Description

Despite missing 4Q revenue by over 30%, and guiding down 2021 revenue from $134mm in the spac deck to now $18-40mm (not a typo), the sell side still treats RMO as a legitimate business and values it based on mgmt projections and announced backlog. Stock tends to go up massively when company puts out press releases announcing partneships. We believe the company is nothing what they claim to be, and should be trading at or near our YE21 cash balance estimate of ~$1.30 per share.

Let’s go through bulls’ claims step by step and list our beliefs on what we believe would be more realistic:

1.   1.    Romeo Power founded by a team of ex-Tesla and SpaceX engineers, which allows them to develop unique battery pack technology. CEO Lionel Selwood held various roles of increasing responsibility at prominent and fast-moving startups SpaceX and Faraday Future, and is a highly credible.

a.       The two co-founders were Porter Harris and Michael Patterson. Porter Harris indeed worked on batteries at SpaceX and later at Faraday, and despite the Faraday car not working at the time of his departure, he is seen in the industry as a highly respected battery engineer. However, he quit RMO in 2019, and the current CTO’s experience following his postdoctoral training is limited to 2 years at a now-defunct Bosch battery division.

                                                               i.      Our Linkedin search found 1 out of ~190 employees at RMO who in fact worked at TSLA (as a battery tester back in 2015)- something to keep in mind as RMO CEO keeps referencing TSLA pedigree as a key edge

b.       Michael Patterson is described in the regulatory filings as a Chief Sales Officer, and having as having “started his career building companies in the mobile market”. However, the same regulatory filings include a contract with Michael Patterson dated August 2020 for him to be the CEO and Chairman of the Board. Why does Mr. Patterson move from that to, in under 5 weeks, being just a Chief Sales Officer? Our opinion that someone realized that SEC bans ‘bad actors’ from being officers or directors of public companies. We leave it to the reader to type his name into Finra Brokercheck, or even into google followed by “securities fraud”. In our experience, the company would not comment on the details of what you are going to see there- but its  a rather long list spanning many years and various firms.

                                                               i.      Wait imd, are you telling us the SPAC sponsors didn’t google the CEO of the company they were buying?? Well, we will never know. We do know that the SPAC drop-dead date was around 8-Feb-21, and they managed to close the RMO deal on 29-Dec-20… so we can imagine the situation where the sponsors had a difficult decision of taking what they had or losing their entire promote due to clock running out- but that would be pure conjecture on our part

                                                             ii.      And to the extent you may be wondering how the Spac sponsors arrived at the implied $10/share valuation math- we are puzzled, since in 2020 the company was issuing equity to employees at as low as $0.12 per share

c.       Lionel Selwood at the time of his promotion to CEO, as we believe, was a 30-yr old former GE machine shop supervisor who got an online masters degree and went to briefly work as a manager of a small team in the purchasing department of SpaceX and then Faraday. We aren’t entirely sure what his responsibilities at RMO were, but at the time of his promotion to CEO role he wasn’t even living near the RMO HQ in CA, but rather in Florida. We leave it to the reader to diligence whether Mr. Selwood is in control of the company or a figurehead to mask Mr. Patterson’s involvement.

                                                               i.      Wait imd, how would the CFO agree to sign a 10K given all of what you are saying so far? Well, the reader can google “Ashcroft group Washington” and decide whether working as a controller at a firm of that size prepares one for being a CFO of a billion dollar public company. All we can say about the 10K is what is in the earnings transcript: they are not going to file a 10K within regular deadline. Just remember the original spac presentation projections were prepared by management team of a then-private company that was not subject to Sarbanes Oxley.

2.  2.     RMO has $544mm of Contracted Revenue and up to $2.2Bn Under Advanced Negotiation

a.       Back in 2017, when Romeo was raising a funding round, they claimed they had a $65mm order book with ‘major OEMs’. Since then they produced ~$7mm of product revenue by our math. When asked major OEMs that ended up buying their battery packs, the mgmt team tends to points to Daimler- as we understand it, a small upfitter called Agility (now Hexagon Agility) bought some modules from Romeo, assembled them into Agility’s own battery pack design, and installed into some Daimler trucks they bought.

                                                               i.      We note that a company called Akasol has been an actual supplier to Daimler since 2015- remember the name, it will come up later

b.       We know 2 OEMs responsible for 82% of the $544mm of the backlog. One is Lion Electric, a Canadian EV spac. The other is none other than NKLA, aka the people who rolled a non-functional truck downhill. Since the scandal broke, NKLA dramatically significantly reduced their own projections for production of BEV trucks, by our math by amount roughly equal to the entirety of their RMO backlog- yet RMO mgmt continues to claim the backlog is safe.

