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"); •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. Our operations consist of two business segments:Romeo Power North America and Joint Venture Support.The Romeo Power North America business segment designs and manufactures industry leading battery modules, battery packs, and BMS 25
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technologies for our customers in
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 six months endedJune 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 raw materials than previously expected. Our efforts to qualify certain new suppliers, particularly inAsia , have been postponed indefinitely, which delay 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. 26
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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 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.
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 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 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.
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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 through the expansion of our customer base and strategic partners. We currently offer products targeting the North American market for commercial trucks and buses, and through the BorgWarner JV, the European market for commercial and high-performance vehicles. Through the BorgWarner JV, we expect to continue to expand the geographic reach of our product offerings and explore new revenue channels in 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 six months endedJune 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. All Public Warrants could be exercised untilApril 5, 2021 to purchase shares of our Common Stock, at the exercise price of$11.50 per share, and any Public Warrants that remained unexercised were voided and no longer exercisable. 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. 28
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Investment Loss Investment loss primarily includes realized losses recognized in connection with our available-for-sale debt investments. Other Expense InApril 2020 , Legacy Romeo agreed to cancel$1.79 million of$9.12 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$1.39 million in other expense for the six months endedJune 30, 2020 , which represented the estimated fair value of the derivative liability as ofJune 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 six months endedJune 30, 2021 and 2020, these losses relate only to the BorgWarner JV, in which we hold a 40% ownership interest. As ofJune 30, 2021 , there was no activity related toHeritage Battery Recycling, LLC ("HBR"). Therefore, during the three and six months endedJune 30, 2021 , there are no profits or losses from our equity method investment in HBR to be recognized.
Provision for 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. Any amounts reflected in provision for income taxes represent various state and local tax obligations and consist primarily ofCalifornia franchise tax. 29
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Results of Operations
Three Months Ended
June 30, $ %
2021 2020 Change Change
Revenues: (dollars in thousands)
Product revenues $ 466 $ 458 $ 8 1.7 %
Service revenues 460 671 (211) (31.4) %
Total revenues 926 1,129 (203) (18.0)%
Cost of revenues:
Product cost 5,542 1,737 3,805 219.1 %
Service cost 403 686 (283) (41.3) %
Total cost of revenues 5,945 2,423 3,522 145.4%
Gross loss (5,019) (1,294) (3,725) 287.9%
Operating expenses:
Research and development 1,792 1,594 198 12.4 %
Selling, general, and administrative 22,911 2,451 20,460 834.8%
Total operating expenses 24,703 4,045 20,658 510.7 %
Operating loss (29,722) (5,339) (24,383) 456.7 %
Interest expense (5) (264) 259 (98.1) %
Change in fair value of public and private
placement warrants 1,995 - 1,995 NM
Investment loss, net (379) - (379) NM
Other expense - (1,386) 1,386 (100.0)%
Loss before income taxes and loss in equity
method investments (28,111) (6,989) (21,122) 302.2%
Loss in equity method investments (563) (36) (527) 1463.9%
Provision for income taxes - - - NM
Net loss $ (28,674) $ (7,025) $ (21,649) 308.2%
NM = Not meaningful
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Six Months Ended
June 30, $ %
2021 2020 Change Change
Revenues: (dollars in thousands)
Product revenues $ 1,078 $ 2,046 $ (968) (47.3) %
Service revenues 902 1,605 (703) (43.8) %
Total revenues 1,980 3,651 (1,671) (45.8)%
Cost of revenues:
Product cost 9,980 4,466 5,514 123.5 %
Service cost 792 1,589 (797) (50.2) %
Total cost of revenues 10,772 6,055 4,717 77.9%
Gross loss (8,792) (2,404) (6,388) 265.7%
Operating expenses:
Research and development 5,563 3,396 2,167 63.8 %
Selling, general, and administrative 40,910 5,358 35,552 663.5%
Total operating expenses 46,473 8,754 37,719 430.9 %
Operating loss (55,265) (11,158) (44,107) 395.3 %
Interest expense (12) (518) 506 (97.7) %
Change in fair value of public and private
placement warrants 118,120 - 118,120 NM
Investment loss, net (289) - (289) NM
Other expense - (1,386) 1,386 (100.0)%
Income (loss) before income taxes and loss in
equity method investments 62,554 (13,062) 75,616 578.9%
Loss in equity method investments (1,206) (732) (474) 64.8%
Provision for income taxes (10) - (10) NM
Net income (loss) $ 61,338 $ (13,794) $ 75,132 544.7%
NM = Not meaningful
Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020
Revenues
Three Months Ended June 30,
2021 2020
Amount % Amount %
(dollars in thousands)
Product revenues $ 466 50.3% $ 458 40.6%
Service revenues 460
49.7% 671 59.4%
Total revenues $ 926 100.0% $ 1,129 100.0%
Product revenues
Product revenues remained relatively consistent compared to the same period in
the prior year. We expect the current volume of our commercial vehicle pack and
module production and delivery activity to increase as we increase delivery on
the four supply contracts that started production and delivery during 2021.
