The following information and any forward-looking statements should be read in
conjunction with the unaudited financial information and the notes thereto
included in this Quarterly Report on Form 10-Q, including those risks identified
in the "Risk Factors" section of our most recent Annual Report on Form 10-K.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q of Loop Industries, Inc., a Nevada
corporation (the "Company," "Loop Industries," "we," or "our"), contains
"forward-looking statements," as defined in the United States Private Securities
Litigation Reform Act of 1995. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These forward-looking statements include, without limitation,
statements about our market opportunity, our strategies, ability to improve and
expand our capabilities, competition, expected activities and expenditures as we
pursue our business plan, the adequacy of our available cash resources,
regulatory compliance, plans for future growth and future operations, the size
of our addressable market, market trends, and the effectiveness of the Company's
internal control over financial reporting. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Actual results may differ materially from the predictions
discussed in these forward-looking statements. The economic environment within
which we operate could materially affect our actual results. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. These risks and other factors include, but
are not limited to, those listed under "Risk Factors." Additional factors that
could materially affect these forward-looking statements and/or predictions
include, among other things: (i) commercialization of our technology and
products, (ii) our status of relationship with partners, (iii) development and
protection of our intellectual property and products, (iv) industry competition,
(v) our need for and ability to obtain additional funding, (vi) building our
manufacturing facility, (vii) our ability to scale, manufacture and sell our
products in order to generate revenues, (viii) our proposed business model and
our ability to execute thereon,(ix) adverse effects on the Company's business
and operations as a result of increased regulatory, media or financial reporting
scrutiny, practices, rumors, or otherwise, (x) disease epidemics and health
related concerns, such as the current outbreak of a novel strain of coronavirus
(COVID-19), which could result in (and, in the case of the COVID-19 outbreak,
has resulted in some of the following) reduced access to capital markets, supply
chain disruptions and scrutiny or embargoing of goods produced in affected
areas, government-imposed mandatory business closures and resulting furloughs of
our employees, government employment subsidy programs, travel restrictions or
the like to prevent the spread of disease, and market or other changes that
could result in noncash impairments of our intangible assets, and property,
plant and equipment, (xi) the outcome of the current SEC investigation or recent
class action litigation filed against us, (xii) our ability to hire and/or
retain qualified employees and consultants and (xiii) other factors discussed in
our subsequent filings with the SEC.
Management has included projections and estimates in this Form 10-Q, which are
based primarily on management's experience in the industry, assessments of our
results of operations, discussions and negotiations with third parties and a
review of information filed by our competitors with the SEC or otherwise
publicly available.
In addition, statements that "we believe" and similar statements reflect our
beliefs and opinions on the relevant subject. These statements are based upon
information available to us as at the date of this Form 10-Q, and while we
believe such information forms a reasonable basis for such statements, such
information may be limited or incomplete, and our statements should not be read
to indicate that we have conducted an exhaustive inquiry into, or review of, all
potentially available relevant information. These statements are inherently
uncertain, and investors are cautioned not to unduly rely upon these statements.
We caution readers not to place undue reliance on any such forward-looking
statements, which speak only as at the date made. We disclaim any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
4
Introduction
Loop Industries is a technology company whose mission is to accelerate the
world's shift toward sustainable PET plastic and polyester fiber and away from
our dependence on fossil fuels. Loop Industries owns patented and proprietary
technology that depolymerizes no and low-value waste PET plastic and polyester
fiber, including plastic bottles and packaging, carpets and textiles of any
color, transparency or condition and even ocean plastics that have been degraded
by the sun and salt, 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, thus
enabling our customers to meet their sustainability objectives. Loop Industries
is contributing to the global movement toward a circular economy by reducing
plastic waste and recovering waste plastic for a sustainable future.
Industry Background and Market Opportunity
The global annual market demand for PET plastic and polyester fiber at nearly
$130 billion per year, and the current growth projections from the 2018 IHS
Polymer Market Report indicate this will exceed $160 billion by 2022.
We believe, plastic pollution continues to be one of the most persistently
covered environmental issues by media and local and global environmental
non-governmental organizations. Some of the main concerns associated with PET
are the emissions associated with its production from non-renewable hydrocarbons
and the length of time it persists in landfills and the natural environment.
There is an increasing demand for action to address the global plastic crisis,
which has been characterized by facts provided by leading academic and
not-for-profit organizations. In the last few years, governments in North
America and Europe have been enacting and proposing laws and regulations
mandating the use of minimum recycled content in packaging underlying the
strength of this issue in the marketplace. Consumer brands are seeking a
solution to their plastic challenge, and they are taking action. In recent years
we have seen major brands make significant commitments to close the loop on
their plastic packaging by transitioning their packaging to recyclable materials
and by incorporating more recycled content into their packaging.
Global consumer goods companies, apparel manufacturers, and retail brands have
announced significant public commitments and targets to make the transition to a
circular plastic economy, namely:
?
In January 2018, Danone's evian® brand bottled spring water committed to a 100%
recycled content package by 2025;
?
