UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

—————————————————

FORM 10-Q

—————————————————


☒			QUARTERLY ~~QUARTERLY~~ REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2022~~2023


☐			~~QUARTERLY~~ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

STEM, INC.

(Exact name of registrant as specified in its charter)

Delaware

~~333-251397~~001-39455

85-1972187

(State or Other Jurisdiction

of Incorporation)

(Commission File Number)

(IRS Employer
Identification No.)

100 California St., 14th ~~Fl,~~Fl., San Francisco, California 94111

(Address of principal executive offices, including zip code)

1-877-374-7836

(Registrant’s telephone number, including area ~~code~~code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001

STEM

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange ~~Act~~Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒


Class			Outstanding as of July 25, ~~2022~~2023
Common Stock, $0.0001 par value per share			~~154,227,627~~155,802,411

STEM, INC.

Quarterly Report on Form 10-Q

For the ~~Quarterly~~ Period Ended June 30, ~~2022~~2023

TABLE OF CONTENTS


			Page
Part I. Financial Information			3
Item 1. Financial Statements (Unaudited)			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss)			5
Condensed Consolidated Statements of Stockholders’ Equity ~~(Deficit)~~			6
Condensed Consolidated Statements of Cash Flows			8
Notes to Condensed Consolidated Financial Statements			10
Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations			2926
Item 3. Quantitative and Qualitative Disclosures About Market Risk			4341
Item 4. Controls and Procedures			4342
Part II. Other Information			4643
Item 1. Legal Proceedings			4643
Item 1A. Risk Factors			4643
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			4744
Item 3. Defaults Upon Senior Securities			4744
Item 4. Mine Safety Disclosures			4744
Item 5. Other Information			4744
Item 6. Exhibits			4845
~~Signatures~~Signature			4845

Part I.I - Financial Information

Item 1. Financial Statements (Unaudited)

STEM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share amounts)


		June 30, 2022		December 31, 2021			June 30, 2023		December 31, 2022

ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	151,003	$	747,780	Cash and cash equivalents	$	75,405	$	87,903
Short-term investments	Short-term investments	183,890		173,008		Short-term investments	62,769		162,074
Accounts receivable, net of allowances of $1,639 and $91 as of June 30, 2022 and December 31, 2021, respectively		95,855		61,701
Accounts receivable, net of allowances of $5,349 and $3,879 as of June 30, 2023 and December 31, 2022, respectively						Accounts receivable, net of allowances of $5,349 and $3,879 as of June 30, 2023 and December 31, 2022, respectively	293,853		223,219
Inventory, net	Inventory, net	63,055		22,720		Inventory, net	145,523		8,374
Other current assets (includes $58 and $213 due from related parties as of June 30, 2022 and December 31, 2021, respectively)		47,927		18,641
Deferred costs with suppliers						Deferred costs with suppliers	22,119		43,159
Other current assets (includes $58 and $74 due from related parties as of June 30, 2023 and December 31, 2022, respectively)						Other current assets (includes $58 and $74 due from related parties as of June 30, 2023 and December 31, 2022, respectively)	13,139		8,026
Total current assets	Total current assets	541,730		1,023,850		Total current assets	612,808		532,755
Energy storage systems, net	Energy storage systems, net	98,427		106,114		Energy storage systems, net	84,627		90,757
Contract origination costs, net	Contract origination costs, net	9,321		8,630		Contract origination costs, net	12,412		11,697
Goodwill	Goodwill	546,732		1,741		Goodwill	547,204		546,649
Intangible assets, net	Intangible assets, net	164,796		13,966		Intangible assets, net	159,472		162,265
Operating lease right-of-use assets	Operating lease right-of-use assets	13,200		12,998		Operating lease right-of-use assets	13,810		12,431
Other noncurrent assets	Other noncurrent assets	52,496		24,531		Other noncurrent assets	73,157		65,339
Total assets	Total assets	$	1,426,702	$	1,191,830	Total assets	$	1,503,490	$	1,421,893
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	113,180	$	28,273	Accounts payable	$	102,980	$	83,831
Accrued liabilities	Accrued liabilities	33,057		25,993		Accrued liabilities	55,530		85,258
Accrued payroll	Accrued payroll	10,132		7,453		Accrued payroll	7,965		12,466
Financing obligation, current portion	Financing obligation, current portion	14,784		15,277		Financing obligation, current portion	18,158		15,720
Deferred revenue, current portion	Deferred revenue, current portion	49,692		9,158		Deferred revenue, current portion	115,381		64,311
Other current liabilities (includes $354 and $306 due to related parties as of June 30, 2022 and December 31, 2021, respectively)		4,415		1,813
Other current liabilities (includes $34 and $687 due to related parties as of June 30, 2023 and December 31, 2022, respectively)						Other current liabilities (includes $34 and $687 due to related parties as of June 30, 2023 and December 31, 2022, respectively)	7,479		5,412
Total current liabilities	Total current liabilities	225,260		87,967		Total current liabilities	307,493		266,998
Deferred revenue, noncurrent	Deferred revenue, noncurrent	65,849		28,285		Deferred revenue, noncurrent	78,736		73,763
Asset retirement obligation	Asset retirement obligation	4,217		4,135		Asset retirement obligation	4,079		4,262
Notes payable, noncurrent	Notes payable, noncurrent	1,673		1,687		Notes payable, noncurrent	—		1,603
Convertible notes, noncurrent	Convertible notes, noncurrent	446,914		316,542		Convertible notes, noncurrent	522,506		447,909
Financing obligation, noncurrent	Financing obligation, noncurrent	67,102		73,204		Financing obligation, noncurrent	58,895		63,867
Lease liabilities, noncurrent	Lease liabilities, noncurrent	11,921		12,183		Lease liabilities, noncurrent	11,874		10,962
Other liabilities	Other liabilities	339		—		Other liabilities	563		362
Total liabilities	Total liabilities	823,275		524,003		Total liabilities	984,146		869,726
Commitments and contingencies (Note 15)	Commitments and contingencies (Note 15)	0		0		Commitments and contingencies (Note 15)
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021		—		—
Common stock, $0.0001 par value; 500,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 154,226,275 and 144,671,624 issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		15		14
Preferred stock, $0.0001 par value; 1,000,000 shares authorized as of June 30, 2023 and December 31, 2022; zero shares issued and outstanding as of June 30, 2023 and December 31, 2022						Preferred stock, $0.0001 par value; 1,000,000 shares authorized as of June 30, 2023 and December 31, 2022; zero shares issued and outstanding as of June 30, 2023 and December 31, 2022	—		—
Common stock, $0.0001 par value; 500,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 155,796,411 and 154,540,197 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively						Common stock, $0.0001 par value; 500,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 155,796,411 and 154,540,197 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	16		15
Additional paid-in capital	Additional paid-in capital	1,166,865		1,176,845		Additional paid-in capital	1,176,678		1,185,364
Accumulated other comprehensive (loss) income		(1,136)		20
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(88)		(1,672)
Accumulated deficit	Accumulated deficit	(562,529)		(509,052)		Accumulated deficit	(657,737)		(632,081)
Total Stem's stockholders' equity		603,215		667,827
Total Stem’s stockholders’ equity						Total Stem’s stockholders’ equity	518,869		551,626
Non-controlling interests	Non-controlling interests	212		—		Non-controlling interests	475		541
Total stockholders’ equity	Total stockholders’ equity	603,427		667,827		Total stockholders’ equity	519,344		552,167
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,426,702	$	1,191,830	Total liabilities and stockholders’ equity	$	1,503,490	$	1,421,893

The accompanying notes are an integral part of these condensed consolidated financial statements.

STEM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except share and per share amounts)

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Revenue
Services revenue $ 12,521 $ 5,153 $ 22,486 $ 10,035
Hardware revenue 54,426 14,184 85,549 24,723
Total revenue 66,947 19,337 108,035 34,758
Cost of revenue
Cost of service revenue 10,141 5,809 18,774 12,715
Cost of hardware revenue 49,018 13,655 77,829 22,286
Total cost of revenue 59,159 19,464 96,603 35,001
Gross margin 7,788 (127) 11,432 (243)
Operating expenses:
Sales and marketing 12,955 3,913 22,097 6,580
Research and development 8,963 4,827 17,906 9,234
General and administrative 15,693 15,014 36,205 17,706
Total operating expenses 37,611 23,754 76,208 33,520
Loss from operations (29,823) (23,881) (64,776) (33,763)
Other expense, net:
Interest expense (2,691) (3,929) (5,909) (10,162)
Loss on extinguishment of debt — (5,064) — (5,064)
Change in fair value of warrants and embedded derivative — (67,179) — (133,577)
Other income (expenses), net 484 (163) 959 (203)
Total other expense, net (2,207) (76,335) (4,950) (149,006)
Loss before income taxes (32,030) (100,216) (69,726) (182,769)
Income tax benefit 7 — 15,220 —
Net loss (32,023) (100,216) (54,506) (182,769)
Net loss attributed to non-controlling interests (4) — (4) —
Net loss attributable to Stem $ (32,019) $ (100,216) $ (54,502) $ (182,769)
Net loss per share attributable to Stem common stockholders, basic and diluted $ (0.21) $ (1.00) $ (0.36) $ (2.59)
Weighted-average shares used in computing net loss per share to Stem common stockholders, basic and diluted 154,125,061 100,611,965 152,318,090 70,684,750


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue
Services and other revenue	$	16,360	$	12,521	$	31,033	$	22,486
Hardware revenue	76,586		54,426		129,318		85,549
Total revenue	92,946		66,947		160,351		108,035
Cost of Revenue
Cost of services and other revenue	11,756		10,141		23,260		18,774
Cost of hardware revenue	69,319		49,018		124,226		77,829
Total cost of revenue	81,075		59,159		147,486		96,603
Gross profit	11,871		7,788		12,865		11,432
Operating expenses:
Sales and marketing	13,680		12,955		26,086		22,097
Research and development	14,156		8,963		27,600		17,906
General and administrative	18,904		15,693		36,701		36,205
Total operating expenses	46,740		37,611		90,387		76,208
Loss from operations	(34,869)		(29,823)		(77,522)		(64,776)
Other income (expense), net:
Interest expense, net	(3,903)		(2,691)		(5,680)		(5,909)
Gain on extinguishment of debt, net	59,121		—		59,121		—

Other (expense) income, net	(736)		484		(1,175)		959
Total other income (expense), net	54,482		(2,207)		52,266		(4,950)
Income (loss) before (provision for) benefit from income taxes	19,613		(32,030)		(25,256)		(69,726)
(Provision for) benefit from income taxes	(491)		7		(400)		15,220
Net income (loss)	19,122		(32,023)		(25,656)		(54,506)
Net loss attributed to non-controlling interests	—		(4)		—		(4)
Net income (loss) attributable to Stem	$	19,122	$	(32,019)	$	(25,656)	$	(54,502)

Net income (loss) per share attributable to common stockholders, basic	$	0.12	$	(0.21)	$	(0.17)	$	(0.36)
Net loss per share attributable to common stockholders, diluted	$	(0.26)	$	(0.21)	$	(0.17)	$	(0.36)

Numerator used to compute net income (loss) per share:
Net income (loss) attributable to Stem common stockholders, basic	$	19,122	$	(32,019)	$	(25,656)	$	(54,502)
Net loss attributable to Stem common stockholders, diluted (Note 13)	$	(40,011)	$	(32,019)	$	(25,656)	$	(54,502)

Weighted-average shares used in computing net income (loss) per share to common stockholders, basic	155,619,179		154,125,061		155,294,475		152,318,090
Weighted-average shares used in computing net loss per share to common stockholders, diluted	155,804,953		154,125,061		155,294,475		152,318,090

The accompanying notes are an integral part of these condensed consolidated financial statements.

STEM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~LOSS~~INCOME (LOSS)

(UNAUDITED)

(in thousands)

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net loss $ (32,023) $ (100,216) $ (54,506) $ (182,769)
Other comprehensive loss:
Unrealized loss on available-for-sale securities (399) — (1,010) —
Foreign currency translation adjustment (118) (602) (146) (351)
Other comprehensive loss (32,540) (100,818) (55,662) (183,120)
Less: Comprehensive loss attributable to non-controlling interests (4) — (4) —
Total comprehensive loss attributable to Stem $ (32,536) $ (100,818) $ (55,658) $ (183,120)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income (loss)	$	19,122	$	(32,023)	$	(25,656)	$	(54,506)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities	47		(399)		1,590		(1,010)
Foreign currency translation adjustment	(133)		(118)		(6)		(146)
Total other comprehensive income (loss)	19,036		(32,540)		(24,072)		(55,662)
Less: Comprehensive loss attributable to non-controlling interests	—		(4)		—		(4)
Total comprehensive income (loss) attributable to Stem	$	19,036	$	(32,536)	$	(24,072)	$	(55,658)

The accompanying notes are an integral part of these condensed consolidated financial statements.

STEM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ~~(DEFICIT)~~

(UNAUDITED)

(in thousands, except share amounts)


	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Non-controlling Interests		Total Stockholders’ Equity
	Shares	Amount
Balance as of January 1, 2023	154,540,197	$	15	$	1,185,364	$	(1,672)	$	(632,081)	$	541	$	552,167



Stock option exercises, net of statutory tax withholdings	65,045	—		149		—		—		—		149
Issuance of common stock upon release of restricted stock units	903,061	1		—		—		—		—		1

Stock-based compensation	—	—		8,108		—		—		—		8,108
Unrealized gain on available-for-sale securities	—	—		—		1,543		—		—		1,543
Foreign currency translation adjustments	—	—		—		127		—		—		127

Redemption of non-controlling interests, net	—	—		—		—		—		(72)		(72)
Net loss	—	—		—		—		(44,778)		—		(44,778)
Balance as of March 31, 2023	155,508,303	16		1,193,621		(2)		(676,859)		469		517,245



Stock option exercises, net of statutory tax withholdings	39,528	—		80		—		—		—		80
Issuance of common stock upon release of restricted stock units	248,580	—		—		—		—		—		—

Stock-based compensation	—	—		10,817		—		—		—		10,817
Purchase of capped call options (Note 10)	—	—		(27,840)		—		—		—		(27,840)
Unrealized loss on available-for-sale securities	—	—		—		47		—		—		47
Foreign currency translation adjustments	—	—		—		(133)		—		—		(133)
Contributions from non-controlling interests	—	—		—		—		—		6		6
Net income	—	—		—		—		19,122		—		19,122
Balance as of June 30, 2023	155,796,411	$	16	$	1,176,678	$	(88)	$	(657,737)	$	475	$	519,344

Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Non-controlling Interests Total Stockholders’ Equity
Shares Amount
Balance as of January 1, 2022 144,671,624 $ 14 $ 1,176,845 $ 20 $ (509,052) $ — $ 667,827
Cumulative-effect adjustment upon adoption of ASU 2020-06 (Note 10) — — (130,979) — 1,598 — (129,381)
Cumulative-effect adjustment upon adoption of ASU 2016-13 — — — — (573) — (573)
Common stock issued upon business combination (Note 6) 8,621,006 1 108,882 — — — 108,883
Stock option exercises, net of statutory tax withholdings 425,167 — (426) — — — (426)
Stock-based compensation — — 6,787 — — — 6,787
Unrealized loss on available-for-sale securities — — — (611) — — (611)
Foreign currency translation adjustments — — — (28) — — (28)
Acquisition of non-controlling interests — — — — — 141 141
Net loss — — — — (22,483) — (22,483)
Balance as of March 31, 2022 153,717,797 15 1,161,109 (619) (530,510) 141 630,136
Stock option exercises, net of statutory tax withholdings 355,712 — (1,415) — — — (1,415)
Issuance of common stock upon release of restricted stock units 131,665 — — — — — —
Shares issued for exercise of warrants 21,101 — 150 — — — 150
Stock-based compensation — — 7,021 — — — 7,021
Unrealized loss on available-for-sale securities — — — (399) — — (399)
Foreign currency translation adjustments — — — (118) — — (118)
Acquisition of non-controlling interests — — — — — 75 75
Net loss — — — — (32,019) (4) (32,023)
Balance as of June 30, 2022 154,226,275 $ 15 $ 1,166,865 $ (1,136) $ (562,529) $ 212 $ 603,427

The accompanying notes are an integral part of these condensed consolidated financial statements.

Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Non-controlling Interests Total Stockholders’ Equity (Deficit)
Shares Amount
Balance as of January 1, 2021 40,202,785 $ 4 $ 230,620 $ (192) $ (407,841) $ — $ (177,409)
Recognition of beneficial conversion feature related to convertible notes — — 1,126 — — — 1,126
Stock option exercises 1,392,494 — 2,750 — — — 2,750
Legacy warrant exercises 19,531 — 397 — — — 397
Stock-based compensation — — 784 — — — 784
Foreign currency translation adjustments — — — 251 — — 251
Net loss — — — — (82,553) — (82,553)
Balance as of March 31, 2021 41,614,810 4 235,677 59 (490,394) — (254,654)
Merger and PIPE financing (Note 1) 70,428,326 7 247,011 — — — 247,018
Conversion of warrants into common stock upon Merger (Note 11) 2,759,970 — 60,568 — — — 60,568
Conversion of convertible notes into common stock upon Merger (Note 10) 10,921,548 1 77,747 — — — 77,748
Exchange of warrants into common stock (Note 11) 4,683,349 1 168,646 — — — 168,647
Issuance of common stock warrants for services (Note 11) — — 9,183 — — — 9,183
Stock option and stock warrant exercises 360,052 — 39 — — — 39
Stock-based compensation — — 1,047 — — — 1,047
Foreign currency translation adjustments — — — (602) — — (602)
Net loss — — — — (100,216) — (100,216)
Balance as of June 30, 2021 130,768,055 $ 13 $ 799,918 $ (543) $ (590,610) $ — $ 208,778


	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Non-controlling Interests		Total Stockholders’ Equity
	Shares	Amount
Balance as of January 1, 2022	144,671,624	$	14	$	1,176,845	$	20	$	(509,052)	$	—	$	667,827
Cumulative-effect adjustment upon adoption of ASU 2020-06 (Note 10)	—	—		(130,979)		—		1,598		—		(129,381)
Cumulative-effect adjustment upon adoption of ASU 2016-13	—	—		—		—		(573)		—		(573)
Common stock issued upon business combination (Note 6)	8,621,006	1		108,882		—		—		—		108,883
Stock option exercises, net of statutory tax withholdings	425,167	—		(426)		—		—		—		(426)
Stock-based compensation	—	—		6,787		—		—		—		6,787
Unrealized loss on available-for-sale securities	—	—		—		(611)		—		—		(611)
Foreign currency translation adjustments	—	—		—		(28)		—		—		(28)
Contributions from non-controlling interests	—	—		—		—		—		141		141
Net loss	—	—		—		—		(22,483)		—		(22,483)
Balance as of March 31, 2022	153,717,797	15		1,161,109		(619)		(530,510)		141		630,136



Stock option exercises, net of statutory tax withholdings	355,712	—		(1,415)		—		—		—		(1,415)
Issuance of common stock upon release of restricted stock units	131,665	—		—		—		—		—		—
Shares issued for exercise of warrants	21,101	—		150		—		—		—		150
Stock-based compensation	—	—		7,021		—		—		—		7,021
Unrealized loss on available-for-sale securities	—	—		—		(399)		—		—		(399)
Foreign currency translation adjustments	—	—		—		(118)		—		—		(118)
Contributions from non-controlling interests	—	—		—		—		—		75		75
Net loss	—	—		—		—		(32,019)		(4)		(32,023)
Balance as of June 30, 2022	154,226,275	$	15	$	1,166,865	$	(1,136)	$	(562,529)	$	212	$	603,427

The accompanying notes are an integral part of these condensed consolidated financial statements.

STEM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


		Six Months Ended June 30,					Six Months Ended June 30,
		2022		2021			2023		2022
OPERATING ACTIVITIES	OPERATING ACTIVITIES					OPERATING ACTIVITIES
Net loss	Net loss	$	(54,506)	$	(182,769)	Net loss	$	(25,656)	$	(54,506)
Adjustments to reconcile net loss to net cash used in operating activities:	Adjustments to reconcile net loss to net cash used in operating activities:					Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	Depreciation and amortization expense	20,887		10,315		Depreciation and amortization expense	22,376		20,887
Non-cash interest expense, including interest expenses associated with debt issuance costs	Non-cash interest expense, including interest expenses associated with debt issuance costs	902		7,119		Non-cash interest expense, including interest expenses associated with debt issuance costs	1,586		902
Stock-based compensation	Stock-based compensation	12,732		1,784		Stock-based compensation	17,122		12,732
Change in fair value of warrant liability and embedded derivative		—		133,577
Noncash lease expense		1,131		334
Change in fair value of derivative liability						Change in fair value of derivative liability	2,576		—
Non-cash lease expense						Non-cash lease expense	1,406		1,131
Accretion of asset retirement obligations						Accretion of asset retirement obligations	120		122
Impairment loss of energy storage systems						Impairment loss of energy storage systems	2,069		919

Impairment of energy storage systems		919		1,275
Issuance of warrants for services		—		9,183
Impairment loss of project assets						Impairment loss of project assets	122		—

Net (accretion of discount) amortization of premium on investments	Net (accretion of discount) amortization of premium on investments	410		—		Net (accretion of discount) amortization of premium on investments	(1,300)		410
Income tax benefit from release of valuation allowance	Income tax benefit from release of valuation allowance	(15,100)		—		Income tax benefit from release of valuation allowance	(335)		(15,100)
Provision for accounts receivable allowance	Provision for accounts receivable allowance	1,010		—		Provision for accounts receivable allowance	1,734		1,010
Net loss on investments						Net loss on investments	1,561		—

Gain on extinguishment of debt, net						Gain on extinguishment of debt, net	(59,121)		—
Other	Other	88		112		Other	(680)		(34)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	(26,123)		(4,219)		Accounts receivable	(72,187)		(26,123)
Inventory	Inventory	(36,634)		(6,323)		Inventory	(137,149)		(36,634)
Deferred costs with suppliers						Deferred costs with suppliers	28,759		(23,430)
Other assets	Other assets	(52,134)		(16,924)		Other assets	(17,816)		(28,704)
Contract origination costs		(3,625)		(1,650)
Accounts payable, accrued expenses and other current liabilities		89,598		3,292

Contract origination costs, net						Contract origination costs, net	(2,256)		(3,625)
Project assets						Project assets	(2,834)		—
Accounts payable						Accounts payable	19,049		82,405
Accrued expenses and other liabilities						Accrued expenses and other liabilities	(35,087)		7,006
Deferred revenue	Deferred revenue	28,471		3,294		Deferred revenue	56,043		28,471
Lease liabilities	Lease liabilities	(469)		(289)		Lease liabilities	(1,341)		(469)
Other liabilities		(187)		56

Net cash used in operating activities	Net cash used in operating activities	(32,630)		(41,833)		Net cash used in operating activities	(201,239)		(32,630)
INVESTING ACTIVITIES	INVESTING ACTIVITIES					INVESTING ACTIVITIES
Acquisition of AlsoEnergy, net of cash acquired		(533,009)		—
Acquisitions, net of cash acquired						Acquisitions, net of cash acquired	(1,847)		(533,009)
Purchase of available-for-sale investments	Purchase of available-for-sale investments	(98,922)		—		Purchase of available-for-sale investments	(58,034)		(98,922)
Sales and maturities of available-for-sale investments		86,623		—
Proceeds from maturities of available-for-sale investments						Proceeds from maturities of available-for-sale investments	84,750		86,623
Proceeds from sales of available-for-sale investments						Proceeds from sales of available-for-sale investments	73,917		—
Purchase of energy storage systems	Purchase of energy storage systems	(232)		(5,603)		Purchase of energy storage systems	(2,640)		(232)
Capital expenditures on internally-developed software	Capital expenditures on internally-developed software	(8,085)		(2,693)		Capital expenditures on internally-developed software	(7,388)		(8,085)

