UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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☒ | QUARTERLY QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20222023
OR
| | | | | |
☐
| 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 | | 333-251397001-39455 | | 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 codecode)
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 ActAct.
| | | | | | | | | | | |
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 October 25, 20222023 |
Common Stock, $0.0001 par value per share | 154,488,799155,895,641 |
STEM, INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 20222023
TABLE OF CONTENTS
Part I.I - Financial Information
STEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
| ASSETS | ASSETS | | ASSETS | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 100,098 | | | $ | 747,780 | | Cash and cash equivalents | $ | 97,064 | | | $ | 87,903 | |
Short-term investments | Short-term investments | 193,403 | | | 173,008 | | Short-term investments | 28,301 | | | 162,074 | |
Accounts receivable, net of allowances of $2,811 and $91 as of September 30, 2022 and December 31, 2021, respectively | 144,259 | | | 61,701 | | |
Accounts receivable, net of allowances of $5,328 and $3,879 as of September 30, 2023 and December 31, 2022, respectively | | Accounts receivable, net of allowances of $5,328 and $3,879 as of September 30, 2023 and December 31, 2022, respectively | 288,674 | | | 223,219 | |
Inventory, net | Inventory, net | 29,217 | | | 22,720 | | Inventory, net | 65,656 | | | 8,374 | |
Deferred costs with suppliers | Deferred costs with suppliers | 61,580 | | | 13,745 | | Deferred costs with suppliers | 20,298 | | | 43,159 | |
Other current assets (includes $68 and $213 due from related parties as of September 30, 2022 and December 31, 2021, respectively) | 8,668 | | | 4,896 | | |
Other current assets (includes $53 and $74 due from related parties as of September 30, 2023 and December 31, 2022, respectively) | | Other current assets (includes $53 and $74 due from related parties as of September 30, 2023 and December 31, 2022, respectively) | 10,520 | | | 8,026 | |
Total current assets | Total current assets | 537,225 | | | 1,023,850 | | Total current assets | 510,513 | | | 532,755 | |
Energy storage systems, net | Energy storage systems, net | 94,828 | | | 106,114 | | Energy storage systems, net | 80,709 | | | 90,757 | |
Contract origination costs, net | Contract origination costs, net | 9,757 | | | 8,630 | | Contract origination costs, net | 11,930 | | | 11,697 | |
Goodwill | Goodwill | 546,634 | | | 1,741 | | Goodwill | 547,164 | | | 546,649 | |
Intangible assets, net | Intangible assets, net | 163,553 | | | 13,966 | | Intangible assets, net | 158,321 | | | 162,265 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 12,609 | | | 12,998 | | Operating lease right-of-use assets | 13,023 | | | 12,431 | |
Other noncurrent assets | Other noncurrent assets | 52,618 | | | 24,531 | | Other noncurrent assets | 77,132 | | | 65,339 | |
Total assets | Total assets | $ | 1,417,224 | | | $ | 1,191,830 | | Total assets | $ | 1,398,792 | | | $ | 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 | $ | 94,923 | | | $ | 28,273 | | Accounts payable | $ | 85,444 | | | $ | 83,831 | |
Accrued liabilities | Accrued liabilities | 61,601 | | | 25,993 | | Accrued liabilities | 60,615 | | | 85,258 | |
Accrued payroll | Accrued payroll | 13,268 | | | 7,453 | | Accrued payroll | 10,439 | | | 12,466 | |
Financing obligation, current portion | Financing obligation, current portion | 17,024 | | | 15,277 | | Financing obligation, current portion | 17,381 | | | 15,720 | |
Deferred revenue, current portion | Deferred revenue, current portion | 49,436 | | | 9,158 | | Deferred revenue, current portion | 82,676 | | | 64,311 | |
Other current liabilities (includes $292 and $306 due to related parties as of September 30, 2022 and December 31, 2021, respectively) | 4,225 | | | 1,813 | | |
Other current liabilities (includes $40 and $687 due to related parties as of September 30, 2023 and December 31, 2022, respectively) | | Other current liabilities (includes $40 and $687 due to related parties as of September 30, 2023 and December 31, 2022, respectively) | 12,689 | | | 5,412 | |
Total current liabilities | Total current liabilities | 240,477 | | | 87,967 | | Total current liabilities | 269,244 | | | 266,998 | |
Deferred revenue, noncurrent | Deferred revenue, noncurrent | 69,254 | | | 28,285 | | Deferred revenue, noncurrent | 83,028 | | | 73,763 | |
Asset retirement obligation | Asset retirement obligation | 4,261 | | | 4,135 | | Asset retirement obligation | 4,085 | | | 4,262 | |
Notes payable, noncurrent | Notes payable, noncurrent | 1,583 | | | 1,687 | | Notes payable, noncurrent | — | | | 1,603 | |
Convertible notes, noncurrent | Convertible notes, noncurrent | 447,411 | | | 316,542 | | Convertible notes, noncurrent | 523,068 | | | 447,909 | |
Financing obligation, noncurrent | Financing obligation, noncurrent | 65,314 | | | 73,204 | | Financing obligation, noncurrent | 54,314 | | | 63,867 | |
Lease liabilities, noncurrent | Lease liabilities, noncurrent | 11,308 | | | 12,183 | | Lease liabilities, noncurrent | 11,145 | | | 10,962 | |
Other liabilities | Other liabilities | 391 | | | — | | Other liabilities | 565 | | | 362 | |
Total liabilities | Total liabilities | 839,999 | | | 524,003 | | Total liabilities | 945,449 | | | 869,726 | |
Commitments and contingencies (Note 15) | Commitments and contingencies (Note 15) | | Commitments and contingencies (Note 15) | |
Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Preferred stock, $0.0001 par value; 1,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021 | — | | | — | | |
Common stock, $0.0001 par value; 500,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 154,487,778 and 144,671,624 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 15 | | | 14 | | |
Preferred stock, $0.0001 par value; 1,000,000 shares authorized as of September 30, 2023 and December 31, 2022; zero shares issued and outstanding as of September 30, 2023 and December 31, 2022 | | Preferred stock, $0.0001 par value; 1,000,000 shares authorized as of September 30, 2023 and December 31, 2022; zero shares issued and outstanding as of September 30, 2023 and December 31, 2022 | — | | | — | |
Common stock, $0.0001 par value; 500,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 155,883,088 and 154,540,197 issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | | Common stock, $0.0001 par value; 500,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 155,883,088 and 154,540,197 issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | 16 | | | 15 | |
Additional paid-in capital | Additional paid-in capital | 1,175,733 | | | 1,176,845 | | Additional paid-in capital | 1,187,628 | | | 1,185,364 | |
Accumulated other comprehensive (loss) income | (2,122) | | | 20 | | |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | 23 | | | (1,672) | |
Accumulated deficit | Accumulated deficit | (596,808) | | | (509,052) | | Accumulated deficit | (734,809) | | | (632,081) | |
Total Stem’s stockholders’ equity | Total Stem’s stockholders’ equity | 576,818 | | | 667,827 | | Total Stem’s stockholders’ equity | 452,858 | | | 551,626 | |
Non-controlling interests | Non-controlling interests | 407 | | | — | | Non-controlling interests | 485 | | | 541 | |
Total stockholders’ equity | Total stockholders’ equity | 577,225 | | | 667,827 | | Total stockholders’ equity | 453,343 | | | 552,167 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 1,417,224 | | | $ | 1,191,830 | | Total liabilities and stockholders’ equity | $ | 1,398,792 | | | $ | 1,421,893 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Revenue | Revenue | | | | | | | | Revenue | | | | | | | |
Services and other revenue | Services and other revenue | $ | 13,692 | | $ | 4,947 | | $ | 36,178 | | $ | 14,982 | Services and other revenue | $ | 16,597 | | $ | 13,692 | | $ | 47,630 | | $ | 36,178 |
Hardware revenue | Hardware revenue | 85,809 | | 34,886 | | 171,358 | | 59,609 | Hardware revenue | 117,143 | | 85,809 | | 246,461 | | 171,358 |
Total revenue | Total revenue | 99,501 | | 39,833 | | 207,536 | | 74,591 | Total revenue | 133,740 | | 99,501 | | 294,091 | | 207,536 |
Cost of revenue | | |
Cost of Revenue | | Cost of Revenue | |
Cost of services and other revenue | Cost of services and other revenue | 11,445 | | | 6,639 | | | 30,219 | | | 19,354 | | Cost of services and other revenue | 13,684 | | | 11,445 | | | 36,944 | | | 30,219 | |
Cost of hardware revenue | Cost of hardware revenue | 78,929 | | | 30,057 | | | 156,758 | | | 52,343 | | Cost of hardware revenue | 140,347 | | | 78,929 | | | 264,573 | | | 156,758 | |
Total cost of revenue | Total cost of revenue | 90,374 | | | 36,696 | | | 186,977 | | | 71,697 | | Total cost of revenue | 154,031 | | | 90,374 | | | 301,517 | | | 186,977 | |
Gross margin | 9,127 | | | 3,137 | | | 20,559 | | | 2,894 | | |
Gross (loss) profit | | Gross (loss) profit | (20,291) | | | 9,127 | | | (7,426) | | | 20,559 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Sales and marketing | Sales and marketing | 13,187 | | | 4,975 | | | 35,284 | | | 11,555 | | Sales and marketing | 11,605 | | | 13,187 | | | 37,691 | | | 35,284 | |
Research and development | Research and development | 10,526 | | | 6,268 | | | 28,432 | | | 15,502 | | Research and development | 14,420 | | | 10,526 | | | 42,020 | | | 28,432 | |
General and administrative | General and administrative | 18,013 | | | 11,024 | | | 54,218 | | | 28,730 | | General and administrative | 21,955 | | | 18,013 | | | 58,656 | | | 54,218 | |
Total operating expenses | Total operating expenses | 41,726 | | | 22,267 | | | 117,934 | | | 55,787 | | Total operating expenses | 47,980 | | | 41,726 | | | 138,367 | | | 117,934 | |
Loss from operations | Loss from operations | (32,599) | | | (19,130) | | | (97,375) | | | (52,893) | | Loss from operations | (68,271) | | | (32,599) | | | (145,793) | | | (97,375) | |
Other (expense) income, net: | Other (expense) income, net: | | Other (expense) income, net: | |
Interest expense | (2,520) | | | (2,674) | | | (8,429) | | | (12,835) | | |
Loss on extinguishment of debt | — | | | — | | | — | | | (5,064) | | |
Change in fair value of warrants and embedded derivatives | — | | | 137,001 | | | — | | | 3,424 | | |
Interest expense, net | | Interest expense, net | (4,405) | | | (2,520) | | | (10,085) | | | (8,429) | |
Gain on extinguishment of debt, net | | Gain on extinguishment of debt, net | — | | | — | | | 59,121 | | | — | |
Change in fair value of derivative liability | | Change in fair value of derivative liability | (5,155) | | | — | | | (7,731) | | | — | |
Other income, net | Other income, net | 863 | | | 415 | | | 1,822 | | | 211 | | Other income, net | 713 | | | 863 | | | 2,114 | | | 1,822 | |
Total other (expense) income, net | Total other (expense) income, net | (1,657) | | | 134,742 | | | (6,607) | | | (14,264) | | Total other (expense) income, net | (8,847) | | | (1,657) | | | 43,419 | | | (6,607) | |
(Loss) income before (provision for) benefit from income taxes | (34,256) | | | 115,612 | | | (103,982) | | | (67,157) | | |
(Provision for) benefit from income taxes | (19) | | | — | | | 15,201 | | | — | | |
Net (loss) income | (34,275) | | | 115,612 | | | (88,781) | | | (67,157) | | |
Loss before benefit from (provision for) income taxes | | Loss before benefit from (provision for) income taxes | (77,118) | | | (34,256) | | | (102,374) | | | (103,982) | |
Benefit from (provision for) income taxes | | Benefit from (provision for) income taxes | 46 | | | (19) | | | (354) | | | 15,201 | |
Net loss | | Net loss | (77,072) | | | (34,275) | | | (102,728) | | | (88,781) | |
Net income attributed to non-controlling interests | Net income attributed to non-controlling interests | 4 | | | — | | | — | | | — | | Net income attributed to non-controlling interests | — | | | 4 | | | — | | | — | |
Net (loss) income attributable to Stem | $ | (34,279) | | | $ | 115,612 | | | $ | (88,781) | | | $ | (67,157) | | |
Net loss attributable to Stem | | Net loss attributable to Stem | $ | (77,072) | | | $ | (34,279) | | | $ | (102,728) | | | $ | (88,781) | |
| Net (loss) income per share attributable to Stem common stockholders, basic | $ | (0.22) | | | $ | 0.85 | | | $ | (0.58) | | | $ | (0.73) | | |
Net loss per share attributable to Stem common shareholders, diluted | $ | (0.22) | | | $ | (0.15) | | | $ | (0.58) | | | $ | (0.73) | | |
Net loss per share attributable to common stockholders, basic and diluted | | Net loss per share attributable to common stockholders, basic and diluted | $ | (0.49) | | | $ | (0.22) | | | $ | (0.66) | | | $ | (0.58) | |
| Weighted-average shares used in computing net loss per share to Stem common stockholders, basic | 154,392,573 | | | 135,231,146 | | | 153,043,010 | | | 92,436,649 | | |
Weighted-average shares used in computing net loss per share to Stem common stockholders, diluted | 154,392,573 | | | 140,285,165 | | | 153,043,010 | | | 92,436,649 | | |
| | Weighted-average shares used in computing net loss per share to common stockholders, basic and diluted | | Weighted-average shares used in computing net loss per share to common stockholders, basic and diluted | 155,829,348 | | | 154,392,573 | | | 155,474,725 | | | 153,043,010 | |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMELOSS
(UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net (loss) income | $ | (34,275) | | | $ | 115,612 | | | $ | (88,781) | | | $ | (67,157) | |
Other comprehensive (loss) income: | | | | | | | |
Unrealized loss on available-for-sale securities | (845) | | | (19) | | | (1,855) | | | (19) | |
Foreign currency translation adjustment | (141) | | | 245 | | | (287) | | | (106) | |
Other comprehensive (loss) income | (35,261) | | | 115,838 | | | (90,923) | | | (67,282) | |
Less: Comprehensive income attributable to non-controlling interests | 4 | | | — | | | — | | | — | |
Total comprehensive (loss) income attributable to Stem | $ | (35,265) | | | $ | 115,838 | | | $ | (90,923) | | | $ | (67,282) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net loss | $ | (77,072) | | | $ | (34,275) | | | $ | (102,728) | | | $ | (88,781) | |
Other comprehensive loss: | | | | | | | |
Unrealized gain (loss) on available-for-sale securities | 60 | | | (845) | | | 1,650 | | | (1,855) | |
Foreign currency translation adjustment | 51 | | | (141) | | | 45 | | | (287) | |
Total other comprehensive loss | (76,961) | | | (35,261) | | | (101,033) | | | (90,923) | |
