EVOLV TECHNOLOGIES HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year endedDecember 31, 2021 included in our 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" section of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and in other parts of this Quarterly Report on Form 10-Q. OnJuly 16, 2021 , we consummated the business combination (the "Merger"), contemplated by the Agreement and Plan of Merger, datedMarch 5, 2021 , withNHIC Sub Inc. ("Merger Sub"), a wholly-owned subsidiary ofNewHold Investment Corp. ("NHIC"), a special purpose acquisition company, which is our legal predecessor, andEvolv Technologies, Inc. dbaEvolv Technology, Inc. ("Legacy Evolv"), as amended by that certain First Amendment to Agreement and Plan of Merger datedJune 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 toEvolv Technologies Holdings, Inc. Evolv Technologies Holdings, Inc. became the successor entity to NHIC. As used in this Quarterly Report on Form 10-Q, unless otherwise indicated or the context otherwise requires, references to "we," "us," "our," the "Company" and "Evolv" refer to the consolidated operations ofEvolv 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 toEvolv Technologies, Inc. dbaEvolv 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 250 million visitors worldwide. We believe that we have screened more people through advanced systems than any organization other than theUnited 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. 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$8.7 million and$4.0 million for the three months ended 1
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March 31, 2022 and 2021, respectively. We generated a net loss of$14.6 million and$13.8 million for the three months endedMarch 31, 2022 and 2021, respectively. We expect to continue to incur operating losses as we focus on growing and establishing recurring commercial sales of our products in boththe 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. InJuly 2021 , we received gross proceeds of$300.0 million from ourPIPE 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
OnJuly 16, 2021 , we completed the previously announced Merger, pursuant to the Agreement and Plan of Merger, dated as ofMarch 5, 2021 , and amended by the First Amendment to Agreement and Plan of Merger (the "Merger Agreement"), dated as ofJune 5, 2021 . Upon the closing of the Merger, NHIC changed its name toEvolv 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 thePIPE 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 thePIPE 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 condensed consolidated financial statements in Item 1. Part I of this Report.
COVID-19
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 have experienced supply chain challenges during the three months endedMarch 31, 2022 , we do see this being overcome in the near future. In the long-term, we believe that the COVID-19 pandemic may encourage organizations to continue 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 our Annual Report on Form 10-K for the year ended
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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.
Pricing, Product Cost and Margins
Revenue generated by the sale of products represented 60% and 63% of our total revenue for the three months endedMarch 31, 2022 and 2021, 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$3.0 million and$1.3 million for the three months endedMarch 31, 2022 and 2021, respectively. With the further development, enhancement, and maintenance of Evolv Insights and its analytical platform during the three months endedDecember 31, 2021 , we expect this source of subscription revenue to become a more significant portion of our total revenue in the year endedDecember 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.
We believe that we are a global 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 condensed 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 condensed
consolidated statements of operations and comprehensive loss. When the
Triggering Events have been achieved and the Earn-Out Shares are issued, the
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Company will reclassify the corresponding amount from a liability to additional
paid-in-capital and common stock at par value of
Additional information regarding Contingent Earn-out Shares vesting provisions and accounting treatment appear in Note 2 of our consolidated financial statements for the year endedDecember 31, 2021 of our Annual Report on Form 10-K.
Contingently Issuable Common Stock
Prior to the Merger, certain NHIC shareholders owned 4,312,500 Founder Shares. 1,897,500 shares vested at the closing of the Merger, 517,500 shares were transferred back to NHIC and then contributed toGive Evolv LLC . The remaining 1,897,500 outstanding shares shall vest upon the Company achieving certain milestones. The Founders Shares (the "Contingently Issuable Common Stock") are classified as liabilities in our condensed 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 issuable common stock are recorded in other income (expense), net in our condensed 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
Components of Results of Operations
Revenue
We derive revenue from (1) subscription arrangements generally 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 for product sales and upon installation for subscriptions. 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 becomes 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 sales-type lease criteria per ASC 842 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 SaaS, maintenance
installation and training, 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
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obligations are classified as a single category of subscription revenue in our condensed consolidated statements of operations and comprehensive loss.
Services Revenue
We provide SaaS, maintenance installation and training 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.
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 stock-based compensation expense.
Cost of Subscription Revenue
Cost of subscription revenue consists primarily of labor costs, shipping costs, amortization expense related to internal-use software, depreciation expense related to leased units, and stock-based compensation expense.
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 theEvolv 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, supplies, and stock-based compensation expense. 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 ofMarch 31, 2022 , the warranty accrual was 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.