Purchase of property and equipment	Purchase of property and equipment	(2,405)		(300)		Purchase of property and equipment	(289)		(2,405)
Net cash used in investing activities		(556,030)		(8,596)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	88,469		(556,030)
FINANCING ACTIVITIES	FINANCING ACTIVITIES					FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants	Proceeds from exercise of stock options and warrants	611		2,933		Proceeds from exercise of stock options and warrants	229		611
Payments for taxes related to net share settlement of stock options	Payments for taxes related to net share settlement of stock options	(2,302)		—		Payments for taxes related to net share settlement of stock options	—		(2,302)
Net contributions from Merger and PIPE financing, net of transaction costs of $58,061		—		550,322

Proceeds from financing obligations	Proceeds from financing obligations	311		4,929		Proceeds from financing obligations	—		311
Repayment of financing obligations	Repayment of financing obligations	(6,817)		(4,609)		Repayment of financing obligations	(2,587)		(6,817)
Proceeds from issuance of convertible notes, net of issuance costs of $0 and $8 for the six months ended June 30, 2022 and 2021, respectively		—		1,118
Proceeds from issuance of notes payable, net of issuance costs of $0 and $101 for the six months ended June 30, 2022 and 2021, respectively		—		3,940
Investment from non-controlling interests		216		—
Proceeds from issuance of convertible notes, net of issuance costs of $7,601 and $0 for the six months ended June 30, 2023 and 2022, respectively						Proceeds from issuance of convertible notes, net of issuance costs of $7,601 and $0 for the six months ended June 30, 2023 and 2022, respectively	232,399		—
Repayment of convertible notes						Repayment of convertible notes	(99,754)		—
Purchase of capped call options						Purchase of capped call options	(27,840)		—

(Redemption of) investment from non-controlling interests, net						(Redemption of) investment from non-controlling interests, net	(67)		216
Repayment of notes payable	Repayment of notes payable	—		(41,446)		Repayment of notes payable	(2,101)		—
Net cash (used in) provided by financing activities		(7,981)		517,187
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	100,279		(7,981)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(136)		438		Effect of exchange rate changes on cash and cash equivalents	(7)		(136)
Net (decrease) increase in cash and cash equivalents		(596,777)		467,196
Cash and cash equivalents, beginning of year		747,780		6,942
Cash and cash equivalents, end of period		$	151,003	$	474,138
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(12,498)		(596,777)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 3,407 $ 7,131
NON-CASH INVESTING AND FINANCING ACTIVITIES
Change in asset retirement costs and asset retirement obligation $ 40 $ 71
Exchange of warrants for common stock $ — $ 168,647
Conversion of warrants upon merger $ — $ 60,568
Conversion of convertible notes upon merger $ — $ 77,748
Conversion of accrued interest into outstanding note payable $ — $ 337
Right-of-use asset obtained in exchange for lease liability $ — $ 1,230
Settlement of warrant liability into preferred stock due to exercise $ — $ 253
Stock-based compensation capitalized to internal-use software $ 522 $ 47


Cash and cash equivalents, beginning of year	87,903		747,780
Cash and cash equivalents, end of period	$	75,405	$	151,003


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	2,588	$	3,407
NON-CASH INVESTING AND FINANCING ACTIVITIES
Change in asset retirement costs and asset retirement obligation	$	302	$	40
Purchases of energy storage systems in accounts payable	$	388	$	—





Right-of-use asset obtained in exchange for lease liability	$	2,782	$	—




Stock-based compensation capitalized to internal-use software	$	1,803	$	522

The accompanying notes are an integral part of these condensed consolidated financial statements.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.BUSINESS

Description of the Business

Stem, Inc., together with its consolidated subsidiaries (“Stem,” the “Company,” “we,” “us,” or “our”), maintains one of the world’s largest digitally ~~connected,~~connected, intelligent renewable energy networks, providing customers (i) with an energy storage system, sourced from leading, global battery original equipment manufacturers (“OEMs”), that the Company delivers through its partners, including ~~solar project~~ developers, distributors and engineering, procurement and construction (“EPC”) firms, (ii) edge hardware to aid in the collection of site data and the real-time operation and control of the site plus other optional equipment, (iii) ongoing ~~software-enabled~~software platform and professional services to operate ~~the~~standalone energy storage, and integrated solar plus storage systems, ~~for up to 20 years,~~ through its ~~Athena®~~Athena® artificial intelligence (“AI”) platform (“Athena”), and ~~(iii)~~(iv) solar asset performance monitoring and control, through ~~its~~Athena’s PowerTrack ~~software.~~application. In addition, in all the markets where the Company ~~operates~~helps manage its customers’ energy storage ~~systems,~~assets, the Company has agreements to use the Athena platform to participate in ~~energy~~such markets and to share the revenue from such market participation.

The Company delivers its battery hardware and software-enabled services to its customers through its Athena ~~platform to its customers.~~platform. The Company’s hardware and recurring software-enabled services mitigate customer energy costs through services such as time-of-use and demand charge management optimization and by aggregating the dispatch of energy through a network of virtual power plants. The resulting network created by the Company’s growing customer base increases grid resilience and reliability through the real-time processing of market-based demand ~~cycles,~~signals, energy prices and other factors in connection with the deployment of renewable energy resources to such customers. Additionally, the Company’s energy storage solutions support renewable energy generation by alleviating grid intermittency issues, ~~and~~ thereby reducing customer dependence on traditional, fossil fuel resources.

The Company’s Athena PowerTrack ~~platform~~application provides a ~~vertically-integrated~~vertically integrated solution that incorporates on-site power monitoring equipment that aggregates and communicates data to enable remote control of solar generation assets. PowerTrack provides direct access to individual site performance to measure and benchmark expected energy production, maximizing asset value for our customers.

From time to time, the Company, through an indirect wholly-owned development subsidiary (“DevCo”) ~~formed in January 2022,~~ will enter into strategic joint ventures (each a “DevCo JV”) with qualified third parties for the development of select renewable energy projects (“DevCo Projects”). In this structure, DevCo forms a new DevCo JV entity as the majority owner, with the developer as the minority owner. The purpose of the DevCo JV is to develop and sell DevCo Projects and secure Company hardware and software services for those projects. In DevCo Projects, the Company makes development capital contributions to fund project ~~development. The~~development, and recovers those capital contributions plus a fee when the developer takes ownership of the project. Given long times to secure hardware, the Company will in some cases ~~also~~ elect to make cash advances to hardware suppliers to accelerate project construction timelines given long lead times to secure hardware. This business model is intended to allow the Company to ~~opportunistically deploy its balance sheet by providing~~advance development capital to key partners in strategic markets and ~~securing~~secure hardware upfront, in order to generate higher-margin software and services and other revenue via exclusive long-term services contracts under the DevCo Projects.

On February 1, 2022, the Company acquired all of the issued and outstanding capital stock of Also Energy Holdings, Inc. (“AlsoEnergy”), which has been consolidated since the date of acquisition. Through AlsoEnergy, the Company provides end-to-end turnkey solutions that monitor and manage renewable energy systems through ~~AlsoEnergy’s~~its PowerTrack software. PowerTrack includes data acquisitions and monitoring, performance modeling, agency reporting, internal reports, work order tickets, and supervisory control and data acquisition (“SCADA”) controls. AlsoEnergy has deployed systems at various international locations, but its ~~primary customer base~~largest concentration of customers is in the United States, Germany and Canada. See Note 6 — Business Combinations.

The Company operated as Rollins Road Acquisition Company (f/k/a Stem, Inc.) (“Legacy Stem”) prior to the Merger ~~(as defined below). Stem, Inc. was incorporated on March 16, 2009 in the State of Delaware and is headquartered in San Francisco, California.~~

~~Star Peak Acquisition Corp. Merger~~

~~On December 3, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”)~~ with Star Peak Transition Corp. (“STPK”), an entity that was then listed on the New York Stock Exchange under the trade symbol “STPK,” and STPK Merger Sub Corp., a Delaware corporation and wholly-owned subsidiary of STPK (“Merger Sub”), providing for, among other things, and subject to the conditions therein, the combination of the Company and STPK pursuant to the merger of Merger Sub with and into the Company, with the Company continuing as the surviving entity (the “Merger”). Stem, Inc. was incorporated on March 16, 2009 in the State of Delaware and is headquartered in San Francisco, California.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~On April 28, 2021, shareholders of STPK approved the Merger, under which Stem received approximately $550.3 million, net of fees and expenses as follows (in thousands):~~


	~~Recapitalization~~
~~Cash — STPK trust and working capital cash~~	$	~~383,383~~
~~Cash — PIPE (as described below)~~	~~225,000~~
~~Less: transaction costs and advisory fees paid~~	~~(58,061)~~
~~Merger and PIPE financing~~	$	~~550,322~~

Immediately prior to the closing of the Merger, (i) all issued and outstanding shares of Legacy Stem preferred stock, par value $0.00001 per share (the “Legacy Stem Preferred Stock”), were converted into shares of Legacy Stem common stock, par value $0.000001 per share (the “Legacy Stem Common Stock”) in accordance with Legacy Stem’s amended and restated certificate of incorporation, (ii) all outstanding convertible promissory notes of Legacy Stem (the “Legacy Stem Convertible Notes”) were converted into Legacy Stem Preferred Stock in accordance with the terms of the Legacy Stem Convertible Notes and (iii) certain warrants issued by Legacy Stem to purchase Legacy Stem Common Stock and Legacy Stem Preferred Stock (the “Legacy Stem Warrants”) were exercised by holders into Legacy Stem Common Stock in accordance with the terms thereof. Upon the consummation of the Merger, each share of Legacy Stem common stock then issued and outstanding was canceled and converted into the right to receive shares of common stock of Stem using an exchange ratio of 4.6432.

In connection with the execution of the Merger Agreement, STPK entered into separate subscription agreements (each, a “Subscription Agreement”) with a number of investors (each a “Subscriber”), pursuant to which the Subscribers agreed to purchase, and STPK agreed to sell to the Subscribers, an aggregate of 22,500,000 shares of common stock (the “PIPE Shares”), for a purchase price of $10 per share and an aggregate purchase price of $225.0 million, in a private placement pursuant to the subscription agreements (the “PIPE”). The PIPE investment closed simultaneously with the consummation of the Merger. The Merger was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, STPK was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Stem issuing stock for the net assets of STPK, accompanied by a recapitalization. The net liabilities of STPK of $302.2 million, comprised primarily of the warrant liabilities associated with the Public and Private Placement Warrants discussed in Note 11 —~~Warrants, are stated at historical cost, with no goodwill or other intangible assets recorded.~~

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Liquidity

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of the Regulation S-X, assuming the Company will continue as a going concern. As of June 30, ~~2022,~~2023, the Company had cash and cash equivalents of ~~$151.0~~$75.4 million, short-term investments of ~~$183.9~~$62.8 million, an accumulated deficit of ~~$562.5~~$657.7 million and net working capital of ~~$316.5 million, with $14.8 million of financing obligations coming due within the next 12 months.~~$305.3 million. During the six months ended June 30, ~~2022,~~2023, the Company incurred a net loss of ~~$54.5~~$25.7 million and had negative cash flows from operating activities of ~~$32.6~~$201.2 million. ~~However,~~Further, the ~~net proceeds from the Merger of $550.3 million, the proceeds of $145.3 million from the exercise of Public Warrants (as described in Note 11~~ —~~Warrants), and the~~Company received net proceeds of ~~$445.7~~$232.4 million from the issuance of the Company’s ~~0.50%~~4.25% Green Convertible Senior Notes due ~~2028~~2030 (the ~~“2028~~“2030 Convertible Notes”) (as described in Note 10 — Convertible ~~Promissory~~ Notes) ~~provided~~of which $99.8 million was paid to reduce the ~~Company with a significant amount of cash proceeds. As discussed in~~ ~~Note 6~~ —~~Business Combinations, the Company acquired 100%~~principal balance by $163.0 million of the ~~issued and outstanding capital stock of AlsoEnergy for an aggregate purchase price of~~ ~~$652.0 million, including~~ ~~$543.1 million~~ ~~in cash net of a working capital adjustment for an~~ ~~escrow recovery~~ ~~and $108.9 million in common stock.~~2028 Convertible Notes. The Company believes that its cash position is sufficient to meet capital and liquidity requirements for at least the next 12 months after the date that the financial statements are available to be issued.

The Company’s business prospects are subject to risks, expenses, and uncertainties frequently encountered by companies in the early stages of commercial operations. ~~Prior to the Merger, the Company had been funded primarily by equity financings, convertible promissory notes and borrowings from affiliates.~~ The attainment of profitable operations is dependent upon future events, including securing new customers and maintaining current ones, securing and maintaining adequate supplier relationships, building ~~its~~the Company’s customer base, successfully executing its business and marketing strategy, obtaining adequate financing to complete the Company’s development activities, and hiring and retaining appropriate personnel. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require the Company to modify, delay or abandon some of its planned future expansion or development, to seek additional equity or debt financing, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on the Company’s business, operating results and financial condition.

~~COVID-19~~Supply Chain Constraints and Risk

There has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate in various regions of the world, and there are ongoing global effects resulting from the pandemic, including challenges and increases in costs for logistics and supply chains, such as increased port congestion, intermittent supplier delays and labor shortages. Ongoing government and business responses to COVID-19, along with COVID-19 variants and the resurgence of related disruptions, could have a continued material adverse effect on economic and market conditions and trigger a period of continued global and U.S. economic slowdown.

The Company’s industry continues to face shortages and shipping delays affecting the supply of inverters, enclosures, battery modules and associated component parts for inverters and battery energy storage systems available for purchase. These shortages and delays can be attributed in part to the ~~pandemic~~evolving macroeconomic, geopolitical and ~~resulting government action, as well as broader macroeconomic conditions that may persist once~~business environment, including the ~~immediate~~ effects of increased global inflationary pressures and interest rates, potential import tariffs, geopolitical pressures, including the ~~pandemic have subsided,~~Russia-Ukraine armed conflict, rising tensions between China and ~~have been exacerbated by the ongoing conflict between Russia~~Taiwan and ~~Ukraine. While management believes that a majority~~unknown effects of ~~the Company’s suppliers have secured sufficient supply to permit them to continue delivery~~current and ~~installations through the end of 2022, if~~future trade regulations. If these shortages and delays persist ~~into~~through the second half of 2023, they could adversely affect the timing of when battery energy storage systems can be delivered and installed, and when (or if) the Company can begin to generate revenue from those systems. The Company cannot predict the full effects the ~~pandemic~~macroeconomic, geopolitical and business environment will continue to have on our business, cash flows, liquidity, financial condition and results of ~~operations at this time due to numerous uncertainties. The Company will continue to monitor developments affecting its workforce, its suppliers, its customers~~operations. In addition, the COVID-19 pandemic caused, and any new outbreaks or resurgence of COVID-19 and its ~~business operations generally,~~variants could again cause, a significant reduction in global economic activity, significantly weakening demand for our products and ~~will take actions the Company determines are necessary in order to mitigate these.~~services.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with ~~GAAP~~U.S. generally accepted accounting principles (“GAAP”) for interim reporting and with the instructions to Form 10-Q and Article 10 of Regulation ~~S-X.~~S-X, assuming the Company will continue as a going concern. Accordingly, the condensed consolidated balance sheet at December 31, ~~2021~~2022 has been derived from the audited financial statements at that date, but certain notes or other information that are normally required by GAAP have been omitted if they substantially

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

duplicate the disclosures contained in the Company’s annual audited consolidated financial statements. In the opinion of Stem management, all normal and recurring adjustments considered necessary for a fair statement of the results for the interim period presented have been included in the accompanying unaudited condensed consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other future interim period or year.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and consolidated variable interest entities (“VIEs”). The Company presents non-controlling interests within the equity section of its condensed consolidated balance sheets, and the amount of consolidated net ~~loss~~income (loss) that is attributable to Stem and the non-controlling interest in its condensed consolidated statements of operations. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2021. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022 or for any other future interim period or year.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Variable Interest Entities

The Company forms special purpose entities (“SPEs”), some of which are VIEs, with its investors in the ordinary course of business to facilitate the funding and monetization of its energy storage systems. A legal entity is considered a VIE if it has either a total equity investment that is insufficient to finance its operations without additional subordinated financial support or whose equity holders lack the characteristics of a controlling financial interest. The Company’s variable interests arise from contractual, ownership, or other monetary interests in the entity. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests.

The Company consolidates a VIE if it is deemed to be the primary beneficiary. The Company determines it is the primary beneficiary if it has the power to direct the activities that most significantly impact the VIEs’ economic performance and has the obligation to absorb losses or has the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company evaluates its relationships with its VIEs on an ongoing basis to determine whether it is the primary beneficiary.

Beginning in January 2022, the Company formed DevCo JVs with the purpose of originating potential battery storage facility projects in ~~the~~ specific locations and conducting early-stage planning and development activities. The Company determined that the DevCo JVs are ~~variable interest entities (“VIEs”)~~VIEs, as they lack sufficient equity to finance their activities without additional financial support. The Company determined that it has both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or receive benefits from the VIE that could potentially be significant. Accordingly, the Company has determined that it is the primary beneficiary of the DevCo JVs, and as a result, the DevCo JVs’ operating results, assets and liabilities are consolidated by the ~~Company.~~Company, with third party minority owners’ share presented as noncontrolling interest. The Company applied the hypothetical liquidation at book value method in allocating recorded net income (loss) to each owner based on the change in the reporting period, of the amount of net assets of the entity to which each owner would be entitled to under the governing contracts in a liquidation scenario.

The following table summarizes the carrying values of the assets and liabilities of the DevCo JVs that are consolidated by the Company as of June 30, 2023 (in thousands):


	~~June 30, 2022~~
~~Assets~~
~~Cash and cash equivalents~~	$	~~4,597~~
~~Fixed assets, net~~	~~1,353~~
~~Total assets~~	~~5,950~~
~~Liabilities~~
~~Accounts payable~~	~~143~~
~~Total liabilities~~	$	~~143~~


	June 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	892	$	6,686
Other current assets	7		38
Other noncurrent assets	5,920		3,208
Total assets	6,819		9,932
Liabilities
Accounts payable	530		356
Other current liabilities	163		97
Total liabilities	$	693	$	453

For the six months ended June 30, 2023 and 2022, the Company contributed approximately $0.1 million and $5.6 million in capital investments for hardware ~~purchases.~~purchases, respectively. The net ~~loss~~income from the DevCo JVs was immaterial during the three and six months ended June 30, 2023 and 2022.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. Such reclassifications have no impact on previously reported net income (loss), stockholders’ equity, or cash flows. For the six months ended June 30, 2022, a $23.4 million net cash outflow was ~~not material.~~reclassified from changes in other assets to changes in deferred costs with suppliers, a $7.0 million net cash inflow was reclassified from change in accounts payable to accrued expenses and other liabilities, and a $0.2 million net cash outflow was reclassified from other liabilities to accrued expenses and other liabilities in the condensed consolidated statements of cash flows. This change had no impact to net cash used in operating activities.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Actual results could differ from those estimates and such differences could be material to the financial position and results of operations.

Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, depreciable life of energy storage systems; the amortization of acquired intangibles; the amortization of financing obligations; deferred commissions and contract fulfillment costs; the valuation of energy storage systems, internally developed software, and asset retirement obligations; and the fair value of equity instruments, equity-based instruments, ~~warrant liabilities, embedded derivatives~~derivative liability and net assets acquired in a business combination.

Segment Information

Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is the CODM. The CODM reviews financial

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. As such, management has determined that the Company operates as 1one operating segment that is focused exclusively on innovative technology services that transform the way energy is distributed and consumed. The operations acquired as part of the acquisition of AlsoEnergy have been included in the Company’s operating segment. Net assets outside of the U.S. were less than 10% of total net assets as of June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

Concentration of Credit Risk and Other Uncertainties

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company’s cash balances are primarily invested in money market funds or on deposit at high credit quality financial institutions in the U.S. The Company’s cash and cash equivalents are held at financial institutions where account balances may at times exceed federally insured limits. Management believes the Company is not exposed to significant credit risk due to the financial strength of the depository institution in which the cash is held. The Company has no financial instruments with off-balance sheet risk of loss.

At times, the Company may be subject to a concentration of credit risk in relation to certain customers due to the purchase of large energy storage systems made by such customers. The Company routinely assesses the creditworthiness of its customers. The Company has not experienced ~~any~~ material losses related to receivables from individual customers, or groups of customers during the six months ended June 30, ~~2022~~2023 and ~~2021~~2022. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for credit losses is believed by management to be probable in the Company’s accounts receivable.

Significant Customers

A significant customer represents 10% or more of the Company’s total revenue or accounts receivable, net balance at each reporting date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:


		Accounts Receivable				Revenue				Revenue					Accounts Receivable				Revenue				Revenue
		June 30,		December 31,		Three Months Ended June 30,				Six Months Ended June 30,					June 30,		December 31,		Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021		2022		2021			2023		2022		2023		2022		2023		2022
Customers:	Customers:													Customers:
Customer A	Customer A	*		23	%	*		*		*		*		Customer A	58	%	54	%	61	%	50	%	35	%	46	%
Customer B	Customer B	12	%	15	%	*		*		*		*		Customer B	12	%	16	%	*		*		*		*
Customer C	Customer C	*		13	%	*		*		*		*		Customer C	13	%	11	%	*		*		26	%	*
Customer D	Customer D	47	%	*		50	%	*		46	%	*		Customer D	*		*		*		15	%	*		*
Customer E		*		*		15	%	*		*		*
Customer F		*		*		*		27	%	*		15	%
Customer G		*		*		*		10	%	*		*
Customer H		*		*		*		*		*		15	%
Customer I		*		*		*		25	%	*		14	%

*Total less than 10% for the ~~respective~~ period.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

There are inherent risks whenever a large percentage of total revenue is concentrated in a limited number of customers. Should a significant ~~customer:~~customer terminate or fail to renew its contracts with us, in whole or in part, for any reason, or experience significant financial or operating difficulties, it could have a material adverse effect on our financial condition and results of operations. In general, a customer that makes up a significant portion of revenues in one period, may not make up a significant portion in subsequent periods. See “We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly” in Part II, Item 1A. “Risk Factors” of this report for additional information about certain risks related to the concentration of our customers.

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value in the unaudited condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).

Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

Level 2 — Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

Level 3 — Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s assessment of the significance of a specific input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

Financial assets and liabilities held by the Company measured at fair value on a recurring basis as of June 30, ~~2022~~2023 and December 31, ~~2021~~2022 include cash and cash equivalents, short-term investments, derivative liability, and convertible ~~promissory~~ notes.