Less: Comprehensive income attributable to non-controlling interests | — | | | 4 | | | — | | | — | |
Total comprehensive loss attributable to Stem | $ | (76,961) | | | $ | (35,265) | | | $ | (101,033) | | | $ | (90,923) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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) Income | | 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 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Stock option exercises, net of statutory tax withholdings | 12,144 | | | — | | | 28 | | | — | | | — | | | — | | | 28 | |
Issuance of common stock upon release of restricted stock units | 74,533 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 10,922 | | | — | | | — | | | — | | | 10,922 | |
| | | | | | | | | | | | | |
Unrealized gain on available-for-sale securities | — | | | — | | | — | | | 60 | | | — | | | — | | | 60 | |
Foreign currency translation adjustments | — | | | — | | | — | | | 51 | | | — | | | — | | | 51 | |
Contributions from non-controlling interests | — | | | — | | | — | | | — | | | — | | | 10 | | | 10 | |
Net loss | — | | | — | | | — | | | — | | | (77,072) | | | — | | | (77,072) | |
Balance as of September 30, 2023 | 155,883,088 | | | $ | 16 | | | $ | 1,187,628 | | | $ | 23 | | | $ | (734,809) | | | $ | 485 | | | $ | 453,343 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Stock option exercises, net of statutory tax withholdings | 201,496 | | | — | | | 584 | | | — | | | — | | | — | | | 584 | |
Issuance of common stock upon release of restricted stock units | 60,007 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 8,284 | | | — | | | — | | | — | | | 8,284 | |
Unrealized loss on available-for-sale securities | — | | | — | | | — | | | (845) | | | — | | | — | | | (845) | |
Foreign currency translation adjustments | — | | | — | | | — | | | (141) | | | — | | | — | | | (141) | |
Contributions from non-controlling interests | — | | | — | | | — | | | — | | | — | | | 191 | | | 191 | |
Net (loss) income | — | | | — | | | — | | | — | | | (34,279) | | | 4 | | | (34,275) | |
Balance as of September 30, 2022 | 154,487,778 | | | $ | 15 | | | $ | 1,175,733 | | | $ | (2,122) | | | $ | (596,808) | | | $ | 407 | | | $ | 577,225 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Public Warrant exercises (Note 11) | 12,638,723 | | | 1 | | | 312,115 | | | — | | | — | | | | | 312,116 | |
Stock option exercises | 879,181 | | | — | | | (12,552) | | | — | | | — | | | — | | | (12,552) | |
Stock-based compensation | — | | | — | | | 6,739 | | | — | | | — | | | — | | | 6,739 | |
Unrealized loss on available-for-sale securities | — | | | — | | | — | | | (19) | | | — | | | | | (19) | |
Foreign currency translation adjustments | — | | | — | | | — | | | 245 | | | — | | | — | | | 245 | |
Net income | — | | | — | | | — | | | — | | | 115,612 | | | — | | | 115,612 | |
Balance as of September 30, 2021 | 144,285,959 | | | $ | 14 | | | $ | 1,106,220 | | | $ | (317) | | | $ | (474,998) | | | $ | — | | | $ | 630,919 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Stock option exercises, net of statutory tax withholdings | 201,496 | | | — | | | 584 | | | — | | | — | | | — | | | 584 | |
Issuance of common stock upon release of restricted stock units | 60,007 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 8,284 | | | — | | | — | | | — | | | 8,284 | |
Unrealized loss on available-for-sale securities | — | | | — | | | — | | | (845) | | | — | | | — | | | (845) | |
Foreign currency translation adjustments | — | | | — | | | — | | | (141) | | | — | | | — | | | (141) | |
Contributions from non-controlling interests | — | | | — | | | — | | | — | | | — | | | 191 | | | 191 | |
Net (loss) income | — | | | — | | | — | | | — | | | (34,279) | | | 4 | | | (34,275) | |
Balance as of September 30, 2022 | 154,487,778 | | | $ | 15 | | | $ | 1,175,733 | | | $ | (2,122) | | | $ | (596,808) | | | $ | 407 | | | $ | 577,225 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
OPERATING ACTIVITIES | OPERATING ACTIVITIES | | | | OPERATING ACTIVITIES | | | |
Net loss | Net loss | $ | (88,781) | | | $ | (67,157) | | Net loss | $ | (102,728) | | | $ | (88,781) | |
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 | 32,060 | | | 15,620 | | Depreciation and amortization expense | 33,593 | | | 32,060 | |
Non-cash interest expense, including interest expenses associated with debt issuance costs | Non-cash interest expense, including interest expenses associated with debt issuance costs | 1,479 | | | 8,098 | | Non-cash interest expense, including interest expenses associated with debt issuance costs | 1,969 | | | 1,479 | |
Stock-based compensation | Stock-based compensation | 20,410 | | | 7,983 | | Stock-based compensation | 28,320 | | | 20,410 | |
Change in fair value of warrant liability and embedded derivative | — | | | (3,424) | | |
Noncash lease expense | 1,722 | | | 280 | | |
Change in fair value of derivative liability | | Change in fair value of derivative liability | 7,731 | | | — | |
Non-cash lease expense | | Non-cash lease expense | 2,162 | | | 1,722 | |
Accretion of asset retirement obligations | | Accretion of asset retirement obligations | 178 | | | 183 | |
Impairment loss of energy storage systems | | Impairment loss of energy storage systems | 2,347 | | | 1,293 | |
| Impairment of energy storage systems | 1,293 | | | 2,200 | | |
Issuance of warrants for services | — | | | 9,183 | | |
Impairment loss of project assets | | Impairment loss of project assets | 158 | | | — | |
| Net (accretion of discount) amortization of premium on investments | Net (accretion of discount) amortization of premium on investments | 301 | | | 295 | | Net (accretion of discount) amortization of premium on investments | (1,672) | | | 301 | |
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 | 1,874 | | | — | | Provision for accounts receivable allowance | 1,754 | | | 1,874 | |
Net loss on investments | | Net loss on investments | 1,561 | | | — | |
Gain on sale of project assets | Gain on sale of project assets | (592) | | | — | | Gain on sale of project assets | — | | | (592) | |
Gain on extinguishment of debt, net | | Gain on extinguishment of debt, net | (59,121) | | | — | |
Other | Other | 144 | | | 174 | | Other | (831) | | | (39) | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | (75,390) | | | (21,383) | | Accounts receivable | (67,029) | | | (75,390) | |
Inventory | Inventory | (2,237) | | | (3,357) | | Inventory | (57,282) | | | (2,237) | |
Deferred costs with suppliers | Deferred costs with suppliers | (47,836) | | | (4,159) | | Deferred costs with suppliers | 30,579 | | | (47,836) | |
Other assets | Other assets | (25,242) | | | (13,901) | | Other assets | (17,947) | | | (25,242) | |
Contract origination costs | (4,842) | | | (1,853) | | |
| Contract origination costs, net | | Contract origination costs, net | (4,184) | | | (4,842) | |
Project assets | | Project assets | (2,827) | | | — | |
Accounts payable | Accounts payable | 63,207 | | | 2,916 | | Accounts payable | 1,771 | | | 63,207 | |
Accrued expense and other liabilities | 38,329 | | | 3,334 | | |
Accrued expenses and other liabilities | | Accrued expenses and other liabilities | (28,910) | | | 38,329 | |
Deferred revenue | Deferred revenue | 31,620 | | | (3,538) | | Deferred revenue | 27,630 | | | 31,620 | |
Lease liabilities | Lease liabilities | (1,053) | | | (331) | | Lease liabilities | (2,135) | | | (1,053) | |
| Net cash used in operating activities | Net cash used in operating activities | (68,634) | | | (69,020) | | Net cash used in operating activities | (205,248) | | | (68,634) | |
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 | (181,541) | | | (171,109) | | Purchase of available-for-sale investments | (58,034) | | | (181,541) | |
Proceeds from maturities of available-for-sale investments | Proceeds from maturities of available-for-sale investments | 148,064 | | | — | | Proceeds from maturities of available-for-sale investments | 119,650 | | | 148,064 | |
Proceeds from sales of available-for-sale investments | Proceeds from sales of available-for-sale investments | 10,930 | | | — | | Proceeds from sales of available-for-sale investments | 73,917 | | | 10,930 | |
Purchase of energy storage systems | Purchase of energy storage systems | (469) | | | (6,173) | | Purchase of energy storage systems | (2,912) | | | (469) | |
Capital expenditures on internally-developed software | Capital expenditures on internally-developed software | (12,652) | | | (4,250) | | Capital expenditures on internally-developed software | (10,123) | | | (12,652) | |
Net proceeds from sale of project assets | Net proceeds from sale of project assets | 1,251 | | | — | | Net proceeds from sale of project assets | — | | | 1,251 | |
Capital expenditures on project assets | Capital expenditures on project assets | (3,009) | | | — | | Capital expenditures on project assets | — | | | (3,009) | |
Purchase of property and equipment | Purchase of property and equipment | (1,490) | | | (525) | | Purchase of property and equipment | (395) | | | (1,490) | |
Net cash used in investing activities | (571,925) | | | (182,057) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 120,256 | | | (571,925) | |
FINANCING ACTIVITIES | FINANCING ACTIVITIES | | | | FINANCING ACTIVITIES | | | |
Proceeds from exercise of stock options and warrants | Proceeds from exercise of stock options and warrants | 1,194 | | | 148,322 | | Proceeds from exercise of stock options and warrants | 257 | | | 1,194 | |
Payments for taxes related to net share settlement of stock options | Payments for taxes related to net share settlement of stock options | (2,302) | | | (12,622) | | 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 | 1,519 | | | 4,929 | | Proceeds from financing obligations | — | | | 1,519 | |
Repayment of financing obligations | Repayment of financing obligations | (7,637) | | | (5,721) | | Repayment of financing obligations | (7,766) | | | (7,637) | |
Proceeds from issuance of convertible notes, net of issuance costs of $0 and $8 for the nine months ended September 30, 2022 and 2021, respectively | — | | | 1,118 | | |
Proceeds from issuance of notes payable, net of issuance costs of $0 and $101 for the nine months ended September 30, 2022 and 2021, respectively | — | | | 3,917 | | |
Investment from non-controlling interests | 407 | | | — | | |
Proceeds from issuance of convertible notes, net of issuance costs of $7,601 and $0 for the nine months ended September 30, 2023 and 2022, respectively | | Proceeds from issuance of convertible notes, net of issuance costs of $7,601 and $0 for the nine months ended September 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 | (56) | | | 407 | |
Repayment of notes payable | Repayment of notes payable | — | | | (41,446) | | Repayment of notes payable | (2,101) | | | — | |
Net cash (used in) provided by financing activities | (6,819) | | | 648,819 | | |
Effect of exchange rate changes on cash and cash equivalents | (304) | | | 505 | | |
Net (decrease) increase in cash and cash equivalents | (647,682) | | | 398,247 | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
| | | | | | | | | | | |
Cash and cash equivalents, beginning of year | 747,780 | | | 6,942 | |
Cash and cash equivalents, end of period | $ | 100,098 | | | $ | 405,189 | |
| | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Cash paid for interest | $ | 4,910 | | | $ | 8,992 | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | |
Change in asset retirement costs and asset retirement obligation | $ | 56 | | | $ | 162 | |
| | | |
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 | $ | — | | | $ | 13,816 | |
| | | |
Settlement of warrant liability into common stock due to exercise | $ | — | | | $ | 167,050 | |
Settlement of warrant liability into common stock due to redemption | $ | — | | | $ | 2,121 | |
| | | |
Stock-based compensation capitalized to internal-use software | $ | 1,680 | | | $ | 587 | |
| | | | | | | | | | | |
Net cash provided by (used in) financing activities | 95,139 | | | (6,819) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 114 | | | (304) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 10,261 | | | (647,682) | |
Cash, cash equivalents and restricted cash, beginning of year | 87,903 | | | 747,780 | |
Cash, cash equivalents and restricted cash, end of period | $ | 98,164 | | | $ | 100,098 | |
| | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Cash paid for interest | $ | 4,070 | | | $ | 4,910 | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | |
Change in asset retirement costs and asset retirement obligation | $ | 354 | | | $ | 56 | |
Purchases of energy storage systems in accounts payable | $ | 78 | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
Right-of-use asset obtained in exchange for lease liability | $ | 2,782 | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
Stock-based compensation capitalized to internal-use software | $ | 3,033 | | | $ | 1,680 | |
| | | |
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH WITHIN THE CONDENSED CONSOLIDATED BALANCE SHEETS TO THE AMOUNTS SHOWN IN THE STATEMENTS OF CASH FLOWS ABOVE: | | | |
Cash and cash equivalents | $ | 97,064 | | | $ | 100,098 | |
Restricted cash included in other noncurrent assets | 1,100 | | | — | |
Total cash, cash equivalents, and restricted cash | $ | 98,164 | | | $ | 100,098 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
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”), is a global leader in artificial intelligence (“AI”) -driven clean energy solutions and services. The Company 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 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 platform and professional services to operate integratedstandalone energy storage, andintegrated solar plus storage systems, through its Athena® artificial intelligence (“AI”) platform (“Athena”), and (iii) solar asset performance monitoring and control through its Athena® clean energy optimization platform (“Athena”), and (iv) solar asset performance monitoring and control, through Athena’s PowerTrack application. In addition, in all the markets where the Company helps manage its customers’ clean energy assets, the Company has agreements to use the Athena platform to participate in 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 signals, energy prices and other factors in connection with the deployment of renewable energy resources to such customers. Additionally, the Company’s clean energy storage solutions support renewable energy generation by alleviating grid intermittency issues, thereby reducing customer dependence on traditional, fossil fuel resources.
