Evolv Technologies Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Evolv develops AI-based weapons-detection systems, sold directly and through multi-year subscription arrangements. Unless otherwise noted, amounts below are in millions of dollars.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $9.07 | $4.68 | $17.78 | $8.37 |
| Gross profit | $0.55 | $0.73 | $1.45 | $1.18 |
| Gross margin | 6.1% | 15.6% | 8.2% | 14.1% |
| Operating loss | $(25.28) | $(6.91) | $(49.15) | $(15.87) |
| Net loss | $(25.69) | $(22.98) | $(39.49) | $(36.48) |
| Net loss per share | $(0.18) | $(1.93) | $(0.28) | $(3.26) |
| Cash used in operating activities | — | $(52.50) | $(18.29) |
- Q2 revenue rose 94%; product revenue was $4.15 million, subscription revenue $4.01 million, and service revenue $0.92 million. Subscription revenue grew 163% year over year.
- Operating expenses were $25.84 million in Q2, up from $7.64 million, reflecting increased hiring and spending in research and development, sales and marketing, and administration.
- At June 30, cash and cash equivalents were $242.7 million, with total cash, cash equivalents and restricted cash of $243.4 million. Current assets were $287.4 million and current liabilities $33.1 million.
- Debt was approximately $10.0 million: $4.0 million current and $6.0 million noncurrent. The JPMorgan facility is secured by company assets, including intellectual property.
- Six-month investing cash use was $12.7 million, primarily property and equipment purchases ($11.4 million) and internal-use software development ($1.3 million). Financing cash provided was $0.4 million.
Changes, management commentary and outlook
- Revenue growth reflected increased sales and deployments of Evolv Express systems. Product revenue increased 58% in Q2, but its gross margin turned negative: (29)% versus 16% a year earlier. Management cited lower-priced single-lane and channel-partner sales, raw-material purchase-price variances, scrap inventory, and supply-chain costs.
- Subscription gross margin improved to 51% in Q2 from 30%, with management attributing improvement to more active subscriptions and a larger customer base. Service revenue remained loss-making at a (30)% gross margin; management expects better leverage as the business scales.
- Management expects continued operating losses while investing in product development, manufacturing capacity, and sales and marketing. It expects subscription revenue to become a larger share of revenue and anticipates potential product-margin improvement from lower-cost components and easing shipping and materials costs. No quantified financial guidance is provided.
- Cash used in operations increased substantially year over year, in part due to working-capital needs, including contract-manufacturer deposits, inventory, and receivables. Management stated available cash and expected operating cash generation should fund operating and capital needs for at least 12 months from the filing date, while noting possible future financing needs and uncertainty of access to capital.
- COVID-19-related supply-chain challenges persisted; management said it expected them to be overcome in the near term. Risks also include macroeconomic and inflationary pressures, reduced customer spending, geopolitical disruption, third-party manufacturing dependence, and continued losses.
Unusual items, contingencies and reporting matters
- Six-month other income included $9.4 million of net gains from fair-value remeasurement of earn-out, contingently issuable share, and public warrant liabilities. These are noncash and increased reported earnings relative to operating performance.
- The company recorded $0.4 million of property-and-equipment impairment, related to retired Edge units and Express prototypes as domestic customers transition to newer Express units.
- Management identified errors in previously issued financial statements, including expense classifications, equipment classification and cash-flow presentation, and warrant accounting. Prior-period amounts were revised; management concluded the effects were not material to previously issued statements. The 2021 comparative figures presented here reflect those revisions.
- Disclosure controls were deemed ineffective at June 30, 2022 because of material weaknesses in financial reporting and IT controls. Remediation efforts include additional finance and IT staff, revised processes, outside consultants, and a new ERP system; management said remediation was not yet complete.
- The company reported no current litigation. It disclosed a potential sales- and-use-tax contingency among the factors behind higher non-income taxes, but the filing does not provide a clear quantified exposure.
Investor verification points
- Track whether revenue growth converts into improved product and service gross margins, particularly as channel, product configuration, and supply-chain costs change.
- Assess operating cash burn, working-capital requirements, and the stated cash runway against actual future deployment and equipment-purchase needs.
- Monitor completion and testing of internal-control remediation, and whether subsequent filings disclose further revisions or control deficiencies.
- Review dilution from equity awards, warrants, and contingent shares; 144.2 million Class A shares were outstanding as of August 17, 2022.
- Evaluate related-party and channel exposure: Motorola-related distributor revenue was $1.9 million in Q2 and $2.8 million for the first half, with $3.0 million receivable at quarter-end.