~~Recently Adopted Accounting Standards~~

~~The Company has adopted ASU 2020-06,~~ ~~Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40),~~ effective January 1, 2022 using the modified retrospective approach. ASU 2020-06 simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate conversion features from the host contract for convertible instruments. As a result of the adoption of ASU 2020-06, the 2028 Convertible Notes are no longer bifurcated into separate liability and equity components in the ~~June 30, 2022~~ ~~condensed consolidated balance sheet. Rather, the $460.0 million principal amount of the Company’s 2028 Convertible Notes was classified as a liability in the~~ ~~June 30, 2022~~ condensed consolidated balance sheet. Upon adoption of ASU 2020-06, an adjustment was recorded to the 2028 Convertible Notes liability component, equity component (additional paid-in-capital) and accumulated deficit. The cumulative effect of the change was recognized as an adjustment to the opening balance of accumulated deficit at the date of adoption. The comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. This adjustment was calculated based on the carrying amount of the 2028 Convertible Notes as if it had always been treated only as a liability. Further, an adjustment was recorded to the debt discount and issuance costs as if these had always been treated as a contra liability only. Interest expense related to the accretion of the 2028 Convertible Notes is no longer recognized. Interest expense for the 2028 Convertible Notes for the three and six months ended ~~June 30, 2022~~ would have been $3.8 million and $7.5 million higher without the adoption of ASU 2020-06, respectively. As such, net loss attributable to the Company per common share for the three and six months ended ~~June 30, 2022~~ ~~is $0.02 and $0.05 lower due to the effect of adoption of ASU 2020-06, respectively.~~

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, and subsequent related ASUs, which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. This ASU is effective for public and private companies’ fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and December 15, 2022, respectively. As the Company is no longer an emerging growth company as of January 1, 2022, the Company adopted ASU 2016-13 effective on such date, utilizing the modified retrospective transition method. Upon adoption, the Company updated its impairment model to utilize a forward-looking current expected credit losses (“CECL”) model in place of the incurred loss methodology for financial instruments measured at amortized cost, primarily including its accounts receivable. The adoption did not have a material effect on the Company’s ~~unaudited~~ ~~condensed consolidated financial statements.~~

~~In October 2021, the FASB issued ASU 2021-08,~~ ~~Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers~~. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The Company early adopted ASU 2021-08 on a prospective basis effective January 1, 2022. As indicated in Note 6 —~~Business Combinations~~, the Company completed the acquisition of AlsoEnergy on February 1, 2022. The adoption of ASU 2021-08 resulted in the recognition of deferred revenue at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value.

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes~~ (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 was effective for public entities for interim and annual periods beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 will be effective for private entities for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 effective May 1, 2021. The adoption of this standard did not have a material impact on the Company’s ~~unaudited~~ ~~condensed consolidated financial statements.~~

3.REVENUE

Disaggregation of Revenue

The following table provides information on the disaggregation of revenue as recorded in the condensed consolidated statements of operations (in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Hardware revenue	Hardware revenue	$	54,426	$	14,184	$	85,549	$	24,723	Hardware revenue	$	76,586	$	54,426	$	129,318	$	85,549
Services revenue		12,521		5,153		22,486		10,035
Services and other revenue										Services and other revenue	16,360		12,521		31,033		22,486
Total revenue	Total revenue	$	66,947	$	19,337	$	108,035	$	34,758	Total revenue	$	92,946	$	66,947	$	160,351	$	108,035

The table above includes AlsoEnergy’s hardware and services revenue of $6.9 million and $7.2 million, respectively, for the three months ended June 30, 2022 and $11.7 million and $12.0 million, respectively, for the six months ended June 30, 2022.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes reportable revenue by geographic regions determined based on the location of the customers (in thousands):


		Three Months Ended June 30,		Six Months Ended June 30,			Three Months Ended June 30,				Six Months Ended June 30,
		2022		2022			2023		2022		2023		2022
United States	United States	$	64,202	$	103,660	United States	$	89,636	$	64,202	$	150,208	$	103,660
Rest of the world	Rest of the world	2,745		4,375		Rest of the world	3,310		2,745		10,143		4,375
Total revenue	Total revenue	$	66,947	$	108,035	Total revenue	$	92,946	$	66,947	$	160,351	$	108,035

Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that has not been recognized, which include contract liabilities (deferred revenue) and amounts that will be billed and recognized as revenue in future periods. As of June 30, 2023 and June 30, 2022, the Company had $767.0 million and $363.8 million of remaining performance obligations, respectively, and the approximate percentages expected to be recognized as revenue in the future are as follows (in thousands, except percentages):


		Total Remaining Performance Obligations				Percent Expected to be Recognized as Revenue												June 30, 2023
				Less Than One Year				Two to Five Years				Greater Than Five Years			Total Remaining Performance Obligations						Percent Expected to be Recognized as Revenue
Service revenue				$	258,080			18	%			51	%					31		%
																		Total Remaining Performance Obligations				Less Than One Year				Two to Five Years				Greater Than Five Years
Services and other revenue																Services and other revenue						12		%		44		%		44		%
Hardware revenue	Hardware revenue	105,680				100	%			—	%			—		%	Hardware revenue		360,003				100		%		—		%		—		%
Total revenue	Total revenue	$	363,760													Total revenue		$	767,029

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


	June 30, 2022
	Total Remaining Performance Obligations		Percent Expected to be Recognized as Revenue
			Less Than One Year		Two to Five Years		Greater Than Five Years
Services and other revenue	$	258,080	18	%	51	%	31	%
Hardware revenue	105,680		100	%	—	%	—	%
Total revenue	$	363,760

Contract Balances

Deferred revenue primarily includes cash received in advance of revenue recognition related to energy optimization services and incentives. The following table presents the changes in the deferred revenue balance during the six months ended June 30, 2023 and June 30, 2022 (in thousands):


~~Beginning balance as of January 1, 2022~~	$	~~37,443~~
~~Deferred revenue acquired upon business combination~~	~~49,626~~
~~Upfront payments received from customers~~	~~85,598~~
~~Upfront or annual incentive payments received~~	~~3,868~~
~~Revenue recognized related to amounts that were included in beginning balance of deferred revenue~~	~~(4,488)~~
~~Revenue recognized related to amounts that were included in acquired balance of deferred revenue~~	~~(7,983)~~
~~Revenue recognized related to deferred revenue generated during the period~~	~~(48,523)~~
~~Ending balance as of June 30, 2022~~	$	~~115,541~~


	Six Months Ended June 30,
	2023		2022
Beginning balance	$	138,074	$	37,443
Deferred revenue acquired upon business combination	—		49,626
Upfront payments received from customers	117,356		85,598
Upfront or annual incentive payments received	1,614		3,868
Revenue recognized related to amounts that were included in beginning balance of deferred revenue	(18,820)		(4,488)
Revenue recognized related to amounts that were included in acquired balance of deferred revenue	—		(7,983)
Revenue recognized related to deferred revenue generated during the period	(44,107)		(48,523)
Ending balance	$	194,117	$	115,541

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4.SHORT-TERM INVESTMENTS

The following tables summarize the estimated fair value of the Company’s short-term investments and the gross unrealized holding gains and losses as of June 30, ~~2022~~2023 and December 31, ~~2021~~2022 (in thousands):


		As of June 30, 2022									As of June 30, 2023
		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value			Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value

Corporate debt securities	Corporate debt securities	$	35,366	$	—	$	(284)	$	35,082	Corporate debt securities	$	5,036	$	—	$	(18)	$	5,018
Commercial paper	Commercial paper	19,985		—		(1)		19,984		Commercial paper	8,945		—		—		8,945
U.S. government bonds	U.S. government bonds	105,881		—		(861)		105,020		U.S. government bonds	21,357		—		(47)		21,310
Certificate of deposits	Certificate of deposits	10,849		—		—		10,849		Certificate of deposits	4,697		—		—		4,697
Treasury bills	Treasury bills	10,494		—		(11)		10,483		Treasury bills	14,644		—		(19)		14,625
Agency bonds	Agency bonds	2,500		—		(28)		2,472		Agency bonds	8,182		1		(9)		8,174
Total short-term investments	Total short-term investments	$	185,075	$	—	$	(1,185)	$	183,890	Total short-term investments	$	62,861	$	1	$	(93)	$	62,769


											As of December 31, 2022
		As of December 31, 2021									Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value
		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value

Corporate debt securities	Corporate debt securities	$	42,174	$	11	$	(52)	$	42,133	Corporate debt securities	$	17,056	$	—	$	(164)	$	16,892
Commercial paper	Commercial paper	20,743		—		—		20,743		Commercial paper	18,922		—		—		18,922
U.S. government bonds	U.S. government bonds	86,265		—		(135)		86,130		U.S. government bonds	106,774		—		(1,515)		105,259
Certificate of deposits	Certificate of deposits	21,501		6		—		21,507		Certificate of deposits	9,986		—		—		9,986
Treasury bills										Treasury bills	9,518		3		(5)		9,516
Agency bonds	Agency bonds	2,500		—		(5)		2,495		Agency bonds	1,500		—		(1)		1,499
Total short-term investments	Total short-term investments	$	173,183	$	17	$	(192)	$	173,008	Total short-term investments	$	163,756	$	3	$	(1,685)	$	162,074

The following table presents the contractual maturities of the Company’s short-term investments as of June 30, ~~2022~~2023 (in thousands):


		As of June 30, 2022					As of June 30, 2023
		Amortized cost		Estimated Fair Value			Amortized cost		Estimated Fair Value

Due within one year	Due within one year	$	154,073	$	153,152	Due within one year	$	62,861	$	62,769
Due between one to two years		31,002		30,738

Total	Total	$	185,075	$	183,890	Total	$	62,861	$	62,769

The Company periodically reviews the individual securities that have unrealized losses on a regular basis to evaluate whether or not any security has experienced, or is expected to experience, credit losses resulting in the decline in fair value. The Company evaluates, among other factors, whether the Company intends to sell any of these marketable securities and whether it is more likely than not that the Company will be required to sell any of them before recovery of the amortized cost basis.

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

During the six months ended June 30, ~~2022,~~2023, the Company did not record an allowance for credit losses, as management believes any such losses would be immaterial based on the ~~high-grade~~investment-grade credit rating for each of the short-term investments as of the end of each period.

5.FAIR VALUE MEASUREMENTS

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the carrying amount of accounts receivable, other current assets, accounts payable, and accrued and other current liabilities approximated their estimated fair value due to their relatively short maturities.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table provides the financial instruments measured at fair value (in thousands):


		June 30, 2022									June 30, 2023
		Level 1		Level 2		Level 3		Fair Value			Level 1		Level 2		Level 3		Fair Value
Assets
Assets:										Assets:
Cash equivalents:	Cash equivalents:									Cash equivalents:
Money market fund	Money market fund	$	1,847	$	—	$	—	$	1,847	Money market fund	$	48,392	$	—	$	—	$	48,392
Commercial paper	Commercial paper	—		9,229		—		9,229		Commercial paper	—		6,492		—		6,492
Treasury bills		—		4,744		—		4,744
Total cash equivalents		1,847		13,973		—		15,820

Debt securities:	Debt securities:									Debt securities:
Corporate debt securities	Corporate debt securities	—		35,082		—		35,082		Corporate debt securities	—		5,018		—		5,018
Commercial paper	Commercial paper	—		19,984		—		19,984		Commercial paper	—		8,945		—		8,945
U.S. government bonds	U.S. government bonds	—		105,020		—		105,020		U.S. government bonds	—		21,310		—		21,310
Certificate of deposits	Certificate of deposits	—		10,849		—		10,849		Certificate of deposits	—		4,697		—		4,697
Treasury bills	Treasury bills	—		10,483		—		10,483		Treasury bills	—		14,625		—		14,625
Agency bonds	Agency bonds	—		2,472		—		2,472		Agency bonds	—		8,174		—		8,174
Total financial assets	Total financial assets	$	1,847	$	197,863	$	—	$	199,710	Total financial assets	$	48,392	$	69,261	$	—	$	117,653

Liabilities:										Liabilities:
Derivative liability										Derivative liability	$	—	$	—	$	2,576	$	2,576


		December 31, 2021									December 31, 2022
		Level 1		Level 2		Level 3		Fair Value			Level 1		Level 2		Level 3		Fair Value
Assets
Assets:										Assets:
Cash equivalents:	Cash equivalents:									Cash equivalents:
Money market fund	Money market fund	$	127,261	$	—	$	—	$	127,261	Money market fund	$	10,618	$	—	$	—	$	10,618
Commercial paper										Commercial paper	—		2,988		—		2,988

Debt securities:	Debt securities:									Debt securities:
Corporate debt securities	Corporate debt securities	—		42,133		—		42,133		Corporate debt securities	—		16,892		—		16,892
Commercial paper	Commercial paper	—		20,743		—		20,743		Commercial paper	—		18,922		—		18,922
U.S. government bonds	U.S. government bonds	—		86,130		—		86,130		U.S. government bonds	—		105,259		—		105,259
Certificate of deposits	Certificate of deposits	—		21,507		—		21,507		Certificate of deposits	—		9,986		—		9,986
Treasury bills										Treasury bills	—		9,516		—		9,516
Other	Other	—		2,495		—		2,495		Other	—		1,499		—		1,499
Total financial assets	Total financial assets	$	127,261	$	173,008	$	—	$	300,269	Total financial assets	$	10,618	$	165,062	$	—	$	175,680

The Company’s money market funds are classified as Level 1 because they are valued using quoted market prices. The Company’s short-term investments consist of available-for-sale securities and are classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data. The Company’s other current liabilities includes a derivative liability that is attributable to a derivative feature within a revenue contract, whereby final settlement is indexed to the price per ton of lithium carbonate. The balance will be valued using a third party forecast for lithium carbonate. As the revenue contracts are not traded on an exchange they are classified within Level 3 of the fair value hierarchy.

1817

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Fair Value of Convertible Promissory Notes

The convertible notes are recorded at face value less unamortized debt issuance costs (see Note 10 — Convertible ~~Promissory~~ Notes for additional details) on the condensed consolidated balance ~~sheet~~sheets as of June 30, ~~2022.~~2023. As of June 30, 2023 and December 31, 2022, the estimated fair value of the convertible notes was $~~282.7~~412.0 million and $293.1 million, respectively, based on Level 2 quoted bid prices of the convertible notes in an over-the-counter market on the last trading date of the reporting period.

6.BUSINESS COMBINATIONS

AlsoEnergy Acquisition

On February 1, 2022, Stem, Inc. acquired 100% of the outstanding shares of AlsoEnergy. AlsoEnergy provides end-to-end turnkey solutions that monitor and manage renewable energy systems. AlsoEnergy has deployed systems at various international locations, but its largest customer bases are in the United States, Germany and Canada. The combined company delivers a one-stop-shop solution for front-of-meter and commercial and industrial (“C&I”) customers with solar and storage needs.

The total consideration to acquire AlsoEnergy was $652.0 million, comprised of $543.1 million in cash, net of a working capital adjustment for an escrow recovery, and $108.9 million in the form of 8,621,006 shares of the Company’s common stock. The Company incurred $6.1 million of transaction costs related to the acquisition of AlsoEnergy, which were recorded in general and administrative expense ~~during~~in the six months ended June 30, 2022.

~~The following table summarizes the purchase price as a part of the acquisition of AlsoEnergy (in thousands):~~

Purchase Price
Cash consideration $ 544,059
Equity consideration 108,883
Working capital adjustment (915)
Total consideration $ 652,027

~~The following table summarizes the fair values of assets acquired and liabilities assumed in the acquisition of AlsoEnergy at the date of acquisition (in thousands):~~

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


~~Assets Acquired~~
~~Cash~~	$	~~10,135~~
~~Accounts receivable~~	~~9,614~~
~~Other current assets~~	~~1,795~~
~~Inventory~~	~~3,701~~
~~Operating lease right-of-use assets~~	~~1,333~~
~~Separately identifiable intangible assets acquired other than goodwill~~	~~152,100~~
~~Other non-current assets~~	~~1,032~~
~~Total identifiable assets acquired~~	~~179,710~~
~~Liabilities Assumed~~
~~Accounts payable~~	~~1,985~~
~~Other current liabilities~~	~~1,596~~
~~Accrued payroll~~	~~2,533~~
~~Deferred revenue, current portion~~	~~17,486~~
~~Lease liabilities, current portion~~	~~431~~
~~Deferred revenue, noncurrent~~	~~32,140~~
~~Lease liabilities, noncurrent~~	~~902~~
~~Deferred tax liability~~	~~15,476~~
~~Other noncurrent liabilities~~	~~150~~
~~Total liabilities assumed~~	~~72,699~~
~~Total net identifiable assets acquired~~	~~107,011~~
~~Goodwill~~	~~545,016~~
~~Total consideration~~	$	~~652,027~~

~~Based on the accounting guidance provided in ASC 805, the Company accounted for the acquisition of AlsoEnergy as a business combination in which the Company determined that AlsoEnergy was a business.~~

The Company's purchase price allocation for the acquisition of AlsoEnergy is preliminary and subject to revision as additional information about the fair value of the assets and liabilities becomes available. In the second quarter of 2022, a working capital adjustment was made that resulted in the decrease of goodwill of $0.9 million. The fair values assigned to tangible and intangible assets acquired, and liabilities assumed, are based on management’s estimates and assumptions and may be subject to change as additional information is received. Additional information that existed as of the closing date but not known at the time of this filing may become known to the Company during the remainder of the 12-month measurement period. The Company will continue to collect information and reevaluate these estimates and assumptions quarterly.

The following table and accompanying paragraphs below summarize the intangible assets acquired, their fair value as of the acquisition date, and their estimated useful lives for amortizable intangible (in thousands, except estimated useful life, which is in years):

Fair Value Useful Life
Trade name $ 11,300 7
Customer relationships 106,800 12
Backlog 3,900 1.1
Developed technology 30,100 7
Separately identifiable intangible assets acquired other than goodwill $ 152,100

Trade names include the AlsoEnergy and PowerTrack trade names, which were measured at fair value using the relief-from-royalty method. Customer relationships represent the estimated fair values of the underlying relationship with AlsoEnergy customers measured using the multiple-period excess earnings method under the income approach. Backlog relates to subscriptions contracts that were measured at fair value using the multiple-period excess earnings method under the income approach. Developed technology represents the preliminary fair value of AlsoEnergy’s renewable energy platform that was

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

measured using the relief-from-royalty method of the income approach. The amortization expense for all acquired intangible assets will be recognized on a straight-line basis over their respective estimated useful lives.

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired. The acquisition of AlsoEnergy resulted in the recognition of $545.0 million of goodwill. The Company believes that goodwill acquired primarily consists of expanded market and product opportunities, including acceleration of growth of renewable energy onto the power grid, expanded value for the Company’s customers to manage and optimize combined solar and energy storage systems through the vertical integration of software solutions, as well as access of the Company’s product offerings to international markets.

Goodwill created as a result of the acquisition of AlsoEnergy is not expected to be deductible for tax purposes. A net deferred tax liability of $15.5 million was established for the intangible assets acquired net of deferred tax assets, which primarily consists of net operating loss carryforwards and deferred revenue. Goodwill ~~has been allocated to the Company’s single reporting unit.~~

The Company included the financial results of AlsoEnergy in its unaudited condensed consolidated financial statements from the acquisition date, which contributed revenue of $14.1 million and $23.7 million of revenue during the three and six months ended June 30, 2022, respectively, and net loss of $5.8 million and $9.3 million during the three and six months ended June 30, 2022, respectively.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information summarizes the combined results of operations for the Company and AlsoEnergy, as if the acquisition had occurred on January 1, ~~2021.~~2022. The pro forma financial information is as follows (in thousands):


		(Unaudited)				(Unaudited)
		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Total revenue	Total revenue	$	66,947	$	32,428	$	111,871	$	60,001	Total revenue	$	92,946	$	66,947	$	160,351	$	111,871
Net loss		$	(32,023)	$	(105,316)	$	(62,411)	$	(199,473)
Net income (loss)										Net income (loss)	$	19,122	$	(32,023)	$	(25,656)	$	(62,411)

The pro forma financial information for the periods presented above has been calculated after adjusting the results of AlsoEnergy to reflect the business combination accounting effects resulting from this acquisition, including the elimination of transaction costs incurred by the Company, amortization expense from acquired intangible assets, and settlement of stock option awards. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination. The pro forma financial information is for informational purposes only, and is not indicative of either future results of operations, or results that may have been achieved had the acquisition been consummated as of the beginning of ~~2022 or 2021.~~2022.

7.GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

Goodwill consists of the following (in thousands):


		June 30,		December 31,			June 30,		December 31,
		2022		2021			2023		2022
Goodwill	Goodwill	$	547,556	$	1,625	Goodwill	$	547,158	$	547,556
Recovery of escrow from AlsoEnergy acquisition	Recovery of escrow from AlsoEnergy acquisition	(915)		—		Recovery of escrow from AlsoEnergy acquisition	—		(915)
Effect of foreign currency translation	Effect of foreign currency translation	91		116		Effect of foreign currency translation	46		8
Total goodwill	Total goodwill	$	546,732	$	1,741	Total goodwill	$	547,204	$	546,649

2118

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Intangible Assets, Net

Intangible assets, net, consists of the following (in thousands):


		June 30,		December 31,			June 30,		December 31,
		2022		2021			2023		2022
Developed technology	Developed technology	$	30,600	$	500	Developed technology	$	32,000	$	30,600
Trade name	Trade name	11,300		—		Trade name	11,300		11,300
Customer relationships	Customer relationships	106,800		—		Customer relationships	106,800		106,800
Backlog	Backlog	3,900		—		Backlog	3,900		3,900
Internally developed software	Internally developed software	38,881		29,706		Internally developed software	58,664		49,472
Intangible assets	Intangible assets	191,481		30,206		Intangible assets	212,664		202,072
Less: Accumulated amortization	Less: Accumulated amortization	(26,713)		(16,276)		Less: Accumulated amortization	(53,206)		(39,809)
Add: Currency translation adjustment	Add: Currency translation adjustment	28		36		Add: Currency translation adjustment	14		2
Total intangible assets, net	Total intangible assets, net	$	164,796	$	13,966	Total intangible assets, net	$	159,472	$	162,265

Amortization expense for intangible assets was $~~6.2~~6.8 million and ~~$1.3~~$6.2 million for the three months ended June 30, 2023 and 2022, ~~and 2021,~~ respectively, and~~and $10.4~~ $13.3 million and $~~2.5~~10.4 million for the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

8.ENERGY STORAGE SYSTEMS, NET

Energy Storage Systems, Net

Energy storage systems, net, consists of the following (in thousands):


		June 30,		December 31,			June 30,		December 31,
		2022		2021			2023		2022
Energy storage systems placed into service	Energy storage systems placed into service	$	144,215	$	143,592	Energy storage systems placed into service	$	141,450	$	143,154
Less: accumulated depreciation	Less: accumulated depreciation	(52,125)		(45,250)		Less: accumulated depreciation	(62,338)		(58,782)
Energy storage systems not yet placed into service	Energy storage systems not yet placed into service	6,337		7,772		Energy storage systems not yet placed into service	5,515		6,385
Total energy storage systems, net	Total energy storage systems, net	$	98,427	$	106,114	Total energy storage systems, net	$	84,627	$	90,757

Depreciation expense for energy storage systems was approximately ~~$3.7~~$3.6 million and ~~$3.6~~$3.7 million for the three months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and approximately ~~$7.4~~$7.2 million and ~~$7.3~~$7.4 million for the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Depreciation expense is recognized in cost of ~~service~~services and other revenue.

9.NOTES PAYABLE

~~Revolving Loan Due to SPE Member~~

In April 2017, the Company entered into a revolving loan agreement with an affiliate of a member of certain of the Company’s special purpose entities (“SPE”). This agreement was, from time to time, subsequently amended. The purpose of this revolving loan agreement was to finance the Company’s purchase of hardware for its various energy storage system projects. The agreement had a total revolving loan capacity of $45.0 million that bore fixed interest at 10% with a maturity date of June 2020.

