10-K/A: Li-Cycle Holdings Corp. Files Amended 10-K, Citing Material Restatement and Going Concern Doubts

Li-Cycle Holdings Corp. has filed an amendment to its annual report on Form 10-K to correct the market value of common shares, update financial statements due to a change in accounting standards, and address material weaknesses in internal controls and going concern doubts.

Summary

• Li-Cycle Holdings Corp. filed an amendment to its annual report on Form 10-K to correct the aggregate market value of its common shares held by non-affiliates.
• The amendment also includes updated financial statements to add unaudited supplementary financial information required by Item 302 of Regulation S-K due to a material retrospective change in the statement of comprehensive income.
• This change was a result of the company's transition from International Financial Reporting Standards (IFRS) to U.S. Generally Accepted Accounting Principles (U.S. GAAP).
• The company also corrected the numbering of certain management contracts in the exhibit index.
• The filing includes certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act.
• The amendment does not modify or update any other financial or non-financial information from the original filing, and does not reflect any events after the original filing date of March 15, 2024.
• The company's independent auditor, KPMG, expressed an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023, citing material weaknesses.
• The company has suffered recurring losses from operations since inception, continued cash outflows from operating activities, and paused its construction of the Rochester Hub project, raising substantial doubt about its ability to continue as a going concern.
• The company reported product sales revenue of $12.6 million for the year ended December 31, 2023, and $5.8 million for the 2 months ended December 31, 2022.
• The company's total revenue was $18.3 million for the year ended December 31, 2023, compared to $5.9 million for the two months ended December 31, 2022, and $13.4 million for the year ended October 31, 2022.
• The company's net loss was $138.0 million for the year ended December 31, 2023, compared to a net income of $1.6 million for the two months ended December 31, 2022, and a net loss of $50.3 million for the year ended October 31, 2022.
• The company's cash and cash equivalents decreased significantly from $517.9 million at the end of 2022 to $70.6 million at the end of 2023.
• The company has a negative working capital of $7.7 million as of December 31, 2023.
• The company has paused construction on its Rochester Hub project due to escalating costs, which were expected to exceed the previously disclosed budget of $560 million.
• The company is actively exploring external financing options, including a $75 million senior secured convertible note from Glencore, but there is no assurance that additional funding will be secured.
• The company has implemented a cash preservation plan, including reducing staffing and pausing production at its Ontario Spoke.

Sentiment

Score: 2

Explanation: The document reveals significant financial distress, including substantial losses, a sharp decline in cash reserves, and a paused major project. The adverse opinion on internal controls and the going concern doubts further contribute to a very negative outlook.

Positives

• The company is actively pursuing additional funding alternatives, including working with the United States Department of Energy (DOE).
• The company has a global lithium-ion battery recycling partnership with a leading global provider of industrial trucks and supply chain solutions.
• The company has taken steps to preserve cash flow, including reducing staffing and pausing production at its Ontario Spoke.

Negatives

• The company has suffered recurring losses from operations since inception.
• The company has continued cash outflows from operating activities.
• The company has paused construction of the Rochester Hub project due to escalating costs.
• The company has a negative working capital of $7.7 million as of December 31, 2023.
• The company's independent auditor, KPMG, expressed an adverse opinion on the effectiveness of the company's internal control over financial reporting.
• There is substantial doubt about the company's ability to continue as a going concern.
• The company has material weaknesses in its internal control environment, risk assessment process, information and communication processes, and financial statement close control activities.

Risks

• The company may not be able to secure additional funding under reasonable commercial terms or at all.
• Additional financing may be insufficient to provide sufficient liquidity for ongoing operations or to fund future growth or capital projects.
• Additional financing may have restrictive covenants that significantly limit the company's operating and financial flexibility.
• There are inherent risks associated with the company's ability to execute its growth strategy.
• The company may not be able to develop the manufacturing capabilities and processes, secure reliable sources of component supply, or meet required production volumes.
• The company is subject to various claims and legal proceedings in the ordinary course of its business.
• The company is facing shareholder litigation related to the announcement of the Rochester Hub construction pause.
• The company is exposed to commodity price movements for the inventory it holds and produces.

Future Outlook

The company is actively exploring external financing options and is working with the United States Department of Energy (DOE) towards obtaining financing for the Rochester Hub. However, there is no assurance that additional funding will be secured, and any additional financing may be insufficient to provide sufficient liquidity for ongoing operations or to fund future growth or capital projects.

Management Comments

• Management has concluded that there is substantial doubt about its ability to continue as a going concern for a period of one year from the date that these consolidated financial statements were issued.
• Management is implementing mitigating initiatives to strengthen its financial position, enhance liquidity, and preserve cash flow.

Industry Context

The document highlights the challenges faced by a company in the lithium-ion battery recycling industry, including the high capital costs of building recycling facilities, the volatility of commodity prices, and the complexities of scaling up operations. The company's struggles reflect the broader challenges in the industry as it seeks to meet the growing demand for battery recycling.

Comparison to Industry Standards

• The company's financial performance, particularly the significant net losses and cash burn, is worse than many established companies in the broader recycling industry.
• The pause in construction of the Rochester Hub is a significant setback compared to other companies that have successfully completed similar projects.
• The adverse opinion on internal controls is a serious concern, as it indicates a lack of robust financial management practices, which is not typical for publicly listed companies.
• The company's reliance on convertible debt and the need for additional financing highlight its precarious financial position compared to more financially stable competitors.
• The company's negative working capital is a sign of financial distress, which is not common among well-established companies in the industry.

Legal Proceedings

• The company is subject to various claims and legal proceedings in the ordinary course of its business.
• Three shareholder suits were launched following the company's announcement on October 23, 2023, that it would be pausing construction on the Rochester Hub project.
• The company received a notice of a subrogation liability claim by an insurance company on behalf of one of the other tenants of the New York Spokes warehouse.

Related Party Transactions

• The company has convertible debt instruments with Glencore Ltd.
• The company has agreements with Glencore, pursuant to which Glencore purchases certain by-products produced at the company's Spokes.
• The company has engaged Fade In Production Pty. Ltd., which is controlled by certain members of the immediate family of the Executive Chair of Li-Cycle, to provide it with corporate video production services.
• The company has engaged in sourcing and marketing fee agreements with Glencore.

Stakeholder Impact

• Shareholders are negatively impacted by the company's poor financial performance, the pause in the Rochester Hub project, and the potential for further dilution through capital raises.
• Employees are impacted by the company's cash preservation plan, which includes reducing staffing.
• Customers may be impacted by the company's financial instability and potential disruptions to its operations.
• Suppliers may be impacted by the company's financial instability and potential delays in payments.
• Creditors are at risk due to the company's financial instability and the substantial doubt about its ability to continue as a going concern.

Next Steps

• The company will continue to explore external financing options.
• The company will continue to work with the United States Department of Energy (DOE) towards obtaining financing for the Rochester Hub.
• The company will continue to implement its cash preservation plan.
• The company will continue to review the go-forward strategy for the Rochester Hub project.

Key Dates

Keywords

Li-Cycle, Lithium-ion battery recycling, Financial statements, Going concern, Internal control, Rochester Hub, Convertible debt, Material weakness, Cash flow, Revenue, Net loss, Capital raise, Glencore, KPMG, US GAAP, IFRS