Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information and any forward-looking statements should be read in conjunction with “Risk Factors” discussed elsewhere in this Annual Report on Form 10-K. Please refer to the Cautionary Note Regarding Forward-Looking Statements on page 4.
Overview
Loop is a technology company whose mission is to accelerate the world’s shift towards sustainable PET plastic and polyester fiber and away from the dependence on fossil fuels. Loop owns patented and proprietary technology that depolymerizes no and low-value waste PET plastic and polyester fiber (“Infinite Loop ™ Technology”), 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, as well as other specialty polymers, thus enabling our customers to meet their sustainability objectives. Loop is contributing to the global movement towards a circular economy by reducing and recovering plastic waste for a sustainable future.
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The Company is presently in the planning stages of pursuing the construction of Infinite Loop ™ commercial scale facilities. Loop is currently engaged in discussions to secure financing for its investments in the various planned manufacturing facilities and the sequencing of the manufacturing facilities will be determined in conjunction with the outcome of the Company’s financing discussions and discussions with our partners.
In the past years, we have seen major consumer brands make significant commitments to close the loop on their plastic use by transitioning their packaging to recyclable materials and by incorporating more recycled content into their packaging. We believe Loop ™ PET resin and polyester fiber provides the ideal solution for these brands because it is recyclable and is made from 100% recycled waste PET and polyester fiber, while being virgin-quality and suitable for use in food-grade packaging.
Commercialization Plan and Progress
Our objective is to achieve global expansion of the Infinite Loop ™ Technology through a mix of fully owned manufacturing facilities, strategic partnerships, and licensing agreements. We believe that industrial companies, some of which today may not be in the business of manufacturing DMT, MEG, PET resin, polyester fiber or other specialty polymers, will view involvement with Infinite Loop ™ projects as a significant growth opportunity, which may offer attractive economic returns either as Loop manufacturing partners or as licensees of the technology.
The Infinite Loop ™ 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 by recycling waste plastic rather than depleting finite resources. The Infinite Loop ™ Technology allows for waste PET plastic and polyester fiber to be broken down into its base building blocks, monomers DMT and MEG, using Loop’s patented technology. Once the monomers are purified, they can be sold directly to chemical companies, used in the production of specialty polymers, or repolymerized into PET plastic or polyester fiber using INVISTA know-how, which Loop licenses, and Chemtex Global Corporation’s engineering. The INVISTA polymerization process and the associated designs are historically proven in the commercial production of PET resin and polyester fiber.
We have completed our basic design package for the Infinite Loop ™ full-scale manufacturing facilities. The engineering philosophy we have adopted is “design one, build many.” This approach allows for the basic design package to be used as the base engineering platform for all future geographical expansion. We believe this approach allows for quick execution, speed to market, and lends itself well to modular construction. The basic design package has a capacity of up to 70,000 M/T of rDMT and 23,000 M/T of rMEG, or 70,000 M/T of PET resin output per year. Permitting, site and regulatory considerations may impact plant capacity.
On May 1, 2024, we announced our strategic partnership with Ester to build and operate an Infinite Loop ™ manufacturing facility in India which will produce a unique product offering of lower carbon footprint rDMT, rMEG and specialty polymers, using the Infinite Loop ™ Technology. Loop has a well-established working relationship with Ester, which has nearly 40 years of specialized polymer production, operational proficiency, and local expertise, including sourcing of PET plastic and polyester fiber waste feedstocks. The rDMT and rMEG product offerings expected to be manufactured at the Infinite Loop ™ India facility represent a strategic product expansion in a low-cost manufacturing environment which complements Loop's existing PET plastic and polyester fiber manufacturing business and will fuel growth by addressing the large and growing demand in the market. We believe this expansion will enable the Infinite Loop ™ Technology to reach new markets and cater to a broader range of customers across multiple industries including electronics, automotive, textile, cosmetics and packaging.
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The India facility will leverage the Infinite Loop ™ Technology and existing engineering package which should accelerate the lead-time towards groundbreaking, expected to occur by end of this year. Feedstock sourcing for the facility, in which there is abundant supply from textile waste in India, is well advanced and the partners have engaged an external firm to source and secure the land for the facility. Construction is expected to be completed by the end of 2026, with commercial operations commencing in early 2027. Loop will receive an annual technology license fee from the Infinite Loop ™ manufacturing facility in India.