In May 2020, concurrent with the 2020 Credit Agreement discussed below, the Company entered into an amendment to the revolving loan agreement, which reduced the loan capacity to $35.0 million and extended the maturity date to May 2021. The amendment increased the fixed interest rate for any borrowings outstanding more than nine months to 14% thereafter. Additionally, under the original terms of the revolving loan agreement, the Company was able to finance 100% of the value of the hardware purchased up to the total loan capacity. The amendment reduced the advance rate to 85%, with an additional reduction to 70% in August 2020. The amendment was accounted for as a modification of the debt, which did not have a material impact on the unaudited condensed consolidated financial statements. In April 2021, the Company repaid the remaining outstanding balance of this facility with the proceeds received from the Merger. The facility was terminated after the repayment in April 2021.

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~Term Loan Due to Former Non-Controlling Interest Holder~~

In June 2018, the Company acquired the outstanding member interests of an entity controlled by the Company for $8.1 million. The Company financed this acquisition by entering into a term loan agreement with the noncontrolling member bearing fixed interest of 4.5% per quarter (18.0% per annum) on the outstanding principal balance. The loan required fixed quarterly payments throughout the term of the loan, which was scheduled to be paid in full by April 1, 2026.

In May 2020, the Company amended the term loan and, using the proceeds from the 2020 Credit Agreement discussed below, prepaid $1.5 million of principal and interest on the note, of which $1.0 million was towards the outstanding principal balance, thereby reducing the fixed quarterly payment due to the lender. In relation to this amendment, the Company was required to issue warrants for 400,000 shares of common stock resulting in a discount to the term loan of $0.2 million. In April 2021, the Company repaid the remaining outstanding balance of this facility with the proceeds received from the Merger. Upon prepayment of this facility, the Company incurred $2.6 million in prepayment penalties that were recorded to loss on extinguishment of debt in the Company’s statement of operations. The facility was terminated after the repayment in April 2021.

~~2020 Credit Agreement~~

In May 2020, the Company entered into a credit agreement (“2020 Credit Agreement”) with a new lender that provided the Company with proceeds of $25.0 million to provide the Company with access to working capital towards the purchase of energy storage system equipment. The 2020 Credit Agreement has a maturity date of the earlier of (1) May 2021, (2) the maturity date of the revolving loan agreement, or (3) the maturity date of the convertible promissory notes discussed below. The loan bore interest of 12% per annum, of which 8% was paid in cash and 4% added back to principal of the loan balance every quarter. The Company used a portion of the proceeds towards payments associated with existing debt as previously discussed. In April 2021, the Company repaid the remaining outstanding balance of this facility with the proceeds received from the Merger. Upon prepayment of this facility, the Company incurred $1.4 million in prepayment penalties that were recorded to loss on extinguishment of debt in the Company’s statement of operations. The facility was terminated after the repayment in April 2021.

2021 Credit Agreement

In January 2021, a ~~wholly owned~~wholly-owned Canadian subsidiary of the Company entered into a credit agreement to provide a total of $2.7 million towards the financing of certain energy storage systems. The credit agreement iswas structured on a non-recourse basis and the ~~system will be~~systems were operated by the Company. The credit agreement ~~has~~had a stated interest of 5.45% and a maturity date of June 2031. The Company received an advance under the credit agreement of $1.8 million in January 2021. The repayment of advances received under ~~this~~the credit agreement iswas determined by the lender based on the proceeds generated by the Company through the operation of the underlying energy storage systems. ~~As of June 30, 2022, and December 31, 2021,~~

On April 6, 2023, the Company repaid the remaining outstanding balance ~~was $1.9 million. The Company was in compliance with all covenants contained in~~under the 2021 Credit Agreement ~~as of June 30, 2022.~~

~~The Company’s outstanding debt consisted~~with a portion of the ~~following as~~net proceeds from the issuance of ~~June 30, 2022 (in thousands):~~


	~~June 30, 2022~~
~~Outstanding principal~~	$	~~1,875~~
~~Unamortized discount~~	~~(202)~~
~~Carrying value of debt~~	$	~~1,673~~

~~10.~~the 2030 Convertible Notes (as described in Note 10 ~~CONVERTIBLE PROMISSORY NOTES~~—

AsConvertible Notes). Upon prepayment of ~~December 31, 2020,~~this facility, the Company ~~had various convertible notes outstanding to investors.~~incurred a $0.3 million loss on extinguishment of debt, which is recorded in the Company’s statement of operations. The ~~Company refers to~~facility was terminated after the collective group of all such note instruments as the “Pre-Merger Convertible Promissory Notes.” As of December 31, 2020, these Pre-Merger Convertible Promissory Notes had a balance of $67.6 million. During the ~~year ended~~ ~~December 31, 2021, the Company issued additional convertible notes, including convertible promissory notes issued and sold~~repayment in ~~January 2021 (the “Q1 2021 Convertible Notes”) and the 2028 Convertible Notes. Upon effectiveness of the Merger on~~ April 28, 2021, all outstanding Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes were converted to common stock and cancelled (see “—Conversion and Cancellation of Convertible Promissory Notes Upon Merger” below). As of December 31, 2021, the Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes were 0 longer outstanding.

2023.

2319

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Q1 2021 Convertible Notes~~

In January 2021, the Company issued and sold the Q1 2021 Convertible Notes under the same terms as the then existing Pre-Merger Convertible Promissory Notes to various investors with aggregate gross proceeds of $1.1 million. The Company evaluated the conversion option within the Q1 2021 Convertible Notes and determined the effective conversion price was beneficial to the note holders.

~~Conversion and Cancellation of Convertible Promissory Notes Upon Merger~~

Immediately prior to the effectiveness of the Merger, the entire balance of the Company’s outstanding Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes issued by Legacy Stem automatically converted into shares of Legacy Stem Common Stock. Upon the effectiveness of the Merger, these shares of Legacy Stem Common Stock automatically converted into 10,921,548 shares of common stock of Stem. The balance associated with the outstanding Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes totaling $77.7 million, including $7.7 million of interest accrued on the notes through the date of Merger, was reclassified to additional paid-in-capital. The unamortized portion of the debt discount associated with the outstanding Q1 2021 Convertible Notes totaling $1.1 million was fully expensed to loss on extinguishment of debt on the Company’s statement of operations.10.CONVERTIBLE NOTES

2028 Convertible Notes and 2028 Capped Call Options

2028 Convertible Notes

On November 22, 2021, the Company issued $460.0 million aggregate principal amount of its 2028 Convertible Notes in a private placement offering to qualified institutional buyers (the ~~“Initial~~“2021 Initial Purchasers”) pursuant to Rule 144A under the Securities Act of 1933, as amended.

The 2028 Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 0.5% per year, payable in cash semi-annually in arrears in June and December of each year, beginning in June 2022. The notes will mature on December 1, 2028, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon conversion, the Company may choose to pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The Notes are redeemable for cash at the Company’s option at any time given certain conditions (as discussed below), at an initial conversion rate of 34.1965 shares of common stock per $1,000 principal amount of 2028 Convertible Notes, which is equivalent to an initial conversion price of approximately $29.24 (the “2028 Conversion Price”) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture.

The Company may redeem for cash all or any portion of the 2028 Convertible Notes, at the Company’s option, on or after December 5, 2025 if the last reported sale price of the Company’s common stock has been at least 130% of the 2028 Conversion Price then in effect for at least 20 trading days at a redemption price equal to 100% of the principal amount of the 2028 Convertible Notes to be redeemed, plus accrued and unpaid interest.

The Company’s net proceeds from this offering were approximately $445.7 million, after deducting the 2021 Initial Purchasers’ discounts and debt issuance costs. To minimize the impact of potential dilution to the Company’s common stockholders upon conversion of the 2028 Convertible Notes, the Company entered into separate capped ~~calls~~call transactions (the ~~“Capped~~“2028 Capped Calls”) as described below. In connection with the issuance of the 2030 Convertible Notes, during the three months ended June 30, 2023, the Company used approximately $99.8 million of the net proceeds to purchase and surrender for cancellation approximately $163.0 million aggregate principal amount of the Company’s 2028 Convertible Notes, which resulted in a $59.4 million gain on debt extinguishment. See 2030 Convertible Notesbelow for further details of the 2030 Convertible Notes.

Upon adoption of ASU 2020-06, the Company allocated all of the debt discount to long-term debt. The debt discount is amortized to interest expense using the effective interest method, computed to be 0.9%, over the life of the 2028 Convertible Notes or approximately its seven-year term. The outstanding 2028 Convertible Notes balances as of June 30, 2023 and December 31, 2022 are summarized in the following table (in thousands):


	~~June 30, 2022~~
~~Long Term Debt~~
~~Outstanding principal~~	$	~~460,000~~
~~Unamortized initial purchaser’s debt discount and debt issuance cost~~	~~(13,086)~~
~~Net carrying amount~~	$	~~446,914~~


	June 30, 2023		December 31, 2022
Long Term Debt
Outstanding principal	$	297,024	$	460,000
Unamortized initial purchaser’s debt discount and debt issuance cost	(7,148)		(12,091)
Net carrying amount	$	289,876	$	447,909

2420

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents total interest expense recognized related to the 2028 Convertible Notes during the three and six months ended June 30, 2023 and 2022 (in thousands):


		Three Months Ended June 30,		Six Months Ended June 30,			Three Months Ended June 30,				Six Months Ended June 30,
		2022		2022			2023		2022		2023		2022
Cash interest expense	Cash interest expense					Cash interest expense
Contractual interest expense	Contractual interest expense	$	575	$	1,150	Contractual interest expense	$	376	$	575	$	951	$	1,150
Non-cash interest expense	Non-cash interest expense					Non-cash interest expense
Amortization of debt discount and debt issuance cost	Amortization of debt discount and debt issuance cost	496		991		Amortization of debt discount and debt issuance cost	342		496		841		991
Total interest expense	Total interest expense	$	1,071	$	2,141	Total interest expense	$	718	$	1,071	$	1,792	$	2,141

2028 Capped Call Options

On November 17, 2021, in connection with the pricing of the 2028 Convertible Notes, and on November 19, 2021, in connection with the exercise in full by the 2021 Initial Purchasers of their option to purchase additional Notes, the Company entered into the 2028 Capped Calls with certain counterparties. The Company used $66.7 million of the net proceeds to pay the cost of the 2028 Capped Calls.

The 2028 Capped Calls have an initial strike price of $29.2428 per share, which corresponds to the initial conversion price of the 2028 Convertible Notes and is subject to anti-dilution adjustments. The 2028 Capped Calls have a cap price of $49.6575 per share, subject to certain adjustments.

The 2028 Capped Calls are considered separate transactions entered into by and between the Company and the 2028 Capped Calls counterparties, and are not part of the terms of the 2028 Convertible Notes. The Company recorded a reduction to additional paid-in capital of $66.7 million during the year ended December 31, 2021 related to the premium payments for the 2028 Capped Calls. These instruments meet the conditions outlined in FASB ASU 2022-01 Topic 815, Derivatives and Hedging (“ASC 815”) to be classified in stockholders’ equity and are not subsequently remeasured as long as the conditions for equity classification continue to be met.

2030 Convertible Notes and 2030 Capped Call Options

2030 Convertible Notes

The 2030 Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 4.25% per year, payable in cash semi-annually in arrears in April and October of each year, beginning on October 1, 2023. The notes will mature on April 1, 2030, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon conversion, the Company may choose to pay or deliver cash, shares of common stock or a combination of cash and shares of common stock. The Notes are redeemable for cash at the Company’s option at any time given certain conditions (as discussed below), at an initial conversion rate of 140.3066 shares of common stock per $1,000 principal amount of the 2030 Convertible Notes, which is equivalent to an initial conversion price of approximately $7.1272 (the “2030 Conversion Price”) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the related Indenture.

The 2030 Convertible Notes will be redeemable, in whole or in part, at the Company’s option, on or after April 5, 2027 if the last reported sale price of the Company’s common stock has been at least 130% of the 2030 Conversion Price then in effect for at least 20 trading days at a redemption price equal to 100% of the principal amount of the 2030 Convertible Notes to be redeemed, plus accrued and unpaid interest.

The Company’s net proceeds from this offering were approximately $232.4 million, net of $7.6 million in debt issuance costs primarily consisting of underwriters, advisory, legal, and accounting fees. The Company used approximately $99.8 million of the net proceeds to purchase and surrender for cancellation approximately $163.0 million aggregate principal amount of the Company’s 2028 Convertible Notes. See 2028 Convertible Notesabove for further details on the impacts of the debt extinguishment.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The outstanding 2030 Convertible Notes balances as of June 30, 2023 are summarized in the following table (in thousands):


	June 30, 2023
Long Term Debt
Outstanding principal	$	240,000
Unamortized initial purchaser’s debt discount and debt issuance cost	(7,370)
Net carrying amount	$	232,630

The debt discount and debt issuance costs are amortized to interest expense using the effective interest method, computed to be 4.70%, over the life of the 2030 Convertible Notes or its approximately seven-year term.

The following table presents total interest expense recognized related to the 2030 Convertible Notes during the three months ended June 30, 2023 (in thousands):


	Three Months Ended June 30, 2023

Cash interest expense
Contractual interest expense	$	2,493
Non-cash interest expense
Amortization of debt discount and debt issuance cost	231
Total interest expense	$	2,724

2030 Capped Call Options

On March 29, 2023 and March 31, 2023, in connection with the pricing of the 2030 Convertible Notes, and on April 3, 2023, in connection with the exercise in full by the 2023 Initial Purchasers of their option to purchase additional Notes, the Company entered into Capped Calls (the “2030 Capped Calls”) with certain counterparties. The Company used $27.8 million of the net proceeds from the 2030 Convertible Notes to pay the cost of the 2030 Capped Calls.

The 2030 Capped Calls have an initial strike price of $7.1272 per share, which corresponds to the initial conversion price of the 2030 Convertible Notes and is subject to anti-dilution adjustments. The 2030 Capped Calls have a cap price of $11.1800 per share, subject to certain adjustments.

The 2030 Capped Calls are considered separate transactions entered into by and between the Company and the 2030 Capped Calls counterparties, and are not part of the terms of the 2030 Convertible Notes. The Company recorded a reduction to additional paid-in capital of $27.8 million during the three months ended June 30, 2023 related to the premium payments for the 2030 Capped Calls. These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity and are not subsequently remeasured as long as the conditions for equity classification continue to be met.

11.WARRANTS

Legacy Stem Warrants

Prior to the Merger, the Company had issued warrants to purchase shares of Legacy Stem’s preferred stock in conjunction with various debt financings. The Company has also issued warrants to purchase shares of Legacy Stem’s common stock. Upon effectiveness of the Merger, the Company had 50,207,439 warrants outstanding, of which substantially all were converted into 2,759,970 shares of common stock of Stem. Upon conversion of the warrants, the existing warrant liabilities were remeasured to fair value resulting in a gain on remeasurement of $100.9 million and a total warrant liability of $60.6 million, which was then reclassified to additional paid-in-capital. At June 30, ~~2022,~~2023, there were 2,533 Legacy Stem Warrants outstanding. These instruments are exercisable into the Company’s common stock and are equity classified.

~~Public Warrants and Private Placement Warrants~~

As part of STPK’s initial public offering, under a Warrant Agreement dated as of August 20, 2020 (the “Warrant Agreement”) and, prior to the effectiveness of the Merger, STPK issued 12,786,168 warrants, each of which entitled the holder to purchase 1 share of common stock at an exercise price of $11.50 per share of common stock (the “Public Warrants”). Simultaneously with the closing of the initial public offering, STPK completed the private sale of 7,181,134 million warrants to STPK’s sponsor (the “Private Warrants”). Upon issuance, these warrants met the criteria for liability classification. Upon the effectiveness of the Merger, Stem assumed the outstanding Public Warrants and Private Warrants, which continued to meet the criteria for liability classification, resulting in assumed warrant liabilities of $185.9 million and $116.7 million, respectively, or a total warrant liability of $302.6 million. Such warrants were initially recorded at fair value and remeasured to fair value at each reporting period. The fair value of the Private Warrants was determined using the Black-Scholes method. Black-Scholes inputs used to value the warrants are based on information from purchase agreements and within valuation reports prepared by an independent third party for the Company. Inputs include exercise price, selection of guideline public companies, volatility, fair value of common stock, expected dividend rate and risk-free interest rate.

On June 25, 2021, the Company entered into an exchange agreement (the “Exchange Agreement”) with the holders of the 7,181,134 outstanding Private Placement Warrants, pursuant to which such holders received 4,683,349 shares of the Company’s

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

common stock on June 30, 2021, in exchange for the cancellation of all outstanding Private Placement Warrants. The Exchange Shares were issued in reliance upon the exemption provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Immediately prior to the exchange, the Private Warrants were marked to fair value, resulting in a loss of $52.0 million. As a result of the Exchange Agreement, there are no Private Warrants outstanding.

~~On August 20, 2021, the Company issued an irrevocable notice for redemption of all 12,786,129 of the Company’s outstanding public warrants at 5:00 p.m.~~Eastern time on September 20, 2021 (“Redemption Date”). Pursuant to the notice of redemption, holders exercised 12,638,723 Public Warrants for a purchase price of 11.50 per share, for proceeds to the Company of approximately $145.3 million. The Company redeemed all remaining outstanding Public Warrants that had not been exercised as of 5:00 p.m. Eastern time on the Redemption Date. As a result of the settlement of the Public Warrants, the Company recorded a gain of $134.9 million on the revaluation of the warrant liability. The Company also recorded a gain of $2.1 million on the redemption of unexercised Public Warrants. These gains are recorded in “change in fair value of warrants and embedded derivative” in the condensed consolidated statements of operation for the year ended December 31, 2021. The Public Warrants have been delisted from the NYSE, and there are 0 Public Warrants outstanding.

~~Warrants Issued for Services~~

On April 7, 2021, the Company entered into a strategic relationship with an existing shareholder not deemed to be a related party to jointly explore, on a non-exclusive basis possible business opportunities to advance projects in the United States, the United Kingdom, Europe and Asia. As consideration for the strategic relationship, upon closing of the Merger, the Company issued warrants to purchase 350,000 shares of the Company’s common stock at an exercise price of $0.01 per share. These warrants were deemed to have been fully earned as of the grant date. The warrants were valued at fair market value as of the grant date totaling $9.2 million and recorded to general and administrative expense in the Company’s statement of operations. In May 2021, all of these warrants were exercised for shares of the Company’s common stock.

12.STOCK-BASED COMPENSATION

Equity Incentive Plans

Under both the Stem, Inc. 2009 Equity Incentive Plan (the “2009 Plan”) and the Stem, Inc. 2021 Equity Incentive Plan (the “2021 Plan,” and together with the 2009 Plan, the “Plans”), the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance stock units (“PSUs”), and other awards that are settled in

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

shares of the Company’s common stock. The Plans permit net settlement of vested awards, pursuant to which the award holder forfeits a portion of the vested award to satisfy the purchase price (in the case of stock options), the holder’s withholding tax obligation, if any, or both. When the holder net settles the tax obligation, the Company pays the amount of the withholding tax to the U.S. government in cash, which is accounted for as an adjustment to additional paid-in-capital. The Company does not intend to grant new awards under the 2009 Plan. All shares that remain available for future grants are under the 2021 Plan.

Stock Options

The following table summarizes the stock option activity for the period ended June 30, ~~2022:~~2023:

Number of
Options
Outstanding Weighted-
Average
Exercise Price
Per Share Weighted-
Average
Remaining
Contractual
Life (years) Aggregate
Intrinsic
Value
(in thousands)
Balances as of December 31, 2021 8,766,466 $ 6.01 7.1 $ 123,562
Options granted 1,117,857 9.33
Options exercised (1,274,046) 2.24
Options forfeited (213,592) 14.44
Balances as of June 30, 2022 8,396,685 $ 6.81 7.0 $ 25,557
Options vested and exercisable — June 30, 2022 5,458,391 $ 3.36 6.0 $ 23,845


	Number of Options Outstanding	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Balances as of December 31, 2022	8,243,637	$	6.88	6.6	$	35,566
Options granted	1,291,349	10.25
Options exercised	(104,573)	2.19
Options forfeited and expired	(307,769)	14.30

Balances as of June 30, 2023	9,122,644	$	7.16	6.5	$	16,789
Options vested and exercisable — June 30, 2023	6,030,152	$	4.58	5.4	$	16,640

As of June 30, ~~2022,~~2023, the Company had approximately ~~$21.9~~$20.1 million of remaining unrecognized stock-based compensation expense for stock options, which is expected to be recognized over a weighted average period of ~~2.0~~1.6 years.

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Restricted Stock Units

The following table summarizes the RSU activity for the period ended June 30, ~~2022:~~2023:


		Number of RSUs Outstanding	Weighted-Average Grant Date Fair Value Per Share			Number of RSUs Outstanding (1)	Weighted-Average Grant Date Fair Value Per Share
Balances as of December 31, 2021		1,799,677	$	36.01
Balances as of December 31, 2022					Balances as of December 31, 2022	6,719,490	$	15.34
RSUs granted	RSUs granted	4,672,680	9.06		RSUs granted	7,257,977	5.57
RSUs vested	RSUs vested	(131,665)	35.81		RSUs vested	(1,151,641)	10.72
RSUs forfeited	RSUs forfeited	(318,840)	18.46		RSUs forfeited	(774,634)	12.10
Balances as of June 30, 2022		6,021,852	$	16.03
Balances as of June 30, 2023					Balances as of June 30, 2023	12,051,192	$	10.10

(1) Includes certain restricted stock units with service and market-based vesting criteria.

As of June 30, ~~2022,~~2023, the Company had approximately ~~$82.7~~$93.4 million of remaining unrecognized stock-based compensation expense for RSUs, which is expected to be recognized over a weighted average period of ~~2.7~~2.2 years.

Stock-Based Compensation

The following table summarizes stock-based compensation expense recorded in each component of operating expenses in the Company’s condensed consolidated statements of operations and comprehensive ~~loss~~income (loss) (in thousands):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Sales and marketing	Sales and marketing	$	1,106	$	168	$	1,930	$	252	Sales and marketing	$	1,550	$	1,106	$	2,495	$	1,930
Research and development	Research and development	562		264		1,869		419		Research and development	2,548		562		4,266		1,869
General and administrative	General and administrative	4,799		592		8,933		1,113		General and administrative	5,822		4,799		10,361		8,933
Total stock-based compensation expense	Total stock-based compensation expense	$	6,467	$	1,024	$	12,732	$	1,784	Total stock-based compensation expense	$	9,920	$	6,467	$	17,122	$	12,732

Research and development expenses of $0.9 million and $0.6 million corresponding to internal-use software, were capitalized during the three months ended June 30, 2023 and 2022, respectively. Research and development expenses of $1.8 million and $1.1 million, corresponding to internal-use software, were capitalized during the ~~three and~~ six months ended June 30, 2023 and 2022, respectively.

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

13.NET ~~LOSS~~INCOME (LOSS) PER SHARE

Net income (loss) per share is computed by dividing net income (loss) by the basic weighted-average number of shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income by the diluted weighted-average number of shares outstanding during the period and, accordingly, reflects the potential dilutive effect of all issuable shares of common stock, including as a result of stock options, restricted stock units, warrants and convertible notes. The diluted weighted-average number of shares used in our diluted net income (loss) per share calculation is determined using the treasury stock method for stock options, restricted stock units, and warrants, and the if-converted method for convertible notes. For periods in which we recognize losses, the calculation of diluted loss per share is the same as the calculation of basic loss per share.

