Stem, Inc 8-K/A, filed May 17, 2021
Stem, Inc. (STEM)
8-K/A
2021-05-17
For: 2021-04-28
View Original
Added on
April 07, 2026
About this 8-K/A
Stem, Inc filed this 8-K/A on May 17, 2021, reporting on events of April 28, 2021.
Items reported
- Item 2.02: Financial results
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date Earliest Event Reported): May 17, 2021 (April 28, 2021 )
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code:
(415 ) 937-7816
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |||||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e- 4(c)) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
INTRODUCTORY NOTE
This Amendment No. 1 on Form 8-K/A (“Amendment No. 1”) amends the Current Report on Form 8-K of Stem, Inc., a Delaware corporation (formerly known as Star Peak Energy Transition Corp.) (prior to the Closing Date, “STPK” and after the Closing Date, “New Stem”), filed on May 4, 2021 (the “Original Report”), in which the Company (as defined below) reported, among other events, the completion of the Merger (as defined in the Original Report) on April 28, 2021 (the “Closing Date”).
In connection with the Closing, the registrant changed its name from Star Peak Energy Transition Corp., to Stem, Inc. Unless the context otherwise requires, “New Stem,” “we,” “us,” “our,” and the “Company” refer to the combined company following the Merger, together with its subsidiaries, “STPK” refers to the registrant prior to the closing of the Merger and “Stem” refers to Rollins Road Acquisition Company (f/k/a Stem, Inc.), together with its subsidiaries, prior to the Merger.
This Amendment No. 1 includes (i) the unaudited condensed consolidated financial statements of Stem as of March 31, 2021 and for the three months ended March 31, 2021 and 2020, (ii) Stem's Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2021 and 2020 and (iii) the unaudited pro forma condensed combined financial information of STPK and Stem as of and for the three months ended March 31, 2021.
This Amendment No. 1 does not amend any other item of the Original Report or purport to provide an update or a discussion of any developments at the Company or its subsidiaries, including Stem, subsequent to the filing date of the Original Report. The information previously reported in or filed with the Original Report is hereby incorporated by reference to this Form 8-K/A.
Item 2.02. Results of Operations and Financial Condition.
This Amendment No. 1 includes (i) the unaudited condensed consolidated financial statements of Stem as of March 31, 2021 and for the three months ended March 31, 2021 and 2020, (ii) Stem's Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2021 and 2020, and (iii) the unaudited pro forma condensed combined financial information of STPK and Stem as of and for the three months ended March 31, 2021.
The information set forth under Item 9.01 of this Current Report on Form 8-K is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements.
The unaudited condensed consolidated financial statements of Stem as of March 31, 2021 and for the three months ended March 31, 2021 and 2020, and the related notes thereto are attached as Exhibit 99.1 and are incorporated herein by reference. Also included as Exhibit 99.2 and incorporated herein by reference is the Management’s Discussion and Analysis of Financial Condition and Results of Operations of Stem for the three months ended March 31, 2021 and 2020.
(b) Pro forma financial information.
The unaudited pro forma condensed combined financial information of STPK and Stem as of March 31, 2021, and for the three months ended March 31, 2021 and for the year ended December 31, 2020, and the related notes thereto are attached as Exhibit 99.3 and are incorporated herein by reference.
2
(d) Exhibits.
Exhibit Index
| Exhibit No. | Description | |||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
| 99.3 | ||||||||
| 99.6 | ||||||||
SIGNATURES
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 hereunto duly authorized.
| STEM, INC. | |||||||||||
| By: | /s/ William Bush | ||||||||||
| Name: | William Bush | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
| Date: May 17, 2021 | |||||||||||
3
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2021 and 2020
STEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventory, net | |||||||||||
Other current assets (includes $ | |||||||||||
| Total current assets | |||||||||||
| Energy storage systems, net | |||||||||||
| Contract origination costs, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Accrued payroll | |||||||||||
| Notes payable, current portion | |||||||||||
Convertible promissory notes (includes $ | |||||||||||
| Financing obligation, current portion | |||||||||||
| Deferred revenue, current | |||||||||||
Other current liabilities (includes $ | |||||||||||
| Total current liabilities | |||||||||||
| Deferred revenue, noncurrent | |||||||||||
| Asset retirement obligation | |||||||||||
| Notes payable, noncurrent | |||||||||||
| Financing obligation, noncurrent | |||||||||||
| Warrant liabilities | |||||||||||
| Lease liability, noncurrent | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 13) | |||||||||||
Convertible preferred stock, $ | |||||||||||
| Stockholders’ Deficit: | |||||||||||
Series 1 convertible preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ deficit | ( | ( | |||||||||
| Total liabilities, convertible preferred stock and stockholders’ deficit | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Services revenue | $ | $ | |||||||||
| Hardware revenue | |||||||||||
| Total revenue | |||||||||||
| Cost of service revenue | |||||||||||
| Cost of hardware revenue | |||||||||||
| Total cost of revenue | |||||||||||
| Gross margin | ( | ( | |||||||||
| Operating expenses: | |||||||||||
| Sales and marketing | |||||||||||
| Research and development | |||||||||||
| General and administrative | |||||||||||
| Total operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income (expense), net: | |||||||||||
| Interest expense | ( | ( | |||||||||
| Change in fair value of warrants and embedded derivative | ( | ||||||||||
| Other expenses, net | ( | ( | |||||||||
| Total other income (expense) | ( | ( | |||||||||
| Loss before income taxes | ( | ( | |||||||||
| Income tax expense | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Net loss per share attributable to common shareholders, basic and diluted | $ | ( | $ | ( | |||||||
| Weighted-average shares used in computing net loss per share, basic and diluted | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income: | |||||||||||
| Foreign currency translation adjustment | |||||||||||
| Total comprehensive loss | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(in thousands, except share amounts)
| Convertible Preferred Stock | Series 1 Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recognition of beneficial conversion feature related to convertible notes (Note 7) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common and preferred stock upon exercise of stock options and warrants | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock | Series 1 Convertible Preferred Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of exchange transaction (Note 7) | ( | ( | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and warrants | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-5
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization expense | |||||||||||
| Non-cash interest expense, including interest expenses associated with debt issuance costs | |||||||||||
| Stock-based compensation | |||||||||||
| Change in fair value of warrant liability and embedded derivative | ( | ||||||||||
| Noncash lease expense | |||||||||||
| Accretion expense | |||||||||||
| Impairment of energy storage systems | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Contract origination costs | ( | ( | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Deferred revenue | |||||||||||
| Lease liabilities | ( | ( | |||||||||
| Other liabilities | |||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchase of energy storage systems | ( | ( | |||||||||
| Capital expenditures on internally-developed software | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Proceeds from exercise of stock options and warrants | |||||||||||
| Proceeds from financing obligations | |||||||||||
| Repayment of financing obligations | ( | ( | |||||||||
Proceeds from issuance of convertible notes, net of issuance costs of $ | |||||||||||
| Proceeds from issuance of notes payable | |||||||||||
| Repayment of notes payable | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | |||||||||||
| Change in asset retirement costs and asset retirement obligation | $ | $ | |||||||||
| Purchases of energy storage systems in accounts payable | $ | $ | |||||||||
| Conversion of accrued interest into outstanding note payable | $ | $ | |||||||||
| Settlement of warrant liability into preferred stock due to exercise | $ | $ | |||||||||
| Stock-based compensation capitalized to internal-use software | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-6
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.BUSINESS
Description of the Business
Rollins Road Acquisition Company (f/k/a Stem, Inc.) and its subsidiaries (together “Stem, Inc.,” “Stem” or the “Company”) is an energy technology company that creates innovative technology services that transform the way energy is distributed and consumed. Through its technology, the Company enables businesses to control their electricity expense and helps the electrical grid be more efficient in managing peak usage. Prior to the Merger (as defined below), Rollins Road Acquisition Company was named Stem, Inc.
Stem, Inc. was incorporated on March 16, 2009 in the State of Delaware and is headquartered in Millbrae, 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”, prior to the closing of the Merger and the “New Stem”, following the closing of the Merger), 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 proposed merger of Merger Sub with and into the Company with the Company continuing as the surviving entity (the “Merger”).
On April 28, 2021, shareholders approved the Merger Agreement, under which Stem received approximately $577.1 million, net of fees and expenses. See Note 14, Subsequent Events for additional details regarding this transaction.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), assuming the Company will continue as a going concern. As of March 31, 2021, the Company had cash and cash equivalents of $9.9 million, an accumulated deficit of $490.4 million and net current liabilities of $154.9 million, with $123.1 million of debt financing coming due within the next 12 months. During the three months ended March 31, 2021, the Company incurred a net loss of $82.6 million and had negative cash flows from operating activities of $1.8 million. However, as previously noted, the Company closed the Merger on April 28, 2021 that provided the Company with a significant amount of cash proceeds. The Company believes that the cash position, inclusive of funds raised with the Merger, is sufficient to meet capital and liquidity requirement for at least the next 12 months after the date that the financial statements are available to be issued and, therefore, there is no longer substantial doubt about the Company’s ability to continue as a going concern.
The Company’s business prospects are subject to risks, expenses, and uncertainties frequently encountered by companies in the early stages of commercial operations. To date, the Company has been funded primarily by equity financings, convertible promissory notes and borrowings from affiliates. The attainment of profitable operations is dependent upon future events, including obtaining adequate financing to complete the Company’s development activities, obtaining adequate supplier relationships, building its customer base, successfully executing its 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 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, financial condition, and ability to achieve its intended business objectives.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus disease (“COVID-19”) as a pandemic, and we expect our operations in all locations to be affected as the virus continues to proliferate. We have adjusted certain aspects of our operations to protect our employees and customers while still meeting customers’ needs for vital technology. We will continue to monitor the situation closely and it is possible that we will implement further measures. In light of the uncertainty as to the severity and duration of the pandemic, the impact on our revenues, profitability and financial position is uncertain at this time.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
F-7
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and include the accounts of the Company, its wholly-owned subsidiaries, and consolidated variable interest entities (“VIEs”). All intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying interim condensed consolidated balance sheet as of March 31, 2021, the interim condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss, condensed consolidated statements of convertible preferred stock and stockholders’ deficit and condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020, and amounts relating to the interim periods included in the accompanying notes to the interim condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited consolidated financial statements, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s condensed consolidated balance. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes for the years ended December 31, 2020 and 2019.
Use of Estimates
The preparation of 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 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 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 and embedded derivatives.
F-8
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Accounts Receivable | Revenue | ||||||||||||||||||||||
| March 31, | December 31, | Three Months Ended March 31, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Customers: | |||||||||||||||||||||||
| Customer A | * | * | % | * | |||||||||||||||||||
| Customer B | % | % | * | * | |||||||||||||||||||
| Customer C | % | % | * | * | |||||||||||||||||||
| Customer D | % | % | * | * | |||||||||||||||||||
| Customer E | * | * | % | * | |||||||||||||||||||
| Customer F | * | * | * | % | |||||||||||||||||||
*Total less than 10% for the respective period
Fair Value of Financial Instruments
Assets and liabilities recorded at fair value in the 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, 2021 and December 31, 2020 include cash and cash equivalents and warrant liabilities.
Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. The amendments applicable to the Company on, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be prospectively applied in the initial fiscal year of adoption. All other amendments applicable to the Company should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 as of January 1, 2020. The Company’s disclosures related to its level 3 financial instruments were not materially impacted for the periods presented. See Note 4, Fair Value Measurements, for more information.
F-9
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The intent of this pronouncement is to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal- use software as defined in ASC 350-40. Under ASU 2018-15, the capitalized implementation costs related to a cloud computing arrangement will be amortized over the term of the arrangement and all capitalized implementation amounts will be required to be presented in the same line items of the financial statements as the related hosting fees. ASU 2018-15 is effective for public and private companies’ fiscal years beginning after December 15, 2019, and December 15, 2020, respectively, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2018-15 as of January 1, 2021. The adoption did not have a material impact to the Company’s condensed consolidated financial statements.
Recently Issued Accounting Standards
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. The Company expects to adopt ASU 2016-13 under the private company transition guidance beginning January 1, 2023 and is currently assessing the impact, if any, the guidance will have on the Company’s consolidated financial statements.
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 will be 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 plans to adopt ASU 2019-12 for the fiscal year beginning January 1, 2022 and is currently assessing the impact, if any, the guidance will have on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity's Own Equity (Subtopic 815-40) — Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2023, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company plans to adopt 2020-06 for the fiscal year beginning January 1, 2024 and is currently evaluating the impact that this new guidance will have on the Company's financial statements.
3.REVENUE
The Company generates revenue through two types of arrangements with customers, host customer arrangements and partnership arrangements. The Company recognizes revenue under these arrangements as described below.
Host Customer Arrangements
Host customer contracts are generally entered into with commercial entities who have traditionally relied on power supplied directly from the grid. Host customer arrangements consist of a promise to provide energy optimization services through the Company’s proprietary SaaS platform coupled with a dedicated energy storage system owned and controlled by the Company throughout the term of the contract. The host customer does not obtain legal title to, or ownership of the dedicated energy storage system at any point in time. The host customer is the end consumer of the energy that directly benefits from the energy optimization services provided by the Company. The term for the Company’s contracts with host customers generally
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ranges from 5 to 10 years, which may include certain renewal options to extend the initial contract term or certain termination options to reduce the initial contract term.
Although the Company installs an energy storage system at the host customer site in order to provide the energy optimization services, the Company determined it has the right to direct how and for what purpose the asset is used through the operation of its SaaS platform and, as such, retains control of the energy storage system; therefore, the contract does not contain a lease. The Company determined the various energy optimization services provided throughout the term of the contract, which may include services such as remote monitoring, performance reporting, preventative maintenance and other ancillary services necessary for the safe and reliable operation of the energy storage system, are part of a combined output of energy optimization services and the Company provides a single distinct combined performance obligation representing a series of distinct days of services.
The Company determines the transaction price at the outset of the arrangement, primarily based on the contractual payment terms dictated by the contract with the customer. Fees charged to customers for energy optimization services generally consist of recurring fixed monthly payments throughout the term of the contract. In certain arrangements, the transaction price may include incentive payments that are earned by the host customer from utility companies in relation to the services provided by the Company. Under such arrangements, the rights to the incentive payments are assigned by the host customer to the Company. These incentives may be in the form of fixed upfront payments, variable monthly payments, or annual performance-based payments over the first five years of the customer contract term. Incentive payments may be contingent on approval from utility companies or actual future performance of the energy storage system.
Substantially all of the Company’s arrangements provide customers the unilateral ability to terminate for convenience prior to the conclusion of the stated contractual term or the contractual term is shorter than the estimated benefit period, which the Company has determined to be 10 years based on the estimated useful life of the underlying energy storage systems and the period over which the customer can benefit from the energy optimization services utilizing such energy storage systems. In these instances, the Company determined that upfront incentive payments received from its customers represent a material right that is, in effect, an advance payment for future energy optimization services to be recognized throughout the estimated benefit period. In contracts where the customer does not have the unilateral ability to terminate for convenience without a penalty during the estimated benefit period, the Company determined the upfront incentive payments do not represent a material right for services provided beyond the initial contractual period and are therefore a component of the initial transaction price. The Company revisits its estimate of the benefit period each reporting period. The Company’s contracts with host customers do not contain a significant financing component.
