As alleged in the Complaint, the Company repeatedly represented that it had “secured $300 million in revenue” (a figure that grew to $555 million by December 31, 2020) based on “existing customer contracts” (or “backlog”) and secured another $2.4 billion in contract revenue under “advanced” negotiations. The Company and Individual Defendants (collectively, “Defendants”) further claimed that Romeo expected to recognize approximately $59 million of that backlog revenue by September 30, 2021. Based in part on that figure, Defendants estimated revenue of $11 million for 2020 and $140 million for 2021, signaling that Romeo was ramping up production to begin delivering on a significant portion of its secured revenues in 2021. The Company typically has a 16-week lead time to manufacture products to meet customers’ requirements, meaning Romeo would have needed to secure component materials and began production by October 2020 to deliver scheduled orders on time in 2021.
To meet this supposed demand, Romeo needed to secure sufficient supply of high- quality battery cells. Defendants claimed that Romeo obtained its battery cells from four major suppliers—LG Chem, Samsung, Murata, and SK Innovation–signaling the Company had a stable supply of this critical product component. Further, Defendants represented that Romeo was not bound “to any level of the value chain,” that Romeo’s supply chain was “hedged” against potential supply disruptions, and that the Company did not “see any big challenges as [Romeo’s] order book continue[d] to grow.”
Unbeknownst to the public, however, Romeo had been experiencing a material shortage of high quality battery cells. Contrary to Defendants’ representations and specific assurances about Romeo’s supply: (1) Selwood eventually admitted that Romeo relied upon at most two battery cell suppliers for its core products, not four; (2) Romeo did not have sufficient battery cell inventory and/or supply to accommodate demand and ramp up production in the fourth quarter 2020 and into 2021; (3) Romeo’s supply chain for battery cells was not “hedged,” but in fact was at material risk of shortages and beholden to just two battery cell suppliers and the spot market to fulfill the Company’s 2021 inventory needs; (4) Romeo’s supply constraints were a material hindrance to Romeo’s business operations and financial performance; (5) any future “potential” risks that Defendants warned of concerning supply disruption or shortage had in fact already occurred, were continuing to occur, and were already negatively affecting Romeo’s business, operations, and prospects when the purported risk warnings were made; and (6) the Company failed to maintain sufficient internal controls. Given the supply constraints that Romeo faced, the Individual Defendants had no reasonable basis to represent that the Company could fulfill orders of existing customer contracts to generate the stated levels of backlog revenue for 2020 and 2021.
On March 30, 2021, Romeo issued a press release and filed a Form 8-K reporting its financial results for fourth quarter and full year 2020, and held a conference call with investors and analysts (the “March 30, 2021 Conference Call”). The Company reported 2020 revenue of only $8.97 million, falling far short of expectations and more than $2 million short of what Romeo had projected as late as just three weeks before the end of the year in its December 10, 2020 Proxy Statement and Prospectus soliciting votes for the Company’s business combination with RMG. Defendants explained that Romeo’s production had been hampered by “a significant shortfall” in supply of battery cells, and further reported that its estimated 2021 revenue would thus be drastically reduced from $140 million down to a range of only $18 to $40 million, or a reduction of 71-87%.
On April 16, 2021, purchasers of Company stock filed the Securities Action against the Company and Defendants Selwood, Webb, Mancini, and Kassin. On September 15, 2021, plaintiffs in the Securities Action filed an Amended Complaint (ECF No. 82) alleging claims for violations of the Securities Exchange Act of 1934 (the “Exchange Act”). On June 2, 2022, the Court granted in part and denied in part the defendants’ motion to dismiss (Dkt. No. 107, Order dated June 2, 2022) (the “Securities Action Opinion”).
In addition to the costs and expenses related to defending itself against the Securities Action and exposing Romeo to potential liability for class-wide damages, it is alleged that the Individual Defendants’ misconduct has subjected the Company to costs incurred in connection with wasting of corporate assets, and enabled the Individual Defendants, who were improperly overcompensated by the Company, to unjustly enrich themselves, among other damages.
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