In 2018, Coca-Cola committed to an average recycled content of 50% across its
packaging by 2030;
?
In October 2018, PepsiCo committed to use an average of 25% recycled plastic in
its packaging by 2025, PepsiCo is also aiming to use 50% recycled plastic in its
bottles across the European Union by 2030;
?
In 2020, L'OCCITANE en Provence committed to 100% recycled content plastic in
their bottles by 2025;
?
In 2020, L'Oréal Group committed to using 100% recycled or biobased plastic in
their packaging by 2030;
?
By 2025, Unilever targets increasing the use of post-consumer recycled plastic
material in their packaging to at least 25%;
?
Colgate-Palmolive states a 2025 goal of increasing recycled content for plastic
to 25%;
?
Nestlé aims to increase the amount of recycled PET used across their brands
globally to 50% by 2025;
?
Adidas Group aims to replace all virgin polyester with recycled polyester in all
adidas and Reebok products where a solution exists by 2024;
?
H&M is aiming to ensure that at least 25% of the plastic they use is from
post-consumer recycled materials.
?
Walmart has an objective to use at least 17% post-consumer recycled content
globally in their private brand plastic packaging and is taking action to
eliminate problematic or unnecessary plastic packaging and move from single-use
toward reuse models where relevant by 2025; and
?
Ikea's ambition is, that by 2030, all plastic used in their products will be
based on renewable or recycled material.
Additionally, there is a growing regulatory and policy environment to encourage
a reduction in the production of virgin fossil fuel based plastic and a minimum
recycled content in packaging imposed by various governments. For example, on
July 21 2020, the European Union announced a new tax on plastic waste starting
January 1, 2021. This tax will have a rate of €800/ton on nonrecycled plastic
packaging. In the UK, a new £200/ton tax will apply to plastic packaging
produced or imported into the UK that does not contain at least 30% recycled
plastic, effective 2022. A California law filed on September 24, 2020 requires
that plastic bottles contain at least 15% post-consumer resin by 2022, 25% by
2025 and 50% by 2030. The growing regulatory environment is expected to increase
the demand for recycled PET plastic further.
We believe that mechanical recycling processes may not be adequate to meet
increasing demand resulting from companies' changing packaging demand and
shifting regulatory environment discussed above. As explained by the
International Bottled Water Association, currently, mechanical recycled PET
(rPET) plastic is produced principally through the conversion of bales of PET
bottles. The materials have to be collected and transported to a materials
recovery facility ("MRF"), where they are sorted from other materials, baled,
and sent to specific PET recycling facilities. The bales are broken and sorted
to remove any non-PET materials. The PET is then ground and put through a
separation process which separates the PET from the bottle cap and label
materials. Clean PET flake is then further processed depending on its intended
end market. It may become more highly refined PET pellet for new bottles or
extruded into PET sheet for clamshells, trays, and cups. Recycled PET is also
spun into fiber for carpet, clothing, fiber fill, or other materials.
5
We believe mechanically recycled PET has a number of challenges in meeting the
quality specifications and growing volume requirements implied by commitments
from major brands, mainly due to the cost and variety of acceptable PET
feedstock. Some mechanical recycling processes involve remelting the PET flake
which reduces the quality of the rPET output each time it is recycled relative
to the specifications of virgin PET produced from fossil fuels. Each time the
PET plastic is mechanically recycled, its quality and clarity are reduced.
Therefore, mechanically recycled PET may need to be mixed with virgin PET from
fossil fuels to maintain quality. Lower quality mechanically recycled PET is
often downcycled to alternate uses such as polyester fibers which may be dyed
and used in carpets or clothing. Additionally, mechanically recycled PET
manufactured for use in clear bottles or food containers requires predominantly
clear and clean PET flakes separated from waste bales, and cannot accommodate
darkly colored PET flakes, lower quality fiber feedstock, or materially
contaminated feedstock, which may be cheaper.
We believe the commercialization plans of Loop™ PET resin and polyester fiber
may provide the ideal solution for global brands because Loop™ PET resin and
polyester fiber contains 100% recycled PET and polyester fiber content. The
Loop™ PET resin and polyester fiber is virgin quality suitable for use in
food-grade packaging. That means consumer packaged goods companies will be able
to choose to market packaging made from a 100% Loop™ branded PET resin and
polyester fiber.
Proprietary Technology and Intellectual Property
We believe, the power of our technology lies in its ability to use
post-industrial and post-consumer waste PET plastic and polyester fiber
feedstocks, which could end up in landfills, rivers, oceans and natural areas,
to create Loop™ PET resin. We believe our technology can deliver high-purity
profitable virgin quality PET resin suitable for use in food-grade packaging and
polyester fiber.