The Company’s Athena PowerTrack application provides a 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, and recovers those capital contributions plus a fee when the developer takes ownership of the project. TheGiven 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 advance development capital to key partners in strategic markets and securingsecure 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 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 largest customer bases areconcentration 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 September 30, 2022,2023, the Company had cash and cash equivalents of $100.1$97.1 million, short-term investments of $193.4$28.3 million, an accumulated deficit of $596.8$734.8 million and net working capital of $296.7 million, with $17.0 million of financing obligations coming due within the next 12 months.$241.3 million. During the nine months ended September 30, 2022,2023, the Company incurred a net loss of $88.8$102.7 million and had negative cash flows from operating activities of $68.6$205.2 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 theCompany 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 20282030 (the “2028“2030 Convertible Notes”) (as described in Note 10 — Convertible Promissory Notes) providedof 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.Company’s 0.5% Green Convertible Senior Notes due 2028 (the “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 itsthe 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.
Supply Chain Constraints and Risk; COVID-19
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.Risk
The Company’s industry continues to faceCompany has in the past faced 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 attributedwere due in part to the pandemicevolving macroeconomic, geopolitical and resulting government action, as well as broader macroeconomic conditions that may persist oncebusiness environment, including the immediate effects of global inflationary pressures and interest rates, general economic slowdown or a recession, changes in monetary policy, instability in financial institutions, the pandemic have subsided, and have been exacerbated by the ongoing conflict between Russia and Ukraine. While management believes thatprospect of a majorityshutdown of the Company’s suppliers have secured sufficient supply to permit them to continue deliveryU.S. federal government, potential import tariffs, geopolitical pressures, including the Russia-Ukraine armed conflict, rising tensions between China and installations through the endUnited States and unknown effects of 2022, if these shortagescurrent and delays persist into 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.future trade regulations. The Company cannot predict the full effects the pandemicmacroeconomic, 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 customersoperations. In addition, the COVID-19 pandemic caused, and any new outbreaks or resurgence of COVID-19 and its business operations generally,variants, or outbreaks of other infectious diseases, 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 GAAPU.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, 20212022 has been derived from the audited financial statements at that
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
date, but certain notes or other information that are normally required by GAAP have been omitted if they substantially 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 nine months ended September 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) incomeloss 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 nine months ended September 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, 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 September 30, 2023 and December 31, 2022 (in thousands):
| | | | | |
| September 30, 2022 |
Assets | |
Cash and cash equivalents | $ | 5,732 | |
Other current assets | 42 | |
Other noncurrent assets | 2,350 | |
Total assets | 8,124 | |
Liabilities | |
Accounts payable | 447 | |
Other current liabilities | $ | 74 | |
Total liabilities | $ | 521 | |
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Assets | | | |
Cash and cash equivalents | $ | 2,482 | | | $ | 6,686 | |
Other current assets | 5 | | | 38 | |
Other noncurrent assets | 5,877 | | | 3,208 | |
Total assets | 8,364 | | | 9,932 | |
Liabilities | | | |
Accounts payable | 826 | | | 356 | |
Other current liabilities | 137 | | | 97 | |
Total liabilities | $ | 963 | | | $ | 453 | |
For the nine months ended September 30, 2023 and 2022, the Company contributed approximately $0.1 million and $6.6 million in capital investments for hardware purchases.purchases, respectively. The net income from the DevCo JVs was $1.2 million and $1.4 million during the three and nine months ended September 30, 2022 was immaterial.
Reclassifications
Certain prior year amounts have been reclassified for consistency with2023, respectively, and immaterial during the current year presentation. Such reclassifications have no impact on previously reported net (loss) income, stockholders' equity (deficit), or cash flows. For thethree and nine months ended September 30, 2021, a $4.2 million net cash outflow was reclassed from Other assets to Deferred costs with suppliers in the 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)
2022.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; estimates of transaction price with variable consideration; 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
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
value of equity instruments, equity-based instruments, warrantderivative liability, accruals related to sales tax liabilities embedded derivatives 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 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 one 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 September 30, 20222023 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 nine months ended September 30, 20222023 and 20212022. 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 |
| | September 30, | | December 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, | | September 30, | | December 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Customers: | Customers: | | | | | | | | | | | | Customers: | | | | | | | | | | | |
Customer A | Customer A | * | | 23 | % | | * | | * | | * | | * | Customer A | 54 | % | | 54 | % | | * | | 58 | % | | 18 | % | | 52 | % |
Customer B | Customer B | * | | 15 | % | | * | | 15 | % | | * | | 11 | % | Customer B | 10 | % | | 16 | % | | * | | * | | * | | * |
Customer C | Customer C | * | | 13 | % | | * | | 22 | % | | * | | 12 | % | Customer C | 14 | % | | 11 | % | | * | | * | | * | | * |
Customer D | Customer D | 60 | % | | * | | 58 | % | | * | | 52 | % | | * | Customer D | * | | * | | * | | 12 | % | | * | | * |
Customer E | Customer E | * | | * | | * | | * | | * | | 11 | % | Customer E | * | | * | | 89 | % | | * | | 41 | % | | * |
Customer F | * | | * | | * | | * | | * | | 13 | % | |
Customer G | * | | * | | 12 | % | | * | | * | | * | |
| |
*Total less than 10% for the respective period.
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
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
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 September 30, 20222023 and December 31, 20212022 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 September 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 September 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 nine months ended September 30, 2022 would have been $3.9 million and $11.4 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 nine months ended September 30, 2022 is $0.03 and $0.07 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,
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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. 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 September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Hardware revenue | $ | 85,809 | | $ | 34,886 | | $ | 171,358 | | $ | 59,609 |
Services and other revenue | 13,692 | | 4,947 | | 36,178 | | 14,982 |
Total revenue | $ | 99,501 | | $ | 39,833 | | $ | 207,536 | | $ | 74,591 |
The table above includes AlsoEnergy’s hardware and services and other revenue of $9.5 million and $7.1 million, respectively, for the three months ended September 30, 2022 and $21.2 million and $19.1 million, respectively, for the nine months ended September 30, 2022. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Hardware revenue | $ | 117,143 | | $ | 85,809 | | $ | 246,461 | | $ | 171,358 |
Services and other revenue | 16,597 | | 13,692 | | 47,630 | | 36,178 |
Total revenue | $ | 133,740 | | $ | 99,501 | | $ | 294,091 | | $ | 207,536 |
The following table summarizes reportable revenue by geographic regions determined based on the location of the customers (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
United States | United States | $ | 97,815 | | | $ | 201,475 | | United States | $ | 129,800 | | | $ | 97,815 | | | $ | 280,010 | | | $ | 201,475 | |
Rest of the world | Rest of the world | 1,686 | | | 6,061 | | Rest of the world | 3,940 | | | 1,686 | | | 14,081 | | | 6,061 | |
Total revenue | Total revenue | $ | 99,501 | | | $ | 207,536 | | Total revenue | $ | 133,740 | | | $ | 99,501 | | | $ | 294,091 | | | $ | 207,536 | |
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 2023 and September 30, 2022, the Company had $545.3 million and $365.8 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):
STEM, INC. | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| 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 | $ | 331,520 | | | 14 | % | | 48 | % | | 38 | % |
Hardware revenue | 213,813 | | | 100 | % | | — | % | | — | % |
Total revenue | $ | 545,333 | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | September 30, 2022 |
| | Total Remaining Performance Obligations | | Percent Expected to be Recognized as Revenue | | Total Remaining Performance Obligations | | Percent Expected to be Recognized as Revenue |
| | Less Than One Year | | Two to Five Years | | Greater Than Five Years | | Less Than One Year | | Two to Five Years | | Greater Than Five Years |
Services and other revenue | Services and other revenue | $ | 264,195 | | | 17 | % | | 51 | % | | 32 | % | Services and other revenue | $ | 264,195 | | | 17 | % | | 51 | % | | 32 | % |
Hardware revenue | Hardware revenue | 101,603 | | | 98 | % | | 2 | % | | — | % | Hardware revenue | 101,603 | | | 98 | % | | 2 | % | | — | % |
Total revenue | Total revenue | $ | 365,798 | | | Total revenue | $ | 365,798 | | |
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 nine months ended September 30, 2023 and September 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 | 113,101 | |
Upfront or annual incentive payments received | 4,592 | |
Revenue recognized related to amounts that were included in beginning balance of deferred revenue | (16,122) | |
Revenue recognized related to amounts that were included in acquired balance of deferred revenue | (3,338) | |
Revenue recognized related to deferred revenue generated during the period | (66,612) | |
Ending balance as of September 30, 2022 | $ | 118,690 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Beginning balance | $ | 138,074 | | | $ | 37,443 | |
Deferred revenue acquired upon business combination | — | | | 49,626 | |
Upfront payments received from customers | 217,360 | | | 113,101 | |
Upfront or annual incentive payments received | 2,805 | | | 4,592 | |
Revenue recognized related to amounts that were included in beginning balance of deferred revenue | (26,538) | | | (16,122) | |
Revenue recognized related to amounts that were included in acquired balance of deferred revenue | — | | | (3,338) | |
Revenue recognized related to deferred revenue generated during the period | (165,997) | | | (66,612) | |
Ending balance | $ | 165,704 | | | $ | 118,690 | |
Parent Company Guarantees
In certain customer contracts, the Company previously agreed to provide a guarantee that the value of purchased hardware will not decline for a certain period of time. Under this guarantee, if these customers were unable to install or designate the hardware to a specified project within such period of time, the Company would be required to assist the customer in re-marketing the hardware for resale by the customer. The guarantee provided that, in such cases, if the customer resold the hardware for less than the amount initially sold to the customer, the Company would be required to compensate the customer for any shortfall in fair value for the hardware from the initial contract price. The Company accounts for such contractual terms and guarantees as variable consideration at each measurement date. The Company updates its estimate of variable consideration, including changes in estimates related to such guarantees, each quarter for facts or circumstances that have changed from the time of the initial estimate. As a result, the Company recorded a revenue reduction during the third quarter of fiscal year 2023 of $32.7 million in hardware revenue relating to hardware deliveries prior to third quarter 2023. During the
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
three months ended September 30, 2023, variable consideration relating to current quarter hardware deliveries was constrained by $4.7 million.
