STEM, INC. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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| ☒ | QUARTERLY QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2022
OR
| ☐ | QUARTERLY TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
for the transition period from ________ to ________
STEM, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 333-251397 | 85-1972187 | ||||||||||||
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||||||||
100 California St., 14th Fl, San Francisco, California 94111
(Address of principal executive offices including zip code)
1-877-374-7836
Registrant’s telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock, par value $0.0001 | STEM | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
| Class | Outstanding as of April 25, 2022 | ||||
| Common Stock, $0.0001 par value per share | 154,057,258 | ||||
TABLE OF CONTENTS
| Page | |||||
Part I. Financial Information
STEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 174,537 | $ | 747,780 | |||||||
| Short-term investments | 177,273 | 173,008 | |||||||||
| Accounts receivable, net | 74,123 | 61,701 | |||||||||
| Inventory, net | 72,985 | 22,720 | |||||||||
Other current assets (includes $207 and $213 due from related parties as of March 31, 2022 and December 31, 2021, respectively) | 28,252 | 18,641 | |||||||||
| Total current assets | 527,170 | 1,023,850 | |||||||||
| Energy storage systems, net | 102,320 | 106,114 | |||||||||
| Contract origination costs, net | 9,620 | 8,630 | |||||||||
| Goodwill | 547,700 | 1,741 | |||||||||
| Intangible assets, net | 165,840 | 13,966 | |||||||||
| Operating leases right-of-use assets | 13,785 | 12,998 | |||||||||
| Other noncurrent assets | 51,380 | 24,531 | |||||||||
| Total assets | $ | 1,417,815 | $ | 1,191,830 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 99,307 | $ | 28,273 | |||||||
| Accrued liabilities | 22,785 | 25,993 | |||||||||
| Accrued payroll | 8,422 | 7,453 | |||||||||
| Financing obligation, current portion | 14,177 | 15,277 | |||||||||
| Deferred revenue, current portion | 40,722 | 9,158 | |||||||||
Other current liabilities (includes $179 and $306 due to related parties as of March 31, 2022 and December 31, 2021, respectively) | 2,622 | 1,813 | |||||||||
| Total current liabilities | 188,035 | 87,967 | |||||||||
| Deferred revenue, noncurrent | 64,051 | 28,285 | |||||||||
| Asset retirement obligation | 4,168 | 4,135 | |||||||||
| Notes payable, noncurrent | 1,719 | 1,687 | |||||||||
| Convertible notes, noncurrent | 446,418 | 316,542 | |||||||||
| Financing obligation, noncurrent | 70,395 | 73,204 | |||||||||
| Lease liability, noncurrent | 12,526 | 12,183 | |||||||||
| Other liabilities | 367 | — | |||||||||
| Total liabilities | 787,679 | 524,003 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $0.0001 par value; 1,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021 | — | — | |||||||||
Common stock, $0.0001 par value; 500,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 153,717,797 and 144,671,624 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 15 | 14 | |||||||||
| Additional paid-in capital | 1,161,109 | 1,176,845 | |||||||||
| Accumulated other comprehensive income (loss) | (619) | 20 | |||||||||
| Accumulated deficit | (530,510) | (509,052) | |||||||||
| Total Stem's stockholders' equity | 629,995 | 667,827 | |||||||||
| Non-controlling interests | 141 | — | |||||||||
| Total stockholders’ equity | 630,136 | 667,827 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,417,815 | $ | 1,191,830 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | |||||||||||
| Services revenue | $ | 9,965 | $ | 4,881 | |||||||
| Hardware revenue | 31,123 | 10,539 | |||||||||
| Total revenue | 41,088 | 15,420 | |||||||||
| Cost of revenue | |||||||||||
| Cost of service revenue | 8,633 | 6,905 | |||||||||
| Cost of hardware revenue | 28,811 | 8,632 | |||||||||
| Total cost of revenue | 37,444 | 15,537 | |||||||||
| Gross margin | 3,644 | (117) | |||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | 9,142 | 2,667 | |||||||||
| Research and development | 8,943 | 4,407 | |||||||||
| General and administrative | 20,512 | 2,692 | |||||||||
| Total operating expenses | 38,597 | 9,766 | |||||||||
| Loss from operations | (34,953) | (9,883) | |||||||||
| Other income (expense), net: | |||||||||||
| Interest expense | (3,218) | (6,233) | |||||||||
| Change in fair value of warrants and embedded derivative | — | (66,397) | |||||||||
| Other income (expenses), net | 475 | (40) | |||||||||
| Total other expense, net | (2,743) | (72,670) | |||||||||
| Loss before income taxes | (37,696) | (82,553) | |||||||||
| Income tax benefit | 15,213 | — | |||||||||
| Net loss | $ | (22,483) | $ | (82,553) | |||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | (0.15) | $ | (2.04) | |||||||
| Weighted-average shares used in computing net loss per share, basic and diluted | 150,491,041 | 40,425,009 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | (22,483) | $ | (82,553) | |||||||
| Other comprehensive loss: | |||||||||||
| Unrealized loss on available-for-sale securities | (611) | — | |||||||||
| Foreign currency translation adjustment | (28) | 251 | |||||||||
| Total comprehensive loss | $ | (23,122) | $ | (82,302) | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
(in thousands, except share amounts)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Non-controlling Interests | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | 144,671,624 | 14 | 1,176,845 | 20 | (509,052) | — | 667,827 | ||||||||||||||||||||||||||||||||||
| Cumulative-effect adjustment upon adoption of ASU 2020-06 (Note 10) | — | — | (130,979) | — | 1,598 | — | (129,381) | ||||||||||||||||||||||||||||||||||
| Cumulative-effect adjustment upon adoption of ASU 2016-13 | — | — | — | — | (573) | — | (573) | ||||||||||||||||||||||||||||||||||
| Common stock issued upon business combination (Note 6) | 8,621,006 | 1 | 108,882 | — | — | — | 108,883 | ||||||||||||||||||||||||||||||||||
| Stock option exercises, net of statutory tax withholdings | 425,167 | — | (426) | — | — | — | (426) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,787 | — | — | — | 6,787 | ||||||||||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | (611) | — | — | (611) | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (28) | — | — | (28) | ||||||||||||||||||||||||||||||||||
| Acquisition of non-controlling interests | — | — | — | — | — | 141 | 141 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (22,483) | — | (22,483) | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | 153,717,797 | 15 | 1,161,109 | (619) | (530,510) | 141 | 630,136 | ||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Non-controlling Interests | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | 40,202,785 | 4 | 230,620 | (192) | (407,841) | — | (177,409) | ||||||||||||||||||||||||||||||||||
| Recognition of beneficial conversion feature related to convertible notes | — | — | 1,126 | — | — | — | 1,126 | ||||||||||||||||||||||||||||||||||
| Stock option exercises | 1,392,494 | — | 2,750 | — | — | — | 2,750 | ||||||||||||||||||||||||||||||||||
| Legacy warrant exercises | 19,531 | — | 397 | — | — | — | 397 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 784 | — | — | — | 784 | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 251 | — | — | 251 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (82,553) | — | (82,553) | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 41,614,810 | 4 | 235,677 | 59 | (490,394) | — | (254,654) | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | (22,483) | $ | (82,553) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization expense | 8,725 | 5,079 | |||||||||
| Non-cash interest expense, including interest expenses associated with debt issuance costs | 456 | 3,902 | |||||||||
| Stock-based compensation | 6,265 | 760 | |||||||||
| Change in fair value of warrant liability and embedded derivative | — | 66,397 | |||||||||
| Noncash lease expense | 546 | 160 | |||||||||
| Accretion expense | 60 | 50 | |||||||||
| Impairment of energy storage systems | 171 | 613 | |||||||||
| Net (accretion of discount) amortization of premium on investments | 293 | — | |||||||||
| Income tax benefit from release of valuation allowance | (15,100) | — | |||||||||
| Other | (17) | — | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (3,352) | (955) | |||||||||
| Inventory | (46,564) | (1,466) | |||||||||
| Other assets | (32,284) | (4,690) | |||||||||
| Contract origination costs | (1,670) | (779) | |||||||||
| Accounts payable and accrued expenses | 61,755 | 8,640 | |||||||||
| Deferred revenue | 17,705 | 2,992 | |||||||||
| Lease liabilities | (54) | (176) | |||||||||
| Other liabilities | (457) | 199 | |||||||||
| Net cash used in operating activities | (26,005) | (1,827) | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Acquisition of AlsoEnergy, net of cash acquired | (532,839) | — | |||||||||
| Purchase of available-for-sale investments | (41,437) | — | |||||||||
| Sales/maturities of available-for-sale investments | 36,271 | — | |||||||||
| Purchase of energy storage systems | (108) | (1,525) | |||||||||
| Capital expenditures on internally-developed software | (3,537) | (1,238) | |||||||||
| Purchase of property and equipment | (1,278) | — | |||||||||
| Net cash used in investing activities | (542,928) | (2,763) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Proceeds from exercise of stock options and warrants | 347 | 2,894 | |||||||||
| Payments for taxes related to net share settlement of stock options | (773) | — | |||||||||
| Proceeds from financing obligations | 311 | 2,732 | |||||||||
| Repayment of financing obligations | (4,178) | (3,369) | |||||||||
Proceeds from issuance of convertible notes, net of issuance costs of $0 and $8 for the three months ended March 31, 2022 and 2021, respectively | — | 1,118 | |||||||||
Proceeds from issuance of notes payable, net of issuance costs of $0 and $101 for the three months ended March 31, 2022 and 2021, respectively | 6 | 3,879 | |||||||||
| Repayment of notes payable | — | (161) | |||||||||
| Net cash provided by (used in) financing activities | (4,287) | 7,093 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (23) | 428 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (573,243) | 2,931 | |||||||||
| Cash and cash equivalents, beginning of period | 747,780 | 6,942 | |||||||||
| Cash and cash equivalents, end of period | $ | 174,537 | $ | 9,873 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid for interest | $ | 1,869 | $ | 1,480 | |||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | |||||||||||
| Change in asset retirement costs and asset retirement obligation | $ | 27 | $ | 37 | |||||||
| Purchases of energy storage systems in accounts payable | $ | — | $ | 1,260 | |||||||
| Conversion of accrued interest into outstanding note payable | $ | — | $ | 256 | |||||||
| Settlement of warrant liability into preferred stock due to exercise | $ | — | $ | 253 | |||||||
| Stock-based compensation capitalized to internal-use software | $ | 522 | $ | 24 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.BUSINESS
Description of the Business
Stem, Inc. and its subsidiaries (together, “Stem” or the “Company”) is one of the largest digitally connected, intelligent energy storage networks, providing customers (i) with an energy storage system, sourced from leading, global battery original equipment manufacturers (“OEMs”), that the Company delivers through its partners, including solar project developers and engineering, procurement and construction firms and (ii) through its Athena® artificial intelligence (“AI”) platform (“Athena”), with ongoing software-enabled services to operate the energy storage systems for up to 20 years. In addition, in all the markets where the Company operates its customers’ systems, the Company has agreements to manage the energy storage systems using the Athena platform to participate in energy markets and to share the revenue from such market participation.
The Company delivers its battery hardware and software-enabled services through its Athena platform to its customers. The Company’s hardware and recurring software-enabled services mitigate customer energy costs through services such as time-of-use and demand charge management optimization and by aggregating the dispatch of energy through a network of virtual power plants. The resulting network created by the Company’s growing customer base increases grid resilience and reliability through the real-time processing of market-based demand cycles, energy prices and other factors in connection with the deployment of renewable energy resources to such customers. Additionally, the Company’s energy storage solutions support renewable energy generation by alleviating grid intermittency issues and thereby reducing customer dependence on traditional, fossil fuel resources.
On February 1, 2022, the Company acquired all of the issued and outstanding capital stock of Also Energy Holdings, Inc. (“AlsoEnergy”), which has been consolidated since the date of acquisition. Through AlsoEnergy, the Company provides end-to-end turnkey solutions that monitor and manage renewable energy systems through AlsoEnergy’s PowerTrack software. PowerTrack includes data acquisitions and monitoring, performance modelling, agency reporting, internal reports, work order tickets, and supervisory control and data acquisition (“SCADA”) controls. AlsoEnergy has deployed systems at various international locations, but its primary customer base is in the United States, Germany and Canada. See Note 6 — Business Combinations.
The Company operated as Rollins Road Acquisition Company (f/k/a Stem, Inc.) (“Legacy Stem”) prior to the Merger (as defined below). Stem, Inc. was incorporated on March 16, 2009 in the State of Delaware and is headquartered in San Francisco, California.
Star Peak Acquisition Corp. Merger
On December 3, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Star Peak Transition Corp. (“STPK”), an entity listed on the New York Stock Exchange under the trade symbol “STPK,” and STPK Merger Sub Corp., a Delaware corporation and wholly-owned subsidiary of STPK (“Merger Sub”), providing for, among other things, and subject to the conditions therein, the combination of the Company and STPK pursuant to the merger of Merger Sub with and into the Company, with the Company continuing as the surviving entity (the “Merger”).
