ROMEO POWER, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financings, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Throughout this section unless otherwise noted "we," "us," "our," "its,"
"Company," or "Romeo" refer to
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 BMS. We differentiate ourselves from competitors by leveraging our technical expertise and depth of knowledge of energy storage systems. In 2019, Legacy Romeo formed the BorgWarner JV with a subsidiary of BorgWarner, a global Tier 1 automotive supplier with world-class capabilities in manufacturing, engineering, and technology development. The BorgWarner JV is owned 40% by Legacy Romeo and 60% by BorgWarner's subsidiary. Our strategic alliance with BorgWarner should give the joint venture an opportunity to benefit from BorgWarner's manufacturing expertise, superior purchasing power with our existing suppliers, and longstanding relationships with many of our target customers. We believe that this strategic alliance will also allow us, through the BorgWarner JV, to accelerate our reach into new markets, particularly inEurope andAsia , without the need to expend substantial capital developing new production facilities. We believe partnering with a highly regarded supplier helps to de-risk our production plan and should allow us, through the BorgWarner JV, to eventually leverage BorgWarner's global production resources to scale production operations worldwide, while maintaining the highest levels of product quality. The rights of Legacy Romeo and BorgWarner with respect to the BorgWarner JV are set forth in the JV Agreement and the IP License. Since 2014, we have been designing and manufacturing battery modules and packs and enabling battery technology for key customers in the automotive industry. Currently, we primarily focus on two key markets in mobility energy technology: North American commercial trucks and buses and, through the BorgWarner JV, commercial and high-performance vehicles outside ofNorth America . We also formed a collaborative arrangement with HBR, an affiliate of HES, to focus on sustainability and reuse applications of our battery technologies. In 2021 we entered a Strategic Alliance Agreement with Republic Services, Inc. to collaborate on the development of our battery technology for use in their electric garbage trucks. We also announced that we have entered into an MOU withEcellix Inc. , to cooperate in the development, validation and launch of next-generation battery technology. The MOU outlines the expectations for the two companies to negotiate in good faith to formalize a material supply agreement, partnership pricing, and a future equity investment. The MOU also forms a Steering Committee that will develop specific technical goals and objectives that will govern and drive the development of the partnership. These relationships help us to de-risk our business model, scale our business, and deliver value to customers. 54 Table of Contents
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 technologies for our customers inNorth America . The Joint Venture Support business segment provides engineering and other professional services to the BorgWarner JV.
We expect our capital and operating expenditures to increase significantly in connection with our ongoing activities, 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 its future state as a publicly-traded
company. Current Market Conditions
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"
COVID-19
OnMarch 11, 2020 , the WHO declared the COVID-19 outbreak a pandemic. In addition to existing travel restrictions, some locales may impose prolonged quarantines and further restrict travel, which may significantly impact the ability of our employees to get to their places of work to produce products, may make it such that we are unable to obtain sufficient components or raw materials and component parts on a timely basis or at a cost-effective price, or may significantly hamper our products from moving through the supply chain. We have taken 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 have suspended non-essential travel worldwide for employees, and we are discouraging employee attendance at other gatherings. To date, COVID-19 has had a limited adverse impact on our operations, supply chains, and distribution systems, but has resulted in higher losses on raw material than previously expected. Our efforts to qualify 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 activity are unknown at this time. 55 Table of Contents Global Battery Cell Shortage
The cost of battery cells 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 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 inthe United States that received substantial funding in initial public offerings via mergers with special purpose acquisition companies (SPACs) in 2020 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 our products or services. The availability and price of cylindrical cells is particularly sensitive to the demand surge, since most of the pouch and prismatic cell supply 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. There are only three battery cell suppliers for cylindrical cells ("Tier 1 Suppliers") whose cells are qualified for use in electric vehicle applications because of their superior quality, performance, and safety standards. Other battery cell suppliers are emerging as potentially suited for qualification, but until they have been qualified the Tier 1 Suppliers are the only source of battery cells for electric vehicle battery packs. 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 inAsia and inthe 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 will start to stabilize in 2023.
Comparability of Financial Information
Our results of operations and statements of assets and liabilities may not be comparable between periods as a result of the Business Combination.
Business Combination and Public Company Costs
As described in "Note 1 - Description of Business and Basis of Presentation" and "Note 3 - Business Combination" of the notes to the consolidated financial statements, we completed the Business Combination onDecember 29, 2020 , with Legacy Romeo surviving the merger as our wholly owned subsidiary. Prior to the Business Combination, Legacy Romeo financed its operations primarily through issuances of term notes and convertible notes (the "Notes"), as well as private placements of common stock and redeemable convertible preferred stock. From the date of Legacy Romeo's incorporation in 2014 throughDecember 29, 2020 , the date of the Business Combination, Legacy Romeo raised aggregate gross proceeds of approximately$235 million from the issuance of Notes, common stock, and redeemable convertible preferred stock in exchange for cash. Upon the consummation of the Business Combination we issued 82,037,151 shares of Common Stock for all the issued and outstanding equity interests of Legacy Romeo, inclusive of shares of Common Stock issued in exchange for both Legacy Romeo's issued and outstanding preferred stock and issued and outstanding convertible notes (inclusive of interest accrued thereon), as if each had converted into Legacy Romeo common stock immediately prior to the Business Combination. In connection with the Business Combination, 16,000,000 shares of Common Stock (the "PIPE Shares") also were sold and issued for a purchase price of$10.00 per share, or an aggregate purchase price of$160.00 million , pursuant to the Subscription Agreements entered into onOctober 5, 2020 . The net cash received from the Business Combination after underwriter and transaction costs was$345.83 million . Notwithstanding the legal form of the Business Combination pursuant to the Merger Agreement, the Business Combination was accounted for as a reverse recapitalization in accordance withU.S. GAAP. Under this method of accounting, we are treated as the acquired company for financial reporting purposes, and Legacy Romeo is treated as the accounting acquiror. In accordance with this accounting, the Business Combination is treated as the equivalent of Legacy 56
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Romeo issuing stock for the net assets of RMG, accompanied by a recapitalization. The net assets of RMG are stated at historical cost, with no goodwill or other intangible assets recorded, and the operations prior to the Business Combination will be those of Legacy Romeo. Legacy Romeo is the deemed accounting acquiror for purposes of the Business Combination based on the evaluation of the following facts and circumstances:
? Legacy Romeo's former stockholders hold a majority ownership interest in the
combined company;
? Legacy Romeo's senior management team comprise senior management of the
combined company;
? Legacy Romeo is the larger of the companies based on historical operating
activity and employee base; and
? Legacy Romeo's operations comprise the ongoing operations of the combined
company.
Legacy Romeo became the successor to an
Components of Operating Results
The following discussion describes certain line items in our Consolidated Statements of Operations.
Revenues
We primarily generate revenues from the sale of battery modules, battery packs, and BMS, as well as the performance of engineering services, inclusive of the development of prototypes. Revenues generated from the sale of our battery modules, battery packs, and BMS under standard production contracts are presented as product revenue on our statements of operations. Revenues generated from the production of prototypes are included in services revenue on our statements of operations, as 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. Related party service revenues relate entirely to revenues earned for engineering services provided to the BorgWarner JV.