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share amounts):

Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Numerator - Basic:
Net loss attributable to Stem common stockholders, basic and diluted $ (32,019) $ (100,216) $ (54,502) $ (182,769)
Denominator:
Weighted-average number of shares outstanding used to compute net loss per share attributable to Stem common stockholders, basic and diluted 154,125,061 100,611,965 152,318,090 70,684,750
Net loss per share attributable to common stockholders, basic and diluted $ (0.21) $ (1.00) $ (0.36) $ (2.59)

~~STEM, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Numerator - Basic:
Net income (loss) per share attributable to common stockholders, basic	$	19,122	$	(32,019)	$	(25,656)	$	(54,502)

Numerator - Diluted:
Net income (loss) per share attributable to common stockholders, basic	19,122		(32,019)		(25,656)		(54,502)
Less: Gain on extinguishment of debt, net of tax	(59,133)		—		—		—
Net loss attributable to Stem common stockholders, diluted	(40,011)		(32,019)		(25,656)		(54,502)

Denominator:
Weighted-average number of shares outstanding used to compute net income (loss) per share attributable to common stockholders, basic	155,619,179		154,125,061		155,294,475		152,318,090
Dilutive potential common shares	185,774		—		—		—
Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, diluted	155,804,953		154,125,061		155,294,475		152,318,090

Net income (loss) per share attributable to common stockholders, basic	$	0.12	$	(0.21)	$	(0.17)	$	(0.36)
Net loss per share attributable to common stockholders, diluted	$	(0.26)	$	(0.21)	$	(0.17)	$	(0.36)

The following table shows total outstanding potentially dilutive shares excluded from the computation of diluted loss per share as their effect would have been anti-dilutive, as of June 30, ~~2022~~2023 and ~~2021:~~2022:


		June 30, 2022	June 30, 2021		June 30, 2023	June 30, 2022
Outstanding convertible promissory notes		—	—

Outstanding 2028 Convertible Notes	Outstanding 2028 Convertible Notes	15,730,390	—	Outstanding 2028 Convertible Notes	10,157,181	15,730,390
Outstanding 2030 Convertible Notes				Outstanding 2030 Convertible Notes	33,673,584	—
Outstanding stock options	Outstanding stock options	8,396,685	10,357,133	Outstanding stock options	9,122,644	8,396,685
Outstanding warrants	Outstanding warrants	2,533	12,809,802	Outstanding warrants	2,533	2,533
Outstanding RSUs	Outstanding RSUs	6,021,852	—	Outstanding RSUs	12,051,192	6,021,852
Total	Total	30,151,460	23,166,935	Total	65,007,134	30,151,460

STEM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

14.INCOME TAXES

The following table reflects the ~~Company's~~Company’s (provision for) benefit ~~for~~from income taxes and the effective tax rates for the periods presented below (in thousands, except effective tax rate):

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Loss before benefit from income taxes $ (32,030) $ (100,216) $ (69,726) $ (182,769)
Benefit from income taxes $ 7 $ — $ 15,220 $ —
Effective tax rate — % — % 21.8 % — %


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Income (loss) before (provision for) benefit from income taxes	$	19,613		$	(32,030)		$	(25,256)		$	(69,726)
(Provision for) benefit from income taxes	$	(491)		$	7		$	(400)		$	15,220
Effective tax rate	2.5		%	—		%	(1.6)		%	21.8		%

For the three months ended June 30, 2023, the Company recognized a provision for income taxes of $0.5 million, representing an effective tax rate of 2.5%, which was lower than the statutory federal tax rate because the Company maintains a valuation allowance on its U.S. deferred tax assets. For the six months ended June 30, ~~2022~~2023, the Company recognized a provision for income taxes of $0.4 million, representing an effective tax rate of 1.6%, which was lower than the statutory federal tax rate due to a $0.3 million tax benefit from an acquisition for a partial valuation allowance release on U.S. deferred tax assets due to the deferred tax liability established in purchase accounting on acquired intangibles during the six months ended June 30, 2023. For the six months ended June 30, 2022, the Company recognized a benefit from income taxes of $15.2 million, representing an effective tax rate of 21.8%, which was higher than the statutory federal tax ~~rate. The~~rate due to a $15.1 million tax benefit from ~~income taxes was mainly~~the acquisition of AlsoEnergy for a partial valuation allowance release on U.S. Deferred tax assets due to the ~~partial release of the Company’s valuation allowance on U.S.~~ deferred tax ~~assets,~~liability established in ~~connection with deferred tax liabilities resulting from intangible assets recognized in~~purchase accounting on the ~~acquisition of AlsoEnergy.~~acquired intangibles.

15.COMMITMENTS AND CONTINGENCIES

Contingencies

The Company is party to various legal proceedings from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. Management believes that the probability of a material loss with respect to any currently pending legal proceeding is remote. However, litigation is inherently uncertain and it is not possible to ~~definitively~~ predict the ultimate disposition of any of these proceedings. ~~The~~As of the date of this filing, the Company does not believe that there are any pending legal proceedings or other loss contingencies that will, either individually or in the aggregate, have a material adverse ~~impact~~effect on the ~~Company’s unaudited condensed consolidated financial statements.~~Company taken as a whole.

Commitments

On ~~February~~March 1, ~~2022, as part of the acquisition of AlsoEnergy,~~2023, the Company recognized a ~~$1.3~~$2.8 million operating lease liability and a corresponding operating lease right-of-use (“ROU”) asset, which are included in the condensed consolidated balance ~~sheet~~sheets as of June 30, ~~2022.~~2023. The operating lease liability and operating lease ROU asset correspond to ~~15,847 and 13,947~~41,811 square feet of leased office ~~manufacturing, laboratory and warehouse space~~ in ~~Boulder, Colorado and Longmont, Colorado, respectively.~~Gurugram, India. As of the ~~acquisition~~commencement date of the lease, the remaining lease ~~terms for Boulder and Longmont are for 34 and 35 months, respectively. These~~term was 58 months. The lease ~~agreements contemplate~~agreement contemplates options to extend the non-cancelable lease term, which have been determined not reasonably certain to be exercised. ~~Combined base~~Base rent ~~for these two locations~~ is ~~$39,725~~approximately $58,500 per month with escalating payments.

~~Legal Proceedings~~

On April 29, 2020, the Company filed a lawsuit against one of its insurers alleging breach of contract. On May 2, 2022, the Company received settlement proceeds of $1.1 million net of legal costs and fees, which was recorded within general and administrative expense in the condensed consolidated statements of operations for the three and six months ended June 30, 2022.

2825

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

This second quarter ~~2022~~2023 Form 10-Q, as well as other statements we make, contains “forward-looking statements” within the meaning of the federal securities laws, which include any statements that are not historical facts. Such statements often contain words such as “expect,” “may,” “can,” “believe,” “predict,” “plan,” “potential,” “projected,” “projections,” “forecast,” “estimate,” “intend,” “anticipate,” “ambition,” “goal,” “target,” “think,” “should,” “could,” “would,” “will,” “hope,” “see,” “likely,” and other similar words.

Forward-looking statements address matters that are, to varying degrees, uncertain, such as statements about ~~our~~ financial and performance targets and other forecasts or expectations regarding, or dependent on, our business outlook; the expected ~~synergies~~benefits of the combined Stem/AlsoEnergy company; our ability to ~~successfully integrate the combined companies;~~secure sufficient and timely inventory from suppliers; our ability to meet contracted customer demand; our ability to manage supply chain issues and manufacturing or delivery delays; our joint ventures, partnerships and other alliances; forecasts or expectations regarding energy transition and global climate change; reduction of greenhouse gas (“GHG”) emissions; the integration and optimization of energy resources; our business strategies and those of our customers; ~~the global commitment to decarbonization;~~ our ability to retain or upgrade current customers, further penetrate existing markets or expand into new markets; our ability to manage our supply chains and distribution channels and the effects of natural disasters and other events beyond our ~~control, such as the COVID-19 pandemic and variants thereof, and government and business responses thereto; the impact of~~control; the ongoing conflict in Ukraine; the expected benefits of the Inflation Reduction Act of 2022 on our ~~ability to meet contracted customer demand;~~business; and future results of operations, including ~~revenue and Adjusted~~adjusted EBITDA.

Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including but not limited to our ~~ability~~inability to ~~achieve~~secure sufficient and timely inventory from our suppliers, and provide us with contracted quantities of equipment; our inability to meet contracted customer demand; supply chain interruptions and manufacturing or delivery delays; disruptions in sales, production, service or other business activities; general economic, geopolitical and business conditions in key regions of the world, including inflationary pressures, general economic slowdown or a recession, increasing interest rates, changes in monetary policy, instability in financial institutions, and ~~performance targets~~the prospect of a shutdown of the U.S. federal government; the direct and ~~other forecasts~~indirect effects of widespread health emergencies on our workforce, operations, financial results and ~~expectations; our ability to help reduce GHG emissions; our ability to integrate~~cash flows; the ongoing conflict in Ukraine; the results of operations and ~~optimize energy resources; our ability to recognize the anticipated benefits~~financial condition of our ~~recent acquisition of AlsoEnergy; challenges, disruptions~~customers and ~~costs of integrating the combined company~~suppliers; pricing pressures; weather and ~~achieving anticipated synergies, or such synergies taking longer~~seasonal factors; our inability to realize than expected; risks that the integration disrupts current plans and operations that may harm our business; uncertainty as to the effects of the transaction on our financial performance; our abilitycontinue to grow and manage our growth ~~profitably;~~effectively; our ~~ability to retain or upgrade current customers, further penetrate existing markets or expand into new markets; our ability~~inability to attract and retain qualified employees and key personnel; our ~~ability~~inability to comply with, and the effect on ~~their businesses~~our business of, evolving legal standards and regulations, ~~particularly~~including concerning data protection and consumer privacy and evolving labor standards; risks relating to the development and performance of our energy storage systems and software-enabled services; ~~the risk that the global commitment~~our inability to ~~decarbonization may not materialize as we predict,~~retain or even if it does, that we might not be able to benefit therefrom; our ability to secure sufficient inventory from our suppliers to meet customer demand, and provide us with contracted quantities of equipment; general economic, geopolitical and business conditions in key regions of the world, including inflationary pressures, general economic slowdownupgrade current customers, further penetrate existing markets or a recession, increasing interest rates, and changes in monetary policy; the ongoing conflict in Ukraine; supply chain interruptions and manufacturing or delivery delays; disruptions in sales, production, service or other business activities;expand into new markets; the risk that our business, financial condition and results of operations may be adversely affected by other political, economic, business and competitive factors; and other risks and uncertainties ~~set forth~~discussed in ~~this Form 10-Q and~~Part I, Item 1A, “Risk Factors” of our ~~most recent~~Annual Report on Form 10-K ~~Form 10-Q~~ for the fiscal year ended December 31, 2022 and ~~Forms 8-K filed~~in our other filings with ~~or furnished to~~ the SEC. If one or more of these or other risks or uncertainties ~~materializes~~materialize (or the consequences of any such development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. Forward-looking and other statements in this ~~Form 10-Q~~report regarding our environmental, social, and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking environmental, social, and sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. ~~Statements~~Forward-looking statements in this ~~Form 10-Q~~report are made as of ~~August 4, 2022,~~the date of this report, and ~~Stem disclaims~~we do not assume any ~~intention or~~ obligation to update ~~publicly or revise such~~any forward-looking statements ~~whether~~after the date of this report, except as ~~a result of new information, future events or otherwise.~~required by law.

You should read the following management’s discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion and analysis should also be read together with our audited consolidated financial statements and related notes, as well as the section entitled “Stem’s Management’s Discussion and Analysis of Financial Condition and Results or Operations” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021.~~2022. You should carefully read the sections entitled “Special Note Regarding Forward-Looking Statements” ~~contained herein~~ and ~~the section entitled~~ “Risk Factors” ~~contained in our Annual Report on Form 10-K for the fiscal year ended~~ ~~December 31, 2021~~ ~~and our Quarterly Report for the quarter ended March 31, 2022,~~herein to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Throughout this section, unless otherwise noted “we,” “us,” “our” and the “Company” refer to Stem and its consolidated subsidiaries.

2926

Overview

Our mission is to ~~build~~maximize the economic, environmental, and ~~operate the largest, digitally connected, intelligent~~resiliency value of renewable energy ~~network for~~assets through our ~~customers.~~leading artificial intelligence (“AI”) platform. In order to fulfill our mission, we provide our customers, which include commercial and industrial (“C&I”) enterprises as well as independent power producers, renewable project developers, utilities and grid operators, with (i) an energy storage system, sourced from leading, global battery original equipment manufacturers (“OEMs”), that we deliver through our partners, including ~~solar project~~ developers, distributors, and engineering, procurement and construction (“EPC”) firms, (ii) edge hardware to aid in the collection of site data and ~~(ii) solar~~the real-time operation and control of the site plus other optional equipment, (iii) ongoing software platform and professional services to operate integrated energy storage, ~~monitoring, control, optimization,~~ and ~~reporting~~solar systems, through our Athena® AI platform (“Athena”), and (iv) solar asset performance monitoring and control, through Athena’s PowerTrack application. In addition, in all the markets where we help manage our customers’ clean energy assets, we have agreements to use the Athena platform to participate in such markets and ~~PowerTrack platforms.~~to share the revenue from such market participation.

We operate in two key areas within the energy ~~storage~~ landscape: Behind-the-Meter (“BTM”) and Front-of-the-Meter (“FTM”). An energy system’s position in relation to a customer’s electric meter determines whether it is designated a BTM or FTM system. BTM systems provide power that can be used on-site without interacting with the electric grid and passing through an electric meter. Our software reduces C&I customer energy bills, increases their energy yield, and helps our customers facilitate the achievement of their corporate environmental, social, and corporate governance (“ESG”) and carbon reduction objectives.

FTM, grid-connected systems provide power to off-site locations and must pass through an electric meter prior to reaching an end-user. Through Athena, our FTM storage systems decrease risk for project developers, ~~lead~~ asset ~~professionals,~~owners, independent power producers and investors by adapting to dynamic energy market conditions in connection with the deployment of electricity and improving the value of energy storage over the course of their FTM system’s lifetime. Through PowerTrack, our software maximizes FTM energy output and minimizes asset downtime.

Through our February 2022 acquisition of AlsoEnergy, we combined our storage optimization capabilities with solar asset performance monitoring and control software.

Since our inception in 2009, we have engaged in developing and marketing ~~software enabled~~software-enabled services, raising capital, and recruiting personnel. We have incurred net operating losses and negative cash flows from operations each year since our inception. We have financed our operations primarily through proceeds received from the ~~Merger,~~merger with Star Peak Transition Corp., the issuance of convertible preferred stock, convertible senior notes, debt financing, and cash flows from ~~customers.~~ customers.

Our total revenue grew from ~~$19.3 million for the three months ended June 30, 2021 to~~ $66.9 million for the three months ended June 30, ~~2022. For~~2022 to $92.9 million for the three months ended June 30, ~~2022~~2023. We generated net income of $19.1 million for the three months ended June 30, 2023 and ~~2021, we~~ incurred net losses of $32.0 million ~~and $100.2 million, respectively.~~for the three months ended June 30, 2022. Our total revenue grew from ~~$34.8 million for the six months ended June 30, 2021 to~~ $108.0 million for the six months ended June 30, ~~2022.~~2022 to $160.4 million for the six months ended June 30, 2023. For the six months ended June 30, ~~2022~~2023 and ~~2021,~~2022, we incurred net losses of ~~$54.5~~$25.7 million and ~~$182.8~~$54.5 million, respectively. As of June 30, ~~2022,~~2023, we had an accumulated deficit of ~~$562.5~~$657.7 million.

We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts to increase sales of our solutions, expand existing relationships with our customers, and obtain regulatory clearances or approvals for future product enhancements. In addition, we expect our general and administrative costs and expenses to increase due to the additional costs associated with scaling our business operations as well as being a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations and other costs and expenses.

Acquisition of AlsoEnergy

On February 1, 2022, we acquired 100% of the issued and outstanding capital stock of AlsoEnergy. The transaction combines our storage optimization capabilities with AlsoEnergy’s solar asset performance monitoring and control software. Through AlsoEnergy, we provide end-to-end turnkey solutions that monitor and manage renewable energy systems through AlsoEnergy’s PowerTrack software. PowerTrack includes data acquisitions and monitoring, performance modelling, agency reporting, internal reports, work order tickets, and supervisory control and data acquisition (“SCADA”) controls. AlsoEnergy has deployed systems at various international locations, but its primary customer base is in the United States, Germany and Canada. The total consideration for the AlsoEnergy acquisition was ~~$652.1~~$652.0 million, comprised of $543.1 million paid in cash, net of a working capital adjustment for an escrow recovery, and $108.9 million in the form of 8,621,006 shares of our common stock. We incurred $6.1 million of transaction costs related to the acquisition of AlsoEnergy, which were recorded in general and administrative expense during the six months ended June 30, ~~2022.~~2022. See Note 6 — Business Combinations, of the Notes to the unaudited condensed consolidated financial statements in this report for additional details regarding this transaction.

Key Factors, Trends and ~~Risks~~Uncertainties Affecting our Business

We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including but not limited to:

Decline in Lithium-Ion Battery Costs

Our revenue growth is directly tied to the continued adoption of energy storage systems by our customers. The cost of ~~lithium~~-~~ion~~lithium-ion energy storage hardware has generally declined ~~significantly in~~over the last decade, ~~and has resulted~~notwithstanding increases in ~~a large addressable market today.~~recent months. The market for energy storage is rapidly evolving, and while we believe costs will continue to decline over time, there is no

guarantee. If costs do not continue to decline, or do not decline as quickly as we anticipate, this could adversely affect our ability to increase our revenue and grow our business. The United States Inflation Reduction Act of 2022 (the “IRA”) was signed into law in August 2022 and includes incentives and tax credits aimed at reducing the effects of climate change, such as a tax credit for stand-alone battery storage projects. The implementation of the IRA is expected to further reduce the cost of battery storage systems for certain customers; however, there are numerous restrictions and requirements associated with qualifying for the tax credits and other incentives available under the IRA, and the Company continues to assess how the IRA may affect its business.

Increase in Deployment of Renewables

Deployment of intermittent resources has accelerated over the last decade, and today, wind and solar have become a low cost fuel source. We expect the cost of generating renewable energy to continue to decline and deployments of energy storage systems to increase. As renewable energy sources of energy production are expected to represent a larger proportion of energy generation, grid instability rises due to their intermittency, which can be addressed by energy storage solutions. The IRA is expected to further increase the deployment of renewable energy assets. We are continuing to evaluate the IRA and its requirements, as well as the application to our business and our customers.

Competition

We are a market leader in terms of capacity of energy storage under management. We intend to strengthen our competitive position over time by leveraging the network effect of Athena’s AI infrastructure. Existing competitors may expand their product offerings and sales strategies, and new competitors may enter the market. Furthermore, our competitors include other types of software providers and some hardware manufacturers that offer software solutions. If our market share declines due to increased competition, our revenue and ability to generate profits in the future may be adversely affected.

Government Regulation and Compliance

Although we are not regulated as a utility, the market for our product and services is heavily influenced by federal, state, and local government statutes and regulations concerning electricity. These statutes and regulations, like the IRA, affect electricity pricing, net metering, incentives, taxation, competition with utilities, and the interconnection of customer-owned electricity generation. In the United States and internationally, governments continuously modify these statutes and regulations and acting through state utility or public service commissions, regularly change and adopt different rates for commercial customers. These changes can positively or negatively affect our ability to deliver cost savings to customers.

Customer Concentration

We depend on a small number of significant customers for our sales, and a small number of customers have historically accounted for a material portion of our revenue. While we are committed to diversifying our customer base, we may continue to derive a significant portion of our revenue from a small number of customers. Loss of a significant customer, the inability to close a significant contract at any time, or a significant reduction in pricing or order volume from a significant customer, could materially reduce our revenue in a given quarter and have a material adverse effect on our operating results.

Supply Chain Constraints and Risk; COVID-19

We rely on a very small number of suppliers of energy storage systems and other equipment. If any of our suppliers ~~was~~were unable or unwilling to provide us with contracted quantities in a timely manner at prices, quality levels, and volumes acceptable to us, we ~~would~~will have very limited alternatives for supply, and we may not be able find suitable replacements for our customers, orif at all. Such an event could materially adversely affect our business, prospects, financial condition, and results of operations.

The ongoing COVID-19 pandemic has resulted and may continue to result in widespread adverse effects on the global and U.S. economies. Ongoing government and business responses to COVID-19, along with COVID-19 variants and the resurgence of related disruptions, could have a continued material adverse impact on economic and market conditions and trigger a period of continued global and U.S. economic slowdown.

In addition, the global supply chain and our industry have experienced significant disruptions in recent periods. We have seen supply chain challenges and logistics constraints increase, including shortages of inverters, enclosures, battery modules, and associated component parts for inverters and battery energy storage systems available for purchase. In certain cases, this has caused delays in critical equipment and inventory, longer lead times, and ~~have~~has resulted in cost volatility. These shortages and delays can be attributed in part to macroeconomic conditions, such as labor shortages, rising inflation, rising interest rates, and a recessionary environment and geographical instability, including the ongoing conflict between Russia and Ukraine and rising tensions between China and Taiwan, among other factors, as well as the COVID-19 pandemic and resulting government action, as well as broader macroeconomic conditions that may persist once the immediate effects of the COVID-19 pandemic have subsided, and have been exacerbated by the ongoing conflict between Russia and Ukraine. While we believe that a majority of our suppliers have secured sufficient supply to permit them to continue delivery and installations through the end of 2022, ifaction. If these shortages and delays persist ~~into~~through the second half 2023, they could adversely affect the timing of when battery energy storage systems can be delivered and installed, and when (or if) we can begin to generate revenue from those systems. In addition, we have experienced and are experiencing varying levels of volatility in costs of equipment and labor resulting in part from disruptions caused by general global economic conditions, including inflationary pressures and the COVID‐19 pandemic.

~~We cannot predict the full effects~~As the COVID-19 pandemic ~~will have~~reaches endemic stages, the future impact of the COVID-19 pandemic on our business, cash flows, liquidity, financial condition and results of operations ~~at this time due to numerous uncertainties.~~remains highly dependent on future developments. Given the dynamic nature of these circumstances on our ongoing business, results of operations and overall financial performance, the ~~full~~future impact of COVID-19 and other macroeconomic factors, including the conflict in Ukraine, cannot be reasonably estimated at this time. In the event we are unable to mitigate the impact of delays or price volatility in energy storage systems, raw materials, and freight, it could materially adversely affect our business, prospects, financial condition, and results of operations.

DevCo Joint Ventures

~~DevCo Cash Advances~~

~~From time to time, the~~The Company, through an indirect wholly-owned development subsidiary, has entered into strategic joint ventures with qualified third parties to develop select energy storage ~~power~~ generation projects (“DevCo Projects”), as more fully described above under Note 1 — Business, of the Notes to the unaudited condensed consolidated financial statements in this report. These projects require significant upfront investment by us and involve a high degree of risk. These projects require significant upfront investment by us and involve a high degree of risk. If a DevCo Project fails to reach completion or is significantly delayed, we could lose all or a portion of our development capital ~~investment and our cash advances to purchase hardware.~~investment. See “We Face Risks Related to our DevCo Business Model” in Part ~~II,~~I, Item ~~1A.~~1A, “Risk Factors” of ~~this report~~our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for additional information about certain risks related to these DevCo Projects.