We are also focused on our planned joint venture projects with SKGC in Asia and Europe to build and operate Infinite Loop ™ manufacturing facilities producing and selling Loop ™ PET resin and polyester fiber. These projects leverage SKGC’s engineering and operational infrastructure. In addition, the joint venture projects will provide Loop with an annual technology licensing fee. SKGC is committed to commercializing Loop’s technology as the underpinning of its sustainable plastics strategy. Loop is working collaboratively with SKGC to put in place a financing plan for the rollout of large-scale manufacturing in Asia and Europe, including the planned Asian manufacturing facility in Ulsan, South Korea.
The planned Infinite Loop ™ commercial manufacturing facility in Ulsan, South Korea, is expected to have an annual capacity to supply up to 70,000 metric tons per year of Loop ™ PET resin for packaging and polyester fiber applications, and was planned to break ground in the first half of 2024. The timing of the facility is currently under review by the partners while they evaluate opportunities to reduce capital costs and carry out discussions with the Korean government for subsidies related to the facility. Loop and SKGC are also evaluating the opportunity to build a monomer facility in order to capitalize on the large and growing market and attractive economics for DMT and MEG, including lower capital investment requirements for such a facility.
The global expansion plan for our technology will allow our customers, mostly comprised of CPG brand companies, apparel companies, and chemical companies, to integrate Loop ™ PET resin, polyester fiber rDMT and rMEG into their products and packaging. As countries around the globe continue to increase sustainability targets and recycled content mandates, our customers are increasing the use of sustainably produced materials into their products.
Our market strategy is to assist global consumer goods brands in meeting their public sustainability commitments by offering co-branded packaging or polyester fibers that are made with Loop 100% recycled, virgin-quality MEG, DMT, PET or polyester fibers. We believe that Loop ™ recycled 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 Loop ™ production. Factors under consideration in determining project economics include the feasibility design engineering and cost estimate work, timing and permitting of a facility, customer offtake demand, commitment terms, and feedstock sources, quality, availability, PET bale index pricing, logistics, and ramp up, among others.
The Company’s ability to move to the next stage of its strategic development and construct manufacturing plants is dependent on, among other factors, 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.
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RESULTS OF OPERATIONS
Fourth Quarter Ended February 29, 2024
The following table summarizes our operating results for the three-month periods ended February 29, 2024 and February 28, 2023, in U.S. Dollars.
Three months ended
February 29, 2024
February 28, 2023
Change
favorable / (unfavorable)
Revenues
$ 45
$ 12
$ 33
Expenses
Research and development
External engineering
786
359
(427 )
Employee compensation
980
1,289
309
Stock-based compensation
66
167
101
Plant and laboratory operating expenses
1,081
215
(866 )
Machinery and equipment expenditures
21
83
62
Other
84
100
16
Total research and development
3,018
2,213
(805 )
General and administrative
Professional fees
677
704
27
Employee compensation
459
546
87
Stock-based compensation
216
(50 )
(266 )
Insurance
623
711
88
Other
246
288
42
Total general and administrative
2,221
2,199
(22 )
Gain on disposition of land
-
(9,980 )
(9,980 )
Depreciation and amortization
135
140
5
Interest and other financial expenses (income)
(182 )
50
232
Interest income
(74 )
(6 )
68
Foreign exchange loss (gain)
18
(27 )
(45 )
Total expenses
5,136
(5,411 )
(10,547 )
Net income (loss)
$ (5,091 )
$ 5,423
$ (10,514 )
Revenues
Revenues for the three-month period ended February 29, 2024 increased $33 to $45, as compared to $12 for the same period in 2023. The revenues resulted from the delivery of initial volumes to customers of Loop ™ PET resin produced using monomers manufactured at the Terrebonne Facility.
Research and Development
Research and development expenses for the three-month period ended February 29, 2024 increased $805 to $3,018, as compared to $2,213 for the same period in 2023. The increase was primarily attributable to a $866 increase in plant and laboratory operating expenses, which included an inventory write-down of $817 in the three-month period ended February 29, 2024 on finished goods and work in process inventories related to inventory volumes not expected to be sold in the next twelve months, and a $427 increase in external engineering expenses which included $504 related to the Infinite Loop ™ Europe project in the three-month period ended February 29, 2024. These increases were partially offset by a $309 decrease in employee compensation expenses, and a $101 decrease in stock-based compensation expenses.
