Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. The Company, Basis of Presentation
The Company
Loop Industries, Inc. (the “Company,” “Loop,” “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. The Company is currently in the development stage with limited revenues.
Basis of Presentation
These 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, 2022, filed with the SEC on May 27, 2022. 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, 2022, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by US 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 six-month periods ended August 31, 2022 are not necessarily indicative of the results to be expected for any subsequent quarter, for the fiscal year ending February 28, 2023, or for any other period.
The consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the continuing of operations, the realization of assets and the settlement of liabilities in the normal course of business.
2. Summary of Significant Accounting Policies
Liquidity Risk Assessment
From inception to August 31, 2022, the Company has been in the development stage with limited revenues, and with its ongoing operations and commercialization plans financed primarily by raising equity. The Company has incurred net losses and negative cash flow from operating activities since its inception and expects to incur additional net losses while it continues to develop and plan for commercialization. As at August 31, 2022, the Company’s available liquidity was $25.67 million, consisting of cash and cash equivalents of $23.00 million and an undrawn senior loan facility from a Canadian bank. Additionally, the Company sold a portion of excess land on September 15, 2022 for net cash proceeds of $8.69 million as described in Note 21. Management actively monitors the Company’s cash resources against the Company’s short-term cash commitments to ensure the Company has sufficient liquidity to fund its costs for at least twelve months from the financial statement issuance date. Management evaluates the Company’s liquidity to determine if there is substantial doubt about the Company’s ability to continue as a going concern. In preparing this liquidity assessment, management applies significant judgment in estimating future cash flow requirements of the Company based on budgets and forecasts, which includes developing assumptions related to: (i) estimation of amount and timing of future cash outflows and cash inflows and (ii) determining what future expenditures are committed and what could be considered discretionary. Based on this assessment, management believes that the Company will be able to realize its assets and discharge its liabilities in the normal course of operations as they become due for a period of no less than twelve months from the date of issuance of these consolidated financial statements.
The Company is currently evaluating financing options to move to the next stage of its strategic development and construct manufacturing plants in Canada, Europe and Asia. The Company’s ability to successfully commercialize its business and generate future revenues depends on whether the Company can obtain the necessary financing through a combination of the issuance of debt, equity, and/or joint ventures and/or government incentive programs. The Company has committed a portion of its cash resources for certain long lead equipment in connection with the Bécancour project. The Company may enter into additional commitments to move the project ahead within its targeted construction timeframes. However, there is no assurance that the Company will be successful in attracting additional funding. Even if additional financing is available, it may not be available on terms favorable to the Company. Failure to secure additional financing on favorable terms when it becomes required would have an adverse effect on the Company’s current operation and on its ability to execute its business plan.
Revenue recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company enters into contracts with customers to sell Loop™ PET resin. These contracts include a single performance obligation, which is the delivery of Loop™ PET resin, and the transaction price is a fixed rate per delivered volume. Revenue is recognized when control of the product transfers to the customer, which is when product is delivered to the customer location. Shipping and handling costs are accounted for as a fulfillment cost.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to use its judgment 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 the going concern assessment, 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, assets held for sale, 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.
The COVID-19 pandemic, as well as supply chain and geo-political disruptions, have affected business operations and planning for future commercial facilities to varying degrees 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 conditions has had and may continue to have an effect on our development and commercialization efforts.
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 recognized as compensation expense on the straight-line basis over the vesting period. When performance conditions exist, the Company recognizes 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 is 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.
Inventories
Inventories are stated at the lower of cost or net realizable value using the average cost method. Inventory cost includes direct labor, cost of raw materials and production overhead.
The Company separates its inventories into three main categories: raw materials, work in process, and finished goods. The raw materials category includes goods used in the production process that have not yet entered the production process at the balance sheet date and mainly comprises chemicals and other process consumables. The work in process category includes goods that are in the production process at the balance sheet date and mainly comprises monomers that have not yet been polymerized into Loop™ branded PET resin. The finished goods category includes goods that have completed the production process and mainly comprises Loop™ branded PET resin.
