10-Q 1 loi_10q.htm QUARTERLY REPORT Blueprint
 

United States
Securities and Exchange Commission
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 31, 2019 
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to __________ 
 
Commission File No. 000-54768
 
 
Loop Industries, Inc.
(Exact name of Registrant as specified in its charter)
 
Nevada
 
27-2094706
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
480 Fernand-Poitras, Terrebonne, Québec, Canada J6Y 1Y4
(Address of principal executive offices zip code)
 
Registrant’s telephone number, including area code (450) 951-8555
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
LOOP
Nasdaq Global Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐  No ☒
 
As at October 8, 2019, there were 39,032,528 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.
 
 
 
 
 
LOOP INDUSTRIES, INC.
 
TABLE OF CONTENTS
 
 
 
 
 Page No.
PART I . Financial Information

 
 Item 1.
Financial Statements
 4
 Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 20
 Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 25
 Item 4.
Controls and Procedures
 26
  
  
 
PART II. Other Information
  
 
Item 1.
Legal Proceedings
 27
Item 1A.
Risk Factors
 27
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 27
Item 3.
Defaults Upon Senior Securities
 27
Item 4.
Mine Safety Disclosures
 27
Item 5.
Other Information
 27
Item 6.
Exhibits
 27
    
Signatures
 29
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Loop Industries, Inc.
Three and Six months ended August 31, 2019
Index to the Unaudited Interim Condensed Consolidated Financial Statements
 
Contents  
Page(s)
   
 
Condensed consolidated balance sheets as at August 31, 2019 and February 28, 2019 (Unaudited)  
F-2
   
 
Condensed consolidated statements of operations and comprehensive loss for the three and six months ended August 31, 2019 and 2018 (Unaudited)  
F-3
   
 
Condensed consolidated statement of changes in stockholders’ equity for the three and six months ended August 31, 2019 and 2018 (Unaudited)  
F-4
   
 
Condensed consolidated statement of cash flows for the six months ended August 31, 2019 and 2018 (Unaudited)  
F-6
   
 
Notes to the condensed consolidated financial statements (Unaudited)  
F-7
 
 

 
  4
 
 
Loop Industries, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
 
August 31,
2019
 
 
February 28,
2019
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 $37,931,040 
 $5,833,390 
Sales tax, tax credits and other receivables (Note 3)
  716,314 
  599,000 
Prepaid expenses
  248,712 
  226,521 
Total current assets
  38,896,066 
  6,658,911 
Investment in joint venture (Note 8)
  500,000 
  - 
Property, plant and equipment, net (Note 4)
  6,428,004 
  5,371,263 
Intangible assets, net (Note 5)
  200,351 
  127,672 
Total assets
 $46,024,421 
 $12,157,846 
 
    
    
Liabilities and Stockholders' Equity
    
    
Current liabilities
    
    
Accounts payable and accrued liabilities (Notes 7)
 $1,511,976 
 $2,670,233 
Convertible notes (Notes 6 and 10)
  4,259,759 
  5,636,172 
Warrants (Note 10)
  - 
  219,531 
Current portion of long-term debt (Notes 6 and 9)
  52,651 
  53,155 
Total current liabilities
  5,824,386 
  8,579,091 
Long-term debt (Notes 6 and 9)
  917,012 
  952,363 
Total liabilities
  6,741,398 
  9,531,454 
 
    
    
Stockholders' Equity
    
    
Series A Preferred stock, par value $0.0001; 25,000,000 shares authorized; one share issued and outstanding (Note 11)
  - 
  - 
Common stock, par value $0.0001: 250,000,000 shares authorized; 39,032,528 shares issued and outstanding (February 28, 2019 – 33, 805,706) (Note 11)
  3,903 
  3,381 
Additional paid-in capital
  74,414,197 
  38,966,208 
Additional paid-in capital – Warrants (Notes 10 and 11)
  9,700,102 
  757,704 
Additional paid-in capital – Beneficial conversion feature (Note 10)
  1,200,915 
  1,200,915 
Common stock issuable, 1,000,000 shares (Note 11)
  - 
  800,000 
Accumulated deficit
  (45,708,185)
  (38,811,592)
Accumulated other comprehensive loss
  (327,909)
  (290,224)
Total stockholders' equity
  39,283,023 
  2,626,392 
Total liabilities and stockholders' equity
 $46,024,421 
 $12,157,846 
 
    
    
 
    
    
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-2
 
 
 Loop Industries, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
 
 
 
 Three Months Ended August 31
 
 
 Six Months Ended August 31
 
 
 
 2019
 
 
 2018
 
 
 2019
 
 
 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $- 
 $- 
 $- 
 $- 
 
    
    
    
    
Expenses -
    
    
    
    
Research and development, net (Note 12)
  970,213 
  1,066,292 
  1,968,074 
  2,132,371 
    General and administrative (Note 12)
  1,718,613 
  2,394,398 
  3,621,243 
  4,749,948 
    Depreciation and amortization (Notes 4 and 5)
  201,403 
  110,589 
  365,739 
  211,658 
    Interest and other finance costs (Note 15)
  622,183 
  13,443 
  1,124,064 
  26,481 
Interest income
  (192,259)
  (122)
  (192,291)
  (247)
Foreign exchange (gain) loss
  21,890 
  (46,190)
  9,764 
  (52,271)
Total expenses
  3,342,043 
  3,538,410 
  6,896,593 
  7,067,940 
 
    
    
    
    
                 Net Loss
  (3,342,043)
  (3,538,410)
  (6,896,593)
  (7,067,940)
 
    
    
    
    
      Other comprehensive loss -
    
    
    
    
      Foreign currency translation adjustment
  102,457 
  (59,321)
  (37,685)
  (111,589)
Comprehensive Loss
 $(3,239,586)
 $(3,597,731)
 $(6,934,278)
 $(7,179,529)
 
    
    
    
    
Loss per share
    
    
    
    
- Basic and Diluted
 $(0.09)
 $(0.10)
 $(0.19)
 $(0.21)
 
    
    
    
    
Weighted average common shares outstanding
    
    
    
    
- Basic and Diluted
  38,383,156 
  33,805,706 
  36,548,832 
  33,768,516 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-3
 
 
Loop Industries, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
 

Three Months Ended August 31, 2019
 
 
Common stock
 
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
par value $0.0001
 
 
par value $0.0001
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
 
 
Additional Paid-in Capital - Warrants
 
 
Additional Paid-in Capital – Beneficial Conversion Feature
 
 
Common Stock Issuable
 
 
Accumulated Deficit
 
 
Accumulated Other Comprehensive (Loss)
 
 
Total Stockholders' Equity
 
Balance, May 31, 2019
  34,875,032 
 $3,488 
  1 
 $- 
 $46,536,157 
  1,074,633 
  1,200,915 
 $800,000 
 $(42,366,142)
 $(430,366)
 $6,818,685 
 
    
    
    
    
    
    
    
    
    
    
