You should read the following discussion and analysis of our financial condition
and results of operations together with our audited consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K. This discussion contains forward-looking statements based upon current
plans, expectations and beliefs involving risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under "Risk
Factors" and in other parts of this Annual Report on Form 10-K.

On July 16, 2021, we consummated the business combination (the "Merger"),
contemplated by the Agreement and Plan of Merger, dated March 5, 2021, with NHIC
Sub Inc. ("Merger Sub"), a wholly-owned subsidiary of NewHold Investment Corp.
("NHIC"), a special purpose acquisition company, which is our legal predecessor,
and Evolv Technologies, Inc. dba Evolv Technology, Inc. ("Legacy Evolv"), as
amended by that certain First Amendment to Agreement and Plan of Merger dated
June 5, 2021 by and among NHIC, Merger Sub and Legacy Evolv (the "Amendment" and
as amended, the "Merger Agreement"). Pursuant to the Merger Agreement, Merger
Sub was merged with and into Legacy Evolv, with Legacy Evolv surviving the
merger as a wholly owned subsidiary of NHIC. Upon the closing of the Merger,
NHIC changed its name to Evolv Technologies Holdings, Inc. Evolv Technologies
Holdings, Inc. became the successor entity to NHIC pursuant to Rule 12g-3(a)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").

As used in this Annual Report on Form 10-K, unless otherwise indicated or the
context otherwise requires, references to "we," "us," "our," the "Company" and
"Evolv" refer to the consolidated operations of Evolv Technologies Holdings,
Inc. and its subsidiaries. References to "NHIC" refer to the company prior to
the consummation of the Merger and references to "Legacy Evolv" refer to Evolv
Technologies, Inc. dba Evolv Technology, Inc. prior to the consummation of

the
Merger.

Business Overview

We are a global leader in AI-based weapons detection for security screening.
Unlike conventional walk-through metal detectors, our products use advanced
sensors, artificial intelligence software, and cloud services to reliably detect
guns, improvised explosives, and large knives while ignoring harmless items like
phones and keys. This not only enhances security at venues and facilities but
also improves the visitor experience by making screening up to ten times faster
than alternatives at up to 70% lower total cost.

Our products have screened over 200 million visitors worldwide. We believe that
we have screened more people through advanced systems than any organization
other than the United States Transportation Security Administration ("TSA"). Our
customers include many iconic venues across a wide variety of industries
including major sports teams, notable performing arts and entertainment venues,
major tourist destinations and cultural attractions, large industrial
workplaces, large school districts, and prominent houses of worship. We offer
our products for purchase and primarily under a multi-year security-as-a-service
subscription pricing model that delivers ongoing value to customers, generates
predictable revenue and creates expansion and upsell opportunities.

Our mission is to make the world a safer and more enjoyable place to live, work,
study, and play. We are focused on delivering value in the spaces in and around
the physical threshold of large venues and facilities. We believe that digitally
transforming the threshold experience is one of the most exciting innovation
opportunities of our time. We believe that our ongoing innovations will not only
make venues and facilities safer and more enjoyable, but also more efficient and
profitable.

Touchless security screening represents a paradigm shift for the security
screening market which, according to our estimates, is currently a $20 billion
market opportunity on an annual basis. Touchless security screening is a radical
change from conventional security screening processes that primarily rely on
walk-through metal detectors based on core

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technology that was invented in the nineteenth century. This conventional
approach presents numerous operational problems and hidden costs including a
high number of nuisance alarms due to the inability to distinguish weapons from
harmless items. These frequent nuisance alarms require resolution using manual
bag checks and pat downs that are error-prone, labor cost-intensive, and
unpleasant for visitors. This creates long wait times, dangerous crowding, and
numerous opportunities for weapons to slip into venues undetected. The result is
reduced security, frustrated visitors, and acutely stressful working conditions
for employees.

By allowing visitors to walk through at a normal pace with their bags in hand
and without emptying their pockets, our products significantly accelerate the
security screening process while also reducing the number of nuisance alarms to
a level that allows security guards to focus their attention on real threats. We
believe there is significant demand for touchless security screening in venues
and facilities that currently use slower, more invasive conventional metal
detector screening. We also believe there is additional opportunity in venues
and facilities that have not previously adopted weapon screening because of the
limitations of conventional screening. Our technology is designed to allow these
venues and facilities to successfully deploy security screening for the first
time.

Our potential to develop this significant opportunity is rooted in our deep
domain experience and commitment to research and development. Our engineering
efforts are led by a team of seasoned experts in software development, physical
security, and cybersecurity. Since our founding in July 2013, we have invested
significant resources in developing an extensive portfolio of proprietary and
differentiated technologies, with a focus on making security screening more
precise, much faster, and far less labor intensive.

Since our inception, we have incurred significant operating losses. Our ability
to generate revenue and achieve cost improvements sufficient to achieve
profitability will depend on the successful further development and
commercialization of our products. We generated revenue of $23.7 million and
$4.8 million for the years ended December 31, 2021 and 2020, respectively. We
generated a net loss of $10.9 million and $27.4 million for the years ended
December 31, 2021 and 2020, respectively. We expect to continue to incur
operating losses as we focus on growing and establishing recurring commercial
sales of our products in both the United States and international markets,
including growing our sales and marketing teams, scaling our manufacturing
operations, and continuing research and development efforts to develop new
products and further enhance our existing products.

Because of the numerous risks and uncertainties associated with product
development and commercialization, we are unable to accurately predict the
timing or amount of increased expenses or when, or if, we will be able to
achieve or maintain profitability. Until such time, if ever, as we can generate
substantial revenue sufficient to achieve profitability, we expect to finance
our operations through a combination of equity offerings and debt financings. In
July 2021, we received gross proceeds of $300.0 million from our PIPE Investment
as well as $84.9 million in proceeds, net of redemptions received from the
closing of the Merger. However, we may be unable to raise additional funds or
enter into such other agreements or arrangements when needed on favorable terms,
or at all. If we are unable to raise capital or enter into such agreements as,
and when, needed, we may have to significantly delay, scale back or discontinue
the further development and commercialization efforts of one or more of our
products, or may be forced to reduce or terminate our operations. See "Liquidity
and Capital Resources."

Merger Agreement

NewHold Investment Corporation Merger


On July 16, 2021, we completed the previously announced Merger, pursuant to the
Agreement and Plan of Merger, dated as of March 5, 2021, and amended by the
First Amendment to Agreement and Plan of Merger (the "Merger Agreement"), dated
as of June 5, 2021. Upon the closing of the Merger, NHIC changed its name to
Evolv Technologies Holdings, Inc. and the officers of NHIC, the legal
predecessor company, resigned. The officers of Legacy Evolv became the officers
of the Company, and the Company listed its shares of common stock, par value
$0.0001 per share, on Nasdaq under the symbol "EVLV".

Prior to the completion of the Merger, we entered into subscription agreements (collectively, the "PIPE Investment") with certain parties subscribing for shares of our common stock (the "Subscribers"). Pursuant to the PIPE



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Investment, we issued 30,000,000 shares of common stock for a purchase price of
$10.00 per share with gross proceeds of $300.0 million. The purpose of the PIPE
Investment was to fund general corporate expenses.

Upon the closing of the Merger, each share of NHIC Class B common stock issued
and outstanding immediately prior to the effective time of the Merger, which
totaled 10,391,513 shares held by the NHIC Initial Shareholders ("Initial
Shareholders"), was automatically converted into one validly-issued share of our
common stock.

Additional information regarding the Merger Agreement appears in Note 3 of our consolidated financial statements for the year ended December 31, 2021.