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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 for the year ended
December 31, 2022 compared to the year ended December 31, 2021 as we continue to
invest in advancing our portfolio of security screening products.
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 for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 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 for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 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 theSEC , 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 Edge units and Express prototype units that were removed from service and retired. We are transitioning our domestic customers from the Edge units to our most current 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 and amortization of deferred financing fees and costs.
Interest Income
Interest income relates to interest earned on our lease receivables for our Evolv Express units.
Change in Fair Value of Derivative Liability
In August throughSeptember 2019 and inSeptember 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
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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
condensed 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 condensed 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 condensed 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 condensed 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 toGive 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 condensed consolidated statements of operations and comprehensive loss.
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"). 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.
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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 condensed 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 condensed 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 forU.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 three months endedMarch 31, 2022 and 2021 because we have historically incurred net operating losses and maintain a full valuation allowance against its deferred tax assets. 8 Table of Contents Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended March 31,
2022 2021 $ Change % Change
Revenue:
Product revenue $ 5,194 $ 2,502 $ 2,692 108 %
Subscription revenue 3,020 1,300 1,720 132
Service revenue 501 197 304 154
Total revenue 8,715 3,999 4,716 118
Cost of revenue:
Cost of product revenue 5,576 2,229 3,347 150
Cost of subscription revenue 1,065
595 470 79
Cost of service revenue 448 127 321 253
Total cost of revenue 7,089 2,951 4,138 140
Gross profit 1,626 1,048 578 55
Operating expenses:
Research and development 4,286 3,612 674 19
Sales and marketing 12,053 3,684 8,369 227
General and administrative 11,093 2,899 8,194 283
Loss from impairment of property and
equipment 96 - 96 *
Total operating expenses 27,528 10,195 17,333 170
Loss from operations (25,902) (9,147) (16,755) 183
Other income (expense), net:
Interest expense (142) (2,447) 2,305 (94)
Interest income 209 - 209 *
Change in fair value of derivative
liability - (1,425) 1,425 *
Change in fair value of contingent
earn-out liability 4,226 - 4,226 *
Change in fair value of contingently
issuable common stock liability 1,472 - 1,472 *
Change in fair value of public warrant
liability 5,586 - 5,586 *
Change in fair value of common stock
warrant liability - (736) 736 *
Total other income (expense), net 11,351 (4,608) 15,959 (346) Net loss$ (14,551) $ (13,755) $ (796) 6 % * - Not meaningful 9 Table of Contents
Revenue, Cost of Revenue and Gross Profit
Product Revenue
Three Months Ended March 31,
2022 2021 $ Change % Change
Product revenue $ 5,194 $ 2,502 $ 2,692 108 %
Cost of product revenue $ 5,576 $ 2,229 $ 3,347 150 %
Gross profit - Product
revenue $ (382) $ 273 $ (655) (240) %
Gross profit margin -
Product revenue (7) % 11 % N/A (18) %
The increase in product revenue and increase in cost of product revenue are
primarily due to the increases in product sales of Evolv Express units, which
included the significant increase in the adoption of Evolv Express units by
schools, hotels and casinos, and professional sports arenas. The decreases in
gross profit and gross profit margin are primarily driven by purchase price
variances recorded on raw materials and the costs associated with the write-off
of scrap inventory incurred without corresponding revenue. We expect 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 improvements in gross margin to the extent shipping costs and high demand
costs decline when global supply chain disruptions ease.
Subscription Revenue
Three Months Ended March 31,
2022 2021 $ Change % Change
Subscription revenue $ 3,020 $ 1,300 $ 1,720 132 %
Cost of subscription revenue $ 1,065 $ 595 $ 470 79 %
Gross profit - Subscription
revenue $ 1,955 $ 705 $ 1,250 177 %
Gross profit margin -
Subscription revenue 65 % 54 % N/A 11 %
The increase in subscription revenue and increase in cost of subscription
revenue are primarily due to a higher 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
Three Months Ended March 31,
2022 2021 $ Change % Change
Service revenue $ 501 $ 197 $ 304 154 %
Cost of service revenue $ 448 $ 127 $ 321 253 %
Gross profit - Service
revenue $ 53 $ 70 $ (17) (24) %
Gross profit margin -
Service revenue 11 % 36 % N/A (25) %
The increase in service revenue is primarily due to the increased number of purchase subscription units deployed in the preceding twelve months and increased installation and training related to the Evolv Express units. The decrease in gross profit is due the increase in field services costs associated with the Evolv Express units.