Non-GAAP Financial Measures

In addition to financial results determined in accordance with U.S. generally accepted accounting principles ~~or GAAP~~(“GAAP”), we use ~~Adjusted~~adjusted EBITDA and non-GAAP gross profit and margin, which are non-GAAP financial measures, for financial and operational decision making and as a means to evaluate our operating performance and prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures that may not be indicative of our operating performance, such as stock-based compensation and other non-cash charges, as well as discrete cash charges that are infrequent in nature. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to our historical performance and liquidity as well as comparisons to our competitors’ operating results. We believe these non-GAAP financial measures are useful to investors ~~both~~ because they both (1) allow for greater transparency with respect to key metrics used by management in their financial and operational decision making and (2) are used by our institutional investors and the analyst community to help them analyze the health of our business. Adjusted EBITDA and non-GAAP gross profit and margin should be considered in addition to, not as a substitute for, or superior to, other measures of financial performance prepared in accordance with GAAP.

Non-GAAP Gross Profit and Margin

We define non-GAAP gross profit as gross profit excluding amortization of capitalized software, impairments related to decommissioning of end-of-life systems, and including revenue constraint. We define non-GAAP gross margin as non-GAAP gross ~~margin excluding amortization~~profit as a percentage of ~~capitalized software~~revenue.

The Company generally records the full purchase order value as revenue at the time of hardware delivery; however, for certain non-cancelable purchase orders entered into during the first quarter of 2023, the final settlement amount payable to the Company is variable and ~~impairments~~indexed to the price per ton of lithium carbonate in the first quarter of 2024 such that the Company may increase or decrease the final prices in such purchase orders based on the price per ton of lithium carbonate at final settlement. Lithium carbonate is a key raw material used in the production of hardware systems that the Company ultimately sells to customers. The total dollar amount of such purchase orders for the indexed contracts is approximately $52 million. However, as a result of the pricing structure in such purchase orders, the Company recorded revenue in the first quarter of 2023

of approximately $42 million, net of a $10 million revenue constraint, using a third party forecast of the lithium carbonate trading value in the first quarter of 2024. Because the Company had not before used indexed pricing in its customer contracts or purchase orders and had not previously constrained revenue related to ~~decommissioning~~forecasted inputs of ~~end-of-life systems.~~its hardware systems, the Company believes that including the $10 million revenue constraint from the first quarter of 2023 into non-GAAP profit enhances the comparability to the Company’s non-GAAP profit in prior periods. Because the purchase orders are variable and depend on the specified price per ton of lithium carbonate at the time of final measurement in the first quarter of 2024, the Company may, pursuant to such purchase orders, ultimately adjust final revenue downward to $34 million, subject to market conditions upon settlement. The Company recorded the full cost of hardware revenue for these indexed contracts in the first quarter of 2023.

The following table provides a reconciliation of gross profit and margin (GAAP) to non-GAAP gross profit and margin ~~($ in~~(in millions, except ~~for~~ percentages):

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue $ 66.9 $ 19.3 $ 108.0 $ 34.8
Cost of revenue (59.2) (19.4) (96.6) (35.0)
GAAP gross margin 7.7 (0.1) 11.4 (0.2)
GAAP gross margin (%) 12 % (1) % 11 % (1) %
Adjustments to Gross Margin (1):
Amortization of capitalized software & developed technology 2.6 1.3 4.7 2.5
Impairments 1.0 0.3 1.8 1.2
Non-GAAP gross margin $ 11.3 $ 1.5 $ 17.9 $ 3.5
Non-GAAP gross margin (%) 17 % 8 % 17 % 10 %


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenue	$	93.0		$	66.9		$	160.4		$	108.0
Cost of revenue	(81.1)			(59.2)			(147.5)			(96.6)
GAAP gross profit	11.9			7.7			12.9			11.4
GAAP gross margin (%)	13		%	12		%	8		%	11		%








Non-GAAP Gross Profit
GAAP Revenue	$	93.0		$	66.9		$	160.4		$	108.0
Add: Revenue constraint (1)	—			—			10.2			—
Subtotal	93.0			66.9			170.6			108.0
Less: Cost of revenue	(81.1)			(59.2)			(147.5)			(96.6)
Add: Amortization of capitalized software & developed technology	3.3			2.6			6.3			4.7
Add: Impairments	1.2			1.0			2.1			1.8
Non-GAAP gross profit	$	16.4		$	11.3		$	31.5		$	17.9
Non-GAAP gross margin (%)	18		%	17		%	18		%	17		%

(1) ~~Historically, management included a separate “Other Adjustments” caption~~Refer to the discussion of revenue constraint in the ~~table above as part~~definition of ~~the adjustments to~~non-GAAP gross margin. Other Adjustments consisted of certain operating expenses including communication and cloud service expenditures reclassified to cost of revenue. Other Adjustments are no longer in the calculation of Non-GAAP Gross Margin and Non-GAAP Gross Margin %. The Company believes that this change reflects a more accurate representation of our business for stakeholders to assess its performance.profit provided above.

Adjusted EBITDA

We calculate ~~Adjusted~~adjusted EBITDA as net ~~loss~~income (loss) attributable to Stem before depreciation and amortization, including amortization of internally developed software, net interest expense, further adjusted to exclude stock-based compensation and other income and expense items, including ~~transaction and acquisition related charges,~~ the net gain on extinguishment of debt, revenue constraint, change in fair value of ~~warrants~~derivative liability, transaction and

~~embedded derivatives, vesting of warrants, loss on extinguishment of debt,~~ acquisition-related charges, litigation settlement, restructuring costs and income tax provision or benefit. The expenses and other items that we exclude in our calculation of ~~Adjusted~~adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude when calculating ~~Adjusted~~adjusted EBITDA.

The following table provides a reconciliation of ~~Adjusted~~adjusted EBITDA to net ~~loss:~~income (loss):


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
		(in thousands)				(in thousands)					(in thousands)				(in thousands)
Net loss attributable to Stem		$	(32,019)	$	(100,216)	$	(54,502)	$	(182,769)
Net income (loss) attributable to Stem										Net income (loss) attributable to Stem	$	19,122	$	(32,019)	$	(25,656)	$	(54,502)
Adjusted to exclude the following:	Adjusted to exclude the following:									Adjusted to exclude the following:
Depreciation and amortization (1)	Depreciation and amortization (1)	12,910		5,543		21,806		11,555		Depreciation and amortization (1)	12,609		12,910		24,567		21,806
Interest expense		2,691		3,929		5,909		10,162
Loss on extinguishment of debt		—		5,064		—		5,064
Interest expense, net										Interest expense, net	3,903		2,691		5,680		5,909
Gain on extinguishment of debt, net										Gain on extinguishment of debt, net	(59,121)		—		(59,121)		—
Stock-based compensation	Stock-based compensation	6,467		1,024		12,732		1,784		Stock-based compensation	9,920		6,467		17,122		12,732
Vesting of warrants		—		9,184		—		9,184
Change in fair value of warrants and embedded derivative		—		67,179		—		133,577
Revenue constraint (2)										Revenue constraint (2)	—		—		10,200		—

Change in fair value of derivative liability										Change in fair value of derivative liability	2,576		—		2,576		—

Transaction costs in connection with business combination	Transaction costs in connection with business combination	—		—		6,068		—		Transaction costs in connection with business combination	—		—		—		6,068
Litigation settlement	Litigation settlement	(1,127)		—		(727)		—		Litigation settlement	—		(1,127)		—		(727)
Income tax benefit		(7)		—		(15,220)		—
Provision for (benefit from) income taxes										Provision for (benefit from) income taxes	491		(7)		400		(15,220)
Other expenses (3)										Other expenses (3)	1,021		—		1,021		—
Adjusted EBITDA	Adjusted EBITDA	$	(11,085)	$	(8,293)	$	(23,934)	$	(11,443)	Adjusted EBITDA	$	(9,479)	$	(11,085)	$	(23,211)	$	(23,934)

(1) Depreciation and amortization includes depreciation and amortization expense, impairment loss of energy storage systems, and impairment loss of project assets.

(2) Refer to the discussion of revenue constraint in the definition of non-GAAP profit provided above.

(3) Adjusted EBITDA for both the three and six months ended June 30, ~~2021~~2023 reflects ~~adjustments to depreciation and amortization~~other expenses of ~~approximately $0.3~~$1.0 million ~~and $1.2 million, respectively,~~ for expenses related to ~~impairments, decommissioning~~restructuring costs to pursue greater efficiency and ~~forfeited incentives that were not previously reflected in reported Adjusted EBITDA amounts.~~to realign our business and strategic priorities. Restructuring expenses consisted of employee severance and other exit costs.

3331

Financial Results and Key Metrics

The following table presents our financial results and our key metrics (in millions unless otherwise noted):

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(in millions) (in millions)
Key Financial Metrics
Revenue $ 66.9 $ 19.3 $ 108.0 $ 34.8
GAAP gross margin $ 7.7 $ (0.1) $ 11.4 $ (0.2)
GAAP gross margin (%) 12 % (1) % 11 % (1) %
Non-GAAP gross margin $ 11.3 $ 1.5 $ 17.9 $ 3.5
Non-GAAP gross margin (%) 17 % 8 % 17 % 10 %
Net loss attributable to Stem $ (32.0) $ (100.2) $ (54.5) $ (182.8)
Adjusted EBITDA $ (11.1) $ (8.3) $ (23.9) $ (11.4)
Key Operating Metrics
12-Month pipeline (in billions)* (1) $ 5.6 $ 1.7 $ 5.6 $ 1.7
Bookings (2) $ 225.7 $ 45.1 $ 376.5 $ 95.9
Contracted backlog* (3) $ 726.6 $ 249.7 $ 726.6 $ 249.7
Contracted storage AUM (in GWh)* (4) 2.1 1.2 2.1 1.2
Solar monitoring AUM (in GW)* (5) 32.1 ** 32.1 **
CARR* (6) $ 57.6 ** $ 57.6 **
* at period end
** not available
(1) As described below.
(2) As described below.
(3) Total value of bookings in dollars, as reflected on a specific date. Backlog increases as new contracts are executed (bookings) and decreases as integrated storage systems are delivered and recognized as revenue.
(4) Total GWh of systems in operation or under contract.
(5) Total GW of systems in operation or under contract.
(6) Contracted Annual Recurring Revenue (CARR): Annual run rate for all executed software services contracts including contracts signed in the period for systems that are not yet commissioned or operating.

~~Pipeline~~

Pipeline represents the total value (excluding market participation revenue) of uncontracted, potential hardware and software contracts that are currently being pursued by Stem direct salesforce and channel partners with developers and independent power producers seeking energy optimization services and transfer of energy storage systems that have a reasonable likelihood of execution within 12 months of the end of the relevant period based on project timelines published by such developers and independent power producers. We cannot guarantee that our pipeline will result in meaningful revenue or profitability.


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022

Key Financial Metrics
Revenue	$	93.0		$	66.9		$	160.4		$	108.0
GAAP gross profit	$	11.9		$	7.7		$	12.9		$	11.4
GAAP gross margin (%)	13		%	12		%	8		%	11		%


Non-GAAP gross profit	$	16.4		$	11.3		$	31.5		$	17.9
Non-GAAP gross margin (%)	18		%	17		%	18		%	17		%
Net income (loss) attributable to Stem	$	19.1		$	(32.0)		$	(25.7)		$	(54.5)
Adjusted EBITDA	$	(9.5)		$	(11.1)		$	(23.2)		$	(23.9)

Key Operating Metrics

Bookings (1)	$	236.4		$	225.7		$	599.9		$	376.5
Contracted backlog* (2)	$	1,364.3		$	726.6		$	1,364.3		$	726.6
Contracted storage AUM (in GWh)* (3)	3.8			2.4			3.8			2.4
Solar monitoring AUM (in GW)* (4)	26.0			32.1			26.0			32.1
CARR* (5)	$	74.9		57.6			$	74.9		57.6
* at period end


(1) As described below.
(2) Total value of bookings in dollars, as reflected on a specific date. Backlog increases as new contracts are executed (bookings) and decreases as integrated storage systems are delivered and recognized as revenue.
(3) Total GWh of systems in operation or under contract. Contracted storage AUM as of June 30, 2022 has been adjusted from 2.1 GWh, as previously disclosed, to 2.4 GWh. Revised AUM reflects adjustments to total GWh of energy storage systems to previously executed customer contracts as a result of revisions to the system configuration or changes in hardware specifications due to updates from the original equipment manufacturer.
(4) Total GW of systems in operation or under contract.
(5) Contracted Annual Recurring Revenue (CARR): Annual run rate for all executed software services contracts including contracts signed in the period for systems that are not yet commissioned or operating.

Bookings

Due to the long-term nature of our contracts, bookings are a key metric that allows us to understand and evaluate the growth of our Company and our estimated future revenue related to customer contracts for our energy optimization services and transfer of energy storage systems. Bookings represents the accumulated value at a point in time of contracts that have been executed under both our host customer and partnership sales models.

For host customer sales, bookings represent the expected consideration from energy optimization services contracts, including estimated incentive payments that are earned by the host customer from utility companies in relation to the services provided by us and assigned by the host customer to us. For host customer sales, there are no differences between bookings and remaining performance obligations at any point in time.

For partnership sales, bookings are the sum of the expected consideration to be received from the transfer of hardware and energy optimization services (excluding any potential revenues from market participation). For partnership sales, even though we have secured an executed contract with estimated timing of project delivery and installation from the customer, we do not consider it a contract in accordance with FASB ASU 2014-09 Topic 606, Revenue from Contracts with Customers (“ASC 606”), or a remaining performance obligation, until the customer has placed a binding purchase order. A signed customer contract is considered a booking as this indicates the customer has agreed to place a purchase order in the foreseeable future, which typically occurs within three (3) months of contract execution. However, executed customer contracts, without binding purchase orders, are cancellable without penalty by either party.

For partnership sales, once a purchase order has been executed, the booking is considered to be a contract in accordance with ASC 606, and therefore, gives rise to a remaining performance obligation as we have an obligation to transfer hardware

and energy optimization services in our partnership agreements. We also have the contractual right to receive consideration for our performance obligations.

The accounting policy and timing of revenue recognition for host customer contracts and partnership arrangements that qualify as contracts with customers under ASC 606, are described within Note 2 — Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022.

The following discussion and analysis of our results of operations and our liquidity and capital resources ~~includes~~include the results of operations for AlsoEnergy for the period from February 1, ~~2022 through June 30,~~ 2022. For additional information, including pro forma results of operations for the three and six months ended June 30, 2022 ~~and 2021~~ calculated as if AlsoEnergy had been acquired as of January 1, ~~2021,~~2022, see Note 6 — Business Combinations, of the Notes to the unaudited condensed consolidated financial statements in this report.

Components of Our Results of Operations

Revenue

We generate ~~service~~services and other revenue and hardware revenue. ~~Service~~Services and other revenue is mainly generated through arrangements with host customers to provide energy optimization services using our proprietary ~~cloud-based~~ software platform coupled with a dedicated energy storage system owned and controlled by us throughout the term of the contract. Fees charged to customers for energy optimization services generally consist of recurring fixed monthly payments throughout the term of the contract and in some arrangements, an installation and/or upfront fee component. We may also receive incentives from utility companies in relation to the sale of our services.

Services and other revenue also include the sale of project assets.

We generate hardware revenue through partnership arrangements consisting of promises to sell an energy storage system to solar plus storage project developers. Performance obligations are satisfied when the energy storage system along with all ancillary hardware components are delivered. The milestone payments received before the delivery of hardware are treated as deferred revenue. We separately generate services revenue through partnership arrangements by providing energy optimization services after the developer completes the installation of the project.

Cost of Revenue

Cost of ~~hardware revenue includes the cost of the hardware, which generally includes the cost of the hardware purchased from a manufacturer, shipping, delivery,~~services and other costs required to fulfill our obligation to deliver the energy storage system to the customer location. Cost of revenue may also include any impairment of energy storage systems held in our inventory for sale to our customer. Cost of hardware revenue related to the sale of energy storage systems is recognized when the delivery of the product is completed.

~~Cost of service~~ revenue includes depreciation of the cost of energy storage systems we own under long-term customer contracts, which includes capitalized fulfillment costs, such as installation services, permitting and other related costs. Cost of services and other revenue also includes the costs for the development and construction of project assets. Cost of revenue may also include any impairment of inventory and energy storage systems, along with system maintenance costs associated with the ongoing services provided to customers. Costs of revenue are recognized as energy optimization and other supporting services are provided to our customers throughout the term of the contract.

Cost of hardware revenue generally includes the cost of the hardware purchased from a manufacturer, shipping, delivery, and other costs required to fulfill our obligation to deliver the energy storage system to the customer location. Cost of hardware revenue may also include any impairment of energy storage systems held in our inventory for sale to our customer. Cost of hardware revenue related to the sale of energy storage systems is recognized when the delivery of the product is completed.

Gross ~~Margin~~Profit

Our gross ~~margin~~profit fluctuates significantly from quarter to quarter. Gross ~~margin,~~profit, calculated as revenue less costs of revenue, has been, and will continue to be, affected by various factors, including fluctuations in the amount and mix of revenue and the amount and timing of investments to expand our customer base. WeOver the long term, we hope to increase both our gross ~~margin~~profit in absolute dollars and gross margin as a percentage of revenue through enhanced operational efficiency and economies of scale.

Operating Expenses

Sales and Marketing

Sales and marketing expense consists of payroll and other related personnel costs, including salaries, stock-based compensation, employee benefits, and travel for our sales and marketing personnel. In addition, sales and marketing expense includes trade show costs, amortization of intangibles and other expenses. We expect our selling and marketing expense to increase in future periods to support the overall growth in our business.

Research and Development

Research and development expense consists primarily of payroll and other related personnel costs for engineers and third parties engaged in the design and development of products, third-party software and technologies, including salaries, bonus and stock-based compensation expense, project material costs, services and depreciation. We expect research and development expense to increase in future periods to support our growth, including continuing to invest in optimization, accuracy and reliability of our platform and other technology improvements to support and drive efficiency in our operations. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments.

General and Administrative Expense

General and administrative expense consists of payroll and other related personnel costs, including salaries, stock-based compensation, employee benefits and expenses for executive management, legal, finance and other costs. In addition, general and administrative expense includes fees for professional services and occupancy costs. We expect our general and administrative expense to increase in future periods as we scale up headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

Other Income (Expense), Net

Interest Expense, Net

Interest ~~Expense~~

~~Interest~~ expense, net consists primarily of interest on our outstanding borrowings under our outstanding notes payable, convertible ~~promissory~~senior notes, and financing obligations and accretion on our asset retirement obligations.

~~Loss~~Gain on Extinguishment of Debt, Net

~~Loss~~Gain on extinguishment of debt consists of ~~penalties incurred~~income recognized in relation to the prepayment of our outstanding borrowings under our outstanding convertible notes ~~payable~~ and the write-off of any unamortized debt issuance costs associated with such notes.

~~Change in Fair Value of Warrants and Embedded Derivatives~~

Change in fair value of warrants and embedded derivatives is related to the revaluation of our outstanding convertible preferred stock warrant liabilities and embedded derivatives related to the redemption features associated with our convertible notes at each reporting date.

Other (Expense) Income, ~~(Expenses),~~ Net

Other income, ~~(expenses),~~ net consists primarily of income from equity investments and foreign exchange gains or losses.

Results of Operations for the Three Months Ended June 30, ~~2022~~2023 and ~~2021~~2022


		Three Months Ended June 30,				$ Change					% Change		Three Months Ended June 30,				$ Change		% Change
		2022		2021						2023				2022
		(In thousands, except percentages)											(in thousands, except percentages)
Revenue	Revenue											Revenue
Services revenue		$	12,521	$	5,153			$	7,368				143%
Services and other revenue												Services and other revenue	$	16,360	$	12,521	$	3,839	31%
Hardware revenue	Hardware revenue	54,426		14,184		40,242					284%	Hardware revenue	76,586		54,426		22,160		41%
Total revenue	Total revenue	66,947		19,337		47,610					246%	Total revenue	92,946		66,947		25,999		39%
Cost of revenue	Cost of revenue											Cost of revenue
Cost of service revenue		10,141		5,809		4,332					75%
Cost of services and other revenue												Cost of services and other revenue	11,756		10,141		1,615		16%
Cost of hardware revenue	Cost of hardware revenue	49,018		13,655		35,363					259%	Cost of hardware revenue	69,319		49,018		20,301		41%
Total cost of revenue	Total cost of revenue	59,159		19,464		39,695					204%	Total cost of revenue	81,075		59,159		21,916		37%
Gross margin		7,788		(127)		7,915					6,232%
Gross profit												Gross profit	11,871		7,788		4,083		52%
Operating expenses:	Operating expenses:											Operating expenses:
Sales and marketing	Sales and marketing	12,955		3,913		9,042					231%	Sales and marketing	13,680		12,955		725		6%
Research and development	Research and development	8,963		4,827		4,136					86%	Research and development	14,156		8,963		5,193		58%
General and administrative	General and administrative	15,693		15,014		679					5%	General and administrative	18,904		15,693		3,211		20%
Total operating expenses	Total operating expenses	37,611		23,754		13,857					58%	Total operating expenses	46,740		37,611		9,129		24%
Loss from operations	Loss from operations	(29,823)		(23,881)		(5,942)					25%	Loss from operations	(34,869)		(29,823)		(5,046)		17%
Other expense, net:
Interest expense		(2,691)		(3,929)		1,238					(32)%
Loss on extinguishment of debt		—		(5,064)		5,064					(100)%
Change in fair value of warrants and embedded derivative		—		(67,179)		67,179					(100)%
Other income (expenses), net		484		(163)		647					(397)%
Total other expense, net		(2,207)		(76,335)		74,128					(97)%
Loss before income taxes		(32,030)		(100,216)		68,186					(68)%
Income tax benefit		7		—		7					100%
Net loss		$	(32,023)	$	(100,216)	$	68,193				(68)%
Other income (expense), net:												Other income (expense), net:
Interest expense, net												Interest expense, net	(3,903)		(2,691)		(1,212)		45%
Gain on extinguishment of debt, net												Gain on extinguishment of debt, net	59,121		—		59,121		*

Other (expense) income, net												Other (expense) income, net	(736)		484		(1,220)		(252)%
Total other income (expense), net												Total other income (expense), net	54,482		(2,207)		56,689		*
Income (loss) before (provision for) benefit from income taxes												Income (loss) before (provision for) benefit from income taxes	19,613		(32,030)		51,643		(161)%
(Provision for) benefit from income taxes												(Provision for) benefit from income taxes	(491)		7		(498)		*
Net income (loss)												Net income (loss)	19,122		(32,023)		51,145		(160)%
Net loss attributed to non-controlling interests	Net loss attributed to non-controlling interests	(4)		—		(4)					100%	Net loss attributed to non-controlling interests	—		(4)		4		(100)%
Net loss attributable to Stem		$	(32,019)	$	(100,216)	$	68,197				(68)%
Net income (loss) attributable to Stem												Net income (loss) attributable to Stem	$	19,122	$	(32,019)	$	51,141	(160)%

*Percentage is not meaningful

Revenue

Revenue increased by ~~$47.6~~$26.0 million, or ~~246%~~39%, for the three months ended June 30, ~~2022,~~2023, as compared to the three months ended June 30, ~~2021.~~2022. The increase was primarily driven by a ~~$40.2~~$22.2 million increase in hardware revenue primarily due to increase in demand for systems related to both FTM and BTM partnership agreements. Services and other revenue also increased by ~~$7.4~~$3.8 million primarily due to ~~the inclusion of AlsoEnergy’s revenue~~an increase in ~~the current period.~~solar services subscriptions from existing and new customers.