COVID-19



In March 2020, the World Health Organization declared the outbreak of the
COVID-19 pandemic. The COVID-19 pandemic initially caused us to experience
several adverse impacts, including extended sales cycles to close new orders for
our products because many of our customers were required to shut down facilities
completely or partially, delays in shipping and installing orders due to closed
facilities and travel limitations, and delays in collecting accounts receivable.

The rapid development and uncertainty of the impacts of the COVID-19 pandemic
precludes any prediction as to the ultimate impact of the COVID-19 pandemic on
our business. However, the COVID-19 pandemic, and the measures taken to contain
it, continue to present material uncertainty and risk with respect to our
performance and financial results. In particular, venues and facilities across
an array of vertical markets are temporarily reducing capital expenditure
budgets globally as they seek to preserve liquidity to ensure the longevity of
their own operations, which in turn may lead to reductions in purchases of our
security screening products. Further, office closures may prevent organizations
from reaching typical utilizations of our security screening products, resulting
in reductions in purchases of add-on products and expansion units. Additionally,
the COVID-19 pandemic may contribute to facility closures at our third-party
contract manufacturer and key suppliers, causing delays and disruptions in
product manufacturing, which could affect our ability to ship products purchased
by our customers in a timely manner. Disruptions in the capital markets as a
result of the COVID-19 pandemic may also adversely affect our business if these
impacts continue for a prolonged period and we need additional liquidity.

In the short-term, we have taken, and will continue to take, actions to mitigate
the impact of the COVID-19 pandemic on our cash flow and results of operations
and financial condition. While we are experiencing supply chain challenges, we
do see this being overcome in the near future. In the long-term, we believe that
the COVID-19 pandemic will encourage organizations to reassess their security
screening processes and may continue to accelerate their adoption of solutions
such as touchless security screening, which could create additional demand for
our products.

Additional information regarding COVID-19 risks appear in the "Risk Factors" section of this Annual Report.

Key Factors Affecting Our Operating Results



We believe that our performance and future success depend on many factors that
present significant opportunities for us but also pose risks and challenges,
including the following:

Adoption of our Security Screening Products



We believe the world will continue to focus on the safety and security of people
in the places where they gather. Many of these locations are moving toward a
more frictionless security screening experience. We believe that we are
well-positioned to take advantage of this opportunity due to our proprietary
technologies and global distribution capabilities. Our products are designed to
empower venues and facilities to realize the full benefits of touchless security
screening, including a rapid visitor throughput and minimal security staff to
screened visitor physical contact. We expect that our results of operations,
including revenue, will fluctuate for the foreseeable future as venues and
facilities continue to shift away from conventional security screening processes
towards touchless security screening. The degree to which potential and current
customers recognize these benefits and invest in our products will affect our
financial results.

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Pricing, Product Cost and Margins


To date, most of our revenue has been generated by sales of products which
represented 58.7% and 26.7% of our total revenue for the years ended December
31, 2021 and 2020, respectively. The remaining revenue was generated from
subscription sales and services for our products. Going forward, we expect our
products to be adopted in a variety of vertical industry markets and geographic
regions. Subscription revenue was $7.9 million and $2.6 million for the years
ended December 31, 2021 and 2020, respectively. With the further development,
enhancement, and maintenance of Evolv Insights and its analytical platform
during the three months ended December 31, 2021, we expect this source of
subscription revenue to become a more significant portion of our total revenue
in the year ended December 31, 2022, given its new features, functions and
capabilities.

Pricing may also vary by region due to market-specific dynamics. As a result,
our financial performance depends, in part, on the mix of
sales/bookings/business in different markets during a given period. In addition,
we are subject to price competition, and our ability to compete in key markets
will depend on the success of our investments in new technologies and cost
improvements as well as our ability to efficiently and reliably introduce
cost-effective touchless security screening products to our customers.

Continued Investment and Innovation


We believe that we are a leader in AI-based weapons detection for security
screening, offering transformative technologies that enable higher throughput, a
more frictionless visitor experience, and substantial cost savings through our
product innovations. Our performance is significantly dependent on the
investment we make in our research and development efforts and on our ability to
be at the forefront of the security screening industry. It is essential that we
continually identify and respond to rapidly evolving customer requirements,
develop and introduce innovative new products, enhance existing products and
generate customer demand for our products. We believe that investment in our
security screening products will contribute to long-term revenue growth, but it
may adversely affect our near-term profitability.

Contingent Earn-out Shares


In connection with the Merger and pursuant to the Merger Agreement, certain of
the Legacy Evolv shareholders and Legacy Evolv Service Providers are entitled to
receive additional shares of the Company's common stock (the "Earn-Out Shares")
upon the Company achieving certain milestones.

The Earn-Out Shares are classified as liabilities in our consolidated balance
sheets and were initially measured at fair value. Each reporting period, the
Earn-Out Shares are remeasured and changes in the fair value of the contingent
earn-out are recorded in other income (expense), net in our consolidated
statements of operations and comprehensive loss. When the Triggering Events have
been achieved and the Earn-Out Shares are issued, the Company will reclassify
the corresponding amount from a liability to additional paid-in-capital and
common stock at par value of $0.0001 per share.

Additional information regarding Contingent Earn-out Shares vesting provisions and accounting treatment appear in Note 2 of our consolidated financial statements for the year ended December 31, 2021.

Contingently Issuable Common Stock



Prior to the Merger, NewHold Industrial Technology Holdings, LLC, the sponsor of
the NHIC special purpose acquisition company owned 4,312,500 shares of NHIC
Class B common stock (the "Founder Shares"). Upon the closing of the Merger,
NHIC Class A and Class B common stock became the Company's common stock. The
Founder Shares are subject to certain share-performance-based vesting
provisions. As of December 31, 2021, 1,897,500 Founder Shares have vested and
are no longer subject to forfeiture.

The Founders Shares are classified as liabilities in our consolidated balance
sheets and were initially measured at fair value. Each reporting period, the
Founders Shares are remeasured and changes in the fair value of the contingently

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issuable common stock are recorded in other income (expense), net in our
consolidated statements of operations and comprehensive loss. When the
Triggering Events have been achieved and the Founders Shares are issued, the
Company will reclassify the corresponding amount from a liability to additional
paid-in-capital and common stock at par value of $0.0001 per share.

Additional information regarding Contingently Issuable Common Stock vesting provisions and accounting treatment appear in Note 2 of our consolidated financial statements for the year ended December 31, 2021.

Components of Results of Operations

Revenue



We derive revenue from (1) subscription arrangements accounted for as operating
leases, (2) from the sale of products, inclusive of SaaS and maintenance, and
(3) professional services. Our arrangements are generally noncancelable and
nonrefundable after ownership passes to the customer. Revenue is recognized

net
of sales tax.

Product Revenue

We derive a portion of our revenue from the sale of our Express and Edge
equipment and related add-on accessories to customers. Revenue is recognized
when control of the product has transferred to the customer, which follows the
terms of each contract. We expect product revenue to decline as a percentage of
our overall revenue overtime as more and more customers enter full subscription
transactions with us and as our subscription become more valuable to our
business.

Subscription Revenue



In addition to selling our products directly to customers, we also lease our
Express and Edge equipment which we classify as subscription revenue. Lease
terms are typically four years and customers generally pay either a quarterly or
annual fixed payment for the lease and maintenance elements over the contractual
lease term. Equipment leases are generally classified as operating leases as
they do not meet any of the capital lease criteria per ASC 840 and recognized
ratably over the duration of the lease. There are no contingent lease payments
as a part of these arrangements.