The Company transfers control of its energy optimization services to its customers continuously throughout the term of the contract (a stand-ready obligation) and revenue is recognized ratably as control of these services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for its services. Monthly incentive payments based on the performance of the energy storage system are allocated to the distinct month in which they are earned because the terms of the payments relate specifically to the outcome from transferring the distinct time increment (month) of service and because such amounts reflect the fees to which the Company expects to be entitled for providing energy optimization services each period, consistent with the allocation objective. Annual variable performance- based payments are estimated at the inception in the transaction price using the expected value method, which takes into consideration historical experience, current contractual requirements, specific known market events and forecasted energy storage system performance patterns, and the Company recognizes such payments ratably using a time-based measure of progress of days elapsed over the term of the contract to the extent that it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. At the end of each reporting period, the Company reassesses its estimate of the transaction price. The Company does not begin recognition of revenue until the energy storage system is live (i.e., provision of energy optimization services has commenced) or, as it relates to incentive payments, when approval has been received from the utility company if later.
Partnership Arrangements
Partnership arrangements consist of promises to transfer inventory in the form of an energy storage system to a solar plus storage project developer and separately provide energy optimization services as described previously to the ultimate owner of the project after the developer completes the installation of the project. Under partnership arrangements, the Company’s customer is the solar plus storage project developer. The customer obtains legal title to along with ownership and control of the inventory upon delivery and the customer is responsible for the installation of the project. Once installation of the project is complete, the owner of the solar plus storage project provides energy to the end consumer through a separate contractual
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
arrangement directly with the end consumer. The term for the Company’s contracts with customers under partnership arrangements generally ranges from 10 to 20 years.
The Company determined the promise to deliver the inventory as a component of the solar plus storage project for which the customer is responsible to develop is a separate and distinct performance obligation from the promise to provide energy optimization services.
The Company determines the transaction price at the outset of the arrangement, primarily based on the contractual payment terms dictated by the contract with the customer. Fees charged for the sale of inventory generally consist of fixed fees payable upon or shortly after successful delivery to the customer. Fees charged to customers for energy optimization services consist of recurring fixed monthly payments throughout the term of the contract. The Company is responsible for designing, procuring, delivering and ensuring the proper components are provided in accordance with the requirements of the contract. Although the inventory is purchased by the Company from a third-party manufacturer, the Company determined it obtains control of the inventory prior to delivery to the customer and is the principal in the arrangement. The Company is fully responsible for responding to and correcting any customer issues related to the delivery of the inventory. The Company holds title and assumes all risks of loss associated with the inventory until the customer accepts the inventory. The Company is primarily responsible for fulfilling the delivery of the inventory to the customer, assumes substantial inventory risks and has discretion in the pricing charged to the customer. The Company has not entered into any partnership arrangements where it is not the principal in the transaction.
The Company allocates revenue between the hardware and energy storage services performance obligations based on the standalone selling price of each performance obligation. The standalone selling price for the hardware is established based on observable pricing. The standalone selling price for the energy optimization services is established using a residual value approach due to the significant variability in the services provided to each individual customer based on the specific requirements of each individual project and the lack of observable standalone sales of such services. The Company’s partnership arrangements do not contain a significant financing component.
The Company transfers control of the inventory upon delivery and simultaneous transfer of title to the customer. The Company transfers control of its energy optimization services to its customers continuously throughout the term of the contract (a stand-ready obligation), which does not commence until the customer successfully completes the installation of the project. As a result, the time frame between when the Company transfers control of the inventory to the customer upon delivery is generally several months, and can be in excess of one year, before the Company is required to perform any subsequent energy optimization services. Revenue is recognized ratably as control of these services is transferred to its customers based on a time-based output measure of progress of days elapsed over the term of the contract, in an amount that reflects the consideration the Company expects to be entitled to in exchange for its services.
In some partnership arrangements, the Company charges shipping fees for the inventory. The Company accounts for shipping as a fulfillment activity, since control transfers to the customer after the shipping is complete and includes such amounts within cost of revenue.
Disaggregation of Revenue
The following table provides information on the disaggregation of revenue as recorded in the consolidated statements of operations (in thousands):
| March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
Partnership hardware revenue | $ | $ | |||||||||
Partnership service revenue | |||||||||||
Host customer service revenue | |||||||||||
Total revenue | $ | $ | |||||||||
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, 2021,
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company had $172.4 million of remaining performance obligations, and the approximate percentages expected to be recognized as revenue in the future are as follows (in thousands):
| Total remaining performance obligations | Percent Expected to be Recognized as Revenue | ||||||||||||||||||||||
| Less than one year | Two to five years | Greater than five year | |||||||||||||||||||||
(in thousands, except percentages) | |||||||||||||||||||||||
Service revenue | $ | ||||||||||||||||||||||
Hardware revenue | % | % | % | ||||||||||||||||||||
| Total revenue | $ | ||||||||||||||||||||||
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, 2021 (in thousands):
| Beginning balance as of January 1, 2021 | $ | ||||
| Upfront payments received from customers | |||||
| Upfront or annual incentive payments received | |||||
| Revenue recognized related to amounts that were included in beginning balance of deferred revenue | ( | ||||
| Revenue recognized related to deferred revenue generated during the period | ( | ||||
| Ending balance as of March 31, 2021 | $ | ||||
4.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, 2021 and December 31, 2020, the carrying amount of accounts receivable, other current assets, other assets, accounts payable, and accrued and other current liabilities approximated their estimated fair value due to their relatively short maturities.
The following table provides the financial instruments measured at fair value (in thousands):
| March 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
Money market fund | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Convertible preferred stock warrant liability | $ | $ | $ | $ | |||||||||||||||||||
Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
Assets | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
Money market fund | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Convertible preferred stock warrant liability | $ | $ | $ | $ | |||||||||||||||||||
Total liabilities | $ | $ | $ | $ | |||||||||||||||||||
The Company’s money market funds are classified as Level 1 because they are valued using quoted market prices. The convertible preferred stock warrant liabilities are defined as Level 3 in the fair value hierarchy as the valuations are based on
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
significant unobservable inputs, which reflect the Company’s own assumptions incorporated in valuation techniques used to determine fair value; further discussion of these assumptions is set forth below. There were no transfers into or out of Level 3 of the fair value hierarchy during the periods presented.
Convertible Preferred Stock Warrant Liabilities
The fair value of the detachable redeemable preferred stock warrants was determined as of March 31, 2021 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, volatility, fair value of common or preferred stock, expected dividend rate and risk-free interest rate.
The key assumptions used for the valuation of the preferred stock warrant liabilities upon remeasurement were as follows:
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected term (in years) | ||||||||
| Dividend yield | % | % | ||||||
| Discount for lack of marketability | % | % | ||||||
The following table presents the changes in the liability for warrants on convertible preferred stock during the three months ended March 31, 2021 (in thousands):
Convertible Preferred Warrant Warrant Stock | |||||
| Balance as of December 31, 2020 | $ | ||||
Change in fair value of warrants | |||||
Exercised warrants | ( | ||||
| Balance as of March 31, 2021 | $ | ||||
5.ENERGY STORAGE SYSTEMS, NET
Energy Storage Systems, Net
Energy storage systems, net, consists of the following (in thousands):
| March 31, 2021 | |||||
| Energy storage systems placed into service | $ | ||||
| Less: accumulated depreciation | ( | ||||
| Energy storage systems not yet placed into service | |||||
| Total energy storage systems, net | $ | ||||
Depreciation expense for energy storage systems was approximately $3.8 million and $3.6 million within cost of service revenue for the three months ended March 31, 2021 and 2020, respectively.
6.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 special purpose entities (“SPE”) with the Company, which was subsequently amended from time to time. The purpose of this revolving
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STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
loan agreement is to finance the Company’s purchase of hardware for its various energy storage system projects. As of the beginning of 2020, 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 condensed consolidated financial statements. As of March 31, 2021 and December 31, 2020, the Company had $9.6 million and $7.4 million, respectively, outstanding under the revolving loan agreement.
The revolving loan agreement is primarily secured by the purchased hardware under the facility and secondarily by substantially all the Company’s assets with a negative pledge agreement concerning the Company’s intellectual property and contains customary representations and warranties, certain nonfinancial covenants, and certain limitations on liens and indebtedness. The Company was in compliance with all covenants associated with the revolving loan agreement as of March 31, 2021.
Term Loan Due to SPE Member
In December 2018, the Company entered into a term loan in the amount of $13.3 million with an affiliate of a member of certain SPEs with the Company. As of the beginning of 2020, the term loan bore fixed interest of 12.5 % on the outstanding principal balance with a final balloon payment of $3.0 million due at the maturity date of June 30, 2020. In May 2020, the Company repaid the remaining outstanding balance of $5.9 million with the proceeds received through the 2020 Credit Agreement discussed below.
Term Loan Due to Former Non-Controlling Interest Holder
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 requires fixed quarterly payments throughout the term of the loan, which will 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. Such debt discount is being amortized to earnings through interest expense over the expected life of the debt. As of March 31, 2021, and December 31, 2020 the outstanding balance was $5.7 million and $5.8 million, respectively.
The term loan is secured by substantially all the Company’s assets with a negative pledge agreement concerning the Company’s intellectual property, and contains customary representations and warranties, nonfinancial covenants, and certain limitations on liens and indebtedness. The Company was in compliance with all covenants associated with the revolving loan agreement as of March 31, 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 that will 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 bears interest of 12 % per annum, of which 8 % is paid in cash and 4 % is 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. As of March 31, 2021, and December 31, 2020, the outstanding balance was $25.9 million and $25.6 million, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In relation to the 2020 Credit Agreement, the Company issued warrants for 750,000 shares of Series D convertible preferred stock. However, if the Company repays the borrowed amount with 12 months from the issuance date, the warrants are terminated. The Company determined the fair value of these warrants upon issuance are immaterial.
The 2020 Credit Agreement is secured by substantially all the Company’s assets with a negative pledge agreement concerning the Company’s intellectual property and contains customary representations and warranties, certain nonfinancial covenants, and certain limitations on liens and indebtedness. The Company was in compliance with all covenants associated with the 2020 Credit Agreement as of March 31, 2021.
2021 Credit Agreement
In January 2021, the Company entered into a credit agreement to provide a total of $2.7 million towards the financing of certain energy storage systems owned and 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, 2021, and December 31, 2020, the outstanding balance was $1.8 million and zero , respectively. The Company was in compliance with all covenants associated with the 2021 Credit Agreement as of March 31, 2021.
The Company’s outstanding debt consisted of the following as of March 31, 2021 (in thousands):
| 3/31/2021 | |||||
| Outstanding principal | $ | ||||
| Unamortized discount | ( | ||||
| Carrying value of debt | $ | ||||
The following table summarizes the aggregate undiscounted amount of maturities of all borrowings as of March 31, 2021 (in thousands):
| Payment Schedule | |||||
| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
7.CONVERTIBLE NOTES
During the years ended March 31, 2021, and December 31, 2020, the Company issued various convertible notes to investors. The details of the convertible notes issued are set forth below and the Company refers to the collective group of all such note instruments as the “Convertible Notes”.
January 2020 Convertible Notes and Warrants Issuance and Equity Exchange
In January 2020, the Company issued and sold convertible promissory notes (“the “January 2020 Convertible Notes”) to various investors and received aggregate gross proceeds of $14.3 million, of which $13.7 million was issued and sold to related parties as a result of affiliations with certain members of the Board. Each of the January 2020 Convertible Notes was issued at par with interest at 8 % per annum and a maturity date of June 2020 under the same terms as the existing convertible notes issued prior to 2020. At the election of a majority of the note holders, the maturity date of the January 2020 Convertible Notes can be extended by six months up to four separate times. The Company incurred $0.2 million of additional debt issuance costs associated with the notes offering, which was included within the convertible promissory notes balance on the consolidated balance sheet and amortized over the expected life of the related notes, which approximated six months from the date of
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
issuance. In May 2020, the note holders voted to extend the maturity date of the then outstanding Convertible Notes by six months , resulting in an expected maturity date of December 2020.
At the time of the January 2020 Convertible Notes offering, certain note holders that bought a minimum threshold of the January 2020 Convertible Notes were also issued warrants giving them rights to acquire Financing Stock at the Financing Stock Offer Price, or in the event the Financing Stock offering does not occur to acquire Series D’ preferred stock (the “January 2020 Preferred Stock Warrants”). The January 2020 Preferred Stock Warrants are transferrable (with Company consent) and expire upon the earlier of the occurrence of certain events, as defined by the warrant agreement, or the seventh anniversary of date of issuance (2027). A total of 9,338,642 January 2020 Preferred Stock Warrants were issued and initially recognized at fair value, which resulted in warrant liabilities totaling approximately $2.0 million.
Concurrent with the issuance of certain of the January 2020 Convertible Notes and January 2020 Preferred Stock Warrants (discussed in Note 8), the Company entered into an equity exchange transaction with certain note holders that were existing stockholders. Under this transaction and consistent with the exchange transaction related to the 2019 Convertible Notes, preferred stockholders exchanged their existing junior preferred stock, and in certain cases common stock, for senior Series D’ preferred stock. The transaction was accounted for as an extinguishment and as the preferred equity exchange, January 2020 Convertible Notes issuance and January 2020 Preferred Stock Warrants issuance all occurred in connection with one another, the Company recorded each unit of account in the transaction at their respective fair values. In relation to the January 2020 transaction, the difference between the fair value of Convertible Notes of $15.4 million, Preferred Stock Warrants of $2.0 million, and senior Series D’ preferred stock of $29.8 million which were issued to the Holders and the cash paid of $14.1 million and carrying value of preferred and common equity of $40.4 million surrendered by the Holders in the amount of $7.3 million, was credited to accumulated deficit.
In Q4 2020, the Company entered into an agreement with one holder that participated in the exchange transaction discussed above which allowed the holder to reverse the previously executed exchange. The cancellation of such exchange did not have a material impact on the Company’s financial statements.
Net Loss Per Share Impact of January 2020 Convertible Notes and Warrant Issuance and Equity Exchange
For the purpose of determining the impact of the aforementioned transaction on the calculation of net loss per share, the Company reduced net loss attributable to common stockholders for three months ended March 31, 2020, by $9.5 million, to reflect a dividend for the amount by which the (1) aggregate fair value of new instruments issued less the amount of cash received is greater than (2) the fair value of preferred and common stock surrendered. Given that the exchanges involved a multiple element transaction and the fair value of the consideration received by the stockholders exceeded the fair value of the preferred and common equity given up, the Company has adjusted the EPS computation to reflect the value given to note holders from the common stockholders of the Company that did not participate. This adjustment was computed on the individual holder unit of account basis.