    
Issuance of common shares for cash, net of share issuance costs (Note 11)
  4,093,567 
  409 
  - 
  - 
  26,092,669 
  8,663,769 
  - 
  - 
  - 
  - 
  34,756,847 
Issuance of shares upon the vesting of restricted stock units
  43,932 
  4 
    
    
  799,996 
    
    
  (800,000)
    
    
  - 
Issuance of shares upon the cashless exercise of stock options
  4,565 
  1 
    
    
  (1)
    
    
    
    
    
  - 
Issuance of shares upon exercise of warrants
  15,432 
  1 
    
    
  182,048 
  (38,300)
    
    
    
    
  143,749 
Stock options issued for services (Note 12)
  - 
  - 
  - 
  - 
  498,198 
  - 
  - 
  - 
  - 
  - 
  498,198 
Restricted stock units issued for services (Note 12)
  - 
  - 
  - 
  - 
  305,130 
  - 
  - 
  - 
  - 
  - 
  305,130 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  102,457 
  102,457 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (3,342,043)
  - 
  (3,342,043)
Balance, August 31, 2019
  39,032,528 
 $3,903 
  1 
 $- 
 $74,414,197 
  9,700,102 
  1,200,915 
  - 
 $(45,708,185)
 $(327,909)
 $39,283,023 
 
 F-4
 
 

Three Months Ended August 31, 2018
 
 
Common stock
 
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
par value $0.0001
 
 
par value $0.0001
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
 
 
Additional Paid-in Capital - Warrants
 
 
Additional Paid-in Capital – Beneficial Conversion Feature
 
 
Common Stock Issuable
 
 
Accumulated Deficit
 
 
Accumulated Other Comprehensive (Loss)
 
 
Total Stockholders' Equity
 
Balance, May 31, 2018
  33,805,706 
 $3,381 
  1 
 $- 
 $32,150,634 
  - 
  - 
 $800,000 
 $(24,804,711)
 $(221,368)
 $7,927,936 
 
    
    
    
    
    
  - 
    
    
    
    
    
Stock options issued for services (Note 12)
  - 
  - 
  - 
  - 
  823,978 
  - 
  - 
  - 
  - 
  - 
  823,978 
Restricted stock units issued for services (Note 12)
  - 
  - 
  - 
  - 
  181,492 
  - 
  - 
  - 
  - 
  - 
  181,492 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (59,321)
  (59,321)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (3,538,410)
  - 
  (3,538,410)
Balance, August 31, 2018
  33,805,706 
 $3,381 
  1 
 $- 
 $33,156,104 
  - 
  - 
 $800,000
 $(28,343,121)
 $(280,689)
 $5,335,675 
 

 F-5
 
 

Six Months Ended August 31, 2019  
 
 
Common stock
 
 
Preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
par value $0.0001
 
 
par value $0.0001
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
 
 
Additional Paid-in Capital - Warrants
 
 
Additional Paid-in Capital – Beneficial Conversion Feature
 
 
Common Stock Issuable
 
 
Accumulated Deficit
 
 
Accumulated Other Comprehensive (Loss)
 
 
Total Stockholders' Equity
 
Balance, February 28, 2019
  33,805,706 
 $3,381 
  1 
 $- 
 $38,966,208 
  757,704 
  1,200,915 
 $800,000 
 $(38,811,592)
 $(290,224)
 $2,626,392 
 
    
    
    
    
    
    
    
    
    
    
    
Issuance of common shares for cash, net of share issuance costs (Note 11)
  4,693,567 
  469 
  - 
  - 
  30,359,394 
  8,663,769 
  - 
  - 
  - 
  - 
  39,023,632 
Issuance of shares for legal settlement
  150,000 
  15 
  - 
  - 
  (15)
  - 
  - 
  - 
  - 
  - 
  - 
Issuance of shares upon conversion of Convertible notes (Note 10)
  319,326 
  32 
  - 
  - 
  2,372,549 
  316,929 
  - 
  - 
  - 
  - 
  2,689,510 
Issuance of shares upon the vesting of restricted stock units
  43,932 
  4 
    
    
  799,996 
    
    
  (800,000)
    
    
  - 
Issuance of shares upon the cashless exercise of stock options
  4,565 
  1 
    
    
  (1)
    
    
    
    
    
  - 
Issuance of shares upon exercise of warrants
  15,432 
  1 
    
    
  182,048 
  (38,300)
    
    
    
    
  143,749 
Stock options issued for services (Note 12)
  - 
  - 
  - 
  - 
  1,073,711 
  - 
  - 
  - 
  - 
  - 
  1,073,711 
Restricted stock units issued for services (Note 12)
  - 
  - 
  - 
  - 
  660,307 
  - 
  - 
  - 
  - 
  - 
  660,307 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (37,685)
  (37,685)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (6,896,593)
  - 
  (6,896,593)
Balance, August 31, 2019
  39,032,528 
 $3,903 
  1 
 $- 
 $74,414,197 
  9,700,102 
  1,200,915 
  - 
 $(45,708,185)
 $(327,909)
 $39,283,023 
 
 
 
Six Months Ended August 31, 2018
 
 
 
Common Stock
 
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
par value $0.0001
 
 
par value $0.0001
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
AdditionalPaid-in Capital
 
 
 
 
AdditionalPaid-in Capital - Warrants
 
 
AdditionalPaid-in Capital – Beneficial Conversion Feature
 
 
Common Stock Issuable
 
 
Accumulated Deficit
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Total Stockholders' Equity
 
Balance, February 28, 2018
  33,751,088 
 $3,376 
  1 
 $- 
 $30,964,970 
  - 
  - 
 $800,000 
 $(21,275,181)
 $(169,100)
 $10,324,065 
 
    
    
    
    
    
    
    
    
    
    
    
Issuance of shares upon cashless exercise of warrants
  18,821 
  2 
  - 
  - 
  (2)
  - 
  - 
  - 
  - 
  - 
  - 
Issuance of shares upon vesting of restricted stock units
  35,797 
  3 
  - 
  - 
  (3)
  - 
  - 
  - 
  - 
  - 
  - 
Stock options issued for services
  - 
  - 
  - 
  - 
  1,802,003 
  - 
  - 
  - 
  - 
  - 
  1,802,003 
Restricted stock units issued for services
  - 
  - 
  - 
  - 
  389,136 
  - 
  - 
  - 
  - 
  - 
  389,136 
Foreign currency translation
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (111,589)
  (111,589)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (7,067,940)
  - 
  (7,067,940)
Balance, August 31, 2018
  33,805,706 
 $3,381 
  1 
 $- 
 $33,156,104 
  - 
  - 
 $800,000 
 $(28,343,121)
 $(280,689)
 $5,335,675 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-6
 
 
Loop Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Six Months Ended August 31
 
 
 
2019
 
 
2018
 
Cash Flows from Operating Activities
 
 
 
 
 
 
Net loss
 $(6,896,593)
 $(7,067,940)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  365,739 
  211,658 
Stock-based compensation expense
  1,734,018 
  2,191,139 
Accrued interest
  215,433 
  - 
Loss on revaluation of warrants
  8,483 
  - 
Debt accretion
  1,035,888 
  - 
Deferred financing costs
  66,327 
  - 
Gain on conversion of convertible notes
  (232,565)
  - 
Changes in operating assets and liabilities:
    