Cost of Revenue

Cost of revenue increased by ~~$39.7~~$21.9 million, or ~~204%~~37%, for the three months ended June 30, ~~2022,~~2023, as compared to the three months ended June 30, ~~2021.~~2022. The increase was primarily driven by an increase in cost of hardware revenue of ~~$35.4~~$20.3 million ~~which is in line with~~due to the increase in demand for ~~systems, as well as an increase~~systems. Cost of ~~$4.3~~services and other revenue also increased $1.6 million ~~in cost~~primarily due to solar cloud service costs and amortization of ~~service revenue, primarily related to AlsoEnergy.~~internally developed software costs.

3735

Operating Expenses

Sales and Marketing

Sales and marketing expense increased by ~~$9.0~~$0.7 million, or ~~231%~~6%, for the three months ended June 30, ~~2022,~~2023, as compared to the three months ended June 30, ~~2021.~~2022. The increase was primarily due to an increase of ~~$3.5 million in amortization expense related to intangible assets from the acquisition of AlsoEnergy, $1.9 million of amortization of contract origination costs, an increase of $3.6~~$2.0 million in personnel related expenses primarily as a result of higher headcount ~~inclusive~~and an increase of ~~$0.9~~$0.2 million ~~increase~~ in ~~stock-based compensation~~office-related expenses, partially offset by a decrease of $1.4 million in amortization expense ~~as a result of new stock options and RSUs grants~~related to ~~employees.~~contract origination costs.

Research and Development

Research and development expense increased by ~~$4.1~~$5.2 million, or ~~86%~~58%, for the three months ended June 30, ~~2022,~~2023, as compared to the three months ended June 30, ~~2021.~~2022. The increase was primarily due to an increase of ~~$3.4~~$4.0 million in personnel related expenses as a result of higher headcount ~~including new AlsoEnergy employees,~~ and an increase of ~~$0.7~~$1.2 million in professional ~~services.~~services and other expenses.

General and Administrative

General and administrative expense increased by ~~$0.7~~$3.2 million, or 5%20%, for the three months ended June 30, ~~2022,~~2023, as compared to the three months ended June 30, ~~2021.~~2022. The increase was primarily driven by an increase of ~~$6.6~~$1.7 million in personnel costs ~~inclusive of a $4.2 million increase in stock-based compensation expense due to grants of stock options and RSUs to employees,~~driven by additional headcount and an increase of ~~$2.9~~$1.5 million in ~~insurance and other expenses. The increase was partially offset by a decrease of $7.8 million in professional and legal fees and a $1.1 million litigation settlement payment discussed in Note 15~~ ~~— Commitments and Contingencies~~.office-related costs.

Other ~~Expense,~~Income (Expense), Net

Interest Expense

Interest expense ~~decreased~~increased by $1.2 million, or ~~32%~~45%, for the three months ended June 30, ~~2022,~~2023, as compared to the three months ended June 30, ~~2021.~~2022. The ~~decrease~~increase was primarily driven by ~~the repayment of loans and the conversion of~~an increase in interest on convertible notes ~~in connection with the Merger for $2.9~~of $2.3 million, partially offset by the ~~recognition~~accretion of ~~$1.1~~discount on short-term investments of $0.9 million and a decrease of $0.2 million in interest ~~expense corresponding to the~~ ~~0.50% Green Convertible Senior Notes due 2028 (the “2028 Convertible Notes”)~~ ~~issued in November 2021.~~on financing obligations.

~~Loss~~Gain on Extinguishment of Debt, Net

~~Loss~~During the three months ended June 30, 2023, we recorded a $59.4 million gain on extinguishment of debt driven by a $99.8 million payment to extinguish approximately $163.0 million aggregate principal amount of our 2028 Convertible Notes. The gain was partially offset by a $0.3 million loss on extinguishment of debt from repayment of our 2021 Credit Agreement.

Other (Expense) Income, Net

Other income, net decreased by ~~$5.1~~$1.2 million, or ~~100%~~252%, for the three months ended June 30, ~~2022,~~2023, as compared to the three months ended June 30, ~~2021. The~~2022, primarily due to $2.6 million in unrealized losses related to customers contracts, partially offset by an increase ~~was driven by a prior year payment~~ of ~~a $4.0~~$0.8 million ~~penalty on debt extinguishment and the write-off of $1.1 million of unamortized debt issuance costs upon the conversion of our Series D convertible notes~~ in ~~connection with the Merger.~~

~~Change in Fair Value of Warrants and Embedded Derivative~~

The change in fair value of warrants and embedded derivative reflected no activity in the three months ended June 30, 2022 (as no warrants and embedded derivatives were outstanding), as compared to a $67.2 million loss in the three months ended June 30, 2021. The $67.2 million expense in the three months ended June 30, 2021 resulted from a revaluation loss of the Series A, D and D’ warrants and embedded derivative.

~~Other Income (Expenses), Net~~

Other income (expenses), net increased by $0.6 million, or 397%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, and was primarily driven by a $0.5 million increase inaccrued interest income from ~~short-term investments.~~investments and a $0.6 million increase due to the reversal of previously recognized accretion expense on assets.

(Provision for) Benefit from Income ~~Tax Benefit~~Taxes

During the three months ended June 30, ~~2022~~2023, we recorded a provision for~~tax benefit of $7 thousand. The Company did not record a provision or benefit for~~ income taxes of $0.5 million as a result of income tax expense from the gain on extinguishment of 2028 Convertible Notesduring the second quarter of 2023. During the three months ended June 30, ~~2021. The increase in the tax~~2022, we recorded a $7 thousand benefit ~~is immaterial.~~from income taxes.

3836

Results of Operations for the Six Months Ended June 30, ~~2022~~2023 and ~~2021~~2022


		Six Months Ended June 30,				$ Change					% Change		Six Months Ended June 30,				$ Change		% Change
		2022		2021						2023				2022
		(In thousands, except percentages)											(in thousands, except percentages)
Revenue	Revenue											Revenue
Services revenue		$	22,486	$	10,035			$	12,451				124%
Services and other revenue												Services and other revenue	$	31,033	$	22,486	$	8,547	38%
Hardware revenue	Hardware revenue	85,549		24,723		60,826					246%	Hardware revenue	129,318		85,549		43,769		51%
Total revenue	Total revenue	108,035		34,758		73,277					211%	Total revenue	160,351		108,035		52,316		48%
Cost of revenue	Cost of revenue											Cost of revenue
Cost of service revenue		18,774		12,715		6,059					48%
Cost of services and other revenue												Cost of services and other revenue	23,260		18,774		4,486		24%
Cost of hardware revenue	Cost of hardware revenue	77,829		22,286		55,543					249%	Cost of hardware revenue	124,226		77,829		46,397		60%
Total cost of revenue	Total cost of revenue	96,603		35,001		61,602					176%	Total cost of revenue	147,486		96,603		50,883		53%
Gross margin		11,432		(243)		11,675					4,805%
Gross profit												Gross profit	12,865		11,432		1,433		13%
Operating expenses:	Operating expenses:											Operating expenses:
Sales and marketing	Sales and marketing	22,097		6,580		15,517					236%	Sales and marketing	26,086		22,097		3,989		18%
Research and development	Research and development	17,906		9,234		8,672					94%	Research and development	27,600		17,906		9,694		54%
General and administrative	General and administrative	36,205		17,706		18,499					104%	General and administrative	36,701		36,205		496		1%
Total operating expenses	Total operating expenses	76,208		33,520		42,688					127%	Total operating expenses	90,387		76,208		14,179		19%
Loss from operations	Loss from operations	(64,776)		(33,763)		(31,013)					92%	Loss from operations	(77,522)		(64,776)		(12,746)		20%
Other expense, net:
Interest expense		(5,909)		(10,162)		4,253					(42)%
Loss on extinguishment of debt		—		(5,064)		5,064					(100)%
Change in fair value of warrants and embedded derivative		—		(133,577)		133,577					(100)%
Other income (expenses), net		959		(203)		1,162					(572)%
Total other expense, net		(4,950)		(149,006)		144,056					(97)%
Loss before income taxes		(69,726)		(182,769)		113,043					(62)%
Income tax benefit		15,220		—		15,220					100%
Other income (expense), net:												Other income (expense), net:
Interest expense, net												Interest expense, net	(5,680)		(5,909)		229		(4)%
Gain on extinguishment of debt, net												Gain on extinguishment of debt, net	59,121		—		59,121		*

Other (expense) income, net												Other (expense) income, net	(1,175)		959		(2,134)		(223)%
Total other income (expense), net												Total other income (expense), net	52,266		(4,950)		57,216		*
Loss before (provision for) benefit from income taxes												Loss before (provision for) benefit from income taxes	(25,256)		(69,726)		44,470		(64)%
(Provision for) benefit from income taxes												(Provision for) benefit from income taxes	(400)		15,220		(15,620)		(103)%
Net loss	Net loss	$	(54,506)	$	(182,769)	$	128,263				(70)%	Net loss	(25,656)		(54,506)		28,850		(53)%
Net loss attributed to non-controlling interests	Net loss attributed to non-controlling interests	(4)		—		(4)					100%	Net loss attributed to non-controlling interests	—		(4)		4		(100)%
Net loss attributable to Stem	Net loss attributable to Stem	$	(54,502)	$	(182,769)	$	128,267				(70)%	Net loss attributable to Stem	$	(25,656)	$	(54,502)	$	28,846	(53)%

*Percentage is not meaningful

Revenue

Revenue increased by ~~$73.3~~$52.3 million, or ~~211%~~48%, for the six months ended June 30, ~~2022,~~2023, as compared to the six months ended June 30, ~~2021.~~2022. The increase was primarily driven by a ~~$60.8~~$43.8 million increase in hardware revenue primarily due to increase in demand for systems related to both FTM and BTM partnership agreements. Services and other revenue also increased by ~~$12.5~~$8.5 million primarily due to ~~the inclusion of AlsoEnergy’s~~an increase in solar subscription services revenue ~~in the current period.~~from existing and new customers.

Cost of Revenue

Cost of revenue increased by $~~61.6~~50.9 million, or ~~176%~~53%, for the six months ended June 30, ~~2022,~~2023, as compared to the six months ended June 30, ~~2021.~~2022. The increase was primarily driven by an increase ofin cost of hardware revenue of ~~$55.5~~$46.4 million ~~inclusive of AlsoEnergy, which is in line with~~due to the increase in demand for ~~systems, as well as an increase~~storage systems. Cost of ~~$6.1~~services and other revenue also increased by $4.5 million ~~in cost~~primarily due to solar cloud service costs and amortization of ~~service revenue, primarily related to AlsoEnergy.~~internally developed software costs.

Operating Expenses

Sales and Marketing

Sales and marketing expense increased by $~~15.5~~4.0 million, or ~~236%~~18%, for the six months ended June 30, ~~2022,~~2023, as compared to the six months ended June 30, ~~2021.~~2022. The increase was primarily due to an increase of ~~$5.8 million in amortization expense~~

~~related to the intangible assets from the acquisition of AlsoEnergy, $2.4 million amortization of contract origination costs, an increase of $5.7~~$3.6 million in personnel related expenses as a result of higher headcount, ~~inclusive~~and an increase of ~~$1.7~~$0.4 million in ~~stock-based compensation expense primarily due to grants of stock options and RSUs to employees, and $1.6 million of~~ additional ~~professional services and office~~office-related expenses.

Research and Development

Research and development expense increased by $~~8.7~~9.7 million, or ~~94%~~54%, for the six months ended June 30, ~~2022,~~2023, as compared to the six months ended June 30, ~~2021.~~2022. The increase was primarily due to an increase of $~~7.4~~7.3 million in personnel related expenses as a result of higher headcount ~~including new AlsoEnergy employees,~~ and an increase of ~~$1.2~~$2.4 million in professional services and other expenses.

General and Administrative

General and administrative expense increased by $~~18.5~~0.5 million, or ~~104%~~1%, for the six months ended June 30, ~~2022~~2023, as compared to the six months ended June 30, ~~2021.~~2022. The increase was primarily driven by an increase of ~~$12,946,197~~$3.9 million in personnel related expenses as a result of higher headcount, ~~inclusive of a $7.8 million increase in stock-based compensation expense due to grants of stock options and RSUs to employees,~~ and an increase of ~~$6.4~~$2.7 million in ~~insurance and other~~additional office-related expenses, partially offset by a decrease of $~~1.1~~6.1 million ~~settlement payment discussed~~ in ~~Note 15~~ ~~— Commitments~~professional services and ~~Contingencies~~.other expenses.

Other Expense, Net

Interest Expense

Interest expense decreased by $~~4.3~~0.2 million, or ~~42%~~4%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The decrease was primarily driven by the repayment of loans and the conversion of convertible notes in relation to the Merger for $7.3 million, partially offset by the recognition of $2.1 million of interest expense corresponding to the ~~0.50% Green Convertible Notes~~ ~~issued in November 2021.~~

~~Loss on Extinguishment of Debt~~

~~Loss on extinguishment of debt decreased by~~ ~~$5.1 million, or 100% for the six months ended June 30, 2022,~~2023, as compared to the six months ended June 30, ~~2021.~~2022. The decrease was primarily driven by the accretion of discount on short-term investments of $2.0 million and a ~~prior year payment~~decrease of ~~a $4.0~~$0.6 million ~~penalty~~ in interest on ~~debt extinguishment and the write-off~~financing obligations, partially offset by an increase of ~~$1.1~~$2.4 million ~~of unamortized debt issuance costs upon the conversion of~~ in interest on our ~~Series D~~ convertible ~~notes in relation to the Merger.~~notes.

Gain on Extinguishment of Debt

~~Change in Fair Value of Warrants and Embedded Derivative~~

~~The change in fair value of warrants and embedded derivative reflected no activity in~~During the six months ended June 30, ~~2022 (as no warrants and embedded derivatives were outstanding), as compared~~2023, we recorded a $59.4 million gain on extinguishment of debt driven by a $99.8 million payment to extinguish approximately $163.0 million aggregate principal amount of our 2028 Convertible Notes. The gain was partially offset by a ~~$133.6~~$0.3 million loss ~~in the six months ended June 30,~~on extinguishment of debt from repayment of our 2021 ~~which resulted from a revaluation loss of the Series A, D and D’ warrants and embedded derivative.~~Credit Agreement.

Other (Expense) Income, ~~(Expenses),~~ Net

Other income, ~~(expenses),~~ net ~~increased~~decreased by $~~1.2~~2.1 million, or ~~572%~~223%, for the six months ended June 30, ~~2022,~~2023, as compared to the six months ended June 30, ~~2021~~2022 primarily as due to $2.6 million in unrealized losses related to customers contracts, and a ~~result of a $1.0~~$1.6 million realized loss on short-term investments, partially offset by $1.3 million increase in accrued interest income from short-term ~~investments.~~investments, a $0.6 million increase due to the reversal of previously recognized accretion expense on assets, and a $0.1 million increase in income from equity investments.

(Provision for) Benefit from Income ~~Tax Benefit~~Taxes

During the six months ended June 30, ~~2022~~2023, we recorded ~~$15.2~~a provision for income taxes of $0.4 million primarily as a result of state income tax expense from the gain on extinguishment of 2028 Convertible Notes during the second quarter of 2023, which was offset by a partial release of our deferred tax asset valuation due to an acquisition during the first quarter of 2023. During the six months ended June 30, 2022, we recorded a $15.2 millionbenefit from income taxes as a result of the partial release of our deferred tax asset valuation ~~allowance, in connection with~~ ~~deferred tax liabilities resulting from intangible assets recognized in~~due to the acquisition of AlsoEnergy. ~~The Company did not record a provision or benefit for income taxes during the six months ended June 30, 2021.~~

Liquidity and Capital Resources

Sources of ~~liquidity~~Liquidity

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, contractual obligations and other commitments. We assess liquidity in terms of our cash flows from operations and their sufficiency to fund our operating and investing activities. To meet our payment service obligations we must have sufficient liquid assets and be able to move funds on a timely basis.

As of June 30, ~~2022,~~2023, our principal source of liquidity iswere cash, ~~generated from financing activities. Cash generated from financing activities through June 30, 2022 primarily includes proceeds from the Merger~~cash equivalents, and ~~PIPE financing that provided us~~

~~with approximately $550.3~~short-term investments of $138.2 million, net of fees and expenses, sales of convertible preferred stock, proceeds from convertible notes, including the 2028 Convertible Notes that provided us net proceeds of $445.7 million, proceeds from our various borrowings, and the exercise of Public Warrants, which provided $145.3 million of cash. In connection with the Merger, the convertible notes and related accrued interest converted to equity and we paid in full all other outstanding debt except the 2021 Credit Agreement described below. On February 1, 2022, we completed the acquisition of ~~100%~~ ~~of the issued and outstanding capital stock of AlsoEnergy~~were held for ~~an aggregate purchase price of $652.1 million, including $543.1 million in cash~~ ~~net of a~~ working capital ~~adjustment~~purposes and for ~~an escrow recovery,~~investment growth opportunities. Our marketable securities generally consist of high-grade commercial paper, agency bonds, corporate debt securities, U.S. government agency securities, and ~~$108.9 million in common stock.~~treasury bills. We believe that our cash position is sufficient to meet our capital and liquidity requirements for at least the next 12 ~~months from the date of issuance of this Form 10-Q.~~months.

Our business prospects are subject to risks, expenses, and uncertainties frequently encountered by companies in the early stages of commercial operations. The attainment of profitable operations is dependent upon future events, including obtaining adequate financing to complete our development activities, obtaining adequate supplier relationships, building our customer base, successfully executing our business and marketing strategy and hiring appropriate personnel. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on our business, operating results, and financial condition.

In the future, we may be required to obtain additional equity or debt financing in order to support our continued capital expenditures and ~~operations. In the event that additional financing is required from outside sources, we~~operations, which may not be ~~able to raise it~~available on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our business, growth and results of operations.

Our long-term liquidity requirements are linked primarily to the continued extension of the Athena platform and supporting applications, including Athena PowerTrack ~~platforms~~ and the use of our balance sheet to improve the terms and conditions associated with the purchase of energy storage systems from our hardware vendors. While we have plans to potentially expand our geographical footprint beyond our current partnerships and enter into joint ventures, those are not required initiatives to achieve our ~~plan.~~plans.

Financing Obligations

We have entered into arrangements wherein we finance the cost of energy storage systems via special purpose entities (“SPE”) we establish with outside investors. These SPEs are not consolidated into our financial statements, but are accounted for as equity method investments. Through the SPEs, the investors provide us upfront payments. Under these arrangements, the payment by the SPE to us is accounted for as a borrowing by recording the proceeds received as a financing obligation. The financing obligation is repaid with the future customer payments and incentives received. A portion of the amounts paid to the SPE is allocated to interest expense using the effective interest rate method.

Furthermore, we continue to account for the revenues from customer arrangements and incentives and all associated costs despite such systems being legally sold to the SPEs due to our significant continuing involvement in the operations of the energy storage systems.

The total financing obligation as of June 30, ~~2022~~2023 was ~~$81.9~~$77.1 million, of which ~~$14.8~~$18.2 million was classified as a current liability.

Notes Payable

2021 Credit Agreement

In January 2021, we entered into a non-recourse credit agreement to provide a total of $2.7 million towards the financing of certain energy storage systems that we ~~own~~owned and ~~operate.~~operated. The credit agreement ~~has~~had a stated interest of 5.45% and a maturity date of June 2031. We received an advance under the credit agreement of $1.8 million in January 2021. The repayment of advances received under ~~this~~the credit agreement iswas determined by the lender based on the proceeds generated by us through the operation of the underlying energy storage systems. AsOn April 6, 2023, we repaid the remaining outstanding balance under the 2021 Credit Agreement with a portion of ~~June 30, 2022, there were $1.9 million~~the proceeds received from the issuance of ~~outstanding borrowings under this credit facility.~~the 2030 Convertible Notes. The facility was terminated after the repayment in April 2023. See Note 9 —Notes Payable for additional details.

2028 Green Convertible Senior Notes

On November 22, 2021, we sold to Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC and Barclays Capital Inc, as initial purchasers (the ~~“Initial~~“2021 Initial Purchasers”), and the 2021 Initial Purchasers purchased from us, ~~$460~~$460.0 million aggregate principal amount of our 2028 Convertible Notes, pursuant to a purchase agreement dated as of November 17, 2021, by and between us

and the 2021 Initial Purchasers. Our net proceeds from this offering were approximately $445.7 million, after deducting the 2021 Initial Purchasers’ discounts and commissions and the offering expenses paid by the Company. The 2028 Convertible Notes will accrue interest payable semi-annually in arrears and will mature on December 1, 2028, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon conversion, we may choose to pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The 2028 Convertible Notes are redeemable for cash at our option at any time given certain conditions. Refer to Note 10 — Convertible ~~Promissory~~ Notes, of the Notes to the unaudited condensed consolidated financial statements in this report for additional details regarding this transaction.

On ~~November 17, 2021,~~April 3, 2023, we used approximately $99.8 million of the net proceeds from the issuance of the 4.25% Green Convertible Senior Notes due 2030 (“2030 Convertible Notes”) to purchase and surrender for cancellation approximately $163.0 million aggregate principal amount of the Company’s 2028 Convertible Notes. See Note 10 —Convertible Notes, of the Notes to the unaudited condensed consolidated financial statements in this report for additional details.

2030 Convertible Notes

On April 3, 2023, the Company issued $240.0 million aggregate principal amount of its 2030 Convertible Notes in a private placement offering to qualified institutional buyers (the “2023 Initial Purchasers”) pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2030 Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 4.25% per year, payable in cash semi-annually in arrears in April and October of each year, beginning in October 1, 2023. The notes will mature on April 1, 2030, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon conversion, the Company may choose to pay or deliver cash, shares of common stock or a combination of cash and shares of common stock. The Notes are redeemable for cash at the Company’s option at any time given certain conditions. See Note 10 —Convertible Notes, of the Notes to the unaudited condensed consolidated financial statements in this report, for additional details regarding this transaction.

The Company’s net proceeds from this offering were approximately $232.4 million, after deducting for $7.6 million of debt issuance costs primarily consisting of underwriters, advisory, legal, and accounting fees. The Company used approximately $99.8 million of the net proceeds to purchase and surrender for cancellation approximately $163.0 million aggregate principal amount of the Company’s 2028 Convertible Notes.