Q4 2020 Convertible Notes and Warrants Issuance
From October 2020 through December 2020, the Company issued and sold convertible promissory notes (the “Q4 2020 Convertible Notes”) under the same terms as the existing Convertible Notes to various investors with aggregate gross proceeds of $19.0 million, of which $7.9 million was issued and sold to related parties as a result of affiliations with certain members of the Board or significant ownership of the Company’s outstanding capital stock. In December 2020, the note holders voted to further extend the maturity date of all outstanding Convertible Notes by six months to June 2021. At the time of the Q4 2020 Convertible Notes offering, certain note holders that bought a minimum threshold of the Q4 2020 Convertible Notes were also issued warrants giving them rights to acquire Financing Stock at the Financing Stock Offer Price, or in the event the Financing Stock offering does not occur to acquire Series D’ preferred stock (the “Q4 2020 Preferred Stock Warrants”). The Q4 2020 Preferred Stock Warrants are transferrable (with Company consent) and expire upon the earlier of the occurrence of certain events, as defined by the warrant agreement, or the seventh anniversary of date of issuance (2027). A total of 4,620,018 Q4 2020 Preferred Stock Warrants were issued and initially recognized at fair value, which resulted in warrant liabilities totaling approximately $1.6 million.
Additionally, the Company evaluated the conversion option within the Q4 2020 Convertible Notes and determined the effective conversion price was beneficial to the note holders. As such, the Company recorded a beneficial conversion feature (“BCF”) related to the issuance of the Q4 2020 Convertible Notes based on the difference between the effective conversion rate
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and the fair value of the Series D’ preferred stock into which it is convertible. The BCF resulted in a $1.6 million discount to the Q4 2020 Convertible Notes with an increase to additional paid in capital. The Company will accrete the discount in connection with the BCF as interest expense over the term of the Q4 2020 Convertible Notes using the effective interest rate method.
Q1 2021 Convertible Notes
In January 2021, the Company issued and sold convertible promissory notes (the “Q1 2021 Convertible Notes”) under the same terms as the existing Convertible 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. As such, the Company recorded a BCF related to the issuance of the Q1 2021 Convertible Notes based on the difference between the effective conversion rate and the fair value of the Series D’ preferred stock into which it is convertible, limited by the amount of the aggregate gross proceeds. The BCF resulted in a $1.1 million discount to the Q1 2021 Convertible Notes with an increase to additional paid in capital. The Company will accrete the discount in connection with the BCF as interest expense over the term of the Q1 2021 Convertible Notes using the effective interest rate method.
8.WARRANTS
Convertible Preferred Stock Warrants
Since inception the Company has issued warrants on convertible preferred stock in conjunction with various debt financings. See Note 4 for further information regarding fair value measurements associated with the resulting warrant liabilities, which are remeasured on a recurring basis each period. Warrants to purchase Financing Stock or Series D’ preferred stock were issued along with certain of the Convertible Notes at an exercise price which is dependent on the next equity financing event.
The following tables represents the warrants on convertible preferred stock outstanding:
| March 31, 2021 | ||||||||||||||||||||||||||
| Issuance Date | Exercise Price | Number of Shares | Term (years) | |||||||||||||||||||||||
| Series A’ | 2012 | $ | ||||||||||||||||||||||||
| Series D | 2017 | |||||||||||||||||||||||||
| Series D’ | 2019 and 2020 | ** | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
________________
**In connection with various issuances of convertible promissory notes that occurred during 2021 and 2020, warrants to purchase either next financing stock or Series D’ preferred stock were issued. At March 31, 2021 and December 31, 2020, the number of warrants issued was subject to adjustment pending the occurrence of the next round of financing; however, the number of shares and exercise price of these warrants and related valuation of these warrants has been performed assuming that the warrants will be on Series D’ preferred stock.
Common Stock Warrants
As of March 31, 2021, the Company had 6,001,639 warrants to purchase common stock outstanding, respectively, to purchase common stock at an exercise price ranging from $0.36 to $1.53 and an expiration date ranging from less than to six years . None of the outstanding warrants are classified as liabilities and, as such, are not subject to remeasurement.
9.CONVERTIBLE PREFERRED STOCK AND COMMON STOCK
Convertible Preferred Stock
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| March 31, 2021 | |||||||||||||||||||||||
| Authorized Shares | Outstanding Shares | Net Carrying Value | Liquidation Preference | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
| Series D’ | $ | $ | |||||||||||||||||||||
| Series D | |||||||||||||||||||||||
| Series C | |||||||||||||||||||||||
| Series B | |||||||||||||||||||||||
| Series A’ | |||||||||||||||||||||||
| Series A | |||||||||||||||||||||||
| Series 1 | — | — | |||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
The Company had reserved shares of common stock for issuance, on an as-converted basis, as follows:
| March 31, 2021 | |||||
| Shares reserved for convertible preferred stock outstanding | |||||
| Shares reserved for warrants to purchase shares of common stock | |||||
| Shares reserved for warrants to purchase shares of preferred stock | |||||
| Options issued and outstanding | |||||
| Shares available for future option grants | |||||
| Total | |||||
10.STOCK-BASED COMPENSATION
In 2009, the Company adopted the 2009 Stock Plan (the “Plan”). The Plan provides for the granting of incentive stock options (ISOs), nonqualified stock options (NSOs), stock bonuses, and rights to acquire restricted stock to employees, directors and consultants. The Company has reserved 55,305,506 shares of common stock for issuance under the Plan.
Under the Plan, 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 Board. Options under the Plan generally expire after ten years . Under the Plan, the Board determines when the options granted will become exercisable. Options granted under the Plan 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 up to 10 years after the date of the grant. The Plan allows 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.
A summary of activity under the Plan is as follows:
| Options Available for Grant | 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, 2020 | $ | $ | |||||||||||||||||||||||||||
| Options granted | ( | ||||||||||||||||||||||||||||
| Options exercised | ( | ||||||||||||||||||||||||||||
| Options forfeited | ( | ||||||||||||||||||||||||||||
| Balances as of March 31, 2021 | $ | $ | |||||||||||||||||||||||||||
| Options vested and exercisable — March 31, 2021 | $ | $ | |||||||||||||||||||||||||||
The weighted-average grant date fair value of stock options granted to employees was $2.24 during the three months ended March 31, 2021. There were no stock options granted during the three months ended March 31, 2020. The intrinsic value of
F-19
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
options exercised were $30.2 million and less than $0.1 million during the three months ended March 31, 2021 and 2020, respectively.
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, | |||||||||||
| 2021 | 2020 | ||||||||||
| Sales and marketing | $ | $ | |||||||||
| Research and development | |||||||||||
| General and administrative | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
As of March 31, 2021, the Company had approximately $3.5 million of remaining unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.2 years.
11.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, | |||||||||||
| 2021 | 2020 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | |||||||
| Less: Deemed dividend to preferred stockholders (see Note 7) | ( | ||||||||||
| ( | ( | ||||||||||
| Denominator: | |||||||||||
Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | |||||||||||
Net loss per share attributable to common stockholders, basic and diluted | $ | ( | $ | ( | |||||||
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, 2021 | March 31, 2020 | ||||||||||
Convertible preferred stock | |||||||||||
Convertible promissory notes | |||||||||||
Outstanding stock options | |||||||||||
Outstanding common stock warrants | |||||||||||
Outstanding convertible preferred stock warrants | |||||||||||
Total | |||||||||||
12.INCOME TAXES
13.COMMITMENTS AND CONTINGENCIES
F-20
STEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Contingencies
The Company may be subject to various claims and legal proceedings which arise in the normal course of business. Management believes that the ultimate resolution of any such matters will not have a material adverse effect on the financial position or results of operations of the Company.
The Company is currently the defendant in a lawsuit alleging that the Company wrongfully diluted the plaintiffs’ equity holdings. The Company settled with the primary plaintiffs in September 2019 for a cash payment of $1.7 million while those defendants forfeited their remaining preferred stock totaling 2,949 shares, representing a combination of Series 1 and Series A preferred shares in the Company and also forfeited 10,540 of common shares in the Company. The remaining plaintiffs are pursuing claims which the Company believes have no merit and will be dismissed.
14.SUBSEQUENT EVENTS
Management has evaluated subsequent events through May 17, 2021, the date the condensed consolidated financial statements were available for issuance. The following subsequent events were noted:
On April 28, 2021, the Company completed the Merger transaction as discussed in Note 1, which provides the Company with approximately $608.6 million of gross cash proceeds. On April 29, 2021, New Stem’s shares of Class A common stock began trading on the New York Stock Exchange under the ticker symbol “STEM” and warrants under ticker symbol “STEM WS.”
The Merger will be accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, STPK, who is the legal acquirer will be treated as the “acquired” company for financial reporting purposes and the Company will be treated as the accounting acquirer. As a result of the Merger, each outstanding share of the Company’s common stock, will convert into newly issued shares of STPK’s Class A common stock, as calculated pursuant to the terms of the Merger Agreement.
Concurrent with the Merger, the Company paid off certain existing notes payable including the revolving loan due to SPE member, the term loan due to former non-controlling interest holder, and the 2020 Credit Agreement. The total amount of the repayment was $45.4 million, of which approximately $2.7 million was related to accrued interest and $2.6 million was related to prepayment penalties required under the terms of the notes.
F-21
STEM’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed interim financial statements and related notes thereto, and our pro forma financial information as of March 31, 2021, and for the three months ended March 31, 2021 and year ended December 31, 2020, included elsewhere in this amendment to our current report on Form 8-K, which was originally filed with the Securities and Exchange Commission (the “SEC”) on May 4, 2021 (as originally filed, the “Super 8-K” and, as amended hereby, the “Amended Super 8-K”). This discussion and analysis should also be read together with our audited consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019 and the sections entitled “Stem’s Management’s Discussion and Analysis of Financial Condition and Results or Operations” incorporated by reference into the Super 8-K. Some of the information contained in this discussion and analysis are set forth elsewhere in the Amended Super 8-K or incorporated by reference in the Super 8-K, including information with respect to Stem’s plans and strategy for Stem’s business and related financing, and includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the sections entitled “Risk Factors,” Stem’s actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Throughout this section, unless otherwise noted “we,” “us,” “our” and the “Company” refer to Stem and its consolidated subsidiaries.
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 utilizing the Athena platform to participate in energy markets and to share the revenue from such market participation.
We operate in two key markets 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 commercial and industrial (“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 the issuance of convertible preferred stock, debt financing, and cash flows from customers.
Our total revenue grew from $4.1 million for the three months ended March 31, 2020 to $15.4 million for the three months ended March 31, 2021. For the three months ended March 31, 2021 and 2020, we incurred net losses of $82.6 million and $17.5 million, respectively. As of March 31, 2021, we had an accumulated deficit of $490.4 million. Following the merger, 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 expenses to increase following the merger 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 expenses.
As a result, we will require substantial additional funding for expenses related to our operating activities, including selling, general and administrative expenses, as well as research and development. See “— Liquidity and Capital Resources.”
Key Factors and Trends 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 those discussed below and in the sections entitled “Risk Factors” included elsewhere in the Super 8-K.
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, this could adversely affect our ability to increase our revenue or grow our business.
Increasing 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 represent a large proportion of energy generation, grid instability rises due to their intermittency, which can be addressed by energy storage solutions.
Competition
We are currently a market leader in terms of capacity of energy storage under management. We intend to expand our market share 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.
Impact of COVID-19
In December 2019, COVID-19 was first reported to the World Health Organization (“WHO”), and in January 2020, the WHO declared the outbreak to be a public health emergency. In March 2020, the WHO characterized COVID-19 as a pandemic. The impact of COVID-19, including changes in consumer and business behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and reduced economic activity. The spread of COVID-19 has also created a disruption in the manufacturing, delivery and installation of energy storage systems worldwide.
As a result of the COVID-19 pandemic, we modified our business practices (including employee travel, recommending that all non-essential personnel work from home and cancellation or reduction of physical participation in sales activities, meetings, events and conferences), and implemented additional safety protocols for essential workers. We may take additional actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, suppliers, vendors and business partners.
The COVID-19 pandemic has had an adverse effect on the global economy, but the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. In particular, we cannot predict whether the pandemic will adversely affect demand for our services, lengthen our sales cycles or installation timelines, adversely affect collections of accounts receivable, reduce or delay spending by new customers, cause customers to go out of business or limit the ability of our direct sales force to travel to existing or potential customers, all of which could adversely affect our business, financial condition and results of operations.
Non-GAAP Financial Measures
Adjusted EBITDA
We believe that Adjusted EBITDA is useful for investors to use in comparing our financial performance with the performance of other companies for the following reasons:
•Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as stock-based compensation expense, depreciation and interest expense, that can vary substantially from company to company depending upon their financing and capital structures, and the method by which assets were acquired; and
•Adjusted EBITDA provides consistency and comparability with our past financial performance, and facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:
•Although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
• Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
• Adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us;
• and 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 from Adjusted EBITDA when they report their operating results.
Because of these limitations, Adjusted EBITDA should be considered along with other operating and financial performance measures presented in accordance with GAAP.
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 the change in fair value of warrants and embedded derivatives.
The following table provides a reconciliation of net loss to Adjusted EBITDA:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Net loss | $ | (82,553) | $ | (17,471) | |||||||
| Adjusted to exclude the following: | |||||||||||
| Depreciation and amortization | 5,079 | 3,994 | |||||||||
| Interest expense | 6,233 | 4,369 | |||||||||
| Stock-based compensation | 760 | 456 | |||||||||
| Change in fair value of warrants and embedded derivative | 66,397 | (1,009) | |||||||||
| Adjusted EBITDA | $ | (4,084) | $ | (9,661) | |||||||
Key Operating Metrics
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Bookings | $ | 50,800 | $ | 19,802 | |||||||
| Revenue | $ | 15,420 | $ | 4,111 | |||||||
| Net loss | $ | (82,553) | $ | (17,471) | |||||||
| Adjusted EBITDA | $ | (4,084) | $ | (9,661) | |||||||
Bookings
Due to the long-term nature of our contracts, bookings are a key operating metric that allow us to understand 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 represent 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 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 3 of the notes to our consolidated financial statements and our unaudited condensed consolidated financial statements, which are included elsewhere in the Super 8-K and Amended Super 8-K.
Adjusted EBITDA
See description of Adjusted EBITDA in Non-GAAP Financial Measures above.
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 a solar plus storage project developer. 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
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 & marketing department. In addition, sales and marketing expense includes trade show costs, amortization of intangibles and others. We expect to increase selling and marketing expense 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 others. In addition, general and administrative expense includes fees for professional services and occupancy costs. We expect our general and administrative expense to increase 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 Securities Exchange Commission, 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.
