UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 31, 2017

 

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 Number: 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, Quebec, Canada J6Y 1Y4

(Address of principal executive offices, including zip code) 

 

(450) 951-8555

(Registrant’s telephone number, including area code) 

 

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 (§232.405 of this chapter) 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	¨
Non-accelerated filer	¨	Smaller reporting company	x
(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 Securities Exchange Act). Yes ¨ No x

 

As of July 10, 2017, the registrant had 32,674,673 shares of common stock, $0.0001 par value per share, outstanding.

 

 

LOOP INDUSTRIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED May 31, 2017

 

Index				PAGE
PART I. FINANCIAL INFORMATION
	Item 1	Financial Statements		F-1
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		4
	Item 3	Quantitative and Qualitative Disclosures About Market Risk		6
	Item 4	Controls and Procedures		6
PART II. OTHER INFORMATION
	Item 1	Legal Proceedings		7
	Item 1A	Risk Factors		7
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		7
	Item 3	Defaults Upon Senior Securities		7
	Item 4	Mine Safety Disclosures		7
	Item 5	Other Information		7
	Item 6	Exhibits		8
SIGNATURES				9
INDEX TO EXHIBITS				8

 

2

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q of Loop Industries, Inc., a Nevada corporation (the “Company,” “we,” 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, and the size of our addressable market and market trends. 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) development and protection of our intellectual property and products, (iii) our need for and ability to obtain additional financing, (iv) industry competition, (v) regulatory and other legal compliance, (vi) the exercise of the control over us by Daniel Solomita, our President and Chief Executive Officer, Chairman of the Board of Directors, and majority stockholder, (vii) other factors over which we have little or no control, and (viii) other factors discussed in our filings with the SEC.

 

Our 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 of 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 of 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.

 

3

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Loop Industries, Inc.

Three months ended May 31, 2017

Index to the Condensed Consolidated Financial Statements

 

Contents		Page(s)
Condensed Consolidated balance sheets at May 31, 2017 (Unaudited) and February 28, 2017		F-2
Condensed Consolidated statements of operations and comprehensive loss for the three months ended May 31, 2017 and 2016 (Unaudited)		F-3
Condensed Consolidated statement of changes in stockholders’ equity for the three months ended May 31, 2017 (Unaudited)		F-4
Condensed Consolidated statement of cash flows for the three months ended May 31, 2017 and 2016 (Unaudited)		F-5
Notes to the condensed consolidated financial statements		F-6

 

F-1

 

Loop Industries, Inc.

Condensed Consolidated Balance Sheets

 

		As at
		May 31, 2017				February 28, 2017
		(Unaudited)
ASSETS
Current Assets
Cash		$	5,535,020			$	916,487
Valued added tax and other receivables			63,182				259,297
Total current assets			5,598,202				1,175,784
Property and Equipment, net of accumulated depreciation of $570,346 and $497,244, respectively			1,518,767				1,566,969
Intellectual Property, net of accumulated amortization of $152,945 and $137,050, respectively			292,105				308,000
Total assets		$	7,409,074			$	3,050,753
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued liabilities		$	629,818			$	161,536
Accrued officer compensation			35,156				360,000
Advances from major stockholder			-				391,695
Total current liabilities			664,974				913,231
Commitments and Contingencies
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; 32,595,239 and 31,451,973 shares issued and outstanding, respectively			3,260				3,146
Additional paid-in capital			14,842,968				8,723,390
Common stock issuable, 1,000,000 shares at May 31 and February 28, 2017, respectively			5,500,000				5,500,000
Accumulated deficit			(13,460,893	)			(11,937,803	)
Accumulated other comprehensive loss			(141,235	)			(151,211	)
Total stockholders’ equity			6,744,100				2,137,522
Total liabilities and stockholders’ equity		$	7,409,074			$	3,050,753

 

