Evolv Technologies Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; financial statements are unaudited. Evolv provides AI-based touchless security screening products, sold outright or through multi-year subscriptions. The July 16, 2021 merger with NHIC was accounted for as a reverse recapitalization, so pre-merger operating results reflect Legacy Evolv.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $8.4 million | $1.5 million | $16.8 million | $2.8 million |
| Gross profit | $4.2 million | $0.6 million | $6.3 million | $0.8 million |
| Gross margin | 49.7% | 43.7% | 37.6% | 29.9% |
| Operating loss | $16.6 million | $6.2 million | $32.1 million | $17.6 million |
| Net income (loss) | $22.8 million | ($6.3 million) | ($13.4 million) | ($17.8 million) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | ($50.5 million) | ($18.4 million) |
- Q3 revenue rose sharply, led by product sales: $5.3 million versus $0.3 million. Subscription revenue was $2.3 million versus $0.8 million, and service revenue was $0.7 million versus $0.3 million.
- Despite Q3 net income, operating results remained loss-making. Q3 net income included $39.4 million of net other income, chiefly noncash fair-value gains on merger-related earn-out, contingently issuable stock and public warrant liabilities. The nine-month net loss also included $12.7 million of debt-extinguishment losses and $6.0 million of interest expense.
- At September 30, cash and cash equivalents were $333.7 million; restricted cash was $0.7 million, for total cash, cash equivalents and restricted cash of $334.4 million. Current assets were $359.8 million and current liabilities $21.3 million.
- Debt was $15.4 million, including $5.4 million drawn on the revolving line. Nine-month investing cash outflow was $3.1 million. Financing provided $383.3 million, principally from the $300.0 million PIPE and $84.9 million of merger proceeds, net of offering costs and other financing activity.
- Q3 and nine-month operating expenses were $20.8 million and $38.4 million, respectively. Sales and marketing and general and administrative expenses increased substantially year over year as the company expanded and incurred public-company and transaction-related costs.
Material changes and unusual items
- The merger and PIPE substantially increased cash and equity; the PIPE issued 30 million shares at $10 per share. Legacy Evolv shareholders held approximately 92.7% of common shares at closing, excluding shares issuable from options, warrants and earn-outs.
- A $1.7 million impairment was recorded for Edge and Express prototype equipment retired as domestic customers transitioned to Express. The company also wrote off $0.4 million of inventory and reported $0.7 million of other expense, primarily from disposal of demo units.
- Merger-related earn-out and contingently issuable stock liabilities are remeasured at fair value. At September 30, these stood at $35.0 million and $6.0 million, respectively; the public warrant liability was $20.5 million. Fair-value changes can materially affect reported earnings without corresponding operating cash flow.
- The company reported customer concentration: one customer represented 21.2% of Q3 revenue, primarily product revenue. A separate customer accounted for 16.0% of accounts receivable at quarter-end.
Outlook, commentary and risks
- Management expects continued net losses as it invests in sales and marketing, manufacturing capacity, research and development, and public-company infrastructure. It gave no specific revenue or earnings guidance.
- Management stated cash and cash equivalents, together with expected operating cash generation, should fund operating and capital needs for at least 12 months from the filing date. It also noted that additional capital may be needed to support growth or respond to business needs.
- Management expects touchless screening adoption and the subscription share of revenue to grow, and cited manufacturing standardization and lower-cost components as potential gross-margin benefits. These are expectations, not guarantees.
- Risks include COVID-19 effects on customer spending, facilities and supply chains; supplier and manufacturing dependence; sales-cycle and adoption uncertainty; competition; and the need to scale operations. The company reported ongoing supply-chain challenges, while management said it expected these to be overcome in the near future.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2021 because of continuing material weaknesses in financial reporting, complex transaction accounting, staffing and IT general controls. Remediation was underway, including hiring and ERP work; management had not concluded the weaknesses were remediated.
- The company reported no current litigation, no defaults upon senior securities and no off-balance-sheet arrangements. It has not paid or declared cash dividends.
Key facts for investors to verify
- How much of the reported Q3 profit came from noncash fair-value movements, and whether operating losses and cash burn are improving.
- Whether revenue growth, recurring subscription revenue and gross-margin improvements persist as product mix and customer adoption change.
- Cash deployment, ongoing operating cash needs, debt repayment schedule and management’s stated liquidity runway.
- Potential dilution and earnings volatility from the 15 million earn-out shares, founder-share vesting conditions, warrants, options and related liabilities.
- Progress in remediating the material weaknesses in internal controls and any subsequent changes to the company’s assessment.
- Customer concentration, collections, inventory levels and the effect of supply-chain constraints on deliveries.