Results of Operations for the Three Months Ended March 31, 2021 and 2020
| Three Months Ended March 31, | $ Change | % Change | |||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (In thousands, except percentage) | |||||||||||||||||||||||
| Service revenue | $ | 4,881 | $ | 3,393 | $ | 1,488 | 44 | % | |||||||||||||||
| Hardware revenue | 10,539 | 718 | 9,821 | 1,368 | |||||||||||||||||||
| Total revenue | 15,420 | 4,111 | 11,309 | 275 | |||||||||||||||||||
| Cost of service revenue | 6,905 | 4,762 | 2,143 | 45 | |||||||||||||||||||
| Cost of hardware revenue | 8,632 | 751 | 7,881 | 1,049 | |||||||||||||||||||
| Total cost of revenue | 15,537 | 5,513 | 10,024 | 182 | |||||||||||||||||||
| Gross margin | (117) | (1,402) | 1,285 | (92) | |||||||||||||||||||
Operating expenses:(1) | |||||||||||||||||||||||
| Sales and marketing | 2,667 | 4,397 | (1,730) | (39) | |||||||||||||||||||
| Research and development | 4,407 | 3,395 | 1,012 | 30 | |||||||||||||||||||
| General and administrative | 2,692 | 3,004 | (312) | (10) | |||||||||||||||||||
| Total operating expenses | 9,766 | 10,796 | (1,030) | (10) | |||||||||||||||||||
| Loss from operations | (9,883) | (12,198) | 2,315 | (19) | |||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Interest expense | (6,233) | (4,369) | (1,864) | 43 | |||||||||||||||||||
| Change in fair value of warrants and embedded derivative | (66,397) | 1,009 | (67,406) | (6,680) | |||||||||||||||||||
| Other expenses, net | (40) | (1,913) | 1,873 | (98) | |||||||||||||||||||
| Total other income (expense) | (72,670) | (5,273) | (67,397) | 1,278 | |||||||||||||||||||
| Loss before income taxes | (82,553) | (17,471) | (65,082) | 373 | |||||||||||||||||||
| Income tax expense | — | — | — | — | |||||||||||||||||||
| Net loss | $ | (82,553) | $ | (17,471) | $ | (65,082) | 373 | % | |||||||||||||||
________________
(1)Includes stock-based compensation as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
Sales and marketing | $ | 84 | $ | 63 | |||||||
Research and development | 155 | 167 | |||||||||
General and administrative | 521 | 226 | |||||||||
Total stock-based compensation expense | $ | 760 | $ | 456 | |||||||
Revenue
Revenue increased $11.3 million, or 275%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase is primarily driven by a $9.8 million increase in hardware revenue as our sales of standalone systems related to FTM partnership agreements continue to grow. Services revenue increased by $1.5 million primarily due to continued growth in host customers arrangements and partnership revenue related to services provided.
Cost of Revenue
Cost of revenue increased $10.0 million, or 182%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily driven by an increase of cost of hardware sales of $7.9 million in line with the increase in hardware revenue and an increase of $2.1 million in cost of service revenue associated with growth in service revenue. The increase in cost of service revenue was also driven by the amortization of the energy storage systems, as well as the cost associated with developing the software that optimizes the efficiency of the energy storage systems.
Operating Expenses
Sales and Marketing
Sales and marketing expense decreased by $1.7 million, or 39%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily a result of a decrease in personnel related costs as a result of turnover in the period along with a decrease in commissions due to a change in our commission plan structure.
Research and Development
Research and development expense increased by $1.0 million, or 30%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily as a result of an increase in personnel related costs related because of increased headcount to support the growth in our operations.
General and Administrative
General and administrative expense decreased by $0.3 million, or 10% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, driven primarily by a decrease of $0.8 million of personnel costs and office related expenses due to personnel working remotely and turnover. This decrease was partially offset by a $0.3 million increase in stock-based compensation as a result of additional options to purchase our common stock granted to certain executives and key employees, and a $0.2 million increase due to an increase in professional services and legal expenses during the period.
Other Income (Expense), Net
Interest Expense
Interest expense increased by $1.9 million, or 43%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily driven by a $1.6 million of interest expense for the issuance of Series D convertible notes from October 2020 through December 2020, and a $0.8 million on interest expense for the credit agreement that was entered in May 2020. This increase was partially offset by a decrease of $0.5 million interest expense due to the repayments of the term loans to SPE members throughout 2020.
Change in Fair Value of Warrants and Embedded Derivative
Change in fair value of warrants and embedded derivative increased by a $67.4 million, or 6,680% , for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This increase is primary driven by result the issuance of new warrants in 2020 and the increased fair value of the warrants as a result of increases in fair value of the underlying stock.
Other Expenses, Net
Other expenses decreased by $1.9 million, or 98%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily driven by foreign exchange gains realized in the period related to operations in Canada.
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 at all times we must have sufficient highly liquid assets and be able to move funds on a timely basis.
As of March 31, 2021, our principal sources of liquidity were our cash and cash equivalents totaling $9.9 million. We had an accumulated deficit of $490.4 million and net current liabilities of $154.9 million, with $123.1 million of debt financing coming due within the next twelve months. During the three months ended March 31, 2021, we incurred a net loss of $82.6 million and had negative cash flows from operating activities of $1.8 million. However, the Company closed the proposed merger transaction on April 28, 2021 that provided the Company with $577.1, net of fees and expenses, and resulted in the conversion of approximately $70.0 million of convertible notes and the related accrued interest to equity and the payoff of all other outstanding debt except the 2021 Credit Agreement described below. We believe that our cash position, inclusive of funds raised with the merger, is sufficient to meet our capital and liquidity requirement for at least the next 12 months after the date that the condensed consolidated financial statements are available to be issued and thereafter for the foreseeable future; therefore, there is no longer substantial doubt about our ability to continue as a going concern.
Our business prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the early stages of commercial operations. To date, we have financed our operations primarily through equity financings, convertible promissory notes and borrowings from affiliates. 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 and ability to achieve our intended business objectives.
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.
The Company’s long-term liquidity requirements are primarily linked to the continued extension of the Athena platform 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.
In addition to the foregoing, based on our current assessment, we do not expect any material adverse effect on our long-term liquidity due to the COVID-19 pandemic. However, we will continue to assess the effect of the pandemic to our operations. The extent to which the COVID-19 pandemic will affect our business and operations will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, any restrictions on the ability of hospitals and trial sites to conduct trials that are not designed to address the COVID-19 pandemic and the perceived effectiveness of actions taken in the United States and other countries to contain and treat the disease. While the potential economic impact brought by COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital in the future. In addition, a recession or long-term market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
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, 2021, and December 31, 2020 was $88.1 million, and $88.0 million, respectively, of which $18.1 million, and $14.9 million, respectively, was classified as a current liability.
Notes Payable
Revolving Loan Due to SPE Member
In April 2017, we entered into a revolving loan agreement with an affiliate of a member of certain SPEs in which we have an ownership interest. The purpose of this revolving loan agreement is to finance the Company’s purchase of hardware for its various energy storage system projects. We have amended the loan from time to time as our business has grown, and as of the beginning of 2020, 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, we amended the facility to reduce the loan capacity to $35.0 million and extend 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, we were 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. We had $9.6 million outstanding under this revolving loan agreement as of March 31, 2021. In April 2021, we repaid the remaining outstanding balance in full.
Term Loan Due to SPE Member
In December 2018, we entered into a term loan in the amount of $13.3 million with an affiliate of a member of certain SPEs in which we have an ownership interest. As of the beginning of 2020, this term loan bore fixed interest of 12.5% on the outstanding principal balance with a final balloon payment of $3.0 million due at the maturity date of June 30, 2020. In May 2020, we repaid the remaining outstanding balance of $5.9 million with the proceeds received through the 2020 Credit Agreement discussed below.
Term Loan Due to Former Non-Controlling Interest Holder
In June 2018, we acquired the outstanding member interests of an entity we controlled for $8.1 million. We financed this acquisition by entering into a term loan agreement with the noncontrolling member bearing fixed interest of 4.5% on the outstanding principal balance. This loan requires fixed monthly payments throughout the term of the loan, which will be paid in full by April 1, 2026.
In May 2020, we 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, we were required to issue warrants for 400,000 shares of common stock resulting in a discount to the term loan of $0.2 million. Such debt discount is being amortized to earnings through interest expense over the expected life of the debt. We had $5.7 million outstanding under this term loan agreement as of March 31, 2021. In April 2021, we repaid the remaining outstanding balance in full.
2020 Credit Agreement
In May 2020, we entered into a credit agreement (“2020 Credit Agreement”) with a new lender that provided us with proceeds of $25.0 million that increased our access to working capital. The 2020 Credit Agreement has a maturity date of the earlier of (1) May 14, 2021, (2) the maturity date of the revolving loan agreement, or (3) the maturity date of the convertible promissory notes discussed below. The loan bears interest of 12% per annum, of which 8% is paid in cash and 4% is added back to principal of the loan balance every quarter. We used a portion of the proceeds towards payments associated with existing debt as previously discussed. We had $25.9 million of outstanding borrowings, including the portion of the interest that has accrued as principal, under this term loan agreement as of March 31, 2021. In April 2021, we repaid the remaining outstanding balance in full.
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. We have $1.8 million of outstanding borrowings under this credit agreement as of March 31, 2021.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
Net cash used in operating activities | $ | (1,827) | $ | (10,670) | |||||||
Net cash used in investing activities | (2,763) | (3,310) | |||||||||
Net cash provided by financing activities | 7,093 | 12,155 | |||||||||
Effect of exchange rate changed on cash | 428 | (184) | |||||||||
Net increase (decrease) in cash and cash equivalents | $ | 2,931 | $ | (2,009) | |||||||
Operating Activities
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 for non-cash charges of $77.0 million and net cash inflows 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 change in the fair value of warrant liability and embedded derivative of $66.4 million, and impairment of energy storage systems of $0.6 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 due to payments for hardware sales prior to delivery and state rebate incentives received in the period, an increase in accounts payable and accrued expenses of $8.6 million due to increases in hardware purchases in partnership arrangements, an increase in other liabilities of $0.2 million partially offset by an increase in inventory of $1.5 million due to additional partnership system purchases, an increase in other assets of $4.7 million due to capitalized offering costs for the period, an increase in accounts receivable of $1.0 million due to advance billings for partner hardware sales in the period and an increase in contract origination costs of $0.8 million related to commissions paid on new contracts executed in the period.
During the three months ended March 31, 2020, net cash used in operating activities was $10.7 million, primarily resulting from our operating loss of $17.5 million, offset by non-cash charges of $6.0 million and net cash inflows of $0.8 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of $4.0 million, non-cash interest expense of $2.1 million, which includes interest expenses associated with debt issuance costs, stock-based compensation expense of $0.5 million, and partially offset by the change in the fair value of warrant liability and embedded derivative of $1.0 million. The net cash inflow from changes in operating assets and liabilities was primarily driven by an increase in deferred revenue of $8.0 million due to payments for hardware sales prior to delivery and state rebate incentives received in the period, an increase in accounts payable and accrued expenses of $1.1 million due to a decrease of supplier’s accrual related to hardware sales for the period partially offset by increase in inventory of $5.1 million due to additional partnership system purchases, an increase in contract origination costs of $0.7 million related to commissions paid on new contracts executed in the period, and an increase in other assets of $2.7 million due to an increase in advances to suppliers in the period.
Investing Activities
During the three months ended March 31, 2021, net cash used for investing activities was $2.8 million, consisting of $1.6 million in purchase of energy systems and $1.2 million in capital expenditures on internally-developed software.
During the three months ended March 31, 2020, net cash used for investing activities was $3.3 million, consisting of $1.9 million in purchase of energy systems and $1.4 million in capital expenditures on internally-developed software.
Financing Activities
During the three months ended March 31, 2021, net cash provided by financing activities was $7.1 million, primarily resulting from proceeds from issuance of notes payable of $3.9 million, proceeds from financing obligations of $2.7 million, proceeds from exercise of stock options and warrants of $2.9 million, net proceeds from issuance of note payable of $1.1 million, and partially offset by repayment of financing obligations of $3.4 million.
During the three months ended March 31, 2020, net cash provided by financing activities was $12.2 million, primarily resulting from net proceeds from issuance of convertible notes of $14.1 million, proceeds from financing obligations of $3.9 million, partially offset by repayment of notes payable of $4.0 million and repayment of financing obligations of $1.9 million.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Notes payable | $ | 38,866 | $ | 33,713 | $ | 1,800 | $ | 2,559 | $ | 794 | |||||||||||||||||||
| Interest on notes payable | 5,072 | 2,597 | 1,590 | 831 | 54 | ||||||||||||||||||||||||
| Convertible notes | 68,875 | 68,875 | — | — | — | ||||||||||||||||||||||||
| Interest on convertible notes | 8,564 | 8,564 | — | — | — | ||||||||||||||||||||||||
| Operating lease obligations | 390 | 333 | 57 | — | — | ||||||||||||||||||||||||
| Total | $ | 121,767 | $ | 114,082 | $ | 3,447 | $ | 3,390 | $ | 848 | |||||||||||||||||||
The table above excludes our financing obligations as our repayments of the obligation are only required to the extent payments are collected in relation to the operation of the underlying energy storage systems. The obligation is nonrecourse and there are no contractual commitments to pay specific amounts at any point in time throughout the life of the obligation.
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 effect on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition results of operations are based upon our consolidated financial statements included elsewhere in the Super 8-K and Amended Super 8-K. The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.
Our critical accounting policies are those that materially affect our consolidated financial statements and involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our consolidated financial statements. We believe that the critical accounting policies listed below involve the most difficult management decisions because they require the use of significant estimates and assumptions as described above.
See Note 2 of the notes to our consolidated financial statements and our unaudited condensed consolidated financial statements, which are included elsewhere in the Super 8-K and Amended Super 8-K, for more information.
Revenue Recognition
We generate revenue through two types of arrangements with customers, host customer arrangements and partnership arrangements. We recognize revenue under these arrangements as described below.
Host Customer Arrangements
Host customer contracts are generally entered into with commercial entities who have traditionally relied on power supplied directly from the grid. Host customer arrangements consist of a promise to provide energy optimization services through our proprietary SaaS platform coupled with a dedicated energy storage system owned and controlled by us throughout the term of the contract. The host customer does not obtain legal title to, or ownership of the dedicated energy storage system at any point in time. The host customer is the end consumer of the energy that directly benefits from the energy optimization services we provide. The term for our contracts with host customers generally ranges from 5 to 10 years, which may include certain renewal options to extend the initial contract term or certain termination options to reduce the initial contract term.
Although we install energy storage systems at the host customer site in order to provide the energy optimization services, we determined we have the right to direct how and for what purpose the asset is used through the operation of our SaaS platform and, as such, retain control of the energy storage system; therefore, the contract does not contain a lease. We determined the various energy optimization services provided throughout the term of the contract, which may include services such as remote monitoring, performance reporting, preventative maintenance and other ancillary services necessary for the safe and reliable operation of the system, are part of a combined output of energy optimization services and we provide a single distinct combined performance obligation representing a series of distinct days of services.
We determine the transaction price at the outset of the arrangement, primarily based on the contractual payment terms dictated by the contract with the customer. Fees charged to customers for energy optimization services generally consist of recurring fixed monthly payments throughout the term of the contract. In certain arrangements, the transaction price may include incentive payments that are earned by the host customer from utility companies in relation to the services we provide. Under such arrangements, the rights to the incentive payments are assigned to us by the host customer. These incentives may be in the form of fixed upfront payments, variable monthly payments, or annual performance-based payments over the first five years of the customer contract term. Incentive payments may be contingent on approval from utility companies or actual future performance of the energy storage system.
Substantially all of our arrangements provide customers the unilateral ability to terminate for convenience prior to the conclusion of the stated contractual term or the contractual term is shorter than the estimated benefit period, which we have determined to be 10 years based on the estimated useful life of the underlying energy storage systems and the period over which the customer can benefit from the energy optimization services utilizing such energy storage systems. In these instances, we determined that upfront incentive payments received from our customers represent a material right that is, in effect, an advance payment for future energy optimization services to be recognized throughout the estimated benefit period. In contracts where the customer does not have the unilateral ability to terminate for convenience without a penalty during the estimated benefit period, we determined the upfront incentive payments do not represent a material right for services provided beyond the initial contractual period and are therefore a component of the initial transaction price. We revisit our estimate of the benefit period each reporting period. Our contracts with host customers do not contain a significant financing component.