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 May 31,
		2017				2016
Revenue		$	-			$	-
Operating Expenses -
General and administrative			889,580				439,746
Research and development			496,538				415,568
Depreciation and amortization			90,487				113,024
Foreign exchange (gain) loss			46,485				(3,789	)
Total operating expenses			1,523,090				964,549
Net Loss			(1,523,090	)			(964,549	)
Other comprehensive (loss) income-
Foreign currency translation adjustment			9,976				(20,493	)
Comprehensive Loss		$	(1,513,114	)		$	(985,042	)
Loss per share
- Basic and Diluted		$	(0.05	)		$	(0.03	)
Weighted average common shares outstanding
- Basic and Diluted			31,442,283				30,442,256

 

See accompanying notes to the condensed consolidated financial statements.

 

F-3

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Loop Industries, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

Three months ended May 31, 2017

(Unaudited)

 

		Common stock par value $0.0001								Preferred stock par value $0.0001								Additional				Common								Accumulated Other				Total
		Number of Shares				Amount				Number of shares				Amount				Paid-in Capital				Stock Issuable				Accumulated Deficit				Comprehensive Income (Loss)				Stockholders’ Equity
Balance, February 28, 2017			31,451,973			$	3,146				1			$	-			$	8,723,390			$	5,500,000			$	(11,937,803	)		$	(151,211	)		$	2,137,522
Issuance of common shares for cash			1,123,266				112												5,897,076																5,897,188
Fair value of warrants issued for services																			222,504																222,504
Issuance of shares upon cash-less exercise of warrants			20,000				2												(2	)															-
Foreign currency translation																															9,976				9,976
Net loss																											(1,523,090	)							(1,523,090	)
Balance, May 31, 2017			32,595,239			$	3,260				1			$	-			$	14,842,968			$	5,500,000			$	(13,460,893	)		$	(141,235	)		$	6,744,100

 

See accompanying notes to the condensed consolidated financial statements.

 

F-4

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Loop Industries, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three months ended May 31,
		2017				2016
Cash Flows from Operating Activities
Net loss		$	(1,523,090	)		$	(964,549	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense			74,592				93,921
Amortization expense			15,895				22,257
Fair value of warrants issued for services			222,504				41,359
Changes in operating assets and liabilities:
Valued added tax and other receivables			82,892				(36,804	)
Prepayments and other current assets			-				11,298
Accounts payable and accrued liabilities			468,282				(78,004	)
Accrued officer compensation			(324,844	)			45,000
Advances from majority stockholder			-				18,586
Net Cash Used in Operating Activities			(983,769	)			(846,936	)
Cash Flows from Investing Activities
Purchases of property and equipment			(55,453	)			(79,759	)
Net Cash Used in Investing Activities			(55,453	)			(79,759	)
Cash Flows from Financing Activities
Proceeds from sales of common shares			5,897,188				1,988,003
Repayment of advances from majority stockholder			(278,472	)			-
Net Cash Provided by Financing Activities			5,618,716				1,988,003
Effect of exchange rate changes			39,039				(63,602	)
Net Change in Cash			4,618,533				997,706
Cash - beginning of period			916,487				422,586
Cash - end of period		$	5,535,020			$	1,420,292
Supplemental disclosure of cash flow information:
Income tax paid		$	-			$	-
Non Cash Financing and Investing Activities
Reclassification of value added tax and other receivables to advances from majority stockholder		$	113,223			$	-

 

See accompanying notes to the condensed consolidated financial statements.

 

F-5

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Loop Industries, Inc.

Three months ended May 31, 2017 and 2016

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

Note 1 – The Company and Basis of Presentation

 

The Company

 

Loop Holdings, Inc. was incorporated on March 11, 2010 under the laws of the State of Nevada, under the name “Radikal Phones Inc.” We changed our name to “First American Group Inc.” on October 7, 2010, and then we changed our name to our current name, “Loop Industries, Inc.”, effective July 21, 2015.

