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 28, 2021, filed with the SEC on June 1, 2021. 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 28, 2021,
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 months ended May
31, 2021 are not necessarily indicative of the results to be
expected for any subsequent quarter, for the fiscal year ending
February 28, 2022, or for 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 as well
as the carrying value of our joint venture investment, accruals for
potential liabilities, assumptions made in calculating the fair
value of stock-based compensation and other equity instruments, and
the assessment of performance conditions for stock-based
compensation awards and the judgment in the
assessment.
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.
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
expenses recorded in the current and future periods.
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 expenses recorded during the
three-month periods ended May 31, 2021 and 2020 amounted to
$8,637,905 and $1,480,588,
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.
Foreign currency translations and transactions
The
accompanying 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 is 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.
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-month periods ended May 31, 2021 and 2020, the calculations
of basic and diluted loss per share are the same because potential
dilutive securities would have an antidilutive effect. As at May
31, 2021, the potentially dilutive securities consisted of
1,587,081 outstanding stock options (2020 – 1,587,081),
4,149,125 outstanding restricted stock units (2020 –
4,293,407), and 4,133,720 outstanding warrants (2020 –
5,084,331).
3. Sales Tax, Tax Credits and Other
Receivables
Sales tax, research and development tax credits and other
receivables as at May 31, 2021 and February 28, 2021 were as
follows:
|
|
|
Sales
tax
|
$935,883
|
$1,155,504
|
Research and
development tax credits
|
500,345
|
435,467
|
Other
receivables
|
115,474
|
172,864
|
|
$1,551,702
|
$1,763,835
|
4. Prepaid
expenses
Prepaid expenses and deposits as at May 31, 2021 and February 28,
2021 were as follows:
|
|
|
Directors and
officers insurance
|
$812,455
|
$-
|
Deposits on
machinery and equipment
|
965,670
|
379,395
|
Other
|
200,265
|
230,387
|
|
$1,978,390
|
$609,782
|
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
|
$2,053,585
|
$(228,932)
|
$1,824,653
|
Land
|
5,173,641
|
-
|
5,173,641
|
Building
Improvements
|
1,938,596
|
(594,078)
|
1,344,518
|
Machinery and
equipment
|
6,514,252
|
(6,514,252)
|
-
|
Office equipment
and furniture
|
342,258
|
(115,464)
|
226,794
|
|
$16,022,332
|
$(7,452,726)
|
$8,569,606
|
|
|
|
|
Accumulated
depreciation, write-down and impairment
|
|
Building
|
$1,954,345
|
$(201,589)
|
$1,752,756
|
Land
|
241,578
|
-
|
241,578
|
Building
Improvements
|
1,804,872
|
(474,114)
|
1,330,758
|
Machinery and
equipment
|
6,514,252
|
(6,514,252)
|
-
|
Office equipment
and furniture
|
292,946
|
(104,987)
|
187,959
|
|
$10,807,993
|
$(7,294,942)
|
$3,513,051
|
During
the three-month period ended May 31, 2021, the Company acquired a
19 million square foot parcel of land in Bécancour,
Québec for $4.9 million (CDN $5.9 million). The Company
intended use for the site is to construct a commercial facility to
manufacture Loop™ branded PET resin using its Infinite
Loop™
technology.
Depreciation
expense for the three-month periods ended May 31, 2021 and 2020
amounted to $115,057 and $248,199, respectively, and is recorded as
an operating expense in the consolidated statements of operations
and comprehensive loss.
6. Intangible Assets
|
|
|
|
|
|
|
|
|
Patents, at cost -
beginning of period
|
$859,048
|
$225,174
|
Patents,
accumulated depreciation – beginning of period
|
(64,154)
|
(22,310)
|
Patents, net
– beginning of period
|
794,894
|
202,864
|
|
|
|
Additions in the
period – patents
|
52,319
|
623,811
|
Amortization of
patents
|
(16,944)
|
(41,844)
|
Foreign exchange
effect
|
50,954
|
10,063
|
Patents, net
– end of period
|
$881,223
|
$794,894
|
Amortization
expense for the three-month periods ended May 31, 2021 and 2020
amounted to $16,944 and $7,891, respectively, and is recorded as an
operating expense in the unaudited condensed consolidated
statements of operations and comprehensive loss.
