ROMEO POWER, INC. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q (this "Quarterly Report") to the "Company," "Romeo," "we," "us," "our" and similar terms refer toRomeo Power, Inc. (f/k/aRMG Acquisition Corp. ) and its consolidated subsidiaries. References to "RMG" refer toRMG Acquisition Corp. prior to the consummation of the Business Combination (as defined below) and "Legacy Romeo" refers toRomeo Systems, Inc. Forward-Looking Statements This Quarterly Report contains "forward-looking statements" relating to our future financial performance, the market for our services and our expansion plans and opportunities. Any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "would," "expect," "plan," "anticipate," "contemplate," "intend," "believe," "estimate," "continue," "goal," "project" or the negative of such terms or other similar terms. These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or otherwise implied by the forward-looking statements, including the following: •risks that we are unsuccessful in integrating potential acquired businesses and product lines; •risks of decreased revenues due to pricing pressures or lower product volume ordered from customers; •risks that our products and services fail to interoperate with third-party systems; •potential price increases or lack of availability of third-party technology, battery cells, components or other raw materials that we use in our products; •potential disruption of our products, offerings, and networks; •our ability to deliver products and services following a disaster or business continuity event; •risks resulting from our international operations, including overseas supply chain partners; •risks related to strategic alliances, such as our joint venture with BorgWarner (the "BorgWarner JV"); •risks related to BorgWarner's recent exercise of its right to put its membership interest in the BorgWarner JV to us for 95% of the market value, and the timing and impact of such purchase on our financial condition and business operations; •risks related to our ability to raise additional capital in the future if required; •potential unauthorized use of our products and technology by third parties; •potential impairment charges related to our long-lived assets, including our fixed assets and equity method investments; •changes in applicable laws or regulations, including tariffs and similar charges; •potential failure to comply with privacy and information security regulations governing the client datasets we process and store; •the possibility that the novel coronavirus ("COVID-19") pandemic may adversely affect our future results of operations, financial position and cash flows; and •the possibility that we may be adversely affected by other economic, business or competitive factors. The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with or furnish to theSecurities and Exchange Commission ("SEC"), including the information in "Item 1A. Risk Factors" included in Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2020 ("Form 10-K"). If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Overview We are an industry leading energy storage technology company focused on designing and manufacturing lithium-ion battery modules and packs for commercial electric vehicles. Through our energy dense battery modules and packs, we enable large-scale, sustainable transportation by delivering safe, longer lasting batteries that have shorter charge times and longer life. With greater energy density, we are able to create lightweight and efficient solutions that deliver superior performance and provide improved acceleration, range, and durability compared to battery packs provided by our competitors. Our modules and packs are customizable and scalable and are optimized by our proprietary battery management system ("BMS"). We differentiate ourselves from competitors by leveraging our technical expertise and depth of knowledge of energy storage systems. 28 --------------------------------------------------------------------------------
We expect our capital and operating expenditures to increase significantly in connection with our ongoing activities and to prepare for growth, as the Company:
•purchases production equipment and increases the number of production lines used to manufacture its products; •commercializes products; •continues to invest in research and development related to new technologies; •commits to long-term supply agreements with cell suppliers that may require substantial advance payment; •increases its investment in marketing and advertising, as well as the sales and distribution infrastructure for its products and services; •maintains and improves operational, financial, and management information systems; •hires additional personnel; •obtains, maintains, expands, and protects its intellectual property portfolio; and •enhances internal functions to support the requirements of a publicly-traded company. Comparability of Financial Information Our results of operations and reported assets and liabilities may not be comparable between periods as a result of the Business Combination and becoming a public company. As a result of the Business Combination, we became aNew York Stock Exchange ("NYSE") listed company, which has required and will continue to require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit, compliance, and legal fees.
Key Factors Affecting Operating Results
We believe that our performance and future success depend on a number of factors that present significant opportunities for us, but also pose risks and challenges, including those discussed below and in the section titled "Risk Factors" in the 2020 Form 10-K. COVID-19 Pandemic Update OnMarch 11, 2020 , theWorld Health Organization ("WHO") declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide, including workforces, liquidity, capital markets, consumer behavior, supply chains, and macroeconomic conditions. Some locales continue to impose prolonged quarantines and restrict travel. These restrictions have impacted and continue to impact the ability of our employees to get to their places of work to produce products, our ability to obtain sufficient components or raw materials and component parts on a timely basis or at a cost-effective price, and our ability to keep our products moving through the supply chain. We took temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily requiring some employees to work remotely and implementing social distancing protocols for all work conducted onsite. We continue to suspend non-essential travel worldwide for employees, and we are discouraging employee attendance at other gatherings. For the nine months endedSeptember 30, 2021 , there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate and are increasing in various regions. There are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains, such as increased port congestion and intermittent supplier delays. To date, COVID-19 has had a limited adverse impact on our operations, supply chains, and distribution systems, but has resulted in higher costs for, increased lead times and increased scarcity of raw materials than previously expected. Our efforts to qualify certain new suppliers, particularly inAsia , have been hampered which has required us to continue using higher cost components for our products. Because of travel restrictions, we are unable to visit many prospective customers in person, which could delay the sales conversion cycle. Due to these precautionary measures and resulting global economic impacts, we may experience significant and unpredictable reductions in demand for certain of our products. The degree and duration of disruptions to future business activities are unknown at this time. Ultimately, we cannot predict the duration of the COVID-19 pandemic. We will continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and 29 --------------------------------------------------------------------------------
we will have to accurately project demand and infrastructure requirements and deploy our production, workforce and other resources accordingly.