Research and development expenses
Research and development costs are charged to expense as costs are incurred in performing research and development activities. Research and development expenses relate primarily to process development and design, producing initial volumes of product for customers, testing of pre-production samples, machinery and equipment expenditures for use in the small-scale production facility in Terrebonne, Québec (the “Terrebonne Facility”), compensation, and consulting and engineering fees. Research and development costs are presented net of related tax credits and government grants.
Assets held for sale
Assets are classified as held for sale when they met the criteria set out in ASC 360-10-45-9 Long-lived assets classified as held for sale:
| · | Management, having the authority to approve the action, commits to a plan to sell the asset; |
| · | The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; |
| · | An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; |
| · | The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year; |
| · | The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and |
| · | Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. |
When the criteria are met, the assets are presented at the lesser of fair market value, net of selling costs, and cost in current assets.
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 six-month periods ended August 31, 2022 and 2021, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an antidilutive effect. As at August 31, 2022, the potentially dilutive securities consisted of 1,570,000 outstanding stock options (2021 – 1,587,081), 4,128,718 outstanding restricted stock units (2021 – 4,170,278), and 7,104,553 outstanding warrants (2021 – 11,684,418).
Recently adopted accounting pronouncements
In November 2021, the FASB issued ASU 2021-10, “Disclosures by Business Entities about Government Assistance”. This ASU provided guidance to increase the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. Under the new guidance, an entity is required to provide the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: (1) information about the nature of the transactions and the related accounting policy used to account for the transactions, (2) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item and, (3) significant terms and conditions of the transactions, including commitments and contingencies. This update is effective for fiscal years beginning after December 15, 2021. The adoption of this accounting guidance did not impact the disclosures in our Consolidated Financial Statements.
3. Sales Tax, Tax Credits and Other Receivables
Sales tax, tax credits and other receivables as at August 31, 2022 and February 28, 2022 were as follows:
| | August 31, 2022 | | | February 28, 2022 | |
Sales tax | | $ | 408,767 | | | $ | 1,337,783 | |
Investment tax credits | | | 756,644 | | | | - | |
Research and development tax credits | | | 486,273 | | | | 313,599 | |
Other receivables | | | 152,214 | | | | 64,880 | |
| | $ | 1,803,898 | | | $ | 1,716,262 | |
4. Inventories
Inventories as at August 31, 2022 and February 28, 2022 were as follows:
| | August 31, 2022 | | | February 28, 2022 | |
Work in process | | $ | 176,073 | | | $ | - | |
Finished goods | | | 111,939 | | | | - | |
Raw materials | | | 42,450 | | | | - | |
| | $ | 330,462 | | | $ | - | |
5. Prepaid Expenses and Deposits
Prepaid expenses as at August 31, 2022 and February 28, 2022 were as follows:
| | August 31, 2022 | | | February 28, 2022 | |
Deposits on machinery and equipment | | $ | 3,917,877 | | | $ | 2,801,680 | |
Other | | | 82,135 | | | | 163,966 | |
| | $ | 4,000,012 | | | $ | 2,965,646 | |
As at August 31, 2022, the Company had $3,917,877 (February 28, 2022 – $2,801,680) of non-refundable cash deposits on machinery and equipment. $510,727 (February 28, 2022 – $672,713) of the prepayments are on machinery and equipment that will be used in connection with the research and development activities at the Terrebonne Facility and will be expensed, and classified as research and development expenses in the period the equipment is received. The remainder of the prepayments of $3,407,150 (February 28, 2022 – $2,128,967) are non-refundable cash deposits on long-lead machinery and equipment that will be used in the planned Infinite Loop™ manufacturing facility in Bécancour, Québec.
6. Assets held for sale
On May 27, 2021, we acquired land in Bécancour, Québec for cash of $4.8 million (CDN $5.9 million), for which a portion of the land is the site of our planned Infinite Loop™ manufacturing facility. The excess land has been classified as an asset held for sale, with a carrying value at August 31, 2022 of $3,282,515, on the basis that management was committed to a plan to dispose of the excess land and at the balance sheet date, and considered the sale to be probable within one year. As disclosed in Note 21, the Company sold approximately two thirds of the land held for sale on September 15, 2022 for cash proceeds of $8,694,989.
