Slumping Battery Startup Romeo Power Pays Big To Secure Cell Supply

Newly public Romeo Power Inc. is betting a large part of its future on a long-term cell supply agreement with LG Electronics that would allow the startup to compete for new business and fill its current backlog.

Los Angeles-based Romeo RMO, which went public in late December following a business combination with special purpose acquisition company RMG Acquisition Corp., has a joint venture with BorgWarner Inc. and investment from Republic Services Group.

But under the glare of Wall Street, the company's share price has foundered after reaching $38.90 on Dec. 28.

Shares were trading 20.1% lower intraday Tuesday at $4.65 following Monday's Q2 earnings report in which Romeo reported a $29.7 million operating loss compared to a loss of $5.33 million on a pro forma basis — before it went public — a year earlier. 

Romeo reported Q2 revenue of $926,000 compared with $1.13 billion a year earlier. But it cost nearly three times as much to generate the sales as the larger amount a year ago.

Too Much, Too Soon?

Despite signing a five-year deal with PACCAR Inc. to supply batteries for the manufacturer's Peterbilt electric trucks, there is a question as to whether Romeo, like some other SPAC-sponsored electrification startups, went public too soon.

"Up until a couple of years ago, most of these companies would not have been anywhere close to going public," Sam Abuelsamid, principal analyst at Guidehouse Insights, told FreightWaves.

"They're going the SPAC route because they feel like they can raise some capital much more cheaply than they can by looking for VC [venture capital] or other private investors without having to give up as much of a stake in the company to get that capital."

The deal with RMG brought in $394 million for expansion and valued the company at $900 million, relatively small by SPAC standards. The roughly 600 SPACs created across all industries in the past year have a value of $700 billion.

A Risky Bet?

In a filing with the Securities and Exchange Commission last Friday, Romeo detailed a supplemental contract with South Korea's LG Energy Solution Ltd. to purchase cylindrical lithium-ion battery cells through 2028. 

Romeo is obligated to buy 17 million cells through the end of 2022 followed by 37 million in 2023, 87 million each year from 2024 to 2027, and 43.5 million through the first half of 2028. The company agreed to pay a $1.5 million deposit and $64.7 million, which will be used to build an additional assembly line at LG Energy's manufacturing facility in Ochang, Korea. 

"We also are in discussion with additional potential partners to secure further commitments for cell supply, including cells manufactured in the U.S.," Chief Strategy and Commercial Officer Lauren Webb said Monday on Romeo's earnings call with analysts.

Romeo had $267 million in cash and investments at the end of Q2.

"We believe securing our long-term cell supply agreement mitigates to some degree the wild card of availability for our most important product component," Chief Financial Officer Kerry Shiba told analysts.

"We are a Tier 1 supplier and don't control the pace of end-market product acceptance and sales volume. I don't mean to make excuses or bore you with stating the obvious, but I do want to be sure everybody understands what we control and what we do not control."

"We are a Tier 1 supplier and don't control the pace of end-market product acceptance and sales volume. I don't mean to make excuses or bore you with stating the obvious, but I do want to be sure everybody understands what we control and what we do not control."

Kerry Shiba, Chief Financial Officer, Romeo Power Inc.

Cell Competition

A day after Romeo's Aug. 10 deal — which it announced in a press release and quickly retracted — rival Proterra Inc. committed to pay LG a low nine-figure sum upfront to secure multiple gigawatt-hours of dedicated U.S. manufactured battery cell capacity. 

LG is adding two plants in the U.S. in addition to four facilities it is building in a joint venture with General Motors to make cells for batteries that would be used in GM vehicles as it phases out internal combustion engines by 2035.

The Proterra PTRA capacity coming from a U.S. facility would qualify its battery systems for duty-free status under United States-Mexico-Canada Trade Agreement regulations, according to a Proterra SEC filing last Friday.

Executive Shakeup

Romeo parted ways with CEO Lionel Selwood Aug. 6 and hired auto industry veteran Susan Brennan while reracking senior leadership in recent months to bring in executives with public company experience. That includes Shiba, who has 30 years at several public companies and joined the company in July. Webb, his predecessor, transitioned to the strategy and commercial role.

Coincidentally, Romeo recently signed a memorandum of understanding with the energy office of the U.S Virgin Islands, where Selwood was born, to support the development of electric infrastructure by helping electrify the government's vehicle fleet and through a future pilot program to provide stationary energy storage from secondary use of Romeo batteries.

Romeo has a backlog of $554 million in contracted business, some of which is expected to begin production in the fourth quarter, Shiba said. 

"We are preparing for rapid sales growth," he said. "So, we are investing to increase the strength and capacity of our team, while also incurring costs related to becoming a public company."

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Click for more FreightWaves articles by Alan Adler.

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