General and administrative expenses
General and administrative expenses for the three-month period ended February 29, 2024 increased $22 to $2,221, as compared to $2,199 for the same period in 2023. The increase was primarily attributable to an increase of $266 in stock-based compensation expenses which was primarily attributable to restricted stock unit (“RSU”) forfeitures in the three-month period ended February 28, 2023. This increase was partially offset by a $100 decrease in employee compensation expenses.
Net Loss
The net loss for the three-month period ended February 29, 2024 increased $10,514 to $5,091 in the period, as compared to a net income of $5,423 for the same period in 2023. The increase was primarily due to a gain on disposition of assets of $9,980 related to the Company’s sale of land in Bécancour, Québec in the three-month period ended February 28, 2023, and the increase of $805 in research and development expenses.
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Fiscal Year Ended February 29, 2024
The following table summarizes our operating results for the years ended February 29, 2024 and February 28, 2023, in U.S. Dollars.
Years ended
February 29, 2024
February 28,
2023
Change
favorable / (unfavorable)
Revenues
$ 153
$ 173
$ (20 )
Expenses
Research and development
External engineering
2,353
3,273
920
Employee compensation
4,591
6,468
1,877
Stock-based compensation
542
1,337
795
Plant and laboratory operating expenses
2,318
2,581
263
Machinery and equipment expenditures
1,142
4,216
3,074
Tax credits
(318 )
(1,199 )
(881 )
Other
751
670
(81 )
Total research and development
11,379
17,346
5,967
General and administrative
Professional fees
2,928
4,288
1,360
Employee compensation
2,343
2,475
132
Stock-based compensation
880
8,749
7,869
Insurance
2,680
3,594
914
Other
1,157
1,323
166
Total general and administrative
9,988
20,429
10,441
Gain on disposition of land
-
(16,683 )
(16,683 )
Depreciation and amortization
535
550
15
Interest and other financial expenses
(41 )
189
230
Interest income
(558 )
(41 )
517
Foreign exchange gain
(63 )
(316 )
(253 )
Total expenses
21,240
21,474
234
Net loss
$ (21,087 )
$ (21,301 )
$ 214
Revenues
Revenues for the year ended February 29, 2024 decreased $20 to $153, as compared to $173 for the same period in 2023. The revenues resulted from the delivery of initial volumes to customers of Loop ™ PET resin produced using monomers manufactured at the Terrebonne Facility.
Research and Development
Research and development expenses for the year ended February 29, 2024 decreased $5,967 to $11,379, as compared to $17,346 for the same period in 2023. The decrease was primarily attributable to a $3,074 decrease in purchases of machinery and equipment for the Terrebonne Facility, a $2,672 decrease in employee compensation expenses including stock-based compensation, and a $920 decrease in external engineering costs for design work for our Infinite Loop ™ manufacturing process. These decreases were partially offset by a decrease in tax credits accounted for as a reduction of research and development expenses of $881.
General and administrative expenses
General and administrative expenses for the year ended February 29, 2024 decreased $10,441 to $9,988, as compared to $20,429 for the same period in 2023. The decrease was primarily attributable to a $7,869 decrease in stock-based compensation which is mostly related to a $7,740 expense recorded in relation to the achievement of a performance milestone for 1,000,000 RSUs in the year ended February 28, 2023, a $1,360 decrease in professional fees, and a $914 decrease in insurance costs.
Net Loss
The net loss for the year ended February 29, 2024 decreased $214 to $21,087, as compared to $21,301 for the same period in 2023. The decrease was primarily due to the $10,441 decrease in general and administrative expenses, and the $5,967 decrease in research and development expenses, as well as an increase in interest income of $517. The decrease in net loss was partially offset by a gain on disposition of assets of $16,683 recorded in the year ended February 28, 2023 related to the Company’s sale of land in Bécancour, Québec.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has been in the pre-commercialization stage with no material revenues, and its ongoing operations and commercialization plans have been financed primarily by raising equity. Therefore, 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. To date, we have been successful in raising capital to finance our ongoing operations. Our liquidity position consists of cash and cash equivalents on hand of $6,958 at February 29, 2024 and an undrawn senior loan facility from a Canadian bank of $2,579. Our liquidity position is subject to risks and uncertainties, including those discussed under “Cautionary Statements Regarding Forward-Looking Statements” in this Annual Report on Form 10-K and the Risk Factors section included in Part I, Item 1A of this Annual Report on Form 10-K.