On March 29, 2023 and March 31, 2023, in connection with the pricing of the ~~2028~~2030 Convertible Notes, and on ~~November 19, 2021,~~April 3, 2023, in connection with the exercise in full by the 2023 Initial Purchasers of their option to purchase additional Notes, wethe Company entered into ~~capped call transactions~~Capped Calls (the “2030 Capped Calls”) with certain counterparties. The Company used $27.8 million of the ~~Initial Purchasers of the 2028 Convertible Notes to minimize the potential dilution to our common stockholders upon conversion of the 2028 Convertible Notes. Our~~ net proceeds from ~~this offering were approximately~~ ~~$445.7 million, after deducting~~ the ~~Initial Purchasers’ discounts and commissions and the estimated offering expenses payable by us. We used approximately~~ ~~$66.7 million~~ ~~of the net proceeds~~2030 Convertible Notes to pay the cost of the capped call transactions described above. We intend to allocate an amount equivalent to the net proceeds from this offering to finance or refinance, in whole or in part, existing or new eligible green expenditures of Stem, including investments related to creating a more resilient clean energy system, optimized software capabilities for energy systems, and reducing waste through operations.2030 Capped Calls.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):


		Six Months Ended June 30,					Six Months Ended June 30,
		2022		2021			2023		2022
Net cash used in operating activities	Net cash used in operating activities	$	(32,630)	$	(41,833)	Net cash used in operating activities	$	(201,239)	$	(32,630)
Net cash used in investing activities		(556,030)		(8,596)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	88,469		(556,030)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(7,981)		517,187		Net cash provided by (used in) financing activities	100,279		(7,981)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(136)		438		Effect of exchange rate changes on cash and cash equivalents	(7)		(136)
Net increase (decrease) in cash and cash equivalents		$	(596,777)	$	467,196
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	$	(12,498)	$	(596,777)

Operating Activities

During the six months ended June 30, 2023, net cash used in operating activities was $201.2 million, primarily resulting from our net loss of $25.7 million, adjusted for non-cash items of $10.8 million and net cash outflow of $164.8 million from changes in operating assets and liabilities. Non-cash items primarily consisted a net gain on debt extinguishment, of $59.1 million, net accretion of discount on investments of $1.3 million, and an income tax benefit of $0.3 million, and other non-cash items of $0.4 million, partially offset by depreciation and amortization of $22.4 million, non-cash interest expense of $1.6 million related to debt issuance costs, stock-based compensation expense of $17.1 million, change in fair value of derivative liability of $2.6 million, non-cash lease expense of $1.4 million, impairment of energy storage systems of $2.1 million, provision for accounts receivable allowance of $1.7 million and net recognized loss on investments of $1.6 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in accounts receivable of $72.2 million, an increase in inventory of $137.1 million, an increase in other assets of $17.8 million, an increase in contract origination costs of $2.3 million, an increase in project assets of $2.8 million, a decrease in accrued expenses and other liabilities of $35.1 million, and a decrease in lease liabilities of $1.3 million, partially offset by a decrease in deferred costs with suppliers of $28.8 million, an increase in accounts payable of $19.0 million, and an increase in deferred revenue of $56.0 million.

During the six months ended June 30, 2022, net cash used in operating activities was $32.6 million, primarily resulting from our net loss of $54.5 million, adjusted ~~for~~by non-cash charges of $23.0 million and net cash outflow of $1.1 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of income tax benefit of $15.1 million, depreciation and amortization of $20.9 million, non-cash interest expense of $0.9 million, related to debt issuance costs, stock-based compensation expense of $12.7 million, impairment of energy storage systems of $0.9 million, ~~noncash~~non-cash lease expense of ~~$1.1~~

$1.1 million, provision for accounts receivable allowance of $1.0 million, and net amortization of premium on investments of $0.4 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in accounts receivable of $26.1 million, an increase in other assets of ~~$52.1~~$28.7 million, an increase in deferred costs with suppliers of $23.4 million, an increase in inventory of $36.6 million, ~~and~~ an increase in contract origination costs of $3.6 million, and a decrease in lease liabilities of $0.5 million, partially offset by an increase in accounts payable ~~and~~of $82.4 million, an increase in accrued expenses and other liabilities of ~~$89.6~~$7.0 million, and an increase in deferred revenue of $28.5 million.

Investing Activities

During the six months ended June 30, ~~2021,~~2023, net cash ~~used in operating~~provided by investing activities was ~~$41.8~~$88.5 million, primarily ~~resulting~~consisting of $100.6 million in proceeds from ~~our~~ net ~~loss~~sales of ~~$182.8 million, adjusted~~available-for-sale investments, partially offset by non-cash charges of $163.7 million and net cash outflow of $22.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of $10.3 million, non-cash interest expense of $7.1 million, which includes interest expenses associated with debt issuance costs, stock-based compensation expense of $1.8 million ~~and change~~used for acquisitions, net of cash acquired, $2.6 million in ~~the fair value of warrant liability and embedded derivative of $133.6 million, impairment~~purchases of energy storage systems, $7.4 million in capital expenditures on internally-developed software, and $0.3 million in purchases of ~~$1.3 million,~~property and issuance of warrants for services of $9.2 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in deferred revenue of $3.3 million, an increase in accounts payable and accrued expenses of $3.3 million, partially offset by an increase in other assets of $16.9 million, an increase in inventory of $6.3 million, an increase in accounts receivable of $4.2 million, an increase in contract origination costs of $1.7 million, and a decrease in lease liabilities of $0.3 million.

~~Investing Activities~~equipment.

During the six months ended June 30, 2022, net cash used ~~for~~in investing activities was $556.0 million, primarily consisting of $533.0 million used for our acquisition of AlsoEnergy, net of cash acquired, $12.3 million in net purchases of available-for-sale investments, $0.2 million in purchases of energy systems, ~~$2.4 million in purchases of property plant and equipment, and~~ $8.1 million in capital expenditures on internally-developed ~~software.~~software, and $2.4 million in purchases of property and equipment.

Financing Activities

During the six months ended June 30, ~~2021,~~2023, net cash ~~used for investing~~provided by financing activities was ~~$8.6~~$100.3 million, primarily consisting of ~~$5.6~~net proceeds from the issuance of convertible notes of $132.6 million inand proceeds from exercise of stock options of $0.2 million, partially offset by the purchase of ~~energy systems~~capped calls of $27.8 million, the repayment of financing obligations of $2.6 million, a repayment of notes payable of $2.1 million, and ~~$2.7 million in capital expenditures on internally-developed software, and $0.3 million~~a redemption of ~~purchases~~non-controlling interests of ~~property and equipment.~~

~~Financing Activities~~$0.1 million.

During the six months ended June 30, 2022, net cash used in financing activities was $8.0 million, primarily ~~from the~~consisting of repayment of financing obligations of $6.8 million and payments for taxes related to net share settlement of stock options of $2.3 million, partially offset by proceeds from the exercise of stock options of $0.6 million, ~~and proceeds from other financing transactions of $0.5 million.~~

During the six months ended June 30, 2021, net cash provided by financing activities was $517.2 million, primarily consisting of net proceeds from the Merger and PIPE financing of $550.3 million, net proceeds from issuance of notes payable of $3.9 million, proceeds from financing obligations of ~~$4.9 million, proceeds from the exercise of stock options of $2.9~~$0.3 million, and ~~net proceeds~~investments from ~~issuance~~non-controlling interests of ~~convertible notes of $1.1 million, partially offset by repayment of notes payable of $41.4 million and repayment of financing obligations of $4.6~~$0.2 million.

Contractual Obligations and Commitments

As of June 30, ~~2022,~~2023, except for the 2030 Convertible Notes, there have been no material changes to our contractual obligations described in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, or unconsolidated ~~variable interest entities~~VIEs that either have, or are reasonably likely to have, a current or future material adverse effect on our unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

A summary of our critical accounting policies and estimates is presented in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022.

Recent Accounting Pronouncements

~~Information with respect~~As of June 30, 2023, there have been no material changes to the recent accounting pronouncements ~~may be found~~described in ~~Note 2~~our —Annual Report on Form 10-K for the fiscal year ended December 31, 2022~~Summary of Significant Accounting Policies, of the Notes to the unaudited condensed consolidated financial statements in this report, which information is incorporated herein by reference.~~.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting Stem, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021.~~2022. Our exposure to market risk has not changed materially since December 31, ~~2021.~~2022.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (“Disclosure Controls”) within the meaning of Rules ~~13a-15I~~13a-15(e) and 15d-15(e) of the Securities Exchange ~~Act.~~Act of 1934, as amended (“Exchange Act”). Our Disclosure Controls are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our Disclosure Controls are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Based on management’s evaluation (under the supervision and with the participation of our CEO and our CFO) as of June 30, ~~2022,~~2023, of the effectiveness of the design and operation of our Disclosure Controls, our CEO and CFO have concluded that ~~as of the end of the period covered by this Report,~~ our Disclosure Controls were ~~not~~ effective ~~as of June 30, 2022 due to material weaknesses identified in our internal control over financial reporting as disclosed below.~~

~~Material Weakness in Internal Control over Financial Reporting~~

During the course of preparing our financial statements as of and for the year ended December 31, 2021, management identified certain deficiencies in our internal controls over financial reporting that management believes to be material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such thatat a reasonable ~~possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.~~

Specifically, the material weaknesses identified related to (i) accounting for energy storage systems, deferred cost of goods sold and inventory, (ii) ineffective internal controls over review of the Company’s unaudited condensed consolidated financial statements and related disclosures, (iii) a lack of formality in our internal control activities, especially related to management review-type controls, and (iv) ineffective internal controls over the review of certain revenue recognition calculations. With respect to energy storage systems, inventory and deferred cost of goods sold, we did not properly track inflows and outflows, including the valuation of energy storage systems, due in part to the systems that the Company used to track and value energy storage systems and inventory. With respect to a lack of formality in our control activities, we did not sufficiently establish formal policies and procedures to design effective controls, establish responsibilities to execute these policies and procedures and hold individuals accountable for performance of these responsibilities, including over review over revenue recognition calculations. We had multiple control deficiencies aggregating to a material weakness over ineffective control activities.

~~Remediation Activities~~

Our management, with oversight of the Audit Committee of the Board, continues to devote significant time, attention and resources to remediating the aforementioned material weaknesses in its internal control over financing reporting, and believes that we have made significant progress to that end. The material weaknesses will be considered remediated when management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. As of June 30, 2022, the Company had taken, or initiated, as the case may be, the following steps intended to remediate the material weaknesses described above and strengthen its internal control over financial reporting that, as of June 30, 2022, had not yet been fully implemented or had not been in place for a sufficient period of time to demonstrate that they were having their desired effect:

•Develop and deliver internal control training to management and finance/accounting personnel, focusing on a review of management’s and individual roles and responsibilities related to internal control over financial reporting.

•Hire, train and develop experienced accounting executives and personnel with a level of public accounting knowledge and experience in the application of US GAAP commensurate with our financial reporting requirements and the complexity of our operations and transactions.

•~~Establish and implement policies and practices to attract, develop and retain competent public accounting personnel.~~

•Engage a qualified third party Sarbanes-Oxley (“SOX”) compliance firm to assist us in bolstering and implementing our SOX compliance program, with a focus on documenting processes and controls, identifying and addressing control gaps, formalizing the internal control activities and strengthening the overall quality of documentation that evidences control activities.

•Perform a financial statement risk assessment and scoping exercise to identify and assess the risks of material misstatements in our financial statements to better ensure that the appropriate effort and resources are dedicated to addressing risks of material misstatements.

•Establish a disclosure committee comprised of our CEO, CFO, Chief Legal Officer, Chief Accounting Officer and other senior finance/accounting/legal personnel to, among other things, review and, as necessary, help revise the Company’s controls and other procedures to ensure that information required by us to be disclosed is recorded, processed, summarized and reported accurately and on a timely basis.

•~~Implement a Section 302 sub-certification program to reinforce the Company’s culture of compliance.~~

•Implement processes to improve monitoring activities involving the review and supervision of our accounting operations, including increased and enhanced balance sheet reviews to allow more focus on quality account reconciliations and enhanced monitoring of our internal control over financial reporting.

•~~Implement new accounting applications to enhance and streamline the order-to-cash and commissions processes.~~assurance level.

Changes in Internal Control over Financial Reporting

~~Other than the remediation actions to address the existing material weaknesses as described above, there~~There were no changes in our internal controls over financial reporting during the second quarter of ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Internal Controls

Our management, including ~~the~~our CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Furthermore, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures.

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Part II - Other Information

ITEM 1. LEGAL PROCEEDINGS

The information with respect to this Item 1 is set forth under Note 15 — Commitments and Contingencies, of the Notes to the unaudited condensed consolidated financial statements in this report.

ITEM 1A. RISK FACTORS

~~There~~Except as set forth below, there have been no material changes to the risk factors disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021 and in Part II, Item 1A. “Risk Factors”~~2022.

The trading price of our ~~Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, except as set forth below.~~ common stock is volatile.

The ~~risk~~trading price of our common stock has been and will likely continue to be volatile and is subject to fluctuations in response to various factors, ~~set forth below update, and should be read together with, the risk factors set forth~~some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our ~~Form 10-K for~~common stock. Factors that could cause fluctuations in the ~~fiscal year ended December 31, 2021 and~~trading price of our ~~Form 10-Q for~~common stock include the ~~quarter ended March 31, 2022.~~following:

~~Our suppliers may fail to deliver components according to schedules, prices, quality and volumes that are acceptable to us, which could negatively affect our~~ •results of ~~operations.~~operations that vary from the expectations of securities analysts and investors;

~~We purchase~~•results of operations that vary from those of our ~~components~~competitors;

•volatility in the trading prices and ~~materials from international~~trading volumes of technology stocks;

•changes in expectations as to the Company’s future financial performance, including financial estimates and ~~domestic vendors~~investment recommendations by securities analysts and ~~are exposed to supply chain risks arising from logistics disruptions. Unexpected~~ investors;

•declines in the market prices of stocks generally;

•strategic actions by us or our competitors;

•announcements by us or our competitors of significant contracts, acquisitions, joint ventures, other strategic relationships or capital commitments;

•any significant change in the Company’s senior management;

•changes in general economic or market conditions or trends in the Company’s industry or markets, including as a result of a general economic slowdown or a recession, increasing interest rates and changes in monetary policy, or inflationary pressures;

•changes in business or regulatory conditions, ~~materials pricing,~~ including ~~inflation~~new laws or regulations or new interpretations of ~~raw material costs, labor issues, wars,~~existing laws or regulations applicable to the Company’s business;

•future sales of our common stock or other securities or the incurrence of significant debt;

•investor perceptions or the investment opportunity associated with our common stock relative to other investment alternatives;

•the public’s response to press releases or other public announcements by us or third parties, including the Company’s filings with the SEC;

•litigation involving the Company, the Company’s industry, or both, or investigations by regulators into the Company’s operations or those of the Company’s competitors;

•financial and operating guidance, if any, that we provide to the public, and any changes in this guidance or the Company’s failure to meet this guidance;

•actions by institutional or activist stockholders;

•changes in accounting standards, policies, guidelines, interpretations or principles; and

•other events or factors, including those resulting from natural disasters, ~~health epidemics such as the COVID-19 pandemic, trade~~war, acts of terrorism or responses to these events.

These broad market and shipping disruptions, port congestions and other factors beyond our or our suppliers’ control could also affect these suppliers’ ability to deliver components to us or to remain solvent and operational. In addition, international supply is also exposed to risks related to tariffs and sanctions, as well as political, social, and economic instability in regions where we source products and material. For example, in recent years, China and the U.S. have each imposed tariffs, and there remains a potential for further trade barriers and the possibility of an escalated trade war between China and the U.S. These or other tariffs could adversely affect our hardware component prices and negatively affect any plans to sell products in China and other impacted international markets. Disruptions in the availability of key equipment, components or materialsindustry fluctuations may adversely affect ~~our business, prospects and operations, and volatility in prices and availability of such items may negatively affect our customer relationships and ability to plan for future growth.~~

~~We also face risks resulting from supplier concentration and limited supplier capacity. We rely on a very small number of suppliers of energy storage systems and other equipment. If any~~the market price of our suppliers was unable or unwilling to provide us with contracted quantities in a timely manner at prices, quality levels and volumes acceptable to us, we would have very limited alternatives for supply, and we may not be able to contract for and receive suitable alternative supply in a timely manner for our customers, or at all. Such an event may impair our ability to meet scheduled deliveriescommon stock, regardless of our products to customers, which may cause our customers to cancel orders and subject us to liability, and may materially adversely affect our customer relationships, business, prospects, financial condition and results of operations. We may also be unsuccessful in our continuous efforts to negotiate with existing suppliers to obtain cost reductions and avoid unfavorable changes to terms. Additionally, some of our suppliers supply systems and components to other businesses, including businesses engaged in the production of consumer electronics and other industries unrelated to energy storage systems. There are also larger purchasers of certain parts and materials that we supply to our customers. As a result, we may be unable to procure a sufficient supply of the items in the event that our suppliers fail to produce sufficient quantities to satisfy the demands of all of their customers. Any of these occurrences could materially adversely affect our business, prospects, financial condition and results of operations.

~~We have entered into long-term supply agreements that could result in insufficient inventory and negatively affect our results of operations.~~

We have entered into long-term supply agreements with certain suppliers of battery storage systems and other components of our energy storage systems. Some of these supply agreements provide for fixed or inflation-adjusted pricing and substantial prepayment obligations. If our suppliers provide insufficient inventory at the level of quality required to meet customer demand, or if our suppliers are unable or unwilling to provide us with the contracted quantities, we will have limited alternatives for supply and our results of operations could be materially and negatively impacted. Further, we face significant specific counterparty risk under long-term supply agreements when dealing with certain suppliers without a long, stable production and financial history.

~~Given the uniqueness of our product, some of our suppliers do not have a long~~actual operating history and may not have substantial capital resources. In the event any such supplier experiences financial difficulties, it may be difficult or may require substantial time and expense to replace such supplier. We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers, or secure new long-term supply agreements. Additionally, we procure many of the battery storage systems and components of our energy storage systems from non-U.S. suppliers, which exposes us to risks including unforeseen increases in costs or interruptions in supply arising from changes in applicable international trade regulations, such as taxes, tariffs, or quotas. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.performance.

4643

~~We Face Risks Related to~~In addition, in the past, following periods of market volatility, stockholders have instituted securities class action litigation against companies. For example, in May and July 2023, two putative securities class actions were filed against the Company and certain of our ~~DevCo Business Model~~

~~From time to time, we have entered into strategic joint ventures with qualified third parties to develop energy storage power generation projects (“DevCo Projects”), as more fully described above~~current and former officers and directors alleging claims under ~~Note 1 — Business,~~Sections 10(b) and 20(a) of the ~~Notes to~~Securities Exchange Act of 1934 and Sections 11 and 15 of the ~~unaudited condensed consolidated financial statements in this report. These projects require significant upfront investment by~~Securities Act of 1933. The lawsuits seek damages, litigation costs and interest. Securities litigation against us and involve a high degree of risk. The success of this business model depends in large part on the successful development, financing and construction of projects. However, such projects ultimately may not be commercially viable or may notcould result in an adequate return of capital and, in pursuing these projects, we may incur unanticipated liabilities. Successful completion of a project may be adversely affected, delayed or rendered infeasible by numerous factors, including:

•~~interconnection~~substantial costs and ~~capacity constraints;~~

•~~transmission grid congestion issues;~~

•~~delays in obtaining required governmental permits~~divert our management’s time and ~~approvals;~~

•~~regulatory changes that adversely affect energy storage participation in wholesale markets;~~

•~~changes in wholesale market energy and ancillary services prices and costs;~~

•~~construction delays and contractor or developer partner performance shortfalls;~~

•~~cost overruns, including costs related to renting or owning land necessary to develop DevCo Projects;~~

•~~labor, equipment, and material supply shortages, failures or disruptions; and~~

•~~force majeure and~~attention from other ~~events out of our control.~~

~~In addition, our joint venture partners may at any time have economic,~~ business or legal interests or goals that are inconsistent with the goals of the DevCo Project. Disagreements with our business partners may impede our ability to recognize the benefits of our DevCo Projects. Our joint venture partners may be unable or unwilling to meet their performance or other obligations under the operative documents, and we may be required to fulfill those obligations or to dissolve and liquidate the DevCo Project.

If a DevCo Project experiences any of the factors listed above or otherwise fails to reach completion or is significantly delayed, we could lose all or a portion of our development capital investment and our cash advances to purchase hardware. If a DevCo Project fails then we will need to find a replacement customer or DevCo Project in order to recover the cash advances. Losing or delaying return of all or a portion of our hardware advances in our DevCo Projectsconcerns, which could have a material adverse effect on our business, ~~financial condition and results of operations.~~

We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.

We depend on a small number of significant customers for our sales, and a small number of customers have historically accounted for a material portion of our revenue. The loss of any one of our significant customers, their inability to perform under their contracts, their termination or failure to renew their contracts with us, or their default in payment could cause our revenue to decline materially. For the near future, we may continue to derive a significant portion of our revenue from a small number of customers. For the three months ended June 30, 2022, one customer accounted for approximately 50% of our revenue. Loss of a significant customer or a significant reduction in pricing or order volume from a significant customer could materially reduce our revenue and operating results in any reporting period.

In addition, we are subject to credit risk of our customers, and our operating results depend on receipt of timely payments from our customers. Any delay in payment by our customers may have an adverse effect on revenue and operating results. There is no assurance that we will be able to collect all or anyregardless of the ~~amounts owed to us~~outcome of such litigation. We may be the target of additional litigation of this type in ~~a timely matter. If any of our customers face unexpected situations such as financial difficulties, we may not be able to receive full or any payment of~~ the ~~uncollected sums or enforce any judgment debts against such clients, and our business, results of operations and financial condition could be materially and adversely affected.~~

future.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~None.~~Except as previously disclosed in our Current Report on Form 8-K filed on April 3, 2023, we made no unregistered sales of our common stock during the three months ended June 30, 2023.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None.~~(c) Trading Plans.The following table describes contracts, instructions or written plans for the sale or purchase of our securities adopted or terminated by our Section 16 officers and directors during the second quarter of 2023 and intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), referred to as Rule 10b5-1 trading plans. No Section 16 officer or director adopted or terminated any non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K promulgated under the Exchange Act) during the second quarter of 2023.


Name and Title	Date of Adoption or Termination of Rule 10b5-1 Trading Plan	Duration of Rule 10b5-1 Trading Plan	Aggregate Number of Securities to be Purchased or Sold
David S. Buzby Director	Adopted June 9, 2023	September 7, 2023 through June 1, 2024, or such earlier date when all transactions under the trading plan are completed.	Sale of up to 153,000 shares of common stock.

4744

ITEM 6. ~~EXHIBIT INDEX~~EXHIBITS

EXHIBIT INDEX

Exhibit No.

Description

3.1

Second Amended and Restated Certificate of Incorporation, dated April 28, 2021 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 4, 2021).

3.2

~~Second~~ Amended and Restated ~~by-Laws,~~Bylaws, dated ~~April 28. 2021~~October 27, 2022 (incorporated by reference to Exhibit ~~3.2~~ 3to the Current Report on Form 8-K filed on ~~May 4, 2021)~~October 31, 2022).

~~10.1~~

~~Framework BESS Sale and Purchase Agreement, dated as of August 17, 2021, by and between Tesla, Inc. and Stem, Inc.††~~

~~10.2~~

~~Master Supply Agreement for Purchase and Sale of Energy Storage Equipment, dated as of September 14, 2020, by and between Powin Energy Corporation and Stem, Inc.††~~

~~10.3~~

First Amended and Restated Master Supply Agreement for Purchase and Sale of Energy Storage Equipment, dated as of February 28, 2020, by and between Sungrow USA Corporation, Sungrow Samsung SDI Energy Storage Power Supply Co, Ltd. and Stem, Inc.††

~~31.1~~31.1*

Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~31.2~~31.2*

Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~32.1~~32.1**

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~32.2~~32.2**

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

*Filed herewith

~~†† Information in this exhibit (indicated by brackets) has been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K.~~**Furnished herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August ~~4, 2022.~~3, 2023.


			STEM, INC.

			By:			/s/ William Bush
						William Bush
						Chief Financial Officer
						(Principal Financial Officer)

4845


	Purchase Price
Cash consideration	$	544,059
Equity consideration	108,883
Working capital adjustment	(915)
Total consideration	$	652,027


	Fair Value		Useful Life
Trade name	$	11,300	7
Customer relationships	106,800		12
Backlog	3,900		1.1
Developed technology	30,100		7
Separately identifiable intangible assets acquired other than goodwill	$	152,100