Additionally, we continue to produce against an engineering and prototype
development agreement that is subsequently described in the discussion of
service revenues. The current engineering and prototype agreement is the
precursor to a future product supply agreement, for which product deliveries and
revenues are expected to begin to be recognized towards the completion of our
fiscal year ending December 31, 2021 .
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We expect to continue to report product revenues similar to current levels until we begin to produce and deliver 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 June of 2021 exceed$554.0 million of backlog. While the delivery of modules and packs and recognition of the associated product revenues under certain of these supply contracts will not commence until after completion of the delivery of engineering and prototype services, we expect to recognize approximately$18.9 million of this backlog revenue during the remainder of our fiscal year endingDecember 31, 2021 .
Service revenues
Service revenues decreased approximately$0.2 million , or 31.4%, for the three months endedJune 30, 2021 , as compared to service revenues for the same period in the prior year. The decrease is primarily related to a reduction in engineering labor services provided to the BorgWarner JV. During the three months endedJune 30, 2021 , we provided$0.5 million of engineering labor services to the BorgWarner JV compared to$0.6 million for the same period in the prior year. Additionally, the timing of deliveries against engineering and prototype contracts, for which revenue is deferred until all engineering services are complete and all prototypes have been delivered, varied. During the three months endedJune 30, 2021 , we deferred approximately$1.2 million of service revenues in accordance with our accounting policy, pursuant to which we recognize revenue at the point in time that the final developed prototype is delivered. Cost of Revenues Three Months Ended June 30, 2021 2020 Amount % Amount % (dollars in thousands) Cost of revenues - product cost $ 5,542 93.2% $ 1,737 71.7% Cost of revenues - service cost 403 6.8% 686 28.3% Total cost of revenues $ 5,945 100.0% $ 2,423 100.0% Cost of revenues - product cost Cost of revenues associated with product revenues increased approximately$3.8 million , or 219.1%, for the three months endedJune 30, 2021 , as compared to the same period in the prior year. Our costs of product revenue increased, despite consistent product sales, as production labor headcount and related fixed and semi-fixed costs attributable to production-related personnel increased$1.4 million , as we prepare for the ramp-up of production rates to support larger supply contracts. In addition, a portion of the increase in product costs of sales can be attributed to material costs, including material cost variances. The increase in material costs is partially attributable to procuring some key components at higher than standard costs due to increasing scarcity of supply. We expect the latter half of fiscal year 2021 to reflect a shift in production activities away from the manufacturing of prototypes under significant engineering and prototype service contracts entered into during 2020, towards the manufacture of products to fulfill ongoing supply contracts. In addition, during the three months endedJune 30, 2021 , a$0.9 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 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 and allocated between product and service costs based on production levels. As manufacturing activities under our supply contracts increase we would expect to achieve improved overhead cost leverage as a result.