Our Generation I technology ("GEN I") is a hydrolysis-based depolymerization
technology which yielded purified terephthalic acid ("PTA") and monoethylene
glycol ("MEG"), two common monomers of PET. As the Company evaluated the
transition from the GEN I technology from pilot scale to commercial scale,
several challenges involving PTA and MEG purification were identified. To
overcome the GEN I technology challenges, we embarked on the development of a
second generation of our technology. Our Generation II technology ("GEN II") is
a methanolysis-based depolymerization technology that uses temperatures below
90 °C to depolymerize waste PET and polyester fiber. The low temperature offers
several key advantages which the company believes will improve its ability to
commercialize the GEN II technology, including;
?
Lower energy usage during depolymerization and therefore reduced processing cost
relative to higher temperature processes;
?
Avoidance of side reactions with non-PET waste, which are inherent in waste PET
feedstock streams, during depolymerization which may occur during higher
temperature and higher pressure depolymerization processes. This allows for a
simplified distillation purification process resulting in less, and more
effective, steps to isolate the desired high purity DMT and MEG monomers
suitable to produce virgin quality PET required to meet food contact regulations
as well as the quality and clarity requirements of global consumer product
companies;
?
Allowing the depolymerization of less costly and low-quality feedstocks, which
cannot be effectively recycled today, such as carpet fiber, clothing and mixed
plastics, and upcycling them into high-quality PET that can be used in food
contact use; and
?
The GEN II technology uses only trace amounts of water, eliminates the need for
a halogenated solvent and uses a catalyst at low concentration.
This shift, from producing the monomer PTA to the monomer DMT, was a pivotal
moment for Loop Industries. We believe that GEN II requires less energy and
fewer resource inputs than conventional PET production processes. We also
believe it is an environmentally sustainable method for producing virgin quality
food-grade PET plastic by decoupling PET manufacturing from the fossil fuel
industry.
To independently validate that our GEN II technology can produce DMT and MEG
monomers at mini-pilot and pilot scale, we commissioned Kemitek, a College
Centre for Technology Transfer specialized in the fields of green chemistry and
chemical process scale-up. Kemitek's findings allowed them to confirm that our
technology produces monomers that meet our purity specifications for the
production of PET resin and polyester fiber. The complete, Kemitek report was
filed with the SEC by the Company on December 14, 2020.
6
To protect our technology, we rely on a combination of patents, trademarks,
trade secrets, confidentiality agreements and provisions as well as other
contractual provisions to protect our proprietary rights, which are primarily
our patents, brand names, product designs and marks, We have two technology
areas, referred to as GEN I technology and the GEN II technology, with patent
claims relating to our technology for depolymerizing PET.
?
The GEN I technology portfolio has three issued U.S. patents, all expected to
expire on or around July 2035. Internationally, we also have issued patents in
Argentina, Australia, Europe, Eurasia, China, Israel, Japan, Taiwan, South
Africa, and in the members of the Gulf Cooperation Council and pending patent
applications in Brazil, Canada, Hong Kong, India, Korea, Mexico, and the
Philippines, all expected to expire, if granted, on or around July 2036, not
including any patent term extension.
?
The GEN II technology portfolio currently consists of four patent families:
o
The first has two issued U.S. patent and a pending U.S. application, all
expected to expire on or around September 2037. Internationally, we also have an
issued patent in Bangladesh, and pending applications in Argentina, Australia,
Bolivia, Brazil, Bhutan, Canada, China, Colombia, Eurasia, Europe, members of
the Gulf Countries, Hong Kong, Indonesia, Israel, India, Iraq, Japan, Korea,
Kuwait, Laos, Mexico, Malaysia, Panama, Papua New Guinea, Philippines, Pakistan,
Singapore, Taiwan, Uruguay, Uzbekistan, Venezuela, and South Africa, all
expected to expire on or around September 2038, if granted and not including any
patent term extension.
o
An additional aspect of the GEN II technology is claimed in an issued U.S.
patent and a pending U.S. application. Internationally, we also have an allowed
patent application in Bangladesh and pending applications in Algeria, Argentina,
Australia, Bahrain, Bolivia, Brazil, Cambodia, Canada, Chile, China, Eurasia,
Egypt, Europe, India, Indonesia, Israel, Iran, Japan, Korea, Kuwait, Laos,
Malaysia, members of the Gulf Cooperation Council, Mexico, Morocco, New Zealand,
Oman, Pakistan, Panama, Peru, Philippines, Qatar, Saudi Arabia, Singapore, South
Africa, Taiwan, Thailand, Tunisia, United Arab Emirates, Uruguay, Uzbekistan and
Vietnam, all expected to expire on or around June 2039, if granted and not
including any patent term extension.
o
A further additional aspect of the GEN II technology is the subject of a U.S.
application and an International application. Any patents that would ultimately
grant from these applications would be expected to expire on or around March
2040, not including any patent term extension.
o
Another further additional aspect of the GEN II technology is the subject of a
U.S. application, an International application, and pending applications in
Argentina, Bolivia, Bangladesh, members of the Gulf Cooperation Council,
Pakistan, Taiwan, and Uruguay. Any patents that would ultimately grant from
these applications would be expected to expire on or around March 2040, not
including any patent term extension.