Management continuously monitors the Company’s cash resources against its short-term cash commitments to ensure there is 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 its ability to continue as a going concern. In preparing this going concern 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 the estimation of amount and timing of future cash outflows and inflows. Based on its assessment, management estimates that current available liquidity and forecasted net cash flows will not be sufficient to meet the Company’s obligations, commitments and budgeted expenditures the next twelve months from the consolidated financial statements issuance date. These events and conditions are material uncertainties that raise substantial doubt upon the Company’s ability to continue as a going concern and accordingly, the appropriateness of the use of accounting principles applicable to a going concern.
The Company’s ability to move to the next stage of its strategic development and construct manufacturing plants is dependent on, among other factors, 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. The Company is seeking to finalize the negotiation of previously announced financing initiatives on acceptable terms, although there is no assurance it will succeed.
In December 2021, the Company entered into an agreement for the purchase of long-lead equipment for up to $8,546 which can be used in any Infinite Loop ™ manufacturing facility. As of February 29, 2024, the Company has paid an aggregate of $8,460 and has taken ownership of the long-lead equipment. This amount, along with engineering and development costs that have been and may continue to be incurred, is currently expected to be recovered from the JV Company when construction begins on the Infinite Loop ™ Ulsan facility. However, given that the construction of the Infinite Loop facility has not commenced, the total amounts incurred to date may not be reimbursed, therefore an amount of estimated recoverable amount of $16,000 has not been recognized in the financial statements included in this Annual Report on Form 10-K.
We have a long-term debt obligation to Investissement Québec in connection with a financing facility (the “Financing Facility”) for the expansion of the Terrebonne Facility up to a maximum of $3,390. We received the first disbursement in the amount of $1,628 on February 21, 2020 and the second disbursement in the amount of $1,762 on August 26, 2021. The loan can be repaid at any time by us without penalty. The loan’s interest rate was initially set at 2.36% and there was a 36-month moratorium on both capital and interest repayments as of the first disbursement date. Under the original terms of the financing facility, at the end of the 36-month moratorium, capital and interest was repayable in 84 monthly installments. There is no remaining amount available under the Financing Facility after the second disbursement.
On November 21, 2022, the Company and Investissement Québec entered into an agreement to amend the existing Financing Facility which modifies the repayments of the principal amount (the “Financing Facility Amendment”). As per the Financing Facility Amendment, a total of $37 of the principal amount was repaid in monthly installments in the fiscal year ended February 29, 2024 and the remainder of the principal amount is repayable in 72 monthly installments. The Financing Facility Amendment did not modify the interest rates, the repayment terms of accrued interest or any other terms of the Financing Facility.
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On February 28, 2024, the Company and Investissement Québec entered into an agreement to amend the existing Financing Facility which modified the repayments of the principal amount (the “Second Financing Facility Amendment”). As per the Second Financing Facility Amendment, a total of $74 of the principal amount is repayable in monthly installments in the fiscal year ending February 28, 2025, with the remainder of the principal amount being repayable in 60 monthly installments. Pursuant to the Second Financing Facility Amendment the interest rate of the Financing Facility was increased from 2.36% to 3.36%. The Second Financing Facility Amendment did not modify the repayment terms of accrued interest or any of the other terms of the Financing Facility that are not mentioned above.
The amendments did not meet the criteria of ASC 470, Debt for an extinguishment of debt as the amendments did not substantially modify the terms of the Financing Facility. The Company therefore applied modification accounting and no immediate gain or loss was recognized related to the amendments.
Under the terms of the Financing Facility, Investissement Québec was also issued warrants to purchase shares of our common stock in an amount equal to 10% of each disbursement up to a maximum aggregate amount of $339. The warrants were issued at a price per share equal to the higher of (i) $11.00 per share and (ii) the ten-day weighted average closing price of Loop Industries shares of common stock on the Nasdaq stock market for the 10 days prior to the issue of the warrants. The warrants can be exercised immediately upon grant and have a term of three years from the date of issuance. On February 21, 2020, upon the receipt of the first disbursement under this facility, we issued a warrant to purchase 15,153 shares of common stock at a price of $11.00 to Investissement Québec, which expired in February 2023. On August 26, 2021, upon the receipt of the second disbursement under this facility, we issued a warrant to purchase 17,180 shares of common stock at a price of $11.00 to Investissement Québec, which remains outstanding.