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Research and Development Expenses
Three Months Ended March 31,
2022 2021 $ Change % Change
Personnel related (including
stock-based compensation) $ 3,220 $ 990 $ 2,230 225 %
Materials and prototypes 388 2,284 (1,896) (83)
Professional fees 562 260 302 116
Facilities related and other 116 78 38 49
Total research and development expenses $ 4,286 $ 3,612 $ 674 19 %
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 during the second half of 2021 and the first three months in 2022, an
increase in bonuses, 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 increase in professional fees is due to an increase in
consulting related to research and development efforts for Evolv Express units.
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
Three Months Ended March 31,
2022 2021 $ Change % Change
Personnel related (including
stock-based compensation) $ 8,379 $ 2,767 $ 5,612 203 %
Direct marketing and customer field
services 2,082 401 1,681 419
Travel and entertainment 686 151 535 354
Professional fees 272 186 86 46
Facilities related and other 634 179 455 254
Total sales and marketing expenses $ 12,053
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,
which includes functions such as partner development, customer success,
technical sales and support, and other business development, during the second
half of 2021 and the first three months in 2022, 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 subscriptions related to gathering market
research.
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General and Administrative Expenses
Three Months Ended
2022 2021 $ Change % Change
Personnel related (including stock-based
compensation) $ 4,235 $ 574 $ 3,661 638 %
Professional fees 3,314 2,004 1,310 65
Director and officer insurance 1,427 92 1,335 1,451
Non-income taxes 776 - 776 *
Facilities related and other 1,341 229 1,112 486
Total general and administrative expenses $ 11,093 $ 2,899 $ 8,194 283 % * - Not meaningful The increase in personnel related expenses is due to an increase in salaries and related costs resulting from expanding our administrative team, an increase in stock-based compensation, and severance. The increase in professional fees is due to an increase in accounting, audit, tax, and legal services provided to the Company 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 non-income taxes is due to an increase in property taxes as well as 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 a$0.4 million one-time payment to a former employee.
Loss From Impairment of Property and Equipment
Loss from impairment of property and equipment was$0.1 million for the three months endedMarch 31, 2022 . There was no impairment for the three months endedMarch 31, 2021 . This related to Edge units and Express prototype units that were removed from service and retired. We are transitioning our domestic customers from the Edge units to our most current Express units, which also resulted in an impairment of the remaining economic value of such assets.
Interest Expense
Interest expense was$0.1 million for the three months endedMarch 31, 2022 , compared to$2.4 million for the three months endedMarch 31, 2021 . The decrease of$2.3 million was primarily due to the Convertible Notes and corresponding accrued interest being converted into the Company's common stock upon closing of the Merger. Interest Income
Interest income was
Change in Fair Value of Derivative Liability
Change in fair value of the derivative liability was$0 for the three months endedMarch 31, 2022 , compared to$1.4 million for the three months endedMarch 31, 2021 . The change in fair value of the derivative liability was due to mark to market fluctuations prior to the conversion of the Convertible Notes upon the closing of the Merger.
Change in Fair Value of Contingent Earn-out Liability
Change in fair value of the contingent earn-out liability was$4.2 million for the three months endedMarch 31, 2022 , compared to$0 for the three months endedMarch 31, 2021 . 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 12
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issuance through period end is due to mark to market fluctuations driven by a decrease in stock price, resulting in income recognized in other income (expense), net in our condensed 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$1.5 million for the three months endedMarch 31, 2022 , compared to$0 for the three months endedMarch 31, 2021 . 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 income recognized in other income (expense), net in our condensed 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$5.6 million for the three months endedMarch 31, 2022 , compared to$0 for the three months endedMarch 31, 2021 . 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 income recognized in other income (expense), net in our condensed 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 for the three months endedMarch 31, 2022 , compared to$0.7 million for the three months endedMarch 31, 2021 . 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 three months endedMarch 31, 2022 and 2021 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 offerings and debt instruments. As ofMarch 31, 2022 , we had$270.9 million in cash and cash equivalents. We incurred a net loss of$14.6 million and$13.8 million for the three months endedMarch 31, 2022 and 2021, respectively. We incurred cash outflows from operating activities of$35.9 million and$12.0 million during the three months endedMarch 31, 2022 and 2021, 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 Quarterly Report on Form 10-Q. 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
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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.
In
Financing Arrangements
InDecember 2020 , we entered into a$10.0 million credit agreement withJPMorgan Chase Bank, N.A . ("JPM Credit Agreement") with a maturity date ofDecember 3, 2024 , and a revolving line of credit of up to$10.0 million with a maturity date ofDecember 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 ofMarch 31, 2022 , 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 andFebruary 2021 , we issued a total of$30.0 million of convertible notes with a maturity date ofSeptember 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, which was recorded during the three and nine months endedSeptember 30, 2021 .