Generally, lease arrangements include both lease and non-lease components. The
non-lease components relate to (1) distinct services, such as installation,
training, SaaS, and maintenance, and (2) any add-on accessories. Installation
and training are included in service revenue as described below, and add-on
accessories are included in product revenue as described above. Because the
equipment, SaaS, and maintenance components of a subscription arrangement are
recognized as revenue over the same time period and in the same pattern the
equipment lease and SaaS/maintenance performance obligations are classified as a
single category of subscription revenue in our consolidated statements of
operations and comprehensive loss.

Services Revenue



We provide installation, training, SaaS, and maintenance services for our
products. Revenue for installation and training are recognized upon transfer of
control of these services, which are normally rendered over a short duration.
Maintenance consists of technical support, bug fixes and when-and-if available
threat updates. SaaS and maintenance revenue is recognized ratably over the
period of the arrangement. We sell separately priced extended or nonstandard
warranty services and preventative maintenance plans, which are recognized
ratably over the associated service period.

Cost of Revenue



We recognize cost of revenue in the same manner that the related revenue is
recognized.

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Cost of Product Revenue

Cost of product revenue consists primarily of costs paid to third party manufacturers, labor costs, shipping costs, amortization expense related to internal-use software, and write-offs of Edge units from inventory as we are no longer selling this product.



Cost of Subscription Revenue

Cost of subscription revenue consists primarily of labor costs, shipping costs,
amortization expense related to internal-use software, and depreciation expense
related to leased units.

Cost of Services Revenue

Cost of services revenue consists of costs related to SaaS and maintenance
services. Costs of services revenue related to SaaS consists of costs of
maintaining the Evolv Cloud Portal and our internal-use software, associated
with our Evolv Express units. Cost of services revenue related to maintenance
consists primarily of labor, spare parts, shipping costs, field service repair
costs, equipment, and supplies.

A provision for the estimated cost related to warranty is recorded to cost of
product, subscription, or services revenue at the time the associated revenue is
recognized as necessary. Our estimate of costs to service the warranty
obligations is based on historical experience and expectations of future
conditions. As of December 31, 2021, we recorded a warranty accrual of less than
$0.1 million.

Gross Profit and Gross Margin

Our gross profit is calculated based on the difference between our revenues and cost of revenues. Gross margin is the percentage obtained by dividing gross profit by our revenue. Our gross profit and gross margin are, or may be, influenced by a number of factors, including:

• Market conditions that may impact our pricing;

• Product mix changes between established products and new products;

• Our cost structure for manufacturing operations, including contract

manufacturers, relative to volume, and our product support obligations;

• Our ability to maintain our costs on the components that go into the

manufacture of our product; and

• Write-offs of inventory.

We expect our gross margins to fluctuate over time, depending on the factors described above.



Research and Development

Our research and development expenses represent costs incurred to support
activities that advance the development of innovative security screening
technologies, new product platforms, as well as activities that enhance the
capabilities of our existing product platforms. Our research and development
expenses consist primarily of salaries and bonuses, employee benefits,
stock-based compensation, prototypes, design expenses, consulting and contractor
costs, and the impact of the capitalization of costs associated with developing
the Evolv Cloud Portal, our internal-use software. We expect research and
development costs will increase on an absolute dollar basis over time as we
continue to invest in advancing our portfolio of security screening products.

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Sales and Marketing

Sales and marketing expenses consist primarily of personnel-related expenses
associated with our sales and marketing, customer success and global service,
business development, and strategy functions, as well as costs related to trade
shows and events, and stock-based compensation. We expect our sales and
marketing costs will increase on an absolute dollar basis as we expand our
headcount and initiate new marketing campaigns.

General and Administrative


General and administrative expenses consist primarily of personnel-related
expenses associated with our executive, finance, investor relations, legal,
information technology, and human resources functions, as well as professional
fees for legal, audit, accounting and other consulting services, stock-based
compensation, and sales tax contingencies. We expect our general and
administrative expenses will increase on an absolute dollar basis as a result of
operating as a public company, including expenses necessary to comply with the
rules and regulations applicable to companies listed on a national securities
exchange and related to compliance and reporting obligations pursuant to the
rules and regulations of the SEC, as well as increased expenses for general and
director and officer insurance, and other administrative and professional
services. In addition, we expect to incur additional costs as we hire additional
personnel and enhance our infrastructure to support the anticipated growth of
the business.

Loss From Impairment of Property and Equipment


Impairment of property and equipment relates to any units that are removed from
service and retired. This is related to Edge units and Express prototype units
that were taken out of service and retired. We are transitioning our domestic
customers from the Legacy Evolv Edge units to our most current Evolv Express
units, which also resulted in an impairment of the remaining economic value

of
such assets.

Interest Expense

Interest expense includes cash interest paid on our long-term debt as well as amortization of deferred financing fees and costs.

Other Expense

Other expense includes loss on disposals of our non-leased assets, primarily related to demo units.

Loss on Extinguishment of Debt


There was a modification of the 2021 Convertible Notes due to an agreement with
noteholders to receive an additional 1,000,000 shares of NHIC common stock as
further consideration for the conversion of such notes consistent with the terms
thereof, and interest due to each investor would automatically convert into
shares of the same class and series of capital stock of the Company issued to
other investors in the financing at a conversion price equal to 80% of the price
per share paid by the other investors. This modification of the 2021 Convertible
Notes was accounted for as an extinguishment.

Upon the closing of the Merger, the Convertible Notes automatically converted
into 4,408,672 shares of the Company's common stock and the holders of the
Convertible Notes also received the right to receive 1,000,000 shares of NHIC
common stock. Upon the conversion of the Convertible Notes, the carrying value
of the debt, including unamortized debt discount, and the related derivative
liability and accrued interest were derecognized. The shares of common stock
issued upon conversion of Convertible Notes were recorded at implied fair value
of the Company's common stock with the resulting difference being accounted for
as a loss on extinguishment.

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Change in Fair Value of Derivative Liability



In August through September 2019 and in September 2020, we issued Convertible
Notes to several investors (the "2020 Convertible Notes") that provided a
conversion option whereby upon the closing of a specified financing event the
notes would automatically convert into shares of the same class and series of
our capital stock issued to other investors in the financing at a conversion
price equal to 85% and 80%, respectively, of the price per share of the
securities paid by the other investors. This conversion option was determined to
be an embedded derivative that was required to be bifurcated and accounted for
separately from the notes. The derivative liability was initially recorded at
fair value upon issuance of the notes and is subsequently remeasured to fair
value at each reporting date. Changes in the fair value of the derivative
liability are recognized in the consolidated statements of operations and
comprehensive loss. In October 2019, the specified financing event was
consummated, as such the 2020 Convertible Notes issued August through
September 2019 were converted into shares of Series B-1 Preferred Stock and the
derivative liability was extinguished.

In January and February 2021, we entered into a Convertible Note Purchase
Agreement (the "2021 Convertible Notes") with various investors for gross
proceeds of $30.0 million with a stated interest rate of 8.0% per annum. The
2021 Convertible Notes provided a conversion option whereby upon the closing of
a Qualified Financing event, in which the aggregate gross proceeds totaled at
least $100.0 million, the 2021 Convertible Notes would automatically convert
into shares of the same class and series of capital stock of the Company issued
to other investors in the financing at a conversion price equal to 80% of the
price per share paid by the other investors. The conversion option met the
definition of an embedded derivative and was required to be bifurcated and
accounted for separately from the notes. The proceeds from the 2021 Convertible
Notes were allocated between the derivative liability and included in long-term
liabilities on the Company's consolidated balance sheet. The difference between
the initial carrying value of the notes and the stated value of the notes
represented a discount that was accreted to interest expense over the term of
the Convertible Notes using the effective interest method.