Global Battery Cell Shortage
The cost of battery cells manufactured by our suppliers, depends in part upon
the prices and availability of raw materials such as lithium, nickel, cobalt
and/or other metals. Costs for these raw materials have increased due to higher
production costs and demand surges in the electric vehicle ("EV") market. The
prices for these materials fluctuate, and their available supply may be
unstable, depending on market conditions and global demand, including as a
result of increased global production of electric vehicles and energy storage
products. A rise in the number of EV start-up companies in the United States
that received substantial funding pursuant to capital markets transactions via
mergers with special purpose acquisition companies (SPACs) in 2020 also has
contributed to increases in demand. Any reduced availability of these materials
may impact our access to cells, and any increases in their prices may reduce our
profitability if we cannot recoup the increased costs through the pricing of our
products or services. The availability and price of cylindrical cells, which is
the form we use in our products, is particularly sensitive to the demand surge
since most of the supply of other cell forms, such as pouch and prismatic cells,
has been allocated previously, in some cases several years in advance.
Our current products are designed around cylindrical cells because such cells
allow for optimal energy density, longest life, and the highest level of safety.
There are only three battery cell suppliers for cylindrical cells ("Tier 1
Suppliers") whose cells are qualified for use in EV applications because of
their superior quality, performance, and safety standards. Other battery cell
suppliers who manufacture cylindrical cells are emerging as potentially
qualified sources for EV applications. We are conducting our rigorous
qualification and validation process on these alternative cell suppliers in
order to introduce more sourcing options into our product without sacrificing
necessary performance and safety. Increased demand for electric vehicles
globally has outpaced the cell production capacity of the Tier 1 Suppliers.
While the Tier 1 Suppliers are increasing their output capacity in Asia and in
the United States , electric vehicle battery pack manufacturers are competing for
a severely limited supply of battery cells in the short and medium term. As a
result of the increased demand and higher raw material costs, battery cell
pricing has increased for cell purchases between 2021 and 2023. Pricing
indications from our cell suppliers indicate demand may start to stabilize in
2023 although we cannot be certain this will occur.
Effective August 10, 2021 , we entered into a long-term supply agreement (the
"Supply Agreement") for the purchase of lithium-ion battery cells with a Tier 1
battery cell and materials manufacturer ("Supplier"). Under the Supply
Agreement, the Supplier is committed to supplying cells to us, at escalating
annual minimum quantities, through June 30, 2028 . For further discussion of the
Supply Agreement please see Note 15 - Commitments and Contingencies in the Notes
to the Condensed Consolidated Financial Statements.
Key Components of Operating Results
The following discussion describes certain line items in our condensed
consolidated statements of operations and comprehensive (loss) income.
Revenue
We primarily generate revenue from the sale of battery modules, battery packs,
and BMS, as well as the performance of engineering services, inclusive of the
development of prototypes. Revenue generated from the sale of our battery
modules, battery packs, and BMS under standard supply or production contracts is
presented as product revenue in our condensed consolidated statements of
operations and comprehensive (loss) income. Revenue generated from the
production of prototypes is included in services revenue in our condensed
consolidated statements of operations and comprehensive (loss) income, when
prototypes are developed as a part of broader engineering services contracts,
which are commonly entered into prior to signing a full production contract with
a customer. Services revenue also includes revenue earned for engineering
services provided to the BorgWarner JV.
Cost of Revenue and Gross Loss
Cost of revenue is comprised primarily of product costs, personnel costs (e.g.,
for production line and production management employees), logistics and freight
costs, depreciation and amortization of manufacturing and test equipment, and
allocation of fixed overhead expenses. Our product costs are impacted by
technological innovations, such as advances in battery controls and battery
configurations, new product introductions, economies of scale that result in
lower component costs, and improvements in and automation of our production
processes. Our production line and production management personnel costs
30
--------------------------------------------------------------------------------are primarily impacted by (1) changes in headcount, number of shifts, and number of production lines that will be required to meet our anticipated future production levels, and (2) compensation and benefits.
Gross profit or loss may vary between periods and is primarily affected by production volumes, product costs, including costs for raw materials, components and labor, product mix, customer mix, and warranty costs. Operating Expenses Operating expenses primarily consist of research and development costs and selling, general, and administrative costs. Personnel-related costs are the most significant component of each of these expense classifications and include salaries, benefits, payroll taxes, sales commissions, incentive compensation, and stock-based compensation. Research and Development Expense Research and development expense includes personnel-related costs, third-party design and development costs, testing and evaluation costs, and other indirect costs. Research and development employees are primarily engaged in the design and development of cell science design and engineering, battery module related technology and electro-mechanical engineering, thermal engineering, and BMS engineering. We devote substantial resources to research and development programs that focus on both enhancements to, and cost efficiencies in, existing products and the timely development of new products that utilize technological innovation to drive down product costs, improve product functionality, and enhance product safety and reliability. We intend to continue to invest resources in research and development efforts on an on-going basis, as we believe this investment is critical to maintaining and strengthening our competitive position. Selling, General, and Administrative Expense Selling, general, and administrative expense includes both sales and marketing costs and general and administrative costs associated with back-office functions. Sales and marketing expense includes personnel-related costs, as well as marketing, customer support, trade show, and other indirect costs. We expect to continue to make the necessary sales and marketing investments to enable the execution of our strategy, which includes increasing market penetration geographically, and entering into new markets. We currently offer products to electrify commercial trucks, buses, mining and agricultural equipment, and watercraft. We expect to expand the geographic reach of our product offerings and explore new revenue channels in our addressable markets in the future. General and administrative expense includes personnel-related costs attributable to our executive, finance, human resources, and information technology organizations; certain facility costs; and fees for professional services. Fees for professional services consist primarily of outside legal and accounting, consulting, audit and tax costs. Interest