4.SHORT-TERM INVESTMENTS
The following tables summarize the estimated fair value of the Company’s short-term investments and the gross unrealized holding lossesgains and gainslosses as of September 30, 20222023 and December 31, 20212022 (in thousands):
| | | As of September 30, 2022 | | As of September 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 | $ | 25,323 | | | $ | — | | | $ | (292) | | | $ | 25,031 | | Corporate debt securities | $ | 5,052 | | | $ | — | | | $ | (10) | | | $ | 5,042 | |
Commercial paper | 25,911 | | | — | | | — | | | 25,911 | | |
| U.S. government bonds | U.S. government bonds | 118,810 | | | — | | | (1,711) | | | 117,099 | | U.S. government bonds | 9,985 | | | — | | | (12) | | | 9,973 | |
Certificate of deposits | Certificate of deposits | 18,180 | | | — | | | — | | | 18,180 | | Certificate of deposits | 3,000 | | | — | | | — | | | 3,000 | |
Treasury bills | Treasury bills | 4,708 | | | — | | | (7) | | | 4,701 | | Treasury bills | 6,793 | | | — | | | — | | | 6,793 | |
Agency bonds | Agency bonds | 2,501 | | | — | | | (20) | | | 2,481 | | Agency bonds | 3,503 | | | — | | | (10) | | | 3,493 | |
Total short-term investments | Total short-term investments | $ | 195,433 | | | $ | — | | | $ | (2,030) | | | $ | 193,403 | | Total short-term investments | $ | 28,333 | | | $ | — | | | $ | (32) | | | $ | 28,301 | |
|
| | | | | | | | | | | | | | | | | | | | | | | 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 | |
|
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the contractual maturities of the Company’s short-term investments as of September 30, 20222023 (in thousands):
| | | | As of September 30, 2022 | | | As of September 30, 2023 |
| | | Amortized cost | | Estimated Fair Value | | | Amortized cost | | Estimated Fair Value |
| | Due within one year | Due within one year | | $ | 144,466 | | | $ | 143,613 | | Due within one year | | $ | 28,333 | | | $ | 28,301 | |
Due between one to two years | | 50,967 | | | 49,790 | | |
| Total | Total | | $ | 195,433 | | | $ | 193,403 | | Total | | $ | 28,333 | | | $ | 28,301 | |
|
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. During the nine months ended September 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 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 September 30, 20222023 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):
| | | September 30, 2022 | | September 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 | $ | 540 | | $ | — | | | $ | — | | $ | 540 | Money market fund | $ | 30,293 | | $ | — | | | $ | — | | | $ | 30,293 |
Commercial paper | Commercial paper | — | | | 5,372 | | | — | | | 5,372 | | Commercial paper | — | | | — | | | — | | | — | |
| Total cash equivalents | 540 | | | 5,372 | | | — | | | 5,912 | | |
| Debt securities: | Debt securities: | | Debt securities: | |
Corporate debt securities | Corporate debt securities | — | | | 25,031 | | | — | | | 25,031 | Corporate debt securities | — | | | 5,042 | | | — | | | 5,042 |
Commercial paper | — | | | 25,911 | | | — | | | 25,911 | |
| U.S. government bonds | U.S. government bonds | — | | | 117,099 | | | — | | | 117,099 | U.S. government bonds | — | | | 9,973 | | | — | | | 9,973 |
Certificate of deposits | Certificate of deposits | — | | | 18,180 | | | — | | | 18,180 | Certificate of deposits | — | | | 3,000 | | | — | | | 3,000 |
Treasury bills | Treasury bills | — | | | 4,701 | | | — | | | 4,701 | Treasury bills | — | | | 6,793 | | | — | | | 6,793 |
Agency bonds | Agency bonds | — | | | 2,481 | | | — | | | 2,481 | | Agency bonds | — | | | 3,493 | | | — | | | 3,493 | |
Total financial assets | Total financial assets | $ | 540 | | | $ | 198,775 | | | $ | — | | | $ | 199,315 | | Total financial assets | $ | 30,293 | | | $ | 28,301 | | | $ | — | | | $ | 58,594 | |
| Liabilities: | | Liabilities: | |
Derivative liability | | Derivative liability | $ | — | | | $ | — | | | $ | 7,731 | | | $ | 7,731 | |
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | 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 derivative instrument is not traded on an exchange they are classified within Level 3 of the fair value hierarchy.
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 sheetsheets as of September 30, 2022.2023. As of September 30, 2023 and December 31, 2022, the estimated fair value of the convertible notes2028 Convertible Notes was $341.7177.9 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. As of September 30, 2023, the estimated fair value of the 2030 Convertible Notes was $192.1 million, 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 duringin the nine months ended September 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 |
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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):
| | | | | |
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 noncurrent 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.
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
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 $16.6 million and $40.3 million of revenue during the three and nine months ended September 30, 2022, respectively, and net loss of $5.6 million and $14.9 million during the three and nine months ended September 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 September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Total revenue | Total revenue | $ | 99,501 | | | $ | 56,730 | | | $ | 211,372 | | | $ | 116,732 | | Total revenue | $ | 133,740 | | | $ | 99,501 | | | $ | 294,091 | | | $ | 211,372 | |
Net loss | Net loss | $ | (34,275) | | | $ | 111,245 | | | $ | (96,686) | | | $ | (88,228) | | Net loss | $ | (77,072) | | | $ | (34,275) | | | $ | (102,728) | | | $ | (96,686) | |
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):
| | | September 30, | | December 31, | | September 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 | (7) | | | 116 | | Effect of foreign currency translation | 6 | | | 8 | |
Total goodwill | Total goodwill | $ | 546,634 | | | $ | 1,741 | | Total goodwill | $ | 547,164 | | | $ | 546,649 | |
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Intangible Assets, Net
Intangible assets, net, consists of the following (in thousands):
| | | September 30, | | December 31, | | September 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 | 44,078 | | | 29,706 | | Internally developed software | 62,628 | | | 49,472 | |
Intangible assets | Intangible assets | 196,678 | | | 30,206 | | Intangible assets | 216,628 | | | 202,072 | |
Less: Accumulated amortization | Less: Accumulated amortization | (33,123) | | | (16,276) | | Less: Accumulated amortization | (58,309) | | | (39,809) | |
Add: Currency translation adjustment | Add: Currency translation adjustment | (2) | | | 36 | | Add: Currency translation adjustment | 2 | | | 2 | |
Total intangible assets, net | Total intangible assets, net | $ | 163,553 | | | $ | 13,966 | | Total intangible assets, net | $ | 158,321 | | | $ | 162,265 | |
Amortization expense for intangible assets was $6.55.2 million and $1.4$6.5 million for the three months ended September 30, 2023 and 2022, and 2021, respectively, andand $16.9 $18.5 million and $3.816.9 million for the nine months ended September 30, 20222023 and 2021,2022, respectively.
8.ENERGY STORAGE SYSTEMS, NET
Energy Storage Systems, Net
Energy storage systems, net, consists of the following (in thousands): | | | September 30, | | December 31, | | September 30, | | December 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Energy storage systems placed into service | Energy storage systems placed into service | $ | 144,227 | | | $ | 143,592 | | Energy storage systems placed into service | $ | 141,759 | | | $ | 143,154 | |
Less: accumulated depreciation | Less: accumulated depreciation | (55,511) | | | (45,250) | | Less: accumulated depreciation | (65,606) | | | (58,782) | |
Energy storage systems not yet placed into service | Energy storage systems not yet placed into service | 6,112 | | | 7,772 | | Energy storage systems not yet placed into service | 4,556 | | | 6,385 | |
Total energy storage systems, net | Total energy storage systems, net | $ | 94,828 | | | $ | 106,114 | | Total energy storage systems, net | $ | 80,709 | | | $ | 90,757 | |
Depreciation expense for energy storage systems was approximately $3.8$3.6 million and $3.6$3.8 million for the three months ended September 30, 20222023 and 2021,2022, respectively, and approximately $11.2$10.8 million and $10.8$11.2 million for the nine months ended September 30, 20222023 and 2021,2022, respectively. Depreciation expense is recognized in cost of services and other revenue.
Impairment expense for energy storage systems was approximately $0.3 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively, and approximately $2.3 million and $1.3 million for the nine months ended September 30, 2023 and 2022, respectively. Impairment expense is recognized in cost of 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 ownedwholly-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 besystems were operated by the Company. The credit agreement hashad 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 thisthe 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 September 30, 2022, and December 31, 2021,
On April 6, 2023, the Company repaid the remaining outstanding balance was $1.8 million and $1.9 million, respectively. The Company was in compliance with all covenants contained inunder the 2021 Credit Agreement as of September 30, 2022.
The Company’s outstanding debt consistedwith a portion of the following asnet proceeds from the issuance of September 30, 2022 (in thousands): | | | | | |
| September 30, 2022 |
Outstanding principal | $ | 1,768 | |
Unamortized discount | (185) | |
Carrying value of debt | $ | 1,583 | |
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 tofacility 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 soldrepayment 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 no longer outstanding.
2023.
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 callscall transactions (the “Capped“2028 Capped Calls”) as described below. In connection with the issuance of the 2030 Convertible Notes during the second quarter of 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 September 30, 2023 and December 31, 2022 are summarized in the following table (in thousands):
| | | | | |
| September 30, 2022 |
Long Term Debt | |
Outstanding principal | $ | 460,000 | |
Unamortized initial purchaser’s debt discount and debt issuance cost | (12,589) | |
Net carrying amount | $ | 447,411 | |
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Long Term Debt | | | |
Outstanding principal | $ | 297,024 | | | $ | 460,000 | |
Unamortized initial purchaser’s debt discount and debt issuance cost | (6,825) | | | (12,091) | |
Net carrying amount | $ | 290,199 | | | $ | 447,909 | |
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 nine months ended September 30, 2023 and 2022 (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Cash interest expense | Cash interest expense | | | | Cash interest expense | | | | | | | |
Contractual interest expense | Contractual interest expense | $ | 575 | | | $ | 1,725 | | Contractual interest expense | $ | 371 | | | $ | 575 | | | $ | 1,322 | | | $ | 1,725 | |
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 | 497 | | | 1,488 | | Amortization of debt discount and debt issuance cost | 323 | | | 497 | | | 1,163 | | | 1,488 | |
Total interest expense | Total interest expense | $ | 1,072 | | | $ | 3,213 | | Total interest expense | $ | 694 | | | $ | 1,072 | | | $ | 2,485 | | | $ | 3,213 | |
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
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 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 September 30, 2023 are summarized in the following table (in thousands):
| | | | | | | |
| September 30, 2023 | | |
Long Term Debt | | | |
Outstanding principal | $ | 240,000 | | | |
Unamortized initial purchaser’s debt discount and debt issuance cost | (7,131) | | | |
Net carrying amount | $ | 232,869 | | | |
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 September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
| | | | | | | |
Cash interest expense | | | | | | | |
Contractual interest expense | $ | 2,550 | | | | | $ | 5,043 | | | |
Non-cash interest expense | | | | | | | |
Amortization of debt discount and debt issuance cost | 239 | | | | | 470 | | | |
Total interest expense | $ | 2,789 | | | | | $ | 5,513 | | | |
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 second quarter of 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 September 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 WarrantsAs 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 one 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 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 no 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 shares of the Company’s common stock. 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 September 30, 2022:2023:
| | | Number of Options Outstanding | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value (in thousands) | | 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 | | |
Balances as of December 31, 2022 | | Balances as of December 31, 2022 | 8,243,637 | | | $ | 6.88 | | | 6.6 | | $ | 35,566 | |
Options granted | Options granted | 1,255,490 | | | 9.27 | | | Options granted | 1,291,349 | | | 10.25 | | |
Options exercised | Options exercised | (1,475,542) | | | 2.32 | | | Options exercised | (116,717) | | | 2.20 | | |
Options forfeited and expired | Options forfeited and expired | (249,863) | | | 14.83 | | | Options forfeited and expired | (356,188) | | | 15.64 | | |
| Balances as of September 30, 2022 | 8,296,551 | | | $ | 6.89 | | | 6.8 | | $ | 67,741 | | |
Options vested and exercisable — September 30, 2022 | 5,389,460 | | | $ | 3.80 | | | 5.8 | | $ | 55,096 | | |
Balances as of September 30, 2023 | | Balances as of September 30, 2023 | 9,062,081 | | | $ | 7.08 | | | 6.2 | | $ | 10,278 | |
Options vested and exercisable — September 30, 2023 | | Options vested and exercisable — September 30, 2023 | 6,091,126 | | | $ | 4.88 | | | 5.1 | | $ | 10,230 | |
As of September 30, 2022,2023, the Company had approximately $20.4$17.3 million of remaining unrecognized stock-based compensation expense for stock options, which is expected to be recognized over a weighted average period of 1.91.5 years.
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restricted Stock Units
The following table summarizes the RSU activity for the period ended September 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 | 5,434,757 | | 9.09 | | RSUs granted | 7,542,131 | | 5.62 | |
RSUs vested | RSUs vested | (191,672) | | 27.60 | RSUs vested | (1,226,174) | | 10.78 | |
RSUs forfeited | RSUs forfeited | (485,478) | | 15.85 | RSUs forfeited | (1,791,088) | | 8.65 | |
Balances as of September 30, 2022 | 6,557,284 | | $ | 15.44 | | |
Balances as of September 30, 2023 | | Balances as of September 30, 2023 | 11,244,359 | | $ | 10.56 | |
(1) Includes certain restricted stock units with service and market-based vesting criteria.
As of September 30, 2022,2023, the Company had approximately $78.3$79.5 million of remaining unrecognized stock-based compensation expense for RSUs, which is expected to be recognized over a weighted average period of 2.51.9 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) incomeloss (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Sales and marketing | Sales and marketing | $ | 1,172 | | $ | 723 | | $ | 3,102 | | $ | 975 | Sales and marketing | $ | 1,614 | | $ | 1,172 | | $ | 4,109 | | $ | 3,102 |
Research and development | Research and development | 1,589 | | 965 | | 3,458 | | 1,384 | Research and development | 2,467 | | 1,589 | | 6,733 | | 3,458 |
General and administrative | General and administrative | 4,917 | | 4,511 | | 13,850 | | 5,624 | General and administrative | 7,117 | | 4,917 | | 17,478 | | 13,850 |
Total stock-based compensation expense | Total stock-based compensation expense | $ | 7,678 | | $ | 6,199 | | $ | 20,410 | | $ | 7,983 | Total stock-based compensation expense | $ | 11,198 | | $ | 7,678 | | $ | 28,320 | | $ | 20,410 |
Research and development expenses of $1.2 million and $0.6 million corresponding to internal-use software, were capitalized during the three months ended September 30, 2023 and 2022, respectively. Research and development expenses of $3.1 million and $1.7 million, corresponding to internal-use software, were capitalized during the three and nine months ended September 30, 2023 and 2022, respectively.