In June 2021, we modified the 2021 Convertible Notes to grant the holders an
additional 1,000,000 shares of NHIC common stock as further consideration upon
the automatic conversion of the notes upon closing of the Merger. The
modification of the 2021 Convertible Notes resulted in the recognition of a
derivative liability for the fair value of the 1,000,000 NHIC shares as of
June 21, 2021 as well as a bifurcated embedded derivative for conversion feature
into shares of the same class and series of capital stock of the Company issued
to other investors in the financing at a conversion price equal to 80% of the
price per share paid by the other investors.

Upon the closing of the Merger, the Convertible Notes automatically converted
into 4,408,672 shares of the Company's common stock and the holders of the 2021
Convertible Notes also received 1,000,000 shares of the Company's common stock,
as noted above. Upon the conversion of the Convertible Notes, the carrying value
of the debt of $32.8 million, and the related derivative liability of $19.7
million and accrued interest of $0.2 million were derecognized resulting in a
loss on extinguishment of debt of $0.9 million recorded in other income
(expense), net in the consolidated statements of operations and comprehensive
loss.

Change in Fair Value of Contingent Earn-out Liability


In connection with the Merger and pursuant to the Merger Agreement, certain of
Legacy Evolv's initial shareholders are entitled to receive additional shares of
our common stock upon us achieving certain milestones. The earn-out arrangement
with the Legacy Evolv shareholders is accounted for as a liability and
subsequently remeasured at each reporting date with changes in fair value
recorded as a component of other income (expense), net in the consolidated
statements of operations and comprehensive loss.

Change in Fair Value of Contingently Issuable Common Stock Liability



Prior to the Merger, certain NHIC shareholders owned 4,312,500 shares of Founder
Shares. 1,897,500 shares vested at the closing of the Merger, 1,897,500 shares
shall vest upon us achieving certain milestones and 517,500 shares were
contributed to Give Evolv LLC. Those 1,897,500 outstanding contingently issuable
common shares are accounted for as a liability and subsequently remeasured at
each reporting date with changes in fair value recorded as a component of other
income (expense), net in the consolidated statements of operations and
comprehensive loss.

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Change in Fair Value of Public Warrant Liability


In connection with the closing of the Merger, the Company assumed a warrant to
purchase shares of common stock (the "Public Warrants"). As of December 31,
2021, the Public Warrants are outstanding. We assessed the features of these
warrants and determined that they qualify for classification as a liability.
Accordingly, we recorded the warrants at fair value upon the closing of the
Merger with the offset to additional paid-in capital.

Change in Fair Value of Common Stock Warrant Liability


We classify certain warrants for the purchase of shares of our common stock as a
liability on our consolidated balance sheets as these warrants are freestanding
financial instruments that may require us to adjust the exercise price and
number of shares that is not consistent with a fixed-for-fixed option pricing
model. The warrant liability is initially recorded at fair value on the issuance
date of each warrant and is subsequently remeasured to fair value at each
reporting date. Changes in the fair value of the common stock warrant liability
are recognized as a component of other income (expense), net in the consolidated
statements of operations and comprehensive loss. Changes in fair value of the
common stock warrant liability will continue to be recognized until the warrants
are exercised, expire or qualify for equity classification. In connection with
the closing of the Merger, all common stock warrants that were issued prior to
the closing of the Merger were converted into shares of the Company's common
stock.

Income Taxes

Our income tax provision consists of an estimate for U.S. federal and state
income taxes based on enacted rates, as adjusted for allowable credits,
deductions, uncertain tax positions, changes in deferred tax assets and
liabilities and changes in tax law. There is no provision for income taxes for
the years ended December 31, 2021, and 2020 because we have historically
incurred net operating losses and maintain a full valuation allowance against
its deferred tax assets.

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Results of Operations

Comparison of the Year Ended December 31, 2021 and 2020

The following table summarizes our results of operations for the year ended December 31, 2021 and 2020 (in thousands):



                                                 Year Ended December 31,
                                                  2021                2020       $ Change    % Change
Revenue:
Product revenue                              $       13,917        $    1,279   $   12,638       988 %
Subscription revenue                                  7,855             2,637        5,218       198
Service revenue                                       1,920               869        1,051       121
Total revenue                                        23,692             4,785       18,907       395
Cost of revenue:
Cost of product revenue                              12,471             1,177       11,294       960
Cost of subscription revenue                          3,644             1,824        1,820       100
Cost of service revenue                                 936               495          441        89
Total cost of revenue                                17,051             3,496       13,555       388
Gross profit                                          6,641             1,289        5,352       415
Operating expenses:
Research and development                             11,416            15,710      (4,294)      (27)
Sales and marketing                                  27,404             7,365       20,039       272
General and administrative                           20,013             5,110       14,903       292
Loss from impairment of property and
equipment                                             1,869                 -        1,869         *
Total operating expenses                             60,702            28,185       32,517       115
Loss from operations                               (54,061)          (26,896)     (27,165)       101
Other income (expense), net:
Interest expense, net                               (6,095)             (430)      (5,665)     1,317
Loss on disposal of property and equipment            (617)                 -        (617)         *
Loss on extinguishment of debt                     (12,685)              (66)     (12,619)    19,120
Change in fair value of derivative
liability                                           (1,745)                 -      (1,745)         *
Change in fair value of contingent
earn-out liability                                   46,212                 -       46,212         *
Change in fair value of contingently
issuable common stock liability                       6,406                 -        6,406         *
Change in fair value of public warrant
liability                                            12,606                 -       12,606         *
Change in fair value of common stock
warrant liability                                     (879)                 -        (879)         *
Total other income (expense), net                    43,203             (496)       43,699   (8,810)
Net loss                                     $     (10,858)        $ (27,392)   $   16,534      (60) %


*N/A - Not meaningful

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Revenue, Cost of Revenue and Gross Profit



Product Revenue

                                   Year Ended December 31,
                                     2021             2020            $ Change       % Change
Product revenue                 $       13,917    $      1,279       $    12,638         988  %
Cost of product revenue         $       12,471    $      1,177       $    11,294         960  %
Gross profit - Product
revenue                         $        1,446    $        102       $     1,344       1,318  %
Gross profit margin -
Product revenue                             10  %            8 %             N/A           2  %


The increase in product revenue and increase in cost of product revenue are
primarily due to the increases in direct product sales of Evolv Express units,
which included the significant increase in the adoption of Evolv Express units
by professional sports teams. The increase in gross profit is primarily driven
by our increased product sales volume, which was partially offset by an increase
in shipping costs and one-time charges including write-offs of Evolv Edge units
in inventory as we are no longer selling this product and purchase price
variances recorded on raw materials. The increase in gross profit margin is
primarily driven by our continued efforts to streamline the manufacturing
process and reduce costs by introducing standardized parts into our product. We
expect to continue to see improvement in our gross margins as we continue to
engineer our product with lower cost components. As we continue to gain leverage
in the marketplace with increased sales, we expect higher discounts from
suppliers. We also expect to see improvement in gross margin to the extent
shipping costs and high demand materials costs decline when global supply chain
disruptions ease.

Subscription Revenue

                                   Year Ended December 31,
                                    2021             2020             $ Change       % Change
Subscription revenue            $       7,855    $       2,637       $     5,218         198  %

Cost of subscription revenue    $       3,644    $       1,824       $     1,820         100  %
Gross profit - Subscription
revenue                         $       4,211    $         813       $     3,398         418  %
Gross profit margin -
Subscription revenue                       54  %            31  %            N/A          23  %


The increase in subscription revenue and increase in cost of subscription
revenue are primarily due to a larger number of active Evolv Express units
installed during the period, growth in our customer base and contribution from
our channel partners. The increase in gross profit is primarily driven by our
increased subscription revenue. The increase in gross profit margin was
primarily driven by increased recurring revenue from increased active
subscriptions and customer growth, which we expect to continue.