Loop owns registrations for its trademarks in Canada, the European Union, the
United Kingdom, and the U.S. Loop also has pending applications in Cambodia,
Canada, Indonesia, Taiwan, the U.S., and Vietnam.
Government Regulation and Approvals
As we seek to further develop and commercialize our technology, we will be
subject to extensive and frequently developing federal, state, provincial and
local laws and regulations. Compliance with current and future regulations,
including food packaging regulations, could increase our operational costs.
Our operations require various governmental permits and approvals. We are in the
process of obtaining all necessary permits and approvals for the operation of
our business; however, any of these permits or approvals may be subject to
denial, revocation or modification under various circumstances. Additionally,
due to the impact of the COVID-19 pandemic, we may experience delays in
obtaining such permits or approvals. Failure to obtain or comply with the
conditions of permits and approvals or to have the necessary approvals in place
may adversely affect our operations and may subject us to penalties. See "Risk
Factors" below for additional information.
We believe that if we are successful in addressing food packaging regulations in
various countries and economic regions, that the regulatory environment may
provide Loop™ PET resin a competitive advantage relative to mechanically
recycled alternative resins and virgin PET.
7
We received a no-objection letter (NOL) on March 1, 2021 from the US Federal
Food and Drug Administration ("FDA") to confirm the capability of Loop
Industries' tertiary recycling process, known as methanolysis, in cleaning and
producing post-industrial and post-consumer recycled PET for use in the
manufacture of food-contact articles that contact all food types all conditions
of use for which PET is permitted. The request to the FDA was initiated on
November 23, 2020 and the NOL grant was provided within the expected response
period of three to six months.
We have received from the European Chemicals Agency a confirmation of
registration for our MEG on November 17, 2020, and for our DMT on December 7,
2020. The registration under the Registration, Evaluation, Authorization and
Restriction of Chemicals ("REACH") Regulation (EC 1907/2006) confirms that our
monomers are of a purity equal to what is currently recognized within Europe and
entitles us to manufacture/import the monomers into Europe. It should be noted
that MEG and DMT are on the positive list for plastic materials, which means
that the two monomers can be used as food contact materials.
The levels of monomer purity confirmed by Kemitek's verification are in line
with the data submitted for the REACH registration of our DMT and MEG monomers
and additionally support the March 1, 2021 NOL from the FDA.
Supply Agreements with Global Consumer Brands
Consumer brands are seeking a solution to their plastic challenge and they are
taking bold action. In the past years, we have seen major brands make
significant commitments to close the loop on their plastic use in two ways; by
transitioning their packaging to recyclable materials and by incorporating more
recycled content into their packaging. We believe Loop™ PET resin provides the
ideal solution for these brands because it is recyclable and is made from 100%
recycled PET waste and polyester fiber, while being virgin-quality and suitable
for use in food-grade packaging and polyester fiber.
Due to the commitments by large global consumer brands to incorporate more
recycled content into their product packaging, the regulatory requirements for
minimum recycled content in packaging imposed by governments, the virgin-quality
of Loop™ branded PET resin and its marketability to extoll the sustainability
credentials of consumer brands that incorporate it, we believe we will be able
to sell Loop™ branded PET resin at a premium price relative to virgin and
mechanically recycled PET resin.
We are pursuing supply agreements with customers that are located in North
America, Europe, and Asia. We currently have agreements with some of the world's
leading brands to be supplied from our planned commercial facility from our
joint venture with Indorama Ventures Holdings LP ("Indorama") in Spartanburg,
South Carolina, including:
?
Multi-year supply agreement with Danone SA, one of the world's leading global
food and beverage companies. Danone will purchase 100% sustainable and upcycled
Loop™ branded PET for use in brands across its portfolio including evian®,
Danone's iconic natural spring water;
?
Multi-year supply agreement with PepsiCo, one of the largest purchasers of
recycled PET plastic, enabling PepsiCo to purchase production capacity and
incorporate Loop™ PET resin into its product packaging;
?
Multi-year supply agreement with L'OCCITANE en Provence to supply 100% recycled
and sustainable Loop™ PET resin and incorporate Loop™ PET resin into its product
packaging; and
?
Multi-year supply agreement with L'Oréal Group, the global leader in the beauty
industry, enabling L'Oréal Group to purchase production capacity and incorporate
Loop™ PET resin into its product packaging.
Turning PET Waste into Feedstock
We use waste PET plastic and polyester fiber as feedstock. Our technology can
use PET plastic bottles and packaging of any color, transparency or condition,
carpet, clothing and other polyester textiles that may contain colors, dyes or
additives, and even PET plastics that have been recovered from the ocean and
degraded by exposure to sun and salt. We believe that our ability to use many
materials that mechanical recyclers cannot use is an important advantage of
Loop™ PET resin over mechanically recycled PET resin. This also means we are
creating a new market for materials that have persistently been leaking out of
the waste management system and into our shared rivers, oceans and natural
areas.
