Evolv Technologies Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; financial amounts below are in U.S. dollars. Evolv sells AI-based weapons-detection systems through product sales and multi-year subscription and service arrangements.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $16.5m | $8.4m | $34.3m | $16.8m |
| Gross profit (margin) | $0.2m (1.4%) | $3.5m (41.2%) | $1.7m (4.9%) | $4.6m (27.7%) |
| Operating loss | $(26.6)m | $(19.4)m | $(75.7)m | $(35.2)m |
| Net income (loss) | $(18.6)m | $20.8m | $(58.1)m | $(15.7)m |
| Net loss per share, basic | $(0.13) | $0.17 | $(0.40) | $(0.33) |
| Net cash used in operating activities | Not provided for quarter | $(69.4)m | $(42.6)m |
- Q3 revenue nearly doubled year over year. Product revenue rose 82% to $9.8m, subscription revenue rose 125% to $5.2m, and service revenue rose 108% to $1.5m. For the first nine months, revenue increased 104%.
- Revenue growth did not translate into higher gross profit: product revenue had negative gross margin of 32% in Q3 and 23% for the nine-month period. Management cited more single-lane and channel-partner sales, customer marketing arrangements, shipping costs, and scrap inventory write-offs. Subscription margins improved to 58% in Q3 and 53% year to date.
- Operating expenses increased 18% in Q3 and 94% year to date, to $26.8m and $77.4m, respectively. Growth in personnel, sales and marketing, and public-company and professional costs contributed.
- Q3 2021 net income included substantial noncash fair-value gains, including a $32.6m earn-out liability gain. Q3 2022 also included a $7.2m earn-out gain and a $1.1m gain on contingently issuable shares, partly offset by a $1.1m warrant-liability loss. Thus, reported net income comparisons are affected by volatile, non-operating fair-value adjustments.
Cash, debt, and liquidity
- At September 30, 2022, cash and cash equivalents were $218.5m; cash, cash equivalents, and restricted cash totaled $219.2m. Working capital was approximately $233.8m.
- Nine-month operating cash use was $69.4m, versus $42.6m in the prior-year period. Investing cash use was $19.2m, primarily for leased equipment and internal-use software. Cash declined $89.0m during the nine months.
- Total debt was $9.0m, including $4.0m current and $5.0m long-term, under a JPMorgan credit agreement. The variable-rate debt carried an 8.5% rate at quarter-end and is secured by company assets, including intellectual property. The revolving credit line’s stated maturity was December 3, 2022.
- Management said available cash and expected operating cash generation should fund operating and capital requirements for at least 12 months from the filing date, while noting potential need for additional capital to support growth and leased-equipment demand.
- Remaining performance obligations totaled $109.4m, including $72.6m of subscription revenue; this is not equivalent to current-period revenue or guaranteed cash collections.
Outlook, commentary, and risks
- No quantitative revenue or earnings guidance was provided. Management expects continued operating losses while investing in product development, manufacturing scale, and sales and marketing. It expects subscription revenue to grow as a share of revenue and sees potential for gross-margin improvement from lower-cost product components and easing supply-chain costs.
- Management reported 92 new customers in Q3 2022 versus 23 in Q3 2021, and 189 for the first nine months versus 57 a year earlier. It cited customer expansion and channel-partner momentum as growth drivers.
- Risks include supply-chain constraints, inflation and higher interest rates, potential recession and reduced customer spending, geopolitical disruption, reliance on third-party manufacturing, and dependence on a single solution. Management also cautioned that results may fluctuate with product mix and customer adoption.
- The company reported material weaknesses in internal control over financial reporting and concluded disclosure controls were ineffective at September 30, 2022. Weaknesses covered staffing and segregation of duties, period-end reporting, complex transactions, revenue timing, payables and accruals, and IT controls. Prior-period statements were revised for errors management deemed immaterial to previously issued statements; remediation was ongoing and not yet complete.
- The company reported no material litigation. It identified possible additional sales and use tax exposure in various jurisdictions. It also reported $2.3m of Q3 revenue to related-party distributor Motorola and $4.1m of related receivables at quarter-end.
Important facts for investors to verify
- Whether product gross margins recover and whether subscription growth offsets the low or negative margins in product and service activities.
- Operating cash burn, leased-equipment investment needs, and the timing and terms of any additional financing; also confirm the status of the revolving credit line after its stated December 2022 maturity.
- Progress and independent testing of remediation for the disclosed material weaknesses, including whether further adjustments or revisions are required.
- How much of the $109.4m remaining performance obligations converts to revenue and cash, and the concentration and collectability of customer and channel-partner receivables.
- Potential effects of supply-chain costs, customer mix, sales through channel partners, sales-tax contingencies, and fair-value changes in earn-out and warrant liabilities.