STEM, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Stem provides energy storage hardware and software-enabled energy optimization services through its Athena platform. The April 28 business combination with Star Peak was accounted for as a reverse recapitalization; Stem received approximately $550.3 million net of transaction costs and fees.
Financial highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $19.3 million | $4.4 million | $34.8 million | $8.5 million |
| GAAP gross margin | $(0.1) million | $(1.7) million | $(0.2) million | $(3.1) million |
| Operating loss | $(23.9) million | $(12.0) million | $(33.8) million | $(24.2) million |
| Net loss | $(100.2) million | $(19.0) million | $(182.8) million | $(36.5) million |
| Adjusted EBITDA (non-GAAP) | $(8.6) million | $(7.5) million | $(12.7) million | $(17.1) million |
- Q2 revenue increased 342%; six-month revenue increased 309%. Growth was primarily from hardware sales under front-of-the-meter partnership arrangements. Q2 services revenue was $5.2 million and hardware revenue $14.2 million.
- Q2 GAAP gross margin was approximately negative 1% of revenue, compared with negative 40% a year earlier. Management-reported non-GAAP gross margin was $2.1 million, or 11%, versus $0.2 million, or 5%.
- Q2 net loss included a $67.2 million expense from changes in fair value of warrants and embedded derivatives, and a $5.1 million debt-extinguishment loss. These materially affected GAAP results; the warrant fair-value expense was noncash.
- Cash and cash equivalents were $474.1 million at June 30, 2021, compared with $6.9 million at December 31, 2020. Six-month operating cash use was $41.8 million; investing cash use was $8.6 million; financing provided $517.2 million. The financing inflow included the Merger and PIPE proceeds.
- Total assets were $698.3 million and stockholders’ equity was $208.8 million. Total liabilities were $489.6 million, including $303.8 million of warrant liabilities. Notes payable were $1.7 million; financing obligations totaled $89.8 million, of which $15.3 million was current. Convertible notes were converted in connection with the Merger, and most other pre-Merger debt was repaid.
- Net working capital was $452.5 million. Management said cash was expected to meet capital and liquidity needs for at least 12 months after the financial statements became available for issuance.
Changes, outlook, and risks
- Revenue growth was accompanied by higher costs of revenue, while GAAP gross margin remained negative. General and administrative expense rose substantially, including public-company and transaction-related costs; it also included approximately $9.2 million of warrants issued for services.
- Management expects sales and marketing, research and development, and general and administrative expenses to increase as the business expands and operates as a public company. The filing provides no specific revenue, profit, or cash-flow guidance.
- Management cited dependence on continued customer adoption, lithium-ion battery cost trends, renewable deployment, supplier availability, competition, and evolving electricity regulation. COVID-19 and Delta-variant disruptions could affect supply chains, installations, sales cycles, collections, and customer demand.
- The company has incurred losses and negative operating cash flow since inception. Management cautioned that failure to grow revenue, achieve planned margins and profitability, control costs, or obtain financing could require reduced or delayed expansion.
- Disclosure controls were deemed ineffective because of material weaknesses involving complex transactions, energy storage systems and inventory, financial-statement review, revenue recognition, capitalized software, and control formality. Management had begun remediation through training, hiring and developing accounting personnel, and formalizing policies; successful remediation is not assured.
- The company signed a San Francisco office lease with an approximately 7.7-year term and estimated total payments of $15.2 million. Management said pending litigation losses were considered remote and disclosed no material litigation contingency.
Important facts for investors to verify
- Whether rapid hardware-led revenue growth converts into sustained positive gross margins and improved operating cash flow.
- Cash burn, working-capital needs, the timing and repayment profile of financing obligations, and the cash required to fund owned energy storage systems.
- The impact of warrant accounting and potential share dilution; common shares outstanding were 130.8 million at June 30 and 131.0 million as of August 10, 2021.
- Progress in remediating the disclosed material weaknesses and whether future filings report effective controls.
- Execution and cancellation risk in partnership bookings: certain signed partnership contracts without binding purchase orders may be cancelled without penalty. The filing reported $249.7 million of contracted backlog and a $1.7 billion 12-month pipeline at quarter-end.