Cost of Revenues and Gross Loss
Cost of revenues are comprised primarily of product costs, personnel costs, logistics and freight costs, and depreciation and amortization of manufacturing and test equipment. 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.
Gross profit or loss may vary between periods and is primarily affected by average selling prices, product costs, product mix, customer mix, production volumes, production personnel costs, 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
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and development of cell science design and engineering, modular 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 appropriate resources in research and development efforts, as we believe that this investment is critical to maintaining 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 travel, trade show, marketing, customer support, 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, 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, accounting, and information technology consulting costs.
Legal Settlement Expense
InNovember 2019 , Legacy Romeo entered into a settlement agreement with a pre-existing holder of Legacy Romeo common stock to resolve a dispute related to a share purchase transaction. As a result of the settlement agreement, Legacy Romeo rescinded the share purchase transaction and made a cash payment to the former stockholder. The amount paid in excess of the estimated fair value of the shares that were rescinded resulted in the recognition of legal settlement expense.
Interest Expense
Interest expense primarily consists of interest incurred under the Notes, inclusive of non-cash interest expense related to the amortization of fees and debt discounts associated with beneficial conversion features and detachable warrants issued with the Notes. As Legacy Romeo's outstanding Notes were converted or extinguished upon consummation of the Business Combination, we do not expect to incur material interest expense subsequent to the Business Combination.
Interest Income
Interest income includes interest earned on our cash balances.
Loss on Extinguishment of Debt
Loss on extinguishment of debt reported for the year ended
Other Expense
During 2020, Legacy Romeo forgave certain stockholder notes receivable balances
outstanding as of
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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 years endedDecember 31, 2020 and 2019, these losses relate to the BorgWarner JV, in which we hold a 40% ownership interest.
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 and certain funds and accounts managed by subsidiaries of BlackRock, Inc. and certain funds and accounts managed byAlta Fundamental Advisers LLC . All of the Public and Private Placement Warrants were outstanding as ofDecember 31, 2020 . For the year endedDecember 31, 2020 , the change in fair value of the Public and Private Placement Warrants was$34.17 million . 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 over
the
period.
Income Tax Expense
For the periods presented, income tax expense primarily consists of franchise
and other state and local taxes, as we are currently incurring losses and have
recorded a valuation allowance against our net deferred income tax assets.
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Results of Operations for the Fiscal Years Ended
Years Ended
December 31, December 31, $ %
$ in thousands 2020 2019 Change Change
Revenues
Product revenues $ 2,910 $ 4,847 $ (1,937) (40.0)
Service revenues 2,922 1,665 1,257 75.5Related party service revenues 3,142
1,976 1,166 59.0 Total revenues 8,974 8,488 486 5.7 Cost of revenues Product cost 9,997 12,703 (2,706) (21.3) Service cost 5,337 2,877 2,460 85.5
Related party service cost 2,631
1,657 974 58.8 Total cost of revenues 17,965 17,237 728 4.2 Gross loss (8,991) (8,749) (242) 2.8 Operating expenses
Research and development 7,995 11,242 (3,247) (28.9) Selling, general and administrative 17,338 13,890 3,448 24.8 Legal settlement expense - 4,586 (4,586) (100.0) Total operating expenses 25,333 29,718 (4,385) (14.8) Operating loss (34,324) (38,467) 4,143 (10.8) Interest expense (1,111) (10,954) 9,843 (89.9) Interest income - 269 (269) (100.0) Loss on extinguishment of debt - (9,181) 9,181 (100.0) Change in fair value of Public and Private Placement Warrants 34,168 - 34,168 - Other expense (3,868) - (3,868) - Net loss before income taxes and loss in equity method investments (5,135) (58,333) 53,198 (91.2) Loss in equity method investments (2,480)
(1,520) (960) 63.2 Income tax expense (2) (1) (1) 100.0 Net loss$ (7,617) $ (59,854) $ 52,237 (87.3) Revenues Years Ended December 31, December 31, $ in thousands 2020 2019 Product revenues$ 2,910 $ 4,847 % of total revenues 32.4 % 57.1 % Service revenues 2,922 1,665 % of total revenues 32.6 % 19.6 % Related party service revenues 3,142 1,976 % of total revenues 35.0 % 23.3 % Total revenues$ 8,974 $ 8,488 Product revenues Product revenues decreased approximately$1.94 million , or 40.0%, for the year endedDecember 31, 2020 , as compared to product revenues for the year endedDecember 31, 2019 . The decrease in product revenues relates to decreased deliveries of commercial vehicle products following the completion of a large contract inApril 2020 . Average selling prices per unit did not have a significant impact on revenues for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . 60
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The decrease in our commercial vehicle pack and module production and delivery activity was offset by an increased focus on the execution and delivery against new engineering and prototype development agreements with both new and prospective module and pack customers, as subsequently discussed. Under our typical sales cycle, these engineering and prototype agreements are expected to be precursors to future product supply agreements, for which product revenues are recognized as products are delivered. The primary driver of decreased product revenues was a contract completed duringApril 2020 for which a significant portion of the$4.56 million product revenue was recognized in 2019 and not subsequently replaced in 2020, partially offset by a new contract that was started and completed in 2020 for$2.37 million . Additional contracts in 2020 increased by$0.25 million further offsetting the product revenue decrease. We expect to report lower product revenues until we begin to produce and deliver modules and packs 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 February of 2021 exceed$555 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 4% of this backlog revenue over the twelve-month period followingDecember 31, 2020 . Service revenues Service revenues increased approximately$1.26 million , or 75.5%, for the year endedDecember 31, 2020 , as compared to service revenues for the year endedDecember 31, 2019 . The increase is related to 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. Upon completion of a significant engineering and prototype contract during the final fiscal quarter of 2020,$2.54 million of revenue, inclusive of amounts that had been previously deferred in accordance with our accounting policy, was recognized as of the point in time at which delivery of the final developed prototype occurred. The impact of recognizing$2.54 million of revenues upon completion of the significant engineering and prototype contact in the fourth quarter of 2020, in addition to$0.38 million in other service revenues contracts, was partially offset by$0.71 million of deferred costs in 2018 that were recognized in 2019 and$0.96 million of service revenues related to contracts that were completed in 2019 and did not reoccur in 2020.
Related party service revenues
Related party service revenues increased approximately$1.17 million , or 59.0%, for the year endedDecember 31, 2020 , as compared to related party service revenues for the year endedDecember 31, 2019 . Related party service revenues relate to engineering services that we provided to the BorgWarner JV during each respective period. As our joint venture with BorgWarner was not formed untilJune 28, 2019 , and did not commence operations until the third quarter of 2019, related party service revenues earned during the year endedDecember 31, 2020 exceeded the related party service revenues earned during the portion of the twelve month-period endedDecember 31, 2019 during which Romeo provided engineering services to the BorgWarner JV. On an annualized basis, related party service revenues were down primarily due to a contract ending in 2019 that
did
not reoccur in 2020.