On April 28, 2021, shareholders of STPK approved the Merger, under which Stem received approximately $550.3 million, net of fees and expenses as follows (in thousands):
| Recapitalization | |||||
| Cash — STPK trust and working capital cash | $ | 383,383 | |||
| Cash — PIPE (as described below) | 225,000 | ||||
| Less: transaction costs and advisory fees paid | (58,061) | ||||
| Merger and PIPE financing | $ | 550,322 | |||
Immediately prior to the closing of the Merger, (i) all issued and outstanding shares of Legacy Stem preferred stock, par value $0.00001 per share (the “Legacy Stem Preferred Stock”), were converted into shares of Legacy Stem common stock, par value $0.000001 per share (the “Legacy Stem Common Stock”) in accordance with Legacy Stem’s amended and restated certificate of incorporation, (ii) all outstanding convertible promissory notes of Legacy Stem (the “Legacy Stem Convertible Notes”) were converted into Legacy Stem Preferred Stock in accordance with the terms of the Legacy Stem Convertible Notes and (iii) certain warrants issued by Legacy Stem to purchase Legacy Stem Common Stock and Legacy Stem Preferred Stock
9
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(the “Legacy Stem Warrants”) were exercised by holders into Legacy Stem Common Stock in accordance with the terms thereof. Upon the consummation of the Merger, each share of Legacy Stem common stock then issued and outstanding was canceled and converted into the right to receive shares of common stock of Stem using an exchange ratio of 4.6432.
In connection with the execution of the Merger Agreement, STPK entered into separate subscription agreements (each, a “Subscription Agreement”) with a number of investors (each a “Subscriber”), pursuant to which the Subscribers agreed to purchase, and STPK agreed to sell to the Subscribers, an aggregate of 22,500,000 shares of common stock (the “PIPE Shares”), for a purchase price of $10 per share and an aggregate purchase price of $225.0 million, in a private placement pursuant to the subscription agreements (the “PIPE”). The PIPE investment closed simultaneously with the consummation of the Merger. The Merger was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, STPK was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Merger was treated as the equivalent of Stem issuing stock for the net assets of STPK, accompanied by a recapitalization. The net liabilities of STPK of $302.2 million, comprised primarily of the warrant liabilities associated with the Public and Private Placement Warrants discussed in Note 11 — Warrants, are stated at historical cost, with no goodwill or other intangible assets recorded.
Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of the Regulation S-X, assuming the Company will continue as a going concern. As of March 31, 2022, the Company had cash and cash equivalents of $174.5 million, short-term investments of $177.3 million, an accumulated deficit of $530.5 million and net working capital of $339.1 million, with $14.2 million of financing obligations coming due within the next 12 months. During the three months ended March 31, 2022, the Company incurred a net loss of $22.5 million and had negative cash flows from operating activities of $26.0 million. However, the net proceeds from the Merger of $550.3 million, the proceeds of $145.3 million from the exercise of Public Warrants (as described in Note 11 — Warrants), and the net proceeds of $445.7 million from the issuance of the Company’s 0.50% Green Convertible Senior Notes due 2028 (the “2028 Convertible Notes”) (as described in Note 10 — Convertible Promissory Notes) provided the Company with a significant amount of cash proceeds. As discussed in Note 6 — Business Combinations, the Company acquired 100% of the issued and outstanding capital stock of AlsoEnergy for an aggregate purchase price of $653.0 million, including $544.1 million in cash and $108.9 million in common stock. The Company believes that its cash position is sufficient to meet capital and liquidity requirements for at least the next 12 months after the date that the financial statements are available to be issued.
The Company’s business prospects are subject to risks, expenses, and uncertainties frequently encountered by companies in the early stages of commercial operations. Prior to the Merger, the Company had been funded primarily by equity financings, convertible promissory notes and borrowings from affiliates. The attainment of profitable operations is dependent upon future events, including securing new customers and maintaining current ones, securing and maintaining adequate supplier relationships, building its customer base, successfully executing its business and marketing strategy, obtaining adequate financing to complete the Company’s development activities, and hiring and retaining appropriate personnel. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require the Company to modify, delay or abandon some of its planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on the Company’s business, operating results and financial condition.
COVID-19
The ongoing COVID-19 pandemic has resulted and may continue to result in widespread adverse impacts on the global and U.S. economies. Ongoing government and business responses to COVID-19, along with COVID-19 variants and the resurgence of related disruptions, could have a continued material adverse effect on economic and market conditions and trigger a period of continued global and U.S. economic slowdown.
The Company’s industry is currently facing shortages and shipping delays affecting the supply of inverters, enclosures, battery modules and associated component parts for inverters and battery energy storage systems available for purchase. These shortages and delays can be attributed in part to the COVID-19 pandemic and resulting government action, as well as broader macroeconomic conditions that may persist once the immediate effects of the COVID-19 pandemic have subsided, and have been exacerbated by the ongoing conflict between Russia and Ukraine. While management believes that a majority of the Company’s suppliers have secured sufficient supply to permit them to continue delivery and installations through the end of 2022, if these shortages and delays persist into 2023, they could adversely affect the timing of when battery energy storage
10
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
systems can be delivered and installed, and when (or if) the Company can begin to generate revenue from those systems. The Company cannot predict the full effects the COVID-19 pandemic will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. The Company will continue to monitor developments affecting its workforce, its suppliers, its customers and its business operations generally, and will take actions the Company determines are necessary in order to mitigate these.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with GAAP for interim reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the condensed balance sheet at December 31, 2021 has been derived from the audited financial statements at that date, but certain notes or other information that are normally required by GAAP have been omitted if they substantially duplicate the disclosures contained in the Company’s annual audited consolidated financial statements. In the opinion of Stem management, all normal and recurring adjustments considered necessary for a fair statement of the results for the interim period presented have been included in the accompanying unaudited financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and consolidated variable interest entities (“VIEs”). The Company presents non-controlling interests within the equity section of its condensed consolidated balance sheets, and the amount of consolidated net income (loss) that is attributable to Stem and the non-controlling interest in its condensed consolidated statements of operations. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2021. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022 or for any other future interim period or year.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable. Actual results could differ from those estimates and such differences could be material to the financial position and results of operations.
Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, depreciable life of energy systems; the amortization of financing obligations; deferred commissions and contract fulfillment costs; the valuation of energy storage systems, internally developed software, and asset retirement obligations; and the fair value of equity instruments, equity-based instruments, warrant liabilities, embedded derivatives and net assets acquired in a business combination.
Segment Information
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is the CODM. The CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. As such, management has determined that the Company operates as one operating segment that is focused exclusively on innovative technology services that transform the way energy is distributed and consumed. The operations acquired as part of the acquisition of AlsoEnergy have been included in the Company’s operating segment. Net assets outside of the U.S. were less than 10% of total net assets as of March 31, 2022 and December 31, 2021.
Significant Customers
A significant customer represents 10% or more of the Company’s total revenue or accounts receivable, net balance at each reporting date. For each significant customer, revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable are as follows:
11
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Accounts Receivable | Revenue | ||||||||||||||||||||||
| March 31, | December 31, | Three Months Ended March 31, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Customers: | |||||||||||||||||||||||
| Customer A | * | 23 | % | * | * | ||||||||||||||||||
| Customer B | 19 | % | 15 | % | 11 | % | 14 | % | |||||||||||||||
| Customer C | * | 13 | % | * | * | ||||||||||||||||||
| Customer D | 15 | % | * | 38 | % | * | |||||||||||||||||
*Total less than 10% for the respective period.
Fair Value of Financial Instruments
Assets and liabilities recorded at fair value in the unaudited condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).
Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 — Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s assessment of the significance of a specific input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
Financial assets and liabilities held by the Company measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 include cash and cash equivalents and short-term investments.
Recently Adopted Accounting Standards
The Company has adopted , Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), effective January 1, 2022 using the modified retrospective approach. ASU 2020-06 simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate conversion features from the host contract for convertible instruments. As a result of the adoption of ASU 2020-06, the 2028 Convertible Notes are no longer bifurcated into separate liability and equity components in the March 31, 2022 condensed consolidated balance sheet. Rather, the $460.0 million principal amount of the Company’s 2028 Convertible Notes was classified as a liability in the March 31, 2022 condensed consolidated balance sheet. Upon adoption of ASU 2020-06, an adjustment was recorded to the 2028 Convertible Notes liability component, equity component (additional paid-in-capital) and accumulated deficit. The cumulative effect of the change was recognized as an adjustment to the opening balance of accumulated deficit at the date of adoption. The comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods. This adjustment was calculated based on the carrying amount of the 2028 Convertible Notes as if it had always been treated only as a liability. Further, an adjustment was recorded to the debt discount and issuance costs as if these had always been treated as a contra liability only. Interest expense related to the
12
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
accretion of the 2028 Convertible Notes is no longer recognized. Interest expense for the 2028 Convertible Notes for the three months ended March 31, 2022 would have been $3.7 million higher without the adoption of ASU 2020-06. As such, net loss attributable to the Company per common share for the three months ended March 31, 2022 is $0.02 lower due to the effect of adoption of ASU 2020-06.
In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. This ASU is effective for public and private companies’ fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and December 15, 2022, respectively. As the Company is no longer an emerging growth company as of January 1, 2022, the Company adopted ASU 2016-13 effective on such date, utilizing the modified retrospective transition method. Upon adoption, the Company updated its impairment model to utilize a forward-looking current expected credit losses (“CECL”) model in place of the incurred loss methodology for financial instruments measured at amortized cost, primarily including its accounts receivable. The adoption did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The Company early adopted ASU 2021-08 on a prospective basis effective January 1, 2022. As indicated in Note 6 — Business Combinations, the Company completed the acquisition of AlsoEnergy on February 1, 2022. The adoption of ASU 2021-08 resulted in the recognition of deferred revenue at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 was effective for public entities for interim and annual periods beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 will be effective for private entities for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 effective May 1, 2021. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
3.REVENUE
Disaggregation of Revenue
The following table provides information on the disaggregation of revenue as recorded in the consolidated statements of operations (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Hardware revenue | $ | 31,123 | $ | 10,539 | |||||||
Services revenue | 9,965 | 4,881 | |||||||||
Total revenue | $ | 41,088 | $ | 15,420 | |||||||
The table above includes AlsoEnergy’s hardware and services revenue of $4.8 million and $4.8 million, respectively, for the three months ended March 31, 2022.
The following table summarizes reportable revenue by geographic regions determined based on the location of the customers (in thousands) :
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STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended March 31, | |||||
| 2022 | |||||
| United States | $ | 39,458 | |||
| Rest of the world | 1,630 | ||||
| Total revenue | $ | 41,088 | |||
Remaining Performance Obligations
Remaining performance obligations represent contracted revenue that has not been recognized, which include contract liabilities (deferred revenue) and amounts that will be billed and recognized as revenue in future periods. As of March 31, 2022, the Company had $313.6 million of remaining performance obligations, and the approximate percentages expected to be recognized as revenue in the future are as follows (in thousands, except percentages):
| Total remaining performance obligations | Percent Expected to be Recognized as Revenue | ||||||||||||||||||||||
| Less than one year | Two to five years | Greater than five years | |||||||||||||||||||||
Service revenue | $ | 232,136 | 18 | % | 51 | % | 31 | % | |||||||||||||||
Hardware revenue | 81,427 | 100 | % | — | % | — | % | ||||||||||||||||
| Total revenue | $ | 313,563 | |||||||||||||||||||||
Contract Balances
Deferred revenue primarily includes cash received in advance of revenue recognition related to energy optimization services and incentives. The following table presents the changes in the deferred revenue balance during the three months ended March 31, 2022 (in thousands):
| Beginning balance as of January 1, 2022 | $ | 37,443 | |||
| Deferred revenue acquired upon business combination | 49,626 | ||||
| Upfront payments received from customers | 35,050 | ||||
| Upfront or annual incentive payments received | 2,895 | ||||
| Revenue recognized related to amounts that were included in beginning balance of deferred revenue | (2,938) | ||||
| Revenue recognized related to amounts that were included in acquired balance of deferred revenue | (3,338) | ||||
| Revenue recognized related to deferred revenue generated during the period | (13,965) | ||||
| Ending balance as of March 31, 2022 | $ | 104,773 | |||
4.SHORT-TERM INVESTMENTS
The following tables summarize the estimated fair value of the Company’s short-term investments and the gross unrealized holding gains and losses as of March 31, 2022 and December 31, 2021 (in thousands):
| As of March 31, 2022 | |||||||||||||||||||||||
| Amortized cost | Unrealized gain | Unrealized Loss | Estimated Fair Value | ||||||||||||||||||||
| Corporate debt securities | $ | 37,917 | $ | 1 | $ | (241) | $ | 37,677 | |||||||||||||||
| Commercial paper | 18,741 | — | — | 18,741 | |||||||||||||||||||
| U.S. government bonds | 84,324 | — | (512) | 83,812 | |||||||||||||||||||
| Certificate of deposits | 17,347 | 2 | — | 17,349 | |||||||||||||||||||
| Treasury bills | 17,228 | — | (9) | 17,219 | |||||||||||||||||||
| Agency bonds | 2,499 | — | (24) | 2,475 | |||||||||||||||||||
| Total short-term investments | $ | 178,056 | $ | 3 | $ | (786) | $ | 177,273 | |||||||||||||||
14
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| As of December 31, 2021 | |||||||||||||||||||||||
| Amortized cost | Unrealized gain | Unrealized Loss | Estimated Fair Value | ||||||||||||||||||||
| Corporate debt securities | $ | 42,174 | $ | 11 | $ | (52) | $ | 42,133 | |||||||||||||||
| Commercial paper | 20,743 | — | — | 20,743 | |||||||||||||||||||
| U.S. government bonds | 86,265 | — | (135) | 86,130 | |||||||||||||||||||
| Certificate of deposits | 21,501 | 6 | — | 21,507 | |||||||||||||||||||
| Agency bonds | 2,500 | — | (5) | 2,495 | |||||||||||||||||||
| Total short-term investments | $ | 173,183 | $ | 17 | $ | (192) | $ | 173,008 | |||||||||||||||
The Company periodically reviews the individual securities that have unrealized losses on a regular basis to evaluate whether or not any security has experienced, or is expected to experience, credit losses resulting in the decline in fair value. The Company evaluates, among other factors, whether the Company intends to sell any of these marketable securities and whether it is more likely than not that the Company will be required to sell any of them before recovery of the amortized cost basis. During the three months ended March 31, 2022, the Company did not record an allowance for credit losses, as management believes any such losses would be immaterial based on the high-grade credit rating for each of the short-term investments as of the end of each period.
