Loop Industries, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended August 31, 2018. Unless stated otherwise, amounts are in U.S. dollars. Loop is a pre-revenue technology company developing a process to recycle waste polyester/PET into virgin-quality resin and fiber.
Financial results and liquidity
- Revenue: $0 in both the three- and six-month periods, as in the comparable 2017 periods. With no revenue, operating margins are not meaningful.
- Net loss: $3.54 million for the quarter, versus $2.18 million in 2017; $7.07 million for six months, versus $3.70 million. Six-month basic and diluted loss per share was $0.21, compared with $0.11.
- Expenses: Six-month R&D was $2.13 million (up $0.69 million); general and administrative expense was $4.75 million (up $2.78 million). Management attributed G&A growth to employee costs, non-cash stock compensation, CEO compensation adjustments, legal and commercialization work, and consulting, accounting and public-company costs. Total stock-based compensation was $2.19 million for the six months, versus $0.92 million in 2017.
- Cash flow: Operations used $3.91 million in the six months, versus $2.27 million in 2017. Investing used $1.10 million, primarily for pilot-plant expansion, versus $0.17 million. Financing used $27,000, whereas the prior-year period provided $6.84 million, mainly from equity and warrant proceeds. Cash declined $5.23 million to $2.92 million.
- Balance sheet: At August 31, cash was $2.92 million and total current assets were $3.39 million, against current liabilities of $2.62 million. Total assets were $8.94 million; total liabilities were $3.61 million. Long-term debt, including current portion, was $1.04 million; the company said it complied with its debt covenants.
- Going concern: The company had an accumulated deficit of $28.3 million, no recurring revenue, and stated that its losses and operating cash use raise substantial doubt about its ability to continue as a going concern. It expects to seek additional capital, but availability and terms are uncertain.
Changes, outlook and risks
- In June 2018, Loop activated its Generation II technology, which management said it believes is more streamlined and energy-efficient and eliminates water in dimethyl terephthalate production. Engineering work continued on a planned integrated manufacturing facility.
- On September 24, 2018, after quarter-end, Loop and an Indorama Ventures subsidiary formed a 50:50 joint venture. The venture received an exclusive worldwide license to use Loop technology to retrofit existing facilities and plans to begin commercial production in the first quarter of 2020. These are plans, not reported operating results; Loop’s goal is to negotiate take-or-pay customer contracts.
- Key risks include the need for additional financing, successful commercialization and partner execution, foreign-exchange exposure (the company reported no current currency hedging), and competition and regulatory, intellectual-property and internal-control risks. Management disclosed no off-balance-sheet arrangements.
- Two plaintiffs claim entitlement to two million Loop shares and seek damages and other relief in a lawsuit. Trial was postponed to May 8, 2019. Management considers the claim without merit; the company recorded no provision and could not estimate potential loss.
- The CEO’s amended employment agreement increased base salary and introduced performance-based bonus eligibility, retroactive to March 1, 2018. The company also reported that it remediated a previously disclosed material weakness in accounting for stock-based compensation and concluded disclosure controls and internal controls were effective as of August 31, 2018.
Important facts for investors to verify
- Cash burn, remaining liquidity, and the timing and terms of any additional financing.
- Progress toward commercial production, the joint venture’s planned 2020 start, and whether customer offtake contracts are secured.
- Technical performance and economics of Generation II and the planned facility.
- Potential exposure from the lawsuit seeking two million shares and any changes to the company’s assessment.
- Future stock-based compensation, dilution, and the effectiveness of the remediated accounting controls.