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Cost of Revenues
Years Ended
December 31, December 31,
$ in thousands 2020 2019Cost of revenues - product cost$ 9,997 $
12,703
% of cost of revenues 55.6 %
73.7 %
Cost of revenues - service cost 5,337
2,877
% of cost of revenues 29.7 %
16.7 %
Cost of revenues - related party service cost 2,631
1,657 % of cost of revenues 14.6 % 9.6 % Total cost of revenues$ 17,965 $ 17,237
Cost of revenues - product cost
Cost of revenues associated with product revenues decreased approximately$2.71 million , or 21.3%, for the year endedDecember 31, 2020 , as compared to cost of revenues associated with product revenues for the year endedDecember 31, 2019 . On a period-over-period basis, labor costs decreased$1.27 million and material costs decreased$0.89 million which was attributable to a decrease of approximately 40% in the production of commercial vehicle products under supply contracts, due to a significant shift in the concentration of our plant's production activities to the manufacturing of prototypes under a significant engineering and prototype service contract during 2020. As a result, for the year endedDecember 31, 2020 , a significantly greater portion of our raw material inventory and production line labor were dedicated to delivering upon prototype service contracts. The significant decrease in labor and material costs due to lower module and pack production under supply contracts was offset by a$1.37 million increase in expense related to the write-down of 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$3.11 million for the year endedDecember 31, 2020 , as compared to$1.74 million for the period endedDecember 31, 2019 . The decrease in labor and material costs attributable to lower production levels also resulted in a decrease of approximately$0.55 million in overhead costs. A significant portion of the overhead costs we incurred include facility rent, utilities, and depreciation of manufacturing equipment, which are fixed in nature and allocated between product and service costs based on production levels. Accordingly, these costs are still incurred when we experience a reduction in production volume. The increase in service revenue resulted in an increased allocation of overhead to service revenue. As manufacturing activities under our supply contracts increase to a normalized production volume, we expect our fixed and semi-fixed overhead costs to be absorbed through the production of our modules and packs.
Cost of revenues - service cost
Cost of revenues associated with service revenues increased approximately$2.46 million , or 85.5%, for the year endedDecember 31, 2020 , as compared to cost of revenues associated with service revenues for the year endedDecember 31, 2019 . Costs recognized for the year endedDecember 31, 2020 include amounts incurred in connection with delivery against a significant engineering and prototype service contract, inclusive of$2.36 million of costs that had been deferred as a contract asset prior to the fourth quarter of fiscal year 2020. These previously deferred costs, as well as incremental costs incurred during the fourth quarter of 2020, were recognized contemporaneously with the recognition of the associated revenue, which occurred upon completion of production and delivery of the prototypes specified in the customer contract during the quarter endedDecember 31, 2020 . 62 Table of Contents The impact of the recognition of costs attributable to the significant engineering and prototype service contract was partially offset by costs in 2019 related to four smaller engineering services contracts that were completed in 2019 and did not reoccur in 2020.
Cost of revenues - related party service cost
Cost of revenues associated with related party service revenues increased approximately$0.97 million , or 58.8%, for the year endedDecember 31, 2020 , as compared to the cost of revenues associated with related party service revenues for the year endedDecember 31, 2019 . Costs incurred for the year endedDecember 31, 2020 primarily relate to personnel costs attributable to employees that provided engineering services to the BorgWarner JV during the period. Our joint venture with BorgWarner was not formed untilJune 28, 2019 , and did not commence operations until the third quarter of 2019. We provided increased services to the joint venture and, accordingly, incurred increased engineering labor costs during the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . On an annualized basis, related party service costs were down primarily due to a contract ending in 2019 that did not reoccur in 2020.
Research and Development Expense
Research and development expense decreased approximately
Primary Drivers ($ in thousands) Increase / (Decrease) Compensation and benefit costs $
(4,230)
Materials and consumables 812 Primary drivers of the total decrease in research and development expense $ (3,418) The decrease in research and development expense for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , was primarily attributable to a$4.23 million decrease in compensation and benefits costs as a result of employees' executing on services contracts and BorgWarner JV services resulting in less time being spent on research and development activities. In addition, there was an 8.4% reduction in department headcount when we paused development of our stationary storage product line inMay 2019 to focus development efforts solely on mobility products. The decrease in compensation and benefits costs was offset by materials and consumables increasing$0.81 million due to an increased focus on product development and testing.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased approximately$3.45 million , or 24.8%, for the year endedDecember 31, 2020 , as compared to selling, general, and administrative expense for the year endedDecember 31, 2019 . The increase was primarily attributable to the following drivers: Primary Drivers ($ in thousands) Increase / (Decrease) Compensation and benefit costs $
286
Professional fees 2,844
Warranty expense 363
Primary drivers of the total increase in selling, general and
administrative $ 3,493
The increase in selling, general and administrative expense for the year ended
December 31, 2020 , as compared to the year ended December 31, 2019 , was
primarily a result of $2.02 million of stock-based compensation expense for
incentive and nonqualified stock options. This expense was offset by a 15.0%
decrease in departmental headcount. In addition, professional fees increased
$2.84 million primarily as a result of audit and accounting fees associated with
the Business Combination and warranty expense increased $0.36 million primarily
as a result of increased reserves for estimated warranty expense and returned
products covered under warranty. As discussed in the 'Overview' section, we
expect selling, general, and administrative expense to increase for future
periods now that the Business Combination has been completed, including
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
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technology to support our current state as a publicly traded company; and substantial investment in management information systems.
Legal Settlement Expense
The amount reported for the year endedDecember 31, 2019 relates to a settlement agreement that we entered into inNovember 2019 to resolve a dispute related to a share purchase transaction with a pre-existing holder of our common stock. As a result of the settlement agreement, we rescinded the share purchase transaction and made a cash payment to the former stockholder. The amount paid in excess of the estimated fair value of the shares that were rescinded resulted in the recognition of$4.59 million of settlement expense. All amounts due in connection with the settlement agreement were paid in 2019. We did not incur comparable material legal settlement expense during 2020.
Interest Expense
Interest expense decreased$9.84 million , or 89.9%, for the year endedDecember 31, 2020 , as compared to interest expense for the year endedDecember 31, 2019 . The decrease was partially attributable to the absence of comparable non-cash interest expense related to the amortization of debt discounts associated with beneficial conversion features and detachable warrants in the current period. We incurred$5.59 million of non-cash interest expense during the year endedDecember 31, 2019 , as compared to no non-cash interest expense during the year endedDecember 31, 2020 . This decrease was due to the conversion and/or extinguishment of the debt instruments to which the non-cash interest expense was related during 2019. Additionally, interest expense decreased$4.25 million as a result of a decrease in debt outstanding during the period, accompanied by a reduction in the average interest rate charged for debt instruments outstanding. During the year endedDecember 31, 2019 , we had approximately$50 million in outstanding debt obligations, prior to extinguishment and conversion inMay 2019 , as compared with$3.34 million in outstanding debt obligations atDecember 31, 2020 .
Interest Income
We did not earn any interest income during the year endedDecember 31, 2020 . Interest income for the year endedDecember 31, 2019 was approximately$0.27 million , which was earned on our cash balances.
