Loop Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2016. The company is a development-stage plastics recycling business pursuing commercialization of proprietary PET depolymerization technology. It reported no revenue in this or the prior-year quarter.
Financial results and liquidity
- Revenue and margins: Revenue was $0 in both periods; gross margin is not meaningful because there was no revenue or cost of revenue.
- Loss and expenses: Net loss was $964,549, versus $338,108 in the prior-year quarter. Operating expenses rose to $964,549 from $338,108, including R&D of $415,568 (prior year: $11,589), general and administrative expense of $439,746 (prior year: $320,003), and depreciation and amortization of $113,024 (prior year: $9,795). Basic and diluted loss per share was $0.03 versus $0.01.
- Cash flow: Operating cash use was $846,936, compared with $319,448 in the prior-year quarter. Investing cash use was $79,759. Financing provided $1,988,003 from common-stock sales. Cash at May 31 was $1,420,292, up from $422,586 at February 29.
- Liquidity: Current assets were $1,734,967 and current liabilities were $1,050,791, for working capital of $684,176. The current ratio was approximately 1.65.
- Debt and obligations: The balance sheet shows no conventional borrowing; current liabilities include $510,713 in unsecured, non-interest-bearing advances from the majority shareholder, with no formal repayment terms, and $255,000 in accrued officer compensation. The company also has contingent intellectual-property milestone payments and royalties.
- Assets and equity: Total assets were $3,512,589 and stockholders’ equity was $2,461,798 at May 31. The company sold 662,668 shares for $1,988,003 during the quarter. Warrants outstanding totaled 1,653,668 at period-end.
Material changes and business developments
- Compared with the prior-year quarter, operating expenses increased by $626,441, principally reflecting pilot-plant start-up, staffing, equipment, materials, contractors, and greater depreciation and amortization. Management also cited increased corporate and public-company costs.
- The company said its pilot plant was completed and capable of producing 5,000 pounds per day of high-purity PTA and MEG; it was conducting qualification testing with potential customers and refining the process for scale-up. It estimated a future commercial facility would cost approximately $15 million and process about 36 million pounds of PET annually.
- At May 31, the company remained in its test-pilot program; none of the technology-assignment agreement’s production milestones had been met, and no milestone payments or royalties had been paid.
Outlook, risks, and unusual items
- Going concern: Management stated that available funds would not be sufficient to fund operations through the next 12 months or complete the planned transition to commercial-scale manufacturing. The company had no recurring revenue, incurred a $1.0 million quarterly net loss, and used $0.8 million in operating cash. Management said substantial additional financing was needed and that failure to obtain it could cause the business to fail. No financing was arranged as of the filing’s discussion.
- Financing after quarter-end: The filing describes a June 1, 2016 offering approval and subsequent sales of shares and warrants. It reports $3,895,026 in total proceeds as of the filing date, including $2,602,004 received by May 31. The stated unit price, components, approved aggregate proceeds, and reported share/proceeds totals are not internally clear from the filing text.
- Technology and execution risks: Commercialization and scale-up remain unproven; qualification testing, customer purchases, intellectual-property protection, competition, cost overruns, and the ability to raise capital are material uncertainties. Equity financing may dilute existing shareholders; debt financing could impose restrictions.
- Related-party matters: CEO and majority shareholder Daniel Solomita is owed accrued compensation and has provided or arranged shareholder advances. He also holds one Series A preferred share and is entitled to potential milestone-based common-stock awards. A proposed transfer of pilot-plant assets and liabilities involved a newly formed company wholly owned by him, with a stated intention to transfer its shares to Loop.
- Controls and legal matters: Management concluded disclosure controls and procedures were not effective as of May 31, 2016. The company reported no pending legal proceeding considered likely to have a material adverse effect.
Important facts for investors to verify
- Whether subsequent equity financing closed as described, and reconcile the offering’s unit terms, share counts, warrant terms, and proceeds.
- Cash runway, near-term funding needs, and the terms and dilution or restrictions associated with any new financing.
- Progress in pilot testing, customer qualification, commercial contracts, and the estimated cost and schedule for full-scale production.
- Related-party balances and the terms, valuation, and completion of the proposed pilot-plant asset transfer.
- The plan and timing for remediating ineffective disclosure controls and procedures.