Evolv Technologies Holdings, Inc. — Q2 2023 Form 10-Q
Business context and period: Evolv provides AI-based weapons-detection security screening systems, sold outright or through multi-year subscription arrangements. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $19.8 | $9.1 | $38.4 | $17.8 |
| Gross profit / margin | $7.4 / 37.4% | $0.6 / 6.1% | $12.2 / 31.7% | $1.5 / 8.2% |
| Operating loss | $(23.6) | $(25.3) | $(46.1) | $(49.1) |
| Net loss | $(66.8) | $(25.7) | $(95.4) | $(39.5) |
| Net loss per share, basic and diluted | $(0.45) | $(0.18) | $(0.65) | $(0.28) |
| Cash used in operating activities | — | $(8.5) | $(52.5) |
- Q2 revenue grew 119% year over year. Product revenue was $7.2 million (+75%), subscription revenue $8.0 million (+99%), and service revenue $4.6 million (+403%). For the first half, the respective increases were 71%, 106%, and 458%.
- Q2 product gross margin remained negative at 7%; subscription and service gross margins were 57% and 72%. First-half product gross margin was negative 14%, while subscription and service margins were 60% and 73%.
- Operating expenses rose 20% in Q2 to $31.0 million, including higher R&D and sales and marketing spending. For the first half, operating expenses increased 15% to $58.3 million.
- Q2 net loss included $44.9 million of losses from fair-value changes in contingent earn-out, contingently issuable stock, and public warrant liabilities. For the first half, these remeasurement losses totaled $50.8 million. These are noncash items and substantially explain why net loss worsened despite improved operating loss.
- At June 30, cash and cash equivalents were $155.5 million; total cash, cash equivalents, and restricted cash were $156.8 million. Working-capital current assets were $216.2 million versus current liabilities of $68.2 million. Deferred revenue totaled $60.1 million.
- The company had no debt outstanding at quarter-end after repaying its SVB term loan in March. First-half investing cash outflow was $34.7 million, primarily $33.2 million of property and equipment purchases, largely equipment for customer leases. Financing cash outflow was $30.0 million, mainly debt repayment.
Changes, outlook, and risks
- Growth reflected more customer deployments and adoption, including 74 new customers in Q2 versus 53 a year earlier, and 135 in the first half versus 97. Management cited expansion at existing customers and channel-partner momentum.
- Management is shifting toward a “pure subscription” model and expects subscription revenue to increase as a share of total revenue. It said product margins may improve with lower-cost components, but product sales—especially single-lane and channel-partner configurations—have had lower average selling prices and negative margins.
- Management expects R&D and sales and marketing costs to increase during 2023 to support product development and growth; general and administrative expense is expected to remain relatively consistent with 2022. No specific revenue, earnings, or margin guidance was provided.
- Management stated that cash and expected operating cash generation should fund operating expenses and capital expenditures for at least 12 months from the filing date. It cautioned that additional capital may be needed and may not be available on acceptable terms.
- Key risks include sustained operating losses, reliance on third-party manufacturing and global supply chains, competition and execution in a developing market, product performance and safety, and macroeconomic and funding conditions.
- Disclosure controls were ineffective as of June 30, 2023 because of material weaknesses in financial reporting controls, including staffing and segregation of duties, period-end reporting, complex transactions, revenue timing, payables and accruals, and IT general controls. Management described remediation work, but the weaknesses were not yet considered remediated.
- The filing reports no material litigation and no material changes to the risk factors in the 2022 Form 10-K. It also notes that the company expects to lose emerging-growth-company and smaller-reporting-company status at December 31, 2023 based on its public float.
Investor verification priorities
- Track recurring subscription growth, deployments, renewals, and the shift in revenue mix, while checking whether product and overall gross margins improve.
- Assess cash burn and capital spending required to build and maintain leased equipment, against management’s stated liquidity runway.
- Separate operating performance from noncash fair-value movements in earn-out, contingent-share, and warrant liabilities; confirm the assumptions driving future remeasurement.
- Monitor remediation and testing of the disclosed material weaknesses, and any effects on reporting reliability or future filings.
- Review related-party and channel exposure: related-party revenue was $3.4 million in Q2 and $7.0 million in the first half, principally associated with Motorola and Securitas reseller/distributor activity.