Loss on Extinguishment of Debt
The loss on extinguishment of debt was attributable to$9.18 million in net losses incurred upon the extinguishment of debt during the year endedDecember 31, 2019 . The extinguishment losses recognized during the year endedDecember 31, 2019 were incurred in connection with (1) entering into amendments to extend certain outstanding Notes payable arrangements while pursuing the 2019 preferred stock subscription and (2) the extinguishment of certain Notes at the time of the 2019 preferred stock subscription. No losses were incurred on the debt that we modified or extinguished during the year endedDecember 31, 2020 .
Change in Fair Value of Public and Private Placement Warrants
For the year endedDecember 31, 2020 , the change in fair value of the Public and Private Placement Warrants was$34.17 million . 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.
Other Expense
In April andDecember 2020 , we agreed to cancel$1.79 million and$2.02 million , respectively, of$9.12 million stockholder notes receivable balances outstanding as ofDecember 31, 2019 . Additionally, we determined that$0.05 million of additional stockholder notes receivable balances outstanding as ofDecember 31, 2019 were uncollectable. As a result, we recorded$3.87 million in Other expense for the year endedDecember 31, 2020 , which represents the amounts 64
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forgiven as of
Loss in Equity Method Investments
We account for the investment in the BorgWarner JV under the equity method of accounting and, accordingly, we recognize our proportionate share of the joint venture's earnings and losses. Loss in equity method investments increased$0.96 million , or 63.2%, for year endedDecember 31, 2020 , as compared to loss in equity method investments for the year endedDecember 31, 2019 . The loss in equity method investments recognized for the year endedDecember 31, 2020 and 2019 represents our 40% share of the losses recognized by the joint venture for the corresponding period. The increase in the loss in equity method investments for the current period is due to our joint venture with BorgWarner not being formed untilJune 28, 2019 and not commencing operations until the third quarter of 2019. Accordingly, the loss in equity method investments amount incurred for the year endedDecember 31, 2019 did not relate to a full twelve months of operations of the BorgWarner JV.
Income Tax Expense
The effective tax rate of 0.0% realized for each period was significantly below the Federal statutory rate of 21.0%, as we incurred significant 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 income tax expense represent various state and local tax obligations and consist primarily ofCalifornia franchise tax.
Net Loss
We reported a net loss of$7.62 million for the year endedDecember 31, 2020 , as compared to a net loss of$59.85 million for the year endedDecember 31, 2019 . The decrease in the net loss recognized for the year endedDecember 31, 2020 was due to the factors discussed above but primarily driven by the$34.17 million gain from the change in fair value of the Public and Private Placement Warrants.
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 unrelated external customers; whereas, the Joint Venture Support segment provides engineering services exclusively to the BorgWarner JV, which was formed inJune 2019 and commenced operations in the third quarter of 2019. Segment results for the years endedDecember 31, 2020 and 2019 are as follows: Business Segment Revenue Years Ended $ in thousands December 31, 2020 December 31, 2019 $ Change % Change Revenue Romeo Power North America $ 5,832 $ 6,512$ (680) (10.4) % Joint Venture Support 3,142 1,976 1,166 59.0 Total revenue $ 8,974 $ 8,488$ 486 5.7 % 65 Table of ContentsRomeo Power North America
The Romeo Power North America segment's revenues consist of all product and service revenues, with the exception of our related party service revenues earned from providing services to the BorgWarner JV. Accordingly, the$0.68 million , or 10.4% decrease inRomeo Power North America revenues includes the$1.94 million decrease in product revenue earned from sales of our commercial vehicle battery modules and packs, which is primarily attributable to the completion of delivery under a large supply contract inApril 2020 and not subsequently replaced. The decrease inRomeo Power North America revenues was attributable to lower product sales which was offset by the$1.26 million increase in service revenues. The increase in service revenues was primarily driven by the recognition of revenue upon delivery of the final prototypes under a significant engineering and prototype development contract during the fourth quarter of 2020. Revenue recognized under this significant engineering and prototype development contract during the fourth quarter of 2020 included$2.54 million that had been deferred during prior reporting periods in accordance with our revenue recognition policy. The impact of the revenue from the significant engineering and prototype development contract was partially offset by lesser engineering services revenue earned from certain contracts that were completed in 2019. Average selling prices did not have a significant impact on product sales during the year endedDecember 31, 2020 , as compared to year endedDecember 31, 2019 .
Joint Venture Support
The Joint Venture Support segment's reported revenue for each of the years endedDecember 31, 2020 and 2019 relates to engineering services provided to the BorgWarner JV during each annual period. The Joint Venture Support revenue increased$1.17 million , or 59.0%, for the year endedDecember 31, 2020 , as compared to the Joint Venture Support segment's revenue for the year endedDecember 31, 2019 . The Joint Venture Support segment did not commence providing services to the BorgWarner JV until the third quarter of 2019 and, consequently, this segment recognized substantially less revenue for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2020 .
Business Segment Gross Profit (Loss)
Years Ended
$ in thousands December 31, 2020 December 31, 2019 $ Change % ChangeBusiness segment gross loss Romeo Power North America $ (9,502) $ (9,068)$ (434) 4.8 % Joint Venture Support 511 319 192 60.2
Total business segment gross loss $ (8,991) $
(8,749)$ (242) 2.8 %Romeo Power North America The Romeo Power North America segment's gross loss reflects product and service revenue generated from all customers except the BorgWarner JV, less the associated costs of sales.The Romeo Power North America segment's gross loss was consistent, period-over-period.The Romeo Power North America segment's revenues decreased 10.4%, but margins remained similar to the prior year due to improved pricing and the improved ability to absorb costs. The offset to this improvement is the increase in expense related to the write-down of excess and obsolete inventory$1.37 million . As our production levels and revenues scale, theRomeo Power North America segment's performance is expected to benefit from cost savings attributable 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. 66 Table of Contents 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 increased$0.19 million , or 60.2%, for the year endedDecember 31, 2020 , as compared to the segment's income for the year endedDecember 31, 2019 . We did not commence providing services to the BorgWarner JV until the third quarter of 2019 and, consequently, the recognized gross profit of$0.32 million for the year endedDecember 31, 2019 does not reflect a full twelve months of operating activity. On an annualized basis joint venture support gross profit was down primarily due to a contract ending in 2019 that did not reoccur in 2020. This was partially offset by certain startup costs that occurred in 2019 that did not reoccur in 2020.
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 losses on the extinguishment of debt,
stock-based compensation, settlement of certain legal matters, and forgiveness
of a portion of stockholder notes receivable and a gain on the change in fair
value of the Public and Private Placement Warrants. 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 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 loss to EBITDA and Adjusted EBITDA below and not rely
on any single financial measure to evaluate our performance.
