STEM, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. STEM provides energy storage hardware and software-enabled services, including its Athena platform and solar monitoring through PowerTrack. The February 1, 2022 acquisition of AlsoEnergy expanded its solar monitoring and control business; results include AlsoEnergy from the acquisition date.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $99.5 million | $39.8 million | $207.5 million | $74.6 million |
| GAAP gross margin | $9.1 million; 9% | $3.1 million; 8% | $20.6 million; 10% | $2.9 million; 4% |
| Operating loss | $32.6 million | $19.1 million | $97.4 million | $52.9 million |
| Net income (loss) attributable to Stem | $(34.3) million | $115.6 million | $(88.8) million | $(67.2) million |
| Adjusted EBITDA (non-GAAP) | $(12.5) million | $(6.5) million | $(36.4) million | $(18.0) million |
- Q3 revenue rose 150% year over year, driven mainly by higher hardware sales; services revenue also grew, partly reflecting AlsoEnergy. Nine-month revenue rose 178%.
- Revenue growth did not translate into operating profitability: operating expenses increased 87% in Q3 and 111% year to date. The prior-year Q3 net income included a $137.0 million gain from changes in the fair value of warrants and embedded derivatives; no such instruments were outstanding in 2022.
- Operating cash use was $68.6 million for the nine months, compared with $69.0 million in 2021. Investing cash use was $571.9 million, including $533.0 million for AlsoEnergy, net of cash acquired. Cash and cash equivalents fell to $100.1 million from $747.8 million at year-end 2021.
- At September 30, cash and short-term investments totaled $293.5 million; net working capital was $296.7 million. Management said liquidity was sufficient for at least 12 months from issuance of the filing.
- Debt included $460.0 million principal of 0.50% convertible notes due 2028, carried at $447.4 million, and $82.3 million of financing obligations, including $17.0 million current. The notes’ initial conversion price was approximately $29.24 per share.
- Contracted backlog was $817.2 million; remaining performance obligations were $365.8 million. The company reported a $7.2 billion 12-month pipeline, $222.9 million of Q3 bookings, 2.4 GWh of contracted storage AUM, 25.0 GW of solar monitoring AUM, and $61.4 million of CARR. Pipeline and bookings are company-defined measures and do not guarantee recognized revenue.
Material changes and outlook
- AlsoEnergy was acquired for approximately $652.0 million, including $543.1 million cash and $108.9 million in Stem shares. The acquisition added $545.0 million of goodwill and $152.1 million of acquired intangible assets. AlsoEnergy contributed $16.6 million of Q3 revenue and $40.3 million for the nine-month period.
- Hardware revenue increased with demand across front-of-meter and behind-the-meter partnership arrangements. The company also cited higher headcount and acquisition-related intangible amortization as drivers of increased operating expenses.
- No specific numerical revenue, earnings, or cash-flow guidance is provided in the supplied filing text. Management expected suppliers to have sufficient supply for deliveries and installations through the end of 2022, but warned that shortages and delays continuing into 2023 could postpone installations and revenue.
- Risks include dependence on a small number of equipment suppliers, component shortages, shipping delays, inflation and cost volatility, COVID-19 disruptions, the Russia-Ukraine conflict, customer concentration, competition, regulatory changes, and execution and integration risks. One customer represented 58% of Q3 revenue and 52% of nine-month revenue.
- DevCo joint ventures require upfront capital and hardware advances; delayed or unsuccessful projects could result in loss of some or all of that investment. The company recognized no material legal contingencies and said material loss on pending proceedings was considered remote.
- Disclosure controls were reported ineffective due to material weaknesses involving accounting for energy storage systems, inventory and deferred costs; financial-statement review; formal control activities; and review of revenue-recognition calculations. Remediation was underway but not yet demonstrated effective.
Important facts for investors to verify
- Whether revenue growth converts into improved gross margins, operating results, and lower operating cash use.
- Whether supply availability, delivery schedules, and equipment costs support timely fulfillment of contracted projects.
- How much of the reported pipeline, bookings, backlog, and performance obligations becomes binding orders and recognized revenue, and on what timetable.
- Whether AlsoEnergy integration and expected commercial benefits justify the acquisition’s cash cost, goodwill, and acquired intangibles.
- Progress in remediating the disclosed material weaknesses and maintaining adequate liquidity while funding operations, DevCo projects, and debt obligations.