Awards under our stock bonus program issued through the 2021 Plan are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetary amount determined at a future date to be settled with a variable number of shares of our common stock. We recognized stock-based compensation expense related to such bonuses in the amount of $1.5 millionduring the three and nine months ended September 30, 2023.
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13.NET (LOSS) INCOMELOSS PER SHARE
The following table sets forth the computation of basic and diluted net (loss) incomeloss per share attributable to common stockholders (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator - Basic: | | | | | | | |
Net (loss) income per share attributable to Stem common stockholders, basic | $ | (34,279) | | | $ | 115,612 | | | $ | (88,781) | | | $ | (67,157) | |
| | | | | | | |
Numerator - Diluted: | | | | | | | |
Net (loss) income per share attributable to Stem common stockholders, basic | (34,279) | | | 115,612 | | | (88,781) | | | (67,157) | |
Less: Gain from decrease in fair value and redemption of warrants | — | | | (137,001) | | | — | | | — | |
Net loss attributable to Stem common stockholders, diluted | (34,279) | | | (21,389) | | | (88,781) | | | (67,157) | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average number of shares outstanding used to compute net (loss) income per share attributable to Stem common stockholders, basic | 154,392,573 | | | 135,231,146 | | | 153,043,010 | | | 92,436,649 | |
Dilutive potential common shares | — | | | 5,054,019 | | | — | | | — | |
Weighted-average number of shares outstanding used to compute net (loss) income per share attributable to Stem common stockholders, diluted | 154,392,573 | | | 140,285,165 | | | 153,043,010 | | | 92,436,649 | |
| | | | | | | |
Net (loss) income per share attributable to common stockholders, basic | $ | (0.22) | | | $ | 0.85 | | | $ | (0.58) | | | $ | (0.73) | |
Net loss per share attributable to common stockholders, diluted | $ | (0.22) | | | $ | (0.15) | | | $ | (0.58) | | | $ | (0.73) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Numerator: | | | | | | | |
Net loss per share attributable to common stockholders, basic and diluted | $ | (77,072) | | | $ | (34,279) | | | $ | (102,728) | | | $ | (88,781) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Denominator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | 155,829,348 | | | 154,392,573 | | | 155,474,725 | | | 153,043,010 | |
| | | | | | | |
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.49) | | | $ | (0.22) | | | $ | (0.66) | | | $ | (0.58) | |
| | | | | | | |
The following table shows total outstanding potentially dilutive shares excluded from the computation of diluted (loss) incomeloss per share as their effect would have been anti-dilutive, as of September 30, 20222023 and 2021:2022:
| | | September 30, 2022 | | September 30, 2021 | | September 30, 2023 | | September 30, 2022 |
| 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 | 8,296,551 | | | 9,165,901 | | Outstanding stock options | 9,062,081 | | | 8,296,551 | |
Outstanding warrants | Outstanding warrants | 2,533 | | | 23,673 | | Outstanding warrants | 2,533 | | | 2,533 | |
Outstanding RSUs | Outstanding RSUs | 6,557,284 | | | 1,759,077 | | Outstanding RSUs | 11,244,359 | | | 6,557,284 | |
Total | Total | 30,586,758 | | | 10,948,651 | | Total | 64,139,738 | | | 30,586,758 | |
14.INCOME TAXES
The following table reflects the Company’s (provision for) benefit from income taxes and the effective tax rates for the periods presented below (in thousands, except effective tax rate):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Loss before (provision for) benefit from income taxes | $ | (34,256) | | | $ | 115,612 | | | $ | (103,982) | | | $ | (67,157) | |
(Provision for) benefit from income taxes | $ | (19) | | | $ | — | | | $ | 15,201 | | | $ | — | |
Effective tax rate | 0.1 | % | | — | % | | 14.6 | % | | — | % |
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Loss before benefit from (provision for) income taxes | $ | (77,118) | | | $ | (34,256) | | | $ | (102,374) | | | $ | (103,982) | |
Benefit from (provision for) income taxes | $ | 46 | | | $ | (19) | | | $ | (354) | | | $ | 15,201 | |
Effective tax rate | 0.1 | % | | (0.1) | % | | (0.3) | % | | 14.6 | % |
For the three months ended September 30, 2023, the Company recognized a benefit from income taxes of $46 thousand, representing an effective tax rate of 0.1%, 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 nine months ended September 30, 20222023, the Company recognized a provision for income taxes of $0.4 million, representing an effective tax rate of (0.3)%, 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 nine months ended September 30, 2023. For the nine months ended September 30, 2022, the Company recognized a benefit from income taxes of $15.2 million, representing an effective tax rate of 14.6%, which was lower than the statutory federal tax rate due to a $15.3$15.1 million tax benefit from the acquisition of AlsoEnergy Holdings, Inc. for a partial valuation allowance release on U.S. Deferred tax assets due to the deferred tax liability established in purchase accounting on the acquired intangibles during the three months ended March 31, 2022. For the three months ended September 30, 2022, the Company recognized an income tax expense of $19 thousand, representing an effective tax rate of 0.05%, which was lower than the statutory federal tax rate due to the valuation allowance against the Company’s U.S. deferred tax assets.intangibles.
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. TheAs 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 impacteffect on the Company’s unaudited condensed consolidated financial statements.Company taken as a whole.
Commitments
On FebruaryMarch 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 sheetsheets as of September 30, 2022.2023. The operating lease liability and operating lease ROU asset correspond to 15,847 and 13,94741,811 square feet of leased office manufacturing, laboratory and warehouse space in Boulder, Colorado and Longmont, Colorado, respectively.Gurugram, India. As of the acquisitioncommencement date of the lease, the remaining lease terms for Boulder and Longmont are for 34 and 35 months, respectively. Theseterm was 58 months. The lease agreements contemplateagreement contemplates options to extend the non-cancelable lease term, which have been determined not reasonably certain to be exercised. Combined baseBase rent for these two locations is $39,725approximately $58,500 per month with escalating payments.
Non-Income Related Taxes
The Company is in the process of finalizing its sales tax liability analysis for states in which it has economic nexus. During the third quarter of 2023, the Company determined it was probable the Company would be subject to sales tax liabilities plus applicable interest and has estimated the probable exposure to be $5.6 million and accordingly, the Company accrued this amount with a corresponding charge to earnings as of September 30, 2023.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This third quarter 20222023 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 synergiesbenefits of the combined Stem and Stem/AlsoEnergy company; our ability to continue to successfully integrate the combined companies;secure sufficient and timely inventory from suppliers; our ability to security sufficient inventory from suppliers 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,control; the direct or indirect effects on our business of macroeconomic factors and geopolitical instability, such as the COVID-19 pandemic and variants thereof, and government and business responses thereto; the impact of the ongoing conflict in Ukraine; our ability to meet contracted customer demand; the expected impactbenefits of the Inflation Reduction Act of 2022 on our business; and future results of operations, including revenue and Adjustedadjusted 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 inability to secure sufficient and timely inventory from our suppliers, to meet customer demand, and provide us withas well as 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, geopoliticalmacroeconomic and business conditions in key regions of the world, including inflationary pressures, general economic slowdown or a recession, increasingrising interest rates, and changes in monetary policy;policy, instability in financial institutions, and the ongoingprospect of a shutdown of the U.S. federal government; the direct and indirect effects of the COVID-19 pandemicwidespread health emergencies on our workforce, operations, financial results and cash flows; the effects ofgeopolitical instability, such as the ongoing conflict in Ukraine; the results of operations and financial condition of our customers and suppliers; pricing pressure; inflation;pressures; weather and seasonal factors; challenges, disruptions and costs of integrating AlsoEnergy and achieving anticipated synergies, or such synergies taking longer 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 the long-term value of our common stock; our abilityinability to continue to grow and to manage our growth effectively; our abilityinability to attract and retain qualified employees and key personnel; our abilityinability to comply with, and the effect on their businessesour business of, evolving legal standards and regulations, particularlyincluding 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; our inability to retain or upgrade current customers, further penetrate existing markets or 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 forthdiscussed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, Part II, Item 1A. “Risk Factors” of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023 and in our most recent Forms 10-K, 10-Q and 8-K filedother filings with or furnished to the SEC. If one or more of these or other risks or uncertainties materialize (or the consequences of any such development changes), or should our underlying assumptions prove incorrect, actual results or outcomes, or the timing of these results or outcomes, may vary materially from those reflected in our forward-looking statements. Forward-looking and other statements in this Form 10-Qreport 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. StatementsForward-looking statements in this Form 10-Qreport are made as of November 3, 2022,the date of this report, and Stem disclaimswe do not assume any intention or obligation to update publicly or revise suchany forward-looking statements whetherafter 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 and June 30, 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.
Overview
Our mission is to buildmaximize the economic, environmental, and operate the largest, digitally connected, intelligentresiliency value of renewable energy network forassets 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 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, and EV charging infrastructure monitoring, control, optimization, and reportingsolar systems, through our Athena® artificial intelligence (“AI”) platformclean energy optimization (“Athena”) and supporting applications, includingapplications. In addition, in all the markets where we help manage our customers’ clean energy assets, we have agreements to use the Athena PowerTrack.platform to participate in such markets and 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. Through PowerTrack, our software maximizes energy output and minimizes asset downtime.
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 storageassets over the course of their FTM system’s lifetime.
Through PowerTrack, our software maximizes FTM energy outputFebruary 2022 acquisition of AlsoEnergy, we combined our storage optimization capabilities with solar asset performance monitoring and minimizes asset downtime.control software.
Since our inception in 2009, we have engaged in developing and marketing 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 $39.8 million for the three months ended September 30, 2021 to $99.5 million for the three months ended September 30, 2022.2022 to $133.7 million for the three months ended September 30, 2023. We incurred net losses of $77.1 million for the three months ended September 30, 2023 and incurred net losses of $34.3 million for the three months ended September 30, 2022 and net income of $115.6 million for the three months ended September 30, 2021.2022. Our total revenue grew from $74.6 million for the nine months ended September 30, 2021 to $207.5 million for the nine months ended September 30, 2022.2022 to $294.1 million for the nine months ended September 30, 2023. For the nine months ended September 30, 20222023 and 2021,2022, we incurred net losses of $88.8$102.7 million and $67.2$88.8 million, respectively. As of September 30, 2022,2023, we had an accumulated deficit of $596.8$734.8 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 $652.0 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 nine months ended September 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 RisksUncertainties 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-ionlithium-ion energy storage hardware has generally declined significantly inover the last decade, and has resultednotwithstanding 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 onin August 16, 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-19Risk
We rely on a very small number of suppliers of energy storage systems and other equipment. If any of our suppliers waswere 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 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 has resulted in cost volatility. These shortages and delays can be attributed in part to 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,such as labor shortages, rising inflation, rising interest rates, and have been exacerbated bya recessionary environment and geographical instability, including 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 deliveryUkraine and installations throughrising tensions between China and the end of 2022, ifUnited States, among other factors. If these shortages and delays persist intothrough the remainder of 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 economicmacroeconomic conditions, including inflationary pressures and the COVID‐19 pandemic.
We cannot predict the full effects the COVID-19 pandemic will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. Given the dynamic nature of these circumstances on our ongoing business, results of operations and overall financial performance, the full 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.pressures.
DevCo Cash AdvancesJoint Ventures
From time to time, theThe 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 our QuarterlyAnnual Report on Form 10-Q10-K for the quarterfiscal year ended June 30,December 31, 2022 for additional information about certain risks related to these DevCo Projects.
Parent Company Guarantees
In certain customer contracts, the Company previously agreed to provide a guarantee that the value of purchased hardware will not decline for a certain period of time, as more fully described above under Note 3 — Revenue, of the Notes to the unaudited condensed consolidated financial statements in this report. The Company accounts for such contractual terms and guarantees as variable consideration at each measurement date. The Company updates its estimate of variable consideration, including changes in estimates related to such guarantees, each quarter for facts or circumstances that have changed from the time of the initial estimate. As a result, the Company recorded a revenue reduction of $37.4 million in hardware revenue during the three and nine months ended September 30, 2023. Specifically, $16.9 million of the overall reduction in revenue is related to deliveries that occurred during the fourth quarter of 2022, $15.8 million is related to hardware deliveries that occurred during the second quarter of 2023, and variable consideration relating to current quarter hardware deliveries was constrained by $4.7 million.
The Company does not intend to provide such parent company guarantees in customer contracts going forward. Because these contractual terms and guarantees had not previously resulted in a revenue reduction in prior periods, and because the Company does not intend to provide such parent company guarantees in customer contracts going forward, the Company believes that excluding the impact of the $37.4 million reduction in revenue enhances the comparability to the Company’s adjusted EBITDA and non-GAAP gross profit in prior periods.