We transfer control of our energy optimization services to our customers continuously throughout the term of the contract (a stand-ready obligation) and recognize revenue ratably as control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for our services. Monthly incentive payments based on the performance of the energy storage system are allocated to the distinct month in which they are earned because the terms of the payments relate specifically to the outcome from transferring the distinct time increment (month) of service and because such amounts reflect the fees to which we expect to be entitled for providing energy optimization services each period, consistent with the allocation objective. Annual variable performance- based payments are estimated at the inception in the transaction price using the expected value method, which takes into consideration historical experience, current contractual requirements, specific known market events and forecasted energy storage system performance patterns, and we recognize such payments ratably using a time-based measure of progress of days elapsed over the term of the contract to the extent that it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period. At the end of each reporting period, we reassess our estimate of the transaction price. We do not begin recognition of revenue until the System is live (i.e., provision of energy optimization services has commenced) or, as it relates to incentive payments, when approval has been received from the utility company if later.
Partnership Arrangements
Partnership arrangements consist of promises to transfer inventory in the form of an energy storage system to a solar plus storage project developer and separately provide energy optimization services as described previously to the ultimate owner of the project after the developer completes the installation of the project. Under partnership arrangements, our customer is the solar plus storage project developer. The customer obtains legal title to along with ownership and control of the inventory upon delivery and the customer is responsible for the installation of the project. Once installation of the project is complete, the
owner of the solar plus storage project provides energy to the end consumer through a separate contractual arrangement directly with the end consumer. The term for our contracts with customers under partnership arrangements generally ranges from 10 to 20 years.
We determined the promise to deliver the inventory as a component of the solar plus storage project for which the customer is responsible to develop is a separate and distinct performance obligation from the promise to provide energy optimization services.
We determine the transaction price at the outset of the arrangement, primarily based on the contractual payment terms dictated by the contract with the customer. Fees charged for the sale of inventory generally consist of fixed fees payable upon or shortly after successful delivery to the customer. Fees charged to customers for energy optimization services consist of recurring fixed monthly payments throughout the term of the contract. We are responsible for designing, procuring, delivering and ensuring the proper components are provided in accordance with the requirements of the contract. Although we purchase the inventory from a third-party manufacturer, we determined we obtain control of the inventory prior to delivery to the customer and are the principal in the arrangement. We are fully responsible for responding to and correcting any customer issues related to the delivery of the inventory. We hold title and assume all risks of loss associated with the inventory until the customer accepts the inventory. We are primarily responsible for fulfilling the delivery of the inventory to the customer, assume substantial inventory risks and have discretion in the pricing charged to the customer. We have not entered into any partnership arrangements where we are not the principal in the transaction.
We allocate revenue between the hardware and energy storage services performance obligations based on the standalone selling price of each performance obligation. The standalone selling price for the hardware is established based on observable pricing. The standalone selling price for the energy optimization services is established using a residual value approach due to the significant variability in the services provided to each individual customer based on the specific requirements of each individual project and the lack of observable standalone sales of such services. Our partnership arrangements do not contain a significant financing component.
We transfer control of the inventory upon delivery and simultaneous transfer of title to the customer. We transfer control of our energy optimization services to our customers continuously throughout the term of the contract (a stand-ready obligation), which does not commence until the customer successfully completes the installation of the project. As a result, the time frame between when we transfer control of the inventory to the customer upon delivery is generally several months, and can be in excess of one year, before we are required to perform any subsequent energy optimization services. Revenue is recognized ratably as control of these services is transferred to our customers based on a time-based output measure of progress of days elapsed over the term of the contract, in an amount that reflects the consideration we expect to be entitled to in exchange for our services.
In some partnership arrangements, we charge shipping fees for the inventory. We account for shipping as a fulfillment activity, since control transfers to the customer after the shipping is complete and include such amounts within cost of revenue.
Financing Obligations
We have formed various SPEs to finance the development and construction of our energy storage systems (“Projects”). These SPEs, which are structured as limited liability companies, obtain financing in the form of large upfront payments from outside investors and purchase Projects from us under master purchase agreements. We account for the large upfront payments received from the fund investor as a borrowing by recording the proceeds received as a financing obligation, which will be repaid through host customer payments and incentives received from the utilities that will be received by the investor.
The financing obligation is non-recourse once the associated energy storage systems have been placed in-service and the associated customer arrangements have been assigned to the SPE. However, we are responsible for any warranties, performance guarantees, accounting, performance reporting and all other costs associated with the operation of the energy storage systems. Despite such systems being legally sold to the SPEs, we recognize host customer payments and incentives as revenue during the period as discussed in the Revenue Recognition section above. The amounts received by the fund investor from customer payments and incentives are recognized as interest using the effective interest method, and the balance is applied to reduce the financing obligation. The effective interest rate is the interest rate that equates the present value of the cash amounts to be received by a fund investor in relation to the underlying Projects with the present value of the cash amounts paid to us by the investor, adjusted for any payments made by us.
Energy Storage Systems, net
We sell energy optimization services to host customers through the use of energy storage systems installed at customer locations. We determined that we do not transfer control of these energy storage systems, which are operated and controlled via our proprietary cloud-based software (“SaaS”) platform; therefore, these energy storage systems do not qualify as a leased asset. The energy storage systems are stated at cost, less accumulated depreciation.
Energy storage systems, net is comprised of system equipment costs, which include components such as batteries, inverters, and other electrical equipment, and associated design, installation, and interconnection costs required to begin providing the energy optimization services to our customers.
Depreciation of the energy storage systems is calculated using the straight-line method over the estimated useful lives of the energy storage systems, or 10 years, once the respective systems have been installed, interconnected to the power grid, received permission to operate and we have begun to provide energy optimization services to the host customer (i.e., system is live). The valuation of energy storage systems and the useful life both require significant judgment.
Stock-Based Compensation
Accounting for stock-based compensation requires us to make a number of judgments, estimates and assumptions. If any of our estimates prove to be inaccurate, our net (loss) income and operating results could be adversely affected.
We estimate the fair value of stock options granted to employees and directors using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including (1) the expected stock price volatility, (2) the expected term of the award, (3) the risk-free interest rate and (4) expected dividends. We account for forfeitures as they occur. These assumptions are estimated as follows:
•Fair value. The fair value of our common stock underlying the stock option awards is determined by the board. Given the absence of a public trading market, the board considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting at which awards are approved. These factors include, but are not limited to: (i) contemporaneous third-party valuations of common stock; (ii) the rights, preferences and privileges of convertible preferred stock relative to common stock; (iii) the lack of marketability of common stock; (iv) stage and development of the Company’s business; (v) general economic conditions; and (vi) the likelihood of achieving a liquidity event, such as an initial public offering (“IPO”) or sale of the Company, given prevailing market conditions. To evaluate the fair value of the underlying shares for grants between two independent valuations and after the last independent valuation, a linear interpolation framework is used to evaluate the fair value of the underlying shares.
•Volatility. As a result of the lack of historical and implied volatility data of our common stock, the expected stock price volatility is estimated based on the historical volatilities of a specified group of companies in our industry for a period equal to the expected life of the option. We select companies with comparable characteristics to us, including enterprise value, risk profiles and position within the industry and with historical share price information sufficient to meet the expected term of the stock options. The historical volatility data has been computed using the daily closing prices for the selected companies.
•Expected term. We determine the expected term based on the average period the stock options are expected to remain outstanding using the simplified method, generally calculated as the midpoint of the stock options’ vesting term and contractual expiration period, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
•Risk-free rate. We use the U.S. Treasury yield for our risk-free interest rate that corresponds with the expected term.
•Expected dividend yield. We utilize a dividend yield of zero, as we do not currently issue dividends, nor do we expect to do so in the future.
Historically, we have determined the fair value of our equity, including common stock underlying option grants and preferred stock underlying the various warrants, by considering a variety of factors including, among other things, timely valuations of our equity prepared by an independent third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our equity, our board of directors
exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value, including important developments in our operations, stage of development, valuations performed by an independent third-party valuation firm, sales of our preferred stock, actual operating results and financial performance, the conditions in similar industry sectors and the economy in general, the stock price performance and volatility of comparable public companies, the lack of liquidity of our equity, and the likelihood of achieving a liquidity event, such as an initial public offering, merger or sale of the company.
As of January 2019, our 409A valuation yielded a common stock value of $0.52 per share. In connection with the convertible notes issued in January 2020, we obtained an updated 409A valuation of our common stock, which yielded a decrease in our valuation to $0.43 per share due, in part, to the impact of the two times liquidation preference included in the convertible notes issued. As of March 31, 2020, we applied a valuation method that relied on a continuing operations scenario approach, consistent with all previous valuations, with an estimated time to liquidity of 2.25 years.
Consistent with our approach at September 30, 2020 and December 31, 2020, to determine our 409A valuation, we utilized a combination approach methodology relying on (1) a continued operations scenario and (2) a transaction scenario, which we describe as the hybrid method (the “Hybrid Method”). The Hybrid Method is appropriate for a company expecting a near term liquidity event, but where, due to market or other factors, the likelihood of completing the liquidity event is uncertain. The Hybrid Method is also appropriate when various possible future outcomes are assumed by our management. The Hybrid Method considers a company’s going concern nature, stage of development and the company’s ability to forecast near and long-term future liquidity scenarios. The Hybrid Method was deemed the most appropriate due to the attainment of a non-binding letter of intent with STPK. The outcomes of each scenario are each assigned a probability and a future equity value under each outcome is then estimated. The two scenarios used in the Hybrid Method as of March 31, 2021 are as follows:
Continuing Operations Scenario:
Under the continuing operations scenario (the “Continuing Operations Scenario”), we utilized an Income and Market approach to estimate the enterprise value of the company and the option pricing model (“OPM”) to allocate the resulting enterprise value to the various classes of our securities. This resulted in a per share value of $1.25 per common share, as of March 31, 2021 prior to a discount for the lack of marketability being applied. The OPM assumptions included a time to liquidity event of 1.20 years and a volatility of 65% as of March 31, 2021. The term considers the need for additional capital in this scenario. A discount for lack of marketability (“DLOM”) of 29.0% was applied as of March 31, 2021 based on various put option models assuming a term of 1.20 years and a common stock volatility of 65%. This resulted in a per common share value of $0.89 at March 31, 2021 under the Continuing Operations Scenario.
Transaction Scenario:
Under the transaction scenario (the “Transaction Scenario”) for the March 31, 2021 valuation, the convertible debt and all classes of preferred stock are assumed to convert into common stock and, based on the pre-money equity value of $650.0 million, results in a per share value of $5.63 per common share, prior to a discount for the lack of marketability being applied. Such per share values are based on the preliminary expected conversion ratio of Stem common stock to STPK common stock that will occur upon merger. A DLOM of 5% was applied as of March 31, 2021, based on various put option models assuming a term of 0.08 years, an overall company volatility of 75%, and a present value factor of 35% based on the same term. This resulted in a per common share value of $5.35 at March 31, 2021 under the Transaction Scenario.
The application of the Hybrid Method resulted in a per common share value of $5.12 at March 31, 2021. Such values are derived based on a weighted value assigned to the Continuing Operations Scenario ($0.89) at 5% and Transaction Scenario at 95% ($5.35) as of March 31, 2021. The weightings as of March 31, 2021 reflect the uncertainty regarding the completion of the transaction, which is reflective and consistent with uncertainties we experienced when undergoing an unsuccessful sale process during the first half of 2020. Further, the weightings reflect the non-binding nature of the term sheet and that diligence was not initiated until October 2020 and continued through the middle of November 2020. The transaction also required the successful conclusion of a PIPE transaction initially sized at $150.0 million and initial meetings did not begin until early November with potential investors. The SPAC process, inclusive of the PIPE, was completed in early December 2020, and a merger agreement with STPK was executed on December 3, 2020, and at such point we believed the likelihood of the consummation of the SPAC merger increased significantly.
Convertible Preferred Stock Warrant Liability
We evaluate whether our warrants for shares of convertible redeemable preferred stock are freestanding financial instruments that obligate us to redeem the underlying preferred stock at some point in the future and determined that each of our outstanding warrants for convertible preferred stock are liability classified. The warrants are subject to re-measurement at each balance sheet date, and any change in fair value is recognized in the change in fair value of warrants and embedded derivatives in the consolidated statements of operations. We will continue to remeasure the warrants until the earlier of the exercise or expiration, the completion of a deemed liquidation event, the conversion of convertible preferred stock into common stock, or until holders of the convertible preferred stock can no longer trigger a deemed liquidation event. On expiration, the convertible preferred stock warrants will automatically net exercise, unless the warrant holder provides written notice that it does not wish to exercise its warrants. Upon exercise, the related convertible preferred stock warrant liability will be reclassified to convertible preferred stock.
We estimate the fair value of these liabilities using the Black-Scholes option pricing model, as further discussed in Stock-Based Compensation above, and assumptions that were based on the individual characteristics of the warrants on the valuation date, as well as assumptions for future financings.
Recent Accounting Pronouncements
See Note 2 to our audited financial statements included elsewhere in the Super 8-K for more information.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in inflation, exchange rates or interest rates. We do not hold financial instruments for trading purposes.
Foreign Currency Exchange Risk
Our expenses are generally denominated in U.S. dollars. However, we have foreign currency risks related to our revenue and operating expenses denominated in Canadian dollars. We have entered into contracts with customers and a limited number of supply contracts with vendors with payments denominated in foreign currencies. We are subject to foreign currency transaction gains or losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our financial statements.
Unfavorable changes in foreign exchange rates versus the U.S. dollar could increase our product costs, thus reducing our gross profit. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on operating results or financial condition.
Interest Rate Risk
Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change. Fluctuations in interest rates may impact the level of interest expense recorded on outstanding borrowings. In addition, our convertible promissory notes, notes payable, financing obligations bear interest at a fixed rate and are not publicly traded. Therefore, fair value of our convertible promissory notes, notes payable, financing obligations and interest expense is not materially affected by changes in the market interest rates. Stem does not enter into derivative financial instruments, including interest rate swaps, for hedging or speculative purposes.
Credit Risk
Credit risk with respect to accounts receivable is generally not significant due to a limited carrying balance of receivables. We routinely assess the creditworthiness of our customers. We generally have not experienced any material losses related to receivables from individual customers, or groups of customers during the three months ended March 31, 2021. We do not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in our accounts receivable.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Defined terms used but not defined in this Exhibit 99.3 shall have the meanings ascribed to them in the Company's Current Report on Form 8-K, which was originally filed with the Securities and Exchange Commission (the “SEC”) on May 4, 2021 (as amended by this Current Report on Form 8-K/A, and, if not defined in the Form 8-K/A, STPK’s definitive proxy statement/consent solicitation statement/prospectus on Form 424B3 filed with the SEC on March 30, 2021 (the “proxy statement/consent solicitation statement/prospectus”).
