STEM, INC. annual report, FY2021

STEM, Inc. — FY 2021 Form 10-K

Business context and reporting period. This annual filing covers the year ended December 31, 2021; it does not provide clear standalone fourth-quarter results. Stem sells battery energy-storage systems and provides long-term optimization services through its Athena software platform, serving behind-the-meter commercial customers and front-of-the-meter project developers. The April 2021 merger with Star Peak was accounted for as a reverse recapitalization, with Legacy Stem as the accounting predecessor.

Financial performance and liquidity

Revenue increased 251%, largely from hardware sales, which rose to $106.9 million from $20.7 million; service revenue was $20.5 million, up from $15.6 million. Despite the revenue growth, GAAP gross margin remained thin. Net loss narrowed substantially, but the comparison was affected by warrant and embedded-derivative remeasurement: FY 2020 included an $84.5 million expense, while FY 2021 recorded $3.4 million of income. Adjusted EBITDA loss widened.

At year-end, cash and cash equivalents were $747.8 million and short-term investments were $173.0 million. Current assets were $1.024 billion and current liabilities $88.0 million. The company reported $935.9 million of working capital. Financing obligations totaled $88.5 million, including $15.3 million current. The 2028 convertible notes had $460.0 million principal outstanding and a $316.5 million carrying value; other notes payable had a $1.7 million carrying value. FY 2021 cash provided by financing activities was $1.027 billion. Management said liquidity was sufficient for at least 12 months from issuance of the filing.

Material changes and unusual items

• Bookings rose to $416.5 million from $137.7 million; contracted backlog increased to $449.0 million from $184.0 million; contracted assets under management grew to 1.6 GWh from 1.0 GWh. Pipeline was $4.0 billion, versus $1.6 billion; it is an internal, unaudited metric and is not guaranteed to convert to revenue.
• The company raised $460 million principal through 0.50% green convertible notes due 2028, receiving approximately $445.7 million net before spending $66.7 million on capped calls. It also received $145.3 million from public warrant exercises. Public warrants were subsequently redeemed; private warrants were exchanged for common shares.
• In February 2022, after year-end, Stem acquired AlsoEnergy for $695 million, approximately 75% cash and 25% stock. The acquisition was not reflected in FY 2021 results; initial purchase accounting was pending.
• FY 2021 included $5.1 million of debt-extinguishment loss and $9.2 million of expense for warrants issued for services. The company recorded out-of-period corrections that increased FY 2021 net loss by $2.8 million; the reported fourth-quarter impact was a $4.2 million increase in net loss. Management considered the corrections immaterial to the periods affected.

Outlook, commentary and key risks

Management expects continued investment in sales, research and development, and public-company infrastructure, and expects GAAP net losses through at least 2023. Profitability depends on growth, improved gross margins, cost control, procurement terms, and execution. The filing gives no specific revenue or earnings guidance.

• Supply shortages, shipping delays, inflation, and supplier concentration could delay deliveries and installations. Suppliers had secured quantities intended to support deliveries through 2022, but further disruption into 2023 could affect revenue timing.
• Sales and installation cycles are long; permitting, utility interconnection, customer cancellations, and contractor execution may delay or prevent conversion of bookings and backlog.
• Demand and customer economics depend partly on declining battery costs, electricity rates, and government incentives, as well as evolving electricity-market regulations.
• Battery safety, system performance, warranties, cybersecurity, and reliance on Amazon Web Services create operational and reputational risks.
• AlsoEnergy integration, international expansion, and potential acquisition-related dilution or costs are significant execution risks.
• Management concluded disclosure controls were ineffective at December 31, 2021 because of material weaknesses involving storage-system and inventory accounting, financial-statement review, control formality, and certain revenue calculations. Remediation was ongoing; the filing did not include management’s formal ICFR assessment. The auditor gave an unqualified opinion on the financial statements but did not audit ICFR.

Investor facts to verify

• Whether hardware growth converts into durable service revenue and materially improved GAAP gross margins.
• Actual delivery, installation, and revenue conversion versus bookings, backlog, and pipeline, including the effects of supply constraints.
• Post-acquisition cash, debt, share dilution, integration costs, and the purchase accounting for AlsoEnergy.
• Progress in remediating material weaknesses and whether controls operate effectively over a sufficient testing period.
• Cash burn, financing-obligation repayments, and progress toward management’s stated profitability outlook.