Non-GAAP Financial Measures
In addition to financial results determined in accordance with U.S. generally accepted accounting principles or GAAP(“GAAP”), we use Adjustedadjusted 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 marginprofit as gross marginprofit excluding both amortization of capitalized software, and impairments related to decommissioning of end-of-life systems.systems and reduction in revenue, and including revenue constraint. We define non-GAAP gross margin as non-GAAP gross profit as a percentage of 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 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 forecasted inputs of 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 September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | $ | 99.5 | | | $ | 39.8 | | | $ | 207.5 | | | $ | 74.6 | |
Cost of revenue | (90.4) | | | (36.7) | | | (187.0) | | | (71.7) | |
GAAP gross margin | 9.1 | | | 3.1 | | | 20.5 | | | 2.9 | |
GAAP gross margin (%) | 9 | % | | 8 | % | | 10 | % | | 4 | % |
| | | | | | | |
Adjustments to Gross Margin (1): | | | | | | | |
Amortization of capitalized software & developed technology | 2.9 | | | 1.4 | | | 7.6 | | | 3.8 | |
Impairments | 0.4 | | | 0.7 | | | 2.2 | | | 2.0 | |
| | | | | | | |
Non-GAAP gross margin | $ | 12.4 | | | $ | 5.2 | | | $ | 30.3 | | | $ | 8.7 | |
Non-GAAP gross margin (%) | 13 | % | | 13 | % | | 15 | % | | 12 | % |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenue | $ | 133.7 | | | $ | 99.5 | | | $ | 294.1 | | | $ | 207.5 | |
Cost of revenue | (154.0) | | | (90.4) | | | (301.5) | | | (187.0) | |
GAAP gross (loss) profit | (20.3) | | | 9.1 | | | (7.4) | | | 20.5 | |
GAAP gross margin (%) | (15) | % | | 9 | % | | (3) | % | | 10 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Non-GAAP Gross Profit | | | | | | | |
GAAP Revenue | $ | 133.7 | | | $ | 99.5 | | | $ | 294.1 | | | $ | 207.5 | |
Add: Revenue constraint (1) | — | | | — | | | 10.2 | | | — | |
Add: Revenue reduction (2) | 37.4 | | | — | | | 37.4 | | | — | |
Subtotal | 171.1 | | | 99.5 | | | 341.7 | | | 207.5 | |
Less: Cost of revenue | (154.0) | | | (90.4) | | | (301.5) | | | (187.0) | |
Add: Amortization of capitalized software & developed technology | 3.5 | | | 2.9 | | | 9.8 | | | 7.6 | |
Add: Impairments | 0.8 | | | 0.4 | | | 2.9 | | | 2.2 | |
Non-GAAP gross profit | $ | 21.4 | | | $ | 12.4 | | | $ | 52.9 | | | $ | 30.3 | |
Non-GAAP gross margin (%) | 12 | % | | 13 | % | | 15 | % | | 15 | % |
| | | | | | | |
(1) Historically, management included a separate “Other Adjustments” captionRefer to the discussion of revenue constraint in the table above as part of the adjustments to 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 MarginProfit and Non-GAAP Gross Margin %. TheMargin” above.
(2) Refer to the discussion of reduction in revenue in “— Parent Company believes that this change reflects a more accurate representation of our business for stakeholders to assess its performance.Guarantees” above.
Adjusted EBITDA
We calculate Adjustedadjusted EBITDA as net 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, reduction in revenue, change in fair value of warrantsderivative 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 Adjustedadjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude when calculating Adjusted EBITDAadjusted EBITDA.
The following table provides a reconciliation of Adjustedadjusted EBITDA to net loss:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| | (in thousands) | | (in thousands) | | (in thousands) | | (in thousands) |
Net (loss) income attributable to Stem | $ | (34,279) | | $ | 115,612 | | $ | (88,781) | | $ | (67,157) | |
Net loss attributable to Stem | | Net loss attributable to Stem | $ | (77,072) | | $ | (34,279) | | $ | (102,728) | | $ | (88,781) |
Adjusted to exclude the following: | Adjusted to exclude the following: | | | | | | | | Adjusted to exclude the following: | | | | | | | |
Depreciation and amortization (1) | Depreciation and amortization (1) | 11,547 | | | 6,003 | | | 33,353 | | | 17,558 | | Depreciation and amortization (1) | 11,531 | | | 11,547 | | | 36,098 | | | 33,353 | |
Interest expense | 2,520 | | | 2,674 | | | 8,429 | | | 12,835 | | |
Loss on extinguishment of debt | — | | | — | | | — | | | 5,064 | | |
Interest expense, net | | Interest expense, net | 4,405 | | | 2,520 | | | 10,085 | | | 8,429 | |
Gain on extinguishment of debt, net | | Gain on extinguishment of debt, net | — | | | — | | | (59,121) | | | — | |
Stock-based compensation | Stock-based compensation | 7,678 | | | 6,199 | | | 20,410 | | | 7,983 | | Stock-based compensation | 11,198 | | | 7,678 | | | 28,320 | | | 20,410 | |
Vesting of warrants | — | | | — | | | — | | | 9,183 | | |
Change in fair value of warrants and embedded derivative | — | | | (137,001) | | | — | | | (3,424) | | |
Revenue constraint (2) | | Revenue constraint (2) | — | | | — | | | 10,200 | | | — | |
| Revenue reduction (3) | | Revenue reduction (3) | 37,377 | | | — | | | 37,377 | | | — | |
Change in fair value of derivative liability | | Change in fair value of derivative liability | 5,155 | | | — | | | 7,731 | | | — | |
| 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 | — | | | — | | | (727) | | | — | | Litigation settlement | — | | | — | | | — | | | (727) | |
Income tax provision (benefit) | 19 | | | — | | | (15,201) | | | — | | |
(Benefit from) provision for income taxes | | (Benefit from) provision for income taxes | (46) | | | 19 | | | 354 | | | (15,201) | |
Other expenses (4) | | Other expenses (4) | 6,591 | | | — | | | 7,612 | | | — | |
Adjusted EBITDA | Adjusted EBITDA | $ | (12,515) | | | $ | (6,513) | | | $ | (36,449) | | | $ | (17,958) | | Adjusted EBITDA | $ | (861) | | | $ | (12,515) | | | $ | (24,072) | | | $ | (36,449) | |
(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 “— Non-GAAP Gross Profit and Margin” above.
(3) Refer to the discussion of reduction in revenue in “— Parent Company Guarantees” above.
(4) Adjusted EBITDA for the three and nine months ended September 30, 20212023 reflects adjustments to depreciation and amortizationother expenses of approximately $0.7$6.6 million and $1.9$7.6 million, respectively,respectively. For the three months ended September 30, 2023, other expenses includes $5.6 million in accruals for sales taxes, $0.5 million for impairments, $0.3 million for expenses related to restructuring costs, and $0.2 million of other non-recurring expenses. For the nine months ended September 30, 2023, other expenses include $5.6 million in accruals for sales taxes, $0.5 million for impairments, decommissioning$0.3 million of other non-recurring expense, and forfeited incentives that were not previously reflected in reported Adjusted EBITDA amounts.$1.2 million for expenses related to restructuring costs to pursue greater efficiency and to realign our business and strategic priorities. Restructuring expenses consisted of employee severance and other exit costs.
Financial Results and Key Metrics
The following table presents our financial results and our key metrics (in millions unless otherwise noted):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in millions) | | (in millions) |
Key Financial Metrics | | | | | | | |
Revenue | $ | 99.5 | | | $ | 39.8 | | | $ | 207.5 | | | $ | 74.6 | |
GAAP gross margin | $ | 9.1 | | | $ | 3.1 | | | $ | 20.5 | | | $ | 2.9 | |
GAAP gross margin (%) | 9 | % | | 8 | % | | 10 | % | | 4 | % |
Non-GAAP gross margin | $ | 12.4 | | | $ | 5.2 | | | $ | 30.3 | | | $ | 8.7 | |
Non-GAAP gross margin (%) | 13 | % | | 13 | % | | 15 | % | | 12 | % |
Net (loss) income attributable to Stem | $ | (34.3) | | | $ | 115.6 | | | $ | (88.8) | | | $ | (67.2) | |
Adjusted EBITDA | $ | (12.5) | | | $ | (6.5) | | | $ | (36.4) | | | $ | (18.0) | |
| | | | | | | |
Key Operating Metrics | | | | | | | |
12-Month pipeline (in billions)* (1) | $ | 7.2 | | $ | 2.4 | | $ | 7.2 | | $ | 2.4 |
Bookings (2) | $ | 222.9 | | $ | 103.7 | | $ | 599.4 | | $ | 148.8 |
Contracted backlog* (3) | $ | 817.2 | | $ | 312.0 | | $ | 817.2 | | $ | 312.0 |
Contracted storage AUM (in GWh)* (4) | 2.4 | | 1.4 | | 2.4 | | 1.4 |
Solar monitoring AUM (in GW)* (5) | 25.0 | | ** | | 25.0 | | ** |
CARR* (6) | $ | 61.4 | | ** | | $ | 61.4 | | ** |
* 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. During the three months ended September 30, 2022, Solar monitoring AUM declined approximately 7.1 GW as the result of actions taken by AlsoEnergy to migrate or terminate a legacy-acquired software application, primarily used in Europe, that was unprofitable. |
(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 September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | |
Key Financial Metrics | | | | | | | |
Revenue | $ | 133.7 | | | $ | 99.5 | | | $ | 294.1 | | | $ | 207.5 | |
GAAP gross (loss) profit | $ | (20.3) | | | $ | 9.1 | | | $ | (7.4) | | | $ | 20.5 | |
GAAP gross margin (%) | (15) | % | | 9 | % | | (3) | % | | 10 | % |
| | | | | | | |
| | | | | | | |
Non-GAAP gross profit | $ | 21.4 | | | $ | 12.4 | | | $ | 52.9 | | | $ | 30.3 | |
Non-GAAP gross margin (%) | 12 | % | | 13 | % | | 15 | % | | 15 | % |
Net loss attributable to Stem | $ | (77.1) | | | $ | (34.3) | | | $ | (102.7) | | | $ | (88.8) | |
Adjusted EBITDA | $ | (0.9) | | | $ | (12.5) | | | $ | (24.1) | | | $ | (36.4) | |
| | | | | | | |
Key Operating Metrics | | | | | | | |
| | | | | | | |
Bookings (1) | $ | 676.4 | | $ | 222.9 | | $ | 1,276.3 | | $ | 599.4 |
Contracted backlog* (2) | $ | 1,836.6 | | $ | 817.2 | | $ | 1,836.6 | | $ | 817.2 |
Contracted storage AUM (in GWh)* (3) | 5.0 | | 2.7 | | 5.0 | | 2.7 |
Solar monitoring AUM (in GW)* (4) | 26.3 | | 25.0 | | 26.3 | | 25.0 |
CARR* (5) | $ | 87.5 | | 61.4 | | $ | 87.5 | | 61.4 |
* 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 September 30, 2022 has been adjusted from 2.4 GWh, as previously disclosed, to 2.7 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, 20212022.
The following discussion and analysis of our results of operations and our liquidity and capital resources includesinclude the results of operations for AlsoEnergy for the period from February 1, 2022 through September 30, 2022. For additional information, including pro forma results of operations for the three and nine months ended September 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 services and other revenue and hardware revenue. 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. In certain customer contracts, the Company previously agreed to provide a guarantee that the value of purchased hardware will not decline for a certain period of time, as more fully described above under Note 3 — Revenue, of the Notes to the unaudited condensed consolidated financial statements in this report. We separately generate services and other 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, 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 services and other 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(Loss) Profit
Our gross margin(loss) 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 marginprofit 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) Income, Net
Interest Expense, Net
Interest Expense
Interest expense, net consists primarily of interest on our outstanding borrowings under our outstanding notes payable, convertible promissorysenior notes, and financing obligations and accretion on our asset retirement obligations.
LossGain on Extinguishment of Debt, Net
LossGain on extinguishment of debt consists of penalties incurredincome 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 DerivativesDerivative Liability
Change in fair value of warrants and embedded derivativesderivative liability is related to the revaluation of our outstanding convertible preferred stock warrant liabilities and embedded derivatives relatedderivative feature within a revenue contract, whereby final settlement is indexed to the redemption features associated with our convertible notes at each reporting date.price per ton of lithium carbonate.