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The following table reconciles net loss to EBITDA and Adjusted EBITDA for
the years ended
Years Ended
December 31, December 31,
$ in thousands 2020 2019
Net loss $ (7,617) $ (59,854)
Interest expense 1,111 10,954
Interest income - (269)
Income tax expense 2 1
Depreciation and amortization expense 1,988 1,871
EBITDA (4,516) (47,297)
Loss on debt extinguishment - 9,181
Stock-based compensation 3,567 1,566
Settlement of certain legal matters - 4,586
Change in fair value of Public and Private Placement Warrants (34,168)
-
Forgiveness of portion of stockholder notes receivable 3,868 -
Adjusted EBITDA $ (31,249) $ (31,964) Liquidity and Capital Resources
From our inception in
Between 2016 andApril 2019 , Legacy Romeo's operations were funded by the issuance of convertible notes, two classes of equity, and term notes. During this period, Legacy Romeo issued a total of$22.6 million in convertible notes, borrowed$51.33 million under term notes, sold$7.23 million in Series Seed preferred shares (2016 only), and sold$44.6 million in common stock. During the year endedDecember 31, 2019 , Legacy Romeo issued$19.0 million of the term notes described above and repaid a total of$25.62 million of term notes. InDecember 2019 , Legacy Romeo issued$5.2 million in new convertible notes. InJune 2019 , Legacy Romeo closed a Series A preferred stock round of financing that included cash investments of$56.49 million and the conversion of outstanding debt and interest totaling$31.85 million in exchange for the issuance of an aggregate of 315,286,937 shares of newly authorized Series A preferred stock. Also, in connection with the Series A preferred stock financing, Legacy Romeo redeemed approximately 35.4% of each Series Seed holder's shares of Series Seed preferred stock issued and outstanding. Each Series Seed stockholder received a payment in cash equal to$0.33 per share. The Series Seed preferred stock was not mandatorily redeemable in advance of the Series A preferred stock sale. In connection with the execution of the Series A preferred stock purchase agreement, the Series Seed holders agreed to the redemption. TheJune 2019 Series A preferred stock raise was led by BorgWarner. In conjunction with BorgWarner's investment of$50 million into Legacy Romeo, BorgWarner and Legacy Romeo created a global joint venture, the BorgWarner JV, onJune 28, 2019 , which is intended to accelerate both companies' reach into the European market in a capital efficient way. Legacy Romeo's capital contribution for its 40.0% ownership interest in the joint venture was$4.0 million , which amount was funded through BorgWarner's direct transfer of$4.0 million of the$50.0 million that was due to Legacy Romeo for the purchase of Series A preferred stock to the BorgWarner JV.
Between March and
In
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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 currently believe that our use of the loan proceeds through the forgiveness period has been in compliance with the conditions for forgiveness of the loan. Per the terms of the PPP loan, payments are deferred for borrowers who apply for loan forgiveness until the SBA makes a determination on the loan amount to be forgiven. We applied for forgiveness of the loan following the covered period of the loan.
Between
In addition, in
OnDecember 29, 2020 , the consummation of the Business Combination resulted in net cash proceeds of$345.83 million of cash available to fund our future operations, potential future obligations to contribute cash to the BorgWarner JV, our$35.00 million initial contribution for a profit sharing interest in the HBR System, and our long-term business plan for the next twenty-four to thirty-six months. The net proceeds received reflect the receipt of gross proceeds of$394.20 million from the Business Combination, inclusive of cash from the PIPE Shares, offset by the following: (i) settling all of Legacy Romeo's issued and outstanding term notes, inclusive of accrued and unpaid interest, (ii) payment of transaction costs incurred by both RMG and Legacy Romeo, and (iii) payments of deferred legal fees, underwriting commissions, and other costs incurred in connection with the initial public offering of RMG. Our current business plan through 2025 includes substantial investments into expanded research and development capacity, as well as an allocation of capital for new factories or strategic acquisitions, which activities are expected to be funded using the cash available to the Company resulting from the Business Combination and long-term revenues through multi-year supply agreements for our products and services. These activities are currently planned to occur even while we are in the process of achieving positive free cash flow from our existing business segments. The current business plan does not factor any type of working capital financing that, if needed, could extend our cash reserves until we become self-sustaining.
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;
? 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 potential 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
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? other risks discussed in the section entitled "Risk Factors."
COVID-19
As discussed in the 'Overview' section, we have taken temporary precautionary measures intended to help minimize the risk of the COVID-19 virus to our employees including temporarily requiring some employees to work remotely and implementing social distancing protocol for all work conducted onsite. We have suspended non-essential travel worldwide for employees and we discourage employee attendance at other gatherings. To date, COVID-19 has had a limited adverse impact on our operations, supply chains and distribution systems, and has resulted in sustaining higher losses on raw material than previously expected. The degree and duration of disruptions to future business activity are unknown at this time.
Short-Term Liquidity Requirements
As ofDecember 31, 2020 , our current assets were approximately$305.49 million , consisting primarily of cash and cash equivalents, inventory, and insurance receivables. As ofDecember 31, 2020 , our current liabilities were approximately$16.05 million , consisting primarily of accounts payable, accrued expenses, a legal settlement amount, and current debt obligations. The Business Combination resulted in an increase of$345.83 million in cash that will be sufficient to fund both our liquidity needs over the near-term and the execution of our business strategy over the next 24 to 36-month period, which we expect will include (1) expanding and scaling our production capabilities, (2) investing in research and development activities, (3) expanding sales and marketing activities, and (4) pursuing strategic partnerships.
Long-Term Liquidity Requirements
Management anticipates that our most significant long-term liquidity and capital
needs will relate to capital expenditures and the expansion of production
capacity, working capital to support increased production volume, and general
overhead and personnel expenses to support continued growth and scale. We
believe the cash available to us from the consummation of the Business
Combination, including the sale of the PIPE Shares, will be sufficient to cover
forecasted capital needs and operating expenditures for fiscal year 2021 through
fiscal year 2022. Beginning in 2023, we anticipate that we will be able to
generate sufficient free cash flow from the sale of our products and services to
cover operating expenses, working capital, and capital expenditures. If adequate
funds are not available to accomplish our anticipated long-term growth, we plan
to fund future cash needs through debt financing. If we raise funds by issuing
debt securities, these debt securities 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.