                                                               i.      Wait imd, there is a contract attached to the regulatory filings saying NKLA commits to a minimum quantity regardless of whether they make trucks or not- so the backlog is indeed safe? Well, we aren’t going to opine on the collectability of any possible damages from NKLA- but we note that the contract is conditional on RMO delivering battery packs with minimal performance at a certain maximum cost, which we believe to be outside of what is currently possible...

                                                             ii.      …and we note that new NKLA mgmt is currently telling investors that they are planning to use their own pack designs and battery management system (leaving the more-commoditized module production to RMO)- AND that they are looking to ‘diversify’ their suppliers by the time they get to 2^nd version of their truck to have an ‘option’ to go with GM’s product.

c.       Mgmt on their 4Q20 call called out their Republic (RSG) deal as an exciting contract for electrifying specialty eg garbage trucks. However, it is our understanding that RSG has actually committed to RMO electrifying a total of 2 (two) trucks. Something to keep in mind when reading the press releases

d. We believe that for their latest announced 'supply agreement', RMO mgmt gave away ~$6.5mm of equity in exchange for no specific commitment to any unit volume, platform exclusivity, etc

3.  3.     RMO has unique proprietary technology around battery modules, battery packs, and most importantly the battery management system (“BMS”). Their pack’s energy density is unbeatable.

a.       As we noted above, Agility only used Romeo for the modules (ie the more-commoditized part of the battery unit), and NKLA claims they are going to use their own pack design and BMS. But let’s take RMO’s word that what matters is their unique energy density. Since we can’t include charts, we refer you to p.34 of Romeo spac deck here- you need to look at the vertical axis as the relevant stat for the truck use case. Note how close Akasol is to RMO, and more importantly how much YoY improvement Akasol is experiencing. But more importantly, Akasol is an established German company (ASL GY) shipping their packs to established OEMs in production volumes. That is what we believe RMO is showing you, a RMO ‘demo grade’ pack being similar to Akasol’s ‘production-grade’ pack. To make the data comparable, we looked up Akasol’s demo at Battery Show Europe 2018 that had 211 Wh/kg density vs RMO’s claimed 2021 195 Wh/kg

                                                               i.      Wait imd, I have heard of Akasol recently, is there more to the story? Of course there is! Back in 2019, Romeo ran out of cash with no viable product- you can literally find vendor lawsuits against them or look up Glassdoor comments. BorgWarner (BWA), an established auto powertrain supplier, came in with a $50mm investment (for a 20% stake) that we believe saved Romeo- with the goal of BWA learning about battery pack and also setting up a JV to make battery packs for non-US markets. In fact, whole sections of Romeo spac presentation are devoted to BorgWarner being highly strategic, enabling acceleration of growth and de-risking of execution. And guess what- in mid Fed BWA announced they are buying Akasol as ‘next step’ in their battery plans. Akasol is again an established company shipping large volumes of products now while demo’ing superior future tech. You can look up transcripts of BWA mgmt saying things like “Romeo was a good investment… and Akasol is a very important next step for us”. BWA will tell the market what their plan is for RMO once they close ASL deal. As RMO CEO said in a recent investor meeting, “we will probably sit down to see if there is a way to collaborate”. Needless to say, RMO guidance includes material revenue and profit from royalties, engineering, and support services to the JV

b.       When pressed, RMO mgmt calls out supplier qualification, perhaps even more vs proprietary tech, as their key edge. They are very proud of the fact that they have narrowed down their battery suppliers to only 4 that actually are able to deliver the right quality and performance. We believe these 4 to be LG, Samsung, Murata, and SK. We note that this also happens to be the exact list of NMC cell suppliers producing any meaningful volumes outside China.

                                                               i.      We also note that the company blamed its 2021 guidance revision of up to -77% on their inability to source sufficient quantity of cells from their suppliers…

In summary, we don’t see RMO having technology, management team, or contractual agreements required to deliver anything resembling their spac outlook, or positive FCF, at any time in the future. We believe battery packs will eventually be made by either OEMs themselves (as is already done for every passenger car from TSLA to GM), or by Tier1 automotive suppliers as part of their overall powertrain offering (eg BWA), leaving no room for any standalone subscale pack supplier.

What is the stock worth? We believe the mgmt plan to collect cash from warrant redemptions isnt practical, and so the company will likely finish 2021 with ~$1.30 per share of cash, and no material value to the core business. Adding back as ‘takeout value’ the highest 2020 option grant price produces a price target of ~$2.00 

Catalyst

Catalysts include (a) potential announcement from BWA on formal dissolution of their RMO relationship, (b) potential ongoing admission by mgmt that spac targets are no longer realistic, and (c) the overall cooling of EV spac hype cycle as traditional OEMs demonstrate their own offerings while spac EV players fail to go beyond lab prototypes