5.FAIR VALUE MEASUREMENTS
Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. At March 31, 2022 and December 31, 2021, the carrying amount of accounts receivable, other current assets, accounts payable, and accrued and other current liabilities approximated their estimated fair value due to their relatively short maturities. There were no assets or liabilities classified as Level 3 as of March 31, 2022.
The following table provides the financial instruments measured at fair value (in thousands):
| March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||||||||||
Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market fund | $ | 9,931 | $ | — | $ | — | $ | 9,931 | |||||||||||||||
| Commercial paper | — | 12,595 | — | 12,595 | |||||||||||||||||||
| Total cash equivalents | 9,931 | 12,595 | — | 22,526 | |||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Corporate debt securities | — | 37,677 | — | 37,677 | |||||||||||||||||||
| Commercial paper | — | 18,741 | — | 18,741 | |||||||||||||||||||
| U.S. government bonds | — | 83,812 | — | 83,812 | |||||||||||||||||||
| Certificate of deposits | — | 17,349 | — | 17,349 | |||||||||||||||||||
| Treasury bills | — | 17,219 | — | 17,219 | |||||||||||||||||||
| Agency bonds | — | 2,475 | — | 2,475 | |||||||||||||||||||
| Total financial assets | $ | 9,931 | $ | 189,868 | $ | — | $ | 199,799 | |||||||||||||||
15
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||||||||||
Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
Money market fund | $ | 127,261 | $ | — | $ | — | $ | 127,261 | |||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Corporate debt securities | — | 42,133 | — | 42,133 | |||||||||||||||||||
| Commercial paper | — | 20,743 | — | 20,743 | |||||||||||||||||||
| U.S. government bonds | — | 86,130 | — | 86,130 | |||||||||||||||||||
| Certificate of deposits | — | 21,507 | — | 21,507 | |||||||||||||||||||
| Other | — | 2,495 | — | 2,495 | |||||||||||||||||||
| Total financial assets | $ | 127,261 | $ | 173,008 | $ | — | $ | 300,269 | |||||||||||||||
The Company’s money market funds are classified as Level 1 because they are valued using quoted market prices. The Company’s short-term investments consist of available-for-sale securities and are classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data.
6.BUSINESS COMBINATIONS
On February 1, 2022, Stem, Inc. acquired 100% of the outstanding shares of AlsoEnergy. AlsoEnergy provides end-to-end turnkey solutions that monitor and manage renewable energy systems. AlsoEnergy has deployed systems at various international locations, but its largest customer bases are in the United States, Germany and Canada. The combined company delivers a one-stop-shop solution for front-of-meter and commercial and industrial (“C&I”) customers with solar and storage needs.
The total consideration to acquire AlsoEnergy was $653.0 million, comprised of $544.1 million paid in cash and $108.9 million in the form of 8,621,006 shares of the Company’s common stock. The Company incurred $6.1 million of transaction costs related to the acquisition of AlsoEnergy, which were recorded in general and administrative expense during the three months ended March 31, 2022.
The following table summarizes the purchase price as a part of the acquisition of AlsoEnergy (in thousands):
| Purchase Price | |||||
Cash consideration (1) | $ | 544,059 | |||
| Equity consideration | 108,883 | ||||
| Total consideration | $ | 652,942 | |||
(1) As of March 31, 2022, there was approximately $1.1 million of unpaid cash consideration relating to certain shareholders of AlsoEnergy.
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The Company believes that its estimates and assumptions underlying the valuations are reasonable. However, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill.
The following table summarizes the fair values of assets acquired and liabilities assumed in the acquisition of AlsoEnergy at the date of acquisition (in thousands):
16
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Assets Acquired | |||||
| Cash | $ | 10,135 | |||
| Accounts receivable | 9,614 | ||||
| Other current assets | 1,795 | ||||
| Inventory | 3,701 | ||||
| Operating leases right-of-use assets | 1,333 | ||||
| Separately identifiable intangible assets acquired other than goodwill | 152,100 | ||||
| Other non-current assets | 1,032 | ||||
| Total identifiable assets acquired | 179,710 | ||||
| Liabilities Assumed | |||||
| Accounts payable | 1,985 | ||||
| Other current liabilities | 1,596 | ||||
| Accrued payroll | 2,533 | ||||
| Deferred revenue, current portion | 17,486 | ||||
| Lease liabilities, current portion | 431 | ||||
| Deferred revenue, noncurrent | 32,140 | ||||
| Lease liability, noncurrent | 902 | ||||
| Deferred tax liability | 15,476 | ||||
| Other noncurrent liabilities | 150 | ||||
| Total liabilities assumed | 72,699 | ||||
| Total net identifiable assets acquired | 107,011 | ||||
| Goodwill | 545,931 | ||||
| Total consideration | $ | 652,942 | |||
Based on the accounting guidance provided in ASC 805, the Company accounted for the acquisition of AlsoEnergy as a business combination in which the Company determined that AlsoEnergy was a business.
The Company's purchase price allocation for the acquisition of AlsoEnergy is preliminary and subject to revision as additional information about the fair value of the assets and liabilities becomes available. The fair values assigned to tangible and intangible assets acquired, and liabilities assumed, are based on management’s estimates and assumptions and may be subject to change as additional information is received. Additional information that existed as of the closing date but not known at the time of this filing may become known to the Company during the remainder of the 12-month measurement period. The Company will continue to collect information and reevaluate these estimates and assumptions quarterly.
The following table and accompanying paragraphs below summarize the intangible assets acquired, their fair value as of the acquisition date, and their estimated useful lives for amortizable intangible (in thousands, except estimated useful life, which is in years):
| Fair Value | Useful Life | ||||||||||
| Trade name | $ | 11,300 | 7 | ||||||||
| Customer relationships | 106,800 | 12 | |||||||||
| Backlog | 3,900 | 1.1 | |||||||||
| Developed technology | 30,100 | 7 | |||||||||
| Separately identifiable intangible assets acquired other than goodwill | $ | 152,100 | |||||||||
Trade names include the AlsoEnergy and Powertrack trade names, which were measured at fair value using the relief-from-royalty method. Customer relationships represent the estimated fair values of the underlying relationship with AlsoEnergy customers measured using the multiple-period excess earnings method under the income approach. Backlog relates to
17
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
subscriptions contracts that were measured at fair value using the multiple-period excess earnings method under the income approach. Developed technology represents the preliminary fair value of AlsoEnergy’s renewable energy platform that was measured using the relief-from-royalty method of the income approach. The amortization expense for all acquired intangible assets will be recognized on a straight-line basis over their respective estimated useful lives.
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired. The acquisition of AlsoEnergy resulted in the recognition of $545.9 million of goodwill. The Company believes that goodwill acquired primarily consists of expanded market and product opportunities, including acceleration of growth of renewable energy onto the power grid, expanded value for the Company’s customers to manage and optimize combined solar and energy storage systems through the vertical integration of software solutions, as well as access of the Company’s product offerings to international markets.
Goodwill created as a result of the acquisition of AlsoEnergy is not expected to be deductible for tax purposes. A net deferred tax liability of $15.5 million was established for the intangible assets acquired net of deferred tax assets, which primarily consists of net operating loss carryforwards and deferred revenue. Goodwill has been allocated to the Company’s single reporting unit.
The Company included the financial results of AlsoEnergy in its unaudited condensed consolidated financial statements from the acquisition date, which contributed $9.6 million and $3.5 million of revenue and net loss, respectively, during the three months ended March 31, 2022.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information summarizes the combined results of operations for the Company and AlsoEnergy, as if the acquisition had occurred on January 1, 2021. The pro forma financial information is as follows (in thousands):
| (Unaudited) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Total revenue | $ | 44,924 | $ | 27,573 | |||||||
| Net loss | $ | (30,469) | $ | (94,158) | |||||||
The pro forma financial information for the periods presented above has been calculated after adjusting the results of AlsoEnergy to reflect the business combination accounting effects resulting from this acquisition, including the elimination of transaction costs incurred by the Company, amortization expense from acquired intangible assets, and settlement of stock option awards. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination. The pro forma financial information is for informational purposes only, and is not indicative of either future results of operations, or results that may have been achieved had the acquisition been consummated as of this date.
7.GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill consists of the following (in thousands):
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Goodwill | $ | 547,557 | $ | 1,625 | |||||||
| Effect of foreign currency translation | 143 | 116 | |||||||||
| Total goodwill | $ | 547,700 | $ | 1,741 | |||||||
18
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Intangible Assets, Net
Intangible assets, net, consists of the following (in thousands):
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Developed technology | $ | 30,600 | $ | 500 | |||||||
| Trade name | 11,300 | — | |||||||||
| Customer relationships | 106,800 | — | |||||||||
| Backlog | 3,900 | — | |||||||||
| Internally developed software | 33,772 | 29,706 | |||||||||
| Intangible assets | 186,372 | 30,206 | |||||||||
| Less: Accumulated amortization | (20,576) | (16,276) | |||||||||
| Add: Currency translation adjustment | 44 | 36 | |||||||||
| Total intangible assets, net | $ | 165,840 | $ | 13,966 | |||||||
Amortization expense for intangible assets was $4.4 million and $1.4 million for the three months ended March 31, 2022 and 2021, respectively.
8.ENERGY STORAGE SYSTEMS, NET
Energy Storage Systems, Net
Energy storage systems, net, consists of the following (in thousands):
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Energy storage systems placed into service | $ | 143,134 | $ | 143,592 | |||||||
| Less: accumulated depreciation | (48,582) | (45,250) | |||||||||
| Energy storage systems not yet placed into service | 7,768 | 7,772 | |||||||||
| Total energy storage systems, net | $ | 102,320 | $ | 106,114 | |||||||
Depreciation expense for energy storage systems was approximately $4.3 million and $3.8 million for the three months ended March 31, 2022 and 2021, respectively. Depreciation expense is recognized in cost of service revenue.
9.NOTES PAYABLE
Revolving Loan Due to SPE Member
In April 2017, the Company entered into a revolving loan agreement with an affiliate of a member of certain of the Company’s special purpose entities (“SPE”). This agreement was, from time to time, subsequently amended. The purpose of this revolving loan agreement was to finance the Company’s purchase of hardware for its various energy storage system projects. The agreement had a total revolving loan capacity of $45.0 million that bore fixed interest at 10% with a maturity date of June 2020.
In May 2020, concurrent with the 2020 Credit Agreement discussed below, the Company entered into an amendment to the revolving loan agreement, which reduced the loan capacity to $35.0 million and extended the maturity date to May 2021. The amendment increased the fixed interest rate for any borrowings outstanding more than nine months to 14% thereafter. Additionally, under the original terms of the revolving loan agreement, the Company was able to finance 100% of the value of the hardware purchased up to the total loan capacity. The amendment reduced the advance rate to 85%, with an additional reduction to 70% in August 2020. The amendment was accounted for as a modification of the debt, which did not have a material impact on the unaudited condensed consolidated financial statements. In April 2021, the Company repaid the remaining outstanding balance of this facility with the proceeds received from the Merger. The facility was terminated after the repayment in April 2021.
Term Loan Due to Former Non-Controlling Interest Holder
19
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In June 2018, the Company acquired the outstanding member interests of an entity controlled by the Company for $8.1 million. The Company financed this acquisition by entering into a term loan agreement with the noncontrolling member bearing fixed interest of 4.5% per quarter (18.0% per annum) on the outstanding principal balance. The loan required fixed quarterly payments throughout the term of the loan, which was scheduled to be paid in full by April 1, 2026.