Service Revenue

                                    Year Ended December 31,
                                     2021               2020            $ Change       % Change
Service revenue                 $         1,920     $        869       $     1,051         121  %
Cost of service revenue         $           936     $        495       $       441          89  %
Gross profit - Service
revenue                         $           984     $        374       $       610         163  %
Gross profit margin -
Service revenue                              51   %           43 %             N/A           8  %


The increase in service revenue and increase in cost of service revenue are
primarily due to increased installation and training related to the Evolv
Express units and SaaS and maintenance services associated with increased
subscriptions. The increase in gross profit is due to increased installations
and trainings associated with greater sales. The increase in gross profit margin
is primarily driven by standardization of the installation and training process,
which results in overall lower costs, and increased margins related to SaaS and
maintenance services provided for product sales. We expect to see continued
increases in gross margin due to continued growth in active subscriptions and
our customer base.

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Research and Development Expenses



                                                 Year Ended December 31,
                                                2021                    2020         $ Change      % Change
Personnel related (including
stock-based compensation)                   $       8,091            $    3,737     $    4,354         117  %
Materials and prototypes                            2,153                 8,907        (6,754)        (76)
Professional fees                                     861                 2,642        (1,781)        (67)

Facilities related and other                          311                   424          (113)        (27)
Total research and development expenses     $      11,416            $   

15,710 $ (4,294) (27) %




The increase in personnel related expenses is due to an increase in additional
personnel costs resulting from new hires in our research and development
function in 2021, an increase in bonuses and commissions, an increase in
stock-based compensation and an increase in recruiting costs, partially offset
by of $0.3 million of wages capitalized in association with the development of
internal-use software. The decrease in materials and prototype costs is due to
the transition from prototype production to standard manufacturing of the Evolv
Express, which results in lower prototyping costs. The decrease in professional
fees is due to a decrease in consulting related to research and development
efforts for prototype units and $0.7 million of external consulting costs
capitalized in association with the development of internal-use software. The
capitalization of the development of internal-use software is due to internal
and external costs associated with further developing the Evolv Cloud Portal
associated with our Evolv Express units.

Sales and Marketing Expenses

                                             Year Ended December 31,
                                           2021                      2020        $ Change       % Change
Personnel related (including
stock-based compensation)              $       18,717             $    5,347     $   13,370         250  %
Direct marketing and customer
field services                                  4,292                    590          3,702         627
Travel and entertainment                        1,652                    554          1,098         198
Professional fees                                 874                    461            413          90
Facilities related and other                    1,869                    413          1,456         353
Total sales and marketing expenses     $       27,404             $    

7,365 $ 20,039 272 %




The increase in personnel related expenses is due to an increase in additional
personnel costs resulting from new hires in our sales and marketing functions in
2021, an increase in bonuses and commissions, and an increase in stock-based
compensation. The increase in direct marketing and customer field services is
due to an increase in trade shows and events and an increase in sales volume.
The increase in travel and entertainment expense is due to an increase in travel
costs for in-person sales personnel meetings and events. The increase in
professional fees is due to an increase in consulting fees related to business
development and marketing as part of efforts to drive sales growth. The increase
in facilities related and other expenses is primarily due to an increase in
office supplies and an increase in subscriptions related to gathering market
research.

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General and Administrative Expenses



                                                    Year Ended December 31,
                                                  2021                      2020         $ Change       % Change
Personnel related (including stock-based
compensation)                                 $        7,731             $    1,967      $    5,764         293  %
Professional fees                                      6,241                  1,879           4,362         232
Director and officer insurance                         2,187               

    566           1,621         286
Sales tax contingencies                                1,091                      -           1,091           *
Facilities related and other                           2,763                    698           2,065         296

Total general and administrative expenses     $       20,013             $ 

  5,110      $   14,903         292  %


*N/A - Not meaningful

The increase in personnel related expenses is due to an increase in salaries and
related costs resulting from expanding our administrative team and an increase
in stock-based compensation. The increase in professional fees is due to an
increase in audit, tax, and legal services provided to the Company related to
the Merger and to support public company requirements. The increase in director
and officer insurance expense is due to us operating as a public company. The
increase in sales tax contingencies is due to an increase in our sales tax
contingency liability as we may owe additional sales and use taxes in various
jurisdictions.  The increase in facilities related and other expenses is due to
us relocating to our new corporate headquarters with a larger office space to
accommodate our growth and increase in personnel.

Loss From Impairment of Property and Equipment



Impairment of property and equipment was $1.9 million for the year ended
December 31, 2021. There was no impairment for the year ended December 31, 2020.
This related to Edge units and Express prototype units that were removed from
service and retired. We are transitioning our domestic customers from the Legacy
Evolv Edge units to our most current Evolv Express units, which also resulted in
an impairment of the remaining economic value of such assets.

Interest Expense



Interest expense was $6.1 million for the year ended December 31, 2021, compared
to $0.4 million for the year ended December 31, 2020. The increase of $5.7
million was primarily due to the issuance of $30.0 million of convertible notes
during the year ended December 31, 2021. The Convertible Notes and corresponding
accrued interest were converted into the Company's common stock upon closing of
the Merger.

Loss on Disposal of Property and Equipment



Other expense was $0.6 million for the year ended December 31, 2021, compared to
$0 for the year ended December 31, 2020. The increase of $0.6 million was
primarily due to loss on disposal of non-leased assets, primarily related to
demo units, during the year ended December 31, 2021.

Loss on Extinguishment of Debt



Loss on extinguishment of debt was $12.7 million for the year ended December 31,
2021, compared to $0.1 million for the year ended December 31, 2020. This was
due to the modification of the 2021 Convertible Notes and then the conversion of
the 2021 Convertible Notes into shares of the Company's stock upon closing of
the Merger.

Change in Fair Value of Derivative Liability

Change in fair value of the derivative liability was $1.7 million for the year ended December 31, 2021. There was no change in fair value of derivative liability for the year ended December 31, 2020. This was due to entering into



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additional convertible notes during 2021 and changes in the fair value of corresponding embedded derivatives given the pending Merger.

Change in Fair Value of Contingent Earn-out Liability


Change in fair value of the contingent earn-out liability was $46.2 million for
the year ended December 31, 2021, compared to $0 for the year ended December 31,
2020. This was due to establishing the contingent earn-out liability in
connection with the closing of the Merger. The change in fair value of the
contingent earn-out liability from issuance through period end is due to mark to
market fluctuations driven by a decrease in stock price, resulting in
significant income recognized in other income (expense), net in our consolidated
statements of operations and comprehensive loss.

Change in Fair Value of Contingently Issuable Common Stock Liability



Change in fair value of the contingently issuable common stock liability was
$6.4 million for the year ended December 31, 2021, compared to $0 for the year
ended December 31, 2020. This was due to establishing the contingently issuable
common stock liability in connection with the closing of the Merger. The change
in fair value of the contingently issuable common stock liability from issuance
through period end is due to mark to market fluctuations driven by a decrease in
stock price, resulting in significant income recognized in other income
(expense), net in our consolidated statements of operations and comprehensive
loss.