Expense Interest expense recognized during the three and nine months endedSeptember 30, 2020 , primarily consisted of interest incurred under Legacy Romeo's outstanding notes. As Legacy Romeo's outstanding notes were converted into our Common Stock or extinguished upon consummation of the Business Combination, we have not incurred material interest expense subsequent to the Business Combination. Change in Fair Value of Public and Private Placement Warrants InFebruary 2019 , RMG issued 7,666,648 warrants (the "Public Warrants") to purchase shares of Common Stock at$11.50 per share. Simultaneously, RMG issued 4,600,000 warrants (the "Private Placement Warrants" and, together with the Public Warrants, the "Public and Private Placement Warrants") to purchase shares of Common Stock at$11.50 per share toRMG Sponsor, LLC , certain funds and accounts managed by subsidiaries of BlackRock, Inc., and certain funds and accounts managed byAlta Fundamental Advisers LLC . The Company re-measures the fair value of the Public and Private Placement Warrants at each reporting period. OnFebruary 16, 2021 , we announced the redemption of all of the outstanding Public Warrants to purchase shares of our Common Stock. The Public Warrants were issued under the Warrant Agreement, datedFebruary 7, 2019 , by and between RMG andAmerican Stock Transfer & Trust Company, LLC , as warrant agent, as part of the units sold in the initial public offering of RMG. OnApril 5, 2021 , 7,223,683 Public Warrants were redeemed at the redemption price of$0.01 per Public Warrant. The Company paid Public Warrant holders a total of$72,237 in connection with the redemption. 31 -------------------------------------------------------------------------------- Gain from extinguishment of PPP loan As a result of COVID-19, we faced risks to raising necessary capital which could significantly disrupt our business. To help mitigate those risks and support our ongoing operations, we received loan proceeds from two loans totaling$3.34 million under theU.S. Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses. The loans and accrued interest are forgivable after 24 weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. We applied for forgiveness of the loans following the covered period of the loans. InAugust 2021 , we received a notice from the SBA that our$3.3 million PPP loan was fully forgiven. AtSeptember 30, 2021 , the$0.04 million PPP loan remained outstanding.
Investment Gain (Loss), Net
Investment gain (loss), net primarily includes realized gains or losses recognized in connection with our available-for-sale debt investments. Other Expense
InApril 2020 , Legacy Romeo agreed to cancel$1.8 million of$9.1 million stockholder notes receivable outstanding as ofDecember 31, 2019 , in the event of a sale of Legacy Romeo or an initial public offering. As a result, we recorded$1.6 million in other expense for the nine months endedSeptember 30, 2020 , which represented the estimated fair value of the derivative liability as ofSeptember 30, 2020 .
Loss in Equity Method Investments
Loss in equity method investments reflects the recognition of our proportional share of the net losses of our equity method investments. For the three and nine months endedSeptember 30, 2021 and 2020, these losses relate only to the BorgWarner JV, in which we hold a 40% ownership interest. As ofSeptember 30, 2021 , there was no activity related toHeritage Battery Recycling, LLC ("HBR"). Therefore, during the three and nine months endedSeptember 30, 2021 , there are no profits or losses from our equity method investment in HBR to be recognized.
Benefit from Income Taxes
The effective tax rate realized for each period was significantly below the Federal statutory rate of 21.0%, as we incurred significant operating losses during each reporting period and did not recognize an income tax benefit associated with these losses because a full valuation allowance is maintained against our net deferred income tax assets. Amounts reflected in benefit from income taxes generally represent various state and local taxes and consist primarily ofCalifornia franchise tax. 32 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended
September 30, $ %
2021 2020 Change Change
Revenues: (dollars in thousands)
Product revenues $ 2,740 $ 51 $ 2,689 5273 %
Service revenues 3,019 624 2,395 384 %
Total revenues 5,759 675 5,084 753 %
Cost of revenues:
Product cost 7,904 716 7,188 1004 %
Service cost 2,565 1,080 1,485 138 %
Total cost of revenues 10,469 1,796 8,673 483 %
Gross loss (4,710) (1,121) (3,589) 320 %
Operating expenses:
Research and development 4,732 1,817 2,915 160 %
Selling, general, and administrative 17,607 4,945 12,662 256 %
Total operating expenses 22,339 6,762 15,577 230 %
Operating loss (27,049) (7,883) (19,166) 243 %
Interest expense (4) (265) 261 (98) %
Change in fair value of public and private
placement warrants 6,134 - 6,134 NM
Gain from extinguishment of PPP loan 3,300 - 3,300 NM
Investment gain, net 266 - 266 NM
Other expense - (228) 228 (100) %
Loss before income taxes and loss in equity
method investments (17,353) (8,376) (8,977) 107 %
Loss in equity method investments (611) (540) (71) 13 %
Benefit from income taxes 11 - 11 NM
Net loss $ (17,953) $ (8,916) $ (9,037) 101 %
NM = Not meaningful
33--------------------------------------------------------------------------------
Nine Months Ended
September 30, $ %
2021 2020 Change Change
Revenues: (dollars in thousands)
Product revenues $ 3,818 $ 2,097 $ 1,721 82 %
Service revenues 3,921 2,229 1,692 76 %
Total revenues 7,739 4,326 3,413 79 %
Cost of revenues:
Product cost 17,884 5,182 12,702 245 %
Service cost 3,357 2,669 688 26 %
Total cost of revenues 21,241 7,851 13,390 171 %
Gross loss (13,502) (3,525) (9,977) 283 %
Operating expenses:
Research and development 10,295 5,213 5,082 97 %
Selling, general, and administrative 54,393 10,303 44,090 428 %
Total operating expenses 64,688 15,516 49,172 317 %
Operating loss (78,190) (19,041) (59,149) 311 %
Interest expense (16) (783) 767 (98)%
Change in fair value of public and private
placement warrants 124,254 - 124,254 NM
Gain from extinguishment of PPP loan 3,300 - 3,300 NM
Investment loss, net (23) - (23) NM
Other expense - (1,614) 1,614 (100) %
Income (loss) before income taxes and loss in
equity method investments 49,325 (21,438) 70,763 330 %
Loss in equity method investments (1,817) (1,272) (545) 43 %
Benefit from income taxes 1 - 1 NM
Net income (loss) $ 47,509 $ (22,710) $ 70,219 309 %
NM = Not meaningful
Three Months Ended September 30, 2021 Compared with Three Months Ended September
30, 2020
Revenues
Three Months Ended September 30,
2021 2020
Amount % Amount %
(dollars in thousands)
Product revenues $ 2,740 48 % $ 51 8 %
Service revenues 3,019 52 % 624 92 %
Total revenues $ 5,759 100 % $ 675 100.0 %
Product revenues
Product revenues increased approximately $2.7 million , or 5273% , for the three
months ended September 30, 2021 , as compared to product revenues for the same
period in the prior year. The increase in product revenues relates to increased
delivery of commercial vehicle battery packs and modules under four active
supply contracts. We expect the current volume of our commercial vehicle battery
pack and module production and delivery activity to continue growing as we
increase delivery on the four supply contracts that started production and
delivery during 2021. Additionally, during the three months ended September 30,
2021 we completed production and delivery on an engineering and prototype
development agreement that is
34
--------------------------------------------------------------------------------
subsequently described in the discussion of service revenues. The engineering
and prototype agreement was the precursor to a current product supply agreement,
for which we recognized $0.9 million of revenue for product deliveries during
the period.