In May 2020, the Company amended the term loan and, using the proceeds from the 2020 Credit Agreement discussed below, prepaid $1.5 million of principal and interest on the note, of which $1.0 million was towards the outstanding principal balance, thereby reducing the fixed quarterly payment due to the lender. In relation to this amendment, the Company was required to issue warrants for 400,000 shares of common stock resulting in a discount to the term loan of $0.2 million. In April 2021, the Company repaid the remaining outstanding balance of this facility with the proceeds received from the Merger. Upon prepayment of this facility, the Company incurred $2.6 million in prepayment penalties that were recorded to loss on extinguishment of debt in the Company’s statement of operations. The facility was terminated after the repayment in April 2021.
2020 Credit Agreement
In May 2020, the Company entered into a credit agreement (“2020 Credit Agreement”) with a new lender that provided the Company with proceeds of $25.0 million to provide the Company with access to working capital towards the purchase of energy storage system equipment. The 2020 Credit Agreement has a maturity date of the earlier of (1) May 2021, (2) the maturity date of the revolving loan agreement, or (3) the maturity date of the convertible promissory notes discussed below. The loan bore interest of 12% per annum, of which 8% was paid in cash and 4% added back to principal of the loan balance every quarter. The Company used a portion of the proceeds towards payments associated with existing debt as previously discussed. In April 2021, the Company repaid the remaining outstanding balance of this facility with the proceeds received from the Merger. Upon prepayment of this facility, the Company incurred $1.4 million in prepayment penalties that were recorded to loss on extinguishment of debt in the Company’s statement of operations. The facility was terminated after the repayment in April 2021.
2021 Credit Agreement
In January 2021, the Company, through a wholly owned Canadian entity, entered into a credit agreement to provide a total of $2.7 million towards the financing of certain energy storage systems. The credit agreement is structured on a non-recourse basis and the system will be operated by the Company. The credit agreement has a stated interest of 5.45% and a maturity date of June 2031. The Company received an advance under the credit agreement of $1.8 million in January 2021. The repayment of advances received under this credit agreement is determined by the lender based on the proceeds generated by the Company through the operation of the underlying energy storage systems. As of March 31, 2022, and December 31, 2021, the outstanding balance was $1.9 million. The Company was in compliance with all covenants contained in the 2021 Credit Agreement as of March 31, 2022.
The Company’s outstanding debt consisted of the following as of March 31, 2022 (in thousands):
| March 31, 2022 | |||||
| Outstanding principal | $ | 1,932 | |||
| Unamortized discount | (213) | ||||
| Carrying value of debt | $ | 1,719 | |||
10.CONVERTIBLE PROMISSORY NOTES
As of December 31, 2020, the Company had various convertible notes outstanding to investors. The Company refers to the collective group of all such note instruments as the “Pre-Merger Convertible Promissory Notes.” As of December 31, 2020, these Pre-Merger Convertible Promissory Notes had a balance of $67.6 million. During the year ended December 31, 2021, the Company issued additional convertible notes, including convertible promissory notes issued and sold in January 2021 (the “Q1 2021 Convertible Notes”) and the 2028 Convertible Notes. Upon effectiveness of the Merger on April 28, 2021, all outstanding Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes were converted to common stock and cancelled (see “—Conversion and Cancellation of Convertible Promissory Notes Upon Merger” below). As of December 31, 2021, the Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes were no longer outstanding.
20
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Q1 2021 Convertible Notes
In January 2021, the Company issued and sold the Q1 2021 Convertible Notes under the same terms as the then existing Pre-Merger Convertible Promissory Notes to various investors with aggregate gross proceeds of $1.1 million. The Company evaluated the conversion option within the Q1 2021 Convertible Notes and determined the effective conversion price was beneficial to the note holders.
Conversion and Cancellation of Convertible Promissory Notes Upon Merger
Immediately prior to the effectiveness of the Merger, the entire balance of the Company’s outstanding Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes issued by Legacy Stem automatically converted into shares of Legacy Stem Common Stock. Upon the effectiveness of the Merger, these shares of Legacy Stem Common Stock automatically converted into 10,921,548 shares of common stock of Stem. The balance associated with the outstanding Pre-Merger Convertible Promissory Notes and the Q1 2021 Convertible Notes totaling $77.7 million, including $7.7 million of interest accrued on the notes through the date of Merger, was reclassified to additional paid-in-capital. The unamortized portion of the debt discount associated with the outstanding Q1 2021 Convertible Notes totaling $1.1 million was fully expensed to loss on extinguishment of debt on the Company’s statement of operations.
2028 Convertible Notes and Capped Call Options
2028 Convertible Notes
On November 22, 2021, the Company issued $460.0 million aggregate principal amount of its 2028 Convertible Notes in a private placement offering to qualified institutional buyers (the “Initial Purchasers”) pursuant to Rule 144A under the Securities Act of 1933, as amended.
The 2028 Convertible Notes are senior, unsecured obligations of the Company and bear interest at a rate of 0.5% per year, payable in cash semi-annually in arrears in June and December of each year, beginning in June 2022. The notes will mature on December 1, 2028, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon conversion, the Company may choose to pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The Notes are redeemable for cash at the Company’s option at any time given certain conditions (as discussed below), at an initial conversion rate of 34.1965 shares of common stock per $1,000 principal amount of 2028 Convertible Notes, which is equivalent to an initial conversion price of approximately $29.24 (the “2028 Conversion Price”) per share of the Company’s common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture.
The Company may redeem for cash all or any portion of the 2028 Convertible Notes, at the Company’s option, on or after December 5, 2025 if the last reported sale price of the Company’s common stock has been at least 130% of the 2028 Conversion Price then in effect for at least 20 trading days at a redemption price equal to 100% of the principal amount of the 2028 Convertible Notes to be redeemed, plus accrued and unpaid interest.
The Company’s net proceeds from this offering were approximately $445.7 million, after deducting the Initial Purchasers’ discounts and debt issuance costs. To minimize the impact of potential dilution to the Company’s common stockholders upon conversion of the 2028 Convertible Notes, the Company entered into separate capped calls transactions (the “Capped Calls”) as described below.
Upon adoption of ASU 2020-06, the Company allocated all of the debt discount to long-term debt. The debt discount is amortized to interest expense using the effective interest method, computed to be 0.9%, over the life of the 2028 Convertible Notes or approximately its seven-year term. The outstanding 2028 Convertible Notes balances as of March 31, 2022 are summarized in the following table (in thousands):
| March 31, 2022 | |||||
| Long Term Debt | |||||
| Outstanding principal | $ | 460,000 | |||
| Unamortized initial purchaser’s debt discount and debt issuance cost | (13,582) | ||||
| Net carrying amount | $ | 446,418 | |||
The following table presents total interest expense recognized related to the 2028 Convertible Notes during the three months ended March 31, 2022 (in thousands):
21
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| March 31, 2022 | |||||
| Cash interest expense | |||||
| Contractual interest expense | $ | 575 | |||
| Non-cash interest expense | |||||
| Amortization of debt discount and debt issuance cost | 495 | ||||
| Total interest expense | $ | 1,070 | |||
Capped Call Options
On November 17, 2021, in connection with the pricing of the 2028 Convertible Notes, and on November 19, 2021, in connection with the exercise in full by the Initial Purchasers of their option to purchase additional Notes, the Company entered into Capped Calls with certain counterparties. The Company used $66.7 million of the net proceeds to pay the cost of the Capped Calls.
The Capped Calls have an initial strike price of $29.2428 per share, which corresponds to the initial conversion price of the 2028 Convertible Notes and is subject to anti-dilution adjustments. The Capped Calls have a cap price of $49.6575 per share, subject to certain adjustments.
The Capped Calls are considered separate transactions entered into by and between the Company and the Capped Calls counterparties, and are not part of the terms of the 2028 Convertible Notes. The Company recorded a reduction to additional paid-in capital of $66.7 million during the year ended December 31, 2021 related to the premium payments for the Capped Calls. These instruments meet the conditions outlined in ASC 815 to be classified in stockholders’ equity and are not subsequently remeasured as long as the conditions for equity classification continue to be met.
11.WARRANTS
Legacy Stem Warrants
Prior to the Merger, the Company had issued warrants to purchase shares of Legacy Stem’s preferred stock in conjunction with various debt financings. The Company has also issued warrants to purchase shares of Legacy Stem’s common stock. Upon effectiveness of the Merger, the Company had 50,207,439 warrants outstanding, of which substantially all were converted into 2,759,970 shares of common stock of Stem. Upon conversion of the warrants, the existing warrant liabilities were remeasured to fair value resulting in a gain on remeasurement of $100.9 million and a total warrant liability of $60.6 million, which was then reclassified to additional paid-in-capital. At March 31, 2022, there were 23,673 Legacy Stem Warrants outstanding. These instruments are exercisable into the Company’s common stock and are equity classified.
Public Warrants and Private Placement Warrants
As part of STPK’s initial public offering, under a Warrant Agreement dated as of August 20, 2020 (the “Warrant Agreement”) and, prior to the effectiveness of the Merger, STPK issued 12,786,168 warrants, each of which entitled the holder to purchase one share of common stock at an exercise price of $11.50 per share of common stock (the “Public Warrants”). Simultaneously with the closing of the initial public offering, STPK completed the private sale of 7,181,134 million warrants to STPK’s sponsor (the “Private Warrants”). Upon issuance, these warrants met the criteria for liability classification. Upon the effectiveness of the Merger, Stem assumed the outstanding Public Warrants and Private Warrants, which continued to meet the criteria for liability classification, resulting in assumed warrant liabilities of $185.9 million and $116.7 million, respectively, or a total warrant liability of $302.6 million. Such warrants were initially recorded at fair value and remeasured to fair value at each reporting period. The fair value of the Private Warrants was determined using the Black-Scholes method as well as a discount for lack of marketability. Black-Scholes inputs used to value the warrants are based on information from purchase agreements and within valuation reports prepared by an independent third party for the Company. Inputs include exercise price, selection of guideline public companies, volatility, fair value of common stock, expected dividend rate and risk-free interest rate.
On June 25, 2021, the Company entered into an exchange agreement (the “Exchange Agreement”) with the holders of the 7,181,134 outstanding Private Placement Warrants, pursuant to which such holders received 4,683,349 shares of the Company’s common stock on June 30, 2021, in exchange for the cancellation of all outstanding Private Placement Warrants. The Exchange Shares were issued in reliance upon the exemption provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Immediately prior to the exchange, the Private Warrants were marked to fair value, resulting in a loss of $52.0 million. As a result of the Exchange Agreement, there are no Private Warrants outstanding.
22
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On August 20, 2021, the Company issued an irrevocable notice for redemption of all 12,786,129 of the Company’s outstanding public warrants at 5:00 p.m. Eastern time on September 20, 2021 (“Redemption Date”). Pursuant to the notice of redemption, holders exercised 12,638,723 Public Warrants for a purchase price of $11.50 per share, for proceeds to the Company of approximately $145.3 million. The Company redeemed all remaining outstanding Public Warrants that had not been exercised as of 5:00 p.m. Eastern time on the Redemption Date. As a result of the settlement of the Public Warrants, the Company recorded a gain of $134.9 million on the revaluation of the warrant liability. The Company also recorded a gain of $2.1 million on the redemption of unexercised Public Warrants. These gains are recorded in “change in fair value of warrants and embedded derivative” in the condensed consolidated statements of operation for the year ended December 31, 2021. The Public Warrants have been delisted from the NYSE, and there are no Public Warrants outstanding.
Warrants Issued for Services
On April 7, 2021, the Company entered into a strategic relationship with an existing shareholder not deemed to be a related party to jointly explore, on a non-exclusive basis possible business opportunities to advance projects in the United States, the United Kingdom, Europe and Asia. As consideration for the strategic relationship, upon closing of the Merger, the Company issued warrants to purchase 350,000 shares of the Company’s common stock at an exercise price of $0.01 per share. These warrants were deemed to have been fully earned as of the grant date. The warrants were valued at fair market value as of the grant date totaling $9.2 million and recorded to general and administrative expense in the Company’s statement of operations. In May 2021, all of these warrants were exercised for shares of the Company’s common stock.
12.COMMON STOCK
As of March 31, 2022, the Company had reserved shares of common stock for issuance as follows:
| March 31, 2022 | |||||
| Shares reserved for warrants | 23,673 | ||||
| Options issued and outstanding | 9,218,431 | ||||
| RSUs issued and outstanding | 5,967,768 | ||||
| Shares available for future issuance under equity incentive plan | 15,556,388 | ||||
| Conversion of 2028 Convertible Notes | 20,842,773 | ||||
| Total | 51,609,033 | ||||
As of March 31, 2022, the Company had 23,722,254 shares of common stock reserved for future issuance under the Stem Inc. 2021 Equity Incentive Plan (the “2021 Plan”). As of March 31, 2022, 2,193,492 stock options and 5,972,374 RSUs had been granted to employees under the 2021 Plan.