Change in Fair Value of Public Warrant Liability


Change in fair value of the public warrant liability was $12.6 million for the
year ended December 31, 2021, compared to $0 for the year ended December 31,
2020. This was due to establishing the public warrant liability in connection
with the closing of the Merger. The change in fair value of the public warrant
liability from issuance through period end is due to mark to market fluctuations
driven by a decrease in the publicly traded warrant price, resulting in
significant income recognized in other income (expense), net in our consolidated
statements of operations and comprehensive loss.

Change in Fair Value of Common Stock Warrant Liability


Change in fair value of the common stock warrant liability was $0.9 million for
the year ended December 31, 2021, compared to $0 for the year ended December 31,
2020. The change in fair value of the common stock warrant liability was due
mark to market fluctuations prior to the conversion of the common stock warrant
liability upon the closing of the Merger.

Income Taxes



There is no provision for income taxes for the years ended December 31, 2021 and
2020 because we have historically incurred net operating losses and maintain a
full valuation allowance against our deferred tax assets. We have provided a
valuation allowance for all of our deferred tax assets as a result of our
historical net losses in the jurisdictions in which we operate. We continue to
assess all positive and negative evidence, including our future taxable income
by jurisdiction based on our recent historical operating results, the expected
timing of reversal of temporary differences, various tax planning strategies
that we may be able to enact in future periods, the impact of potential
operating changes on our business and our forecasted results from operations in
future periods based on available information at the end of each reporting
period. To the extent that we are able to reach the conclusion that deferred tax
assets are realizable based on any combination of the above factors in any given
tax jurisdiction, a reversal of all or some related portion of our existing
valuation allowances may occur.

Liquidity and Capital Resources

Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures and general corporate needs. We expect these needs to continue as we develop and grow our business. Prior to the Merger, as an early-stage company, we primarily obtained cash to fund our operations through preferred stock



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offerings and debt instruments. As of December 31, 2021, we had $307.5 million
in cash and cash equivalents. We incurred a net loss of $10.9 million and $27.4
million for the year ended December 31, 2021 and 2020, respectively. We incurred
cash outflows from operating activities of $69.6 million and $23.3 million
during the year ended December 31, 2021 and 2020, respectively.

We expect our cash and cash equivalents, together with cash we expect to
generate from future operations, will be sufficient to fund our operating
expenses and capital expenditure requirements for a period of at least twelve
months from the date of this Annual Report on Form 10-K. However, because we are
in the growth stage of our business and operate in an emerging field of
technology, we expect to continue to invest in research and development and
expand our sales and marketing teams worldwide. We are likely to require
additional capital to respond to technological advancements, competitive
dynamics or technologies, customer demands, business opportunities, challenges,
acquisitions or unforeseen circumstances and in either the short-term or
long-term may determine to engage in equity or debt financings or enter into
credit facilities for other reasons. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, when we require it, our
ability to continue to grow or support our business and to respond to business
challenges could be significantly limited. In particular, the widespread
COVID-19 pandemic, including variants, has resulted in, and may continue to
result in, significant disruption of global financial markets, reducing our
ability to access capital. If we are unable to raise additional funds when or on
the terms desired, our business, financial condition and results of operations
could be adversely affected.

PIPE Investment and Proceeds from the closing of the Merger

In July 2021, we received gross proceeds of $300.0 million from our PIPE Investment, as well as $84.9 million in proceeds, net of redemptions received in connection with the closing of the Merger.

Financing Arrangements



In December 2020, we entered into a $10.0 million credit agreement with JPMorgan
Chase Bank, N.A. ("JPM Credit Agreement") with a maturity date of December 3,
2024, and a revolving line of credit of up to $10.0 million with a maturity date
of December 3, 2022, which extinguished the 2020 Silicon Valley Bank Term Loan.
Under the terms of the JPM Credit Agreement, we received proceeds of $10.0
million. As of December 31, 2021, we had $9.9 million of debt outstanding. In
September and December of 2020, we issued a total of $4.0 million of convertible
notes (the "2020 Convertible Notes"). In January and February 2021, we issued a
total of $30.0 million of convertible notes with a maturity date of
September 2021.

Upon the closing of the Merger, the Convertible Notes automatically converted
into 4,408,672 shares of the Company's common stock and the holders of the 2021
Convertible Notes also received the right to receive 1,000,000 shares of the
Company's common stock, as noted above. Upon the conversion of the Convertible
Notes, the carrying value of the debt of $32.8 million and the related
derivative liability of $19.7 million and accrued interest of $0.2 million were
derecognized resulting in a loss on extinguishment of debt of $0.9 million
recorded in other income (expense), net.

Material Cash Requirements for Known Contractual and Other Obligations


The following is a description of commitments for capital expenditures and other
known and reasonably likely cash requirements as December 31, 2021 and December
31, 2020. We anticipate fulfilling such commitments with our existing cash and
cash equivalents obtained through operations, proceeds from long-term debt,
closing of the Merger, and issuance of common stock in connection with the PIPE
investment. Cash and cash equivalents amounted to $307.5 million and $4.7
million as of December 31, 2021 and 2020, respectively.

We entered into a new lease agreement for additional office space starting May
1, 2021 through October 31, 2024, with the option to extend through October 31,
2027 with written notice. We are required to maintain a minimum cash balance of
$0.7 million as a security deposit on the leased space which is classified as
restricted cash, current and restricted cash, non-current on the consolidated
balance sheet as of December 31, 2021. Total future minimum lease payments under
this noncancelable operating lease amount to $3.2 million. See Note 17 to our
consolidated financial statements for the year ended December 31, 2021.

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Cash Flows

The following table sets forth a summary of cash flows for the periods
presented:

                                                                     Year Ended
                                                                    December 31,
                                                                  2021         2020

Net cash used in operating activities                          $ (69,628)   $ (23,254)
Net cash used in investing activities                             (4,738)  

(6,609)


Net cash provided by financing activities                         377,829  

17,226


Net increase (decrease) in cash, cash equivalents and
restricted cash                                                $  303,463   $ (12,637)


Operating Activities

During the year ended December 31, 2021, operating activities used $69.6 million
resulting from a net loss of $10.9 million, $30.0 million of cash used by
changes in operating assets and liabilities, and non-cash adjustments of $28.8
million. The non-cash adjustments consisted of a $46.2 million of change in the
fair value of contingent earn-out liability, $6.4 million of change in the fair
value of contingently issuable common stock liability and $12.6 million of
change in the fair value of public warrant liability, partially offset by $12.7
million on loss of extinguishment of debt, $5.2 million in noncash interest
expense, $8.5 million in stock-based compensation expense, $2.9 million in
depreciation and amortization expense, $2.1 million on write-off of inventory,
$1.9 million from loss from impairment of property and equipment, $1.7 million
of change in the fair value of derivative liability, $0.9 million of change in
fair value of common stock warrant liability, and $0.6 million on loss of
disposal of property and equipment. The changes in operating assets and
liabilities consisted primarily of cash used by an increase of $17.5 million in
inventory, $10.1 million in prepaid expenses and other current assets, an
increase of $5.1 million in accounts receivable, an increase of $4.9 million in
contract assets, and an increase of $3.1 million in commission assets, partially
offset by an increase in deferred revenue of $5.0 million, an increase of $5.2
million in accrued expenses and other current liabilities, and an increase of
$0.6 million in deferred rent.