Introduction
The unaudited pro forma combined balance sheet as of March 31, 2021 gives pro forma effect to the Merger and the closing of the PIPE Investment as if it had been consummated as of that date. The unaudited pro forma combined statements of operations for the three months ended March 31, 2021 and for the year ended December 31, 2020 give pro forma effect to the Merger and the closing of the PIPE Investment as if it had occurred as of January 1, 2020. This information should be read together with Stem’s and STPK’s respective audited and unaudited financial statements and related notes, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)” in STPK’s Annual Report on Form 10-K/A filed with the SEC on April 26, 2021 (the “Annual Report”), the section entitled “Stem’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the proxy statement/consent solicitation statement/prospectus, Stem’s unaudited condensed consolidated financial statements and related notes filed as Exhibit 99.1 to the Current Report on Form 8-K/A to which this Exhibit is filed (“Exhibit 99.1”), STPK’s unaudited financial statements and related notes that are included in the Quarterly Report on Form 10-Q, filed with the SEC on May 17, 2021 (the “Quarterly Report”), and the Management’s Discussion and Analysis of Financial Condition and Results of Operations filed as Exhibit 99.2 to the Current Report on Form 8-K/A to which this Exhibit is filed, and other financial information included elsewhere in the proxy statement/consent solicitation statement/prospectus.
The unaudited pro forma combined balance sheet as of March 31, 2021 has been prepared using the following:
•Stem’s unaudited historical condensed consolidated balance sheet as of March 31, 2021, as included in Exhibit 99.1; and
•STPK’s unaudited historical condensed balance sheet as of March 31, 2021, as included in the Quarterly Report.
The unaudited pro forma combined statement of operations for the three months ended March 31, 2021 has been prepared using the following:
•Stem’s unaudited historical condensed consolidated statement of operations for the three months ended March 31, 2021, as included in Exhibit 99.1; and
•STPK’s unaudited historical statement of operations for the three months ended March 31, 2021, as included in the Quarterly Report.
The unaudited pro forma combined statement of operations for the year ended December 31, 2020 has been prepared using the following:
•Stem’s audited historical consolidated statement of operations for the year ended December 31, 2020, as included elsewhere in the proxy statement/consent solicitation statement/prospectus; and
•STPK’s audited historical statement of operations for the year ended December 31, 2020, as included in the Annual Report.
Accounting for the Merger
The Merger is accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, STPK, who is the legal acquirer in the Merger, is treated as the “acquired” company for financial reporting purposes and Stem is treated as the accounting acquirer. Stem has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances under both the minimum and maximum redemption scenarios:
•Stem’s existing stockholders expecting to have the greatest voting interest of the post-combination company with at least 48.0% of the voting interest in each scenario;
•Stem’s senior management comprising all of the senior management of the post-combination company;
•The directors nominated by Stem will represent the majority of the post-combination company Board;
•The relative size (measured in, for example, assets, revenues or earnings) of Stem compared to STPK; and
•Stem’s operations comprising the ongoing operations of the post-combination company.
Accordingly, for accounting purposes, the Merger will be treated as the equivalent of a capital transaction in which Stem is issuing stock for the net assets of STPK. The net assets of STPK will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to Merger will be those of Stem.
Basis of Pro Forma Presentation
The unaudited pro forma combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” Release No. 33-10786 replaces the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). STPK has elected not to present Management’s Adjustments and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma combined financial information. The adjustments presented on the unaudited pro forma combined financial statements have been identified and presented to provide relevant information necessary to assist in understanding the post-combination company upon consummation of the Merger and the PIPE Investment.
The unaudited pro forma combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma combined financial information as being indicative of the historical financial position and results that would have been achieved had the companies always been combined or the future financial position and results that the post-combination company will experience. Stem and STPK have not had any historical relationship prior to the Merger. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
Included in the shares outstanding and weighted average shares outstanding as presented in the pro forma combined financial statements are 65,000,000 shares of STPK common stock (including shares issuable upon exercise of Stem Options and certain Stem Warrants) issued to Stem stockholders.
As a result of the Merger and immediately following the closing of the Merger and the closing of the PIPE Investment, current stockholders of Stem will own approximately 48.0% of the outstanding shares of New Stem Common Stock, the PIPE Investors will own approximately 16.6% of the outstanding shares of New Stem Common Stock, STPK’s Sponsor, officer, directors and other holders of Founder Shares will own approximately 7.1% of the outstanding shares of New Stem Common Stock and the former stockholders of STPK will own approximately 28.3% of the outstanding shares of New Stem Common Stock as of March 31, 2021 (in each case, including shares issuable upon exercise of Stem Options and certain Stem Warrants, and not giving effect to any shares issuable to them upon exercise of STPK Warrants). As a result, current stockholders of Stem, as a group, will collectively own more shares of STPK common stock than any single stockholder following consummation of the Merger with no current stockholder of STPK owning more than 10% of the issued and outstanding capital stock of New Stem.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 2021
(in thousands except share and per share data)
| (A) Stem (Historical) | (B) STPK (Historical) | Pro Forma Adjustments | Pro Forma Balance Sheet | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 9,873 | $ | 426 | $ | 383,586 | (1) | ||||||||||||||||
| 225,000 | (2) | ||||||||||||||||||||||
| (58,255) | (3) | ||||||||||||||||||||||
| (198) | (10) | $ | 560,432 | ||||||||||||||||||||
| Accounts receivable, net | 14,567 | — | — | 14,567 | |||||||||||||||||||
| Prepaid expenses | — | 586 | — | 586 | |||||||||||||||||||
| Inventory, net | 22,309 | — | — | 22,309 | |||||||||||||||||||
| Other current assets | 6,587 | — | — | 6,587 | |||||||||||||||||||
| Total current assets | 53,336 | 1,012 | 550,133 | 604,481 | |||||||||||||||||||
| Cash and marketable securities – held in trust | — | 383,586 | (383,586) | (1) | — | ||||||||||||||||||
| Energy storage systems, net | 119,842 | — | — | 119,842 | |||||||||||||||||||
| Contract origination costs, net | 10,981 | — | — | 10,981 | |||||||||||||||||||
| Goodwill | 1,666 | — | — | 1,666 | |||||||||||||||||||
| Intangible assets, net | 12,170 | — | — | 12,170 | |||||||||||||||||||
| Other noncurrent assets | 14,395 | — | (5,670) | (3) | 8,725 | ||||||||||||||||||
| Total assets | $ | 212,390 | $ | 384,598 | $ | 160,877 | $ | 757,865 | |||||||||||||||
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||
| Accounts payable | $ | 21,721 | $ | 22 | $ | (1,147) | (3) | $ | 20,596 | ||||||||||||||
| Accrued liabilities | 17,084 | 2,616 | (3,707) | (3) | 15,993 | ||||||||||||||||||
| Accrued payroll | 6,512 | — | — | 6,512 | |||||||||||||||||||
| Franchise tax payable | — | 49 | — | 49 | |||||||||||||||||||
| Notes payable, current portion | 36,182 | — | — | 36,182 | |||||||||||||||||||
| Convertible promissory notes | 68,868 | — | (68,868) | (7) | — | ||||||||||||||||||
| Financing obligation, current portion | 18,052 | — | — | 18,052 | |||||||||||||||||||
| Deferred revenue, current | 38,762 | — | — | 38,762 | |||||||||||||||||||
| Other current liabilities | 1,069 | — | — | 1,069 | |||||||||||||||||||
| Total current liabilities | 208,250 | 2,687 | (73,722) | 137,215 | |||||||||||||||||||
| Deferred revenue, noncurrent | 16,640 | — | — | 16,640 | |||||||||||||||||||
| Asset retirement obligation | 4,150 | — | — | 4,150 | |||||||||||||||||||
| Notes payable, noncurrent | 6,418 | — | — | 6,418 | |||||||||||||||||||
| Financing obligation, noncurrent | 70,059 | — | — | 70,059 | |||||||||||||||||||
| Warrant liabilities | 161,486 | 276,874 | (161,486) | (8) | 276,874 | ||||||||||||||||||
| Lease liability, noncurrent | 41 | — | — | 41 | |||||||||||||||||||
| Deferred legal fees | — | 204 | (204) | (3) | — | ||||||||||||||||||
| Deferred underwriting commissions connection with the initial public offering | — | 13,425 | (13,425) | (3) | — | ||||||||||||||||||
| Total liabilities | 467,044 | 293,190 | (248,837) | 511,397 | |||||||||||||||||||
| Commitments and contingencies | |||||||||||||||||||||||
Convertible preferred stock(11) | 220,955 | — | (220,955) | (9) | — | ||||||||||||||||||
Common stock subject to redemption(11) | — | 86,408 | (86,408) | (4) | — | ||||||||||||||||||
| Stockholders’ equity (deficit): | |||||||||||||||||||||||
| (A) Stem (Historical) | (B) STPK (Historical) | Pro Forma Adjustments | Pro Forma Balance Sheet | ||||||||||||||||||||
Common stock(11) | — | — | — | (5) | |||||||||||||||||||
Class A common stock(11) | — | 3 | 2 | (2) | |||||||||||||||||||
| 4 | (4) | ||||||||||||||||||||||
| 6 | (5) | ||||||||||||||||||||||
| 1 | 16 | ||||||||||||||||||||||
Class B common stock(11) | — | 1 | (1) | — | |||||||||||||||||||
| Additional paid-in capital | 14,726 | 273,995 | 224,998 | (2) | |||||||||||||||||||
| (45,442) | (3) | ||||||||||||||||||||||
| 86,404 | (4) | ||||||||||||||||||||||
| (6) | (5) | ||||||||||||||||||||||
| (268,999) | (6) | ||||||||||||||||||||||
| 68,868 | (7) | ||||||||||||||||||||||
| 161,486 | (8) | ||||||||||||||||||||||
| 220,955 | (9) | ||||||||||||||||||||||
| (198) | (10) | 736,787 | |||||||||||||||||||||
| Accumulated other comprehensive income | 59 | — | 59 | ||||||||||||||||||||
| Accumulated deficit | (490,394) | (268,999) | 268,999 | (6) | (490,394) | ||||||||||||||||||
| Total stockholders’ equity (deficit) | (475,609) | 5,000 | 717,077 | 246,468 | |||||||||||||||||||
| Total liabilities, convertible preferred stock and stockholders’ equity (deficit) | $ | 212,390 | $ | 384,598 | $ | 160,877 | $ | 757,865 | |||||||||||||||
Pro Forma Adjustments to the Unaudited Condensed Combined Balance Sheet
(A)Derived from the unaudited condensed consolidated balance sheet of Stem as of March 31, 2021. See Stem’s financial statements and the related notes included in Exhibit 99.1 to this Current Report on Form 8-K/A.
(B)Derived from the unaudited balance sheet of STPK as of March 31, 2021. See STPK’s financial statements and the related notes included in the Quarterly Report.
(1)Reflects the release of cash currently invested in marketable securities held in the trust account.
(2)Reflects the proceeds received from the PIPE Investment with the corresponding issuance of 22,500,000 shares of common stock of the post-combination company at $10.00 per share.
(3)Reflects the payment of fees and expenses related to the Merger, including the deferred underwriting fee of $13,425, deferred legal fees of $204, and legal, financial advisory, accounting and other professional fees. Expenses of $6,750 attributable to the PIPE Investment, including underwriting fees payable to the placement agent in connection with the PIPE Investment, are reflected as an adjustment to additional paid-in capital. The direct, incremental costs of the Merger related to the legal, financial advisory, accounting and other professional fees of $38,692 are reflected as an adjustment to additional paid-in capital. Of these fees and expenses, $5,670 was incurred by Stem and capitalized as of March 31, 2021, of which $1,147 and $3,707 was recorded in accounts payable and accrued liabilities, respectively, with the remainder being already paid in cash. The remainder of these fees and expenses are expected to be paid with the cash released to or received by STPK at closing, as set forth in footnotes (1) and (2).
(4)Reflects the reclassification of Class A Common Stock subject to redemption for cash that is transferred to permanent equity immediately prior to the closing of the Merger.
(5)Reflects the recapitalization of Stem through (a) the contribution of all the share capital in Stem to STPK in the amount of $14,726 and (b) the issuance of 65,000,000 shares of STPK Class A Common Stock at par value of $0.0001 (including approximately 10,925,704 shares issuable upon the exercise of Stem Options and Stem Warrants).
(6)Reflects the elimination of the historical accumulated deficit of STPK, the legal acquirer, in the amount of $268,999.
(7)Reflects the conversion of all of Stem’s convertible promissory notes outstanding in the aggregate amount of $68,868 to common stock and additional paid-in capital.
(8)Reflects the exercise of all of Stem’s outstanding convertible preferred stock warrants in the aggregate amount of $161,486 to common shares and additional paid-in capital.
(9)Reflects the reclassification of $220,955 of Stem’s convertible preferred shares (175,531,186 shares at redemption value) to permanent equity.
(10)Reflects the cash disbursed to redeem 19,804 shares of STPK’s Class A Common Stock in connection with the Merger at an assumed redemption price of approximately $10.00 per share based on funds held in the Trust Account as of March 31, 2021.