We expect to continue to produce and deliver battery modules and packs at
greater scale in accordance with our more recently signed customer supply
contracts, certain of which provide for minimum take or pay order commitments.
Minimum quantity commitments related to contracts signed through September of
2021 are approximately $547.0 million of backlog.
Service revenues
Service revenues increased approximately$2.4 million , or 384%, for the three months endedSeptember 30, 2021 , as compared to service revenues for the same period in the prior year. The increase is primarily related to the recognition of$2.6 million of service revenues due to the completion of an engineering and prototype development agreement. In accordance with our accounting policy, revenue for this arrangement was deferred until the final developed prototype was delivered, which occurred during the three months endedSeptember 30, 2021 . This increase was offset partially by a$0.1 million reduction in engineering labor services provided to the BorgWarner JV. Cost of Revenues Three Months Ended September 30, 2021 2020 Amount % Amount % (dollars in thousands) Cost of revenues - product cost$ 7,904 75 %$ 716 40 % Cost of revenues - service cost 2,565 25 % 1,080 60 % Total cost of revenues$ 10,469 100 %$ 1,796 100 % Cost of revenues - product cost Cost of revenues associated with product revenue increased approximately$7.2 million , or 1004%, for the three months endedSeptember 30, 2021 , as compared to the same period in the prior year. This increase is largely a result of the$2.7 million increase in product revenues during the period, as described above. Cost of revenues associated with product sales increased due to higher production direct labor headcount and other operating costs attributable to production-related personnel incurred in connection with the ramp-up of shipments to support larger supply contracts. In addition, a portion of the increase in product costs of revenues can be attributed to a higher volume of materials consumed. The increase in material costs also reflects procuring some key components at higher than standard costs and the incurrence of delivery expediting costs due to scarcity of supply. In addition, during the three months endedSeptember 30, 2021 , a$0.4 million increase in expense resulted from the write-down of excess and obsolete inventory primarily due to obsolescence of certain raw materials and work-in-progress inventory as a result of technological advances and excess inventory from purchased quantities exceeding amounts originally expected to be consumed. We did not record any inventory write-downs during the same period in the prior year. Overhead costs included in cost of revenues associated with product revenues increased period over period. A significant portion of the overhead costs that we incurred in both periods include facility rent, utilities, and depreciation of manufacturing equipment and tooling, which are fixed or semi-fixed in nature. As manufacturing activities under our supply contracts increase we would expect to achieve improved leverage on fixed and semi-fixed overhead.
Cost of revenues - service cost
Cost of revenues associated with service revenues increased approximately$1.5 million , or 138%, for the three months endedSeptember 30, 2021 , as compared to cost of revenues associated with service revenues for the same period in the prior year. During the period we recognized$2.6 million of revenue and the related costs associated with the completion of deliveries for a significant engineering and prototype contract, for which revenue and costs previously were deferred, in accordance with our accounting policy, until all engineering services were complete and all prototypes had been delivered. This increase was offset partially by a$0.1 million reduction in the cost of engineering labor services provided to the BorgWarner JV. 35 --------------------------------------------------------------------------------
Research and Development Expense
Research and development expense increased approximately$2.9 million , or 160%, for the three months endedSeptember 30, 2021 , as compared to the same period in the prior year. The increase was primarily attributable to the following items (in thousands): Primary Driver Increase / (Decrease) Compensation and benefit costs $ 2,367 Materials and consumables 592
Primary drivers of the total increase in research and development expense $
2,959
The $2.4 million increase in compensation and benefit costs, was due to a 34%
increase in department headcount as a result of increased research and
development activities to support ongoing technology and product development. In
addition to the increase in compensation and benefits costs, materials and
consumables increased $0.6 million , due to a higher volume of materials
consumed. The increase in materials and consumables also reflects rising costs
and the incurrence of delivery expediting costs due to scarcity of supply.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased approximately $12.7
million , or 256%, for the three months ended September 30, 2021 , as compared to
the same period in the prior year. The increase was primarily attributable to
the following items (in thousands):
Primary Drivers Increase / (Decrease)
Compensation and benefit costs (excluding stock-based compensation) $ 6,099
Stock-based compensation expense* 3,038
HES pilot program 866
Professional fees 688
Insurance 1,415Primary drivers of the total increase in selling, general and administrative expense
$ 12,106
* Amounts have been recast to reflect the corrections described in Note 1 to the Condensed Consolidated Financial Statements.