The changes in commission assets and deferred revenue were primarily due to a
continued shift towards a subscription-based model. The increase in accounts
receivable is primarily due to higher sales driven by an increase in customers
and the timing of billings to customers. The increase in accrued expenses and
other current liabilities is primarily due to an increase in sales and marketing
and general and administrative expenses due to the growth in our business and
operating as a public company, the timing of vendor invoicing and payments, and
the increase in sales tax contingency liability as we may owe additional sales
and use taxes in various jurisdictions. The increase in prepaid expenses and
other current assets is primarily due to an increase in prepaid insurance
related to an increase in director and officer insurance premiums as a result of
becoming a public company and an increase in prepaid deposits related to orders
placed for Express units. The increase in inventory is primarily due to an
increase in the production of Express units to meet customer demand. The
increase in contract assets is primarily due to an increase in purchase
subscriptions.

During the year ended December 31, 2020, cash used from operating activities was
$23.3 million, primarily resulting from a net loss of $27.4 million, partially
offset by $2.3 million of cash provided by changes in operating assets and
liabilities and non-cash adjustments of $1.8 million. The non-cash adjustments
consisted primarily of $1.1 million of depreciation and $0.7 million in
stock-based compensation. The changes in operating assets and liabilities
consisted primarily of cash used by increases of $0.5 million in accounts
receivable, $1.8 million in commission assets, $1.5 million in inventory and
$0.4 million in prepaid expenses and other current assets, which were partially
offset by increases of $2.3 million in deferred revenue, $2.3 million in accrued
expenses and other current liabilities and $1.9 million in accounts payable.

The changes in commission assets and deferred revenue were primarily due to a
shift towards a subscription-based model. The increase in accrued expenses and
other current liabilities and accounts payable is primarily due to an increase
in sales and marketing and general and administrative expenses due to the growth
in our business and the anticipation of the Merger, as well as the timing of
vendor invoicing and payments. The increase in prepaid expenses and other
current assets is primarily due to the increase in prepaid subscriptions due to
the increase in purchased subscriptions.

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The increase in accounts receivable is primarily due to higher sales and the
timing of payments from customers. The increase in inventory is primarily due to
Express units now being held in inventory.

Investing Activities


During the year ended December 31, 2021, cash used in investing activities was
$4.7 million, primarily consisting of $3.7 million for the purchases of property
and equipment and $1.0 million for the development of internal-use software.

During the year ended December 31, 2020, cash used in investing activities was $6.6 million, primarily consisting of the purchases of property and equipment.

Financing Activities



During the year ended December 31, 2021, cash provided by financing activities
was $377.8 million, primarily consisting of $300.0 million from the issuance of
common stock in connection with the PIPE investment, $84.9 million of proceeds,
net of redemptions, from the closing of the Merger, $31.9 million from the
issuance of long-term debt, net of issuance costs, and $0.9 million from the
exercise of stock options, partially offset by $34.1 million in net cash
outflows from the payment of offering costs in connection with the Merger, $5.4
million for the repayment of principal on long term debt and $0.4 million for
the repayment of financing obligations.

During the year ended December 31, 2020, cash provided by financing activities
was $17.2 million primarily consisting of $25.5 million from the issuance of
long-term debt, net of issuance costs, $3.0 million from the issuance of Series
B-1 convertible preferred stock, net of issuance costs, and $0.4 million from
the exercise of stock options, partially offset by $11.5 million in net cash
outflows for the repayment of long-term debt.

Recent Accounting Pronouncements



A description of recently issued accounting pronouncements that may potentially
impact our financial position, results of operations or cash flows is disclosed
in Note 2 to our consolidated financial statements included elsewhere in this
Annual Report on Form 10-K.

Critical Accounting Policies and Estimates



Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States. The preparation of our
consolidated financial statements and related disclosures requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
costs and expenses, and the disclosure of contingent assets and liabilities in
our consolidated financial statements. We base our estimates on historical
experience, known trends and events and various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. We evaluate our estimates and
assumptions on an ongoing basis. Our actual results may differ from these
estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2
to our consolidated financial statements, we believe that the following
accounting policies are those most critical to the judgments and estimates used
in the preparation of our consolidated financial statements.

Revenue Recognition



We derive revenue from (1) subscription arrangements accounted for as operating
leases and (2) from the sale of products, inclusive of services and maintenance,
and (3) professional services. Our arrangements are generally noncancelable and
nonrefundable after ownership passes to the customer. Revenue is recognized

net
of sales tax.

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Product Revenue

We derive revenue from the sale of our Express and Edge equipment and related
add-on accessories to customers. Revenue is recognized when control of the
product has transferred to the customer, which follows the terms of each
customer contract. Products are predominately sold with distinct services, which
are described in the services section below.

Subscription Revenue



In addition to selling products directly to customers, we also lease Express and
Edge equipment. These arrangements convey the right to use the equipment for a
period of time (generally 48 months) in exchange for consideration and therefore
are accounted for under ASC 840 due to the scope exception of ASC 606-10-15-2.
Lease terms are typically four years and customers pay quarterly or annual fixed
payments for the lease and maintenance elements over the contractual lease term.

Generally, lease arrangements include both lease and non-lease components. The
non-lease components relate to (1) distinct services, such as installation,
training, SaaS, and maintenance, and (2) any add-on accessories. Installation
and training are included in service revenue as described below, and add-on
accessories are included in product revenue as described above. Because the
equipment, SaaS, and maintenance components of a subscription arrangement are
recognized as revenue over the same time period and in the same pattern, the
equipment lease and maintenance performance obligations are classified as a
single category of subscription revenue in the consolidated statements of
operations and comprehensive loss.

As our leases with customers are generally classified as operating leases, lease revenue is recognized ratably over the duration of the lease. There are no contingent lease payments as a part of these arrangements.

Services Revenue



We provide installation, training, SaaS, and maintenance services for our
products. Revenue for installation and training are recognized upon transfer of
control of these services, which are normally rendered over a short duration.
SaaS include data-driven security information and analytics insights.
Maintenance consists of technical support, bug fixes, and when-and-if-available
threat updates. Maintenance revenue is recognized ratably over the period of the
arrangement. We sell separately priced extended or nonstandard warranty services
and preventative maintenance plans, which are recognized ratably over the
associated service period.

Revenue from Channel Partners



A portion of our revenue is generated by sales in conjunction with our channel
partners. When we transact with a channel partner, our contractual arrangement
is with the channel partner and not with the end-use customer. Whether we
transact with a channel partner and receive the order from a channel partner or
directly from an end-use customer, our revenue recognition policy and resulting
pattern of revenue recognition is the same.

Standalone Selling Price



We allocate the transaction price to each distinct performance obligation based
on the standalone selling price ("SSP") of each product or service. Our
contracts may include multiple performance obligations when customers purchase a
combination of products and services. When our customer arrangements have
multiple performance obligations that contain a lease for Express or Edge
equipment for the customer's use at our site as well as distinct services that
are delivered simultaneously, we allocate the arrangement consideration between
the lease deliverables and non-lease deliverables based on the relative
estimated SSP of each distinct performance obligation. For multiple performance
obligation arrangements that do not contain a lease, we allocate the contract's
transaction price to each performance obligation on a relative SSP basis.

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Stock-Based Compensation

We measure stock-based option awards granted to employees, consultants and
directors based on their fair value on the date of grant using the Black-Scholes
option-pricing model. Compensation expense for those awards is recognized, net
of estimated forfeitures, over the requisite service period, which is generally
the vesting period of the respective award.

Prior to the closing of the Merger, the fair value of each stock option grant
was estimated on the date of grant using the Black-Scholes option-pricing model,
which uses the following inputs: (1) the fair value per share of the common
stock issuable upon exercise of the option, (2) the expected term of the option,
(3) expected volatility of the price of the common stock, (4) the risk-free
interest rate, and (5) the expected dividend yield.

After the closing of the Merger, our board of directors determined the fair value of each share of common stock underlying stock-based awards based on the closing price of our common stock as reported by Nasdaq on the date of grant.