 

On June 29, 2015, Loop Industries, Inc. (the "Company" or "Loop Industries") entered into a Share Exchange Agreement (the “Share Exchange Agreement”), by and among the Company, and the holders of common stock of Loop Holdings, Inc. (“Loop Holdings”). Under the terms and conditions of the Share Exchange Agreement, the Company offered, sold and issued 23,257,500 shares of common stock in consideration for all the issued and outstanding shares in Loop Holdings. The effect of the issuance was that Loop Holdings shareholders held approximately 78.1% of the issued and outstanding shares of common stock of the Company upon consummation of the Share Exchange Agreement.

 

Pursuant to a Stock Redemption Agreement dated June 29, 2015 entered into commensurate with the share exchange, the Company redeemed 25,000,000 shares of First American Group common stock from two stockholders for an aggregate redemption price of $16,000.

 

As the former owners and management of Loop Industries had voting and operating control of the Company after the share exchange, the transaction has been accounted for as a recapitalization with Loop Holdings deemed the acquiring company for accounting purposes, and the Company deemed the legal acquirer. No step-up in basis or intangible assets or goodwill was recorded and the aggregate cost of $60,571, representing the net liabilities assumed of $35,243, cost of the redeemed shares of $16,000 and closing costs of $9,328, had been reflected as a cost of the transaction. The consolidated financial statements reflect the historical results of Loop Industries prior to the share exchange, and that of the combined company following the share exchange.

 

The Company engages in the designing, prototyping and building a closed loop plastics recycling business that leverages a proprietary depolymerization technology.

 

All references to shares of common stock in this Quarterly Report on Form 10-Q give retroactive effect to a one-for-four (1:4) reverse split of the Company’s issued and outstanding shares of common stock, which reverse split took effect on the OTCQB on September 21, 2015.

 

On May 24, 2016, 9449507 Canada Inc. was incorporated to carry on the Company’s depolymerization business. On November 11, 2016, the shares of 9449507 Canada Inc., which was wholly owned by Mr. Solomita, were transferred to Loop Industries, Inc. On December 23, 2016, 9449507 Canada Inc. changed its legal name to Loop Canada Inc. On December 31, 2016, all employees, assets, liabilities, and operations pertaining to the Company’s depolymerization business were transferred to Loop Canada Inc. from 8198381 Canada Inc., a company wholly owned by Mr. Solomita.

 

On March 9, 2017, Loop Holdings, a wholly owned subsidiary of the Company, merged with and into the Company, with the Company being the surviving entity as a result of the merger.

 

F-6

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Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Loop Industries, Inc. and its wholly-owned subsidiary Loop Canada Inc. (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 generally accepted accounting principles for complete 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 months ended May 31, 2017 are not necessarily indicative of the results that may be expected for the year ending February 28, 2018.

 

Intercompany balances and transactions have been eliminated on consolidation.

 

Liquidity

 

The accompanying 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 accompanying consolidated financial statements, the Company has no recurring source of revenue and during the three months ended May 31, 2017, the Company incurred a net loss of $1,523,090 and used cash in operations of $983,769. As of May 31, 2017, the Company had cash on hand of $5,535,020 and stockholders’ equity of $6,744,100.

 

Management estimates that the current funds on hand will be sufficient to continue operations through the next twelve months. However, the Company will need additional financing through either debt or equity to finalize the transition from pilot scale to a full scale commercial manufacturing facility. Management may consider seeking additional funds, primarily through the issuance of debt and equity securities for cash and estimates that a significant amount of capital will be necessary to advance the development of our projects to the point at which they will become commercially viable.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company could obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.

 

Note 2 – Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles 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 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 and equipment, analysis of impairments of recorded intangibles, accruals for potential liabilities and assumptions made in calculating the fair value of certain stock instruments.

 

Foreign Currency Translations and Transactions

 

The accompanying consolidated financial statements are presented in United States dollars, the functional currency of the Company. Capital accounts of foreign subsidiaries are translated into US Dollars from foreign currency at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rate as of the balance sheet date. Income and expenses are translated at the average exchange rate of the period. As a result, currency exchange fluctuations may impact our revenue and the costs of our operations. We currently do not engage in any currency hedging activities.