Other 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 September 30, 20222023 and 20212022
| | | Three Months Ended September 30, | | $ Change | | % Change | | Three Months Ended September 30, | | $ Change | | % Change |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| | (In thousands, except percentages) | | (in thousands, except percentages) |
Revenue | Revenue | | Revenue | | | | |
Services and other revenue | Services and other revenue | $ | 13,692 | | $ | 4,947 | | $ | 8,745 | | 177% | Services and other revenue | $ | 16,597 | | $ | 13,692 | | $ | 2,905 | | 21% |
Hardware revenue | Hardware revenue | 85,809 | | 34,886 | | 50,923 | | 146% | Hardware revenue | 117,143 | | 85,809 | | 31,334 | | 37% |
Total revenue | Total revenue | 99,501 | | 39,833 | | 59,668 | | 150% | Total revenue | 133,740 | | 99,501 | | 34,239 | | 34% |
Cost of revenue | Cost of revenue | | Cost of revenue | |
Cost of services and other revenue | Cost of services and other revenue | 11,445 | | 6,639 | | 4,806 | | 72% | Cost of services and other revenue | 13,684 | | 11,445 | | 2,239 | | 20% |
Cost of hardware revenue | Cost of hardware revenue | 78,929 | | 30,057 | | 48,872 | | 163% | Cost of hardware revenue | 140,347 | | 78,929 | | 61,418 | | 78% |
Total cost of revenue | Total cost of revenue | 90,374 | | 36,696 | | 53,678 | | 146% | Total cost of revenue | 154,031 | | 90,374 | | 63,657 | | 70% |
Gross margin | 9,127 | | | 3,137 | | | 5,990 | | | 191% | |
Gross (loss) profit | | Gross (loss) profit | (20,291) | | | 9,127 | | | (29,418) | | | (322)% |
Operating expenses: | Operating expenses: | | | | | Operating expenses: | | | | |
Sales and marketing | Sales and marketing | 13,187 | | | 4,975 | | | 8,212 | | | 165% | Sales and marketing | 11,605 | | | 13,187 | | | (1,582) | | | (12)% |
Research and development | Research and development | 10,526 | | | 6,268 | | | 4,258 | | | 68% | Research and development | 14,420 | | | 10,526 | | | 3,894 | | | 37% |
General and administrative | General and administrative | 18,013 | | | 11,024 | | | 6,989 | | | 63% | General and administrative | 21,955 | | | 18,013 | | | 3,942 | | | 22% |
Total operating expenses | Total operating expenses | 41,726 | | | 22,267 | | | 19,459 | | | 87% | Total operating expenses | 47,980 | | | 41,726 | | | 6,254 | | | 15% |
Loss from operations | Loss from operations | (32,599) | | | (19,130) | | | (13,469) | | | 70% | Loss from operations | (68,271) | | | (32,599) | | | (35,672) | | | 109% |
Other (expense) income, net: | | |
Interest expense | (2,520) | | | (2,674) | | | 154 | | | (6)% | |
Other expense, net: | | Other expense, net: | |
Interest expense, net | | Interest expense, net | (4,405) | | | (2,520) | | | (1,885) | | | 75% |
| Change in fair value of warrants and embedded derivatives | — | | | 137,001 | | | (137,001) | | | (100)% | |
Change in fair value of derivative liability | | Change in fair value of derivative liability | (5,155) | | | — | | | (5,155) | | | * |
Other income, net | Other income, net | 863 | | | 415 | | | 448 | | | 108% | Other income, net | 713 | | | 863 | | | (150) | | | (17)% |
Total other (expense) income, net | (1,657) | | | 134,742 | | | (136,399) | | | (101)% | |
(Loss) income before (provision for) benefit from income taxes | (34,256) | | | 115,612 | | | (149,868) | | | (130)% | |
Provision for income taxes | (19) | | | — | | | (19) | | | 100% | |
Net (loss) income | $ | (34,275) | | | $ | 115,612 | | | $ | (149,887) | | | (130)% | |
Total other expense, net | | Total other expense, net | (8,847) | | | (1,657) | | | (7,190) | | | 434% |
Loss before benefit from (provision for) income taxes | | Loss before benefit from (provision for) income taxes | (77,118) | | | (34,256) | | | (42,862) | | | 125% |
Benefit from (provision for) income taxes | | Benefit from (provision for) income taxes | 46 | | | (19) | | | 65 | | | * |
Net loss | | Net loss | (77,072) | | | (34,275) | | | (42,797) | | | 125% |
Net income attributed to non-controlling interests | Net income attributed to non-controlling interests | 4 | | | — | | | 4 | | | 100% | Net income attributed to non-controlling interests | — | | | 4 | | | (4) | | | (100)% |
Net (loss) income attributable to Stem | $ | (34,279) | | | $ | 115,612 | | | $ | (149,891) | | | (130)% | |
Net loss attributable to Stem | | Net loss attributable to Stem | $ | (77,072) | | | $ | (34,279) | | | $ | (42,793) | | | 125% |
*Percentage is not meaningful
Revenue
Revenue increased by $59.7$34.2 million, or 150%34%, for the three months ended September 30, 2022,2023, as compared to the three months ended September 30, 2021.2022. The increase was primarily driven by a $50.9$31.3 million increase in hardware revenue primarily due to an increase in demand for systems related to both FTM and BTM partnership agreements. Services and other revenue also increased by $8.7$2.9 million primarily due to the inclusion of AlsoEnergy’s revenuean increase in the current period.solar services subscriptions from existing and new customers.
Cost of Revenue
Cost of revenue increased by $53.7$63.7 million, or 146%70%, for the three months ended September 30, 2022,2023, as compared to the three months ended September 30, 2021.2022. The increase was primarily driven by an increase in cost of hardware revenue of $48.9$61.4 million which is in line withdue to the increase in demand for systems, as well as an increase of $4.8 million in costsystems. Cost of services and other revenue also increased by $2.2 million, primarily relateddue to AlsoEnergy.solar cloud service costs and amortization of internally developed software costs.
Operating Expenses
Sales and Marketing
Sales and marketing expense increaseddecreased by $8.2$1.6 million, or 165%12%, for the three months ended September 30, 2022,2023, as compared to the three months ended September 30, 2021.2022. The increasedecrease was primarily due to an increasea decrease of $3.7$0.8 million in personnel related expenses primarily asand a resultdecrease of higher headcount, an increase of $3.5$0.8 million in amortization expense related to intangible assets from the acquisition of AlsoEnergy, an increase of $0.5 million in office related expenses,professional services and an increase of $0.5 million in amortization of contract origination costs.office-related expenses.
Research and Development
Research and development expense increased by $4.3$3.9 million, or 68%37%, for the three months ended September 30, 2022,2023, as compared to the three months ended September 30, 2021.2022. The increase was primarily due to an increase of $3.2$2.4 million in personnel related expenses as a result of higher headcount including AlsoEnergy employees, and an increase of $1.1$1.5 million in professional services and other costs.expenses.
General and Administrative
General and administrative expense increased by $7.0$3.9 million, or 63%22%, for the three months ended September 30, 2022,2023, as compared to the three months ended September 30, 2021.2022. The increase was primarily driven by an increase of $3.2$5.6 million in business taxes related to state sales tax liabilities and an increase of $0.5 million in personnel costs driven by additional headcount, an increasestock-based compensation expense, partially offset by a decrease of $2.4$2.2 million in insurance and office related costs, and a $1.4 million increase related to bad debt reserves.office-related costs.
Other Income (Expense), Net
Interest Expense, Net
Interest expense decreasedincreased by $0.2$1.9 million, or 6%75%, for the three months ended September 30, 2022,2023, as compared to the three months ended September 30, 2021 due to2022. The increase was primarily driven by an increase in interest on convertible notes of $2.4 million, partially offset by the accretion of the discount on short-term investments of $0.2 million, a reductiondecrease of $0.2 million in interest on financing obligations.obligations, and a decrease of $0.1 million in other interest expense.
Change in Fair Value of Warrants and Embedded Derivative Liability
The change in fair value of warrants and embeddedUnrealized losses relating to our derivative reflected no activity inliability increased by $5.2 million for the three months ended September 30, 2022 (as no warrants and embedded derivatives were outstanding),2023, as compared to income of $137.0 million in the three months ended September 30, 2021. The $137.0 million income2022 due to the decrease in the three months ended September 30, 2021 resulted from a revaluation gainprice per ton of warrants and embedded derivatives.lithium carbonate.
Other Income, Net
Other income, net increaseddecreased by $0.4$0.2 million, or 108%,17% for the three months ended September 30, 20222023, as compared to the three months ended September 30, 2021,2022 primarily due to an increasea decrease of $0.3 million in accrued interest income from investments, partially offset by and a $0.1 million increase in income from equity investments.
Benefit from (Provision for) Income Tax ExpenseTaxes
During the three months ended September 30, 20222023, we recorded a benefit fromtax expense income taxes of $19 thousand compared to no income tax provision during$46 thousand. During the three months ended September 30, 2021.2022, we recorded a $19 thousand provision for income taxes.
Results of Operations for the Nine Months Ended September 30, 20222023 and 20212022
| | | Nine Months Ended September 30, | | $ Change | | % Change | | Nine Months Ended September 30, | | $ Change | | % Change |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| | (In thousands, except percentages) | | (in thousands, except percentages) |
Revenue | Revenue | | Revenue | | | | |
Services and other revenue | Services and other revenue | $ | 36,178 | | $ | 14,982 | | $ | 21,196 | | 141% | Services and other revenue | $ | 47,630 | | $ | 36,178 | | $ | 11,452 | | 32% |
Hardware revenue | Hardware revenue | 171,358 | | 59,609 | | 111,749 | | 187% | Hardware revenue | 246,461 | | 171,358 | | 75,103 | | 44% |
Total revenue | Total revenue | 207,536 | | 74,591 | | 132,945 | | 178% | Total revenue | 294,091 | | 207,536 | | 86,555 | | 42% |
Cost of revenue | Cost of revenue | | Cost of revenue | |
Cost of services and other revenue | Cost of services and other revenue | 30,219 | | 19,354 | | 10,865 | | 56% | Cost of services and other revenue | 36,944 | | 30,219 | | 6,725 | | 22% |
Cost of hardware revenue | Cost of hardware revenue | 156,758 | | 52,343 | | 104,415 | | 199% | Cost of hardware revenue | 264,573 | | 156,758 | | 107,815 | | 69% |
Total cost of revenue | Total cost of revenue | 186,977 | | 71,697 | | 115,280 | | 161% | Total cost of revenue | 301,517 | | 186,977 | | 114,540 | | 61% |
Gross margin | 20,559 | | | 2,894 | | | 17,665 | | | 610% | |
Gross (loss) profit | | Gross (loss) profit | (7,426) | | | 20,559 | | | (27,985) | | | (136)% |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Sales and marketing | Sales and marketing | 35,284 | | | 11,555 | | | 23,729 | | | 205% | Sales and marketing | 37,691 | | | 35,284 | | | 2,407 | | | 7% |
Research and development | Research and development | 28,432 | | | 15,502 | | | 12,930 | | | 83% | Research and development | 42,020 | | | 28,432 | | | 13,588 | | | 48% |
General and administrative | General and administrative | 54,218 | | | 28,730 | | | 25,488 | | | 89% | General and administrative | 58,656 | | | 54,218 | | | 4,438 | | | 8% |
Total operating expenses | Total operating expenses | 117,934 | | | 55,787 | | | 62,147 | | | 111% | Total operating expenses | 138,367 | | | 117,934 | | | 20,433 | | | 17% |
Loss from operations | Loss from operations | (97,375) | | | (52,893) | | | (44,482) | | | 84% | Loss from operations | (145,793) | | | (97,375) | | | (48,418) | | | 50% |
Other expense, net: | | |
Interest expense | (8,429) | | | (12,835) | | | 4,406 | | | (34)% | |
Loss on extinguishment of debt | — | | | (5,064) | | | 5,064 | | | (100)% | |
Change in fair value of warrants and embedded derivatives | — | | | 3,424 | | | (3,424) | | | (100)% | |
Other income (expense), net: | | Other income (expense), net: | |
Interest expense, net | | Interest expense, net | (10,085) | | | (8,429) | | | (1,656) | | | 20% |
Gain on extinguishment of debt, net | | Gain on extinguishment of debt, net | 59,121 | | | — | | | 59,121 | | | * |
Change in fair value of derivative liability | | Change in fair value of derivative liability | (7,731) | | | — | | | (7,731) | | | * |
Other income, net | Other income, net | 1,822 | | | 211 | | | 1,611 | | | 764% | Other income, net | 2,114 | | | 1,822 | | | 292 | | | 16% |
Total other expense, net | (6,607) | | | (14,264) | | | 7,657 | | | (54)% | |
(Loss) income before (provision for) benefit from income taxes | (103,982) | | | (67,157) | | | (36,825) | | | 55% | |
Benefit from income taxes | 15,201 | | | — | | | 15,201 | | | 100% | |
Total other income (expense), net | | Total other income (expense), net | 43,419 | | | (6,607) | | | 50,026 | | | * |
Loss before (provision for) benefit from income taxes | | Loss before (provision for) benefit from income taxes | (102,374) | | | (103,982) | | | 1,608 | | | (2)% |
(Provision for) benefit from income taxes | | (Provision for) benefit from income taxes | (354) | | | 15,201 | | | (15,555) | | | (102)% |
Net loss | Net loss | $ | (88,781) | | | $ | (67,157) | | | $ | (21,624) | | | 32% | Net loss | $ | (102,728) | | $ | (88,781) | | $ | (13,947) | | | 16% |
Net loss attributed to non-controlling interests | — | | | — | | | — | | | —% | |
Net loss attributable to Stem | $ | (88,781) | | $ | (67,157) | | $ | (21,624) | | | 32% | |
|
*Percentage is not meaningful
Revenue
Revenue increased by $132.9$86.6 million, or 178%42%, for the nine months ended September 30, 2022,2023, as compared to the nine months ended September 30, 2021.2022. The increase was primarily driven by a $111.7$75.1 million increase in hardware revenue primarily due to an increase in demand for systems related to both FTM and BTM partnership agreements. Services and other revenue also increased by $21.2$11.5 million primarily due to the inclusion of AlsoEnergy’san increase in solar subscription services revenue in the current period.from existing and new customers.
Cost of Revenue
Cost of revenue increased by $115.3114.5 million, or 161%61%, for the nine months ended September 30, 2022,2023, as compared to the nine months ended September 30, 2021.2022. The increase was primarily driven by an increase in cost of hardware revenue of $104.4$107.8 million which is due to the increase in demand for systems, as well as an increase of $10.9 million in coststorage systems. Cost of services and other revenue also increased by $6.7 million primarily relateddue to AlsoEnergy.an increase in solar cloud service costs and amortization of internally developed software costs.
Operating Expenses
Sales and Marketing
Sales and marketing expense increased by $23.72.4 million, or 205%7%, for the nine months ended September 30, 2022,2023, as compared to the nine months ended September 30, 2021.2022. The increase was primarily due to an increase of $9.4$2.8 million in
personnel related expenses as a result of higher headcount, inclusivepartially offset by a decrease of $2.1$0.4 million in stock-based compensation expense primarily due to new employee grants, an increase of $9.3 million in amortization expense related to intangible assets from the acquisition of AlsoEnergy, an increase of $2.9 million amortization of contract origination costs, professional services and $2.1 million of additional office-related expenses.