    
Sales tax, tax credits and other receivables
  (123,194)
  47,725 
Prepaid expenses
  (22,987)
  359,072 
Accounts payable and accrued liabilities
  (1,385,978)
  349,723 
Net cash used in operating activities
  (5,235,429)
  (3,908,623)
 
    
    
Cash Flows from Investing Activities
    
    
Investment in joint venture
  (500,000)
  - 
Additions to property, plant and equipment
  (1,202,766)
  (1,038,775)
Additions to intangible assets
  (82,432)
  (66,195)
Net cash used in investing activities
  (1,785,198)
  (1,104,970)
 
    
    
Cash Flows from Financing Activities
    
    
Proceeds from sale of common shares
  40,273,751 
  - 
Share issuance costs
  (1,106,370)
  - 
Repayment of long-term debt
  (26,326)
  (26,808)
Net cash provided from (used in) financing activities
  39,141,055 
  (26,808)
 
    
    
Effect of exchange rate changes
  (22,778)
  (191,846)
Net change in cash and cash equivalents
  32,097,650 
  (5,232,247)
Cash and cash equivalents, beginning of period
  5,833,390 
  8,149,713 
Cash and cash equivalents, end of period
 $37,931,040 
 $2,917,466 
 
    
    
Supplemental Disclosure of Cash Flow Information:
    
    
Income tax paid
 $- 
 $- 
Interest paid
 $30,497 
 $26,234 
 
See accompanying notes to the condensed consolidated financial statements.
 
 
F-7
 
 
Loop Industries, Inc.
Three and Six Months Ended August 31, 2019 and 2018
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
 
1. The Company, Basis of Presentation and Going Concern
 
The Company
 
Loop Industries, Inc. is a technology company who owns patented and proprietary technology that depolymerizes no and low value waste 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 plastic resin and polyester fiber suitable for use in food-grade packaging.
 
On November 20, 2017, Loop Industries Inc. commenced trading on the NASDAQ Global Market under its new trading symbol, “LOOP.” From April 10, 2017 to November 19, 2017, our common stock was quoted on the OTCQX tier of the OTC Markets Group Inc. under the symbol “LLPP.”
 
Basis of presentation
 
The accompanying unaudited interim condensed consolidated financial statements of Loop Industries, Inc., its wholly-owned subsidiaries and joint venture (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The balance sheet information as at February 28, 2019 is derived from the Company’s audited consolidated financial statements and related notes for the fiscal year ended February 28, 2019, which is included in Item 8 of the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 8, 2019. These unaudited interim condensed consolidated financial statements should be read in conjunction with those financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair statement have been included. Operating results for the three and six months ended August 31, 2019 are not necessarily indicative of the results that may be expected for the year ending February 28, 2020.
 
Intercompany balances and transactions are eliminated on consolidation.
 
2. Summary of Significant Accounting Policies
 
Use of estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for depreciable lives of property, plant and equipment, intangible assets, analysis of impairments of recorded intangible assets, accruals for potential liabilities and assumptions made in calculating the fair value of stock-based compensation and other stock instruments.
 
Foreign currency translations and transactions
 
The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency of the Company. Assets and liabilities of subsidiaries that have a functional currency other than that of the Company are translated to U.S. dollars at the exchange rate as at the balance sheet date. Income and expenses are translated at the average exchange rate of the period. The resulting translation adjustments are included in other comprehensive income (loss) (“OCI”). As a result, foreign currency exchange fluctuations may impact operating expenses. The Company currently has not engaged in any currency hedging activities.
 
 
 
For transactions and balances, monetary assets and liabilities denominated in foreign currencies are translated into the functional currency of the entity at the prevailing exchange rate at the reporting date. Non-monetary assets and liabilities, and revenue and expense items denominated in foreign currencies are translated into the functional currency using the exchange rate prevailing at the dates of the respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the consolidated statements of operations and comprehensive loss, except for gains or losses arising from the translation of intercompany balances denominated in foreign currencies that forms part in the net investment in the subsidiary which are included in OCI.
 
 
5
 
 
Stock-based compensation
 
The Company periodically issues stock options and restricted stock units to employees and directors. The Company accounts for stock options granted to employees based on the authoritative guidance provided by the FASB wherein the fair value of the award is measured on the grant date and where there are no performance conditions, recognized as compensation expense on the straight-line basis over the vesting period and where performance conditions exist, recognize compensation expense when it becomes probable that the performance condition will be met. Forfeitures on share-based payments are accounted for by recognizing forfeitures as they occur.
 
The Company accounts for stock options 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 are estimated using the Black-Scholes-Merton Option Pricing (“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 expense recorded in the current and future periods.
 
Income taxes
 
The Company calculates its provision for income tax on the basis of the tax laws enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income, in accordance with FASB ASC 740, Income Taxes. The Company uses an asset and liability approach for financial accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
 
Research and development expenses
 
Research and development expenses relate primarily to the development, design, testing of preproduction samples, prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the six-month periods ended August 31, 2019 and 2018 amounted to $1,968,074 and $2,132,371, respectively (see Note 3), and are net of government research and development tax credits and government grants from the federal and provincial taxation authorities accrued and recorded based on qualifying expenditures incurred during the fiscal periods.
 
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 six-month periods ended August 31, 2019 and 2018, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an antidilutive effect. As at August 31, 2019, the potentially dilutive securities consisted of 1,657,081 outstanding stock options (August 31, 2018 – 2,205,290), 4,419,753 outstanding restricted stock units (August 31, 2018 – 99,498), 5,040,267 outstanding warrants (August 31, 2018 – 140,667) and nil outstanding issuable common stock (August 31, 2018 – 1,000,000).
 
Recently adopted accounting pronouncements
 
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Reform Act on items within accumulated other comprehensive income (loss) ("AOCI") to retained earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." Amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update. ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. ASU 2018-02 is applicable beginning March 1, 2019. The adoption of the standard had no impact on the consolidated financial statements of the Company.
 
 
6
 
 
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this Update are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of the standard had no impact on the consolidated financial statements of the Company.
 
In July 2018, the FASB issued ASU 2018-09, Codification Improvements, which clarify certain amendments to guidance that may have been incorrectly or inconsistently applied by certain entities and includes Amendments to Subtopic 718-740, Compensation – Stock Compensation – Income Taxes. The guidance in paragraph 718-740-35-2, as amended by the amendments in ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, is unclear on whether an entity should recognize excess tax benefits (or tax deficiencies) for compensation expense that is taken on the entity’s tax return. The amendment to paragraph 718-740-35-2 in this Update clarifies that an entity should recognize excess tax benefits in the period in which the amount of deduction is determined. The amendments in this Update are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of the standard had no impact on the consolidated financial statements of the Company.
 