Cost of revenues - service cost
Cost of revenues associated with service revenues decreased approximately$0.3 million , or 41.3%, for the three months endedJune 30, 2021 , as compared to cost of revenues associated with service revenues for the same period in the prior year. This decrease is primarily related to the timing of deliveries against engineering and prototype contracts, for which revenue and costs are deferred until all engineering services are complete and all prototypes have been delivered. During the three months 32
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endedJune 30, 2021 , we deferred approximately$1.2 million of cost of revenues in accordance with our accounting policy, pursuant to which we recognize revenue and costs at the point in time the final developed prototype is delivered. Additionally, during the three months endedJune 30, 2021 , cost of revenues attributable to the personnel costs of employees dedicated to providing engineering services to the BorgWarner JV decreased by$0.1 million , due to decreased services provided to the BorgWarner JV during the period. Research and Development Expense Research and development expense increased approximately$0.2 million , or 12.4%, for the three months endedJune 30, 2021 , as compared to the same period in the prior year. The increase was primarily attributable to compensation, benefits and bonus costs, which was due to an increase in department headcount as a result of increased research and development activities to support the product development cycle. Selling, General, and Administrative Expense Selling, general, and administrative expense increased approximately$20.5 million , or 834.8%, for the three months endedJune 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)
$ 4,415
Professional fees 3,042
Stock-based compensation 7,398
Insurance 1,372
Primary drivers of the total increase in selling, general and
administrative expense $ 16,227
The $7.4 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, which was valued at $9.3 million and was recognized
over the period from December 29, 2020 through June 27, 2021 . 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
$3.0 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. Compensation and benefits increased
$4.4 million due to a 37.5% 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 $1.4 million due to the purchases of required insurance policies
to comply with the requirements of 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 increased investment in marketing, advertising, and the sales and
distribution infrastructure for our products and services; increased personnel
in internal functions such as operations, finance, and information technology to
support our current state as a publicly traded company; and substantial
investment in management information systems.
Interest Expense
In connection with the Business Combination, we repaid or converted all
outstanding debt, except for our loans from the U.S. Small Business
Administration's Paycheck Protection Program ("PPP"). The decrease in interest
expense reflects the payoff or conversion of substantially all of our debt on
December 29, 2020 . We did not incur any new debt during the three months ended
June 30, 2021 .
Change in Fair Value of Public and Private Placement Warrants
For the three months ended June 30, 2021 , the change in fair value of the Public
and Private Placement Warrants was a decrease of $2.0 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 due to the decreases in
the price of our Common
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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 three months endedJune 30, 2020 .
Investment Loss
Investment loss for the three months endedJune 30, 2021 was approximately$0.4 million , which primarily represents realized losses incurred in connection with our available-for-sale debt investments. We did not have similar losses 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$1.79 million of$9.12 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$1.39 million in other expense for the three months endedJune 30, 2020 , which represented the estimated fair value of the derivative liability as ofJune 30, 2020 . 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 endedJune 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$28.7 million for the three months endedJune 30, 2021 , as compared to a net loss of$7.0 million for the same period in the prior year. The increase in the net loss recognized for the three months endedJune 30, 2021 was due to the factors discussed above. Six Months EndedJune 30, 2021 Compared with Six Months EndedJune 30, 2020 Revenues Six Months Ended June 30, 2021 2020 Amount % Amount % (dollars in thousands) Product revenues $ 1,078 54.4%$ 2,046 56.0% Service revenues 902 45.6% 1,605 44.0% Total revenues $ 1,980 100.0%$ 3,651 100.0% Product revenues Product revenues decreased approximately$1.0 million , or 47.3%, for the six months endedJune 30, 2021 , as compared to the same period in the prior year. The decrease in product revenues relates primarily to lower deliveries of commercial vehicle products following the completion of a supply contract inApril 2020 . This decrease was partially offset by first time module and pack sales to a related party and four supply contracts that commenced production during the six months endedJune 30, 2021 . The term of the four supply contracts run through our fiscal years endingDecember 31, 2024 . During the six months endedJune 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. The decrease in our current commercial vehicle pack and module production activity is expected to be offset as we increase delivery on the four supply contracts that started production and delivery during 2021. Additionally, we continue to produce 34
