Loop Industries Inc

Notes to the Condensed Consolidated Financial Statements

1. The Company and Basis of Presentation

The Company

Loop Industries, Inc. (the “Company,” “Loop,” “we,” or “our”) is a technology company that owns patented and proprietary technology that depolymerizes no and low-value waste polyethylene terephthalate (“PET”) plastic and polyester fiber 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. The Company is currently in the pre-commercialization stage with limited revenues.

Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures included in these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2023, filed with the SEC on May 18, 2023. The unaudited interim condensed consolidated financial statements comprise the consolidated financial position and results of operations of Loop Industries, Inc. and its subsidiaries, Loop Innovations, LLC and Loop Canada Inc. All subsidiaries are, either directly or indirectly, wholly owned subsidiaries of Loop Industries, Inc. (collectively, the “Company”). The Company also owns, through Loop Innovations, LLC, a 50% interest in a joint venture, Indorama Loop Technologies, LLC, which is accounted for under the equity method.

Intercompany balances and transactions are eliminated on consolidation. The condensed consolidated balance sheet as of February 28, 2023, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by US GAAP on an annual reporting basis. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods. The results for the three- and nine-month periods ended November 30, 2023 are not necessarily indicative of the results to be expected for any subsequent quarter, for the fiscal year ending February 29, 2024, or for any other period.

The consolidated financial statements of the Company have been prepared on a going concern basis, which contemplates the continuing of operations, the realization of assets and the settlement of liabilities in the normal course of business.

All monetary amounts in these notes to the condensed consolidated financial statements are in thousands of U.S. dollars unless otherwise specified, except for per share data.

2. Summary of Significant Accounting Policies

Liquidity Risk Assessment

Since its inception, the Company has been in the pre-commercialization stage with limited revenues from customers, and its ongoing operations and commercialization plans have been financed primarily by raising equity. The Company has incurred net losses and negative cash flow from operating and investing activities since its inception and expects to incur additional net losses while it continues to develop and plan for commercialization. As at November 30, 2023, the Company’s available liquidity was $11,943, consisting of cash and cash equivalents of $9,366 and an undrawn senior loan facility from a Canadian bank of $2,577. Management actively monitors the Company’s cash resources against the Company’s short-term cash commitments to ensure the Company has sufficient liquidity to fund its costs for at least twelve months from the financial statement issuance date. Management evaluates the Company’s liquidity to determine if there is substantial doubt about the Company’s ability to continue as a going concern. In preparing this liquidity assessment, management applies significant judgment in estimating future cash flow requirements of the Company based on budgets and forecasts, which includes developing assumptions related to: (i) estimation of amount and timing of future cash outflows and inflows and (ii) determining what future expenditures are committed and what could be considered discretionary. Based on this assessment, management believes that the Company will be able to realize its assets and discharge its liabilities in the normal course of operations as they become due for a period of no less than twelve months from the date of issuance of these unaudited interim condensed consolidated financial statements.

The Company’s ability to move to the next stage of its strategic development and construct manufacturing plants is dependent on whether the Company can obtain the necessary financing through a combination of the issuance of debt, equity, and/or joint ventures, and/or government incentive programs, and/or customers. However, there is no assurance that the Company will be successful in attracting additional funding. Even if additional financing is available, it may not be available on terms favorable to the Company. Failure to secure additional financing on favorable terms when it becomes required would have an adverse effect on the Company’s financial position and on its ability to execute its business plan.

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include the going concern assessment, estimates for depreciable lives of property, plant and equipment and intangible assets, recoverability of tax credits receivable, assumptions made in calculating the fair value of stock-based compensation and other equity instruments, and the assessment of performance conditions for stock-based compensation awards.

Net earnings (loss) per share

The Company computes net loss per share in accordance with FASB ASC 260,Earnings Per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. The Company includes common stock issuable in its calculation. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation if their effect is antidilutive.

For the three- and nine-month periods ended November 30, 2023 and 2022, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an antidilutive effect. As at November 30, 2023, the potentially dilutive securities consisted of 2,772,000 outstanding stock options (2022 –2,542,000),4,417,688 outstanding restricted stock units (2022 –4,036,803), and 7,089,400 outstanding warrants (2022 –7,104,553).

**3.**Sales Tax, Tax Credits and Other Receivables

Sales tax, research and development tax credits and other receivables as at November 30, 2023 and February 28, 2023 were as follows:

**4.**Inventories

Inventories as at November 30, 2023 and February 28, 2023 were as follows:

As at November 30 and February 28, 2023, inventories included finished goods, work in process and raw materials. Finished goods inventories consist of bottle grade and fiber grade Loop™ PET resin which is intended to be sold to customers. Work in process inventories consist of monomers (dimethyl terephthalate and monoethylene glycol), either purified or yet to be purified, resulting from the depolymerization of PET feedstock. These monomers shall be polymerized into Loop™ PET resin in the future. Raw materials inventories consist of chemicals which are used as inputs in the PET depolymerization process.