In February 2016, the FASB issued ASU 2016-02, “Leases,” amended in July by ASU 2018-10, “Codification Improvements to Topic 842, Leases,” ASU 2018-11, “Targeted Improvements,” and ASU 2018-20, “Narrow-Scope Improvements for Lessors,” which requires lessees to recognize leases on the balance sheet while continuing to recognize expenses in the income statement in a manner similar to current accounting standards. For lessors, the new standard modifies the classification criteria and the accounting for sales-type and direct financing leases. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing, and uncertainty of cash flows arising from leases. This ASU may either be adopted on a modified retrospective approach at the beginning of the earliest comparative period, or through a cumulative-effect adjustment at the adoption date. This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted these standards effective March 1, 2019. The adoption of the standard had no impact on the consolidated financial statements of the Company. The Company elected to apply the package of practical expedients that allows us not to reassess whether expired or existing contracts contain leases, the classification of these leases and whether previously capitalized initial direct costs would qualify for capitalization under Accounting Standards Codification (or “ASC”) 842. Furthermore, we elected to use hindsight in determining the lease term and assessing impairment of the right-of-use assets.
 
3. Sales Tax, Tax Credits and Other Receivables
 
Sales tax, research and development tax credits and other receivables as at August 31, 2019 and February 28, 2019 were as follows:
 
 
 
August 31,
2019
 
 
February 28,
2019
 
Sales tax
 $282,178 
 $82,992 
Research and development tax credits
  339,532 
  410,997 
Other receivables
  94,604 
  105,011 
 
 $716,314 
 $599,000 
 
The Company is registered for the Canadian federal and provincial goods and services taxes. As such, the Company is obligated to collect, and is entitled to claim sale taxes paid on its expenses and capital expenditures incurred in Canada.
 
In addition, Loop Canada Inc. is entitled to receive government assistance in the form of refundable and non-refundable research and development tax credits from the federal and provincial taxation authorities, based on qualifying expenditures incurred during the fiscal year. The refundable credits are from the provincial taxation authorities and are not dependent on its ongoing tax status or tax position and accordingly are not considered part of income taxes. The Company records refundable tax credits as a reduction of research and development expenses when the Company can reasonably estimate the amounts and it is more likely than not, they will be received. During the three and six months ended August 31, 2019, the Company recorded $52,258 and $107,983, respectively, (2018 – $76,503 and $76,503, respectively) as a reduction of research and development expenses. During the three- and six-month periods ended August 31, 2019, research and development tax credits received by the Company from taxation authorities amounted to $175,929 and $175,929, respectively (2018 – nil and nil, respectively).
 
 
 
7
 
 
4. Property, Plant and Equipment
 
 
 
As at August 31, 2019
 
 
 
Cost
 
 
Accumulated depreciation
 
 
Net book value
 
Land
 $230,494 
 $- 
 $230,494 
Building
  1,864,676 
  (99,145)
  1,765,531 
Building Improvements
  690,426 
  (160,918)
  529,508 
Machinery and equipment
  4,907,358 
  (1,086,574)
  3,820,784 
Office equipment and furniture
  137,132 
  (55,445)
  81,687 
 
 $7,830,086 
 $(1,402,082)
 $6,428,004 
 
    
    
    
 
 
 
As at February 28, 2019
 
 
 
Cost
 
 
Accumulated depreciation
 
 
Net book value
 
Land
 $232,699 
 $- 
 $232,699 
Building
  1,882,665 
  (68,596)
  1,814,069 
Building Improvements
  383,985 
  (119,889)
  264,096 
Machinery and equipment
  3,834,338 
  (841,236)
  2,993,102 
Office equipment and furniture
  117,088 
  (49,791)
  67,297 
 
 $6,450,775 
 $(1,079,512)
 $5,371,263 
 
Depreciation expense for the three and six-month periods ended August 31, 2019 amounted to $195,876 and $357,197, respectively (2018 – $89,080 and $173,670, respectively), and is recorded as an operating expense in the consolidated statements of operations and comprehensive loss.
 
5. Intangible Assets
 
On October 27, 2014, the Company entered into an Intellectual Property Assignment Agreement with Mr. Hatem Essaddam wherein the Company purchased a certain technique and method, which was used to develop the Generation I (“GEN I”) technology, for $445,050 allowing for the depolymerization of polyethylene terephthalate at ambient temperature and atmospheric pressure. The GEN I technology patent portfolio has two issued U.S. patents and an allowed U.S. application, all expected to expire on or around July 2035. Internationally, the Company has issued patents in Taiwan, South Africa, and in the members of the Gulf Cooperation Council, and pending patent applications in Argentina, Australia, Brazil, Canada, China, Eurasia, Europe, Israel, India, Japan, Korea, Mexico, and the Philippines, all expected to expire, if granted, on or around July 2036.
 
In addition to the $445,050 paid by the Company under the Intellectual Property Assignment Agreement, the Company is required to make four additional payments of CDN$200,000, totaling CDN$800,000, to Mr. Essaddam within sixty (60) days of attaining each of the following milestones:
 
the average production of 20 metric tonnes of terephthalic acid by the Company, as a result of the GEN I technology, for 20 operating days;
the average production of 30 metric tonnes of terephthalic acid by the Company, as a result of the GEN I technology, for 30 operating days;
the average production of 60 metric tonnes of terephthalic acid by the Company, as a result of the GEN I technology, for 60 operating days;
the average production of 100 metric tonnes of terephthalic acid by the Company, as a result of the GEN I technology, for 100 operating days.
 
 
8
 
 
Additionally, the Company is obligated to make royalty payments of up to CDN$25,700,000, based on the GEN I technology, payable as follows:
 
10% of gross profits on the sale of all products derived by the Company from the technology;
10% of any license fee paid to the Company in respect of any licensing or other right to use the technology that was granted to a third party by the Company; and
5% of any royalty or other similar payment made to the Company by a third party to whom a license or sub-license or other right to use the technology has been granted by the Company or by the third party.
 
The Company has no intention of commercializing the GEN I technology at this time.
 
During the year ended February 28, 2019, the Company finalized the development of its next generation technology, referred to as Generation II (“GEN II”), and has filed various patent applications in jurisdictions around the world. On April 9, 2019, a GEN II U.S. patent was issued and is expected to expire on or around September 2037.
 
Concurrent with the GEN II development, in June 2018, the Company transitioned to its newly constructed GEN II industrial pilot plant. The GEN II technology forms the basis for the commercialization of the Company into the future.
 
As a result of the strategic shift away from the GEN I technology, and the development of the GEN II technology during the year ended February 28, 2019, the Company considered the carrying value of its GEN I intangible asset to be impaired and wrote off the remaining balance of the intangible asset, which amounted to $298,694.
 
Amortization expense for the three- and six-month periods ended August 31, 2019 amounted to $5,527 and $8,545, respectively (2018 - $21,509 and $37,988, respectively), and is recorded as an operating expense in the unaudited condensed consolidated statements of operations and comprehensive loss.
 