The total purchase cost of the land has been allocated between the portion of land held for sale and the land being used for the Infinite Loop™ manufacturing facility based on surface area.
Description | | Balance sheet line item | | Cost | |
Land held for sale | | Asset held for sale | | $ | 3,282,515 | |
Infinite Loop™ manufacturing facility | | Property, plant and equipment, net | | | 1,357,699 | |
| | | | $ | 4,640,214 | |
7. Property, Plant and Equipment
Property, plant and equipment as at August 31, 2022 and February 28, 2022 were as follows:
| | As at August 31, 2022 | |
| | Cost | | | Accumulated depreciation, write-down and impairment | | | Net book value | |
Building | | $ | 1,890,846 | | | $ | (289,543 | ) | | $ | 1,601,303 | |
Land | | | 1,592,295 | | | | - | | | | 1,592,295 | |
Building and Land Improvements | | | 3,004,130 | | | | (1,020,106 | ) | | | 1,984,024 | |
Office equipment and furniture | | | 296,474 | | | | (134,024 | ) | | | 162,450 | |
| | $ | 6,783,745 | | | $ | (1,443,673 | ) | | $ | 5,340,072 | |
| | As at February 28, 2022 | |
| | Cost | | | Accumulated depreciation, write-down and impairment | | | Net book value | |
Building | | $ | 1,952,345 | | | $ | (266,434 | ) | | $ | 1,685,911 | |
Land | | | 1,644,084 | | | | - | | | | 1,644,084 | |
Building and Land Improvements | | | 3,049,892 | | | | (858,342 | ) | | | 2,191,550 | |
Office equipment and furniture | | | 298,141 | | | | (126,824 | ) | | | 171,317 | |
| | $ | 6,944,462 | | | $ | (1,251,600 | ) | | $ | 5,692,862 | |
Depreciation expense for the three- and six-month periods ended August 31, 2022 amounted to $117,486 and $236,488, respectively (2021– $121,733 and $236,790, respectively), and is recorded as an operating expense in the consolidated statements of operations and comprehensive loss.
During the three-month period ended May 31, 2021, the Company acquired a 19 million square foot parcel of land in Bécancour, Québec for $4.8 million (CDN $5.9 million). The Company intends to use a portion of the site to construct a commercial facility to manufacture Loop™ branded PET resin using its Infinite Loop™ technology.
8. Intangible Assets
Intangible assets as at August 31, 2022 and February 28, 2022 were $1,081,704 and $1,013,801, respectively.
During the six-months periods ended August 31, 2022 and 2021, we made additions to intangible assets of $141,404 and $90,591, respectively.
Amortization expense for the three- and six-month periods ended August 31, 2022 amounted to $20,615 and $40,153, respectively (2021 - $19,036 and $358,904, respectively), and is recorded as an operating expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
9. Fair value of financial instruments
The following tables present the fair value of the Company’s financial liabilities as at August 31, 2022 and February 28, 2022:
| | Fair Value as at August 31, 2022 | |
| | Carrying Amount | | | Fair Value | | | Level in the hierarchy | |
Financial liabilities measured at amortized cost: | | | | | | | | | |
Long-term debt | | $ | 3,349,622 | | | $ | 3,362,039 | | | Level 2 | |
| | Fair Value as at February 28, 2022 | |
| | Carrying Amount | | | Fair Value | | | Level in the hierarchy | |
Financial liabilities measured at amortized cost: | | | | | | | | | |
Long-term debt | | $ | 3,378,403 | | | $ | 3,392,600 | | | Level 2 | |
The fair value of long-term debt is determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration and credit default expectations (Level 2).
The fair value of cash and cash equivalents, other receivables, and trade accounts payable and certain accrued liabilities approximate their carrying values due to their short-term maturity.
10. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as at August 31, 2022 and February 28, 2022 were as follows:
| | August 31, 2022 | | | February 28, 2022 | |
Trade accounts payable | | $ | 2,282,367 | | | $ | 4,397,499 | |
Accrued loss contingency for legal settlement (Note 20) | | | 2,231,606 | | | | 2,519,220 | |
Accrued employee compensation | | | 1,039,432 | | | | 1,254,685 | |
Accrued engineering fees | | | - | | | | 774,423 | |
Accrued professional fees | | | 1,054,002 | | | | 526,685 | |
Other accrued liabilities | | | 301,353 | | | | 374,303 | |
| | $ | 6,908,760 | | | $ | 9,846,815 | |
11. Long‑Term Debt
Long-term debt as of August 31, 2022 and February 28, 2022, was comprised of the following:
| | August 31, 2022 | | | February 28, 2022 | |
Investissement Québec financing facility: | | | | | | |
Principal amount | | $ | 3,508,504 | | | $ | 3,622,618 | |
Unamortized discount | | | (306,506 | ) | | | (352,038 | ) |
Accrued interest | | | 147,624 | | | | 107,823 | |
Total Investissement Québec financing facility | | | 3,349,622 | | | | 3,378,403 | |
Less: current portion of long-term debt | | | (250,603 | ) | | | - | |
Long-term debt, net of current portion | | $ | 3,099,019 | | | $ | 3,378,403 | |
Investissement Québec financing facility
The Company recorded interest expense on the Investissement Québec loan for the three- and six-month periods ended August 31, 2022 in the amount of $22,028 and $44,237 respectively (2021 – $11,512 and $22,394) and an accretion expense of $17,684 and $35,270 respectively (2021 – $11,046 and $21,573).
Principal repayments due on the Company’s indebtedness over the next five years are as follows:
Years ending | | Amount | |
February 28, 2023 | | $ | - | |
February 29, 2024 | | | 501,207 | |
February 28, 2025 | | | 501,207 | |
February 28, 2026 | | | 501,207 | |
February 28, 2027 | | | 501,207 | |
Thereafter | | | 1,503,676 | |
Total | | $ | 3,508,504 | |
Credit facility from a Canadian bank
On July 26, 2022, Loop Canada, Inc., a wholly-owned subsidiary of the Company, entered into an Operating Credit Facility (the “Credit Facility”) with a Canadian bank. The Credit Facility allows for borrowings of up to $2,669,514 (CDN $3,500,000) in aggregate principal amount and provides for a two-year term. The Credit Facility is secured by the Company’s Terrebonne, Québec property and is subject to a minimum equity covenant, tested quarterly. All borrowings under the Credit Facility will bear interest at an annual rate equal to the bank’s Canadian prime rate plus 1.0%. The Company is subject to a guarantee of the liabilities of Loop Canada Inc. As at August 31, 2022 the Credit Facility was undrawn.
12. 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 that is far simpler to purify. 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.
During the three-month period ended May 31, 2022, Mr. Solomita met a performance milestone in relation to the signature of a supply agreement with a customer. Accordingly, 1,000,000 performance incentive RSUs with a fair value of $7,740,000 were earned and issuable to Mr. Solomita. This amount was reflected as stock-based compensation expense during the six-month period ended August 31, 2022 based on the grant date fair value. The 1,000,000 vested RSU’s are to be settled annually on October 15 of each year in five equal tranches of 200,000 units.