**5.**Deposits and Prepaid Expenses

As at November 30, 2023, the Company had $8,460 (February 28, 2023 – $3,395) of non-refundable cash deposits on long-lead equipment that are intended to be used in the first planned Infinite Loop™ manufacturing facility.

Prepaid expenses and other deposits as at November 30, 2023 were $470 and $636 as at February 28, 2023.

6. Property, Plant and Equipment

Depreciation expense for the three- and nine-month periods ended November 30, 2023 amounted to $93 and $295, respectively (2022 – $111 and $348).

On May 27, 2021, we acquired land in Bécancour, Québec for cash of $4,400. The Company sold approximately two thirds of the land held for sale in the three-month period ended November 30, 2022 for cash proceeds of $8,559 and a gain on disposition of the asset of $6,704.

7. Intangible Assets

Intangible assets as at November 30, 2023 and February 28, 2023 were $1,485 and $1,210, respectively.

During the nine-month periods ended November 30, 2023 and 2022, we made additions relating to patent application costs to intangible assets of $378 and $225, respectively.

Amortization expense for the three- and nine-month periods ended November 30, 2023 amounted to $38 and $105, respectively (2022 – $23 and $63).

**8.**Fair Value of Financial Instruments

The following tables presents the fair value of the Company’s financial liabilities as at November 30, 2023 and February 28, 2023:

The fair value of cash and cash equivalents, restricted cash, customer deposits, other receivables, and accounts payable and accrued liabilities approximate their carrying values due to their short-term maturity.

9. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities as at November 30, 2023 and February 28, 2023 were as follows:

10. Long‑Term Debt

Long-term debt as of November 30, 2023 and February 28, 2023, was comprised of the following:

Investissement Québec financing facility

The Company recorded interest expense on the Investissement Québec loan for the three- and nine-month periods ended November 30, 2023 in the amount of $21 and $63, respectively (2022 – $21 and $65) and an accretion expense of $18 and $53, respectively (2022 – $17 and $52). During the nine-month period ended November 30, 2023, the Company made repayments of $47 (2022 – nil) on the Investissement Québec loan.

Total repayments due on the Company’s indebtedness over the next five years are as follows:

Credit facility from a Canadian bank

On July 26, 2022, Loop Canada, Inc., a wholly-owned subsidiary of the Company, entered into an Operating Credit Facility (the “Credit Facility”) with a Canadian bank. The Credit Facility allows for borrowings of up to $2,577 in aggregate principal amount and provides for a two-year term. The Credit Facility is secured by the Company’s Terrebonne, Québec property and is subject to a minimum equity covenant, tested quarterly with which the Company was in compliance as at November 30, 2023. All borrowings under the Credit Facility will bear interest at an annual rate equal to the bank’s Canadian prime rate plus 1.0%. The Company is subject to a guarantee of the liabilities of Loop Canada Inc. As at November 30, 2023, the Credit Facility was available and undrawn.

11. Related Party Transactions

Employment Agreement

During the nine-month period ended November 30, 2022, Mr. Solomita met a performance milestone in relation to the signature of a supply agreement with a customer. Accordingly,1,000,000 performance incentive RSUs with a fair value of $7,740 were earned and issuable to Mr. Solomita. This amount was reflected as stock-based compensation expense during the nine-month period ended November 30, 2022. During the nine-month period ended November 30, 2023, no outstanding performance milestones were probable of being achieved and, accordingly, the Company did not record any additional stock-based compensation expense.

On October 12, 2023, Mr. Solomita and the Company agreed to defer by one year the settlement of 800,000 RSUs that were set to settle on October 15, 2023. On October 14, 2022, Mr. Solomita and the Company agreed to defer by one year the settlement of 400,000 RSUs that were set to settle on October 15, 2022.

12. Stockholders’ Equity

Common Stock

During the nine months ended November 30, 2023, the Company recorded the following common stock transaction:

During the nine months ended November 30, 2022, the Company recorded the following common stock transaction:

13. Research and Development Expenses

Research and development expenses for the three-month periods ended November 30, 2023 and 2022 were as follows:

Research and development expenses for the nine-month periods ended November 30, 2023 and 2022 were as follows:

14. General and Administrative Expenses

General and administrative expenses for the three-month periods ended November 30, 2023 and 2022 were as follows:

General and administrative expenses for the nine-month periods ended November 30, 2023 and 2022 were as follows:

15. Share-based Payments

Stock Options

The following tables summarizes the continuity of the Company’s stock options during the three-month periods ended November 30, 2023 and 2022:

The following tables summarizes the continuity of the Company’s stock options during the nine-month periods ended November 30, 2023 and 2022:

The Company applies the fair value method of accounting for stock-based compensation awards granted. Fair value is calculated based on a Black-Scholes option pricing model. There were no new issuances of stock options for the three-month period ended November 30, 2022. The principal components of the pricing model for the stock options granted in the nine-month period ended November 30, 2023 were as follows:

During the three-month periods ended November 30, 2023 and 2022, stock-based compensation expense attributable to stock options amounted to $168 and $551, respectively. During the nine-month periods ended November 30, 2023 and 2022, stock-based compensation expense attributable to stock options amounted to $501 and $1,181, respectively.