 
 
August 31,
2019
 
 
February 28,
2019
 
 
 
 
 
 
 
 
Intangible assets, at cost - beginning of period
 $127,672 
 $533,369 
Intangible assets, accumulated depreciation – beginning of period
  - 
  (200,629)

  127,672 
  332,740 
 
    
    
Add: Additions in the period
  82,432 
  153,477 
Deduct: Amortization of intangibles
  (8,545)
  (59,851)
Deduct: Impairment of intangibles
  - 
  (298,694)
Deduct: Foreign exchange effect
  (1,208)
  - 
 
 $200,351 
 $127,672 
 
 
 
9
 
 
6. Fair value of financial instruments
 
The following tables present the fair value of the Company’s financial liabilities as at August 31, 2019 and February 28, 2019:
 
 
 
Fair Value Measurements as at August 31, 2019
 
 
 
Carrying Amount
 
 
Fair Value
 
 
Level in the hierarchy
 
Instruments measured at fair value:
  - 
  - 
  - 
 
    
    
    
Instruments measured at amortized cost:
    
    
    
  Long-term debt
  969,663 
  969,663 
 
Level 2
 
  Convertible notes (Second Issuance)
 $4,044,575 
 $4,900,000 
 
Level 2
 
 
 
 
 
Fair Value Measurements at February 28, 2019
 
 
 
Carrying Amount
 
 
Fair Value
 
Level in the hierarchy
Instruments measured at fair value:
 
 
 
 
 
 
 
  Warrants (First Issuance)
 $219,531 
 $219,531 
Level 3
 
    
    
 
Instruments measured at amortized cost:
    
    
 
  Long-term debt
  1,005,518 
  1,005,518 
Level 2
  Convertible notes (First Issuance)
  2,495,636 
  2,650,000 
Level 2
  Convertible notes (Second Issuance)
 $3,126,886 
 $3,150,000 
Level 2
 
The Warrants under the First Issuance of Convertible Notes represent a Level 3 in the fair value hierarchy. The Warrants were valued using a Monte Carlo simulation using a volatility of 71.5%. The Company recorded a loss on revaluation from the date of issuance to February 28, 2019 of $65,167.
 
7. Accounts Payable and Accrued Liabilities
 
Accounts payable and accrued liabilities as at August 31, 2019 and February 28, 2019 were as follows:
 
 
 
August 31,
2019
 
 
February 28,
2019
 
Trade accounts payable
 $807,140 
 $1,784,362 
Accrued liabilities
  704,836 
  885,871 
 
 $1,511,976 
 $2,670,233 
 
 
10
 
 
8.
Joint Venture
 
On September 15, 2018, the Company, through its wholly-owned subsidiary Loop Innovations, LLC, a Delaware limited liability company, entered into a Joint Venture Agreement (the “Agreement”) with Indorama Ventures Holdings LP, USA(“Indorama”), an indirect subsidiary of Indorama Ventures Public Company Limited, to retrofit Indorama’s existing PET manufacturing facilities. The joint venture will manufacture and commercialize sustainable LoopTM branded PET resin and polyester fiber. The joint venture agreement details the establishment of an initial 20,700 metric tonnes facility. Due to market demand from existing and potential customers, the joint venture has decided to increase the capacity at the plant to 40,000 metric tonnes. Each company has a 50/50 equity interest in Indorama Loop Technologies, LLC (“ILT”), which was specifically formed to operate and execute the joint venture.
 
Under the Agreement, Indorama Venture is contributing manufacturing knowledge and Loop is required to contribute its proprietary science and technology.
 
Specifically, the Company is contributing an exclusive world-wide royalty-free license to ILT to use its proprietary technology to produce 100% sustainably produced PET resin and polyester fiber.
 
ILT meets the accounting definition of a joint venture where neither party has control of the joint venture entity and both parties have joint control over the decision-making process in ILT. As such, the Company uses the equity method of accounting to account for its share of the investment in ILT. There was no activity in ILT from the date of inception of September 24, 2018 to February 28, 2019 and, as at February 28, 2019, the carrying value of the equity investment was nil. On April 18, 2019, Loop Innovations, LLC, the Company’s wholly owned subsidiary, and Indorama Ventures Holdings LP, USA each contributed cash of $500,000 to ILT. As there were no other transactions during the six-month period ended August 31, 2019, the carrying value of the equity investment as at August 31, 2019 was $500,000.
 
9. Long-Term Debt
 
 
 
August 31,
2019
 
 
February 28,
2019
 
Instalment loan
 $969,663 
 $1,005,518 
Less current portion
  52,651 
  53,155 
Non-current portion
 $917,012 
 $952,363 
 
Principal repayments due on the Instalment loan over the next five years are as follows:
 
Years ending February 28,
 
Amount
 
2020
 $26,326 
2021
  52,651 
2022
  52,651 
2023
  52,651 
2024
  52,651 
Thereafter
  732,733 
Total
 $969,663 
 
Interest paid on the instalment loan during the three- and six-month periods ended August 31, 2019 amounted to $13,993 and $27,062, respectively (2018 - $13,443 and $26,481, respectively). As at August 31, 2019, the Company was in compliance with its financial covenants.
 
10.
Convertible Notes
 
First Issuance
 
On November 13, 2018, the Company issued convertible promissory notes (the “November 2018 Notes”), together with related warrants to acquire an additional 50% of the shares issued upon the conversion of the November 2018 Notes (the “November 2018 Warrants”), for an aggregate purchase price of $2,450,000 (the “November 2018 Private Placement”). On January 3, 2019, the Company issued additional convertible promissory notes from this issuance (the “November 2018 Notes”), together with related warrants to acquire an additional 50% of the shares issued upon the conversion of the November 2018 Notes (the “November 2018 Warrants”), for an aggregate purchase price of $200,000 (the “November 2018 Private Placement”). The November 2018 Notes were converted on April 5, 2019.
 
 
11
 
  
The November 2018 Notes carried an interest rate of 8.00% per annum and had original maturity dates of May 13, 2019 and July 3, 2019 (the “November 2018 Maturity Date”), respectively, upon which date the outstanding principal amount of the November 2018 Notes and all accrued and unpaid interest would automatically convert into shares of the common stock of the Company at the price per share equal to the lesser of (i) $13.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day to the conversion of the November 2018 Notes (the “November 2018 Conversion Price”). The total number of shares of Common Stock to be issued upon automatic conversion at maturity would equal the outstanding principal amount of the November 2018 Notes and all accrued and unpaid interest on the November 2018 Notes, divided by the November 2018 Conversion Price.
 
The November 2018 Warrants are exercisable for an additional fifty percent (50%) of the shares of Common Stock issued upon the conversion of the November 2018 Notes (the “November 2018 Warrant Shares”). The per share purchase price (the “November 2018 Exercise Price”) for each of the November 2018 Warrant Shares purchasable under the November 2018 Warrants was originally to be equal to the lesser of (i) $15.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day of the conversion of the November 2018 Notes. The November 2018 Warrants were issued upon conversion of the November 2018 Notes. The November 2018 Warrants expire eighteen (18) months from the date of the conversion of the November 2018 Notes (the “November 2018 Expiration Date”). The Investors may exercise the November 2018 Warrants at any time prior to the November 2018 Expiration Date.
 
