Revaluation
of warrants
|
-
|
-
|
-
|
8,483
|
Gain on
conversion of November 2018 Notes
|
-
|
-
|
-
|
(232,565)
|
Other
|
-
|
393
|
-
|
3,830
|
|
$(41,855)
|
$693,027
|
$26,016
|
$1,817,091
|
18. Commitments and Contingencies
Commercial commitments
On
September 2, 2020, the Company entered into a know-how and
engineering agreement (the “Chemtex Agreement”) with
Chemtex Global Corporation (“Chemtex”) to license the
PET plastic and polyester polymer for fiber manufacturing know-how
of INVISTA’s technology and licensing group, INVISTA
Performance Technologies (IPT) (“INVISTA”). The total
value of the Chemtex Agreement is $4,300,000 and covers the
know-how and design of two Infinite Loop™ facilities. Payment
terms are based on the completion of certain milestones and total
$2,150,000 for each facility. During the three and nine months
ended November 30, 2020, $500,000 was paid by the
Company.
On
October 29, 2020, Coca-Cola Cross Enterprise Procurement Group
(“CEPG”) advised the Company of its intention to
terminate the Master Terms and Conditions Supply Agreement for Loop
PET plastic, dated November 14, 2018 (the “MTC”)
because the Company did not satisfy its first production milestone
from the joint venture facility by July 2020 as required by the
MTC.
Contingencies
On
October 13, 2020, the Company and certain of its officers were
named as defendants in a proposed class action lawsuit filed in the
United States District Court for the Southern District of New York,
captioned Olivier Tremblay,
Individually and on Behalf of All Other Similarly Situated v. Loop
Industries, Inc., Daniel Solomita, and Nelson Gentiletti,
Case No. 7:20-cv-0838 (“Tremblay Class Action”). The
allegations in the complaint claim that the defendants allegedly
violated Sections 10(b) and 20(a) and Rule 10b-5 of the Securities
Exchange Act of 1934 by allegedly making materially false and/or
misleading statements, as well as allegedly failing to disclose
material adverse facts about the Company’s business,
operations, and prospects, which caused the Company’s
securities to trade at artificially inflated prices. Plaintiff
seeks unspecified damages on behalf of a class of purchasers of
Loop’s securities between September 24, 2018 and October 12,
2020.
On
October 13, 2020, the Company, Loop Canada Inc. and certain of
their officers and directors were named as defendants in a proposed
securities class action filed in the Superior Court of Québec
(District of Terrebonne, Province of Québec, Canada), in file
no. 700-06-000012-205. The Application for authorization of a class
action and for authorization to bring an action pursuant to section
225.4 of the Québec Securities Act (“the
Application”) was filed by an individual shareholder on
behalf of himself and a class of buyers who purchased our
securities during the “Class Period” (not defined).
Plaintiff alleges that throughout the Class Period, the defendants
allegedly made false and/or misleading statements and allegedly
failed to disclose material adverse facts concerning the
Company’s technology, business model, operations and
prospects, thus causing the Company’s stock price to be
artificially inflated and thereby causing plaintiff to suffer
damages. Plaintiff seeks unspecified damages stemming from losses
he claims to have suffered as a result of the foregoing. On
December 13, 2020, the Application was amended in order to add
allegations regarding specific misrepresentations.
On
October 28, 2020, the Company and certain of its officers were
named as defendants in a second proposed class action lawsuit filed
in the United States District Court for the Southern District of
New York, captioned Michelle
Bazzini, Individually and on Behalf of All Other Similarly Situated
v. Loop Industries, Inc., Daniel Solomita, and Nelson
Gentiletti, Case No. 7:20-cv-09031-UA. The allegations in
this complaint are similar in nature to those made in the Tremblay
Class Action.
On
January 4, 2021, the United States District Court for the Southern
District of New York rendered a stipulation and order granting the
consolidation of the two class action lawsuits filed in New York as
In re Loop Industries, Inc.
Securities Litigation, Master File No.
7:20-cv-08538. Sakari
Johansson and John Jay Cappa have been appointed as Co-Lead
Plaintiffs and Glancy Prongay & Murray LLP and Pomerantz LLP
have been appointed as Co-Lead Counsel for the class.
Management
believes that these cases lack merit and intends to defend them
vigorously. No amounts have been provided for in the consolidated
financial statements with respect to these claims. Management has
not yet determined what effect these lawsuits may have on its
financial position or results of operations as they are still in
the preliminary stages.
19. Subsequent events
Subsequent
to the end of the quarter, the Company entered into an engineering
and equipment supply agreement to acquire PET polymerization
equipment from Chemtex Global Corporation to manufacture PET resin
at the demonstration plant. This agreement represents a total
commitment of $4,200,000.