8
Commercialization Plan and Progress
During the three month-period ended May 31, 2021, we continued executing our
corporate strategy with a focus on the commercialization of our technology. We
are progressing on the engineering of our full-scale commercial facilities with
our engineering partner Worley, a leading global engineering, procurement and
construction company. Our design approach allows for the process design package,
which has been completed, to be used as the base engineering platform for all
future geographical expansion. We believe this approach allows for a quick
execution, speed to market and lends itself well to modular construction.
The Infinite LoopTMmanufacturing technology is the key pillar of our
commercialization blueprint. We believe our technology is at the forefront of
the global transition away from fossil fuels and petrochemicals and into the
circular economy, where PET plastic and polyester fiber are produced from
recycled content. The Infinite Loop™ technology is being engineered to support
the commitment of global consumer brands to achieve a high level of recycled
content in packaging. Infinite Loop™ facilities could be located near large
urban centers where more plastic is being consumed and therefore more waste
plastic feedstock is likely available.
Our objective is to achieve global expansion of the technology through a mix of
fully owned facilities, strategic partnerships, and licensing agreements. We
believe that industrial companies, some of which today may not be in the
business of manufacturing PET resin or polyester fiber, will view involvement in
Infinite Loop™ projects as a growth opportunity, which may offer attractive
economic returns either as Loop manufacturing partners or as licensees of the
technology. We are currently pursuing projects for future commercial production
facilities in four regions: Canada, Europe, Asia and the U.S.
On September 2, 2020, we entered into a know-how and engineering agreement (the
"Chemtex Agreement") with Chemtex Global Corporation ("Chemtex") to license the
PET resin and polyester fiber manufacturing know-how of INVISTA's technology and
licensing group, INVISTA Performance Technologies (IPT) ("INVISTA"). The INVISTA
know-how will be used for the polymerization of DMT and MEG monomer output from
Loop's depolymerization technology, the result of which is LoopTMPET resin or
polyester fiber made from 100% recycled content. The INVISTA polymerization
process and the associated designs are historically proven in the commercial
production of PET resin and polyester fiber.
We continue to focus on the completion of the Infinite LoopTMengineering design
with an initial target capacity of up to 70,000 metric tons/year. Permitting,
site and regulatory considerations may impact plant capacity for the various
projects. As discussed above, the design includes the integration of our
depolymerization technology with INVISTA's polymerization technology in
partnership with Worley. We intend to use this design when evaluating Infinite
LoopTMfacilities in various regions. Worley has completed the pre-feasibility
engineering as part of the planning phase for an Infinite LoopTMmanufacturing
facility in the province of Québec. We expect that Worley may also play a role
in the feasibility phase of engineering and the future design of larger capacity
facilities.
We believe that Infinite LoopTMrecycled PET resin and polyester fiber could
command premium pricing over virgin, petroleum-based PET resin and provide
attractive economic returns. We are targeting multi-year take or pay offtake
agreements for planned Infinite LoopTMproduction. Factors under consideration in
determining project economics include pre-feasibility design engineering and
cost estimate work, timing and permitting of a facility, customer offtake
demand, commitment terms, and feedstock sources, quality, availability,
logistics, and ramp up, among others.
Strategic Partnership with SK Global Chemical
We and SK global chemical Co. Ltd. ("SKGC") intend to form a joint venture with
exclusivity to build sustainable PET plastic and polyester fiber manufacturing
facilities throughout Asia, which accounts for approximately 60 percent of the
world's population, making it a key market in terms of plastic manufacturing,
consumption and waste. Under the terms of the Memorandum of Understanding
("MOU") for the proposed joint venture, SKGC will own 51 percent of the joint
venture and we will own 49 percent. We will also receive a recurring annual
royalty fee as a percentage of revenue from each facility for the use of its
technology.
In addition, we and SKGC have entered into a definitive agreement for SKGC to
become a strategic investor in Loop. SKGC will purchase 4,714,813 of our common
shares at a price of $12 per share, for total consideration of $56.5
million. Closing of the strategic equity investment will be as soon as practical
and no later than 90 days from the June 23, 2021 announcement.
We will also grant SKGC options to acquire an additional 461,298 common shares
at $11 per share within the next 12 months, 4,714,813 common shares at a price
of $15 per share, within the next 3 years, and a further 2,357,407 shares at $20
per share, conditional upon the timing of construction of the first Asian
manufacturing facility. SKGC is being granted a seat on our Board of Directors
and as such is expected to provide valued input into the continuing development
of our global commercialization strategy.
9
Infinite LoopTMBécancour, Québec
We are in the planning phase for an Infinite LoopTMmanufacturing facility in the
province of Québec (the "Québec Project"). On May 27, 2021, we acquired a 19
million square foot parcel of land in Bécancour, Québec for $4.9 million (CDN
$5.9 million) (the "New Site"). The site offers attractive logistics being
located on the St-Lawrence river and access to rail. As previously disclosed, we
had identified a different 2 million square feet parcel of land in Bécancour,
Québec (the "Previous Site"), and had negotiated an option right to purchase
that parcel of land. The purchase option was canceled in May 2021. The
environmental impact of building on the New Site is lower than the Previous Site
because we will be recycling an industrial site that has previously been
demolished. The development of this site will likely not result in the
destruction of wetlands or forest and it reduces the overall construction costs
and permitting time. The site size exceeds our project needs and we may choose
to sell a portion of the land to offset part of our project commitment.