Due to the variable conversion price, the November 2018 Notes contain characteristics of a variable share-forward sales contracts (“VSF”) under the guidance of ASC 480-10. Management has determined that for the purpose of ‎the accounting for the November 2018 Notes, it is more likely than not that the November 2018 Conversion Price will be below $13.00, resulting in the issuance of a variable number of shares, the November 2018 Notes are classified as a liability, and accounted for at amortized cost.
 
Due to the variable number of warrants to be issued and the variable strike price of the November 2018 Warrants, these do not meet the “fixed-for-fixed” criteria under ASC 815-40. Accordingly, the November 2018 Warrants are classified as a derivative liability, initially measured at fair value and subsequently revalued at fair value through the income statement. The fair value was calculated using a Monte Carlo simulation.
 
The transaction costs related to this issuance were split pro-rata between the November 2018 Notes and the November 2018 Warrants. The portion relating to the November 2018 Notes were deferred and are being amortized over the life of the convertible notes. The portion relating to the November 2018 Warrants was immediately expensed.
 
The aggregate value of the November 2018 Notes and November 2018 Warrants as shown on the consolidated balance sheet are broken down as follows:
 
 
 
August 31,
2019
 
 
February 28,
2019
 
 
Issue Date
 
November 2018 Convertible Notes – Liability
  - 
 $2,495,636 
 $2,495,636 
Accrued interest – Liability
  - 
  60,793 
  - 
Deferred financing costs
  - 
  (26,557)
  (63,738)
Total
  - 
  2,529,872 
  2,431,898 
 
    
    
    
November 2018 Warrants – Liability
  - 
 $219,531 
 $154,364 
 
On April 5, 2019, the Company and the Investors that purchased the "November 2018 Notes from the Company pursuant to the Note and Warrant Purchase Agreement dated as of November 13, 2018 or January 3, 2019, executed an Amendment, Surrender and Conversion Agreement (“Conversion Agreement”) whereby the parties agreed to convert the November 2018 Notes, and all accrued and unpaid interest, into shares of the common stock of the Company at a newly agreed conversion price per share equal to $8.55 (the “New Conversion Price”), replacing the previous formula which converted the November 2018 Notes and accrued and unpaid interest into shares of the common stock of the Company at the price per share equal to the lesser of (i) $13.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day to the conversion of the November 2018 Notes. The Conversion Agreement stipulates that the interest on the November 2018 Notes would be paid up to and including April 3, 2019. Pursuant to the 2018 Note Purchase Agreement, the Investors also received related warrants to acquire an additional 50% of the shares issued upon the conversion of the November 2018 Notes. As part of the Conversion Agreement, the exercise price of the November 2018 Warrants will also be the New Conversion Price, replacing the previous formula which established the conversion price for the November 2018 Warrants as the lesser of (i) $15.00 and (ii) the average closing price of the Company’s Common Stock on the Nasdaq stock market for the ten days preceding the day of the conversion of the November 2018 Notes. As a result of the Conversion Agreement, the Company issued 319,326 shares of common stock of the Company and issued 159,663 warrants. The November 2018 Warrants expire eighteen (18) months from the date of the conversion of the November 2018 Notes, on October 5, 2020.
 
The Company recorded an expense upon revaluation of the warrants for the period from March 1, 2019 to April 5, 2019 in the amount of $8,483 (2018 – nil) and is included in operating expenses. The Company recorded accretion interest expense on the November 2018 Notes from March 1, 2019 to April 5, 2019 in the amount of $154,364 and is included in operating expenses. The Company recorded interest expense on the November 2018 Notes for the period from March 1, 2019 to April 3, 2019 in the amount of $19,433 (2018 – nil). The value of the 159,633 warrants issued as part of the conversion was determined using the Black-Scholes pricing formula and amounted to $316,929 and is included in additional paid-in capital – warrants. Also, the conversion of the November 2018 Notes into common stock resulted in a gain of $232,565 and has been offset against operating expenses.
 
 
12
 
 
Second Issuance
 
On January 15, 2019, the Company issued convertible promissory notes (the “January 2019 Notes”), together with related warrants to acquire an additional 50% of the shares issuable upon the conversion of the January 2019 Notes (the “January 2019 Warrants”), for an aggregate purchase price of $4,500,000 (the “January 2019 Private Placement”). On January 21, 2019, the Company issued additional convertible promissory notes from this issuance, together with related warrants to acquire an additional 50% of the shares issuable upon the conversion of the January 2019 Notes, for an aggregate purchase price of $400,000.
 
The January 2019 Notes carry an interest rate of 8.00% per annum and mature on January 15, 2020 and January 21, 2020 (the “January 2020 Maturity Date”), respectively. At the January 2020 Maturity Date, the outstanding principal amount of the January 2019 Notes shall automatically convert into shares of the common stock of the Company at the price per share equal to $8.10 (the “January 2020 Conversion Price”). The January 2020 Conversion Price may be adjusted in the event that the Company issues common shares in a private sale or offering at a lower price per share than $8.10 within 180 days of the closing date. The lower price would become the new conversion price of the January 2019 Notes, which would impact the number of shares that would be issued. The total number of shares of Common Stock to be issued upon automatic conversion shall equal the outstanding principal amount of the January 2019 Notes divided by the January 2020 Conversion Price.
 
With respect to accrued and unpaid interest at the January 2020 Maturity Date, the Investors have the option of receiving cash or common stock of the Company at that date. Upon the January 2020 Maturity Date, where the Investor elect’s payment of accrued and unpaid interest on the January 2019 Notes in common stock, the price per share shall be equal to the trading price of the common stock at the close of the market on the date immediately preceding the January 2020 Maturity Date.
 
The January 2019 Warrants are exercisable for an additional fifty percent (50%) of the shares of Common Stock issuable upon the conversion of the January 2019 Notes (the “January 2019 Warrant Shares”). The per share purchase price (the “January 2019 Exercise Price”) for each of the January 2019 Warrant Shares purchasable under the January 2019 Warrants shall be equal to 115% of the January 2020 Conversion Price. The January 2019 Warrants will be calculated and issued upon the closing date of the January 2019 Notes, based upon the initial $8.10 conversion price. As such, the Company issued 302,469 warrants at the closing dates of the January 2019 Notes. If the Investor elects to take accrued and unpaid interest on the January 2019 Notes in common stock, additional warrants will be issued to acquire 50% of the shares issued in connection with the accrued and unpaid interest (also referred to as the “January 2019 Warrants”). The January 2019 Warrants expire twenty-four (24) months from the date of their issuance (the “January 2019 Expiration Date”). The Investors may exercise the January 2019 Warrants at any time prior to the January 2019 Expiration Date.
 
A beneficial conversion feature (“BCF”) of a convertible note is normally characterized as the convertible portion feature that provides a rate of conversion that is below market value or “in-the-money” when issued. The BCF related to the issuance of the January 2019 Notes was recorded at the issuance date. The BCF was measured using the intrinsic value method and is shown as a discount to the carrying amount of the convertible note and is credited to additional paid-in capital. The intrinsic value of the BCF at the issuance date of the January 2019 Notes was determined to be $1,200,915.
 