Compensation and benefits increased$6.1 million due to an 18% increase in departmental headcount and annual compensation increases. The$3.0 million increase in stock-based compensation is related to vesting of stock options, RSUs and PSUs granted under our stock incentive plans. We accrued a$0.9 million payment to Heritage Environmental Services ("HES") for the pilot program that started during the three months endedSeptember 30, 2021 (For further discussion of the HES pilot program, see Note 14 - Transactions with Related Parties in the Notes to the Condensed Consolidated Financial Statements). Professional fees increased$0.7 million primarily as a result of legal, audit and accounting fees associated with new public company accounting and regulatory reporting requirements, as well as additional consulting services obtained to assist with our transition to being a public company. Insurance expense increased approximately$1.4 million reflecting the impact of company growth and associated with being a publicly traded company. As discussed in the 'Overview' section, we expect selling, general, and administrative expense to be higher as compared to historical periods now that the Business Combination has been completed. The higher costs are expected to be attributable to a variety of factors including: increased investment in marketing, advertising, and the sales and distribution infrastructure related to our products and services; increased personnel and other costs supporting internal functions such as operations, finance, and information technology and systems; cost to support our requirements as a publicly traded company.
Interest Expense
In connection with the Business Combination, we repaid or converted all outstanding debt, except for our loans from theU.S. SBA's PPP. The decrease in interest expense reflects the payoff or conversion of substantially all of our debt onDecember 29, 2020 . We did not incur any new debt during the three months endedSeptember 30, 2021 . 36 -------------------------------------------------------------------------------- Change in Fair Value of Public and Private Placement Warrants For the three months endedSeptember 30, 2021 , the change in fair value of the Public and Private Placement Warrants was a decrease of$6.1 million , resulting in the recognition of a gain related to the reduction of the carrying value of the associated liability. The Company re-measures the fair value of the Public and Private Placement Warrants at each reporting period. The decrease in the fair value of the Public and Private Placement Warrants was primarily due to the decrease in the price of our Common Stock. Romeo did not become subject to the recognition of gains and losses from changes in the fair value of the Public and Private Placement Warrants until after the Business Combination and, accordingly, no gain or loss related to such warrants was recognized during the three months endedSeptember 30, 2020 .
Gain from Extinguishment of PPP Loan
Gain from extinguishment of PPP loan for the three months endedSeptember 30, 2021 was$3.3 million and represents the amount of one of our two PPP loans which was forgiven by the SBA inAugust 2021 . We did not have a similar gain during the same period in the prior year.
Investment Gain, net
Investment gain, net for the three months endedSeptember 30, 2021 was approximately$0.3 million , which primarily represents realized gains incurred in connection with our available-for-sale debt investments. We did not have similar activity during the same period in the prior year due to the change in our investment position subsequent to the Business Combination.
Other Expense
InApril 2020 , Legacy Romeo agreed to cancel$1.8 million of$9.1 million stockholder notes receivable outstanding as ofDecember 31, 2019 , in the event of a sale of Legacy Romeo or an initial public offering. As a result, we recorded$0.2 million in other expense for the three months endedSeptember 30, 2020 , which represented the estimated change in fair value of the derivative liability during the period. The non-recurring cancellation of the amount due to us under the stockholder notes receivable was settled during the quarter endedDecember 31, 2020 , and we did not incur similar losses during the same period in the current year. Loss in Equity Method Investments We account for our investment in the BorgWarner JV under the equity method of accounting and, accordingly, recognize our proportionate share of the joint venture's earnings and losses. The amounts recognized as loss in equity method investments for the three months endedSeptember 30, 2021 and 2020 represent our 40% share of the losses recognized by the joint venture for the corresponding period. Net Loss We reported a net loss of$18.0 million for the three months endedSeptember 30, 2021 , as compared to a net loss of$8.9 million for the same period in the prior year. The increase in the net loss recognized for the three months endedSeptember 30, 2021 was due to the factors discussed above. Nine Months EndedSeptember 30, 2021 Compared with Nine Months EndedSeptember 30, 2020 Revenues Nine Months Ended September 30, 2021 2020 Amount % Amount % (dollars in thousands) Product revenues$ 3,818 49 %$ 2,097 48 % Service revenues 3,921 51 % 2,229 52 % Total revenues$ 7,739 100 %$ 4,326 100 % 37
-------------------------------------------------------------------------------- Product revenues Product revenues increased approximately$1.7 million , or 82%, for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year. The increase in product revenues relates primarily to increased delivery on the four supply contracts that started production and delivery during 2021 resulting in recognition of$1.3 million of product revenues. The term of the four supply contracts run through our fiscal years endingDecember 31, 2024 . Additionally, we have completed production and delivery on an engineering and prototype development agreement that is subsequently described in the discussion of service revenues. The engineering and prototype agreement was the precursor to a current product supply agreement, for which we recognized$0.9 million of revenue for product deliveries during the period. During the nine months endedSeptember 30, 2021 , the average selling prices per unit did not have a significant impact on revenues, as compared to the same period in the prior year. Minimum quantity commitments related to contracts signed through September of 2021 is approximately$547.0 million of backlog. With the completion of the delivery of engineering and prototype services, we expect to recognize approximately$9.8 million of this backlog revenue during the remainder of our fiscal year endingDecember 31, 2021 . Service revenues Service revenues increased approximately$1.7 million , or 76%, for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year. The increase is primarily related to the recognition of$2.6 million of service revenues due to the completion of an engineering and prototype development agreement. In accordance with our accounting policy, revenue for this arrangement was deferred until the final developed prototype was delivered, which occurred during the current year. This increase was partially offset by a$0.7 million reduction in engineering labor services provided to the BorgWarner JV. Cost of Revenues Nine Months Ended September 30, 2021 2020 Amount % Amount % (dollars in thousands) Cost of revenues - product cost$ 17,884 84 %$ 5,182 66 % Cost of revenues - service cost 3,357 16 % 2,669 34 % Total cost of revenues$ 21,241 100 %$ 7,851 100 % Cost of revenues - product cost Cost of revenues associated with product revenues increased approximately$12.7 million , or 245%, for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year. Our costs of product revenue increased, in part as a result of an increase of$1.7 million in product revenues recognized during the period. Cost of revenues associated with product sales further increased due to higher