The Québec Project is currently contemplated as wholly-owned and operated by us
which allows us to commercialize near our innovation and engineering teams
located in Terrebonne, Québec. To fund the project and enhance our target
returns, we are exploring financing options. Alternatives under exploration
include incentive and financing programs supported by, or in partnership with,
various levels of government.
The Québec Project would allow us to proceed with Infinite
LoopTMcommercialization in a more expeditious manner without being impacted by
COVID-19 restrictions on international travel.
Infinite LoopTMEurope
We announced on September 10, 2020 a strategic partnership with SUEZ GROUP
("Suez"), with the objective to build the first Infinite Loop™ manufacturing
facility in Europe. With the combination of the Infinite LoopTMtechnology and
the resource management expertise of Suez, this partnership seeks to respond
to growth in demand in Europe from global beverage and consumer goods brand
companies who we believe are committed to ambitious targets for a high level of
recycled content in their products. Together with Suez, we have initiated the
work to enable us to make a final investment decision for the project with the
current priorities being on the site selection, permitting, and feedstock
requirements and engineering. We are targeting final site selection during the
summer of 2021.
Joint Venture with Indorama
In September 2018 we announced a joint venture with Indorama to retrofit their
existing PET manufacturing facilities. The joint venture was formed with the
objective to manufacture and commercialize sustainable Loop™ PET resin to meet
the growing global demand from beverage and consumer packaged goods companies.
This partnership brings together Indorama's manufacturing footprint and Loop
Industries' proprietary technology to become a supplier of 100% sustainable and
recycled PET resin.
We entered into a Limited Liability Company Agreement between (the "LLC
Agreement"), a Marketing Agreement (the "Marketing Agreement") and a License
Agreement (the "License Agreement"), each dated September 24, 2018 (together,
the "Joint Venture Agreements"), with Indorama through our wholly-owned
subsidiary Loop Innovations, LLC ("Loop Innovations"), a Delaware limited
liability company. Each company has 50/50 equity interest in the joint venture.
We are contributing to the 50/50 joint venture an exclusive worldwide
royalty-free license to use our proprietary technology to produce 100%
sustainably produced PET resin in addition to our equity cash contribution. The
Joint Venture Agreement details the establishment of an initial 20,700 metric
tons per year facility in Spartanburg, South Carolina, in the southeastern
United States. In 2019, the joint venture decided to increase the capacity of
the planned Spartanburg plant due to customer demand to 40,000 metric tons per
year.
We have currently contracted for the sale of approximately 40% of the planned
capacity, of the expected output of the Spartanburg facility and we will resume
discussions for the remaining volume once we have more visibility on the
commissioning date of the facility, although we have had and may continue to
experience delays due to the COVID-19 pandemic (see "The global COVID-19
pandemic" as noted under "Risk Factors"). As part of the Joint Venture
Agreement, we are committed to contribute our equity share for the costs under
the joint venture agreement to construct the facility. During the year ended
February 28, 2021, we made a contribution of $650,000 and as at May 31, 2021, we
have contributed a total of $1,500,000 to the joint venture.
10
The joint venture made a decision over the summer of 2020 that due to the
COVID-19 pandemic it would temporarily delay work on the project. Since then, no
expenditures have been incurred by the joint venture. The travel restrictions
and quarantine requirements between Canada and the US continued to cause
disruptions in our timetable. While both joint venture partners currently remain
committed to the project, we continue to monitor the COVID-19 implications on
the project timetable.
In conjunction with the SK strategic partnership mentioned above, on June 18,
2021, we, Loop Innovations, Indorama and Indorama Loop Technologies, LLC (the
"Indorama Joint Venture Company") amended the Joint Venture Agreements (the
"Indorama Joint Venture Amendments").
Under the Indorama Joint Venture Amendments, we, Indorama and the Indorama Joint
Venture Company agreed to:
?
terminate Indorama's right of first refusal under the LLC Agreement over any
facility to produce products utilizing any waste-to-resin technology applying
our PET depolymerization process
?
amend the non-compete obligations under the LLC Agreement to solely apply to the
Company;
?
limit the scope of our grant of intellectual property rights and the scope of
the exclusivity rights of the Indorama Joint Venture Company for the retrofit of
existing facilities under the License Agreement to North America and Europe; and
?
limit the scope of the Indorama Joint Venture Company's permitted marketing
rights under the Marketing Agreement to North America and Europe.
The foregoing description of the Indorama Joint Venture Amendments does not
purport to be complete and is qualified in its entirety by reference to the
Indorama Joint Venture Amendments, a copy of which are filed as exhibits to this
Quarterly Report on Form 10-Q for the quarter ended May 31, 2021.
