STEM

STEM, INC. 10-Q Summary: Period Ended June 30, 2026

Business Context and Reporting Period

STEM, INC. (STEM) is a global provider of software and services for the energy transition, focusing on solar, storage, and hybrid assets. The company operates as a single segment and is headquartered in Houston, Texas. This report covers the quarterly period ended June 30, 2026. The company is currently executing a strategic shift away from low-margin battery hardware resales toward higher-margin AI-enabled software and edge device solutions.

Key Financial Metrics

Note: Total Debt includes Convertible Notes ($184,007), Senior Secured Notes ($135,212), and Financing Obligations ($37,161).

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 12% year-over-year for both the three and six-month periods. This was driven primarily by a strategic reduction in battery hardware resales (down 22% for six months), partially offset by growth in edge hardware and software services.
• Operating Expenses: Operating expenses decreased 19% for the six months ended June 30, 2026, compared to the prior year. Research and Development expenses dropped 39% due to reduced headcount.
• Net Income Volatility: The prior year period (2025) included a non-recurring $220.0 million gain on the extinguishment of debt, resulting in net income of $177.5 million. The current period reflects a net loss of $33.3 million, excluding that one-time gain.
• Interest Expense: Interest expense increased 78% year-over-year for the six-month period due to the higher interest rates on the 2030 Senior Secured Notes issued in a debt exchange in June 2025.
• Asset Impairment: The company recorded a net impairment of $2.8 million on assets held for sale during the six months ended June 30, 2026.

Outlook, Risks, and Management Commentary

• Liquidity: Management believes cash reserves of $38.4 million are sufficient to meet requirements for at least the next 12 months. However, the company maintains a working capital deficit of $18.2 million and may require additional equity or debt financing if cash flow from operations does not improve.
• Strategic Transition: The company is actively de-emphasizing battery hardware resales to pursue higher-margin software and services. This transition has resulted in short-term revenue reductions and operational disruptions.
• Regulatory Impact: The "One Big Beautiful Bill Act" (OBBB) enacted in July 2025 introduced changes to clean energy tax credits (ITC), including phase-downs for storage systems and new domestic content requirements. Management states this has not yet had a material impact on financial statements but is monitoring future effects.
• Debt Structure: The company carries significant debt obligations, including 2030 Senior Secured Notes with interest rates of 11-12% (payable in cash or kind). The company elected to pay interest in kind ($4.6 million) in January 2026, increasing the principal balance.
• Contingencies: An ongoing sales and use tax examination by the state of California remains unresolved. The company has accrued a liability of approximately $5.6 million plus interest.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $38.4 million cash balance against the $18.2 million working capital deficit and high interest obligations.
• Debt Service: Confirm the ability to service the 2030 Senior Secured Notes, particularly the impact of interest paid in kind (PIK) on future principal repayment.
• Revenue Mix: Monitor the trajectory of software and services revenue growth to ensure it offsets the decline in hardware resales.
• Tax Liability: Track the resolution of the California sales tax examination and potential additional accruals.
• Asset Disposal: Review the timeline and proceeds for the sale of assets currently classified as "held for sale."