A Terrebonne company shaken by an accusing report

Loop Industries, a Terrebonne company active in plastic recycling to which Quebec granted a loan of up to $ 4.6 million last fall, is in turmoil. An activist investor published a devastating report about him that led to the filing of several class actions and dropped his stock on the stock market.

Jean-Francois Codère
Press

Richard Dufour
Press

Little known in Quebec, Loop is listed on the American electronic stock exchange NASDAQ, where its value exceeded 480 million US at the start of the week. That was before Hindenburg Research, a firm that has been in the spotlight in recent months for its activism with electric vehicle designer Nikola Motor, released an accusing Loop report on Tuesday. Hindenburg denounces, among other things, what she considers to be the inexperience of managers and researchers, “empty” partnerships with multinationals and technology that does not produce results.

As with many other activist investors before, Hindenburg’s approach is not disinterested. The company claims to have sold Loop shares short, which puts it in a position to profit from the tumble it caused.

In a statement released late Tuesday, Loop denied the allegations of the Hindenburg report.

Reached by phone, company spokesperson Stephanie Corrente declined to provide more information. It was not possible to speak to someone at the facilities on rue Fernand-Poitras, in Terrebonne, where around sixty employees would work, according to Mr.^me Current. Press attempted to reach founder and CEO Daniel Solomita by phone and at his home in Lorraine, without success.

> CONSULT THE HINDENBURG REPORT

> SEE LOOP’S RESPONSE

The stock is down 35%

At least half a dozen class actions, including one at the Saint-Jérôme courthouse and several in the United States, have also been filed against Loop in recent hours. Its stock, which was trading at around US $ 11.50 on NASDAQ before the Hindenburg report came out, lost 35% of its value in two days to end the day at US $ 7.55 on Wednesday night. The stock market value of the company, which has never reported any income so far, has plummeted by around $ 165 million.

According to our information, the company has so far received only about half of the loan promised by the government of Quebec, which had however already granted a grant of $ 100,000 previously.

Plastic recycling

Founded in 2014, Loop claims to have developed and patented a process for recycling a transparent plastic described as being the most used on the planet, particularly for food packaging, commonly called “PET” in English (polyethylene terephthalate in French). More specifically, it claims to be able to extract two perfectly pure components from PET which can then be reused to manufacture other packaging.

According to Hindenburg, Loop “claims she has discovered how to turn vulgar junk into pure gold, a feat that multi-billion dollar chemical companies like DuPont, Dow Chemical and 3M have been unable to achieve on a large scale despite years of effort.”

Based on the testimony of former employees – whose identities remain confidential – the firm has serious reservations about the credibility of Loop’s claims on its technology.

“When I took on the job, they were already talking about high yields with high degrees of purity for both components,” told Press a person who was previously an employee of Loop and contributed to the Hindenburg report, but who does not want to be identified because they are under a confidentiality agreement.

“But one of the two had not even been purified and the other had a variable purity depending on the batches we made. It rang a bell from the start and got worse and worse afterwards. ”

The company has since changed its process, which it now refers to as “Gen 2”. Several claims in the Hindenburg report specifically mention “Gen 2” technology.

Reviews of the staff

From the outset, the report criticizes the curriculum vitae of Loop’s president and chief executive officer, Daniel Solomita, who has no background in chemistry, being rather a graduate in finance and computer science.

Prior to founding Loop, he was involved with another publicly traded company active in the recycling of plastics, Dragon Polymers. The latter ended up completely writing off its recycling activities from its balance sheet, no longer attributing any value to them.

Based on legal documents from a lawsuit in California, Hindenburg also notes that the company has appealed, as part of its first fundraising efforts, to two individuals who have already been convicted by the Securities and Exchange Commission. (SEC) for securities related crimes.

As for the two brothers identified as the chief tech makers, they are both in their twenties and have no previous experience working at Loop, Hindenburg complains.

“Empty” partnerships

Over the years, Loop has announced numerous partnerships with very big names in the business world: Coca-Cola, PepsiCo, L’Oréal and Danone, in particular. However, these partnerships are effectively “empty”, estimates the firm, after having entered into contact with these companies.