13.STOCK-BASED COMPENSATION
Under both the Stem, Inc. 2009 Equity Incentive Plan (the “2009 Plan”) and the 2021 Plan (together the “Plans”), the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and other awards that are settled in shares of the Company’s common stock. The Plans permit net settlement of vested awards, pursuant to which the award holder forfeits a portion of the vested award to satisfy the purchase price (in the case of stock options), the holder’s withholding tax obligation, if any, or both. When the holder net settles the tax obligation, the Company pays the amount of the withholding tax to the U.S. government in cash, which is accounted for as an adjustment to additional paid-in-capital. The Company does not intend to grant new awards under the 2009 Plan. At March 31, 2022, 7,109,200 stock options were outstanding under the 2009 Plan. In May 2021, the Company began issuing awards under the 2021 Plan, with 23,722,254 shares reserved thereunder.
Stock Options
Under the Plans, the exercise price of an option cannot be less than 100% of the fair value of one share of common stock for incentive or non-qualified stock options, and not less than 110% of the fair value for stockholders owning greater than 10% of all classes of stock, as determined by the Company’s Board of Directors (the “Board”). Options under the Plans generally expire after 10 years. Under the Plans, the Compensation Committee of the Board determines when the options granted will become exercisable. Options granted under the Plans generally vest 1/4 one year from the grant date and then 1/48 each month over the following three years and are exercisable for 10 years from the date of the grant. The Plans allow for exercise of unvested options with repurchase rights over the restricted common stock issued at the original exercise price. The repurchase rights lapse at the same rate as the options vest.
23
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes the stock option activity for the period ended March 31, 2022:
| Number of Options Outstanding | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Life (years) | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
| Balances as of December 31, 2021 | 8,766,466 | $ | 6.01 | 7.1 | $ | 123,570 | |||||||||||||||||
| Options granted | 1,117,857 | 9.33 | |||||||||||||||||||||
| Options exercised | (631,050) | 2.17 | |||||||||||||||||||||
| Options forfeited | (34,842) | 18.46 | |||||||||||||||||||||
| Balances as of March 31, 2022 | 9,218,431 | $ | 6.63 | 7.2 | $ | 58,068 | |||||||||||||||||
| Options vested and exercisable — March 31, 2022 | 5,866,395 | $ | 2.68 | 6.2 | $ | 49,144 | |||||||||||||||||
The weighted-average grant date fair value of stock options granted to employees was $5.84 during the three months ended March 31, 2022. The intrinsic value of options exercised was $5.5 million and $30.2 million during the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, the Company issued 216,711 shares of common stock from the net settlement of 422,594 stock options and shares granted. The Company paid $0.8 million in withholding taxes in connection with the net share settlement of these awards.
Restricted Stock Units
RSUs represent a right to receive one share of the Company’s common stock. This right is both non-transferable and forfeitable unless and until certain conditions are satisfied. RSUs generally, either vest 100% on the third anniversary of the award grant date, or vest 1/4 per year over a four-year period, subject to continued employment through each anniversary. During the year ended December 31, 2021, the Company granted RSUs, which vest 1/5 per year over approximately a seven-year period starting in April 2024. The fair value of restricted stock units is determined on the grant date and is amortized over the vesting period on a straight-line basis.
The following table summarizes the RSU activity for the period ended March 31, 2022:
| Number of RSUs Outstanding | Weighted-Average Grant Date Fair Value Per Share | ||||||||||
| Balances as of December 31, 2021 | 1,799,677 | $ | 36.0 | ||||||||
| RSUs granted | 4,170,543 | 9.2 | |||||||||
| RSUs vested | — | — | |||||||||
| RSUs forfeited | (2,452) | 26.4 | |||||||||
| Balances as of March 31, 2022 | 5,967,768 | $ | 17.2 | ||||||||
The fair value of all RSUs granted during the three months ended March 31, 2022 was $38.1 million.
Stock-Based Compensation
The following table summarizes stock-based compensation expense recorded in each component of operating expenses in the Company’s consolidated statements of operations and comprehensive loss (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Sales and marketing | $ | 824 | $ | 84 | |||||||
| Research and development | 1,307 | 155 | |||||||||
| General and administrative | 4,134 | 521 | |||||||||
| Total stock-based compensation expense | $ | 6,265 | $ | 760 | |||||||
24
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of March 31, 2022, the Company had approximately $25.3 million of remaining unrecognized stock-based compensation expense for stock options, which is expected to be recognized over a weighted average period of 3.3 years. As of March 31, 2022, the Company had approximately $89.7 million of remaining unrecognized stock-based compensation expense for RSUs, which is expected to be recognized over a weighted average period of 4.4 years. Research and development expenses of $0.5 million corresponding to internal-use software, were capitalized during the three months ended March 31, 2022.
14.NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share amounts):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator - Basic: | |||||||||||
| Net loss attributable to common stockholders, basic and diluted | $ | (22,483) | $ | (82,553) | |||||||
| Denominator: | |||||||||||
| Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | 150,491,041 | 40,425,009 | |||||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | (0.15) | $ | (2.04) | |||||||
The following potentially dilutive shares were not included in the calculation of diluted shares outstanding for the periods presented as the effect would have been anti-dilutive:
| March 31, 2022 | March 31, 2021 | ||||||||||
| Outstanding convertible promissory notes | — | 10,861,947 | |||||||||
| Outstanding 2028 Convertible Notes | 15,730,390 | — | |||||||||
| Outstanding stock options | 9,218,431 | 9,673,112 | |||||||||
| Outstanding warrants | 23,673 | 10,813,138 | |||||||||
| Outstanding RSUs | 5,967,768 | — | |||||||||
Total | 30,940,262 | 31,348,197 | |||||||||
15.INCOME TAXES
The following table reflects the Company's provision (benefit) for income taxes and the effective tax rates for the periods presented below (in thousands, except effective tax rate):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Loss before provision for (benefit from) income taxes | $ | (37,696) | $ | (82,553) | |||||||
| Provision for (benefit from) income taxes | $ | (15,213) | $ | — | |||||||
| Effective tax rate | 40.4 | % | — | % | |||||||
For the three months ended March 31, 2022, the Company recognized a benefit from income taxes of $15.2 million, representing an effective tax rate of 40.4%, which was higher than the statutory federal tax rate. The benefit from income taxes was due to the partial release of the Company’s valuation allowance on U.S. deferred tax assets, in connection with deferred tax liabilities resulting from intangible assets recognized in the acquisition of AlsoEnergy.
16.COMMITMENTS AND CONTINGENCIES
Contingencies
The Company is party to various legal proceedings from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. Management believes that the probability of a material loss with respect to any currently
25
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
pending legal proceeding is remote. However, litigation is inherently uncertain and it is not possible to definitively predict the ultimate disposition of any of these proceedings. The Company does not believe that there are any pending legal proceedings or other loss contingencies that will, either individually or in the aggregate, have a material adverse impact on the Company’s unaudited condensed consolidated financial statements.
Commitments
On February 1, 2022, as part of the acquisition of AlsoEnergy, the Company recognized a $1.3 million operating lease liability and corresponding operating lease right-of-use (“ROU”) asset, which are included in the condensed consolidated balance sheet as of March 31, 2022. The operating lease liability and operating lease ROU asset correspond to 15,847 and 13,947 square feet of leased office, manufacturing, laboratory and warehouse space in Boulder, Colorado and Longmont, Colorado, respectively. As of the acquisition date, the remaining lease terms for Boulder and Longmont are for 34 and 35 months, respectively. These lease agreements contemplate options to extend the non-cancelable lease term, which have been determined not reasonably certain to be exercised. Combined base rent for these two locations is $39,725 per month with escalating payments.
17.SUBSEQUENT EVENTS
On April 29, 2020, the Company filed a lawsuit against one of its insurers alleging breach of contract. On May 2, 2022, the Company received settlement proceeds of $1.1 million net of legal costs and fees. The Company considers this event a gain contingency, which will be recorded in the condensed consolidated statements of operations in the second quarter of 2022.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This first-quarter 2022 Form 10-Q, as well as other statements we make, contains “forward-looking statements” within the meaning of the federal securities laws, which include any statements that are not historical facts. Such statements often contain words such as “expect,” “may,” “can,” “believe,” “predict,” “plan,” “potential,” “projected,” “projections,” “forecast,” “estimate,” “intend,” “anticipate,” “ambition,” “goal,” “target,” “think,” “should,” “could,” “would,” “will,” “hope” “see,” “likely,” and other similar words.
Forward-looking statements address matters that are, to varying degrees, uncertain, such as statements about our financial and performance targets and other forecasts or expectations regarding, or dependent on, our business outlook; the expected synergies of the combined Stem/AlsoEnergy company; our ability to successfully integrate the combined companies; our joint ventures, partnerships and other alliances; reduction of greenhouse gas (“GHG”) emissions; the integration and optimization of energy resources; our business strategies and those of our customers; the global commitment to decarbonization; our ability to retain or upgrade current customers, further penetrate existing markets or expand into new markets; our ability to manage our supply chains and distribution channels and the effects of natural disasters and other events beyond our control, such as the COVID-19 pandemic and variants thereof, and government and business responses thereto; the impact of the ongoing conflict in Ukraine; our ability to meet contracted customer demand; and future results of operations, including revenue and Adjusted EBITDA. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including but not limited to our ability to achieve our financial and performance targets and other forecasts and expectations; our ability to help reduce GHG emissions; our ability to integrate and optimize energy resources; our ability to recognize the anticipated benefits of our recent acquisition of AlsoEnergy; challenges, disruptions and costs of integrating the combined company and achieving anticipated synergies, or such synergies taking longer to realize than expected; risks that the integration disrupts current plans and operations that may harm our business; uncertainty as to the effects of the transaction on our financial performance; our ability to grow and manage growth profitably; our ability to retain or upgrade current customers, further penetrate existing markets or expand into new markets; our ability to attract and retain qualified employees and key personnel; our ability to comply with, and the effect on their businesses of, evolving legal standards and regulations, particularly concerning data protection and consumer privacy and evolving labor standards; risks relating to the development and performance of our energy storage systems and software-enabled services; the risk that the global commitment to decarbonization may not materialize as we predict, or even if it does, that we might not be able to benefit therefrom; our ability to secure sufficient inventory from our suppliers to meet customer demand, and provide us with contracted quantities of equipment; general economic, geopolitical and business conditions in key regions of the world; the ongoing conflict in Ukraine; supply chain interruptions and manufacturing or delivery delays; disruptions in sales, production, service or other business activities; the risk that our business, financial condition and results of operations may be adversely affected by other political, economic, business and competitive factors; and other risks and uncertainties set forth in this Form 10-Q and our most recent Form 10-K and Forms 8-K filed with or furnished to the SEC. If one or more of these or other risks or uncertainties materializes (or the consequences of any such development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. Forward-looking and other statements in this Form 10-Q regarding our environmental, social and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking environmental, social and sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. Statements in this Form 10-Q are made as of May 5, 2022, and Stem disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise.
You should read the following management’s discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion and analysis should also be read together with our audited consolidated financial statements and related notes, as well as the section entitled “Stem’s Management’s Discussion and Analysis of Financial Condition and Results or Operations” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. You should carefully read the sections entitled “Special Note Regarding Forward-Looking Statements” contained herein and the section entitled “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Throughout this section, unless otherwise noted “we,” “us,” “our” and the “Company” refer to Stem and its consolidated subsidiaries.
The Merger
27
On April 28, 2021, Star Peak Energy Transition Corp. (“STPK”), an entity listed on the New York Stock Exchange under the trade symbol “STPK”, acquired Stem, Inc. (“Legacy Stem”), by the merger of STPK Merger Sub Corp., a Delaware corporation and wholly-owned subsidiary of STPK (“Merger Sub”), with and into Legacy Stem, with Legacy Stem continuing as the surviving entity and a wholly-owned subsidiary of STPK (the “Merger”). The public company resulting from the Merger was renamed Stem, Inc., which we refer to as “Stem,” “we,” “us,” “our,” or the Company, and is listed on the New York Stock Exchange under the trade symbol “STEM.” Upon the consummation of the Merger, Stem received approximately $550.3 million, net of fees and expenses. See Note 1 — Business, of the Notes to the unaudited condensed consolidated financial statements in this report, for additional details regarding this transaction. For financial reporting purposes, Legacy Stem is treated as the accounting acquirer.
Acquisition of AlsoEnergy
On February 1, 2022, we acquired 100% of the issued and outstanding capital stock of AlsoEnergy. The transaction combines our storage optimization capabilities with AlsoEnergy’s solar asset performance monitoring and control software. Through AlsoEnergy, we provide end-to-end turnkey solutions that monitor and manage renewable energy systems through AlsoEnergy’s PowerTrack software. PowerTrack includes data acquisitions and monitoring, performance modelling, agency reporting, internal reports, work order tickets, and supervisory control and data acquisition (“SCADA”) controls. AlsoEnergy has deployed systems at various international locations, but its primary customer base is in the United States, Germany and Canada. The total consideration for the AlsoEnergy acquisition was $653.0 million, comprised of $544.1 million paid in cash, and $108.9 million in the form of 8,621,006 shares of our common stock. We incurred $6.1 million of transaction costs related to the acquisition of AlsoEnergy, which were recorded in general and administrative expense during the three months ended March 31, 2022. See Note 6 — Business Combinations, of the Notes to the unaudited condensed consolidated financial statements in this report, for additional details regarding this transaction.