 

F-7

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The following table summarizes the exchange rates used:

 

		Three Months Ended May 31,
		2017				2016
Period end Canadian $: US Dollar exchange rate		$	0.74			$	0.76
Average period Canadian $: US Dollar exchange rate		$	0.74			$	0.78

 

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

 

Value added tax, tax credits and other receivables

 

The Company is registered for the Canadian Federal and Provincial Goods and Services Taxes. As a registrant, the Company is obligated to collect, and is entitled to claim sale taxes paid on its expenses and capital expenditures incurred in Canada. As at the balance sheet date of May 31 and February 28, 2017, the computed net recoverable sale taxes amounted to $63,182 and $198,830, respectively.

 

Research and Development Costs

 

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 months ended May 31, 2017 and 2016 amounted to $496,538 and $415,568 respectively. Research and development costs are net of $4,472 of grant revenue received and research and development tax credit of $113,223 claimed during the period ended May 31, 2017.

 

Net Loss per Share

 

The Company computes net loss per share in accordance with FASB ASC 260 Earnings per share. Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. 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 months ended May 31, 2017 and 2016, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect. The potentially dilutive securities consisted of 1,000,000 common shares issuable and 1,860,455 and 1,653,668 outstanding warrants as of May 31, 2017 and 2016, respectively.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (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, FASB delayed the required implementation to fiscal years ending after December 15, 2017 but now permitted organizations such 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 also will 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 of the date of adoption. Management has determined to adopt ASU 2014-09 when it becomes effective for the Company in Fiscal 2018 and has not determined the effect of the standard on our ongoing financial reporting.

 

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In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

Note 3 – Property and Equipment

 

		Estimated
		Useful			May 31,				February 28,
		Life			2017				2017
		(years)
Machinery and Equipment		5 - 7			$	1,591,327			$	1,590,187
Office equipment and furniture		5 - 8				141,124				131,607
Leasehold improvements		3				356,662				342,419
						2,089,113				2,064,213
Less: accumulated depreciation						(570,346	)			(497,244	)
Property and equipment, net					$	1,518,767			$	1,566,969

 

Depreciation expense for the three months ended May 31, 2017 and 2016 was $74,592 and $93,921, respectively.

 

Note 4 – Intellectual Property

 

On October 27, 2014, the Company entered into an intellectual property agreement with Mr. Hatem Essaddam (the "Intellectual Property Assignment Agreement") wherein the Company purchased a certain technique and method for $445,050 allowing for the depolymerization of polyethylene terephthalate at ambient temperature and atmospheric pressure. The Company will use such technique and know-how in its manufacturing facility. The technology is being amortized using the straight-line method over the 7 years estimated useful life of the patents.

 

In addition to the $445,050 paid by the Company under the Intellectual Property Assignment Agreement, the Company is required to make additional payments totaling CDN$800,000 to Mr. Essaddam within sixty (60) days of each of the following milestones (the “Milestones”) having been met, as follows:

 

	(i)	CDN$200,000 when an average of twenty (20) metric tons per day of terephthalic acid is produced by the Company for twenty (20) operating days;
	(ii)	CDN$200,000 when an average of thirty (30) metric tons per day of terephthalic acid is produced by the Company for thirty (30) operating days;
	(iii)	CDN$200,000 when an average of sixty (60) metric tons per day of terephthalic acid is produced by the Company for sixty (60) operating days; and
	(iv)	CDN$200,000 when an average of one hundred (100) metric tons per day of terephthalic acid is produced by the Company for sixty (60) operating days.

 

As of May 31, 2017, the Company is still in its test pilot program, none of the Milestones have been met, and accordingly no additional payments have been made.