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against an engineering and prototype development agreement, as subsequently addressed in the discussion of service revenues. The current engineering and prototype agreement is the precursor to a future product supply agreement, for which product deliveries and revenues are expected to begin to be recognized towards the completion of our fiscal year endingDecember 31, 2021 . We expect to continue to report product revenues similar to the current levels until we begin to produce and deliver 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 June of 2021 exceed$554.0 million of backlog. While the delivery of modules and packs and recognition of the associated product revenues under certain of these supply contracts will not commence until after completion of the delivery of engineering and prototype services, we expect to recognize approximately$18.9 million of this backlog revenue during the remainder of our fiscal year endingDecember 31, 2021 . Service revenues Service revenues decreased approximately$0.7 million , or 43.8%, for the six months endedJune 30, 2021 , as compared to the same period in the prior year. Service revenues earned for engineering services provided to the BorgWarner JV were$0.9 million during the six months endedJune 30, 2021 compared to$1.6 million for the same period in the prior year. Additionally, service revenues related to non-recurring engineering and prototype contracts decreased due to the timing of deliveries, for which revenue is deferred until all engineering services are complete and all prototypes have been delivered. During the six months endedJune 30, 2021 , we deferred approximately$2.2 million of service revenues in accordance with our accounting policy, pursuant to which we recognize revenue at the point in time the final developed prototype is delivered. Cost of Revenues Six Months Ended June 30, 2021 2020 Amount % Amount % (dollars in thousands) Cost of revenues - product cost $ 9,980 92.6% 4,466 73.8% Cost of revenues - service cost 792 7.4% 1,589 26.2% Total cost of revenues$ 10,772 100.0% $ 6,055 100.0% Cost of revenues - product cost Cost of revenues associated with product revenues increased approximately$5.5 million , or 123.5%, for the six months endedJune 30, 2021 , as compared to the same period in the prior year. Our costs of product revenue increased, despite lower product sales, as production labor headcount and related fixed and semi-fixed costs attributable to production-related personnel increased$2.2 million , as we prepare for the ramp-up of production rates to support larger supply contracts. In addition, a portion of the increase in product costs of sales can be attributed to material costs, including material cost variances. The increase in material costs is partially attributable to procuring some key components at higher than standard costs due to increasing scarcity of supply. We expect the latter half of fiscal year 2021 to reflect a shift in production activities away from the manufacturing of prototypes under significant engineering and prototype service contracts entered into during 2020, towards the manufacture of products to fulfill ongoing supply contracts. In addition to the significant increase in labor and material costs partially triggered by actions taken in anticipation of higher module and pack production under supply contracts later in the year, we realized a$1.2 million increase in expense resulting from the write-down of excess and obsolete inventory, 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. Expense attributable to inventory write-downs totaled approximately$1.2 million for the six months endedJune 30, 2021 , as compared to zero for 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 and allocated between product and service costs based on production levels. As manufacturing activities under our supply contracts increase we would expect to achieve improved overhead cost leverage as a result. 35
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Cost of revenues - service cost Cost of revenues associated with service revenues decreased approximately$0.8 million , or 50.2%, for the six months endedJune 30, 2021 , as compared to cost of revenues associated with service revenues for the same period in the prior year. During the six months endedJune 30, 2020 the cost of revenue attributable to providing engineering services to the BorgWarner JV decreased by$0.5 million due to decreased services provided to the BorgWarner JV during the period. Additionally, cost of revenues associated with service revenue decreased approximately$0.3 million related to the timing of deliveries against engineering and prototype contracts for which revenue and costs are deferred until all engineering services are complete and all prototypes have been delivered. During the six months endedJune 30, 2021 , we deferred approximately$2.2 million of cost of revenues associated with service revenues in accordance with our accounting policy, pursuant to which we recognize revenue and costs at the point in time the final developed prototype is delivered. Research and Development Expense Research and development expense increased approximately$2.2 million , or 63.8%, for the six months endedJune 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 $ 2,015 The$2.0 million increase in compensation and bonus costs, was due to a 62.4% increase in department headcount as a result of increased research and development activities to support the product development cycle. Selling, General, and Administrative Expense Selling, general, and administrative expense increased approximately$35.6 million , or 663.5%, for the six months endedJune 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)
$ 6,691
Professional fees 6,831
Stock-based compensation 13,501
Insurance 2,612
Primary drivers of the total increase in selling, general and
administrative expense $ 29,635
The $13.5 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, which was valued at $9.3 million and was recognized
over the period from December 29, 2020 through June 27, 2021 . 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
$6.8 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
$6.7 million due to a 31.5% 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 $2.6 million due to the purchases of required insurance policies
to comply with the requirements of 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 increased investment in marketing, advertising, and the sales and
distribution infrastructure for our products and services; increased personnel
in internal functions such as operations, finance, and information technology to
support our current state as a publicly traded company; and substantial
investment in management information systems.