Overview
Our mission is to build and operate the largest, digitally connected, intelligent energy storage network for our customers. In order to fulfill our mission, (i) we provide our customers, which include commercial and industrial (“C&I”) enterprises as well as independent power producers, renewable project developers, utilities and grid operators, with an energy storage system, sourced from leading, global battery original equipment manufacturers (“OEMs”), that we deliver through our partners, including solar project developers and engineering, procurement and construction firms and (ii) through our Athena artificial intelligence (“AI”) platform (“Athena”), we provide our customers with on-going software-enabled services to operate the energy storage systems for 10 to 20 years. In addition, in all the markets where we operate our customers’ systems, we have agreements to manage the energy storage systems using the Athena platform to participate in energy markets and to share the revenue from such market participation.
We operate in two key areas within the energy storage landscape: Behind-the-Meter (“BTM”) and Front-of-the-Meter (“FTM”). An energy system’s position in relation to a customer’s electric meter determines whether it is designated a BTM or FTM system. BTM systems provide power that can be used on-site without interacting with the electric grid and passing through an electric meter. Our BTM systems reduce C&I customer energy bills and help our customers facilitate the achievement of their corporate environmental, social, and corporate governance (“ESG”) objectives. FTM, grid-connected systems provide power to off-site locations and must pass through an electric meter prior to reaching an end-user. Our FTM systems decrease risk for project developers, lead asset professionals, independent power producers and investors by adapting to dynamic energy market conditions in connection with the deployment of electricity and improving the value of energy storage over the course of their FTM system’s lifetime.
Since our inception in 2009, we have engaged in developing and marketing Athena’s software enabled services, raising capital, and recruiting personnel. We have incurred net operating losses and negative cash flows from operations each year since our inception. We have financed our operations primarily through proceeds received from the Merger, the issuance of convertible preferred stock, convertible senior notes, debt financing, and cash flows from customers. Our total revenue grew from $15.4 million for the three months ended March 31, 2021 to $41.1 million for the three months ended March 31, 2022. For the three months ended March 31, 2022 and 2021, we incurred net losses of $22.5 million and $82.6 million, respectively. As of March 31, 2022, we had an accumulated deficit of $530.5 million.
We expect that our sales and marketing, research and development, regulatory and other expenses will continue to increase as we expand our marketing efforts to increase sales of our solutions, expand existing relationships with our customers, and obtain regulatory clearances or approvals for future product enhancements. In addition, we expect our general and administrative costs and expenses to increase due to the additional costs associated with scaling our business operations as well as being a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations and other costs and expenses.
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Key Factors, Trends and Risks Affecting our Business
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including but not limited to:
Decline in Lithium-Ion Battery Costs
Our revenue growth is directly tied to the continued adoption of energy storage systems by our customers. The cost of lithium-ion energy storage hardware has declined significantly in the last decade and has resulted in a large addressable market today. The market for energy storage is rapidly evolving, and while we believe costs will continue to decline, there is no guarantee. If costs do not continue to decline, or do not decline as quickly as we anticipate, this could adversely affect our ability to increase our revenue and grow our business.
Increase in Deployment of Renewables
Deployment of intermittent resources has accelerated over the last decade, and today, wind and solar have become a low cost fuel source. We expect the cost of generating renewable energy to continue to decline and deployments of energy storage systems to increase. As renewable energy sources of energy production are expected to represent a larger proportion of energy generation, grid instability rises due to their intermittency, which can be addressed by energy storage solutions.
Competition
We are a market leader in terms of capacity of energy storage under management. We intend to strengthen our competitive position over time by leveraging the network effect of Athena’s AI infrastructure. Existing competitors may expand their product offerings and sales strategies, and new competitors may enter the market. Furthermore, our competitors include other types of software providers and some hardware manufacturers that offer software solutions. If our market share declines due to increased competition, our revenue and ability to generate profits in the future may be adversely affected.
Government Regulation and Compliance
Although we are not regulated as a utility, the market for our product and services is heavily influenced by federal, state, and local government statutes and regulations concerning electricity. These statutes and regulations affect electricity pricing, net metering, incentives, taxation, competition with utilities, and the interconnection of customer-owned electricity generation. In the United States and internationally, governments continuously modify these statutes and regulations and acting through state utility or public service commissions, regularly change and adopt different rates for commercial customers. These changes can positively or negatively affect our ability to deliver cost savings to customers.
Effects of COVID-19
The ongoing COVID-19 pandemic has resulted and may continue to result in widespread adverse effects on the global and U.S. economies. Ongoing government and business responses to COVID-19, along with COVID-19 variants and the resurgence of related disruptions, could have a continued material adverse impact on economic and market conditions and trigger a period of continued global and U.S. economic slowdown.
Our industry is currently facing shortages and shipping delays affecting the supply of inverters, enclosures, battery modules and associated component parts for inverters and battery energy storage systems available for purchase. These shortages and delays can be attributed in part to the COVID-19 pandemic and resulting government action, as well as broader macroeconomic conditions that may persist once the immediate effects of the COVID-19 pandemic have subsided, and have been exacerbated by the ongoing conflict between Russia and Ukraine. While we believe that a majority of our suppliers have secured sufficient supply to permit them to continue delivery and installations through the end of 2022, if these shortages and delays persist into 2023, they could adversely affect the timing of when battery energy storage systems can be delivered and installed, and when (or if) we can begin to generate revenue from those systems. We cannot predict the full effects the COVID-19 pandemic will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. We will continue to monitor developments affecting our workforce, our suppliers, our customers and our business operations generally, and will take actions we determine are necessary in order to mitigate these impacts as much as possible.
Non-GAAP Financial Measures
In addition to financial results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we use Adjusted EBITDA and non-GAAP gross margin, which are non-GAAP financial measures, for financial and operational decision making and as a means to evaluate our operating performance and prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and
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expenditures that may not be indicative of our operating performance, such as stock-based compensation and other non-cash charges, as well as discrete cash charges that are infrequent in nature. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to our historical performance and liquidity as well as comparisons to our competitors’ operating results. We believe these non-GAAP financial measures are useful to investors both because they (1) allow for greater transparency with respect to key metrics used by management in their financial and operational decision making and (2) are used by our institutional investors and the analyst community to help them analyze the health of our business. Adjusted EBITDA and non-GAAP gross margin should be considered in addition to, not as a substitute for, or superior to, other measures of financial performance prepared in accordance with GAAP.
Non-GAAP gross margin
We define non-GAAP gross margin as gross margin excluding amortization of capitalized software and impairments related to decommissioning of end-of-life systems.
The following table provides a reconciliation of gross margin (GAAP) to non-GAAP gross margin ($ in millions, except for percentages):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | 41.1 | $ | 15.4 | |||||||
| Cost of revenue | (37.4) | (15.5) | |||||||||
| GAAP Gross Margin | 3.6 | (0.1) | |||||||||
| GAAP Gross Margin (%) | 9 | % | (1) | % | |||||||
| Adjustments to Gross Margin: | |||||||||||
| Amortization of Capitalized Software & Developed Technology | 2.0 | 1.2 | |||||||||
| Impairments | 0.8 | 0.9 | |||||||||
| Non-GAAP Gross Margin | $ | 6.4 | $ | 2.0 | |||||||
| Non-GAAP Gross Margin (%) | 16 | % | 13 | % | |||||||
Historically, management included a separate “Other Adjustments” caption in the table above as part of the adjustments to gross margin. Other Adjustments consisted of certain operating expenses including communication and cloud service expenditures reclassified to cost of revenue. Other Adjustments are no longer in the calculation of Non-GAAP Gross Margin and Non-GAAP Gross Margin %.
Adjusted EBITDA
We calculate Adjusted EBITDA as net loss before depreciation and amortization, including amortization of internally developed software, net interest expense, further adjusted to exclude stock-based compensation and other income and expense items, including transaction and acquisition related charges, the change in fair value of warrants and embedded derivatives, and income tax provision or benefit. The expenses and other items that we exclude in our calculation of Adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude when calculating Adjusted EBITDA.
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The following table provides a reconciliation of Adjusted EBITDA to net loss:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net loss | $ | (22,483) | $ | (82,553) | |||||||
| Adjusted to exclude the following: | |||||||||||
Depreciation and amortization (1) | 8,896 | 6,012 | |||||||||
| Interest expense | 3,218 | 6,233 | |||||||||
| Stock-based compensation | 6,265 | 760 | |||||||||
| Change in fair value of warrants and embedded derivative | — | 66,397 | |||||||||
| Transaction costs in connection with business combination | 6,068 | — | |||||||||
| Litigation settlement | 400 | — | |||||||||
| Income tax benefit | (15,213) | — | |||||||||
| Adjusted EBITDA | $ | (12,849) | $ | (3,151) | |||||||
(1) Adjusted EBITDA for the three months ended March 31, 2022, reflects adjustments to depreciation and amortization of approximately $0.9 million for expenses related to impairments, decommissioning and forfeited incentives that were not previously reflected in reported Adjusted EBITDA amounts.
Financial Results and Key Metrics
The following table presents our financial results and our key metrics (in millions unless otherwise noted):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Key Financial Metrics | |||||||||||
| Revenue | $ | 41.1 | $ | 15.4 | |||||||
| GAAP Gross Margin | $ | 3.6 | $ | (0.1) | |||||||
| GAAP Gross Margin (%) | 9 | % | (1) | % | |||||||
| Non-GAAP Gross Margin | $ | 6.4 | $ | 2.0 | |||||||
| Non-GAAP Gross Margin (%) | 16 | % | 13 | % | |||||||
| Net loss | $ | (22.5) | $ | (82.6) | |||||||
| Adjusted EBITDA | $ | (12.8) | $ | (3.2) | |||||||
| Key Operating Metrics | |||||||||||
| 12-Month Pipeline (in billions)* (1) | $ | 5.2 | $ | 1.4 | |||||||
| Bookings (2) | $ | 150.8 | $ | 50.8 | |||||||
| Contracted Backlog* (3) | $ | 565.1 | $ | 221.0 | |||||||
| Contracted Storage AUM (in GWh)* (4) | 1.8 | 1.1 | |||||||||
| Solar Monitoring AUM (in GW)* (5) | 32.4 | ** | |||||||||
| CARR* (6) | $ | 51.5 | ** | ||||||||
| * at period end | |||||||||||
| ** not available | |||||||||||
(1) As described below. | |||||||||||
(2) As described below. | |||||||||||
(3) Total value of bookings in dollars, as reflected on a specific date. Backlog increases as new contracts are executed (bookings) and decreases as integrated storage systems are delivered and recognized as revenue. | |||||||||||
(4) Total GWh of systems in operation or under contract. | |||||||||||
(5) Total GW of systems in operation or under contract. | |||||||||||
(6) Contracted Annual Recurring Revenue (CARR): Annual run rate for all executed software services contracts including contracts signed in the period for systems that are not yet commissioned or operating. | |||||||||||
Pipeline
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Pipeline represents the total value (excluding market participation revenue) of uncontracted, potential hardware and software contracts that are currently being pursued by Stem direct salesforce and channel partners with developers and independent power producers seeking energy optimization services and transfer of energy storage systems that have a reasonable likelihood of execution within 12 months of the end of the relevant period based on project timelines published by such developers and independent power producers. We cannot guarantee that our pipeline will result in meaningful revenue or profitability.
Bookings
Due to the long-term nature of our contracts, bookings are a key metric that allows us to understand and evaluate the growth of our Company and our estimated future revenue related to customer contracts for our energy optimization services and transfer of energy storage systems. Bookings represents the accumulated value at a point in time of contracts that have been executed under both our host customer and partnership sales models.
For host customer sales, bookings represent the expected consideration from energy optimization services contracts, including estimated incentive payments that are earned by the host customer from utility companies in relation to the services provided by us and assigned by the host customer to us. For host customer sales, there are no differences between bookings and remaining performance obligations at any point in time.
For partnership sales, bookings are the sum of the expected consideration to be received from the transfer of hardware and energy optimization services (excluding any potential revenues from market participation). For partnership sales, even though we have secured an executed contract with estimated timing of project delivery and installation from the customer, we do not consider it a contract in accordance with FASB ASU 2014-09 Topic 606, Revenue from Contracts with Customers (“ASC 606”), or a remaining performance obligation, until the customer has placed a binding purchase order. A signed customer contract is considered a booking as this indicates the customer has agreed to place a purchase order in the foreseeable future, which typically occurs within three (3) months of contract execution. However, executed customer contracts, without binding purchase orders, are cancellable without penalty by either party.
For partnership sales, once a purchase order has been executed, the booking is considered to be a contract in accordance with ASC 606, and therefore, gives rise to a remaining performance obligation as we have an obligation to transfer hardware and energy optimization services in our partnership agreements. We also have the contractual right to receive consideration for our performance obligations.
