STEM, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. STEM provides battery storage hardware, AI-enabled energy optimization software and services, and solar asset monitoring through Athena and PowerTrack.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $133.7 million | $99.5 million | $294.1 million | $207.5 million |
| GAAP gross profit (loss) | ($20.3) million | $9.1 million | ($7.4) million | $20.6 million |
| GAAP gross margin | (15)% | 9% | (3)% | 10% |
| Net loss attributable to Stem | ($77.1) million | ($34.3) million | ($102.7) million | ($88.8) million |
| Adjusted EBITDA (non-GAAP) | ($0.9) million | ($12.5) million | ($24.1) million | ($36.4) million |
| Non-GAAP gross profit / margin | $21.4 million / 12% | $12.4 million / 13% | $52.9 million / 15% | $30.3 million / 15% |
Q3 revenue increased 34% year over year, primarily on higher hardware sales; nine-month revenue increased 42%. Hardware revenue was $117.1 million in Q3 and $246.5 million year to date. However, cost of revenue rose faster than sales, driving GAAP gross profit into loss. Q3 operating expenses were $48.0 million, up 15%; research and development and general and administrative costs increased, while sales and marketing declined.
Q3 net loss widened year over year. For the nine-month period, a $59.1 million net gain on extinguishment of debt partly offset operating losses; the company also recorded $7.7 million of derivative fair-value losses. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, revenue adjustments, stock compensation, and debt extinguishment gains.
Cash, liquidity and debt
- At September 30, 2023, cash and cash equivalents were $97.1 million, short-term investments were $28.3 million, and net working capital was $241.3 million. Cash, cash equivalents and restricted cash totaled $98.2 million.
- Operating cash flow was negative $205.2 million for the first nine months, versus negative $68.6 million a year earlier. Working-capital outflows included increases in accounts receivable of $67.0 million and inventory of $57.3 million.
- Cash provided by investing activities was $120.3 million, largely reflecting net investment-security sales. Financing activities provided $95.1 million, including convertible-note proceeds, partly offset by capped-call costs and repayments.
- Convertible notes had a $523.1 million net carrying value at quarter end: $297.0 million principal of 2028 notes and $240.0 million principal of 2030 notes, net of unamortized issuance costs. The company issued $240 million of 4.25% notes due 2030 and used about $99.8 million to retire approximately $163 million principal of 2028 notes. Financing obligations totaled $71.7 million.
- Management stated its cash position was sufficient to meet capital and liquidity requirements for at least the next 12 months.
Material changes, outlook and risks
- Revenue adjustment: The company recorded a $37.4 million hardware-revenue reduction in Q3 and year to date relating to prior customer hardware-value guarantees, including $4.7 million of constrained consideration for current-quarter deliveries. STEM says it does not intend to offer these guarantees in future contracts; further estimate changes could require additional revenue adjustments.
- Sales-tax accrual: STEM accrued $5.6 million for probable state sales-tax liabilities and related interest. This was included among Q3 unusual expenses.
- Operating metrics: Q3 bookings were $676.4 million, contracted backlog $1.84 billion, contracted storage under management 5.0 GWh, solar monitoring under management 26.3 GW, and contracted annual recurring revenue $87.5 million.
- Customer concentration: The filing reports one customer represented 89% of Q3 revenue and 41% of nine-month revenue. It also reports individual customers at 54%, 14%, and 10% of quarter-end receivables. The company cautions that losing or reducing business with a significant customer could materially affect results.
- Management outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management expects sales and marketing, research and development, and general and administrative costs to increase as the business scales. It identifies customer retention and growth, supplier availability, profitability, cost control, and access to financing as important to its plans.
- Other risks and contingencies: Risks include supply-chain and delivery delays, equipment and labor cost volatility, macroeconomic and geopolitical conditions, competition, regulatory changes, and execution and funding risks for development joint ventures. Management said material loss from pending legal proceedings was remote. Disclosure controls were assessed as effective at a reasonable assurance level.
Investor verification points
- Confirm the nature, customer, timing, and potential remaining exposure associated with the $37.4 million hardware-guarantee revenue reduction and lithium-indexed contract estimates.
- Investigate the reported 89% Q3 revenue concentration, including the customer’s contract terms, payment history, and expected future contribution.
- Assess whether operating cash burn and working-capital needs are consistent with management’s stated 12-month liquidity outlook.
- Review debt terms, conversion and potential dilution exposure, including the capped calls and the notes’ cash-versus-share settlement provisions.
- Track gross-margin recovery, sales-tax exposure, supplier delivery performance, and the conversion of bookings and backlog into recognized revenue and cash.