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 $2,579 in aggregate principal amount and provides for a two-year term on amounts drawn. The Credit Facility is secured by the Company’s Terrebonne, Québec property and is subject to a minimum equity covenant, tested quarterly. All borrowings under the Credit Facility will bear interest at an annual rate equal to the bank’s Canadian prime rate (as defined in the Credit Facility) plus 1.0%. The Company is subject to a guarantee of the liabilities of Loop Canada. As at February 29, 2024, the Credit Facility was undrawn.
From time to time, we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. As part of our risk management program, we may enter into foreign exchange forward contracts to lock in the exchange rates for future foreign currency transactions, which is intended to reduce the variability of our operating costs and future cash flows denominated in currencies that differs from our functional currencies. We do not enter into these contracts for trading purposes or speculation, and our management believes all such contracts are entered into as hedges of underlying transactions.
In October 2022, the Company received a cash deposit from a customer of $1,000 in relation to an executed capacity reservation agreement. The deposit was intended to be credited against any future sales of Loop ™ PET resin over a five-year period, commencing two years after the first delivery of Loop ™ PET resin to the customer. Upon mutual agreement, the capacity reservation agreement with the customer was terminated on January 18, 2024. The customer and the Company agreed for the deposit to be refunded in full on July 1, 2027, with no restriction on the Company’s use of the funds. The amount bears no interest. The cause of the termination is related to the customer’s decision to abandon its plans to incorporate rPET in its products for technical reasons.
The following table summarizes the exchange rates used:
February 29, 2024
February 28, 2023
Period end Canadian $: US Dollar exchange rate
$ 0.74
$ 0.73
Average period Canadian $: US Dollar exchange rate
$ 0.74
$ 0.76
Expenditures are translated at the average exchange rate for the period presented.
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Flow of Funds
Summary of Cash Flows
A summary of cash flows for the years ended February 29, 2024, and February 28, 2023 in U.S. dollars was as follows:
February 29, 2024
February 28, 2023
Net cash used in operating activities
$ (18,034 )
$ (34,892 )
Net cash (used in) provided by investing activities
(5,644 )
21,279
Net cash (used in) provided by financing activities
(75 )
1,012
Effect of exchange rate changes on cash
120
(870 )
Net change in cash
$ (23,633 )
$ (13,471 )
Net Cash Used in Operating Activities
During the year ended February 29, 2024, we used $18,034 in operations compared to $34,892 during the year ended February 28, 2023. As discussed above in the Results of Operations, the year-over-year decrease was mainly due to decreased operating expenses as we have completed the upgrade of the Terrebonne Facility and our basic design package for the Infinite Loop ™ full-scale manufacturing facilities, in addition to decreased general and administrative expenses.
Net Cash Used in Investing Activities
During the year ended February 29, 2024, we used $5,644 in investing activities compared to cash provided from investing activities of $21,279 during the year ended February 28, 2023. During the year ended February 29, 2024, cash used for the purchase of long-lead equipment amounted to $5,065, as compared to $594 during the year ended February 28, 2023. During the year ended February 29, 2024, we made investments in intangible assets of $482, as compared to $360 during the year ended February 28, 2023, particularly in our patent technology in the United States and around the world. During the year ended February 28, 2023, we sold land in Bécancour, Québec for cash proceeds of $22,314.
Net Cash Used in Financing Activities
During the year ended February 28, 2023, we received a customer deposit of $1,000 in relation to an executed capacity reservation agreement which was terminated on January 18, 2024. The customer and the Company agreed for the deposit to be refunded in full on July 1, 2027, with no restriction on the Company’s use of the funds. The amount bears no interest. The cause for the termination is related to the customer’s decision to abandon its plans to incorporate rPET in its products for technical reasons.
In the year ended February 29, 2024, we made repayments of long-term debt of $63 as compared to nil in the year ended February 28, 2023.