13. Stockholders’ Equity
Common Stock
For the period ended August 31, 2022 | | Number of shares | | | Amount | |
Balance, February 28, 2022 | | | 47,388,056 | | | $ | 4,740 | |
Issuance of shares upon settlement of restricted stock units | | | 12,653 | | | | 1 | |
Balance, August 31, 2022 | | | 47,400,709 | | | $ | 4,741 | |
For the period ended August 31, 2021 | | Number of shares | | | Amount | |
Balance, February 28, 2021 | | | 42,413,691 | | | $ | 4,242 | |
Issuance of shares upon settlement of restricted stock units | | | 31,660 | | | | 4 | |
Issuance of shares for cash | | | 4,714,813 | | | | 471 | |
Balance, August 31, 2021 | | | 47,160,164 | | | $ | 4,717 | |
During the six-month period ended August 31, 2022, the Company recorded the following common stock transaction:
(i) | The Company issued 12,653 shares of the common stock to settle restricted stock units that vested in the period. |
During the six-month period ended August 31, 2021, the Company recorded the following common stock transactions:
(i) | The Company issued 31,660 shares of the common stock to settle restricted stock units that vested in the period. |
(ii) | The Company issued 4,714,813 shares of its common stock, with warrants, at an aggregate offering price of $12.00 per share for total gross proceeds of $56,577,756 and net proceeds of $56,084,304. |
14. Research and Development Expenses
Research and development expenses for the three-month periods ended August 31, 2022 and 2021 were as follows:
| | August 31, 2022 | | | August 31, 2021 | |
Machinery and equipment expenditures | | $ | 1,183,652 | | | $ | 2,485,232 | |
Employee compensation | | | 2,067,725 | | | | 1,492,688 | |
External engineering | | | 610,839 | | | | 551,381 | |
Plant and laboratory operating expenses | | | 583,615 | | | | 707,043 | |
Tax credits | | | (838,665 | ) | | | (110,741 | ) |
Other | | | 143,989 | | | | 159,194 | |
| | $ | 3,751,155 | | | $ | 5,284,797 | |
Research and development expenses for the six-month periods ended August 31, 2022 and 2021 were as follows:
| | August 31, 2022 | | | August 31, 2021 | |
Machinery and equipment expenditures | | $ | 3,073,309 | | | $ | 5,108,125 | |
Employee compensation | | | 4,355,066 | | | | 3,578,816 | |
External engineering | | | 2,206,454 | | | | 3,454,829 | |
Plant and laboratory operating expenses | | | 1,449,693 | | | | 1,398,510 | |
Tax credits | | | (907,622 | ) | | | (152,391 | ) |
Other | | | 374,739 | | | | 534,743 | |
| | $ | 10,551,639 | | | $ | 13,922,632 | |
15. General and Administrative Expenses
General and administrative expenses for the three-month periods ended August 31, 2022 and 2021 were as follows:
| | August 31, 2022 | | | August 31, 2021 | |
Professional fees | | $ | 1,475,768 | | | $ | 856,997 | |
Employee compensation | | | 1,032,298 | | | | 868,122 | |
Insurance | | | 1,070,840 | | | | 1,059,153 | |
Other | | | 431,781 | | | | 331,954 | |
| | $ | 4,010,687 | | | $ | 3,116,226 | |
General and administrative expenses for the six-month periods ended August 31, 2022 and 2021 were as follows:
| | August 31, 2022 | | | August 31, 2021 | |
Professional fees | | $ | 2,274,752 | | | $ | 2,488,447 | |
Employee compensation(1) | | | 9,816,851 | | | | 1,329,527 | |
Insurance | | | 2,173,381 | | | | 1,927,799 | |
Other | | | 782,344 | | | | 531,024 | |
| | $ | 15,047,328 | | | $ | 6,276,797 | |
| (1) | Includes stock-based compensation expense. During the six-month period ended August 31, 2022, the Company recorded a stock-based compensation expense of $7,740,000 related to the achievement of a performance milestone for 1,000,000 RSUs granted to the Company’s CEO (Note 12). During the six-month period ended August 31, 2021, the Company recorded RSU forfeitures for an amount of $935,837 as a net reversal of stock-based compensation. |
16. Share-based Payments
Stock Options
During the three-month period ended August 31, 2022, the Company granted no stock options (2021 – nil), no stock options were forfeited (2021 – nil) or exercised (2021 – nil), and no stock options expired (2021 – nil). During the six-month period ended August 31, 2022, the Company granted no stock options (2021 – nil), no stock options were forfeited (2021 – nil) or exercised (2021 – nil), and no stock options expired (2021 – 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- and six-month periods ended August 31, 2022 and 2021.
The total number of stock options outstanding as at August 31, 2022 was 1,570,000 (2021 – 1,587,081) with a weighted average exercise price of $6.87 (2021 - $6.81), of which 1,361,667 were exercisable (2021 – 1,278,748) with a weighted average exercise price of $7.73 (2021 – $7.30).