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 ofMarch 31, 2022 . 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$270.9 million as ofMarch 31, 2022 . We entered into a new lease agreement for additional office space startingMay 1, 2021 throughOctober 31, 2024 , with the option to extend throughOctober 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 condensed consolidated balance sheet as ofMarch 31, 2022 . Total future minimum lease payments under this noncancelable operating lease amount to$3.0 million . See Note 6 to our condensed consolidated financial statements for the three months endedMarch 31, 2022 . 14 Table of Contents Cash Flows The following table sets forth a summary of cash flows for the periods presented: Three Months EndedMarch 31, 2022 2021
Net cash used in operating activities$ (35,867) $ (12,038) Net cash used in investing activities (969)
(2,522)
Net cash provided by financing activities 216
31,978
Net increase (decrease) in cash, cash equivalents and restricted cash$ (36,620) $ 17,418 Operating Activities Three Months Ended March 31, 2022 2021 Net loss$ (14,551) $ (13,755) Noncash (income) expense (4,845) 5,976
Changes in operating assets and liabilities (16,471) (4,259)
Net cash used in operating activities
Net loss increased from$13.8 million for the three months endedMarch 31, 2021 to$14.6 million for the three months endedMarch 31, 2022 as a result of the factors discussed in the "Results of Operations" above. Noncash income for the three months endedMarch 31, 2022 was primarily driven by$11.3 million of positive fair value adjustments to financial liabilities, partially offset by$5.2 million of stock-based compensation expense and$1.0 million of depreciation and amortization expense. Noncash expenses for the three months endedMarch 31, 2021 were primarily driven by$2.2 million of negative fair value adjustments to financial liabilities,$2.3 million of noncash interest expense primarily related to the accretion of the debt discount associated with the 2021 Convertible Notes and$1.1 million of stock-based compensation expense.
The
?
units to meet customer demand;
? due to an increase in prepaid deposits related to orders placed for Express
units;
?
driven by an increase in customers and the timing of billings to customers;
? primarily due to the payment of 2021 compensation, bonuses and commissions paid
during the three months ended
?
payments to vendors;
?
rent balances upon the adoption of the new lease standard;
?
towards a subscription-based model;
?
on our operating lease, partially offset by
?
billings associated with higher sales.
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The
?
due to prepaid subscriptions and insurance;
?
to a continued shift towards a subscription-based model;
?
driven by an increase in customers and the timing of billings to customers;
? customers in the first quarter of the year compared to the fourth quarter of
the year and due to an increase in the production of Express units to meet
customer demand, partially offset by
accounts payable primarily due to an increase in research and development and
? general and administrative expenses due to the growth in our business, the
anticipation of the closing of the Merger, and the timing of vendor invoicing
and payments. Investing Activities During the three months endedMarch 31, 2022 , cash used in investing activities was$1.0 million , consisting of$0.3 million for the purchases of property and equipment and$0.6 million for the development of internal-use software.
During the three months ended
Financing Activities
During the three months ended
During the three months endedMarch 31, 2021 , cash provided by financing activities was$32.0 million , consisting of$31.9 million from the issuance of long-term debt, net of issuance costs, and$0.5 million from the exercise of stock options, partially offset by$0.4 million in net cash out flows for the repayment of our finance obligations.
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 condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition" for the year endedDecember 31, 2021 in our Annual Report on Form 10-K. There have been no material changes to our critical accounting policies and estimates during the three months endedMarch 31, 2022 outside of our critical accounting policies and estimates described below.
Leases
We lease our corporate headquarters under a non-cancelable operating lease that expires inOctober 2024 . We determine if our arrangement contains a lease at inception. We do not separate lease and non-lease components of our arrangement determined to contain a lease. 16
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We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of operating lease payments. To determine the estimated incremental borrowing rate, we use publicly available credit ratings for peer companies and estimate the incremental borrowing rate using yields for maturities that are in line with the duration of the lease payments. To determine the residual value estimates and useful life of equipment that we lease to our customers, we are required to make judgments about future events that are subject to risks and uncertainties outside of their control, such as inventory levels of new equipment, changing consumer preferences, new technology and mandatory regulations. We have disciplines related to the management and maintenance of our leased equipment designed to manage the risk associated with the residual values of our revenue generating equipment. We periodically review and adjust, as appropriate, the estimated residual values and useful lives of existing revenue generating equipment for the purposes of recording depreciation expense. Based on the results of our analysis, we may adjust the estimated residual values and useful lives of individual assets of our revenue generating equipment each year.
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 condensed 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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