Press attempted to join these four multinationals on Wednesday. Only L’Oréal Canada responded, indicating that it had no partnership with Loop. “It seems they [Loop] have an agreement with L’Oréal International and unfortunately I have no details, ”said L’Oréal Canada spokesperson, Virginie Hotte-Dupuis, in an email to The Press.

Hindenburg says he spoke with former Loop chief growth officer Nelson Switzer who said multinationals are betting “on all kinds of things” and can then take a year or two after the partnership is announced to complete. eventually due diligence.

None of the partners Hindenburg contacted claimed to have received recycled plastic from Loop.

In 2017, the company contacted the mayor of Montreal East, Robert Coutu, with the goal of possibly building a factory there. The project never saw the light of day.

“I spoke with Daniel Solomita,” Mr. Coutu told Press. I met him, they did a demonstration and a site visit. They were coming in October 2018 to Montreal East. I had checked with our clerk, M^e Sergerie, for the zoning at the time and it was OK. They created about fifty jobs. It was a company with a clientele of international level. They were in talks with customers including Pepsi, Evian and others. I haven’t heard from them since then. ”

Interestingly, three company insiders took advantage of the stock’s drop in the past two days to acquire it. They spent a total of US $ 202,715.

Who is Hindenburg Research?

Hindenburg Research is a New York firm behind the writing of several scathing reports about listed companies.

Founded three years ago by activist investor Nate Anderson, Hindenburg last month published the report calling the Nikola company a “complex fraud based on lies”. The title of the manufacturer of electric and hydrogen trucks fell in the aftermath of US $ 90 to less than US $ 20.

Hindenburg has already targeted the producer of pot Ontario Aphria. The firm published several reports on Aphria in 2018, including raising “red flags” surrounding the management of the company. In fact, Aphria has experienced several difficulties that have plagued the title since.

Hindenburg is betting against the targeted securities, ie it has sold them short. Clearly, Hindenburg will take good profits if the stock falls, but could lose a lot of money if the stock goes up.

In an interview with the American weekly Barron’s Last month, Anderson clarified that Hindenburg not only publishes negative reports on companies, but that the firm is also acquiring blocks of shares in companies deemed interesting. Hindenburg does not advertise the securities in which it invests because they are rather “common”, he says. Prior to founding Hindenburg, Nate Anderson notably worked for nearly four years at FactSet Research, a US provider of financial data.

Hindenburg says he’s trying to track down potential “disasters in the marketplace and point the reflectors there before they claim more innocent lives.”

Many firms like Hindenburg are publishing outrageous reports in an attempt to profit from the stock market crash the allegations could provoke. Sometimes it works well. Sometimes it works less well. Other Quebec companies have been targeted in recent years. The most famous case is that of the Laval-based company Valeant (now Bausch Health), which was the subject of a devastating report five years ago prepared by Citron Research, a prelude to the company’s rout. The year before, Spruce Point Capital had targeted medical technology company TSO3, saying investors were underestimating the risk of a major marketing partnership ending. This is what happened a few months later, marking the beginning of the end of TSO3.

In 2018, Spruce Point this time targeted Dollarama, but with less success: the title had been momentarily achieved, but had regained lost ground.

Loop CEO loses US $ 100 million in two days

Founder and boss of Loop Industries, Daniel Solomita is also its main shareholder. He owns nearly 47% of Loop’s shares and controls nearly 80% of the votes. The storm hitting Loop cost it US $ 100 million this week. The block of 18.8 million shares he controls is nevertheless worth 142 million US at the current market price. The 45-year-old studied administration at Dawson College in the mid-1990s before enrolling at Concordia University, according to documents filed with the Securities and Exchange Commission. He then worked for the Montreal firm CGI for ten years. His LinkedIn profile shows that he has been enrolled in a management program at the Massachusetts Institute of Technology (MIT) for four years. Since 2012, Daniel Solomita has owned a numbered company doing business under the name SMH Recycling in the plastics trade in Asia and Germany, it is stated in a document filed with the authorities by Loop.

– With Isabelle Dubé, André Dubuc and Nathaëlle Morissette, Press