Loop Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 28, 2019. The filing also compares the three months ended February 28, 2019 with the same period in 2018; it is not a calendar-year 2018 quarterly filing.
Business context and reporting period
Loop is a pre-commercial technology and licensing company developing a process to depolymerize low- or no-value PET plastic and polyester waste into materials for virgin-quality recycled PET resin and polyester fiber. The company reported no revenue and had not begun commercial operations. In June 2018 it transitioned to its Generation II (GEN II) process and industrial pilot plant; the filing reports an issued U.S. GEN II patent on April 9, 2019.
Loop’s planned revenue sources are PET and fiber sales through its 50/50 joint venture with Indorama Ventures (IVL), licensing fees from Waste-to-Resin facilities, and development fees related to facility construction.
Financial performance and liquidity
| Metric (U.S. dollars unless noted) | FY ended Feb. 28, 2019 | FY ended Feb. 28, 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Net loss | $17.54 million | $14.04 million |
| Loss per share, basic and diluted | $0.52 | $0.43 |
| Cash used in operating activities | $7.56 million | $6.39 million |
| Cash used in investing activities | $2.05 million | $2.80 million |
| Cash provided by financing activities | $7.33 million | $16.50 million |
- Fourth-quarter net loss was $7.55 million versus $3.63 million in the comparable quarter; revenue was zero in both periods. The quarter’s higher loss principally reflected a $4.04 million legal settlement expense, partly offset by lower R&D spending.
- Annual operating expenses increased $3.50 million. The $4.04 million settlement expense, higher other G&A, depreciation and amortization, impairment, and financing costs were partly offset by lower R&D expenses.
- At February 28, 2019, cash was $5.83 million, total current assets $6.66 million, and current liabilities $8.58 million. Total liabilities were $9.53 million; stockholders’ equity was $2.63 million. Current liabilities included $5.64 million of convertible notes and $0.22 million of warrant liability.
- Operating cash use rose from the prior year. Capital spending included $1.89 million for property, plant and equipment. The accumulated deficit was $38.81 million.
- Long-term bank debt had a $1.01 million balance, including the current portion, and was secured by Loop Canada assets. The loan carries interest at the Canadian prime rate plus 1.5%; the company reported compliance with its financial covenants.
- Gross proceeds from convertible-note issuances during FY2019 were approximately $7.15 million. A March 1, 2019 registered direct offering generated approximately $4.2 million net proceeds. Management estimated $8–10 million would be needed to fund the start-up of joint-venture commercial operations.
Margins: Not meaningful because the company had no revenue. The filing states that losses and cash needs are expected to continue.
Material changes and commercial progress
- GEN II replaced GEN I as the basis for future commercialization. The company wrote off $298,694 of remaining GEN I intangible assets.
- The IVL joint venture planned a 20,700-metric-tonne-per-year retrofit facility in Spartanburg, South Carolina, with production expected in the second half of calendar 2020. The capacity was described as fully subscribed; the venture was evaluating a possible expansion to 40,000 tonnes. Loop had contributed $500,000 by May 2, 2019.
- Loop announced multi-year supply arrangements or frameworks involving Danone, PepsiCo, and Coca-Cola’s Cross Enterprise Procurement Group, as well as an agreement with L’Occitane for supply from a planned European facility. The filing also describes letters of intent with L’Oréal and Nestlé Waters North America. These announcements do not represent revenue recognized in FY2019.
- The company entered a global alliance with Thyssenkrupp Industrial Solutions to develop its Waste-to-Resin facility offering. At year-end, the IVL joint venture had no recorded activity and Loop’s equity-method investment had a nil carrying value.
Outlook, risks, contingencies, and unusual items
- For FY2020, management planned to raise capital, protect intellectual property, upgrade the pilot plant, secure feedstock, pursue customer agreements, and develop the Waste-to-Resin model. First commercial revenue from the IVL joint venture was expected in the second half of calendar 2020; these are forward-looking expectations, not reported results.
- The auditor and management disclosures identify substantial doubt about Loop’s ability to continue as a going concern, given recurring losses, operating cash use, accumulated deficit, and dependence on additional financing. The filing cautions that future funding may not be available on acceptable terms.
- The February 2019 litigation settlement resulted in a $4.04 million expense and agreement to issue 150,000 common shares and 500,000 warrants. The warrants have exercise prices of $11 or $12 per share, subject to stated terms.
- After year-end, holders agreed to convert the November 2018 notes and accrued interest at $8.55 per share; Loop issued 319,326 shares and 159,663 warrants under that agreement. The notes originally had a floating conversion formula, creating dilution risk. January 2019 notes also include conversion and potential price-adjustment provisions.
- Key risks include failure to scale or commercialize the technology, reliance on additional financing, feedstock and commodity-price uncertainty, regulatory and permitting requirements, competition from virgin PET, and protection of intellectual property. The company also cited foreign-exchange exposure.
- Management reported that prior material weaknesses in internal controls over financial reporting, including stock-based-compensation accounting, were remediated during FY2019 and assessed controls as effective at February 28, 2019. Earlier stock-compensation issues had contributed to restatements of prior-period financial statements.
- CEO Daniel Solomita beneficially owned 53.3% of common shares as of May 2, 2019 and held a preferred share with majority voting power under specified conditions, concentrating voting control.
Important facts for investors to verify
- Whether the company secured sufficient financing for ongoing operations and the joint venture, and how long available cash would fund operations.
- Whether the IVL facility was built, reached planned capacity and production timing, and fulfilled customer supply commitments.
- Whether GEN II achieves commercial-scale yields, product quality, and cost competitiveness, and whether feedstock supply is secured.
- The final terms and share dilution from convertible notes, warrants, settlement securities, and other equity awards.
- Whether the reported remediation of internal-control weaknesses was sustained and whether future filings remain reliable.