In connection with the January 2019 Warrants issued along with the January 2019 Notes, they meet the requirements of the scope exemptions in ASC 815-10-15-74 and are thus classified as equity upon issuance. The Company determined the fair value of the warrants using the Black-Scholes pricing formula and is recognized as a discount on the carrying amount of the January 2019 Notes and is credited to additional paid-in capital. The fair value of the warrants at the issuance date was determined to be $757,704.
 
The allocated fair values of the BCF and the warrants was recorded as a debt discount from the face amount of the January 2019 Notes and such discount is being accreted over the expected term of the January 2019 Notes and is charged to interest expense.
 
The aggregate values of the January 2019 Warrants, the January 2019 Notes and the related BCF are as follows:
 
 
 
August 31,
2019
 
 
February 28,
2019
 
 
Issue Date
 
January 2019 Convertible Notes – Liability
  4,044,575 
 $3,126,886 
 $2,941,381 
Accrued interest – Liability
  245,011 
  49,011 
  - 
Deferred financing costs
  (29,827)
  (69,597)
  (79,539)
 
  4,259,759 
  3,106,300 
  2,861,842 
 
    
    
    
January 2019 Beneficial Conversion Option – Equity
  1,200,915 
  1,200,915 
  1,200,915 
 
    
    
    
January 2019 Warrants – Equity
 $719,404 
 $757,704 
 $757,704 
 
The transaction costs relating to this issuance were split pro-rata between the January 2019 Notes, the BCF and the January 2019 Warrants. The portion relating to the January 2019 Notes were deferred and are being amortized over the life of the January 2019 Notes. The portion relating to the BCF and the January 2019 Warrants were recorded as share issuance expenses and offset against additional paid-in capital.
 
The Company recorded accretion interest expense on the January 2019 Notes for the three- and six-month periods ended August 31, 2019 of $488,325 and $917,689, respectively (2018 – nil and nil, respectively) and is included in operating expenses. The Company also recorded interest expense on the January 2019 Notes for the three- and six-months period ended August 31, 2019 in the amount of $98,000 and $196,000, respectively (2018 – nil and nil, respectively).
 
 
13
 
 
11.
Stockholders’ Equity
 
Series A Preferred Stock
 
Mr. Solomita’s amended employment agreement July 13, 2018 provides that the Company shall issue to Mr. Solomita one share of the Company’s Series A Preferred Stock in exchange for Mr. Solomita agreeing not to terminate his employment with the Company for a period of five years from the date of the agreement. The agreement effectively provides Mr. Solomita with a “change of control” provision over the Company in the event that his ownership of the issued and outstanding shares of common stock of the Company is diluted to less than a majority. In order to issue Mr. Solomita his one share of Series A Preferred Stock under the amendment, the Company created a “blank check” preferred stock. Subsequently, the board of directors of the Company approved a Certificate of Designation creating the Series A Preferred Stock. Subsequently, the Company issued one share of Series A Preferred Stock to Mr. Solomita.
 
The one share of Series A Preferred Stock issued to Mr. Solomita holds a majority of the total voting power so long as Mr. Solomita holds not less than 7.5% of the issued and outstanding shares of common stock of the Company, assuring Mr. Solomita of control of the Company in the event that his ownership of the issued and outstanding shares of common stock of the Company is diluted to a level below a majority. Currently, Mr. Solomita's ownership of 18,600,000 shares of common stock and one share of Series A Preferred Stock provides him with 78.0% of the voting control of the Company.
 
Additionally, the one share of Series A Preferred Stock issued to Mr. Solomita contains protective provisions, which precludes the Company from taking certain actions without Mr. Solomita’s (or that of any person to whom the one share of Series A Preferred Stock is transferred) approval. More specifically, so long as any shares of Series A Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a separate class:
 
(a) 
amend the Articles of Incorporation or, unless approved by the Board of Directors, including by the Series A Director, amend the Company’s Bylaws;
 
(b) 
change or modify the rights, preferences or other terms of the Series A Preferred Stock, or increase or decrease the number of authorized shares of Series A Preferred Stock;
 
(c) 
reclassify or recapitalize any outstanding equity securities, or, unless approved by the Board of Directors, including by the Series A Director, authorize or issue, or undertake an obligation to authorize or issue, any equity securities or any debt securities convertible into or exercisable for any equity securities (other than the issuance of stock-options or securities under any employee option or benefit plan);
 
(d) 
authorize or effect any transaction constituting a Deemed Liquidation (as defined in this subparagraph) under the Articles, or any other merger or consolidation of the Company;
 
(e) 
increase or decrease the size of the Board of Directors as provided in the Bylaws of the Company or remove the Series A Director (unless approved by the Board of Directors, including the Series A Director);
 
(f) 
declare or pay any dividends or make any other distribution with respect to any class or series of capital stock (unless approved by the Board of Directors, including the Series A Director);
 
(g) 
redeem, repurchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any outstanding shares of capital stock (other than the repurchase of shares of common stock from employees, consultants or other service providers pursuant to agreements approved by the Board of Directors under which the Company has the option to repurchase such shares at no greater than original cost upon the occurrence of certain events, such as the termination of employment) (unless approved by the Board of Directors, including the Series A Director);
 
(h) 
create or amend any stock option plan of the Company, if any (other than amendments that do not require approval of the stockholders under the terms of the plan or applicable law) or approve any new equity incentive plan;
 
(i) 
replace the President and/or Chief Executive Officer of the Company (unless approved by the Board of Directors, including the Series A Director);
 
(j) 
transfer assets to any subsidiary or other affiliated entity (unless approved by the Board of Directors, including the Series A Director);
 
(k) 
issue, or cause any subsidiary of the Company to issue, any indebtedness or debt security, other than trade accounts payable and/or letters of credit, performance bonds or other similar credit support incurred in the ordinary course of business, or amend, renew, increase or otherwise alter in any material respect the terms of any indebtedness previously approved or required to be approved by the holders of the Series A Preferred Stock (unless approved by the Board of Directors, including the Series A Director);
 
(l) 
modify or change the nature of the Company’s business;
 
(m) 
acquire, or cause a Subsidiary of the Company to acquire, in any transaction or series of related transactions, the stock or any material assets of another person, or enter into any joint venture with any other person (unless approved by the Board of Directors, including the Series A Director); or
 
(n) 
sell, transfer, license, lease or otherwise dispose of, in any transaction or series of related transactions, any material assets of the Company or any Subsidiary outside the ordinary course of business (unless approved by the Board of Directors, including the Series A Director).
 