The accounting policy and timing of revenue recognition for host customer contracts and partnership arrangements that qualify as contracts with customers under ASC 606, are described within Note 2 — Summary of Significant Accounting Policies, described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
The following discussion and analysis of our results of operations and our liquidity and capital resources includes the results of operations for AlsoEnergy for the period from February 1, 2022 through March 31, 2022. For additional information, including pro forma results of operations for the three months ended March 31, 2022 and 2021 calculated as if AlsoEnergy had been acquired as of January 1, 2021, see Note 6 — Business Combinations, of the Notes to the unaudited condensed consolidated financial statements in this report.
Components of Our Results of Operations
Revenue
We generate service revenue and hardware revenue. Service revenue is generated through arrangements with host customers to provide energy optimization services using our proprietary cloud-based software platform coupled with a dedicated energy storage system owned and controlled by us throughout the term of the contract. Fees charged to customers for energy optimization services generally consist of recurring fixed monthly payments throughout the term of the contract and in some arrangements, an installation and/or upfront fee component. We may also receive incentives from utility companies in relation to the sale of our services.
We generate hardware revenue through partnership arrangements consisting of promises to sell an energy storage system to solar plus storage project developers. Performance obligations are satisfied when the energy storage system along with all ancillary hardware components are delivered. The milestone payments received before the delivery of hardware are treated as deferred revenue. We separately generate services revenue through partnership arrangements by providing energy optimization services after the developer completes the installation of the project.
Cost of Revenue
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Cost of hardware revenue includes the cost of the hardware, which generally includes the cost of the hardware purchased from a manufacturer, shipping, delivery, and other costs required to fulfill our obligation to deliver the energy storage system to the customer location. Cost of revenue may also include any impairment of energy storage systems held in our inventory for sale to our customer. Cost of hardware revenue related to the sale of energy storage systems is recognized when the delivery of the product is completed.
Cost of service revenue includes depreciation of the cost of energy storage systems we own under long-term customer contracts, which includes capitalized fulfillment costs, such as installation services, permitting and other related costs. Cost of revenue may also include any impairment of inventory and energy storage systems, along with system maintenance costs associated with the ongoing services provided to customers. Costs of revenue are recognized as energy optimization and other supporting services are provided to our customers throughout the term of the contract.
Gross Margin
Our gross margin fluctuates significantly from quarter to quarter. Gross margin, calculated as revenue less costs of revenue, has been, and will continue to be, affected by various factors, including fluctuations in the amount and mix of revenue and the amount and timing of investments to expand our customer base. We hope to increase both our gross margin in absolute dollars and as a percentage of revenue through enhanced operational efficiency and economies of scale.
Operating Expenses
Sales and Marketing
Sales and marketing expense consists of payroll and other related personnel costs, including salaries, stock-based compensation, employee benefits, and travel for our sales and marketing personnel. In addition, sales and marketing expense includes trade show costs, amortization of intangibles and other expenses. We expect our selling and marketing expense to increase in future periods to support the overall growth in our business.
Research and development
Research and development expense consists primarily of payroll and other related personnel costs for engineers and third parties engaged in the design and development of products, third-party software and technologies, including salaries, bonus and stock-based compensation expense, project material costs, services and depreciation. We expect research and development expense to increase in future periods to support our growth, including continuing to invest in optimization, accuracy and reliability of our platform and other technology improvements to support and drive efficiency in our operations. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments.
General and Administrative Expense
General and administrative expense consists of payroll and other related personnel costs, including salaries, stock-based compensation, employee benefits and expenses for executive management, legal, finance and other costs. In addition, general and administrative expense includes fees for professional services and occupancy costs. We expect our general and administrative expense to increase in future periods as we scale up headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Other Income (Expense), Net
Interest Expense
Interest expense consists primarily of interest on our outstanding borrowings under our outstanding notes payable, convertible promissory notes, and financing obligations and accretion on our asset retirement obligations.
Change in Fair Value of Warrants and Embedded Derivatives
Change in fair value of warrants and embedded derivatives is related to the revaluation of our outstanding convertible preferred stock warrant liabilities and embedded derivatives related to the redemption features associated with our convertible notes at each reporting date.
Other Expenses, Net
Other expenses, net consists primarily of income from equity investments and foreign exchange gains or losses.
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Results of Operations for the Three Months Ended March 31, 2022 and 2021
| Three Months Ended March 31, | $ Change | % Change | |||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Service revenue | $ | 9,965 | $ | 4,881 | $ | 5,084 | 104% | ||||||||||||||||
| Hardware revenue | 31,123 | 10,539 | 20,584 | 195% | |||||||||||||||||||
| Total revenue | 41,088 | 15,420 | 25,668 | 166% | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Cost of service revenue | 8,633 | 6,905 | 1,728 | 25% | |||||||||||||||||||
| Cost of hardware revenue | 28,811 | 8,632 | 20,179 | 234% | |||||||||||||||||||
| Total cost of revenue | 37,444 | 15,537 | 21,907 | 141% | |||||||||||||||||||
| Gross margin | 3,644 | (117) | 3,761 | 3,215% | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 9,142 | 2,667 | 6,475 | 243% | |||||||||||||||||||
| Research and development | 8,943 | 4,407 | 4,536 | 103% | |||||||||||||||||||
| General and administrative | 20,512 | 2,692 | 17,820 | 662% | |||||||||||||||||||
| Total operating expenses | 38,597 | 9,766 | 28,831 | 295% | |||||||||||||||||||
| Loss from operations | (34,953) | (9,883) | (25,070) | 254% | |||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Interest expense | (3,218) | (6,233) | 3,015 | (48)% | |||||||||||||||||||
| Change in fair value of warrants and embedded derivative | — | (66,397) | 66,397 | (100)% | |||||||||||||||||||
| Other expenses, net | 475 | (40) | 515 | (1,288)% | |||||||||||||||||||
| Total other expense, net | (2,743) | (72,670) | 69,927 | (96)% | |||||||||||||||||||
| Loss before income taxes | (37,696) | (82,553) | 44,857 | (54)% | |||||||||||||||||||
| Income tax benefit | 15,213 | — | 15,213 | 100% | |||||||||||||||||||
| Net loss | $ | (22,483) | $ | (82,553) | $ | 60,070 | (73)% | ||||||||||||||||
Revenue
Revenue increased by $25.7 million, or 166%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily driven by a $20.6 million increase in hardware revenue primarily due to increase in demand for systems related to both FTM and BTM partnership agreements. Services revenue increased by $5.1 million primarily due to the inclusion of AlsoEnergy’s revenue in the current period.
Cost of Revenue
Cost of revenue increased by $21.9 million, or 141%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily driven by an increase of cost of hardware revenue of $20.2 million, inclusive of AlsoEnergy, which is in line with the increase in demand for systems, as well as an increase of $1.7 million in cost of service revenue, primarily related to AlsoEnergy.
Operating Expenses
Sales and Marketing
Sales and marketing expense increased by $6.5 million, or 243%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily due to an increase of $2.8 million in amortization expense including new acquired intangible assets as a result of the acquisition of AlsoEnergy, an increase of $2.2 million in personnel related expenses as a result of higher headcount, an increase of $0.7 million in stock-based compensation expense
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primarily due to grants of stock options and RSUs to employees, an increase of $0.5 million in software and subscription related expenses, and an increase of $0.3 million in professional services.
Research and Development
Research and development expense increased by $4.5 million, or 103%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily due to an increase of $2.9 million in personnel related expenses as a result of higher headcount, including new AlsoEnergy employees, an increase of $1.7 million in stock-based compensation expense primarily due to grants of stock options and RSUs to employees, an increase of $0.3 million in professional services, and an increase of $0.1 million in third-party software and technologies related expenses. The increase was partially offset by an increase of $0.5 million in capitalized software development costs, which are deducted from research and development expenses.
General and Administrative
General and administrative expense increased by $17.8 million, or 662%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was primarily driven by $6.1 million of transaction costs in connection with the acquisition of AlsoEnergy, an increase of $3.6 million in stock-based compensation expense primarily due to grants of stock options and RSUs to employees, an increase of $2.8 million in personnel related expenses as a result of higher headcount, including AlsoEnergy employees, an increase of $2.1 million in professional and legal fees, and an increase of $3.2 million in insurance and other expenses.
Other Income (Expense), Net
Interest Expense
Interest expense decreased by $3.0 million, or 48%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The decrease was primarily driven by the repayment of loans and the conversion of convertible notes in relation to the Merger for $4.5 million, partially offset by the recognition of $1.1 million of interest expense corresponding to the 0.50% Green Convertible Senior Notes due 2028 (the “2028 Convertible Notes”) issued in November 2021.
Change in Fair Value of Warrants and Embedded Derivative
The change in fair value of warrants and embedded derivative reflected no activity in the three months ended March 31, 2022 (as no warrants and embedded derivatives were outstanding), compared to a $66.4 million loss in the three months ended March 31, 2021. The $66.4 million expense in the three months ended March 31, 2021 resulted from a revaluation loss of the Series A, D and D’ warrants and embedded derivative.
Other Expenses, Net
Other expenses, net decreased by $0.5 million, or 1,288%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily as a result of additional interest income from our investments.
Income Tax Benefit
During the three months ended March 31, 2022, we recorded $15.2 million of tax benefit, as a result of the partial release of our deferred tax asset valuation allowance, in connection with deferred tax liabilities resulting from intangible assets recognized in the acquisition of AlsoEnergy.
Liquidity and Capital Resources
Sources of liquidity
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, contractual obligations and other commitments. We assess liquidity in terms of our cash flows from operations and their sufficiency to fund our operating and investing activities. To meet our payment service obligations we must have sufficient liquid assets and be able to move funds on a timely basis.
As of March 31, 2022, our principal source of liquidity is cash generated from financing activities. Cash generated from financing activities through December 31, 2021 primarily includes proceeds from the Merger and PIPE financing that provided us with approximately $550.3 million, net of fees and expenses, sales of convertible preferred stock, proceeds from convertible notes, including the 2028 Convertible Notes that provided us net proceeds of $445.7 million, proceeds from our various borrowings, and the exercise of Public Warrants, which provided $145.3 million of cash. In connection with the Merger, the
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convertible notes and related accrued interest converted to equity and we paid in full all other outstanding debt except the 2021 Credit Agreement described below. On February 1, 2022, we completed the acquisition of 100% of the issued and outstanding capital stock of AlsoEnergy for an aggregate purchase price of $653.0 million, including $544.1 million in cash and $108.9 million in common stock. We believe that our cash position is sufficient to meet our capital and liquidity requirements for at least the next 12 months from the date of issuance of this Form 10-Q.
Our business prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the early stages of commercial operations. The attainment of profitable operations is dependent upon future events, including obtaining adequate financing to complete our development activities, obtaining adequate supplier relationships, building our customer base, successfully executing our business and marketing strategy and hiring appropriate personnel. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on our business, operating results, financial condition.
In the future, we may be required to obtain additional equity or debt financing in order to support our continued capital expenditures and operations. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our business, growth and results of operations.
Our long-term liquidity requirements are linked primarily to the continued extension of the Athena and PowerTrack platforms and the use of our balance sheet to improve the terms and conditions associated with the purchase of energy storage systems from our hardware vendors. While we have plans to potentially expand our geographical footprint beyond our current partnerships and enter into joint ventures, those are not required initiatives to achieve our plan.
Financing Obligations
We have entered into arrangements wherein we finance the cost of energy storage systems via special purpose entities (“SPE”) we establish with outside investors. These SPEs are not consolidated into our financial statements, but are accounted for as equity method investments. Through the SPEs, the investors provide us upfront payments. Under these arrangements, the payment by the SPE to us is accounted for as a borrowing by recording the proceeds received as a financing obligation. The financing obligation is repaid with the future customer payments and incentives received. A portion of the amounts paid to the SPE is allocated to interest expense using the effective interest rate method.
Furthermore, we continue to account for the revenues from customer arrangements and incentives and all associated costs despite such systems being legally sold to the SPEs due to our significant continuing involvement in the operations of the energy storage systems.
The total financing obligation as of March 31, 2022 was $84.6 million, of which $14.2 million was classified as a current liability.
Notes Payable
2021 Credit Agreement
In January 2021, we entered into a non-recourse credit agreement to provide a total of $2.7 million towards the financing of certain energy storage systems that we own and operate. The credit agreement has a stated interest of 5.45% and a maturity date of June 2031. We received an advance under the credit agreement of $1.8 million in January 2021. The repayment of advances received under this credit agreement is determined by the lender based on the proceeds generated by us through the operation of the underlying energy storage systems. As of March 31, 2022, there were $1.9 million of outstanding borrowings under this credit facility.
2028 Green Convertible Senior Notes
On November 22, 2021, we sold to Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC and Barclays Capital Inc, as initial purchasers (the “Initial Purchasers”), and the Initial Purchasers purchased from us, $460 million aggregate principal amount of our 2028 Convertible Notes, pursuant to a purchase agreement dated as of November 17, 2021, by and between us and the Initial Purchasers. The 2028 Convertible Notes will accrue interest payable semi-annually in arrears and will mature on December 1, 2028, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon conversion, we may choose to pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The 2028 Convertible Notes are redeemable for cash at our option at any time given certain
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conditions. Refer to Note 10 — Convertible Promissory Notes, of the Notes to the unaudited condensed consolidated financial statements in this report, for additional details regarding this transaction.