(11)Authorized, issued and outstanding shares for each class of common stock and preferred stock as of March 31, 2021 and on a pro forma basis is as follows:
| March 31, 2021 | Pro Forma Combined Company | |||||||||||||||||||||||||||||||||||||
| Authorized | Issued | Outstanding | Authorized | Issued | Outstanding | |||||||||||||||||||||||||||||||||
| Stem convertible preferred stock | ||||||||||||||||||||||||||||||||||||||
| Series D’ | 190,000,000 | 105,386,149 | 105,386,149 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Series D | 87,235,535 | 33,483,143 | 33,483,143 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Series C | 64,129,209 | 23,298,388 | 23,298,388 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Series B | 36,969,407 | 9,185,302 | 9,185,302 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Series A’ | 30,991,277 | 4,158,503 | 4,158,503 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Series A | 21,288 | 16,740 | 16,740 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Series 1 | 4,305 | 2,961 | 2,961 | |||||||||||||||||||||||||||||||||||
| N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||
| Stem common stock | 474,728,323 | 17,694,228 | 17,694,228 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| STPK preferred stock | 1,000,000 | — | — | 1,000,000 | — | — | ||||||||||||||||||||||||||||||||
| STPK class A common stock subject to possible redemption | 8,641,047 | 8,641,047 | 8,641,047 | — | — | — | ||||||||||||||||||||||||||||||||
| STPK class A common stock | 400,000,000 | 29,717,457 | 29,717,457 | 500,000,000 | 135,428,326 | 135,428,326 | ||||||||||||||||||||||||||||||||
| STPK class B common stock | 40,000,000 | 9,589,626 | 9,589,626 | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2021
(in thousands, except share and per share data)
| (A) Stem (Historical) | (B) STPK (Historical) | Pro Forma Adjustments | Pro Forma Income Statement | |||||||||||||||||||||||
| Services revenue | $ | 4,881 | $ | — | $ | — | $ | 4,881 | ||||||||||||||||||
| Hardware revenue | 10,539 | — | — | 10,539 | ||||||||||||||||||||||
| Total revenue | 15,420 | — | — | 15,420 | ||||||||||||||||||||||
| Cost of service revenue | 6,905 | — | — | 6,905 | ||||||||||||||||||||||
| Cost of hardware revenue | 8,632 | — | — | 8,632 | ||||||||||||||||||||||
| Total cost of revenue | 15,537 | — | — | 15,537 | ||||||||||||||||||||||
| Gross Margin | (117) | — | — | (117) | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Sales and marketing | 2,667 | — | — | 2,667 | ||||||||||||||||||||||
| Research and development | 4,407 | — | — | 4,407 | ||||||||||||||||||||||
| General and administrative | 2,692 | 521 | 49 | (4) | 3,262 | |||||||||||||||||||||
| General and administration – Related party | — | 30 | — | 30 | ||||||||||||||||||||||
| Franchise tax expense | — | 49 | (49) | (4) | — | |||||||||||||||||||||
| Total operating expenses | 9,766 | 600 | — | 10,366 | ||||||||||||||||||||||
| Loss from operations | (9,883) | (600) | — | (10,483) | ||||||||||||||||||||||
| Other income (expense), net: | ||||||||||||||||||||||||||
| Interest expense | (6,233) | — | 3,155 | (3) | (3,078) | |||||||||||||||||||||
| Change in fair value of warrants and embedded derivative | (66,397) | (155,782) | 66,397 | (5) | (155,782) | |||||||||||||||||||||
| Other income | — | 35 | (35) | (1) | — | |||||||||||||||||||||
| Other expenses, net | (40) | — | — | (40) | ||||||||||||||||||||||
| Total other income (expense) | (72,670) | (155,747) | 69,517 | (158,900) | ||||||||||||||||||||||
| Loss before income taxes | (82,553) | (156,347) | 69,517 | (169,383) | ||||||||||||||||||||||
| Income tax expense | — | — | — | — | ||||||||||||||||||||||
| Net loss | $ | (82,553) | $ | (156,347) | $ | 69,517 | $ | (169,383) | ||||||||||||||||||
| Net loss attributable to common stockholders | $ | (82,553) | $ | (169,383) | ||||||||||||||||||||||
| Net loss per share attributable to Stem common stockholders, basic and diluted | $ | (6.73) | ||||||||||||||||||||||||
| Weighted-average shares of Stem common stock used in computing net loss per share, basic and diluted | 12,263,160 | |||||||||||||||||||||||||
| Weighted average Class A ordinary shares outstanding, basic and diluted | 38,358,504 | 97,069,822 | (2) | 135,428,326 | ||||||||||||||||||||||
| Basic and diluted net loss per ordinary share, Class A | $ | 0.00 | $ | (1.25) | ||||||||||||||||||||||
Weighted average Class B ordinary shares outstanding, basic and diluted(1) | 9,589,626 | |||||||||||||||||||||||||
| Basic and diluted net loss per ordinary share, Class B | $ | (16.30) | ||||||||||||||||||||||||
_________________
(1)The amount of shares as of March 31, 2021 included up to 1,312,500 shares of Class B common stock subject to forfeiture if the over-allotment option was not exercised in full or in part by the underwriters. On August 26, 2020, the underwriters partially exercised their over-allotment option; thus, 472,874 shares of Class B common stock were forfeited.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2020
(in thousands, except share and per share data)
| (C) Stem (Historical) | (D) STPK (Historical) | Pro Forma Adjustments | Pro Forma Income Statement | |||||||||||||||||||||||
| Service revenue | $ | 15,645 | $ | — | $ | — | $ | 15,645 | ||||||||||||||||||
| Hardware revenue | 20,662 | — | — | 20,662 | ||||||||||||||||||||||
| Total revenue | 36,307 | — | — | 36,307 | ||||||||||||||||||||||
| Cost of service revenue | 21,187 | — | — | 21,187 | ||||||||||||||||||||||
| Cost of hardware revenue | 19,032 | — | — | 19,032 | ||||||||||||||||||||||
| Total cost of revenue | 40,219 | — | — | 40,219 | ||||||||||||||||||||||
| Gross Margin | (3,912) | — | — | (3,912) | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Sales and marketing | 14,829 | — | — | 14,829 | ||||||||||||||||||||||
| Research and development | 15,941 | — | — | 15,941 | ||||||||||||||||||||||
| General and administrative | 14,705 | 3,137 | 200 | (4) | 18,042 | |||||||||||||||||||||
| General and administration – Related party | — | 163 | — | 163 | ||||||||||||||||||||||
| Franchise tax expense | — | 200 | (200) | (4) | — | |||||||||||||||||||||
| Total operating expenses | 45,475 | 3,500 | — | 48,975 | ||||||||||||||||||||||
| Loss from operations | (49,387) | (3,500) | — | (52,887) | ||||||||||||||||||||||
| Other income (expense), net: | ||||||||||||||||||||||||||
| Interest expense | (20,806) | — | 8,452 | (3) | (12,354) | |||||||||||||||||||||
| Change in fair value of warrants and embedded derivative | (84,455) | (109,270) | 84,455 | (5) | (109,270) | |||||||||||||||||||||
| Other income | — | 137 | (137) | (1) | — | |||||||||||||||||||||
| Other expenses, net | (1,471) | — | — | (1,471) | ||||||||||||||||||||||
| Total other income (expense) | (106,732) | (109,133) | 92,770 | (123,095) | ||||||||||||||||||||||
| Loss before income taxes | (156,119) | (112,633) | 92,770 | (175,982) | ||||||||||||||||||||||
| Income tax expense | (5) | — | — | (5) | ||||||||||||||||||||||
| Net loss | $ | (156,124) | $ | (112,633) | $ | 92,770 | $ | (175,987) | ||||||||||||||||||
| Less: Deemed dividend to preferred stockholders | $ | (9,484) | $ | (9,484) | ||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | (165,608) | $ | (185,471) | ||||||||||||||||||||||
| Net loss per share attributable to Stem common stockholders, basic and diluted | $ | (17.48) | ||||||||||||||||||||||||
| Weighted-average shares of Stem common stock used in computing net loss per share, basic and diluted | 9,474,749 | |||||||||||||||||||||||||
| Weighted average Class A ordinary shares outstanding, basic and diluted | 38,208,123 | 97,220,203 | (2) | 135,428,326 | ||||||||||||||||||||||
| Basic and diluted net loss per ordinary share, Class A | $ | (0.00) | $ | (1.37) | ||||||||||||||||||||||
Weighted average Class B ordinary shares outstanding, basic and diluted(1) | 9,589,626 | |||||||||||||||||||||||||
| Basic and diluted net loss per ordinary share, Class B | $ | (11.75) | ||||||||||||||||||||||||
_________________
(1)The amount of shares as of December 31, 2020 included up to 1,312,500 shares of Class B common stock subject to forfeiture if the over-allotment option was not exercised in full or in part by the underwriters. On August 26, 2020, the underwriters partially exercised their over-allotment option; thus, 472,874 shares of Class B common stock were forfeited.
Pro Forma Adjustments to the Unaudited Condensed Consolidated Statement of Operations
(A)Derived from the unaudited condensed consolidated statement of operations of Stem for the three months ended March 31, 2021. See Stem’s financial statements and the related notes included in Exhibit 99.1 to this Current Report on Form 8-K/A.
(B)Derived from the unaudited consolidated statement of operations of STPK for the three months ended March 31, 2021. See STPK’s financial statements and the related notes included in the Quarterly Report.
(C)Derived from the audited consolidated statement of operations of Stem for the year ended December 31, 2020. See Stem’s audited historical consolidated statement of operations for the year ended December 31, 2020, as included elsewhere in STPK’s definitive proxy statement/consent solicitation/prospectus on Form 424B3 filed with the SEC on March 30, 2021.
(D)Derived from the audited consolidated statement of operations of STPK for the year ended December 31, 2020. See STPK’s audited historical consolidated statement of operations for the year ended December 31, 2020, as included in the Annual Report.
(1)Represents an adjustment to eliminate interest income on marketable securities held in the trust account as of the beginning of the period.
(2)The calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that STPK’s IPO occurred as of January 1, 2020. In addition, as the Merger is being reflected as if it had occurred on this date, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares have been outstanding for the entire period presented (including approximately 10,925,704 shares issuable upon the exercise of Stem Options and Stem Warrants). This calculation is retroactively adjusted to eliminate the number of shares redeemed in the merger for the entire period.
(3)Reflects the elimination of interest expense and debt discount amortization on Stem’s convertible promissory notes.
(4)Reflects the reclassification of STPK’s franchise tax expense to align with the income statement presentation of Stem.
(5)Reflects the elimination of the fair market value adjustment on the redemption features embedded in the convertible promissory notes and the convertible preferred stock warrants.
The following presents the calculation of basic and diluted weighted average common shares outstanding.
| Combined | % | ||||||||||
| STPK public shares | 38,338,700 | 28.3 | % | ||||||||
| STPK Founder Shares | 9,589,626 | 7.1 | % | ||||||||
| STPK shares issued in the Merger | 65,000,000 | (1) | 48.0 | % | |||||||
| STPK shares issued to PIPE Investors | 22,500,000 | 16.6 | % | ||||||||
| Pro Forma Common Stock at March 31, 2021 | 135,428,326 | ||||||||||
_________________
(1)Includes approximately 10.9 million shares issuable upon the exercise of Stem Options and Stem Warrants.
Stem, Inc. Announces First Quarter 2021 Financial Results
Revenue exceeds the high end of guidance
Reaffirms 2021 financial guidance
MILLBRAE, Calif. – May 17, 2021 – Stem, Inc. ("Stem" or the "Company") (NYSE:STEM), a global leader in artificial intelligence (AI)-driven clean energy storage services, announced today the financial results for the first quarter ended March 31, 2021. All financial and operating results included in this release are for the Stem business prior to the closing of the business combination with Star Peak Energy Transition Corp. (“Star Peak”). Based on the timing of the transaction close, the Company will not host an earnings call related to the first quarter results but will hold quarterly earnings calls starting with its second quarter 2021 results.
First Quarter 2021 Financial and Operating Highlights
•Revenues of $15.4 million vs. $4.1 million in the same quarter last year
•Gross Margin (GAAP) of (1)% vs. (34)% in the same quarter last year
•Non-GAAP Gross Margin of 19% vs. 1% in the same quarter last year
•Net Loss of $(82.6) million vs. $(17.5) million in the same quarter last year, which included a $66 million non-cash charge from the revaluation of warrants
•Adjusted EBITDA of $(4.1) million vs. $(9.7) million in the same quarter last year
•Contracted AUM of 1.10 gigawatt hours (GWh)
•12-month Pipeline of $1.43 billion
•Contracted Backlog increased to $221 million driven by strong year-over-year bookings growth of 150%
John Carrington, Chief Executive Officer of Stem, commented, “We are excited to announce strong first quarter results following the recent completion of our business combination with Star Peak. Revenue exceeded the high end of our guidance range, coupled with strong gross margin and Adjusted EBITDA performance. Our contracted backlog grew more than 20% sequentially, reflecting strong commercial momentum particularly in the Front of the Meter ("FTM") segment and a quickly growing end market. Looking forward, our sales, product development and operations teams continue to drive toward achieving our 2021 guidance and building momentum into 2022 and beyond. As the first publicly-traded pure-play smart storage company, our experience, industry-leading software, robust service offerings, and strong balance sheet will continue to differentiate Stem in this rapidly expanding market.”
1
| Key metrics | ||||||||||||||||||||
| $ millions unless otherwise noted | ||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Financial metrics | ||||||||||||||||||||
| Revenue | $ | 15.4 | $ | 4.1 | ||||||||||||||||
| Gross Margin (GAAP) | $ | (0.1) | $ | (1.4) | ||||||||||||||||
| Gross Margin (GAAP, %) | (1) | % | (34) | % | ||||||||||||||||
| Non-GAAP Gross Margin | $ | 2.9 | $ | 0.0 | ||||||||||||||||
| Non-GAAP Gross Margin (%) | 19% | 1% | ||||||||||||||||||
| Net Loss | $ | (82.6) | $ | (17.5) | ||||||||||||||||
| Adjusted EBITDA | $ | (4.1) | $ | (9.7) | ||||||||||||||||
| Operating metrics* | ||||||||||||||||||||
| Contracted AUM (GWh) | 1.10 | 0.48 | ||||||||||||||||||
| 12 Month Pipeline ($ billions) | $ | 1.43 | ** | |||||||||||||||||
| Contracted Backlog | $ | 221 | ** | |||||||||||||||||
| * at period end | ||||||||||||||||||||
| ** not available | ||||||||||||||||||||
First Quarter 2021 Financial and Operating Results
Financial Results
For the first quarter ended March 31, 2021, revenues increased 275% to $15.4 million versus $4.1 million in the same quarter last year. Higher hardware revenue from FTM partnership agreements, and more services revenue from host customer arrangements, drove the year-over-year increase.
Gross Margin (GAAP) was $(0.1) million or (1)% versus $(1.4) million or (34)% in the same quarter last year. Non-GAAP Gross Margin was $2.9 million or 19% versus $0.0 million or 1% in the same quarter last year. The year-over-year increase in Non-GAAP Gross Margin resulted from an increased mix of software service revenues and higher-margin hardware deliveries.
Net Loss increased to $(82.6) million versus $(17.5) million in the same period last year. The larger loss was primarily due to a $66 million non-cash charge from the revaluation of warrants tied to an increase in the value of the underlying stock, partially offset by higher margins and lower operating expenses.
Adjusted EBITDA was $(4.1) million compared to $(9.7) million in the same quarter last year. The improved Adjusted EBITDA results were driven by higher gross margins and lower operating expenses reflecting the success in our channel strategy driving lower customer acquisition costs.
Operating Results
Contracted Assets Under Management ("AUM") more than doubled year-over-year to 1.10 GWh, driven by increased commercial activity and the addition of the 345 megawatt hour (MWh) Electrodes Holdings, LLC portfolio. Contracted AUM increased by 10% sequentially as new systems came in service.
The Company’s 12-month forward Pipeline was $1.43 billion as of March 31, 2021 representing significant year-over-year growth. The Gross Pipeline was $1.27 billion as of March 31, 2020. The Company updated its definition of Pipeline from “Gross” to “12-month forward” during 2020.
2
Contracted Backlog increased 20% sequentially, from $184 million as of December 31, 2020 to $221 million as of March 31, 2021. The increase in contracted backlog resulted from strong bookings of $51 million tied to increased commercial activity, particularly in the FTM market, which more than offset recognized revenue. The growth in bookings represents a 150% year-over-year increase from the $20M recorded in the quarter ended March 31, 2020.
Business Highlights
On April 28, 2021, Stem completed its business combination with Star Peak, and on April 29, 2021 began trading under the ticker symbol “STEM” on the New York Stock Exchange (NYSE). All prior Stem shareholders rolled 100% of their equity holdings into the new public company.
On April 14, 2021, Stem announced it had completed six months of successful operation of the 345 MWh energy storage portfolio owned by Electrodes. Customers in the 86-site portfolio realized more than 30% greater monthly energy savings compared to the previous software provider. Stem seamlessly onboarded the portfolio to its AthenaTM smart energy storage software within two months of being awarded the exclusive contract.