 

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Additionally, the Company is obligated to make royalty payments of up to CDN$25,700,000, payable as follows:

 

(a)

10% of gross profits on the sale of all products derived by the Company from the technology assigned to the Company under the Intellecutal Property Assignment Agreement;

 

	(b)	10% of any license fee paid to the Company in respect of any licensing or other right to use the technology assigned to the Company and granted to a third party by the Assignee;
	(c)	5% of any royalty or other similar payment made to the Company by a third party to whom a license or other right to use the technology assigned to the Company has been granted by the Company; and
	(d)	5% of any royalty or other similar payment made to the Company by a third party in respect of a sub-license or other right to use the technology assigned to the Company granted by the third party.

 

As of May 31, 2017, the Company has not made any royalty payments under the Intellectual Property Assignment Agreement.

 

Amortization expense is recorded as an operating expense in the consolidated statements of operations and comprehensive loss and amounted to $15,895, and $22,257 for the three months ended May 31, 2017 and 2016, respectively. As of May 31 and February 28, 2017, accumulated amortization was $152,945 and $137,050, respectively.

 

Note 5 – Related Party Transactions

 

Advances from Major Shareholder

 

Mr. Daniel Solomita, the Company’s major stockholder and CEO, or companies controlled by him, previously made advances to the Company. The advances were unsecured, non-interest bearing with no formal terms of repayment. As of February 28, 2017, the aggregate amount due to Mr. Solomita or companies controlled by him was $391,695. During the period ended May 31, 2017, the Company repaid to Mr. Solomita or companies controlled by him, as applicable, an aggregate amount of $278,472 and reclassified from value added taxes and other receivables an aggregate amount of $113,223.

 

Employment Agreement and Accrued Compensation due to Major Shareholder

 

The Company entered into an employment agreement with Daniel Solomita, the Company’s President and Chief Executive Officer for an indefinite term. During the term, the officer shall receive monthly salary of $15,000. Compensation expense under this agreement amounted to $45,000 during the three months ended May 31, 2017 and May 31, 2016. As of May 31 and February 28, 2017, accrued compensation of $35,156 and $360,000, respectively, was due to Mr. Solomita. On May 5, 2017, the total accrued compensation due to Mr. Solomita for an amount of $360,000 was paid.

 

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In addition, the Company agreed to grant the officer 4 million shares of the Company’s common stock, form of equity to be determined, if certain milestones were met.

 

Effective April 10, 2017, the Company qualified to trade on the OTCQX and began trading the same date. Accordingly, as at May 31, 2017, the officer’s entitlement to 1,000,000 shares with a fair value of $5,500,000, in aggregate, have vested. The milestones for the remaining 3,000,000 shares of common stock have not yet been met.

 

Note 6 – Stockholders’ Equity

 

Common Stock

 

During the three months ended May 31, 2017 the Company sold 1,123,266 shares of its common stock at an offering price of $5.25 per share, resulting in net proceeds to the Company of $5,897,188.

 

Warrants

 

The Company has not adopted a formal stock option plan as of May 31, 2017; however, it has made periodic non-plan grants of warrants for services and financing.

 

During the period ended May 31, 2017, the Company issued to its Chief Financial Officer a warrant to purchase up to 400,000 shares of our common stock at an exercise price of $5.25 per share, which vests quarterly in equal amounts over 24 months beginning on April 3, 2017, and have a contractual life of 10 years. This warrant had a grant date fair value of $2,331,000 as determined by a Black Scholes option pricing model and will be amortized over the vesting period. In addition, the Company issued to its Chief Financial Officer a warrant to purchase up to 150,000 additional shares of our common stock at an exercise price of $5.25 per share that will vest when certain milestones achieved. This warrant had a grant date fair value of $874,125 as determined by a Black Scholes option pricing model and will be amortized as the Company makes progress towards those milestones.

 

During the three months ended May 31, 2017, and 2016, the Company amortized $220,504, and $41,359 respectively, of these costs which are included in operating expenses. As of May 31, 2017, the unamortized balance of these costs was $3,377,143. The aggregate intrinsic value of the warrants outstanding as of May 31, 2017 was $9,325,489 calculated as the difference between the closing market price of $8.05 and the exercise price of the Company’s warrants as of May 31, 2017.