OUTLOOK
In connection with the upcoming fiscal year ending February 28, 2025, we intend to continue to execute our corporate strategy. We believe we must execute on several areas of our operational strategic plan, namely:
·
Continuing to drive the commercialization of our Infinite Loop ™ Technology, which we believe is a key pillar of our ambition to commercialize our technology. This entails the continuation of executing partnerships and/or commercial agreements with customers, including product activations using product manufactured at the Terrebonne Facility and multi-year offtake agreements for the planned commercial facilities;
·
Continuing to identify and secure feedstock to ensure our Terrebonne Facility and planned commercial facilities can operate continuously and efficiently;
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·
Working with our external engineering partners in their process design for the Indian, Asian and European project evaluations and executing on the project plans for the planned Ulsan, South Korea Infinite Loop ™ and Indian commercial facilities;
·
Securing financing to fund our operations, including our planned commercial projects and continued growth;
·
Identifying and pursuing additional strategic partners and regions for new Infinite Loop ™ projects; and
·
Protecting our intellectual property.
Risks that may affect our ability to execute on this strategy include, but are not limited to, those listed under “Risk Factors” elsewhere in this Annual Report on Form 10-K.
CRITICAL ACCOUNTING 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. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Going Concern
These consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and settlement of liabilities in the normal course of business as they come due. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but not limited to, twelve months from the date of issuance of these consolidated financial statements.
Since its inception, the Company has been in the pre-commercialization stage with no material revenues from customers, and its ongoing operations and commercialization plans have been financed primarily by raising equity. Therefore, 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 February 29, 2024, the Company’s available liquidity was $9,537, consisting of cash and cash equivalents of $6,958 and an undrawn senior loan facility from a Canadian bank of $2,579.
Management continuously monitors the Company’s cash resources against its short-term cash commitments to ensure there is 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 its ability to continue as a going concern. In preparing this going concern 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 the estimation of amount and timing of future cash outflows and inflows. Based on its assessment, management estimates that current available liquidity and forecasted net cash flows will not be sufficient to meet the Company’s obligations, commitments and budgeted expenditures the next twelve months from the consolidated financial statements issuance date. These events and conditions are material uncertainties that raise substantial doubt upon the Company’s ability to continue as a going concern and accordingly, the appropriateness of the use of accounting principles applicable to a going concern.
The Company’s ability to move to the next stage of its strategic development and construct manufacturing plants is dependent on, among other factors, 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. The Company is seeking to finalize the negotiation of previously announced financing initiatives on acceptable terms.
These consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
Stock-Based Compensation
The Company periodically issues stock options, warrants and restricted stock units to employees and non-employees in non-capital raising transactions for services and financing expenses. The Company accounts for stock options granted to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (the “FASB”) wherein the fair value of the award is measured on the grant date and recognized as compensation expense on the straight-line basis over the vesting period. When performance conditions exist, the Company recognizes compensation expense when it becomes probable that the performance condition will be met. Forfeitures on share-based payments are recognized as they occur.
The Company accounts for stock options and warrants granted to non-employees in accordance with the authoritative guidance of the FASB wherein the fair value of the stock compensation is based upon the measurement date determined as the earlier of the date at which either a) a commitment is reached with the counterparty for performance or b) the counterparty completes its performance.
The Company estimates the fair value of restricted stock unit awards to employees and directors based on the closing market price of its common stock on the date of grant.
The fair value of the stock options granted is estimated using the Black-Scholes model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options, and future dividends. Stock-based compensation expense is recorded based on the value derived from the Black-Scholes model and on actual experience. The assumptions used in the Black-Scholes model could materially affect stock-based compensation expenses recorded in the current and future periods.
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Inventories
Inventories are stated at the lower of cost or net realizable value using the average cost method. Inventory cost includes direct labor, cost of raw materials and production overhead.
The Company separates its inventories into three main categories: raw materials, work in process, and finished goods. The raw materials category includes goods used in the production process that have not yet entered the production process at the balance sheet date and mainly comprises chemicals and other process consumables. The work in process category includes goods that are in the production process at the balance sheet date and mainly comprises recycled monomers that have not yet been polymerized into Loop™ branded PET resin. The finished goods category includes goods that have completed the production process at the balance sheet date and mainly comprises Loop™ branded PET resin.
The Company is still within the pre-commercialization phase and as such, the cost of producing inventory currently exceeds its net realizable value. In determining the net realizable value of inventory, management applies significant judgements about the future selling price, expected costs to be incurred in the sale of the finished goods, and expected volumes to be sold.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to SEC Release No. 33-8876, we are permitted to use the scaled disclosure requirements applicable to a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, and therefore, we are not required to provide the information called for by this Item.
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