On November 17, 2021, in connection with the pricing of the 2028 Convertible Notes, and on November 19, 2021, in connection with the exercise in full by the Initial Purchasers of their option to purchase additional Notes, we entered into capped call transactions with certain of the Initial Purchasers of the 2028 Convertible Notes to minimize the potential dilution to our common stockholders upon conversion of the 2028 Convertible Notes. Our net proceeds from this offering were approximately $445.7 million, after deducting the Initial Purchasers’ discounts and commissions and the estimated offering expenses payable by us. We used approximately $66.7 million of the net proceeds to pay the cost of the capped call transactions described above. We intend to allocate an amount equivalent to the net proceeds from this offering to finance or refinance, in whole or in part, existing or new eligible green expenditures of Stem, including investments related to creating a more resilient clean energy system, optimized software capabilities for energy systems, and reducing waste through operations.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
Net cash used in operating activities | $ | (26,005) | $ | (1,827) | |||||||
Net cash used in investing activities | (542,928) | (2,763) | |||||||||
Net cash provided by (used in) financing activities | (4,287) | 7,093 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (23) | 428 | |||||||||
Net increase (decrease) in cash and cash equivalents | $ | (573,243) | $ | 2,931 | |||||||
Operating Activities
During the three months ended March 31, 2022, net cash used in operating activities was $26.0 million, primarily resulting from our operating loss of $22.5 million, adjusted for non-cash charges of $1.4 million and net cash outflow of $4.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of income tax benefit of $15.3 million, depreciation and amortization of $8.7 million, non-cash interest expense of $0.5 million, related to debt issuance costs, stock-based compensation expense of $6.3 million, impairment of energy storage systems of $0.2 million, noncash lease expense of $0.5 million, and net amortization of premium on investments of $0.3 million. The net cash outflow from changes in operating assets and liabilities was primarily driven by an increase in accounts receivable of $3.4 million, an increase in other assets of $32.3 million, an increase in inventory of $46.6 million, and an increase in contract origination costs of $1.7 million, partially offset by an increase in accounts payable and accrued expenses of $61.8 million and an increase in deferred revenue of $17.7 million.
During the three months ended March 31, 2021, net cash used in operating activities was $1.8 million, primarily resulting from our operating loss of $82.6 million, adjusted by non-cash charges of $77.0 million and net cash inflow of $3.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of $5.1 million, non-cash interest expense of $3.9 million, which includes interest expenses associated with debt issuance costs, stock-based compensation expense of $0.8 million, and change in the fair value of warrant liability and embedded derivative of $66.4 million. The net cash inflow from changes in operating assets and liabilities was primarily driven by an increase in deferred revenue of $3.0 million, an increase in accounts payable and accrued expenses of $8.6 million, partially offset by an increase in other assets of $4.7 million, an increase in inventory of $1.5 million, an increase in accounts receivable of $1.0 million, an increase in contract origination costs of $0.8 million, and a decrease in lease liabilities of $0.2 million.
Investing Activities
During the three months ended March 31, 2022, net cash used for investing activities was $542.9 million, primarily consisting of $532.8 million net cash acquired for our acquisition of AlsoEnergy, $5.2 million in net purchases of available-for-sale investments, $0.1 million in purchases of energy systems, $1.2 million in purchases of property plant and equipment, and $3.5 million in capital expenditures on internally-developed software.
During the three months ended March 31, 2021, net cash used for investing activities was $2.8 million, consisting of $1.5 million in purchase of energy systems and $1.2 million in capital expenditures on internally-developed software.
Financing Activities
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During the three months ended March 31, 2022, net cash used in financing activities was $4.3 million, primarily from proceeds from financing obligations of $0.3 million, partially offset by repayment of financing obligations of $4.2 million.
During the three months ended March 31, 2021, net cash provided by financing activities was $7.1 million, primarily resulting from net proceeds from issuance of notes payable of $3.9 million, proceeds from financing obligations of $2.7 million, and net proceeds from issuance of convertible notes of $1.1 million, partially offset by repayment of notes payable of $0.2 million and repayment of financing obligations of $3.4 million.
Contractual Obligations and Commitments
As of March 31, 2022, there have been no material changes to our contractual obligations described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, or unconsolidated variable interest entities that either have, or are reasonably likely to have, a current or future material adverse effect on our unaudited condensed consolidated financial statements.
Critical Accounting Policies and Estimates
A summary of our critical accounting policies and estimates is presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements may be found in Note 2 — Summary of Significant Accounting Policies, of the Notes to the unaudited condensed consolidated financial statements in this report, which information is incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting Stem, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Our exposure to market risk has not changed materially since December 31, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (Disclosure Controls) within the meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our Disclosure Controls are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our Disclosure Controls are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
Based on management’s evaluation (under the supervision and with the participation of our CEO and our CFO) as of March 31, 2022, of the effectiveness of the design and operation of our Disclosure Controls, our CEO and CFO have concluded that, as of the end of the period covered by this Report, our Disclosure Controls were not effective as of March 31, 2022 due to material weaknesses identified in our internal control over financial reporting as disclosed below.
Material Weakness in Internal Control over Financial Reporting
During the course of preparing our financial statements as of and for the year ended December 31, 2021, management identified certain deficiencies in our internal controls over financial reporting that management believes to be material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
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Specifically, the material weaknesses identified related to (i) accounting for energy storage systems, deferred cost of goods sold and inventory, (ii) ineffective internal controls over review of the Company’s unaudited condensed consolidated financial statements and related disclosures, (iii) a lack of formality in our internal control activities, especially related to management review-type controls, and (iv) ineffective internal controls over the review of certain revenue recognition calculations. With respect to energy storage systems, inventory and deferred cost of goods sold, we did not properly track inflows and outflows, including the valuation of energy storage systems, due in part to the systems that the Company used to track and value energy storage systems and inventory. With respect to a lack of formality in our control activities, we did not sufficiently establish formal policies and procedures to design effective controls, establish responsibilities to execute these policies and procedures and hold individuals accountable for performance of these responsibilities, including over review over revenue recognition calculations. We had multiple control deficiencies aggregating to a material weakness over ineffective control activities.
Remediation Activities
Our management, with oversight of the Audit Committee of the Board, continues to devote significant time, attention and resources to remediating the aforementioned material weaknesses in its internal control over financing reporting, and believes that we have made significant progress to that end. The material weaknesses will be considered remediated when management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. As of March 31, 2022, the Company had taken, or initiated, as the case may be, the following steps intended to remediate the material weaknesses described above and strengthen its internal control over financial reporting that, as of March 31, 2022, had not yet been fully implemented or had not been in place for a sufficient period of time to demonstrate that they were having their desired effect:
•Develop and deliver internal control training to management and finance/accounting personnel, focusing on a review of management’s and individual roles and responsibilities related to internal control over financial reporting.
•Hire, train and develop experienced accounting executives and personnel with a level of public accounting knowledge and experience in the application of US GAAP commensurate with our financial reporting requirements and the complexity of our operations and transactions.
•Establish and implement policies and practices to attract, develop and retain competent public accounting personnel.
•Engage a qualified third party Sarbanes-Oxley (“SOX”) compliance firm to assist us in bolstering and implementing our SOX compliance program, with a focus on documenting processes and controls, identifying and addressing control gaps, formalizing the internal control activities and strengthening the overall quality of documentation that evidences control activities.
•Perform a financial statement risk assessment and scoping exercise to identify and assess the risks of material misstatements in our financial statements to better ensure that the appropriate effort and resources are dedicated to addressing risks of material misstatements.
•Establish a disclosure committee comprised of our CEO, CFO, Chief Legal Officer, Chief Accounting Officer and other senior finance/accounting/legal personnel to, among other things, review and, as necessary, help revise the Company’s controls and other procedures to ensure that information required by us to be disclosed is recorded, processed, summarized and reported accurately and on a timely basis.
•Implement a Section 302 sub-certification program to reinforce the Company’s culture of compliance.
•Implement processes to improve monitoring activities involving the review and supervision of our accounting operations, including increased and enhanced balance sheet reviews to allow more focus on quality account reconciliations and enhanced monitoring of our internal control over financial reporting.
•Implement new accounting applications to enhance and streamline the order-to-cash and commissions processes.
Changes in Internal Control over Financial Reporting
Other than the remediation actions to address the existing material weaknesses as described above, there were no changes in our internal controls over financial reporting during the first quarter of 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Internal Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
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costs. Furthermore, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures.
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Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
The information with respect to this Item 1 is set forth under Note 16 — Commitments and Contingencies, of the Notes to the unaudited condensed consolidated financial statements in this report.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, except as set forth below. The risk factor set forth below updates, and should be read together with, the risk factors set forth in our Form 10-K.
Changes in the U.S. trade environment, including the imposition of import tariffs, could adversely affect the amount or timing of our revenues, results of operations or cash flows.
Escalating trade tensions, particularly between the United States and China, have led to increased tariffs and trade restrictions, including tariffs applicable to certain materials and components for products used in solar energy projects and the renewable energy market more broadly, such as module supply and availability. More specifically, in March 2018, the United States imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports pursuant to Section 301 of the Trade Act of 1974 and has imposed additional tariffs on steel and aluminum imports pursuant to Section 232 of the Trade Expansion Act of 1962. To the extent we source products that contain overseas supplies of steel and aluminum, these tariffs could result in interruptions in the supply chain and negatively affect costs and our gross margins. Additionally, in January 2018, the United States adopted a tariff on imported solar modules and cells pursuant to Section 201 of the Trade Act of 1974. The tariff was initially set at 30%, with a gradual reduction over four years to 15%. While this tariff does not apply directly to the components we import, it may indirectly affect us by affecting the financial viability of solar energy projects, which could in turn reduce demand for our products. Furthermore, in July 2018, the United States adopted a 10% tariff on a long list of products imported from China under Section 301 of the Trade Act of 1974, including, inverters and power optimizers, which became effective on September 24, 2018. In June 2019, the Office of the U.S. Trade Representative increased the rate of such tariffs from 10% to 25%. While these tariffs are not directly applicable to our products, they could negatively affect the solar energy projects in which our products are used, which could lead to decreased demand for our products.
In addition, the United States currently imposes antidumping and countervailing duties on certain imported crystalline silicon PV cells and modules from China and Taiwan. Such antidumping and countervailing duties can change over time pursuant to annual reviews conducted by the U.S. Department of Commerce (“USDOC”), and an increase in duty rates could have an adverse impact on our operating results.
In February 2022, Auxin Solar Inc., a U.S. producer of crystalline silicon PV products, petitioned the USDOC to investigate alleged circumvention of antidumping and countervailing duties on Chinese imports by crystalline silicon PV cells and module imports assembled and completed in Cambodia, Malaysia, Thailand, and Vietnam. On March 28, 2022, the USDOC announced that it would investigate the circumvention alleged in the petition. The timing and progress of many of our customers’ projects depend upon the supply of PV cells and modules. As a result, if the USDOC makes negative circumvention determinations, it could adversely affect our business, financial condition and results of operations.
Tariffs, and the possibility of additional tariffs in the future, have created uncertainty in the industry. This has resulted in, and may continue to result in, some project delays. If the price of solar systems or energy storage systems in the United States increases, the use of these products could become less economically feasible and could reduce our gross margins or reduce the demand of such systems manufactured and sold, which in turn may decrease demand for our products. Additionally, existing or future tariffs may negatively affect key customers, suppliers, and manufacturing partners. Such outcomes could adversely affect the amount or timing of our revenues, results of operations or cash flows, and continuing uncertainty could cause sales volatility, price fluctuations or supply shortages, or cause our customers to advance or delay their purchase of our products. It is difficult to predict what further trade-related actions governments may take, which may include additional or increased tariffs and trade restrictions, and we may be unable to quickly and effectively react to such actions.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Except as previously disclosed in our Current Report on Form 8-K filed on February 2, 2022, no unregistered sales of our common stock were made during the three months ended March 31, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBIT INDEX
| EXHIBIT INDEX | ||||||||||||||
| Exhibit No. | Description | |||||||||||||
| 3.1 | Second Amended and Restated Certificate of Incorporation, dated April 28, 2021 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 4, 2021). | |||||||||||||
| 3.2 | Second Amended and Restated by-Laws, dated April 28. 2021 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on May 4, 2021). | |||||||||||||
| 31.1 | ||||||||||||||
| 31.2 | ||||||||||||||
| 32.1 | ||||||||||||||
| 32.2 | ||||||||||||||
| 101.INS | Inline XBRL Instance Document | |||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||||||||
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 5, 2022.
| STEM, INC. | |||||||||||
| By: | /s/ William Bush | ||||||||||
| William Bush | |||||||||||
| Chief Financial Officer | |||||||||||
(Principal Financial Officer) | |||||||||||
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