 

During the three months ended May 31, 2017 warrants to purchase an aggregate of 314,667 shares of our common stock expired.

 

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The table below summarizes the Company’s warrants activities:

 

		Number of Warrant Shares				Exercise Price Range Per Share				Weighted Average Exercise Price
Balance, February 28, 2017			1,647,670			$	0.80 to $6.00			$	2.91
Granted			550,000			$	5.25			$	5.25
Exercised			(22,548	)		$	0.80			$	0.80
Expired			(314,667	)		$	6.00			$	6.00
Balance, May 31, 2017			1,860,455			$	0.80 to $6.00			$	3.11
Earned and exercisable, May 31, 2017			836,705			$	0.80 to $6.00			$	2.82
Unvested, May 31, 2017			1,023,750			$	0.80 to $5.25			$	3.34

 

For warrants requiring an assessment of value during the period of May 31, 2017, the fair value of each warrant was estimated using the Black-Scholes option pricing model with the following assumptions:

 

Risk-free interest rate			2.02	%
Expected dividend yield			0	%
Expected volatility			110.72	%
Expected life			6 years

 

As at May 31, 2017, 20,000 shares of common stock were issued as a result of a cashless exercise of 22,548 warrants with an exercise price of $0.80 per share.

 

The following table summarizes information concerning outstanding and exercisable warrants as of May 31, 2017:

 

				Warrants Outstanding												Warrants Exercisable
Range of Exercise Prices				Number Outstanding				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price				Number Exercisable				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price
$	0.80				912,452				0.51			$	0.80				507,452				0.51			$	0.80
$	6.00				323,003				0.08			$	6.00				323,003				0.08			$	6.00
$	3.00				75,000				1.02			$	3.00				6,250				1.02			$	3.00
$	5.25				550,000				9.98			$	5.25				-				-			$	-

    

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Note 7 – Geographic Information

 

As of May 31, 2017 and 2016, the Company had two reportable diverse geographical concentrations, the United States and Canada. Information related to these operating segments, net of eliminations, consists of the following for the periods below:

 

		Three months ended May 31, 2017
		United States				Canada				Total
Revenue		$	-			$	-			$	-
Cost of revenue			-				-				-
General and administrative			482,455				407,125				889,580
Research and development			57,768				438,770				496,538
Depreciation and amortization			25,961				64,526				90,487
Foreign exchange loss (gain)			-				46,485				46,485
Loss from operations		$	(566,184	)		$	(956,906	)		$	(1,523,090	)

 

		As at May 31, 2017
		United States				Canada				Total
Current assets		$	4,571,525			$	1,026,677			$	5,598,202
Property and equipment, net			147,328				1,371,439				1,518,767
Intangible assets, net			292,105				-				292,105
Total assets		$	5,010,958			$	2,398,116			$	7,409,074
Current liabilities		$	230,962			$	434,012			$	664,974
Equity			8,547,511				(1,803,411	)			6,744,100
Total liabilities and equity		$	8,778,473			$	(1,369,399	)		$	7,409,074

 

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		Three months ended May 31, 2016
		United States				Canada				Total
Revenue		$	-			$	-			$	-
Cost of revenue			-				-				-
General and administrative			231,797				207,949				439,746
Research and development			149,674				265,894				415,568
Depreciation and amortization			33,924				79,100				113,024
Foreign exchange loss (gain)			-				(3,789	)			(3,789	)
Loss from operations		$	(415,395	)		$	(549,154	)		$	(964,549	)

 

		As at May 31, 2016
		United States				Canada				Total
Current assets		$	1,374,929			$	360,038			$	1,734,967
Property and equipment, net			146,746				1,281,554				1,428,300
Intangible assets, net			349,322				-				349,322
Total assets		$	1,870,997			$	1,641,592			$	3,512,589
Current liabilities		$	335,483			$	715,308			$	1,050,791
Equity			4,185,534				(1,723,736	)			2,461,798
Total liabilities and equity		$	4,521,017			$	(1,008,428	)		$	3,512,589