production labor headcount and other operating costs attributable to production-related personnel incurred in connection with the ramp-up of shipments to support larger supply contracts. In addition, a portion of the increase in product costs of revenues can be attributed to a higher volume of materials consumed. The increase in material costs also reflects procuring some key components at higher than standard costs and the incurrence of delivery expediting costs due to scarcity of supply. In addition to the above drivers, we realized a$1.6 million increase in expense resulting from the write-down of excess and obsolete inventory during the nine months endedSeptember 30, 2021 , primarily due to obsolescence of certain raw materials and work-in-progress as a result of technological advances and excess inventory from final purchase orders differing from our estimates. We did not record any inventory write-downs during the same period in the prior year. Overhead costs remained consistent period over period. A significant portion of the overhead costs that we incurred in both periods include facility rent, utilities, and depreciation of manufacturing equipment and tooling, which are fixed or semi-fixed in nature. As manufacturing activities under our supply contracts increase, we would expect to achieve improved leverage on fixed and semi-fixed overhead costs. 38 -------------------------------------------------------------------------------- Cost of revenues - service cost Cost of revenues associated with service revenues increased approximately$0.7 million , or 26%, for the nine months endedSeptember 30, 2021 , as compared to cost of revenues associated with service revenues for the same period in the prior year. Cost of revenues associated with service revenue increased due to the completion of engineering and prototype contracts for which revenue and costs are deferred until all engineering services are complete and all prototypes have been delivered. This increase was partially offset by the cost of revenue attributable to providing engineering services to the BorgWarner JV which decreased by$0.6 million during the period due to decreased services provided to the BorgWarner JV during the period.
Research and Development Expense
Research and development expense increased approximately$5.1 million , or 97%, for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year. The increase was primarily attributable to the following item (in thousands): Primary Driver Increase / (Decrease) Compensation and benefit costs $ 4,382 Materials and consumables 630
Primary drivers of the total increase in research and development expense $
5,012
The $4.4 million increase in compensation and benefit costs, was due to a 49%
increase in department headcount as a result of increased research and
development activities to support ongoing technology and product development. In
addition to the increase in compensation and benefits costs, materials and
consumables increased $0.6 million , due to a higher volume of materials
consumed. The increase in materials and consumables also reflects rising costs
and the incurrence of delivery expediting costs due to scarcity of supply.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased approximately
$44.1 million , or 428%, for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. The increase was primarily
attributable to the following items (in thousands):
Primary Drivers Increase / (Decrease)
Compensation and benefit costs (excluding stock-based compensation) $ 12,791
Professional fees 7,519
Stock-based compensation* 12,589
Insurance 4,027
HES pilot program 866Primary drivers of the total increase in selling, general and administrative expense
$ 37,792
* Amounts have been recast to reflect the corrections described in Note 1 to the Condensed Consolidated Financial Statements.
The$12.6 million increase in stock-based compensation expense was driven primarily by the performance and market-based stock option grant awarded to our former chairman and CEO, for which we recognized$5.3 million of stock-based compensation expense during the period. The additional stock-based compensation expense is related to vesting of stock options, RSUs and PSUs granted under our stock incentive plans. Professional fees increased$7.5 million primarily as a result of legal, audit and accounting fees associated with new public company accounting and regulatory reporting requirements and additional consulting services obtained to assist with our transition to being a public company. Compensation and benefits increased$12.8 million due to a 25% increase in departmental headcount, annual compensation increases, and compensation expense related to retention bonuses awarded to five members of our executive team. Insurance expense increased approximately$4.0 million , reflecting the impact of company growth and associated with being a publicly traded company. As discussed in the 'Overview' section, we expect selling, general, and administrative expense to be higher as compared to historical periods now that the Business Combination has been completed. The higher costs are expected to be attributable to a 39 -------------------------------------------------------------------------------- variety of factors, including: increased investment in marketing, advertising, and the sales and distribution infrastructure related to our products and services; increased personnel and other costs supporting in internal functions such as operations, finance, and information technology and systems; cost to support our requirements as a publicly traded company. We accrued a$0.9 million payment to HES for the pilot program that started during the nine months endedSeptember 30, 2021 (For further discussion of the HES pilot program, see Note 14 - Transactions with Related Parties in the Notes to the Condensed Consolidated Financial Statements). Interest Expense In connection with the Business Combination, we repaid or converted all outstanding debt, except for our PPP loans. The decrease in interest expense reflects the payoff or conversion of substantially all of our debt onDecember 29, 2020 . We did not incur any new debt during the nine months endedSeptember 30, 2021 . Change in Fair Value of Public and Private Placement Warrants For the nine months endedSeptember 30, 2021 , the change in fair value of the Public and Private Placement Warrants was a decrease of$124.3 million , resulting in the recognition of a substantial gain related to the reduction of the carrying value of the associated liability. The Company re-measures the fair value of the Public and Private Placement Warrants at each reporting period. The decrease in the fair value of the Public and Private Placement Warrants was primarily due to the decreases in the price of our Common Stock and the Public Warrants subsequent to the Business Combination as well as the Public Warrant redemption that occurred onApril 5, 2021 . Romeo did not become subject to the recognition of gains and losses from changes in the fair value of the Public and Private Placement Warrants until after the Business Combination and, accordingly, no gain or loss related to such warrants was recognized during the nine months endedSeptember 30, 2020 . Gain from Extinguishment of PPP Loan
Gain from extinguishment of PPP loan for the nine months ended
Other Expense
InApril 2020 , Legacy Romeo agreed to cancel$1.8 million of$9.1 million stockholder notes receivable outstanding as ofDecember 31, 2019 , in the event of a sale of Romeo or an initial public offering. As a result, Romeo recorded$1.6 million in Other expense for the nine months endedSeptember 30, 2020 , which represented the estimated fair value of the derivative liability as ofSeptember 30, 2020 . The non-recurring cancellation of the amount due to us under the stockholder notes receivable ultimately was settled during the quarter endedDecember 31, 2020 , and we did not incur similar losses during the same period in the current year.