During the three-month periods ended August 31, 2022 and 2021, stock-based compensation expense attributable to stock options amounted to $312,460 and $343,653, respectively, and is included in operating expenses. During the six-month periods ended August 31, 2022 and 2021, stock-based compensation expense attributable to stock options amounted to $629,600 and $892,971, respectively, and is included in operating expenses.
Restricted Stock Units
During the three-month period ended August 31, 2022, the Company granted 66,744 restricted stock units (“RSUs”) (2021 – 33,184) with a weighted average fair value of $4.05 (2021 – $13.05), settled no RSUs (2021 – 12,031, weighted average fair value of $8.48), and 28,801 RSUs were forfeited (2021 – nil) with a weighted average fair value of $8.68 (2021 – nil).
During the six-month period ended August 31, 2022, the Company granted 151,605 restricted stock units (“RSUs”) (2021 – 286,942) with a weighted average fair value of $5.14 (2021 – $9.41), settled 12,653 RSUs (2021 – 31,660) with a weighted average fair value of $13.04 (2021 – $8.82), and 28,801 RSUs were forfeited (2021 – 295,524) with a weighted average fair value of $8.68 (2021 – $7.93).
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 August 31, 2022 was 4,128,718 (2021 – 4,170,278), of which 1,563,497 were vested (2021 – 725,313).
During the three-month periods ended August 31, 2022 and 2021, stock-based compensation attributable to RSUs amounted to $316,220 and $379,165, respectively, and is included in expenses.
During the six-month periods ended August 31, 2022 and 2021, stock-based compensation attributable to RSUs amounted to $8,465,388 and ($173,238), respectively, and is included in operating expenses. During the six-month period ended August 31, 2022, the Company recorded a stock-based compensation expense of $7,740,000 related to the achievement of a performance milestone for 1,000,000 RSUs granted to the Company’s CEO (Note 12). The net reversal in expenses attributable to RSUs in the six-month period ended August 31, 2021 is due to forfeitures recorded in the period for a total of $935,837.
Stock-Based Compensation Expenses
During the three-month periods ended August 31, 2022 and 2021, stock-based compensation included in research and development expenses amounted to $319,046 and $394,527, respectively, and in general and administrative expenses amounted to $309,633 and $313,282, respectively.
During the six-month periods ended August 31, 2022 and 2021, stock-based compensation included in research and development expenses amounted to $715,541 and $790,072, respectively, and in general and administrative expenses amounted to $8,379,448 and ($70,338), respectively. The amount recorded in general and administrative expenses for the six-month period ended August 31, 2022 includes $7,740,000 related to the achievement of a performance milestone for 1,000,000 RSUs granted to the Company’s CEO (Note 12). The net reversal in stock-based compensation included in general and administrative expenses in the six-month period ended August 31, 2021 is due to forfeitures recorded in the period for a total of $935,837.
17. 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, 2022 and 2021, 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 six-month periods ended August 31, 2022 and 2021:
| | 2022 | | | 2021 | |
| | Number of units | | | Number of units | |
Outstanding, beginning of period | | | 1,043,705 | | | | 1,083,412 | |
Share reserve increase | | | - | | | | - | |
Units granted | | | (151,605 | ) | | | (286,942 | ) |
Units forfeited | | | 28,801 | | | | 295,524 | |
Units expired | | | - | | | | - | |
Outstanding, end of period | | | 920,901 | | | | 1,091,994 | |
18. Warrants
During the six-month period ended August 31, 2022, warrants to purchase 4,554,865 shares of our common stock in aggregate with an exercise price of $11.00 expired. During the six-month period ended August 31, 2021, the Company issued warrants to purchase 7,550,698 shares of our common stock in aggregate with a weighted average exercise price of $16.32.
