Loop Industries, Inc. — FY2016 Form 10-K
Business context and reporting period. The fiscal year ended February 29, 2016. Loop is a development-stage company seeking to depolymerize waste PET into purified terephthalic acid (PTA) and ethylene glycol (EG). A June 29, 2015 reverse acquisition brought Loop Holdings’ recycling business into the public company; prior-period financials reflect Loop Holdings and cover only the period from inception on October 23, 2014 through February 28, 2015. The company reported no revenue in either period.
Key financial metrics
| Metric | FY ended Feb. 29, 2016 | Prior inception period |
|---|---|---|
| Revenue | $0 | $0 |
| General and administrative expense | $1.748 million | $285,908 |
| Research and development expense | $801,666 | $40,614 |
| Depreciation and amortization | $211,845 | $11,377 |
| Net loss | $2.836 million | $287,436 |
| Basic and diluted loss per share | $0.10 | $0.01 |
| Cash used in operating activities | $1.108 million | Cash provided: $192,374 |
| Cash at period end | $422,586 | $209,796 |
| Current assets / current liabilities | $711,756 / $1.065 million | $782,861 / $317,498 |
| Total assets | $2.483 million | $1.229 million |
FY2016 investing cash outflow was $1.599 million, principally for property and equipment; financing provided $2.851 million, including share proceeds and advances for shares issuable. Working capital was negative $353,455 at year-end. The filing does not provide meaningful operating margins because there was no revenue. It reports no formal interest-bearing borrowing; current liabilities included $492,128 in unsecured, non-interest-bearing advances from the CEO/majority shareholder, with no formal repayment terms.
Material changes and developments
- Expenses and losses increased from the short prior inception period as operations expanded; management also cited higher staffing, public-company costs, pilot-plant start-up, stock-based compensation and equipment purchases.
- Net property and equipment rose to $1.399 million from $11,233. The company spent $1.599 million on property and equipment during FY2016.
- Management said the pilot plant was capable of producing 5,000 pounds per day and that product qualification testing with potential customers was underway. The filing also describes process refinement and a planned commercial facility with estimated cost of approximately $15 million and initial capacity of approximately 36 million pounds of PET annually.
- After year-end, the company reported selling 857,335 shares and receiving $2.572 million through the filing date, including $614,001 received before year-end for shares not yet issued. A subsequent-events note separately describes board approval of a $5 million unit offering; the filing does not clearly reconcile the offering terms and proceeds reported.
Outlook, risks, contingencies and unusual items
- Going concern: Management and the auditor stated that recurring losses, no recurring revenue, operating cash use and insufficient funds raise substantial doubt about the company’s ability to continue as a going concern. The auditor’s opinion on the financial statements was unqualified but included a going-concern emphasis. Management said year-end cash would not fund the next 12 months and additional financing was needed; no financing was assured.
- Commercialization and funding: The technology remained in an early stage and required scale-up. The estimated commercial-facility cost was about $15 million. Management anticipated debt or equity financing; equity financing could dilute shareholders. No revenue, customer contracts, or firm commercialization timetable is reported.
- Technology payments: The IP assignment includes up to C$800,000 in milestone payments tied to production thresholds and royalties of up to C$27 million under specified sales and licensing formulas. No milestones had been achieved and no royalties had been paid as of the filing.
- Control and governance: CEO Daniel Solomita held approximately 57% of common shares and one Series A preferred share with voting power equal to 65% of common voting power while he holds at least 7.5% of common shares. The preferred share also has significant approval rights. The board had two members, neither independent; there was no audit committee or audit committee financial expert.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective and identified material weaknesses involving oversight, segregation of duties, and period-end reporting controls.
- Related parties and contingencies: The company accrued $210,000 of CEO compensation and had shareholder advances outstanding. The CEO’s employment agreement provides a $180,000 annual salary, milestone-based potential awards of 4 million common shares, and specified severance terms. No legal proceedings were reported.
- Operational and execution risks: Results depend on proving product quality and economics at scale, obtaining adequate feedstock and financing, protecting intellectual property, and meeting regulatory requirements for future facilities. The company also disclosed Canadian-dollar exposure and no currency hedging.
Investor facts to verify
- Reconcile the post-year-end share sales, $2.572 million of reported proceeds, and the separately described $5 million unit offering; confirm shares and warrants issued and outstanding.
- Confirm current cash, near-term funding needs, financing availability and runway after the reported subsequent financing.
- Verify pilot-plant operating capacity, customer qualification results, product specifications, and progress toward commercial-scale production and the estimated $15 million facility.
- Assess whether the technology can achieve commercially viable yields, costs and product quality, and clarify the status and scope of patent protection.
- Review the contingent IP milestone and royalty obligations, related-party balances and transactions, and the effect of the Series A preferred share’s voting and protective rights.
- Track remediation of the disclosed material weaknesses and whether independent directors and an audit committee are established.