Research and Development
Research and development expense increased by $12.913.6 million, or 83%48%, for the nine months ended September 30, 2022,2023, as compared to the nine months ended September 30, 2021.2022. The increase was primarily due to an increase of $10.19.7 million in personnel related expenses as a result of higher headcount and an increase of $2.8$3.9 million in professional services and other expenses.
General and Administrative
General and administrative expense increased by $25.54.4 million, or 89%8%, for the nine months ended September 30, 20222023, as compared to the nine months ended September 30, 2021.2022. The increase was primarily driven by an increase of $16.6$5.6 million in business taxes related to state sales tax liabilities, an increase of $4.4 million in personnel related expenses as a result of higher headcount, inclusive of an $8.2 million increase in stock-based compensation expense due to new employee grants, as well asand an increase of $8.9$0.6 million in insurance, legal, office,additional office-related expenses, partially offset by a decrease of $6.2 million in professional services and other expenses.
Other Income (Expense),Expense, Net
Interest Expense, Net
Interest expense decreasedincreased by $4.41.7 million, or 34%20%, for the nine months ended September 30, 2022 compared to the nine months ended September 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 $3.2 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 nine months ended September 30, 2022,2023, as compared to the nine months ended September 30, 2021.2022. The increase was primarily driven by an increase of $4.8 million in interest on our convertible notes, partially offset by the accretion of the discount on short-term investments of $2.2 million, a decrease wasof $0.8 million in interest on financing obligations, and a decrease in other interest expense of $0.1 million.
Gain on Extinguishment of Debt, Net
During the nine months ended September 30, 2023, we recorded a $59.4 million gain on extinguishment of debt driven by a prior year$99.8 million payment of a $4.0to extinguish approximately $163.0 million penalty on debt extinguishment and the write-off of $1.1 million of unamortized debt issuance costs upon the conversionaggregate principal amount of our Series D convertible notes in relation to the Merger.
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.
Change in Fair Value of Warrants and Embedded Derivative Liability
The change in fair value of warrants and embedded derivatives reflected no activity in the nine months ended September 30, 2022 (as no warrants and embedded derivatives were outstanding), as comparedUnrealized losses relating to income of $3.4 million in the nine months ended September 30, 2021, which resulted from a revaluation gain of warrants and embedded derivatives.
Other Income, Net
Other income (expenses), netour derivative liability increased by $1.67.7 million, or 764%, for the nine months ended September 30, 2022,2023, as compared to the nine months ended September 30, 20212022 due to the decrease in the price per ton of lithium carbonate.
Other Income, Net
Other income, net increased by $0.3 million, or 16%, for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022 primarily asdue to a result of an$1.1 million increase in accrued interest income from short-term investments, a $0.6 million increase due to the reversal of previously recognized accretion expense on assets, and a $0.2 million increase in income from equity investments, partially offset by a $1.6 million realized loss on short-term investments.
(Provision for) Benefit from Income Tax BenefitTaxes
During the nine months ended September 30, 20222023, we recorded $15.2a 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 partially offset by a partial release of our deferred tax asset valuation due to an acquisition during the first quarter of 2023. During the nine months ended September 30, 2022, we recorded a $15.2 millionbenefit from income taxes as a result of the partial release of our deferred tax asset valuation due to the acquisition of AlsoEnergy. The Company did not record a provision or benefit for income taxes during the nine months ended September 30, 2021.
Liquidity and Capital Resources
Sources of 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 September 30, 2022,2023, our principal source of liquidity were cash, cash equivalents, and short-term investments of $293.5$125.4 million, which were held for working capital purposes and for investment growth opportunities. Our marketable
securities generally consist of high-grade commercial paper, agency bonds, corporate debt securities, U.S. government agency securities, and 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, weoperations, which may not be able to raise itavailable 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 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”SPEs”) 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 SPESPEs 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 September 30, 20222023 was $82.3$71.7 million, of which $17.0$17.4 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 ownowned and operate.operated. The credit agreement hashad 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 thisthe 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 September 30, 2022, there were $1.8 millionthe 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 20282030 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 transactionsCapped 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 proceeds2030 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):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Net cash used in operating activities | $ | (68,634) | | | $ | (69,020) | |
Net cash used in investing activities | (571,925) | | | (182,057) | |
Net cash (used in) provided by financing activities | (6,819) | | | 648,819 | |
Effect of exchange rate changes on cash and cash equivalents | (304) | | | 505 | |
Net (decrease) increase in cash and cash equivalents | $ | (647,682) | | | $ | 398,247 | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Net cash used in operating activities | $ | (205,248) | | | $ | (68,634) | |
Net cash provided by (used in) investing activities | 120,256 | | | (571,925) | |
Net cash provided by (used in) financing activities | 95,139 | | | (6,819) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 114 | | | (304) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 10,261 | | | $ | (647,682) | |
Operating Activities
During the nine months ended September 30, 2023, net cash used in operating activities was $205.2 million, primarily resulting from our net loss of $102.7 million, adjusted for non-cash items of $17.9 million and net cash outflow of $120.3 million from changes in operating assets and liabilities. Non-cash items primarily consisted of depreciation and amortization of $33.6 million, non-cash interest expense of $2.0 million related to debt issuance costs, stock-based compensation expense of $28.3 million, change in fair value of derivative liability of $7.7 million, non-cash lease expense of $2.2 million, impairment of energy storage systems of $2.3 million, provision for accounts receivable allowance of $1.8 million and net recognized loss on investments of $1.6 million, partially offset by a net gain on debt extinguishment, of $59.1 million, net accretion of the discount on investments of $1.7 million, and income tax benefit of $0.3 million, and other non-cash items of $0.5 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in accounts receivable of $67.0 million as a result of increases in sales, an increase in inventory of $57.3 million to fulfill future deliveries, an increase in other assets of $17.9 million, an increase in contract origination costs of $4.2 million, an increase in project assets of $2.8 million, a decrease in accrued expenses and other liabilities of $28.9 million, and a decrease in lease liabilities of $2.1 million, partially offset by a decrease in deferred costs with suppliers of $30.6 million, an increase in accounts payable of $1.8 million, and an increase in deferred revenue of $27.6 million.
During the nine months ended September 30, 2022, net cash used in operating activities was $68.6 million, primarily resulting from our net loss of $88.8 million, adjusted forby non-cash charges of $43.6 million and net cash outflow of $23.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of $32.1 million, non-cash interest expense of $1.5 million, related to debt issuance costs, stock-based compensation expense of $20.4 million, noncash lease expense of $1.7 million, impairment of energy storage systems of $1.3 million, non-cash lease expense of $1.7 million, provision for
accounts receivable allowance of $1.9 million, and net amortization of the premium on investments of $0.3 million and other non-cash items of $0.1 million, partially offset by an income tax benefit of $15.1 million and gain on sale of project assets of $0.6 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in accounts receivable of $75.4 million due to increases in sales, an increase in inventoryother assets of $2.2$25.2 million, an increase in deferred costs with suppliers of $47.8 million for future hardware orders, an increase in other assetsinventory of $25.2$2.2 million, an increase in contract origination costs of $4.8 million, and a decrease in lease liabilities of $1.1 million, partially offset by an increase in accounts payable of $63.2 million due to timing of payments, an increase in accrued expenses and other liabilities of $38.3 million, and an increase in deferred revenue of $31.6 million.
Investing Activities
During the nine months ended September 30, 2021,2023, net cash used in operatingprovided by investing activities was $69.0$120.3 million, primarily resultingconsisting of $135.5 million in proceeds from our net losssales of $67.2available-for-sale investments, partially offset by $1.8 million adjusted by non-cash chargesused for acquisitions, net of $40.4cash acquired, $2.9 million and net cash outflow of $42.2 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of $15.6 million, non-cash interest expense of $8.1 million, which includes interest expenses associated with debt issuance costs, stock-based compensation expense of $8.0 million, impairmentpurchases of energy storage systems, $10.1 million in capital expenditures on internally-developed software, and $0.4 million in purchases of $2.2 million, issuance of warrants for services of $9.2 million, noncash lease expense of $0.3 million,property and net amortization of premium on investments of $0.3 million, offset by a change in the fair value of warrant liability and embedded derivative of $3.4 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in accounts receivable of $21.4 million, an increase in other assets of $13.9 million, an increase in deferred costs with suppliers of $4.2 million, a decrease in deferred revenue of $3.5 million, an increase in inventory of $3.4 million, an increase in contract origination costs of
$1.9 million, and a decrease in lease liabilities of $0.3 million, partially offset by an increase in accounts payable of $2.9 million and accrued expenses and other liabilities of $3.3 million.
Investing Activitiesequipment.
During the nine months ended September 30, 2022, net cash used forin investing activities was $571.9 million, primarily consisting of $533.0 million used for our acquisition of AlsoEnergy, net of cash acquired, $22.5 million in net purchases of available-for-sale investments, $0.5 million in purchases of energy systems, $12.7 million in capital expenditures on internally-developed software, $3.0 million in capital expenditures on project assets, and $1.5 million in purchases of property plant and equipment, partially offset by proceeds from the sale of project assets of $1.3 million.
Financing Activities
During the nine months ended September 30, 2021,2023, net cash used for investingprovided by financing activities was $182.1$95.1 million, primarily consisting of $171.1net proceeds from the issuance of convertible notes of $132.6 million in purchasesand proceeds from the exercise of available-for-sale investments, $6.2stock options of $0.3 million, in purchasespartially offset by the purchase of energy systems, $4.3capped calls of $27.8 million, in capital expenditures on internally-developed software,the repayment of financing obligations of $7.8 million, the repayment of notes payable of $2.1 million, and $0.5 million in purchasesa redemption of property and equipment.
Financing Activitiesnon-controlling interests of $0.1 million.
During the nine months ended September 30, 2022, net cash used in financing activities was $6.8 million, primarily consisting of the repayment of financing obligations of $7.6 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 $1.2 million, proceeds from other financing transactionsobligations of $1.5 million, and an investmentinvestments from non-controlling interests of $0.4 million.
During the nine months ended September 30, 2021, net cash provided by financing activities was $648.8 million, primarily consisting of net proceeds from the Merger and PIPE financing of $550.3 million, proceeds from the exercise of stock options of $148.3 million, proceeds from financing obligations of $4.9 million, net proceeds from issuance of notes payable of $3.9 million, and net proceeds from issuance of convertible notes of $1.1 million, partially offset by repayment of notes payable of $41.4 million, payments for taxes related to net share settlement of stock options of $12.6 million, and repayment of financing obligations of $5.7 million.
Contractual Obligations and Commitments
As of September 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, 20212022.
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 entitiesVIEs 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, 20212022.
Recent Accounting Pronouncements
Information with respectAs of September 30, 2023, there have been no material changes to the recent accounting pronouncements may be founddescribed in Note 2our —Annual Report on Form 10-K for the fiscal year ended December 31, 2022Summary 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,us, 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-15I13a-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 September 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 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 of revenue recognition calculations. We had multiple control deficiencies aggregating to a material weakness in internal control over financial reporting.
Remediation Activities
Our management, with oversight of the Audit Committee of our Board of Directors, 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 September 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 September 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, thereThere were no changes in our internal controls over financial reporting during the third 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 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.
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
ThereExcept as set forth below and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023, 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” of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022.
Our estimates of variable consideration related to revenue recognition in connection with guarantees that we have issued under certain customer contracts are difficult to estimate, and if our subsequent estimates differ significantly from initial estimates, we will be required to record an adjustment in a subsequent period.
Our estimates of variable consideration related to revenue recognition in connection with guarantees that we have issued under certain customer contracts are difficult to estimate, as they are based on some assumptions that may prove to be incorrect. For example, in certain customer contracts, the Company previously agreed to provide a guarantee that the value of hardware purchased by a customer will not decline for a certain period of time. Under these guarantees, if such customers were unable to install or designate the hardware to a specified project within such period of time, the Company would be required to assist the customer in re-marketing the hardware for resell by the customer. Such guarantees provide that, in such cases, if the customer resells the hardware for less than the amount initially sold to the customer, the Company will be required to compensate the customer for any shortfall in fair value for the hardware from the initial contract purchase price. The Company accounts for such guarantees as variable consideration at each measurement date. The Company updates its estimate of variable consideration, including changes in estimates related to such guarantees, each quarter for facts or circumstances that have changed from the time of the initial estimate. As a result of changes in its estimates, the Company recorded a reduction in revenue of $37.4 million during the three and nine months ended September 30, 2023. If our future estimates of variable consideration differ significantly from initial estimates, we would need to record an adjustment to earnings to reverse the revenue previously recognized.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.(c) Trading Plans. During the three months ended September 30, 2023, no Section 16 officer or director of the Company adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), or any non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K promulgated under the Exchange Act)
ITEM 6. EXHIBIT INDEXEXHIBITS
| | | | | | | | | | | | | | |
| | EXHIBIT INDEX |
| | | | |
Exhibit No. | | Description |
3.1 | | |
3.2 | | |
10.1* | | |
10.2* | | |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
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
**Furnished herewith
†† Information in this exhibit (indicated by brackets) has been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
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 November 3, 2022.2, 2023.
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| STEM, INC. |
| | |
| By: | /s/ William Bush | |
| | William Bush | |
| | Chief Financial Officer | |
| | (Principal Financial Officer) | |