During the six-month period ended August 31, 2021, the Company issued warrants to purchase 7,550,698 shares of our common stock. No warrants were exercised, were forfeited, nor expired in the six-month period ended August 31, 2021. The table below summarizes the warrants granted during the six-month period ended August 31, 2021:
Number of warrants | | | Exercise Price | | | Expiration date | |
| 4,714,813 | | | $ | 15.00 | | | July 29, 2024 | |
| 2,357,407 | | | | 20.00 | | | (1) | | |
| 461,298 | | | | 11.00 | | | June 14, 2022 | |
| 17,180 | | | $ | 11.00 | | | August 26, 2024 | |
| (1) | Expiration date is the earlier of (A) the date that is the third anniversary of the start of construction of the JV’s first facility, (B) 18 months after the date both parties have approved the basic design package to be used for the JV facilities, provided that the agreements to form the JV have not been executed by that date, and (C) the third anniversary of the date that both parties approved the basic design package to be used for the JV facilities, provided that the start of construction of the JV’s first facility has not occurred as of such date. |
19. Interest and Other Financial Expenses
Interest and other finance costs for the three-month periods ended August 31, 2022 and 2021 are as follows:
| | 2022 | | | 2021 | |
Interest on long-term debt | | $ | 22,028 | | | $ | 22,056 | |
Accretion expense | | | 17,684 | | | | 11,046 | |
Other | | | 3,518 | | | | - | |
| | $ | 43,230 | | | $ | 33,102 | |
Interest and other finance costs for the six-month periods ended August 31, 2022 and 2021 are as follows:
| | 2022 | | | 2021 | |
Interest on long-term debt | | $ | 44,237 | | | $ | 41,890 | |
Accretion expense | | | 35,270 | | | | 21,573 | |
Other | | | 5,052 | | | | 226 | |
| | $ | 84,559 | | | $ | 63,689 | |
20. Commitments and Contingencies
Agreement to purchase of machinery and equipment
In December 2021, the Company entered into an agreement for the purchase of long lead machinery and equipment in connection with the construction of our Infinite Loop™ manufacturing facility in Bécancour, Québec for up to $8,546,000, subject to various terms and conditions, including fabrication timelines and equipment inspection. Pursuant to the agreement, the Company has paid cash deposits of $3,407,150.
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-NSR (“Tremblay Class Action”). The complaint alleges that the defendants 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. The complaint 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-NSR. The complaint allegations are similar in nature to those in the Tremblay Class Action.
On January 4, 2021, the United States District Court for the Southern District of New York consolidated the two proposed class-action lawsuits as In re Loop Industries, Inc. Securities Litigation, Master File No. 7:20-cv-08538-NSR. Sakari Johansson and John Jay Cappa were appointed as Co-Lead Plaintiffs and Glancy Prongay & Murray LLP and Pomerantz LLP were appointed as Co-Lead Counsel for the class.
Plaintiffs served a consolidated amended complaint on February 18, 2021, which alleges that the defendants 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. 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 March 1, 2022, the Company and the current and former officer defendants entered into an agreement for the settlement of the Tremblay Class Action, and, on March 4, 2022, advised the Court of the agreement to settle. The agreement, which is subject to certain conditions, including court approval, requires the Company to pay $3.1 million to the plaintiff class. The Company’s total cash contribution to the settlement and outstanding legal fees related to the lawsuit, combined, will be approximately $2.52 million. The remainder of the settlement will be paid by the Company’s D&O insurance carriers. As a result, the Company recorded a contingency loss of $2,519,220 which was included in accounts payable and accrued liabilities at February 28, 2022. As at August 31, 2022, the amount included in accounts payable and accrued liabilities related to the settlement was $2,231,606. The accrued loss contingency for legal settlement was reduced by legal costs incurred in the six-month period ended August 31, 2022 of $287,614.
On May 24, 2022, Lead Plaintiffs filed their motion for preliminary approval of the proposed class action settlement. On September 19, 2022, the Court entered an order preliminarily approving the settlement and providing for notice. The Court scheduled the settlement hearing for January 5, 2023.
The settlement agreement does not constitute an admission, concession, or finding of any fault, liability, or wrongdoing by the Company or any defendant.
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 alleged 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 sought unspecified damages stemming from losses he claimed 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. The authorization hearing was held on February 24, 2022.
In a judgment dated July 29, 2022, the Superior Court of Québec dismissed 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 period to appeal the judgment ends on October 26, 2022.
21. Subsequent Events
Sale of asset held for sale
On September 15, 2022, the Company sold approximately two thirds of the land classified as an asset held for sale for cash proceeds of $8,694,989 (CDN $11,400,000).