Evolv Technologies Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Evolv sells AI-based weapons-detection systems through equipment sales and multi-year subscription arrangements, as well as related services. Financial statements are unaudited and prepared under GAAP.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $18.6 million | $8.7 million |
| Gross profit / margin | $4.8 million / 25.7% | $0.9 million / 10.3% |
| Operating loss | $22.5 million | $23.9 million |
| Net loss | $28.6 million | $13.8 million |
| Net loss per share | $0.20 | $0.10 |
| Operating cash flow | $(3.4) million | $(29.4) million |
| Investing cash flow | $(14.0) million | $(7.4) million |
- Revenue rose 113% year over year: product revenue increased 69% to $8.8 million, subscription revenue increased 115% to $6.5 million, and service revenue increased 556% to $3.4 million.
- Product gross margin was negative 21%, compared with approximately breakeven a year earlier. Management attributed the decline to more single-lane systems and channel-partner sales, both at lower average selling prices. Subscription and service gross margins improved to 64% and 74%, respectively.
- Operating expenses rose 10% to $27.3 million. R&D and sales and marketing increased 29% and 32%; general and administrative expense decreased 17%.
- Net loss widened despite a modestly improved operating loss, largely because fair-value remeasurement of earn-out, contingently issuable share, and public warrant liabilities produced a combined $5.8 million expense in Q1 2023, versus a $10.1 million gain in Q1 2022. Q1 2023 also included a $0.6 million debt-extinguishment loss.
Financial position and liquidity
- At March 31, 2023, cash and cash equivalents were $181.0 million; total cash, cash equivalents, and restricted cash were $182.3 million. Cash and cash equivalents were $229.8 million at December 31, 2022.
- The company repaid all borrowings and accrued interest under its SVB credit agreement on March 31 and terminated the agreement; it reported no debt outstanding at quarter-end. The repayment followed the company’s transfer of excess cash after SVB’s failure and resulted in a prepayment penalty and debt-cost write-off.
- Operating cash use improved year over year, but investing cash use increased, primarily due to $13.4 million of equipment purchases, mainly systems intended for customer leases. Financing cash use was $30.3 million, principally reflecting the debt repayment.
- Deferred revenue was $44.7 million, up from $36.0 million at year-end. Remaining performance obligations were $161.8 million, including $99.1 million of subscription revenue; these amounts are not necessarily equivalent to future-period revenue.
- Management expects available cash and expected operating cash generation to fund operations and capital expenditures for at least 12 months from the filing date, while noting that additional capital may be needed for growth or other needs.
Changes, outlook, and risks
- Management reported 61 new customers in Q1 2023, compared with 44 in Q1 2022, and cited customer deployments, channel partners, and demand in education, healthcare, and sports as growth drivers.
- The company is shifting toward a “pure subscription” model and expects subscription revenue to increase as a share of total revenue. It entered a March 2023 manufacturing and distribution arrangement with Columbia Tech; sales under the arrangement were expected to begin by the end of Q2 2023.
- No specific revenue, earnings, or cash-flow guidance was provided. Management expects R&D and sales and marketing costs to increase during 2023 and G&A costs to remain relatively consistent with 2022. It expects gross margins to fluctuate and said product margins may improve through lower-cost components.
- Risks include ongoing operating losses, dependence on adoption of the company’s screening products, third-party manufacturing and supply chains, competition and pricing, macroeconomic conditions, the need for capital, and the possibility that a product failure to detect a threat could cause serious harm.
- Disclosure controls were not effective at March 31, 2023 because of material weaknesses in financial-reporting and IT controls. The company described remediation efforts, but the weaknesses were not yet considered remediated.
- The filing describes revisions to prior-period financial statements for identified errors, which the company determined were not material to previously issued statements. It reports no material litigation and no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether revenue growth, new-customer additions, and subscription deployments continue, and whether the Columbia Tech arrangement begins as expected.
- Whether product gross margins recover and subscription and service margin gains are sustained.
- Cash burn and equipment investment for leased systems, and whether management’s stated liquidity runway remains adequate.
- Progress in remediating material weaknesses and the reliability of future financial reporting.
- Potential dilution: the filing lists 68.8 million potentially dilutive securities excluded from diluted loss per share, and 148.0 million common shares outstanding at March 31, 2023.
- Effects of fair-value changes in earn-out, contingent-share, and warrant liabilities on reported earnings; no earn-out or contingent-share milestones had been achieved by quarter-end.