 

Note 8 – Subsequent Event

 

On June 30, 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”). The Plan permits the granting of options to employees, directors and consultants of the Company. A total of 3,000,000 shares of common stock were reserved for issuance under the Plan with an automatic share reserve increase, as defined in the Plan, effective commencing March 1, 2018. The Plan is administered by the Board of Directors who designates eligible participants to be included under the Plan, the number of stock options granted, the share price pursuant to the stock options and the vesting conditions and period. The options, 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 option will not exceed 5 years.

 

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

 

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our most recent Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or the SEC, on May 30, 2017.

 

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere 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.

 

Overview

 

Our business develops technology and processes to promote the regeneration and reuse of materials to sustain a circular economy.

 

Currently, the focus of our business is on the depolymerizing waste PET plastics and converting them into valuable chemicals, ready to be reintroduced into the manufacturing of virgin PET plastic. Our proprietary technology breaks down PET into its base chemicals, PTA and MEG, at a recovery rate of over 90% and under normal atmospheric pressure and at room temperature.

 

Depolymerization presents two unique advantages in recycling resin-based products: (i) the ability to return a recovered resin to virgin-resin-like quality, and (ii) the potential to recover a valuable feedstock from products that are economically challenging to recycle. When plastic is mechanically recycled, even small levels of contamination can compromise the performance of the resin. However, because depolymerization breaks down plastics into monomer form, all contamination is removed. Our unique depolymerization process can be applied to all sorts of post-consumer PET, including degraded, colored or heavily contaminated PET that is not currently recyclable.

 

We are a development-stage company and have never generated any revenues. Our depolymerization technology must be scaled-up before we can commercialize the technology and generate any revenues. We intend to sell depolymerized LOOP™-branded PET resin to sustainably focused customers. During January 2016, we announced the successful completion of a pilot plant facility in Montreal, Canada with a production capacity of 2.5 metric tons per day of high purity PTA and MEG.

 

Plan of Operation

 

We are planning to and have begun taking steps to build a commercial scale facility with an installed capacity of a minimum of 10,000 metric tons (MT) per annum to supply our potential customers with LOOP™ branded PET resin of up to 50% recycled content. We are planning to finance any new facilities through additional sales of our common stock, government assistance, including grants and low-interest loans and traditional bank financing.

 

We are conducting qualification testing of our LOOP™ branded PET resin and negotiating long term supply contracts with potential customers. In addition, we are optimizing our manufacturing process to ensure a smooth transition from pilot scale to full scale commercial manufacturing facility.

 

Our plan of operation also includes the development of the LOOP™ branded PET resin, by establishing co-marketing and co-branding initiatives with potential customers. LOOP™ branded PET resin will primarily focus on educating consumers on the importance of the circular economy and the Loop technology that can play a pivotal role in this new economy.

 

Results of Operations

 

For the three months ended May 31, 2017 and May 31, 2016

 

We recorded no revenues for the three months ended May 31, 2017 and May 31, 2016.

 

We realized a net loss from operations of $1.5 million for the three months ended May 31, 2017 compared to a net loss of $1.0 million for the three months ended May 31, 2016. This net loss from operations is mainly due to an increase in general and administrative expenses of $0.9 million for the period ended May 31, 2017 compared to $0.4 million for the period ended May 31, 2016. In addition, we incurred $0.5 million in research and development expenses for the period ended May 31, 2017 compared to $0.4 million for the period ended May 31, 2016 as we continue to scale our technology.

 

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Activity in the three months ended May 31, 2017 continues to focus on the development of plans for a commercial facility, continued testing and improvement of our depolymerization process as well as testing of various feedstocks used in the depolymerization process.