Loss in Equity Method Investments
We account for our investment in the BorgWarner JV under the equity method of accounting and, accordingly, recognize our proportionate share of the joint venture's earnings and losses. The amounts recognized as loss in equity method investments for the nine months endedSeptember 30, 2021 and 2020 represent our 40% share of the losses recognized by the joint venture for the corresponding period. Net Income (Loss) We reported net income of$47.5 million for the nine months endedSeptember 30, 2021 , as compared to a net loss of$22.7 million for the same period in the prior year. The increase in the net income recognized for the nine months endedSeptember 30, 2021 was due to the change in fair value of our Public and Private Placement Warrants, partially offset by the factors discussed above. 40 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
In addition to our results determined in accordance with accounting principles generally accepted inthe United States of America (GAAP), our management utilizes certain non-GAAP performance measures, EBITDA and Adjusted EBITDA, for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance. EBITDA and Adjusted EBITDA "EBITDA" is defined as earnings before interest income and expense, income tax expense or benefit, and depreciation and amortization. "Adjusted EBITDA" has been calculated using EBITDA adjusted for, stock-based compensation, a gain on the change in fair value of the Public and Private Placement Warrants, a gain on the extinguishment of a PPP loan, gain or loss on our investments, net and derivative expense. We believe that both EBITDA and Adjusted EBITDA provide additional information for investors to use in (1) evaluating our ongoing operating results and trends and (2) comparing our financial performance with those of comparable companies which may disclose similar non-GAAP financial measures to investors. These non-GAAP measures provide investors with incremental information for the evaluation of our performance after isolation of certain items deemed unrelated to our core business operations. EBITDA and Adjusted EBITDA are presented as supplemental measures to our GAAP measures of performance. When evaluating EBITDA and Adjusted EBITDA, you should be aware that we may incur future expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Furthermore, our computation of Adjusted EBITDA may not be directly comparable to similarly titled measures computed by other companies, as the nature of the adjustments that other companies may include or exclude when calculating Adjusted EBITDA may differ from the adjustments reflected in our measure. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation, nor should these measures be viewed as a substitute for the most directly comparable GAAP measure, which is net income (loss). We compensate for the limitations of our non-GAAP measures by relying primarily on our GAAP results. You should review the reconciliation of our net income (loss) to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our performance. The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA for the three and nine months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net (loss) income$ (17,953) $ (8,916) $ 47,509 $ (22,710) Interest expense 4 265 16 783 Benefit from income taxes (11) - (1) - Depreciation and amortization expense 834 454 1,833 1,404 EBITDA (17,126) (8,197) 49,357 (20,523) Stock-based compensation 4,315 132 14,933 784 Change in fair value of public and private placement warrants (6,134) - (124,254) - Gain from extinguishment of PPP loan (3,300) - (3,300) - Investment (gain) loss, net (266) - 23 - Derivative expense - 228 - 1,614 Adjusted EBITDA$ (22,511) $ (7,837) $ (63,241) $ (18,125)
Liquidity and Capital Resources
Our continuing short-term and long-term liquidity requirements are expected to
be impacted by the following, among other things:
•the timing and the costs involved in bringing our products to market;
41
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•the expansion of production capacity;
•our ability to manage the costs of manufacturing our product, including the
cost of materials;
•the availability of trade credit associated with the purchase of materials;
•capital commitments that may be required to secure long-term cell supply
arrangements;
•general business liabilities, including the cost of warranty and quality
claims, commercial disputes, and potential business litigation costs and
liabilities;
•the scope, progress, results, costs, timing and outcomes of our research and
development for our battery modules and battery packs;
•the costs of maintaining, expanding and protecting our intellectual property
portfolio, including licensing expenses and potential intellectual property
litigation costs and liabilities;
•the costs of additional general and administrative personnel, including
accounting and finance, legal and human resources, as a result of becoming a
public company;
•our ability to collect revenues from start-up companies operating in a
relatively new industry;
•the global battery cell shortage;
•our obligation to fund our proportional share of the operating expenses,
working capital, and capital expenditures of the BorgWarner JV;
•our obligation to purchase BorgWarner's ownership interest in the BorgWarner
JV; and
•other risks discussed in the section titled "Risk Factors."