7. Fair Value of Financial
Instruments
The
following tables presents the fair value of the Company’s
financial liabilities as at May 31, 2021 and February 28,
2021:
|
Fair Value
Measurements as at May 31, 2021
|
|
|
|
|
Instruments
measured at amortized cost:
|
|
|
|
Long-term
debt
|
$2,586,227
|
$2,596,787
|
Level
2
|
|
Fair Value
Measurements at February 28, 2021
|
|
|
|
|
Instruments
measured at amortized cost:
|
|
|
|
Long-term
debt
|
$2,454,123
|
$2,464,540
|
Level
2
|
8. Accounts Payable and
Accrued Liabilities
Accounts payable and accrued liabilities as at May 31, 2021 and
February 28, 2021 were as follows:
|
|
|
Trade accounts
payable
|
$5,279,857
|
$5,082,736
|
Accrued employee
compensation
|
1,051,109
|
970,154
|
Accrued
professional fees
|
1,040,791
|
1,270,628
|
Accrued engineering
fees
|
862,645
|
535,359
|
Other accrued
liabilities
|
823,021
|
265,988
|
|
$9,057,423
|
$8,124,865
|
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 worldwide 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 February
28, 2021 and, as at February 28, 2021, 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 year ended February 28, 2021, we made
contributions to ILT of $650,000 (2020 – $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.
See Note 20. Subsequent Events for the description of an amendment
to the Joint Venture Agreement dated June 18, 2021.
10. Long-Term Debt
Long-term debt as of May 31, 2021 and February 28, 2021, was
comprised of the following:
|
|
|
Investissement
Québec financing facility :
|
|
|
Principal
amount
|
$1,830,048
|
$1,741,612
|
Unamortized
discount
|
(271,001)
|
(268,192)
|
Accrued
interest
|
55,924
|
42,588
|
Total
Investissement Québec financing facility
|
1,614,971
|
1,516,008
|
Term
loan
|
|
|
Principal
amount
|
971,256
|
938,116
|
Less: current
portion
|
(971,256)
|
(938,116)
|
Total term loan,
net of current portion
|
-
|
-
|
Long-term debt, net
of current portion
|
$1,614,971
|
$1,516,008
|
Investissement Québec financing facility
On February 21, 2020, the Company received $1,830,048
(CDN$2,209,234) from Investissement Québec as the first
disbursement of our financing facility, out of a maximum of
$3,810,471 (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, $38,105
(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-month period ended May 31, 2021 in the amount of
$10,882 (2020 – $9,416) and an accretion expense of $10,526
(2020 – $8,547).
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 $381,047 (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 May 31, 2021.
The remaining amount available under the financing facility
is $1,980,422 (CDN$2,390,766) and relates to expenditures incurred
up to June 30, 2021 in connection with our demonstration and
training facility.
Term Loan
On
January 24, 2018, the Company obtained a $1,159,708 (CDN$1,400,000)
20-year term installment 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 $4,832 (CDN$5,833) plus interest, until January
2022. 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, at which time
the monthly repayment amount and interest rate will be subject to
renewal. During the three-month
period ended May 31, 2021, we repaid $14,496 (2020 – $12,693)
on the principal balance of the Loan and interest paid amounted to
$9,178 (2020 – $10,311). The terms of the credit facility
require the Company to comply with certain financial covenants. As
at May 31, 2021 and 2020, the Company was in compliance with its
financial covenants.
Principal
repayments due on the Company’s bank indebtedness over the
next five years are as follows:
Years
ending
|
|
February 28,
2022
|
$45,560
|
February 28,
2023
|
57,985
|
February 29,
2024
|
319,417
|
February 28,
2025
|
319,417
|
February 28,
2026
|
319,417
|
Thereafter
|
1,727,084
|
Total
|
$2,788,880
|
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
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 that is
simpler to purify.
During
the quarters ended May 31, 2021 and May 31, 2020, 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 May 31, 2021
|
|
|
Balance, February
28, 2021
|
42,413,691
|
$4,242
|
Issuance of shares
upon settlement of restricted stock units
|
19,629
|
2
|
Balance, May 31,
2021
|
42,433,320
|
$4,244
|
For
the period ended May 31, 2020
|
|
|
Balance, February
29, 2020
|
39,910,774
|
$3,992
|
Issuance of shares
upon settlement of restricted stock units
|
6,131
|
1
|
Balance, May 31,
2020
|
39,916,905
|
$3,993
|
During
the three months ended May 31, 2021, the Company recorded the
following common stock transaction:
(i)
The
Company issued 19,629 shares of the common stock to settle
restricted stock units that vested in the period.
During
the three months ended May 31, 2020, the Company recorded the
following common stock transaction:
(i)
The
Company issued 6,131 shares of the common stock to settle
restricted stock units that vested in the period.