Demonstration Plant and Innovation Center in Terrebonne, Québec
As part of our plan for the commercialization of future Infinite
LoopTMmanufacturing facilities, we decided to convert our Terrebonne, Québec
pilot plant to an Infinite LoopTMdemonstration and training facility. This
demonstration facility will be used to showcase the Infinite LoopTM end to end
technology to potential partners and customers, and train operational teams in
advance of the commissioning of commercial plants.
We made significant investments in the demonstration plant during the
three-month period ended May 31, 2021. In particular, we began installation of
new distillation columns in the last quarter. We also continued testing on the
two recently installed depolymerization reactors which substantially increase
our demonstration facility's depolymerization capacity and confirm the design
and scale-up factor for the feasibility engineering of the planned
commercial-scale facilities. In addition, we have also entered into an agreement
to acquire PET polymerization equipment from Chemtex to manufacture of Loop™
branded PET resin at our demonstration plant. We anticipate the Infinite
LoopTMdemonstration plant project to be largely completed by late in calendar
2021 and delivering Loop™ branded PET resin to customers in calendar 2022.
In addition to the capital requirements for our commercialization, we continue
to invest in strengthening our intellectual property portfolio, building a core
competency in managing strategic relationships and continue enhancing our brand
value. Our research and development innovation center in Terrebonne, Québec will
continue to push forward the development of our technology.
Human Capital
Our employees are essential to our success and we are committed to providing a
safe, productive, discrimination-free and harassment-free work environment. All
employees are responsible for compliance with our Code of Ethics as well as our
health and safety, and anti-harassment policies. These policies and practices
help us foster a workplace environment that promotes inclusion and diversity.
To attract and retain highly capable and innovative employees, we have developed
competitive compensation packages and benefits programs. Our compensation
packages include market-competitive pay, healthcare benefits, paid time off and
family leave and flexible work schedules. We also offer equity awards with
multi-year vesting provisions to incentivize and reward our employees for
long-term corporate performance and promote retention throughout the vesting
period.
To support our employees this fiscal year and to promote their health and
safety, we encouraged administrative and engineering employees to work remotely.
We provided emergency leave for employees to take care of a child or parent due
to COVID-19 disruptions.
As of May 31, 2021, we had 74 employees of which 29 work in research and
development and 32 in engineering and operations.
11
Results of Operations
The following table summarizes our operating results for the three-month periods
ended May 31, 2021 and 2020, in U.S. Dollars.
Three months ended May 31,
2021 2020 Change
Revenues $- $- $-
Expenses
Research and development
Stock-based compensation 395,545 352,007 43,538
External engineering 2,903,448 74,932 2,828,516
Employee compensation 1,690,583 467,041 1,223,542
Machinery and equipment expenditures 2,622,892 - 2,622,892
Demonstration plant operating expenses 691,537 286,103 405,434
Other
333,900 300,505 33,395
Total research and development 8,637,905 1,480,588 7,157,317
General and administrative
Stock-based compensation (383,630) 659,817 (1,043,447)
Professional fees 1,631,451 221,697 1,409,754
Employee compensation 845,035 483,034 362,001
Directors and officers insurance 868,647 473,574 395,073
Other
199,068 114,959 84,109
Total general and administrative 3,160,571 1,953,081 1,207,490
Depreciation and amortization 132,001 255,974 (123,973)
Interest and other financial expenses 30,588 126,776 (96,188)
Interest income (9,761) (40,346) 30,585
Foreign exchange loss 206,060 76,641 129,419
Total expenses 12,157,364 3,852,714 8,304,650
Net loss $(12,157,364) $(3,852,714) $(8,304,650)
First Quarter Ended May 31, 2021
The net loss for the three-month period ended May 31, 2021 increased $8.30
million to $12.16 million, as compared to the net loss for the three-month
period ended May 31, 2020 which was $3.85 million. The increase is primarily due
to increased research and development expenses of $7.16 million, increased
general and administrative expenses of $1.21 million, an increase in foreign
exchange loss of $0.13 million and a decrease in interest income of $0.03
million, partially offset by lower depreciation and amortization expenses of
$0.12 million and lower interest and other financial expenses of $0.1 million.
12
The $7.16 million increase in research and development for the three-month
period ended May 31, 2021 was primarily attributable to the following:
?
$2.83 million increase in external engineering expenses for ongoing design work
for our Infinite LoopTMmanufacturing process;
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$2.62 million increase in purchases of research and development machinery and
equipment. Starting in Q3 of fiscal 2021, we expense research and development
machinery and equipment in accordance with ASC 730, Research and Development
Costs, and no longer capitalize these costs. The timing of this accounting
treatment is related to management's decision to convert our pilot plant to
exclusively a demonstration and training facility for our future Infinite Loop™
manufacturing facilities, therefore foregoing any alternative future use of its
machinery and equipment assets in other applications;
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$1.2 million increase in employee compensation expenses due to an increase in
hiring; and
?