Liquidity Requirements
As ofSeptember 30, 2021 , our current assets were approximately$221.8 million , consisting primarily of cash and cash equivalents, available-for-sale debt investments, inventory, prepaid expenses and other current assets, and an insurance receivable. As ofSeptember 30, 2021 , our current liabilities were approximately$28.6 million , consisting primarily of accounts payable, accrued expenses, and a legal settlement amount. This strong liquidity position resulted from the Business Combination, which raised$345.8 million in cash that is being used by the Company to fund both operations and strategic initiatives. As described in more detail in Note 15 - Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements, we signed a Supply Agreement effectiveAugust 10, 2021 with a Supplier for the purchase of battery cells over the period of 2021 through 2028. As part of the Supply Agreement, we made a$64.7 million prepayment to the Supplier and agreed to pay an additional$1.5 million deposit byDecember 31, 2021 to secure the supply of cells through the term of the contract. The prepaid amounts will be recouped through credits received as cells are purchased. If we breach our minimum volume commitments during any applicable year, the Supplier will be entitled to keep the remaining balance of the prepaid amounts, as applicable. As described in more detail in Note 17 - Subsequent Events in the Notes to the Condensed Consolidated Financial Statements, onOctober 25, 2021 BorgWarner decided to exercise a right under the Joint Venture Operating Agreement, datedMay 6, 2019 (the "Operating Agreement"), to put its ownership stake in the BorgWarner JV to Romeo. We will have to pay BorgWarner 95% of the market value of its 60% stake in the BorgWarner JV. The transaction will be consummated within 30 days of a nationally recognized valuation firm completing its market value analysis of the BorgWarner JV. Other strategic initiatives, which may or may not be similar in nature to the new cell supply agreement, will continue to be assessed in the context of balancing business value and our liquidity position. We may consider future strategic initiatives which in our assessment may lead to opportunities to maximize value of the business and require significant investment. Management anticipates that, in addition to possible strategic initiatives, our other ongoing liquidity and capital needs will relate primarily to capital expenditures for the expansion and support of production capacity, investment related to continue to reduce the cost of our product, working capital to support increased production and sales volume, and general overhead and personnel expenses to support continued growth and scale. As a result, it is possible we may decide to raise additional capital and liquidity to be prepared to support and fund such initiatives and growth. If we choose to raise additional capital in the future, the method and form of raising such capital has yet to be determined, but could range from debt to equity capital, or possibly both. If we raise funds by issuing debt securities or incurring loans, this form of financing would have rights, preferences, and privileges senior to those of holders of our Common Stock. The availability and the terms under which we can borrow additional capital could be disadvantageous, and the terms of debt securities or borrowings could impose significant restrictions on our operations. Macroeconomic conditions and credit markets could also impact the availability and cost of potential future debt financing. If we raise capital through the issuance of additional equity, such sales and issuance would dilute the ownership interests of the existing holders of the Company's 42 --------------------------------------------------------------------------------
Common Stock. There can be no assurances that any additional debt or equity financing would be available to us or if available, that such financing would be on favorable terms to us.
As ofSeptember 30, 2021 , we have met all of the Company's minimum 2021 annual purchase commitments. We estimate our total unconditional purchase commitments (for those contracts with terms in excess of one year) are$512.9 million through the end of 2025 and$472.4 million thereafter. However, the amount of our purchase commitments subsequent toSeptember 30, 2021 is not fully fixed and is subject to change based on changes in certain raw materials indexes as well the quantities of purchases we actually make. These commitments relate to our inventory purchases. Cash Flow Analysis The following table provides a summary of cash flow data for the nine months endedSeptember 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 2020 Cash, cash equivalents and restricted cash at beginning of period$ 293,942 $ 1,929 Operating activities: Net income (loss) 47,509 (22,710) Non-cash adjustments (105,171) 5,461 Changes in working capital (81,115) 3,123 Net cash used in operating activities (138,777) (14,126) Net cash used in investing activities (138,642) (561) Net cash provided by financing activities 39,755 14,504 Net change in cash, cash equivalents, and restricted cash (237,664) (183)
Cash, cash equivalents and restricted cash at end of period
Cash Flows used in Operating Activities
Net cash used in operating activities was approximately$138.8 million for the nine months endedSeptember 30, 2021 . Significant cash outflows include changes in operating assets and liabilities totaling approximately$81.1 million . These net cash outflows were primarily the result of cash outlays for our Supply Agreement prepayment, pre-paid expenses and inventory purchases as well as an increase in our accounts receivable balance. Cash outflows for prepaid expenses consisted primarily of payments for higher insurance coverage due to company growth and associated with being a publicly traded company and prepayments for inventory to secure supply of certain key materials and to avoid supply scarcity. The aforementioned cash outflows were offset by increases in accounts payable and accrued expenses of$12.4 million . Significant non-cash items included in net income which affected operating activities include, adjustments for stock-based compensation, non-cash equity-method loss, inventory write downs, the gain on extinguishment of our PPP Loan and the change in fair value of our Public and Private Placement Warrants. For the nine months endedSeptember 30, 2020 , net cash used in operating activities was approximately$14.1 million . Cash inflows resulting from changes in operating assets and liabilities totaling approximately$3.1 million , were offset by our loss after adjustment for non-cash items, which approximated$17.2 million . Cash Flows used in Investing Activities For the nine months endedSeptember 30, 2021 , net cash used in investing activities was approximately$138.6 million and was primarily related to$309.0 million used to purchase investments, our contribution of$4.0 million to the BorgWarner JV to fund operating activities, and$5.0 million for capital expenditures. Cash used for investing activities was partially offset by$179.3 million provided from sales and maturities of investments. For the nine months endedSeptember 30, 2020 , net cash used in investing activities was approximately$0.6 million , primarily driven by our capital expenditures for property and equipment. 43
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Cash Flows from Financing Activities For the nine months endedSeptember 30, 2021 , net cash provided by financing activities of approximately$39.8 million was related to$40.1 million of proceeds from the exercise of stock options and warrants, offset by principal payments for finance leases and the redemption of our Public Warrants. For the nine months endedSeptember 30, 2020 , net cash provided by financing activities of approximately$14.5 million was primarily reflective of approximately$6.4 million from the issuance of convertible and term notes,$5.0 million from the issuance of common stock, and$3.3 million from a PPP Loan, offset by principal payments for finance leases. Contractual Obligations and Commitments For the nine months endedSeptember 30, 2021 , there have been no material changes to our significant contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , except as described above in the section titled "Liquidity Requirements". Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. These principles require us to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. Our most significant estimates and judgments involve our equity method investments, revenue recognition, equity valuations, public and private placement warrants, and inventory. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. There have been no substantial changes to these estimates, or the policies related to them during the nine months endedSeptember 30, 2021 . For a full discussion of these estimates and policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Recent Accounting Pronouncements See Note 2 - Summary of Significant Accounting Policies included in the Notes to our Condensed Consolidated Financial Statements included herein. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company, as defined by Rule 12b 2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are not required to provide the information required under this item.
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