 
14
 
Common Stock
 
For the period ended August 31, 2019
 
Number of shares
 
 
Amount
 
Balance, February 28, 2019
  33,805,706 
 $3,381 
Issuance of shares for cash
  4,693,567 
  469 
Issuance of shares for services rendered
  43,932 
  4 
Issuance of shares upon the cashless exercise of stock options
  4,565 
  1 
Issuance of shares upon the exercise of warrants
  15,432 
  1 
Issuance of shares upon settlement of legal matter
  150,000 
  15 
Issuance of shares upon conversion of Convertible notes
  319,326 
  32 
Balance, August 31, 2019
  39,032,528 
 $3,903 
 
 
For the period ended August 31, 2018
 
Number of shares
 
 
Amount
 
Balance, February 28, 2018
  33,751,088 
 $3,376 
Cashless exercise of stock options
  18,821 
  2 
Issuance of shares upon vesting of restricted stock units
  35,797 
  3 
Balance, August 31, 2018
  33,805,706 
 $3,381 
 
During the six months ended August 31, 2019, the Company recorded the following common stock transactions:
 
(i) On March 1, 2019, the Company sold 600,000 shares of its common stock at an offering price of $8.55 per share in a registered direct offering, for gross proceeds of $5,130,000;
(ii) On March 8, 2019 and March 11, 2019, the Company issued 150,000 shares of its common stock in settlement of a legal matter;
(iii) On April 9, 2019, the Company converted Convertible notes with a face value of $2,650,000 plus accrued interest of $80,241 at a conversion price of $8.55, into 319,326 common shares.
(iv) On June 14, 2019, the Company sold 4,093,567 shares of its common stock at an offering price of $8.55 per share in a registered direct offering, for gross proceeds of $35,000,000;
(v) On June 21, 2019, the Company issued 7,043 shares of common stock upon the vesting of restricted stock units related to an employee.
(vi) On July 2, 2019 and July 3, 2019, the Company issued 23,547 shares of common stock upon the vesting of restricted stock units related to current and former Directors.
(vii) On July 12, 2019, the Company issued 4,565 shares of common stock upon the cashless exercise of stock options related to an employee.
(viii) On July 15, 2019, the Company issued 13,342 shares of common stock upon the vesting of restricted stock units related to a former Director.
(ix) On July 17, 2019, the Company issued 15,432 shares of common stock upon the exercise of warrants.
 
During the six months ended August 31, 2018, the Company recorded the following common stock transactions:
 
(i)
the Company issued 18,821 shares of common stock upon the cashless exercise options.
(ii)
the Company issued 35,797 shares of common stock upon the vesting of restricted stock units.
 
 
15
 
 
12. Share-based Payments
 
Stock Options
 
The following tables summarize the continuity of the Company’s stock options during the six-month periods ended August 31:
 
 
 
2019
 
 
2018
 
 
 
Number of stock options
 
 
Weighted average exercise price
 
 
Number of stock options
 
 
Weighted average exercise price
 
Outstanding, beginning of period
  1,962,400 
 $7.53 
  2,374,581 
 $7.99 
Granted
  - 
  - 
  13,209 
  11.52 
Exercised
  (5,000)
  0.80 
  (20,000)
  0.80 
Forfeited
  (39,902)
  9.67 
  (100,000)
  5.25 
Expired
  (260,417)
  13.59 
  (62,500)
  4.80 
Outstanding, end of period
  1,657,081 
 $6.55 
  2,205,290 
 $8.29 
Exercisable, end of period
  958,748 
 $6.26 
  931,248 
 $6.98 
 
 
 
 
2019
 
 
2018
 
Exercise price
 
Number of stock options outstanding
 
 
Weighted average remaining life (yrs.)
 
 
Number of stock options outstanding
 
 
Weighted average remaining life (yrs.)
 
 $0.80 
  577,081 
  6.25 
  582,081 
  7.25 
 $3.00 
  - 
  - 
  - 
  - 
 $5.25 
  380,000 
  7.99 
  380,000 
  8.99 
 $8.75 
  - 
  - 
  - 
  - 
 $11.52 
  - 
  - 
  13,209 
  9.86 
 $12.00 
  700,000 
  8.04 
  700,000 
  9.04 
 $13.49 
  - 
  - 
  250,000 
  9.13 
 $13.89 
  - 
  - 
  280,000 
  9.19 
 
Outstanding, end of period
 
  1,657,081 
  7.41 
  2,205,290 
  8.59 
 
Exercisable, end of period
 
  958,748 
  7.33 
  931,248 
  8.32 
 
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. The following table shows key inputs into the valuation model for the six months ended August 31:
 
 
 
2018
 
Exercise price
 $11.52 
Risk-free interest rate
  2.82%
Expected dividend yield
  0%
Expected volatility
  78%
Expected life
 
6.5 years
 
 
 
There were no new issuances of stock options for the six-month period ended August 31, 2019.
 
During the three- and six-month periods ended August 31, 2019, stock-based compensation expense attributable to stock options amounted to $498,198 and $1,073,711, respectively (2018 - $823,978 and $1,801,085, respectively), and is included in operating expenses.
 
 
 
16
 
 
Restricted Stock Units
 
The following table summarizes the continuity of the restricted stock units (“RSUs”) during the six-month periods ended August 31, 2019 and 2018:
 
 
 
2019
 
 
2018
 
 
 
Number of units
 
 
Weighted average fair value price
 
 
Number of units
 
 
Weighted average fair value price
 
Outstanding, beginning of period
  402,868 
 $8.77 
  34,102 
 $13.00 
Granted
  4,114,567 
  1.06 
  102,818 
  11.54 
Issued as common stock
  (43,932)
  10.36 
  (35,797)
  13.06 
Forfeited
  (53,750)
  9.82 
  (1,625)
  12.31 
Outstanding, end of period
  4,419,753 
 $1.56 
  99,498 
 $11.48 
Outstanding vested, end of period
  1,031,684 
 $1.12 
  - 
 $- 
 
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 closing share price at grant date multiplied by the number of restricted stock unit awards granted.
 
During the three- and six-month periods ended August 31, 2019, stock-based compensation attributable to RSUs amounted to $305,130 and $660,307, respectively (2018 - $181,492 and $389,145, respectively), and is included in operating expenses.
 
During the three- and six-month periods ended August 31, 2019, stock-based compensation included in Research and development expenses amounted to $317,353 and $629,788, respectively (2018 - $250,242 and $660,455, respectively), and in General and administrative expenses amounted to $485,975 and $1,104,230, respectively (2018 - $755,229 and $1,530,686, respectively).
 
13.
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. 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 during the six-month periods ended August 31, 2019 and 2018:
 
 
 
2019
 
 
2018
 
 
 
Number of units
 
 
Number of units
 
Outstanding, beginning of period
  3,223,516 
  1,735,898 
Share reserve increase
  2,000,000 
  1,500,000 
Units granted
  (4,114,567)
  (116,027)
Units forfeited
  93,652 
  101,625 
Units expired
  260,417 
  50,000 
Outstanding, end of period
  1,463,018 
  3,271,496 
 
 
17
 
 
14. Warrants
 
The following table summarizes the continuity of warrants during the six-month periods ended August 31, 2019 and 2018:
 
 
 
2019
 
 
 2018
 
 
 
Number of warrants
 
 
Weighted average exercise price
 
 
Number of warrants
 
 
Weighted average exercise price
 
Outstanding, beginning of period
  802,469 
 $10.74 
  140,667 
 $12.00 
Issued
  4,253,230 
  10.91 
  -