$0.41 million increase in demonstration plant and laboratory operating expenses
due to increased activity at our demonstration plant.
The $1.21 million increase in general and administrative expenses for the
three-month period ended May 31, 2021 was primarily attributable to the
following:
?
$1.41 million increase in expenses for legal and professional fees due to costs
principally associated with the ongoing SEC investigation and class action suits
described in "Part II, Item 1. Legal Proceedings";
?
$0.40 million increase in insurance expenses mainly due to directors and
officers ("D&O") insurance renewal costs; and
?
$0.36 million increase in employee compensation expenses due to an increase in
hiring.
The listed increases in general and administrative expenses were partially
offset by lower stock-based compensation expenses of $1.04 million which are
mainly due to forfeitures of RSUs recorded in the three-month period ended May
31, 2021 for a total of $0.94 million.
The $0.12 million decrease in depreciation and amortization expenses for the
three-month period ended May 31, 2021 is mainly attributable to the write-down
of machinery and equipment assets related to the decision in the third quarter
of fiscal 2021 to dedicate the demonstration and training facility to research
and development activities. Although the machinery and equipment will continue
to be utilized at our demonstration and training facility as it is an integral
part of supporting the commercialization of our technology, application of ASC
730, Research and Development Costsrequires machinery and equipment assets to be
written off and all future costs associated with the demonstration and training
facility to be recognized as a research and development expense in the
consolidated statements of operations and comprehensive loss.
The $0.12 million increase in foreign exchange loss for the three-month period
ended May 31, 2021 is mainly due to the fluctuation in USD/CAD exchange rates.
The $0.10 million decrease in interest and other financial expenses for the
three-month period ended May 31, 2021 is mainly due to the loss on revaluation
of foreign exchange contracts in the three-month period ended May 31, 2020 which
was nil in the three-month period ended May 31, 2021. The $0.03 million decrease
in interest income for the three-month period ended May 31, 2021 is mainly due
to lower interest rates as well as lower cash balances on which we receive
interest.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We are a development stage company with no revenues, and our ongoing operations
and commercialization plans are being financed by raising new equity and debt
capital. To date, we have been successful in raising capital to finance our
ongoing operations. As at May 31, 2021, we had cash and cash equivalents on hand
of $18.04 million. Management actively monitors the Company's cash balance and
short term cash commitments to ensure current operations are funded. We are also
exploring options to finance our commercial projects.
Management continues to pursue our growth strategy and is evaluating our
financing plans to continue to raise capital to finance the start-up of
commercial operations and continue to fund the further development of our
ongoing operations. Although our liquidity position consists of cash and cash
equivalents on hand of $18.04 million, in light of the current global COVID-19
pandemic and its impacts on the global capital markets, our liquidity position
may change, including the inability to raise new equity and debt, disruption in
completing repayments or disbursements to our creditors.
As part of our strategic partnership with SKGC, SKGC will purchase 4,714,813 new
treasury common shares of Loop at a price of $12 per share, for total
consideration of $56.5 million. Closing of the strategic equity investment will
be as soon as practical and no later than 90 days from the June 23, 2021
announcement.
As reflected in the accompanying interim unaudited condensed consolidated
financial statements, we are a development stage company, we have not yet begun
commercial operations and we do not have any sources of revenue. Management
believes that the Company has sufficient financial resources to fund committed
operating and capital expenditures and other working capital needs for at least,
but not limited to, the 12-month period from the date of issuance of the May 31,
2021 interim unaudited condensed consolidated financial statements. There can be
no assurance that any future financing will be available or, if available, that
it will be on terms that are satisfactory to us.
13
We have a short-term debt obligation to a Canadian bank in connection with the
purchase, in the year ended February 28, 2018, of the land and building where
our demonstration plant and corporate offices are located at 480
Fernand-Poitras, Terrebonne, Québec, Canada J6Y 1Y4. On January 24, 2018, the
Company obtained a $1,159,708 (CDN$1,400,000) 20-year term instalment loan (the
"Loan"), from a Canadian bank. The Loan bears interest at the bank's Canadian
prime rate plus 1.5%. By agreement, the Loan is repayable in monthly payments of
$4,832 (CDN$5,833) plus interest, until January 2022, at which time it will be
subject to renewal. It includes an option allowing for the prepayment of the
Loan without penalty.
We also have a long-term debt obligation to Investissement Québec in connection
with a financing facility equal to 63.45% of all eligible expenses incurred for
the expansion of our demonstration and training plant up to a maximum of
$3,810,471 (CDN$4,600,000). We received the first disbursement in the amount of
$1,830,048 (CDN$2,209,234) on February 21, 2020. See Note 10 in the accompanying
interim unaudited condensed consolidated financial statements for additional
information. The remaining amount available under the financing facility after
the first disbursement was $1,980,422 (CDN$2,390,766) and relates to
expenditures incurred up to June 30, 2021 in connection with our demonstration
and training facility.
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