Restricted Stock Units

The following table summarizes the continuity of the restricted stock units during the three-month periods ended November 30, 2023 and 2022:

The following table summarizes the continuity of the restricted stock units during the nine-month periods ended November 30, 2023 and 2022:

The Company applies the fair value method of accounting for awards granted through the issuance of restricted stock units. Fair value is calculated based on the intrinsic value at grant date multiplied by the number of restricted stock unit awards granted.

During the three-month periods ended November 30, 2023 and 2022, stock-based compensation attributable to RSUs amounted to $229 and $323, respectively. During the nine-month periods ended November 30, 2023 and 2022, stock-based compensation attributable to RSUs amounted to $639 and $8,788, respectively. During the nine-month period ended November 30, 2022, the Company recorded a stock-based compensation expense of $7,740 related to the achievement of a performance milestone for 1,000,000 RSUs (Note 11).

Stock-Based Compensation Expense

During the three-month periods ended November 30, 2023 and 2022, stock-based compensation included in research and development expenses amounted to $161 and $455, respectively, and in general and administrative expenses amounted to $236 and $419, respectively.

During the nine-month periods ended November 30, 2023 and 2022, stock-based compensation included in research and development expenses amounted to $476 and $1,170, respectively, and in general and administrative expenses amounted to $664 and $8,799, respectively. The amount recorded in general and administrative expenses for the nine-month period ended November 30, 2022 includes $7,740 related to the achievement of a performance milestone for 1,000,000 RSUs (Note 11).

16. Equity Incentive Plan

On July 6, 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”). The Plan permits the granting of warrants, stock options, stock appreciation rights and restricted stock units to employees, directors and consultants of the Company. A total of 3,000,000 shares of common stock were initially reserved for issuance under the Plan at July 6, 2017, with annual automatic share reserve increases, as defined in the Plan, amounting to the lessor of (i)1,500,000 shares, (ii)5% of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) or such number of shares determined by the Administrator of the Plan, effective March 1, 2018. On March 1, 2023, the share reserve was increased by 1,500,000 shares. On March 1, 2022, the Board of Directors opted to waive the annual share reserve increase. The Plan is administered by the Board of Directors who designates eligible participants to be included under the Plan, the number of awards granted, the share price pursuant to the awards and the vesting conditions and period. The awards, when granted, will have an exercise price of no less than the estimated fair value of shares at the date of grant and a life not exceeding 10 years from the grant date. However, where a participant, at the time of the grant, owns stock representing more than 10% of the voting power of the Company, the life of the options shall not exceed 5 years.

The following table summarizes the continuity of the Company’s Equity Incentive Plan units that were authorized for issuance as at and during the nine-month periods ended November 30, 2023 and 2022:

*The use of the term “units” in the table above describes a combination of stock options and RSUs.

17. Warrants

During the nine-month period ended November 30, 2022, warrants to purchase 4,554,865 shares of our common stock in aggregate with an exercise price of $11.00 expired.

18. Commitments

Agreement for purchase of equipment

In December 2021, the Company entered into an agreement for the purchase of long-lead equipment in connection with the construction of our first Infinite Loop™ manufacturing facility for up to $8,546, subject to various terms and conditions, including fabrication timelines and equipment inspection. Pursuant to the agreement, the Company has paid cash deposits of $8,460 (Note 5). The remaining balance is expected to be paid by the end of this fiscal year.

Agreement with SK Geo Centric Co. Ltd. (“SKGC”)

On April 27, 2023, the Company and SKGC entered into an agreement to build Infinite Loop manufacturing facilities in Asia. Pursuant to the agreement, the Company and SKGC agreed to form a new entity, which will be headquartered in Singapore. SKGC will contribute 51% and Loop will contribute the remaining 49% of the initial equity capital of the new entity. The Company’s investment in the new entity will be accounted for under the equity method and initially recognized at cost. To date, no amounts have been contributed by the Company to the new entity.

19. Subsequent Event

On January 16 th, Loop announced that the Company signed a non-binding memorandum of understanding with Reed Management, a European investment firm, for $66 million in non-dilutive financing as part of a joint venture to roll-out Loop’s technology in the European market. Of this amount, $33 million is to be provided to Loop as non-dilutive capital to fund Loop’s technology commercialization globally. The remaining $33 million is to be invested in the European joint venture.

The non-binding memorandum of understanding is subject to customary due diligence and the fulfillment of certain pre-closing conditions.