STEM, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. STEM provides battery energy-storage hardware and software-enabled services through its Athena platform. The April 28, 2021 merger with Star Peak was accounted for as a reverse recapitalization.
Financial performance
- Q3 revenue: $39.8 million, up 334% year over year. Hardware revenue was $34.9 million; services revenue was $4.9 million.
- Q3 gross margin: $3.1 million, or 8% of revenue, versus a $1.7 million loss and negative 19% margin a year earlier. Non-GAAP gross margin was $5.8 million, or 15%.
- Q3 earnings: GAAP net income was $115.6 million, but included a $137.0 million gain related to warrant revaluation and redemption. Diluted net loss per share was $0.15; basic net income per share was $0.85.
- Nine-month results: Revenue was $74.6 million, up 322%; gross margin was $2.9 million (4%), versus negative $4.9 million (negative 28%) in 2020. Net loss was $67.2 million versus $55.2 million; Adjusted EBITDA was negative $19.9 million versus negative $23.1 million.
- Operating costs: Q3 operating expenses rose 107% to $22.3 million, including general and administrative expense of $11.0 million, up 318%. Nine-month G&A included $9.2 million of expense for warrants issued for services.
- Cash flow: Nine-month operating cash use was $69.0 million, compared with $17.9 million in 2020; investing cash use was $182.1 million, including $171.1 million of short-term investment purchases. Financing provided $648.8 million.
Liquidity, debt, and balance sheet
- At September 30, 2021, cash and cash equivalents were $405.2 million and short-term investments were $170.8 million; net working capital was $573.3 million.
- The merger and PIPE generated $550.3 million net of transaction costs. Public warrant exercises provided approximately $145.3 million.
- Notes payable totaled $1.7 million; financing obligations totaled $89.7 million, of which $14.3 million was current. Convertible notes and most other debt were converted or repaid in connection with the merger.
- Management stated that available liquidity was sufficient for at least 12 months after the financial statements became available for issuance. The company reported a $475.0 million accumulated deficit and nine-month operating cash outflow of $69.0 million.
Changes, outlook, and risks
- Revenue growth was chiefly driven by higher hardware deliveries under front-of-meter and behind-the-meter partnership agreements; services revenue also grew. Hardware cost rose alongside sales, while margins improved from the prior-year periods.
- Q3 GAAP profitability is not representative of underlying operating performance: the warrant-related gain drove reported net income despite a $19.1 million operating loss. The filing reports no quantified forward revenue or earnings guidance.
- Management expects sales and marketing, research and development, and general and administrative expenses to increase as the company expands and bears public-company costs. It aims to improve gross margin through operating efficiency and scale.
- Management cited COVID-19 and Delta-related supply shortages and shipping delays affecting batteries, inverters, and other components. Suppliers had secured quantities expected to support deliveries through year-end 2021, but continued disruption into 2022 could delay installations and revenue. Tariffs, trade restrictions, logistics constraints, and supplier instability are additional risks.
- Remaining performance obligations were $207.2 million; $157.5 million related to services and $49.7 million to hardware. Management cautions that pipeline does not guarantee revenue or profitability. The reported 12-month pipeline was $2.4 billion, contracted backlog $312 million, and contracted AUM 1.4 GWh.
- Disclosure controls were deemed ineffective because of material weaknesses involving complex transactions, inventory and energy-storage-system accounting, revenue recognition, capitalized software, financial-statement review, and control formality. Remediation efforts were underway; management provided no assurance they would be sufficient.
- Management said pending legal matters were not expected to have a material adverse effect; it considered the probability of a material loss remote. A new San Francisco office lease began in September 2021 and runs through February 2029.
Important facts for investors to verify
- How much of reported earnings and per-share results reflects warrant accounting rather than recurring operations.
- Whether hardware-led growth converts into sustained gross-margin improvement, recurring service revenue, and lower cash burn.
- Whether supply constraints, tariffs, or shipping delays affect delivery schedules, installations, and conversion of backlog and pipeline into revenue.
- How management remediates the disclosed material weaknesses and whether controls are subsequently assessed as effective.
- How cash, short-term investments, and financing obligations evolve, and whether management’s stated 12-month liquidity assessment remains valid.