On March 2, 2021, Stem announced the installation of its largest Massachusetts “solar plus storage” site. Located in Haverhill, MA, the 9 MWh battery will generate revenues from multiple value streams by enabling Stem's partner Kearsarge Energy’s storage system to participate in the Solar Massachusetts Renewable Target (SMART) program, New England wholesale energy markets, and Massachusetts’s Clean Peak Energy Standard program.
Outlook
The Company reaffirms its previously issued guidance, which includes revenue of $147 million and Adjusted EBITDA of $(25) million for the full year 2021. Consistent with prior guidance, Stem reaffirms the remaining expected 2021 quarterly revenue as follows: 2Q 5-15%, Q3 20-30%, 4Q 50-60%.
The Company has contracted for sufficient supply chain commitments to meet its 2021 revenue goal and will continue to diversify its supply chain, adopt alternative technologies, and utilize its balance sheet to meet the significant growth in customer demand..
Use of Non-GAAP Financial Measures
The Company has presented certain non-GAAP financial measures in this release, such as Non-GAAP Gross Margin and Adjusted EBITDA. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that either exclude or include amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States, or GAAP. Reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure can be found in the accompanying tables to this release. These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions, and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.
3
The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals, and facilitate period-to-period comparisons. The Company believes that these non-GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business.
About Stem, Inc.
Stem, Inc. (NYSE: STEM) provides solutions that address the challenges of today’s dynamic energy market. By combining advanced energy storage solutions with Athena™, a world-class AI-powered analytics platform, Stem enables customers and partners to optimize energy use by automatically switching between battery power, onsite generation and grid power. Stem’s solutions help enterprise customers benefit from a clean, adaptive energy infrastructure and achieve a wide variety of goals, including expense reduction, resilience, sustainability, environmental and corporate responsibility and innovation. Stem also offers full support for solar partners interested in adding storage to standalone, community or commercial solar projects – both behind and in front of the meter. For more information, visit www.stem.com.
Forward-Looking Statements
Certain statements in this communication may be considered “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. For example, projections of future revenue and other metrics are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expect,” “intend,” “will,” “estimate,” “anticipate," “believe," “predict,” or the negatives of these terms or variations of them or similar terminology. Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements are based upon estimates and assumptions that, while considered reasonable by Stem and its management, depend upon inherently uncertain factors that may cause actual results to differ materially from current expectations, including, but not limited to: Stem’s ability to recognize the anticipated benefits of the business combination, which may be affected by, among other things, competition, the ability of Stem to grow and manage growth profitably, maintain relationships with customers and suppliers and retain its management and key employees; risks relating to the development and performance of Stem’s energy storage systems and software-enabled services; the possibility that Stem may be adversely affected by other economic, business and/or competitive factors; the ability to maintain the listing of Stem’s securities on the NYSE following the consummation of the business combination; the risk that the business combination disrupts current plans and operations of Stem; changes in applicable laws or regulations; Stem’s estimates of its financial performance; the outcome of any legal proceedings that may be instituted against Stem or others following the consummation of the business combination; the impact of the COVID-19 pandemic and its effect on Stem’s business, financial condition and results of operations; and other risks and uncertainties set forth in the section entitled “Risk Factors” in the definitive proxy statement relating to the business combination filed by Star Peak on March 30, 2021 and other documents Stem files with the SEC in the future. Nothing in this communication should be regarded as a representation by any person that the forward-looking statements set forth herein will be achieved or that any of the contemplated results of such forward looking statements will be achieved. We caution you that the foregoing list of factors is not exhaustive, and readers should not place undue reliance on forward-looking statements, which speak only as of the date they are made. Stem does not undertake any duty to update these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
4
Stem Investor Contacts
Ted Durbin, Stem
Marc Silverberg, ICR
IR@stem.com
(847) 905-4400
Ted Durbin, Stem
Marc Silverberg, ICR
IR@stem.com
(847) 905-4400
Stem Media Contacts
Cory Ziskind, ICR
stemPR@icrinc.com
Cory Ziskind, ICR
stemPR@icrinc.com
Source: Stem, Inc.
###
5
STEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||||||||
| ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 9,873 | $ | 6,942 | |||||||||||||
| Accounts receivable, net | 14,567 | 13,572 | |||||||||||||||
| Inventory, net | 22,309 | 20,843 | |||||||||||||||
| Other current assets (includes $1,485 and $123 due from related parties as of March 31, 2021 and December 31, 2020, respectively) | 6,587 | 7,920 | |||||||||||||||
| Total current assets | 53,336 | 49,277 | |||||||||||||||
| Energy storage systems, net | 119,842 | 123,703 | |||||||||||||||
| Contract origination costs, net | 10,981 | 10,404 | |||||||||||||||
| Goodwill | 1,666 | 1,739 | |||||||||||||||
| Intangible assets, net | 12,170 | 12,087 | |||||||||||||||
| Other noncurrent assets | 14,395 | 8,640 | |||||||||||||||
| Total assets | $ | 212,390 | $ | 205,850 | |||||||||||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 21,721 | $ | 13,749 | |||||||||||||
| Accrued liabilities | 17,084 | 16,072 | |||||||||||||||
| Accrued payroll | 6,512 | 5,976 | |||||||||||||||
| Notes payable, current portion | 36,182 | 33,683 | |||||||||||||||
| Convertible promissory notes (includes $45,385 and $45,271 due to related parties as of March 31, 2021 and December 31, 2020, respectively) | 68,868 | 67,590 | |||||||||||||||
| Financing obligation, current portion | 18,052 | 14,914 | |||||||||||||||
| Deferred revenue, current | 38,762 | 36,942 | |||||||||||||||
| Other current liabilities (includes $321 and $399 due to related parties as of March 31, 2021 and December 31, 2020, respectively) | 1,069 | 1,589 | |||||||||||||||
| Total current liabilities | 208,250 | 190,515 | |||||||||||||||
| Deferred revenue, noncurrent | 16,640 | 15,468 | |||||||||||||||
| Asset retirement obligation | 4,150 | 4,137 | |||||||||||||||
| Notes payable, noncurrent | 6,418 | 4,612 | |||||||||||||||
| Financing obligation, noncurrent | 70,059 | 73,128 | |||||||||||||||
| Warrant liabilities | 161,486 | 95,342 | |||||||||||||||
| Lease liability, noncurrent | 41 | 57 | |||||||||||||||
| Total liabilities | 467,044 | 383,259 | |||||||||||||||
| Commitments and contingencies (Note 13) | |||||||||||||||||
| Convertible preferred stock, $0.00001 par value; 409,351,021 shares authorized as of March 31, 2021 and December 31, 2020; 175,528,225 and 175,437,783 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively; (liquidation preference of $258,084 and $257,947 as of March 31, 2021 and December 31, 2020, respectively) | 220,955 | 220,563 | |||||||||||||||
| Stockholders’ Deficit: | |||||||||||||||||
| Series 1 convertible preferred stock, $0.00001 par value; 4,305 shares authorized as of March 31, 2021 and December 31, 2020; 2,961 shares issued and outstanding as of March 31, 2021 and December 31, 2020 | — | — | |||||||||||||||
| Common stock, $0.000001 par value; 474,728,323 shares authorized as of March 31, 2021 and December 31, 2020; 17,694,228 and 11,228,371 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | — | — | |||||||||||||||
| Additional paid-in capital | 14,726 | 10,061 | |||||||||||||||
| Accumulated other comprehensive income (loss) | 59 | (192) | |||||||||||||||
| Accumulated deficit | (490,394) | (407,841) | |||||||||||||||
| Total stockholders’ deficit | (475,609) | (397,972) | |||||||||||||||
| Total liabilities, convertible preferred stock and stockholders’ deficit | $ | 212,390 | $ | 205,850 | |||||||||||||
6
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
| Three Months Ended March 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Services revenue | $ | 4,881 | $ | 3,393 | |||||||||||||
| Hardware revenue | 10,539 | 718 | |||||||||||||||
| Total revenue | 15,420 | 4,111 | |||||||||||||||
| Cost of service revenue | 6,905 | 4,762 | |||||||||||||||
| Cost of hardware revenue | 8,632 | 751 | |||||||||||||||
| Total cost of revenue | 15,537 | 5,513 | |||||||||||||||
| Gross margin | (117) | (1,402) | |||||||||||||||
| Operating expenses: | |||||||||||||||||
| Sales and marketing | 2,667 | 4,397 | |||||||||||||||
| Research and development | 4,407 | 3,395 | |||||||||||||||
| General and administrative | 2,692 | 3,004 | |||||||||||||||
| Total operating expenses | 9,766 | 10,796 | |||||||||||||||
| Loss from operations | (9,883) | (12,198) | |||||||||||||||
| Other income (expense), net: | |||||||||||||||||
| Interest expense | (6,233) | (4,369) | |||||||||||||||
| Change in fair value of warrants and embedded derivative | (66,397) | 1,009 | |||||||||||||||
| Other expenses, net | (40) | (1,913) | |||||||||||||||
| Total other income (expense) | (72,670) | (5,273) | |||||||||||||||
| Loss before income taxes | (82,553) | (17,471) | |||||||||||||||
| Income tax expense | — | — | |||||||||||||||
| Net loss | $ | (82,553) | $ | (17,471) | |||||||||||||
| Net loss per share attributable to common shareholders, basic and diluted | $ | (6.73) | $ | (2.97) | |||||||||||||
| Weighted-average shares used in computing net loss per share, basic and diluted | 12,263,160 | 9,075,646 | |||||||||||||||
7
STEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net loss | $ | (82,553) | $ | (17,471) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization expense | 5,079 | 3,994 | |||||||||
| Non-cash interest expense, including interest expenses associated with debt issuance costs | 3,902 | 2,116 | |||||||||
| Stock-based compensation | 760 | 456 | |||||||||
| Change in fair value of warrant liability and embedded derivative | 66,397 | (1,009) | |||||||||
| Noncash lease expense | 160 | 141 | |||||||||
| Accretion expense | 50 | 114 | |||||||||
| Impairment of energy storage systems | 613 | 237 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (955) | 206 | |||||||||
| Inventory | (1,466) | (5,104) | |||||||||
| Other assets | (4,690) | (2,660) | |||||||||
| Contract origination costs | (779) | (742) | |||||||||
| Accounts payable and accrued expenses | 8,640 | 1,081 | |||||||||
| Deferred revenue | 2,992 | 8,016 | |||||||||
| Lease liabilities | (176) | (152) | |||||||||
| Other liabilities | 199 | 107 | |||||||||
| Net cash used in operating activities | (1,827) | (10,670) | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchase of energy storage systems | (1,525) | (1,911) | |||||||||
| Capital expenditures on internally-developed software | (1,238) | (1,399) | |||||||||
| Net cash used in investing activities | (2,763) | (3,310) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Proceeds from exercise of stock options and warrants | 2,894 | 21 | |||||||||
| Proceeds from financing obligations | 2,732 | 3,912 | |||||||||
| Repayment of financing obligations | (3,369) | (1,860) | |||||||||
| Proceeds from issuance of convertible notes, net of issuance costs of $8 and $238 for the three months ended March 31, 2021 and 2020, respectively | 1,118 | 14,050 | |||||||||
| Proceeds from issuance of notes payable | 3,879 | — | |||||||||
| Repayment of notes payable | (161) | (3,968) | |||||||||
| Net cash provided by financing activities | 7,093 | 12,155 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 428 | (184) | |||||||||
| Net increase (decrease) in cash and cash equivalents | 2,931 | (2,009) | |||||||||
| Cash and cash equivalents, beginning of year | 6,942 | 12,889 | |||||||||
| Cash and cash equivalents, end of period | $ | 9,873 | $ | 10,880 | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid for interest | $ | 1,480 | $ | 1,895 | |||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | |||||||||||
| Change in asset retirement costs and asset retirement obligation | $ | 37 | $ | 4 | |||||||
| Purchases of energy storage systems in accounts payable | $ | 1,260 | $ | 66 | |||||||
| 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 | $ | 24 | $ | — | |||||||
8
STEM, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(in thousands, except percentages; unaudited)
The following table provides a reconciliation of Net loss to Adjusted EBITDA:
| Three Months Ended March 31, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| (in thousands) | |||||||||||||||||
| Net loss | $ | (82,553) | $ | (17,471) | |||||||||||||
| Adjusted to exclude the following: | |||||||||||||||||
| Depreciation and amortization | 5,079 | 3,994 | |||||||||||||||
| Interest expense | 6,233 | 4,369 | |||||||||||||||
| Stock-based compensation | 760 | 456 | |||||||||||||||
| Change in fair value of warrants and embedded derivative | 66,397 | (1,009) | |||||||||||||||
| Adjusted EBITDA | $ | (4,084) | $ | (9,661) | |||||||||||||
The following table provides a reconciliation of Gross Margin (GAAP) to Non-GAAP Gross Margin:
| $ millions unless otherwise noted | ||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Revenue | $ | 15.4 | $ | 4.1 | ||||||||||||||||
| Cost of Good Sold | (15.5) | (5.5) | ||||||||||||||||||
| Gross Margin (GAAP) | $ | (0.1) | $ | (1.4) | ||||||||||||||||
| Gross Margin % (GAAP) | (1) | % | (34) | % | ||||||||||||||||
| Adjustments to Gross Margin | ||||||||||||||||||||
| Amortization of Capitalized Software | $ | 1.2 | $ | 0.9 | ||||||||||||||||
| Impairments | 0.9 | 0.5 | ||||||||||||||||||
| Other Adjustments | 0.9 | 0.0 | ||||||||||||||||||
| Non-GAAP Gross Margin | $ | 2.9 | $ | 0.0 | ||||||||||||||||
| Non-GAAP Gross Margin % | 19% | 1% | ||||||||||||||||||
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The following table provides a reconciliation of current backlog to prior quarter backlog:
| $ millions | |||||||||||
| Period ending 4Q 2020 | $ | 184 | |||||||||
| Add: Bookings | 51 | ||||||||||
| Less: Revenue | (15) | ||||||||||
| Other | 1 | ||||||||||
| Period ending 1Q 2021 | $ | 221 | |||||||||
Key Definitions:
| Item | Definition | ||||
| 12-Month Pipeline | Total value of uncontracted, potential hardware and software revenue from opportunities currently in process by Stem direct salesforce and channel partners which have a reasonable likelihood of contract execution within 12 months •Market participation revenue is excluded from pipeline | ||||
| Gross Pipeline | Total value of uncontracted, potential hardware and software revenue from opportunities currently in process by Stem direct salesforce and channel partners •Market participation revenue is excluded from pipeline | ||||
| Bookings | Total value of executed customer agreements, as measured during a given period (e.g. quarterly booking or annual booking) •Customer contracts are typically executed 6-12 months ahead of installation •Booking amount typically includes: a.Hardware revenue, which is typically recognized at delivery of system to customer, b.Software revenue, which represents total nominal software contract value recognized ratably over the contract period, c.Market participation revenue is excluded from booking value | ||||
| Contracted Backlog | Total value of bookings in dollars, as reflected on a specific date •Backlog increases as new contracts are executed (bookings) •Backlog decreases as integrated storage systems are delivered and recognized as revenue | ||||
| Contracted AUM | Total MWh of systems in operation or under contract | ||||
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