Evolv Technologies Holdings, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. The filing reports annual results, not standalone fourth-quarter figures. Evolv completed its business combination with NewHold Investment Corp. on July 16, 2021; the transaction was accounted for as a reverse recapitalization.
Business context
Evolv sells AI-based weapons-detection screening systems, principally through multiyear subscriptions that combine equipment, software and cloud services. Its flagship Evolv Express supports high-throughput, touchless screening. The company says its systems had screened more than 200 million visitors worldwide. It estimates an annual $20 billion security-screening opportunity and a potential $100 billion market including adjacent applications; these are management estimates, not reported revenue.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $23.7 million | $4.8 million | +395% |
| Gross profit | $6.6 million | $1.3 million | +415% |
| Gross margin | 28.0% | 26.9% | +1.1 percentage points |
| Operating expenses | $60.7 million | $28.2 million | +115% |
| Operating loss | $(54.1) million | $(26.9) million | Loss widened |
| Net loss | $(10.9) million | $(27.4) million | Loss narrowed |
| Operating cash flow | $(69.6) million | $(23.3) million | Cash use increased |
Revenue comprised $13.9 million of product sales, $7.9 million of subscription revenue and $1.9 million of services revenue. Product revenue rose 988%, subscription revenue 198% and services revenue 121%. Product sales were 58.7% of revenue versus 26.7% in 2020. Gross margins were 10% for products, 54% for subscriptions and 51% for services.
The smaller reported net loss does not reflect improved operating profitability: operating loss widened, while net income included substantial noncash fair-value gains. Changes in the fair values of the earn-out liability, contingent founder shares and public warrants generated gains of $46.2 million, $6.4 million and $12.6 million, respectively. These were partly offset by $12.7 million of debt-extinguishment loss, $6.1 million of interest expense and other items. FY2021 loss per share was $0.15, compared with $3.07 in FY2020.
Liquidity, debt and cash flow
At year-end, cash and cash equivalents were $307.5 million; cash, cash equivalents and restricted cash totaled $308.2 million. Current assets were $333.7 million and current liabilities $24.4 million. Long-term debt was $9.9 million, including $2.0 million due in 2022; the JPMorgan facility is secured by company assets, including intellectual property. FY2021 investing cash use was $4.7 million, while financing provided $377.8 million, including $300.0 million from the PIPE investment and $84.9 million of net merger proceeds. Management said available cash was expected to fund operating and capital requirements for at least 12 months from the filing date.
Material changes and unusual items
- Sales and marketing expense increased to $27.4 million from $7.4 million, and general and administrative expense increased to $20.0 million from $5.1 million, reflecting hiring, growth investments and public-company costs. Research and development expense declined to $11.4 million from $15.7 million, mainly as prototype spending fell.
- The company recorded $1.9 million of property-and-equipment impairment and $1.6 million of inventory write-offs as it retired Evolv Edge units and transitioned domestic customers to Express.
- Cash used in operations rose to $69.6 million, driven in part by working-capital needs, including higher inventory, prepaid assets and contract assets.
- The merger and PIPE materially strengthened liquidity; preferred stock and convertible notes converted into common shares. The company had 142.7 million common shares outstanding at year-end.
Outlook, risks and controls
No quantified revenue or earnings guidance is provided. Management expects continued investment in research and development, sales and marketing, manufacturing scale and international growth, and expects operating losses to continue while the business expands. It expects subscription analytics to contribute more significantly in 2022 and anticipates potential gross-margin improvement from product engineering, supplier leverage and easing supply-chain costs; timing and results are uncertain.
Risks include ongoing losses, an early-stage market and long, variable sales cycles; reliance on one contract manufacturer and constrained suppliers; competition and product-detection or reliability failures; customer adoption and renewal uncertainty; privacy, cybersecurity and regulatory exposure; and COVID-19-related sales, installation and supply-chain disruption. The company also warns of potentially material noncash earnings volatility from fair-value remeasurement of warrants and contingent shares.
Management concluded disclosure controls were not effective at December 31, 2021 and identified material weaknesses in financial reporting controls, including staffing and segregation of duties, close and complex-transaction accounting, revenue timing, accounts payable and IT general controls. Remediation was underway, but the weaknesses were not yet considered remediated. The filing reports audit adjustments and immaterial misstatements in prior and current periods and a restatement of the predecessor’s warrant accounting. The independent auditor gave an unqualified opinion on the consolidated financial statements. The company reported no current litigation and no income-tax provision, with a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Reconcile the customer-concentration disclosures: the business section says no customer exceeded 10% of FY2021 revenue, while a financial-statement note appears to report a customer at 10.7%.
- Track recurring subscription growth, renewals and the conversion of bookings and deferred revenue into recognized revenue and cash.
- Assess whether product and consolidated gross margins improve as manufacturing scales and supply-chain costs change.
- Monitor operating cash burn, working-capital needs, remaining debt obligations and the duration of available liquidity.
- Follow remediation and testing of material weaknesses, and review future filings for any further accounting corrections or control findings.
- Separate operating performance from fair-value gains and losses on warrants and contingent shares when assessing earnings.