The Black-Scholes option-pricing model uses as inputs the fair value of our
common shares and assumptions we make for the volatility of our common shares,
the expected term of our stock options, the risk-free interest rate for a period
that approximates the expected term of our stock options and our expected
dividend yield. The Company has historically been a private company and
continues to lack sufficient company-specific historical and implied volatility
information. Therefore, we estimate our expected share volatility based on the
historical volatility of a publicly traded set of peer companies and expect to
continue to do so until such time as we have adequate historical data regarding
the volatility of our own traded share price.

Valuation of Contingent Earn-out Liability



The estimated fair value of the contingent earn-out shares are determined using
a Monte Carlo simulation that simulated the future path of the Company's stock
price over the earn-out period. The significant assumptions utilized in the
calculation are based on the achievement of certain stock price milestones
including projected stock price, volatility, drift rate, and a percentage of
change in control and expected term. For potential common stock issuances
related to a stock price milestones, the fair value was determined based on our
expectations of achieving such a milestone and the simulated estimated stock
price on the expected date of achievement.

We believe our assumptions are reasonable based on available information, our
experience, knowledge, and judgments. These estimates can be affected by factors
that are difficult to predict including future (1) EVLV closing price per share
on the Nasdaq, (2) estimated stock price volatility over the earn-out period,
and (3) risk free rates. Changes in assumptions and estimates used in our
analysis, or future results that vary from assumptions used in the analysis,
could affect the fair value of the contingent earn-out and could result in
material changes in future periods.

Valuation of Contingently Issuable Common Stock Liability



The estimated fair value of the contingently issuable common shares was
determined using a Monte Carlo simulation that simulated the future path of the
Company's stock price over the vesting period. The assumptions utilized in the
calculation are based on the achievement of certain stock price milestones
including projected stock price, volatility, and risk-free rate.

We believe our assumptions are reasonable based on available information, our
experience, knowledge, and judgments. These estimates can be affected by factors
that are difficult to predict including future (1) EVLV closing price per share
on the Nasdaq, (2) estimated stock price volatility over the contingently
issuable common shares period, and (3) risk free rates. Changes in assumptions
and estimates used in our analysis, or future results that vary from assumptions
used in the analysis, could affect the fair value of the contingently issuable
common stock and could result in material changes in future periods.

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Valuation of Common Stock Warrant Liability and Public Warrant Liability



We classify certain warrants to purchase shares of our common stock (the "Common
Stock Warrant") as liabilities on our consolidated balance sheets as these
warrants are free-standing financial instruments that may require us to adjust
the exercise price and number of shares that is not consistent with a
fixed-for-fixed option pricing model. The warrant liability associated with each
of these warrants was initially recorded at fair value on the issuance date of
each warrant and is subsequently remeasured to fair value at each balance sheet
date. Changes in fair value of the warrants are recognized as a component of
other income (expense), net in our statements of operations and comprehensive
loss. We will continue to adjust the liability for changes in fair value until
the warrants are exercised, expire or qualify for equity classification.

For the common stock warrant, we utilized the Black-Scholes option-pricing
model, which incorporates assumptions and estimates to value the warrant
liability. Key estimates and assumptions impacting the fair value measurement
include (1) the fair value per share of the underlying shares of applicable
series of stock issuable upon exercise of the Warrants, (2) the remaining
contractual term of the Warrants, (3) the risk-free interest rate, (4) the
expected dividend yield and (5) the expected volatility of the price of the
underlying applicable common stock. Prior to the closing of the Merger, we
assessed these assumptions and estimates on a quarterly basis as additional
information impacting the assumptions is obtained. We estimate the fair value
per share of the underlying stock based in part on the results of third-party
valuations and additional factors deemed relevant. Upon the closing of the
Merger, the common stock warrant net settled and converted to common stock. As
of December 31, 2021, we no longer have common stock warrants classified as
liabilities.

In connection with the closing of the Merger, we assumed the Public Warrants to
purchase shares of common stock, which were classified as a liability, as the
Public Warrants do not meet the criteria to be indexed to our common stock. As
of December 31, 2021, the Public Warrants remain outstanding. Accordingly, we
recorded the warrants at fair value upon the closing of the Merger with a
corresponding adjustment to additional paid-in capital. After the initial
measurement, the fair value of the Public Warrants is subsequently remeasured
quarterly based on the listed market price on the Nasdaq of such Public
Warrants.

Valuation of Inventory



Inventory is valued at the lower of cost or net realizable value. Cost is
computed using the first-in, first-out method. We regularly review inventory
quantities on-hand for excess and obsolete inventory and, when circumstances
indicate, record charges to write down inventories to their estimated net
realizable value, after evaluating historical sales, future demand, our
estimates of forecasted net revenue, market conditions and expected product life
cycles. A significant change in the timing or level of demand for our products
as compared to forecasted amounts may result in recording additional write-offs.
Such charges are classified as cost of product revenue in the statements of
operations and comprehensive loss. Any write-down of inventory to net realizable
value creates a new cost basis. We recorded $1.6 million in write-offs of Edge
units during the year ended December 31, 2021 as the Company is no longer
selling this product. We did not record any write-offs on inventory during the
year ended December 31, 2020.

Capitalized Internal-Use Software



Software development costs consist of certain consulting costs and compensation
expenses for employees who devote time to the development projects of our
internal-use software, as well as certain upgrades and enhancements that are
expected to result in enhanced functionality. We amortize these development
costs over the estimated useful life of four years. We determined that a four
year life is appropriate for our internal-use software based on our best
estimate of the useful life of the internal-use software after considering
factors such as continuous developments in the technology, obsolescence, and
anticipated life of the service offering before significant upgrades. Management
evaluates the useful lives of these assets on a quarterly basis and test for
impairment whenever events or changes in circumstances occur that could impact
the recoverability of these assets.

We determine the amount of internal software costs to be capitalized based on the amount of time spent by our developments on projects in the application stage of development. There is judgment in estimating the time allocated to a



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particular project in the application stage. A significant change in the time
spent on each project could have a material impact on the amount capitalized and
related amortization expense in subsequent periods.

Emerging Growth Company Status



The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an
"emerging growth company" such as us to take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public
companies until those standards would otherwise apply to private companies. We
meet the definition of an "emerging growth company" and have elected to use this
extended transition period for complying with new or revised accounting
standards that have different effective dates for public and private companies
until the earlier of the date we (1) are no longer an emerging growth company or
(2) affirmatively and irrevocably opt out of the extended transition period
provided in the JOBS Act. As a result of this election, we will not be subject
to the same new or revised accounting standards as other public companies that
are not emerging growth companies and our consolidated financial statements may
not be comparable to other public companies that comply with new or revised
accounting pronouncements as of public company effective dates. We may choose to
early adopt any new or revised accounting standards whenever such early adoption
is permitted for private companies.

We will remain an emerging growth company until the earlier of (1) the last day
of the fiscal year (a) following the fifth anniversary of the completion of the
initial public offering, (b) in which we have total annual gross revenue of at
least $1.07 billion or (c) in which we are deemed to be a large accelerated
filer, and (2) the date on which we have issued more than $1.0 billion in
non-convertible debt during the prior three-year period.

Further, even after we no longer qualify as an emerging growth company, we may
still qualify as a "smaller reporting company," which would allow us to take
advantage of many of the same exemptions from disclosure requirements, including
reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements. We cannot predict if investors will find our
common shares less attractive because we may rely on these exemptions. If some
investors find our common shares less attractive as a result, there may be a
less active trading market for our common shares and our share price may be more
volatile.

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