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Cash Flow Analysis
The following table provides a summary of cash flow data for the years ended
Years Ended
December 31, December 31,
$ in thousands 2020 2019
Cash, cash equivalents, and restricted cash at beginning of
period $ 1,929 $ 1,511
Operating activities:
Net losses (7,617) (59,854)
Non-cash adjustments (18,639) 21,664
Changes in working capital (3,623) (8,774)
Net cash used for operating activities (29,879) (46,964)
Net cash used for investing activities (36,325) (1,171)
Net cash provided by financing activities 358,217 48,553
Net change in cash, cash equivalents, and restricted cash 292,013 418
Cash, cash equivalents, and restricted cash at end of
period $ 293,942 $ 1,929 Cash Flows from Operating Activities
Net cash used for operating activities was approximately$29.88 million for the year endedDecember 31, 2020 . The most significant contributor to the cash used during this period was$18.64 million of non-cash adjustments consisting primarily of the$34.17 million gain from the change in fair value of the Public and Private Placement Warrants and partially offset by$3.87 million of forgiveness of a portion of stockholder notes receivable,$1.99 million related to depreciation and amortization,$3.11 million related to a write-down of inventory,$2.48 million related to losses on our equity method investment,$3.57 million related to stock-based compensation, and$0.51 million related to operating and financing lease expense. Additional drivers include a net loss of approximately$7.61 million and cash outflows of$3.62 million attributable to changes in operating assets and liabilities. Net cash outflows attributable to changes in operating assets and liabilities totaled approximately$3.62 million . These net cash outflows were primarily the result of a decrease in accounts payable of$2.56 million due to a focused effort to paydown outstanding invoices after the consummation of the Business Combination, an increase in prepaid expense of$1.69 million related to a reduction of purchases from certain vendors requiring prepayment as a result of delivery of a significant engineering and prototype development contract during the fourth quarter of 2020, payments for inventory purchases of$1.37 million to support fulfillment of our agreements and a decrease in our lease liabilities of$0.22 million related to ongoing payments. The cash outflows were partially offset by an increase in accrued expenses of$1.74 million primarily due to the timing of payments for materials and professional fees, an increase in contract liabilities of$0.53 million due to the timing of advance payments received in connection with new contract awards,$0.47 million related to interest accrued and paid on notes payable and an increase in accounts receivable of$0.53 million related to timing of payments received. Net cash used for operating activities was approximately$46.96 million for the year endedDecember 31, 2019 . The most significant contributor to the cash used during this period was a net loss of approximately$59.85 million , partially offset by$21.66 million of non-cash expenses consisting primarily of$9.18 million related to debt extinguishment losses recorded upon modification of outstanding convertible notes,$5.59 million of interest expense attributable to the amortization of debt discounts,$1.87 million related to depreciation and amortization,$1.74 million related to a write-down of inventory,$1.57 million related to stock-based compensation, and$1.52 million related to losses on our equity method investment. Net cash outflows attributable to changes in operating assets and liabilities totaled$8.77 million . These net cash outflows were primarily the result of an increase in inventory of$2.57 million due to the purchase of raw materials in advance of production activities and an increase to prepaid expenses of$1.43 million as a result of purchases from certain vendors that required prepayment, partially offset by a decrease in accounts payable of$2.13 million due to
a
focused
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effort to paydown outstanding invoices and reduce costs with vendors, a decrease
in accrued expenses of $1.77 million due to a reduction in commissions, bonuses,
and vacation accruals, and a decrease in contract liabilities of $0.90 million
due to the liquidation of advance payments related to non-recurring engineering
and prototype services contracts upon performance on the contact and recognition
of sales.
Cash Flows from Investing Activities
For the year endedDecember 31, 2020 , net cash used for investing activities was approximately$36.32 million and was primarily related to our contribution of$35.00 million to our strategic collaborator HBR, to fund operating activities under the terms of our Battery Recycling Arrangement (as defined below). The remaining net cash used for investing activities of$1.34 million was related to purchases of property and equipment. For the year endedDecember 31, 2019 , net cash used for investing activities was$1.17 million , primarily driven by our capital expenditures for property and equipment.
Cash Flows from Financing Activities
For the year endedDecember 31, 2020 , net cash provided by financing activities of approximately$358.22 million was primarily related to$345.83 million of proceeds from the Business Combination,$6.48 million from the issuance of term notes,$1.92 million of proceeds from the issuance of convertible notes,$3.30 million of proceeds from a PPP loan,$5.31 million of proceeds from stockholder note receivable,$5.03 million from the issuance of common stock and$2.21 million from the exercise of stock options and warrants. These cash inflows were partially offset by$11.58 million of cash paid to reduce outstanding term and convertible note balances and$0.28 million related to the principal portion of finance lease liabilities. For the year endedDecember 31, 2019 , net cash provided by financing activities of approximately$48.55 million was primarily reflective of approximately$56.49 million of proceeds from the issuance of preferred stock, approximately$19.00 million from the issuance of term notes, approximately$5.45 million from the issuance of convertible notes, and approximately$2.57 million from the exercise of stock warrants. These cash inflows were partially offset by approximately$25.62 million of cash paid to reduce outstanding term and convertible note balances and approximately$4.05 million of cash paid to redeem preferred stock, and approximately$4.09 million of cash paid in dividends to preferred stockholders.
Contractual Obligations and Commitments
The following table describes our contractual obligations and commitments as ofDecember 31, 2020 : 2023 2025 and and $ in thousands Total 2021 2022 2024 2026 Thereafter Operating leases$ 9,998 $ 901 $ 902 $ 1,804 $ 1,804 $ 4,587 Finance leases 314 295 19 - - - PPP Loans 3,342 2,259 1,053 24 6 - Total*$ 13,654 $ 3,455 $ 1,974 $ 1,828 $ 1,810 $ 4,587 *Amounts exclude a$6.00 million legal settlement payable related to an employee liability matter. Our business and umbrella insurance carriers have agreed to cover the cost of damages owed, and we have recorded a$6.00 million insurance receivable to reflect that commitment.
Internal Control over Financial Reporting
In the course of preparing the consolidated financial statements, we and our
independent registered public accounting firm has determined that we have a
material weakness in our internal control over financial reporting. Despite
not conducting a formal assessment regarding ICFR, management identified the
following material weaknesses in its internal controls: (i) inadequate
segregation of duties, including review and approval of journal entries; and
(ii) lack of sufficient
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technical accounting resources. Control deficiencies relating to a lack of sufficient technical accounting resources also included insufficient resources for the timely review of certain accounting analyses and associated journal entries, and of the financial statement and disclosure preparation process. In aggregate we have deemed these deficiencies to be a material weakness.
In order to remediate this material weakness, we plan to take the following actions:
? hiring new accounting personnel;
? transitioning oversight of financial reporting to a principal financial
officer;
engaging a national accounting advisory firm to assist with the documentation,
? evaluation, remediation and testing of our internal control over financial
reporting based on the criteria established in Internal Control - Integrated
Framework (2013) issued by COSO;
? implementation of additional review controls and processes; and
? implementation of process and controls to better identify and manage risks.
In accordance with the provisions of the JOBS Act, we and our independent registered public accounting firm were not required to, and did not, perform an evaluation of our internal control over financial reporting as ofDecember 31, 2020 , nor any period subsequent in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we report on the effectiveness of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act after the completion of this offering.
Critical Accounting Policies
The preparation of our consolidated financial statements and related notes requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Management has based its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a description of our significant accounting policies see Note 2 - "Summary of Significant Accounting Policies," of the notes to consolidated financial statements. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Equity Method Investments
Heritage Battery Recycling Arrangement
OnOctober 2, 2020 , we entered into a Battery Recycling Agreement with HBR, an affiliate of HES (the "Battery Recycling Arrangement"). Under the Battery Recycling Arrangement, HBR has agreed to design, build and operate a System for redeploying, recycling or disposing of lithium-ion batteries to be located at HES's facility inArizona . Immediately following the Business Combination onDecember 29, 2020 , we contributed$35.00 million to HBR, a related party to an investor in Legacy Romeo and an investor of$25.00 million in the PIPE Shares. Our investment in HBR is intended to fund the building, operation, maintenance, and repair of the System. The terms of theBattery Recycling 73
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Arrangement require us to fund 30% of any operating shortfall of the System for the duration of the agreement with HBR and gives us the right to receive 30% of the profit generated by the System. The initial contract duration is for a period of ten years fromDecember 29, 2020 , and the agreement automatically extends for one-year renewal periods indefinitely. While the arrangement is in effect, it establishes a strategic arrangement with HES for the collection of our battery packs for recycling, and it gives our customers priority at the recycling facility. We also have agreed to fund, in principal, up to$10.00 million for a pilot that, if successful, could lead to the purchase of commercial vehicles containing Romeo batteries by HBR's affiliate. The participants in the Pilot Program have been selected and the parties are beginning to work towards an agreement to support the Pilot Program. We have determined that the Battery Recycling Arrangement should be accounted for as an equity method investment. We have not consolidated our interest in the System or HBR in our consolidated financial statements as we lack the ability to direct the activities that most significantly impact HBR's or the System's economic performance and are therefore not the primary beneficiary and we do not exercise control over HBR. We evaluated the characteristics of the arrangement to determine if it is more similar to a financial instrument, a loan, or an investment to be accounted for under the equity method of accounting. The classification of the contribution and subsequent accounting considerations involves significant judgment and relies on various factors including, the significance of HBR's equity in the project, the amount and timing of expected profits, our requirement to fund 30% of the System's operating shortfall, our ability to share in 30% of its operating profits, and the estimated fair value of the arrangement at inception. Based on the facts and circumstances surrounding the Battery Recycling Arrangement we concluded that it constitutes an arrangement that should be accounted for as an equity method investment.