 

On the commercial side, we have undertaken various marketing initiatives to raise awareness of the Loop depolymerization process. In addition, we have been working with future customers and other key stakeholders to ensure that the Loop™ branded PET resin meets customers’ needs and specifications once commercial production begins.

 

Liquidity and Capital Resources

 

As reflected in the accompanying consolidated financial statements, we have no recurring source of revenue and during the three months ended May 31, 2017, we incurred a net loss of $1.5 million and used cash in operations of $1.0 million. As of May 31, 2017, we had cash on hand of $5.5 million and stockholders’ equity of $6.7 million as a result of the sale of 1,123,266 shares of our common stock on May 4, 2017 for net proceeds of $5.9 million.

 

We estimate that the current funds on hand will be sufficient to continue operations through the next twelve months. However, we will need additional financing through either debt or equity to finalize the transition from pilot scale to a full scale commercial manufacturing facility. We are currently seeking additional funds, primarily through the issuance of debt and equity securities for cash and estimates that a significant amount of capital will be necessary to advance the development of our projects to the point at which they will become commercially viable.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we could obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.

 

Off-Balance Sheet Arrangements

 

As of May 31, 2017, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer, we are responsible for conducting an evaluation of the effectiveness of the design and operation of our internal controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the fiscal quarter covered by this report. Disclosure controls and procedures means that the material information required to be included in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective as of May 31, 2017.

 

Changes in Internal Control over Financial Reporting

 

As described under “Material Weakness Discussion and Remediation” in our most recent Annual Report on Form 10-K, filed on May 30, 2017, we have undertaken a broad range of remedial procedures to address the weaknesses in our internal control over financial reporting. Testing of the effectiveness of these remediation efforts will be undertaken in future quarters.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. As of May 31, 2017, no legal proceedings, government actions, administrative actions, investigations or claims 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.

 

We anticipate that we will expend significant financial and managerial resources in the defense of our intellectual property rights in the future if we believe that our rights have been violated. We also anticipate that we will expend significant 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 30, 2017. No material changes to such risk factors have occurred during the three months ended May 31, 2017.

 

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

 

Issuance of Warrants

 

Pursuant to the employment agreement with our chief financial officer D. Jennifer Rhee, dated March 17, 2017, we issued a warrant to purchase up to 400,000 shares of our common stock at a price per share of $5.25, that shall vest quarterly, in equal amounts, over a 24-month period beginning on April 3, 2017 and a warrant to purchase up to 150,000 shares of our common stock at a price per share of $5.25 that shall vest upon the achievement of certain milestones. The warrants were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

 

A copy of the employment agreement and the form of warrant are attached as Exhibit 10.2 and Exhibit 4.2, respectively, to this quarterly report and are incorporated herein by reference.

 

Exercise of Warrants

 

We also issued 20,000 shares of our common stock upon the cash-less exercise of 22,548 warrants with an exercise price of $0.80 per share. The shares and the warrants were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

None.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

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ITEM 6. EXHIBITS.

 

The following Exhibits, as required by Item 601 of Regulation S-K, 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		10-K		000-54768		May 30, 2017		3.1
3.2		By-laws		S-1		333-171091		Dec 10, 2010		3.2
4.1		Form of Common Stock Subscription Agreement		8-K		000-54768		May 5, 2017		10.1
4.2		Form of Warrant						Filed herewith
10.1		Articles of Merger of Loop Holdings, Inc. into Loop Industries, Inc.		10-K		000-54768		May 30, 2017		10.9
10.2		Employment Agreement, dated March 17, 2017, by and between D. Jennifer Rhee and Loop Industries, Inc.						Filed herewith
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, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	LOOP INDUSTRIES, INC.
Date: July 14, 2017	By:	/s/ Daniel Solomita
	Name:	Daniel Solomita
	Title:	President and Chief Executive Officer (principal executive officer)

 

Date: July 14, 2017	By:	/s/ D. Jennifer Rhee
	Name:	D. Jennifer Rhee
	Title:	Chief Financial Officer (principal accounting officer and principal financial officer)

 

 

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