13. Research and Development Expenses
Research
and development expenses for the three-month periods ended May 31,
2021 and 2020 were as follows:
|
|
|
External
engineering
|
$2,903,448
|
$74,932
|
Employee
compensation
|
2,086,128
|
819,048
|
Machinery and
equipment expenditures
|
2,622,892
|
-
|
Demonstration plant
operating expenses
|
691,537
|
286,103
|
Other
|
333,900
|
300,505
|
|
$8,637,905
|
$1,480,588
|
14. General and Administrative Expenses
General
and administrative expenses for the three-month periods ended May
31, 2021 and 2020 were as follows:
|
|
|
Professional
fees
|
$1,631,451
|
$221,697
|
Employee
compensation(1)
|
461,405
|
1,142,851
|
Directors and
officers insurance
|
868,647
|
473,574
|
Other
|
199,068
|
114,959
|
|
$3,160,571
|
$1,953,081
|
(1)
|
Includes
stock-based compensation expense. In the three-month period
ended May 31, 2021, the Company recorded RSU forfeitures for an
amount of $935,837 (2020 – $4,005) as a net reversal of
stock-based compensation.
|
15. Share-based Payments
Stock Options
During
the three-month period ended May 31, 2021, the Company granted no
stock options (2020 – nil), no stock options were forfeited
(2020 – nil) or exercised (2020 – nil) and no stock
options expired (2020 – nil).
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. There were no new issuances of
stock options for the three-month periods ended May 31, 2021 and
2020.
The
total number of stock options outstanding as at May 31, 2021 was
1,587,081 (2020 – 1,587,081) with a weighted average exercise
price of $6.81 (2020 - $6.81), of which 1,229,998 were exercisable
(2019 – 986,248) with a weighted average exercise price of
$7.25 (2020 – $7.32).
During
the three-month periods ended May 31, 2021 and 2020, stock-based
compensation expense attributable to stock options amounted to
$549,318 and $556,895, respectively, and is included in operating
expenses.
Restricted Stock Units
During
the three-month period ended May 31, 2021, the Company granted
253,758 restricted stock units (“RSUs”) (2020 –
83,725) with a weighted average fair value of $8.85 (2020 –
$8.71), settled 19,629 RSUs (2020 – 6,131) with a weighted
average fair value of $9.02 (2020 – $9.55) and 295,524 RSUs
were forfeited (2020 – 2,989) with a weighted average fair
value of $7.93 (2020 – $8.78).
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.
The
total number of RSUs outstanding as at May 31, 2021 was 4,149,125
(2020 – 4,293,407), of which 696,327 were vested (2020
– 836,684).
During
the three-month periods ended May 31, 2021 and 2020, stock-based
compensation attributable to RSUs amounted to ($533,961) and
$370,487, respectively, and is included in operating expenses. The
net reversal in expenses attributable to RSUs in the three-month
period ended May 31, 2021 is due to forfeitures recorded in the
period for a total of $935,837 (2020 – $4,005).
During
the three-month periods ended May 31, 2021 and 2020, stock-based
compensation included in research and development expenses amounted
to $395,545 and $352,007, respectively, and in general and
administrative expenses amounted to ($380,188) and $659,817,
respectively. The net reversal in stock-based compensation included
in general and administrative expenses in the three-month period
ended May 31, 2021 is due to forfeitures recorded in the period for
a total of $935,837 (2020 – $4,005).
16. 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. On March 1, 2021 and 2020, the Board
of Directors opted to waive the annual share reserve increase. 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 three-month periods ended
May 31, 2021 and 2020:
|
|
|
|
|
|
Outstanding,
beginning of period
|
1,083,412
|
1,300,518
|
Automatic share
reserve increase
|
-
|
-
|
Units
granted
|
(253,758)
|
(87,114)
|
Units
forfeited
|
295,524
|
2,989
|
Units
expired
|
-
|
-
|
Outstanding, end of
period
|
1,125,178
|
1,216,393
|
17. Warrants
During
the three-month period ended May 31, 2021, no warrants were
granted, were forfeited, were exercised nor expired.
During
the three-month period ended May 31, 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. No warrants were exercised or expired in the
three-month period ended May 31, 2021.
18. Interest and Other Financial Expenses
Interest and other financial expenses for the three-month periods
ended May 31, 2021 and 2020 are as follows:
|
|
|
Interest on
long-term debt
|
$20,059
|
$19,727
|
Accretion
expense
|
10,529
|
8,547
|
Loss on
revaluation of foreign exchange contracts
|
-
|
98,502
|
|
$30,588
|
$126,776
|
19. 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
amount 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. As at May 31, 2021, the cumulative amount paid
was $900,000 and during the three-month period ended May 31, 2021,
no additional amount was paid by the Company related to this
agreement and included in research and development
expenses.
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 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.
Plaintiffs served a consolidated amended complaint on February 18,
2021 which alleges defendants violated Sections 10(b) and 20(a) and
Rule 10b-5 of the Securities Exchange Act of 1934 by 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. The consolidated amended complaint relies on the October
13, 2020 report published by a third party regarding the Company to
support their allegations. Defendants served a motion to dismiss
the consolidated amended complaint on April 27, 2021.
