Shares in lithium-ion battery company Romeo Power (NYSE:RMO) picked up last week on news that it had entered into a long-term supply agreement to supply battery packs to PACCAR (NASDAQ:PCAR), one of the largest global truck manufacturers.
The California-based company is to supply batteries for PACCAR’s Peterbilt 579 and 520 battery electric vehicles (BEVs) in the United States and Canada up until 2025. In anyone’s book this is a win for Romeo Power, and the latest in a number of strategic partnerships for the firm.
The company’s main market focus is on North American trucks and buses, through its parent company Romeo Systems, of which BorgWarner (one of the top 25 largest car parts suppliers) is a 20% shareholder. It also supplies European high-performance and commercial vehicles through a joint venture with BorgWarner of which Romeo Systems owns 40%. Late last year, it secured a $234 million five-year production contract with Lion Electric to supply its fleet of all-electric class 6-8 commercial urban trucks and all-electric buses.
SPAC brings Romeo to market
At the same time Romeo Power in 2020, like many other battery vehicle-related companies, went public using a Special Purpose Acquisition Company (SPAC). The merger valued Romeo Power at a $900 million pre-money enterprise value and resulted in Romeo Power raising approximately $394 million in additional equity funding.
SPACs are proving increasingly popular as a way of benefitting from the expertise of initial sponsors and providing a shortcut to market. They also allow firms to include financial projections to prospective investors, unlike a traditional IPO. In November last year, the firm forecast revenue for 2022 at $412 million rising to $765 million for 2023. Not surprising then that post IPO, by the end of December, the share price was around $34.
Unlikely to meet revenue forecasts
Romeo Power has undoubtedly made a big impression in its short history – it was founded in 2016. If we go by the company literature, the energy density of their batteries is up to 30% higher than other batteries and their large capacity batteries can be charged in as little as 30 minutes.
But since then, in terms of numbers, it has been a different story. Full year 2020 results show that Romeo Power generated revenues of $9 million and that it now expects its revenue for 2021 to be in the range of $18-40 million. The company stated that this was due to “supply constraints and, as a result of the significant shortfall in battery cell capacity industrywide.” It should also be noted that the deal with PACCAR does not begin until after 2021.
It looks as if the company has a long way to go before it reaches its forecasted revenue of $412 million for 2022. Shares slipped back down to around $8 at the news, although they had already been sliding down throughout March. They are now $9.29 at time of writing.
But there are other issues too. The board announced that because of uncertainty regarding the accounting treatment for its public and private warrants it would not file its annual report on Form 10-K – this week the SEC issued guidance that warrants issued by SPACs should be classified as a liability rather than an equity. Meanwhile, law firm, Kirby McInerney, among others, is investigating potential claims against Romeo Power on behalf of Romeo Power shareholders. The investigation concerns whether it has violated the federal securities laws and/or engaged in other unlawful business practices.
Where Romeo Power goes from here is anyone’s guess, but it is certainly a stock worth watching.