We
recorded our$35.00 million equity method investment in our consolidated balance sheet as ofDecember 31, 2020 , which we believe represents the fair value of the Battery Recycling Arrangement at inception.
Revenue Recognition
We primarily generate revenue from the sale of battery packs, battery modules, and the performance of engineering services, inclusive of the development of prototypes. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We determine the amount, timing, and pattern of revenue recognition by applying the following steps outlined in accounting standards codification (ASC) Topic 606 - Revenue from Contracts with Customers:
1. identifying the contract with a customer;
2. identifying the performance obligations in the contract;
3. determining the transaction price;
4. allocating the transaction price to the performance obligations; and
5. recognizing revenue as the performance obligations are satisfied.
Identifying the performance obligations contained in a contract, determining transaction price, allocating transaction price, and determining when performance obligations are satisfied can require the application of significant judgment, as further discussed below.
Identifying the Performance Obligations in a Contract
We evaluate the products or services promised in each contract at inception to
determine whether the contract should be accounted for as having one or more
performance obligations. The prototypes and services in our contracts with our
customers are typically not distinct from one another due to their complex
integrated relationships and functions required to perform under the contract.
Accordingly, our contracts are typically accounted for as one performance
obligation. In
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limited cases, our contracts have more than one distinct performance obligation,
which occurs when we perform activities that are not highly complex or
interrelated or involve different products. Significant judgment is required in
determining performance obligations, and these decisions could change the amount
of revenue and profit or loss recorded in each period. We classify revenue as
products or services on our consolidated statements of operations based on the
predominant attributes of the performance obligations.
Customer arrangements that include the provision of developed or customized
products that require the bundling of promises, such as providing non-recurring
engineering and development services that lead to a prototype, are combined into
a single performance obligation because the individual products and services
that are required to fulfill the customer requirements do not meet the criteria
for a distinct performance obligation. These customized products generally have
no alternative use to us and are recognized over time or at a point in time
depending on whether the terms and conditions of these arrangements give us the
enforceable right to payment for performance completed to date, including a
reasonable profit margin.
Determination of and Allocation of Transaction Price
Each customer purchase order sets forth the transaction price for the products and services purchased under the arrangement. For contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. We may sell customized solutions unique to a customer's specifications. When it is necessary to allocate the transaction price to multiple performance obligations, we typically use the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service. We also sell standard products or services with observable standalone revenue transactions. In these situations, the observable standalone revenue transactions are used to determine the standalone selling price. Some customer arrangements include variable consideration, such as volume discounts, some of which depend upon the customers meeting specified performance criteria, such as a purchasing level over a period. We use judgment to estimate the most likely amount of variable consideration at each reporting date. When estimating variable consideration, we also apply judgment when considering the probability of whether a reversal of revenue could occur and only recognize revenue subject to this constraint.
Determination of when Performance Obligations are Satisfied
For arrangements which give an enforceable right to payment, control transfers
over time and we measure progress towards completion by selecting the input or
output method that best depicts the transfer of control of the underlying goods
and services to the customer for each respective arrangement. Methods we use to
measure progress toward completion include estimating the percentage of
completion using a cost-to-cost measure of progress because it best depicts the
transfer of control to the customer as we incur costs on our contracts. Under
the percentage-of-completion cost-to-cost measure of progress, the extent of
progress towards completion is measured based on the ratio of costs incurred to
date to the total estimated costs to complete the performance obligation(s). For
arrangements where no enforceable right to payment exists, we will recognize
revenue at a point in time based on the title transfer of the final prototype or
specified product.
Equity Valuations
As there was not a market for Legacy Romeo's equity, valuations of Legacy
Romeo's equity instruments required the application of significant estimates,
assumptions, and judgments. These valuations impact various amounts reported in
our consolidated financial statements, inclusive of the recognition of
equity-based compensation, debt discounts, and beneficial conversion features
associated with convertible financial instruments. The following discussion
provides additional details regarding the significant estimates, assumptions,
and judgments that impact the determination of the fair values of equity-based
compensation awards, warrants, and the preferred stock and common stock that
comprised Legacy Romeo's capital structure prior to the Business Combination.
The following discussion also explained why these estimates, assumptions, and
judgments could be subject to uncertainties and future variability.
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Equity-Based Compensation and Warrants
Legacy Romeo estimated its grant date fair value of stock options, warrants, and restricted stock awards granted to employees, non-employees and directors and used the estimated fair values to measure and recognize the costs for services received in exchange for the grants. Legacy Romeo also estimated the grant date fair value of warrants issued in connection with debt instruments, as a portion of the debt proceeds must be allocated to the warrants. Legacy Romeo used the Black-Scholes option-pricing model in order to estimate the fair values of both time-based stock option awards and warrants. Estimating the fair value of stock options and warrants using the Black-Scholes option-pricing model required the application of significant assumptions, such as the fair value of Legacy Romeo's underlying common stock, the estimated term of the option, the risk-free interest rates, the expected volatility of the price of Legacy Romeo's common stock and the expected dividend yield. Each of these assumptions were subjective, required significant judgment, and were based upon management's best estimates. If any of these assumptions were to change significantly in the future, equity-based compensation for future awards may differ significantly, as compared with awards previously granted.
The assumptions and estimates applied by Legacy Romeo to derive the inputs for inclusion in the Black-Scholes option-pricing model are as follows:
? Fair value of common stock - see "Preferred Stock and Common Stock Valuations"
discussion below.
Expected Term - This is the period that the options or warrants that have been
? granted are expected to remain unexercised. Legacy Romeo employed the
simplified method to calculate the average expected term.
Volatility - This is a measure of the amount by which a financial variable,
such as a share price, has fluctuated (historical volatility) or is expected to
? fluctuate (expected volatility) during a period. As Legacy Romeo did not have
sufficient history of its own volatility, management identified several
guideline comparable companies and estimated volatility based on the volatility
of those companies.
? Risk-Free Interest Rate - This is the
most closely resembles the expected life of the stock option or warrant.
? Dividend Yield - Legacy Romeo did not and does not expect to pay dividends on
its common stock in the foreseeable future.