Plaintiffs’ opposition to the motion to Dismiss was served on
May 27, 2021 and Defendants’ reply in support of the motion
to dismiss was served on June 11, 2021.
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.
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.
20. Subsequent Events
Strategic Partnership
On June
22, 2021, the Company entered into a Securities Purchase Agreement
(the “Purchase Agreement”) by and between the Company
and SK global chemical Co., Ltd, an accredited investor (the
“Purchaser”). Pursuant to the Purchase Agreement, the
Company has agreed to issue and sell to the Purchaser the following
securities for an aggregate purchase price of approximately $56.5
million (collectively, the “Investment”):
●
an aggregate of
4,714,813 shares (the “Shares”) of the Company’s
common stock (the “Common Stock”);
●
warrants to
purchase 4,714,813 shares of Common Stock for an exercise price of
$15.00 (the “First Tranche Warrants”), with an
expiration date of the third anniversary of the issue
date;
●
warrants to
purchase 2,357,407 shares of Common Stock for an exercise price of
$20.00 (the “Second Tranche Warrants”), with an
expiration date of the earlier of (A) the date that is the third
anniversary of the First Plant Milestone (as defined in the Second
Tranche Warrants), (B) the expiration of the JV Negotiation Period
(as defined in the Second Tranche Warrants), provided that the
Joint Venture Transaction Agreements (as defined in the Second
Tranche Warrants) have not been executed by the expiration of the
JV Negotiation Period and (C) the third anniversary of the Date of
approval of the basic engineering package for the facilities
constructed by the JV, provided that the First Plant Milestone has
not occurred as of such date; and
●
warrants to
purchase 461,298 shares of Common Stock for an exercise price of
$11.00 (the “Third Tranche Warrants,” and together with
First Tranche Warrants and the Second Tranche Warrants, the
“Warrants”), with an expiration date of June 14,
2022.
The
Purchaser may exercise the First Tranche Warrant and the Third
Tranche Warrant at any time prior to their applicable expiration
dates. The Purchaser may exercise the Second Tranche Warrant at any
time on or after the first business day following the First Plant
Milestone (as defined in the Second Tranche Warrant) prior to its
expiration date.
After
the closing of the Investment, the Purchaser is expected to own
approximately 10.0% of the issued and outstanding Common Stock as
of that date.
Simultaneous
with the execution of the Purchase Agreement, the Company and the
Purchaser entered into a Joint Venture Memorandum of Understanding
(“JV MOU”) with respect to a potential joint venture to
commercialize the Company’s plastic recycling technology in
Asia (“Proposed Asia JV”). The JV MOU, which is
non-binding, outlines certain principal terms for the Proposed Asia
JV. The Purchase Agreement provides that the parties will negotiate
exclusively with one another from the date of the Purchase
Agreement until the date which is six months from the BDP Date (as
defined in the Purchase Agreement) with respect to the Proposed
Asia JV (subject to extension in accordance with the terms and
conditions of the Purchase Agreement), with the objective of
executing definitive agreements for the Proposed Asia
JV.
Joint Venture Amendment
In
conjunction with the SK strategic partnership described above, on
June 18, 2021, the Company, Loop Innovations, LLC, a wholly-owned
subsidiary of the Company (“Loop Innovations”),
Indorama Ventures Holdings LP (“Indorama”) and Indorama
Loop Technologies, LLC (the “Indorama Joint Venture
Company”) amended (i) the Limited Liability Company Agreement
between Loop Innovations, LLC and Indorama Ventures Holdings LP
(the “LLC Agreement”), (ii) the Marketing Agreement
between the Company and Indorama Loop Technologies, LLC (the
“Marketing Agreement”) and (iii) the License Agreement
between the Company and the Indorama Joint Venture Company (the
“License Agreement”), each dated September 24, 2018
(collectively such amendments, the “Indorama Joint Venture
Amendments”).
Under
the Indorama Joint Venture Amendments, the Company, Indorama and
the Indorama Joint Venture Company agreed to:
●
terminate
Indorama’s right of first refusal under the LLC Agreement
over any facility to produce products utilizing any waste-to-resin
technology applying the PET depolymerization process of the
Company;
●
amend the
non-compete obligations under the LLC Agreement to solely apply to
the Company;
●
limit the scope of
the Company’s grant of intellectual property rights and the
scope of the exclusivity rights of the Indorama Joint Venture
Company for the retrofit of existing facilities under the License
Agreement to North America and Europe; and
●
limit the scope of
the Indorama Joint Venture Company’s permitted marketing
rights under the Marketing Agreement to North America and
Europe.