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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 six months endedJune 30, 2021 . Change in Fair Value of Public and Private Placement Warrants For the six months endedJune 30, 2021 , the change in fair value of the Public and Private Placement Warrants was a decrease of$118.1 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 six months endedJune 30, 2020 . Investment Loss Investment loss for the six months endedJune 30, 2021 was approximately$0.3 million , which represent realized losses, fees, and expenses incurred in connection with our available-for-sale debt investments. We did not have similar losses 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$1.79 million of$9.12 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$1.39 million in Other expense for the six months endedJune 30, 2020 , which represented the estimated fair value of the derivative liability as ofJune 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 six months endedJune 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$61.3 million for the six months endedJune 30, 2021 , as compared to a net loss of$13.8 million for the same period in the prior year. The increase in the net income recognized for the six months endedJune 30, 2021 was due to the change in fair value of our Public and Private Placement Warrants, partially offset by the factors discussed above. Business Segment Results of Operations We operate in two business segments:Romeo Power North America and Joint Venture Support. We have organized our business segments based on the customers served.Romeo Power North America sells our products and services to external 37
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customers; whereas, the Joint Venture Support segment provides engineering
services exclusively to the BorgWarner JV. Segment results for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenues
Romeo Power North America $ 466 $ 542 $ 1,078 $ 2,182
Joint Venture Support 460 587 902 1,469
Total revenues $ 926 $ 1,129 $ 1,980 $ 3,651
Three Months Ended
Romeo Power North America The Romeo Power North America segment's revenues consist of all product and service revenues, with the exception of certain service revenues earned from providing engineering services to the BorgWarner JV. Accordingly, the$0.1 million , or 14.0% decrease inRomeo Power North America revenues was driven by the decrease in service revenues related to non-recurring engineering and prototype contracts discussed above, as product revenues were approximately the same for the comparable quarters endedJune 30, 2021 and 2020.
Joint Venture Support
The Joint Venture Support segment's reported revenue for the three months endedJune 30, 2021 and 2020 relates to engineering services provided to the BorgWarner JV. The Joint Venture Support revenue decreased$0.1 million , or 21.7%, for the three months endedJune 30, 2021 , due to a decrease in the engineering support provided to the BorgWarner JV as compared to the same period in the prior year. Six Months EndedJune 30, 2021 Compared with Six Months EndedJune 30, 2020
The Romeo Power North America segment's revenues consist of all product and service revenues, with the exception of certain service revenues earned from providing engineering services to the BorgWarner JV. Accordingly, the$1.1 million , or 50.6% decline inRomeo Power North America revenues includes the decrease in both product revenues and service revenues related to non-recurring engineering and prototype contracts discussed above. Joint Venture Support The Joint Venture Support segment's reported revenue for the six months endedJune 30, 2021 and 2020 relates to engineering services provided to the BorgWarner JV. The Joint Venture Support revenue decreased$0.6 million , or 38.6%, for the six months endedJune 30, 2021 , due to a decrease in the engineering support provided to the BorgWarner JV as compared to the same period in the prior year. 38
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Business Segment Gross (Loss) Profit
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(dollars in thousands)
Business segment gross (loss) profit
Romeo Power North America $ (5,076) $
(1,386)
57 92 110 224
Total business segment gross loss $ (5,019) $
(1,294)
Three Months Ended
Romeo Power North America The Romeo Power North America segment's gross loss reflects product and service revenues generated from all customers except the BorgWarner JV, less the associated costs of sales.The Romeo Power North America segment's gross loss increased$3.7 million , or 266.2%, for the three months endedJune 30, 2021 , as compared to the same period in the prior year. This increase in the reported gross loss is primarily attributable to the increase in the costs incurred by the segment during the quarter endedJune 30, 2021 . Labor costs increased for the three months endedJune 30, 2021 , as a result of an increase in the headcount of production-related personnel. We have increased headcount in preparation for the anticipated increase in production as we work down our existing sales backlog. During the three months endedJune 30, 2021 , we also experienced (1) an increase in materials costs, including material cost variances