Preferred Stock and Common Stock Valuations
In connection with the Business Combination each issued and outstanding share of Legacy Romeo preferred stock was exchanged for Common Stock, as if each had converted into Legacy Romeo Class A common stock immediately prior to the Business Combination. Subsequent to the issuance of the Series A-5 preferred stock and in connection with the Business Combination, the conversion price for the Series Seed conversion price adjusted to $0.2123. As ofDecember 31, 2020 the Company no longer had any authorized, issued or outstanding shares of preferred stock. Additionally, as ofDecember 29, 2020 there is a public market for our equity instruments. Prior to the Business Combination Legacy Romeo used valuations of its preferred stock and common stock for various purposes, including, but not limited to, the determination of the exercise price of stock options, inclusion in the Black-Scholes option-pricing model, and assessing whether convertible instruments included a beneficial conversion feature. As a privately held company, the lack of an active public market for Legacy Romeo's common stock required Legacy Romeo's management and board of directors to exercise reasonable judgment and consider a number of factors in order to make the best estimate of fair value of Legacy Romeo's equity. As Legacy Romeo's capital structure consisted of multiple classes of equity, Legacy Romeo, with the assistance of a third-party valuation specialist, utilized an option pricing model ("OPM") to determine the fair value of each class of equity. Under this approach, Legacy Romeo first estimated the fair value of Legacy Romeo's total enterprise value and total equity value using a combination of the income 76
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approach, guideline public company method, and guideline transaction method and subsequently used the OPM model to allocate values to each individual equity class by creating a series of call options on Legacy Romeo's equity value, with exercise prices based on the liquidation preferences, participation rights, and exercise prices of the equity instruments. Estimating Legacy Romeo's total enterprise value and total equity value required the application of significant judgment and assumptions. Factors considered in connection with estimating these values:
? Recent arms-length transactions involving the sale or transfer of Legacy
Romeo's common stock;
? The rights, preferences and privileges of Legacy Romeo's Series A preferred
stock relative to those of Legacy Romeo's common stock;
? Legacy Romeo's historical financial results and future financial projections;
? The market value of equity interests in substantially similar businesses, which
equity interests can be valued through nondiscretionary, objective means;
? The lack of marketability of Legacy Romeo's common stock;
? The likelihood of achieving a liquidity event, such as an initial public
offering or business combination, given prevailing market conditions;
? Industry outlook; and
? General economic outlook, including economic growth, inflation and
unemployment, interest rate environment and global economic trends.
The fair value ultimately assigned to Legacy Romeo's common stock took into account any number or combination of the various factors described above, based upon their applicability at the time of measurement. Determination of the fair value of Legacy Romeo's common stock also involved the application of multiple valuation methodologies and approaches, with varying weighting applied to each methodology as of the grant date. Application of these approaches involved the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding Legacy Romeo's expected future revenue, expenses, and future cash flows; discount rates; market multiples; the selection of comparable companies; and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact Legacy Romeo's valuations as of each valuation date and may have a material impact on the historical valuation of Legacy Romeo's common stock. Following the Business Combination, it is not necessary for our management and our board of directors to estimate the fair value of our Common Stock, as the Common Stock of the combined company is traded in the public market.
Public and Private Placement Warrants
We classify the Public and Private Placement Warrants as a long-term liability on our consolidated balance sheet as ofDecember 31, 2020 . Each Public and Private Placement Warrant is initially recorded at fair value on the date of the Business Combination. The Public Warrants were traded on the NYSE prior to their redemption and are recorded at fair value using the closing stock price as of the measurement date. The Private Placement Warrants are recorded at fair value using a Black-Scholes option-pricing model. The Public and Private Placement Warrants are re-measured to fair value at each subsequent reporting date. We will continue to adjust the liability for changes in fair value for the Public and Private Placement Warrants until the warrants are exercised, redeemed or cancelled.
The fair value of the Private Placement warrants is established using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires inputs such as the fair value of our Common Stock, the risk-free interest rate, expected term, expected dividend yield and expected volatility. The fair value of our Common Stock is the closing stock
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price on the NYSE as of the measurement date. The risk-free interest rate assumption is determined by using theU.S. Treasury rates of the same period as the expected term of the Private Placement Warrants, which is 5 years. The dividend yield assumption is based on the dividends expected to be paid over the expected life of the stock option. Our volatility is derived from several publicly traded peer companies. Changes in these assumptions can materially affect the estimate of the fair value of these instruments and ultimately change in fair value of Private Placement Warrants. The Company has historically been a private company and lacked sufficient company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies.
Leases
We evaluate whether our contractual arrangements contain leases at the inception of such arrangements. Specifically, management considers whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Right-of-use (ROU) lease assets represent our right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments. Both the ROU lease asset and liability are recognized as of the lease commencement date based on the present value of the lease payments over the lease term. Most of our leases do not provide an implicit borrowing rate that can readily be determined. Therefore, we apply a discount rate based on the incremental borrowing rate as of the lease commencement date. The incremental borrowing rate is determined by using credit rating models, including adjustments to derive a borrowing rate reflective of our secured borrowings, as well as other information available as of the lease commencement date. These credit rating models require us to make judgments related to inputs such as its credit quality or comparable credit rating. Our lease agreements may include options to extend the lease term or to terminate the lease early. We include options to extend or terminate leases upon determination of the ROU lease asset and liability when it is reasonably certain we will exercise these options. Determination of whether a lease is reasonably certain to be extended or terminated is a judgment made by management. For leases that include such options, we make a determination as to whether it is reasonably certain to exercise the options as of the lease commencement date. If facts and circumstances change such that we are no longer reasonably certain we will exercise our option, where it had previously concluded that it was reasonably certain to exercise the option as of the lease commencement date, we will re-measure the ROU lease asset and liability.
Inventory
Our inventory primarily consists of raw materials and, to a lesser extent, work-in-process, and finished goods. We report inventory at the lower of cost or net realizable value. Cost is computed using standard costing, which approximates the value of inventory on a first-in, first-out method.
We write down the carrying value of inventory when the carrying value exceeds its net realizable value. We estimate write-downs for inventory obsolescence by continuously examining our inventories to determine if and when there are indicators that carrying values exceed net realizable values. Write-downs for excess or obsolete inventories are primarily based upon a comparison of our inventory on hand to assumptions about current and future product demand. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. Factors such as the age of inventory, acceptance of our products in the markets in which we participate, the length of product life cycles, production volumes, production lead times, technological advancements of our products and those of our competitors, and changes in technical standards of our products may impact the demand for our products, the amount of inventory that we carry on hand, and the ultimate net realizable value of inventory items. Accordingly, these factors can be expected to impact if and when inventory write-downs may be required. When there is a write-down of inventory, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If we ultimately sell inventory that has been previously written down, net income or loss reported in future periods would be impacted positively.
During the years ended
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and work-in-progress, due to technological advances. While we believe that adequate write-downs for inventory obsolescence have been made in the consolidated financial statements, actual demand could be less than forecasted demand for our products, and we could experience additional material inventory write-downs in the future.
Recent Accounting Pronouncements
See "Note 2 - Summary of Significant Accounting Policies" included in the notes to our consolidated financial statements included herein.
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