Evolv Technologies Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results are compared with the corresponding 2022 periods. Evolv sells AI-based weapons-detection systems through equipment sales and multi-year subscriptions, as well as related services and licensing.
Key financial results
Amounts in millions of dollars, except percentages and per-share data.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $20.2 | $16.5 | $58.6 | $34.3 |
| Gross profit / margin | $11.4 / 56% | $0.2 / 1% | $23.6 / 40% | $1.7 / 5% |
| Operating loss | $(20.2) | $(26.6) | $(66.4) | $(75.7) |
| Net income (loss) | $6.0 | $(18.6) | $(89.4) | $(58.1) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(6.7) | $(69.4) |
- Q3 revenue grew 22%. Subscription revenue rose 97% to $10.2 million and service revenue rose 219% to $4.8 million. Product revenue fell 68% to $3.2 million; $2.0 million of license-fee revenue was newly recognized under the distribution and license agreement.
- Q3 gross margin improved substantially, but reported net income was driven by approximately $24.5 million in noncash gains from revaluing contingent earn-out, contingently issuable share, and public warrant liabilities. The company still reported a $20.2 million operating loss.
- Nine-month net loss widened by $31.3 million, principally reflecting $26.3 million of aggregate losses from fair-value changes in those liabilities. Operating loss narrowed, while revenue increased 71%.
- As of September 30, cash and cash equivalents were $99.6 million and marketable securities were $39.5 million, or $139.1 million combined. Total current assets were $201.8 million and current liabilities $80.7 million. The company reported no debt outstanding.
- Nine-month investing cash outflow was $92.8 million, including $51.6 million of property and equipment purchases, primarily equipment for customer leases. Cash, cash equivalents and restricted cash declined $129.2 million during the period.
Changes, outlook and significant matters
- Management is shifting toward a “pure subscription” model in which customers lease equipment and pay recurring fees. Subscription revenue increased to 51% of Q3 revenue from 31% a year earlier. The company added 70 customers in Q3 and 205 in the first nine months.
- Deferred revenue increased to $72.5 million from $36.0 million at year-end 2022. Remaining performance obligations were $221.1 million, including $160.2 million of subscription revenue; these amounts are not equivalent to guaranteed future revenue.
- Management said cash, cash equivalents, marketable securities and expected operating cash generation should fund operating and capital needs for at least 12 months from the filing date. It nevertheless noted possible additional capital needs to support growth, leased-equipment purchases and other business requirements.
- Management expected research and development and sales and marketing costs to continue increasing in 2023; general and administrative expenses were expected to remain relatively consistent with 2022. The company expects continued operating losses and provided no specific revenue or earnings guidance in the supplied filing text.
- The company repaid and terminated its Silicon Valley Bank credit agreement in March 2023, including a $0.3 million prepayment penalty and a $0.3 million write-off of debt issuance costs. No debt remained at quarter-end.
- Disclosure controls were not effective at September 30, 2023 because of material weaknesses in financial reporting and IT controls. Weaknesses include period-end reporting, complex transactions, revenue timing, reconciliations, and access/change controls. The weaknesses had led to prior revisions and a restatement of the financial statements for the three and six months ended June 30, 2023. Remediation is ongoing and was not yet considered complete.
- The FTC had requested information about certain marketing practices; the company said it did not expect the inquiry, or other described regulatory inquiries, to materially affect results, financial condition or liquidity. It reported no material litigation.
Important facts for investors to verify
- Review the June 2023 financial-statement restatement and the status, testing and effectiveness of the company’s remediation of material weaknesses.
- Assess the quality of Q3 earnings: the $6.0 million profit reflects substantial noncash fair-value gains despite a material operating loss.
- Track subscription growth, equipment deployment and the economics of the shift to leasing, including capital spending and subscription margins.
- Monitor cash use and liquidity: investing outflows were high, and management’s 12-month funding assessment depends partly on expected cash generation.
- Evaluate the durability and timing of deferred revenue and remaining performance obligations, as well as customer and channel-partner concentration and the related-party revenue disclosures.