for purchases of some key components of our modules and packs at higher than standard costs due to increasing scarcity of supply, and (2) an increase in expense related to the write-down of excess and obsolete inventory of$0.9 million . An increase in our production levels and revenues in future periods to work down our existing sales backlog, would be expected to improve cost leverage due to (1) advanced product design maturity, (2) a reduction in direct materials costs for significant components of our battery modules and packs - for example, as we shift from customized production to more standardized production for key components that make up a significant portion of each unit's materials cost, (3) a reduction in the costs of inventory purchases driven by larger quantity purchases that will be supported by firm customer orders, and (4) lower un-absorbed labor and overhead costs. Joint Venture Support The Joint Venture Support segment's gross profit is reflective of revenues earned from engineering services provided to the BorgWarner JV, less our internal costs to deliver those services - primarily consisting of personnel costs. The Joint Venture Support segment's gross profit decreased by 38%, for the three months endedJune 30, 2021 , due to a decrease in the engineering support provided to the BorgWarner JV as compared to the same period in the prior year. However, the Joint Venture Support segment's gross profit as a percentage of revenue has remained consistent period over period. Six Months EndedJune 30, 2021 Compared with Six Months EndedJune 30, 2020
The Romeo Power North America segment's gross loss reflects product and service revenues generated from all customers except the BorgWarner JV, less the associated costs of sales.The Romeo Power North America segment's gross loss increased$6.3 million , or 238.8%, for the six months endedJune 30, 2021 , as compared to the same period in the prior year. This increase in the reported gross loss is primarily attributable to lower segment product revenue, and an increase in the labor costs incurred by the segment during the six months endedJune 30, 2021 . Labor costs increased for the six months endedJune 30, 2021 , as a result of an increase in the headcount of production-related personnel. We have increased headcount in preparation for the anticipated increase in production as we work down our existing sales backlog. During the six months endedJune 30, 2021 we also experienced (1) an increase in materials costs, including material cost variances for purchases of some key components of our modules and packs at higher than standard costs due to increasing scarcity of supply, and (2) an increase in expense related to the write-down of excess and obsolete inventory of$1.2 million . 39
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An increase in our production levels and revenues in future periods to work down our existing sales backlog, would be expected to improve cost leverage due to (1) advanced product design maturity, (2) a reduction in direct materials costs for significant components of our battery modules and packs - for example, as we shift from customized production to more standardized production for key components that make up a significant portion of each unit's materials cost, (3) a reduction in the costs of inventory purchases driven by larger quantity purchases that will be supported by firm customer orders, and (4) lower unabsorbed labor and overhead costs. Joint Venture Support The Joint Venture Support segment's gross profit is reflective of revenues earned from engineering services provided to the BorgWarner JV, less our internal costs to deliver those services - primarily consisting of personnel costs. The Joint Venture Support segment's gross profit decreased$0.1 million , or 51.0%, for the six months endedJune 30, 2021 , due to a decrease in the engineering support provided to the BorgWarner JV as compared to the same period in the prior year. However, the Joint Venture Support segment's gross profit as a percentage of revenue has remained consistent period over period. 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, investment loss, net and forgiveness of portion of shareholder notes receivable. 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. 40
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The following table reconciles net (loss) income to EBITDA and Adjusted EBITDA
for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Net (loss) income $ (28,674) $ (7,025) $ 61,338 $ (13,794)
Interest expense 5 264 12 518
Provision for income taxes - - 10 -
Depreciation and amortization expense 494 468 999 950
EBITDA (28,175) (6,293) 62,359 (12,326)
Stock-based compensation 8,189 375 14,742 652
Change in fair value of public and private
placement warrants (1,995) - (118,120) -
Investment Loss, net 379 - 289 -
Forgiveness of portion of stockholder notes
receivable - 1,386 - 1,386
Adjusted EBITDA $ (21,602) $ (4,532) $ (40,730) $ (10,288) 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; •the expansion of production capacity; •our ability to manage the costs of manufacturing; •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; and •other risks discussed in the section entitled "Risk Factors."
