10-Q: Li-Cycle Holdings Corp. Reports Q2 2024 Results Amidst Strategic Review and Financial Challenges

Li-Cycle Holdings Corp. announced its Q2 2024 results, highlighting a strategic review of the Rochester Hub project, ongoing cash preservation efforts, and a change in auditors.

Summary

• Li-Cycle reported a net loss of $8.2 million for the three months ended June 30, 2024, and a net loss of $144.9 million for the six months ended June 30, 2024.
• Revenue increased to $8.4 million for the quarter and $12.6 million for the six months, driven by recycling service revenue and fair value adjustments.
• The company is actively exploring financing options, including a potential loan from the U.S. Department of Energy, but there is no assurance of securing additional funding.
• Li-Cycle has paused construction of the Rochester Hub project and is reviewing its go-forward strategy, focusing on producing lithium carbonate and MHP.
• The company has implemented a cash preservation plan, including workforce reductions and pausing operations at the Ontario Spoke.
• Li-Cycle has changed its independent registered public accounting firm from KPMG to Marcum Canada LLP.
• The company has $66.6 million in cash and cash equivalents as of June 30, 2024, a decrease of $13.7 million from the end of 2023.
• The company has convertible debt of $426.4 million as of June 30, 2024.
• The company has identified material weaknesses in its internal control over financial reporting.

Sentiment

Score: 3

Explanation: The document highlights significant financial losses, operational challenges, and uncertainties about the company's future, leading to a negative sentiment. While there are some positive aspects, such as revenue growth and new agreements, the overall tone is cautious and concerning.

Positives

• Revenue increased in Q2 2024 compared to Q2 2023, driven by recycling service revenue and fair value adjustments.
• The company is actively exploring financing options, including a potential loan from the U.S. Department of Energy.
• The company has implemented a cash preservation plan to reduce expenses and slow cash outflows.
• The company has secured new recycling agreements with prominent EV OEMs and battery cell manufacturers in North America and Europe.

Negatives

• The company reported a net loss of $8.2 million for Q2 2024 and a net loss of $144.9 million for the six months ended June 30, 2024.
• The company has paused construction of the Rochester Hub project and is reviewing its go-forward strategy.
• The company has identified material weaknesses in its internal control over financial reporting.
• The company has a declining cash balance, with $66.6 million in cash and cash equivalents as of June 30, 2024, a decrease of $13.7 million from the end of 2023.
• The company has incurred a debt extinguishment loss of $58.9 million in the six months ended June 30, 2024.
• The company has paused or slowed operations at its operational Spokes in North America and Europe.

Risks

• There is substantial doubt about the company's ability to continue as a going concern without additional financing.
• The company may not be able to secure additional funding at attractive commercial terms or at all.
• The company is subject to various claims and legal proceedings, including shareholder lawsuits and mechanics liens.
• The company relies on a limited number of commercial partners to generate most of its revenue.
• The company's common shares may be delisted from the NYSE if it fails to comply with continued listing requirements.
• The company's failure to effectively remediate material weaknesses in its internal control over financial reporting could have a material adverse effect on its business and financial results.
• The company is exposed to commodity price movements for nickel and cobalt.

Future Outlook

The company expects to continue to generate net negative operating cash flow prior to completing and operating the currently paused Rochester Hub asset. The company will require significant additional funding before restarting the Rochester Hub project. The company expects to continue to pause or slow down operations at its operational Spokes in North America over the course of 2024.

Management Comments

• We continue to focus on our review of critical projects, execute against our cash preservation plan and advance funding opportunities.
• We continue to optimize our existing BM&E production abilities within our Spoke network and focus on further cost reductions and operational efficiencies to conserve cash and bolster our balance sheet.

Industry Context

The document notes a robust long-term demand for EVs and hybrids, but also highlights current macroeconomic and industry trends that have resulted in reduced project commitments to build EV-related supply chains. The company expects significant growth in the amount of LIB materials available for recycling, but also notes a deficit of post-processing capacity for black mass in North America and Europe.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards, but it does note that the company's operational activities and product revenue are influenced by the commodity prices for nickel and cobalt, which have experienced recent pricing softness.
• The document also notes that the lithium market has had a surplus of available production relative to estimated demand during the first six months of 2024.
• The document does not provide specific comparisons to other companies in the battery recycling industry, but it does note that the company is focused on supporting key OEM and strategic partners.

Management Changes

Corporate Governance

Legal Proceedings

• Three shareholder lawsuits were launched following the company's announcement on October 23, 2023 that it would be pausing construction on the Rochester Hub project.
• On January 26, 2024, the company filed a lawsuit in New York State Court in Monroe County, seeking an order requiring Pike Conductor DEV 1, LLC to amend and restate the agreement as a ground lease and to pay damages of at least $39.0 million $53.0 million. The parties reached a settlement on May 31, 2024.
• On April 9, 2024, Mastec Industrial Corp. commenced arbitration proceedings against the company's subsidiary, Li-Cycle North America Hub, Inc., seeking recovery of $48.7 million allegedly due under the construction contract for the Rochester Hub project, plus interest, fees, costs and expenses. MasTec is also seeking to enforce its lien through a foreclosure action and an affiliate of MasTec has filed a separate foreclosure action.

Related Party Transactions

• The company has convertible debt instruments with affiliates of Glencore plc.
• The company has agreements with Glencore to sell certain products from its Spokes.
• The company has engaged Fade In Production Pty. Ltd., which is controlled by certain members of the immediate family of the former interim non-executive Chair of the company's Board, to provide it with corporate video production services.
• The company has engaged Consulero Inc., which is controlled by certain members of the immediate family of the company's President and Chief Executive Officer, to provide it with technology services in relation to the company's inventory management system.

Stakeholder Impact

• Shareholders are impacted by the company's financial losses, strategic review of the Rochester Hub project, and the potential for delisting from the NYSE.
• Employees are impacted by workforce reductions and changes in management structure.
• Customers are impacted by the company's focus on supporting key OEM and strategic partners.
• Suppliers are impacted by the company's renegotiation of payment terms.
• Creditors are impacted by the company's convertible debt and the potential for a change of control.

Next Steps

• The company will continue to advance its comprehensive review of the go-forward strategy for the Rochester Hub project.
• The company will continue to implement its Cash Preservation Plan.
• The company will continue to explore financing options focused on addressing the company's immediate liquidity needs.
• The company will continue to re-evaluate its strategy for bringing on additional Spoke and Hub capacity in the near-term.

Key Dates

Keywords

Li-Cycle, battery recycling, lithium-ion batteries, Rochester Hub, financial results, cash preservation, convertible debt, material weaknesses, going concern, Glencore, DOE Loan, black mass, MHP, auditor change