STEM, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Stem provides battery energy storage hardware and software-enabled services, including its Athena platform; following its February 1 acquisition of AlsoEnergy, it also provides solar monitoring and control through PowerTrack. Financial figures below are in U.S. dollars; “million” is abbreviated as “M.”
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $66.9M | $19.3M | $108.0M | $34.8M |
| GAAP gross margin | $7.8M (12%) | $(0.1)M ((1)%) | $11.4M (11%) | $(0.2)M ((1)%) |
| Non-GAAP gross margin | $11.3M (17%) | $1.5M (8%) | $17.9M (17%) | $3.5M (10%) |
| Operating loss | $(29.8)M | $(23.9)M | $(64.8)M | $(33.8)M |
| Net loss attributable to Stem | $(32.0)M | $(100.2)M | $(54.5)M | $(182.8)M |
| Adjusted EBITDA (non-GAAP) | $(11.1)M | $(8.3)M | $(23.9)M | $(11.4)M |
- Q2 revenue rose 246%; six-month revenue rose 211%. Hardware revenue drove most of the increase, reflecting demand in front-of-meter and behind-the-meter partnership projects. AlsoEnergy contributed $14.1M of Q2 revenue and $23.7M for the six-month period; it is included only from the acquisition date.
- Despite positive gross margin, operating losses widened as operating expenses rose. For the first six months, expenses included $6.1M of AlsoEnergy transaction costs; amortization, higher headcount, and stock-based compensation also contributed to higher expenses.
- Reported net losses were substantially lower than in 2021, primarily because the prior-year periods included large warrant and embedded-derivative revaluation losses and debt-extinguishment charges. Adjusted EBITDA losses widened, so the improvement in reported net loss does not indicate improved underlying operating profitability.
- Remaining performance obligations were $363.8M at June 30, including $258.1M of services and $105.7M of hardware. Contracted backlog was $726.6M; bookings were $225.7M in Q2 and $376.5M for the six months.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $151.0M and short-term investments were $183.9M, together $334.9M. Working capital was $316.5M. Management stated that available cash was sufficient for at least 12 months from issuance of the filing.
- Six-month operating cash outflow was $32.6M, versus $41.8M in 2021. Investing cash outflow was $556.0M, including $533.0M for the AlsoEnergy acquisition, net of acquired cash. Cash declined $596.8M during the period, ending at $151.0M.
- The company reported $460.0M principal on 0.50% convertible senior notes due 2028, with a $446.9M balance-sheet carrying amount. The notes are unsecured and potentially convertible into shares or cash; the initial conversion price was approximately $29.24 per share. Financing obligations totaled $81.9M, including $14.8M current; notes payable had a $1.7M carrying value.
- The AlsoEnergy acquisition consideration was $652.0M: $543.1M cash, net of working-capital adjustment and escrow recovery, and $108.9M in stock. The preliminary purchase-price allocation included $545.0M goodwill and $152.1M acquired intangible assets.
Outlook, risks and unusual items
- No quantified full-year revenue, margin, or Adjusted EBITDA guidance is provided in the supplied filing text. Management expects sales and marketing, research and development, and general and administrative expenses to increase as the business scales.
- Management cited component shortages, shipping delays, cost volatility, inflation, labor constraints, and the Russia-Ukraine conflict as risks to equipment delivery and project installation. It said suppliers were expected to support deliveries and installations through 2022, but disruptions continuing into 2023 could delay or prevent revenue generation from affected systems.
- Customer concentration is material: one customer represented approximately 50% of Q2 revenue. The filing also identifies dependence on a small number of suppliers and risks from long-term supply commitments.
- DevCo joint ventures and hardware advances require upfront capital and could result in losses if projects are delayed, fail, or do not earn adequate returns. The company consolidated these VIEs because it determined it was their primary beneficiary.
- Disclosure controls were deemed ineffective at June 30 due to material weaknesses involving energy storage systems, inventory and deferred cost tracking; financial statement review; formality of controls; and revenue-recognition calculations. Remediation efforts were underway but not yet demonstrated effective.
- A $15.2M six-month income tax benefit resulted mainly from a partial release of the valuation allowance related to deferred tax liabilities recognized in the AlsoEnergy acquisition. Stem also received $1.1M net proceeds from an insurer settlement, recorded as a reduction of general and administrative expense.
- Management said pending legal proceedings were not expected to have a material adverse impact. The filing reported no material change in market-risk exposure or contractual obligations from the prior annual report.
Important facts for investors to verify
- Whether revenue growth and backlog convert into delivered projects, recognized revenue, and improved operating margins, particularly given supply constraints and customer concentration.
- Cash consumption and liquidity after the AlsoEnergy acquisition, including working-capital needs, financing obligations, and the company’s ability to meet its stated 12-month liquidity expectation.
- Integration progress and realized benefits from AlsoEnergy, and whether the preliminary acquisition valuation, goodwill, and intangible-asset estimates change.
- Progress in remediating material weaknesses and whether management later concludes that financial reporting controls are effective.
- Potential dilution or cash settlement associated with the 2028 convertible notes, and the implications of their carrying value differing from the disclosed estimated fair value of $282.7M.