Liquidity Requirements
As ofJune 30, 2021 , our current assets were approximately$295.7 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 ofJune 30, 2021 , our current liabilities were approximately$26.3 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 under "Subsequent Events" (see Note 17 of Notes to Condensed Consolidated Financial Statements), the Company signed a contract effectiveAugust 10, 2021 for the purchase of battery cells over the period of 2021 through 2028. As part of this contract, the Company agreed to pay a$1.5 million deposit byDecember 31, 2021 and a$64.7 million prepayment bySeptember 10, 2021 for the supply of cells through the term of the contract. The prepayment will be recouped through credits received as cells are purchased. 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 41
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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 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.
Cash Flow Analysis
The following table provides a summary of cash flow data for the six months
ended
Six Months Ended June 30,
2021 2020Cash, cash equivalents and restricted cash at beginning of period
$ 293,942 $ 1,929 Operating activities: Net income (loss) 61,338 (13,794) Non-cash adjustments (98,660) 3,975 Changes in working capital (6,438) 1,486 Net cash used in operating activities (43,760) (8,333) Net cash used in investing activities (231,048) (603) Net cash provided by financing activities 26,412 13,870 Net change in cash, cash equivalents, and restricted cash (248,396) 4,934
Cash, cash equivalents and restricted cash at end of period $
45,546 $ 6,863
Cash Flows used in Operating Activities
Net cash used in operating activities was approximately$43.8 million for the six months endedJune 30, 2021 . Significant cash outflows include changes in operating assets and liabilities totaling approximately$6.4 million . These net cash outflows were primarily the result of cash outlays for pre-paid expenses and other current assets and inventory purchases as well as an increase in our accounts receivable balance. Cash outflows for prepaid expenses and other current assets consisted primarily of payments for insurance policies required to comply with the requirements of being a publicly traded company and prepayments for inventory to secure supply of certain key materials. The aforementioned cash outflows were offset by increases in accounts payable and accrued expenses of$7.1 million . An additional contributor to net cash used in operating activities during the period was our loss after adjustment for non-cash items, which approximated$37.3 million . Significant non cash adjustments include, adjustments for stock-based compensation, our non-cash equity-method loss, inventory write downs, and the change in fair value of our Public and Private Placement Warrants. For the six months endedJune 30, 2020 , net cash used in operating activities was approximately$8.3 million . Significant cash inflows resulting from changes in operating assets and liabilities totaling approximately$1.5 million , were offset by our loss after adjustment for non-cash items, which approximated$9.8 million . 42
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Cash Flows used in Investing Activities For the six months endedJune 30, 2021 , net cash used in investing activities was approximately$231.0 million and was primarily related to$304.9 million used to purchase investments, our contribution of$4.0 million to the BorgWarner JV to fund operating activities, and$2.1 million for capital expenditures. Cash used for investing activities was partially offset by$79.9 million provided from sales and maturities of investments. For the six months endedJune 30, 2020 , net cash used in investing activities was approximately$0.6 million , primarily driven by our capital expenditures for property and equipment. Cash Flows from Financing Activities For the six months endedJune 30, 2021 , net cash provided by financing activities of approximately$26.4 million was related to$26.6 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 six months endedJune 30, 2020 , net cash provided by financing activities of approximately$13.9 million was primarily reflective of approximately$5.7 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 six months endedJune 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 . EffectiveAugust 10, 2021 , we entered into a long-term supply agreement for the purchase of lithium-ion battery cells with a tier one battery cell and materials manufacturer. See "Note 17 - Subsequent Events" of the notes to our condensed consolidated financial statements included herein for further discussion.
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 six months endedJune 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. 43
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