10q10k10q10k.net

What changed in Evolv Technologies Holdings, Inc.'s 10-K — 2022 vs 2023

vs

Paragraph-level year-over-year comparison of Evolv Technologies Holdings, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+479 added−510 removedSource: 10-K (2024-02-29) vs 10-K (2023-03-24)

Top changes in Evolv Technologies Holdings, Inc.'s 2023 10-K

479 paragraphs added · 510 removed · 356 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

72 edited+10 added−11 removed40 unchanged
Biggest changeOur products, which are offered to our customers primarily under a multi-year subscription pricing model, deliver both excellent value to our customers and predictable revenue streams for us. We are focused on delivering value in the spaces in and around the physical threshold of venues and facilities.
Biggest changeOur products deliver a largely touchless screening experience — a capability that has become an increasingly important consumer demand as well as unique analytic insights about security screening performance and visitor flows. Our products, which are offered to our customers primarily under a multi-year subscription pricing model, deliver both excellent value to our customers and predictable revenue streams for us.
Touchless security screening provides a range of benefits including reliable precision, automated and targeted, high throughput, non-invasive, reduced visitor anxiety, improved security staff experience, cost effective, reduced physical footprint, continuous improvement, and analytic insights.
Touchless security screening provides a range of benefits including reliable precision, automated and targeted, high throughput, non-invasive and reduced visitor anxiety, improved security staff experience, reduced and cost-effective physical footprint, continuous improvement, and analytic insights.
In a world where data is an increasingly decisive competitive advantage, we believe we are well positioned to deliver value to our customers in ways that competitors may be unable to match. 9 Table of Contents • Differentiated and Proprietary Technology Platform We have invested significant resources in developing proprietary and patented technologies across artificial intelligence software, cloud services, and advanced sensors to accelerate the widespread adoption of touchless security screening.
In a world where data is an increasingly decisive competitive advantage, we believe we are well positioned to deliver value to our customers in ways that competitors may be unable to match. • Differentiated and Proprietary Technology Platform We have invested significant resources in developing proprietary and patented technologies across artificial intelligence software, cloud services, and advanced sensors to accelerate the widespread adoption of 9 Table of Contents touchless security screening.
As the accuracy and analytic insight of our systems increases, we believe more prospective customers will be attracted to our products and more engaged prospects will choose to purchase our products. We anticipate that this cycle will continue to operate in the future, creating ongoing competitive advantages for us and for our reseller partners.
As the accuracy and analytic insight of our systems increases, we believe more prospective customers will be attracted to our products and more engaged prospects will choose to purchase our products. We anticipate that this cycle will continue to operate in the future, creating ongoing competitive advantages for us and our reseller partners.
Whenever possible we seek to form relationships with the leading resellers in each region in order to secure access to the most valuable existing customer relationships and the best talent pool available in each region. • Visionary and Experienced Management Team Our management team and board of directors blend a range of skills and backgrounds from technology, cybersecurity, materials science, artificial intelligence, military and law enforcement.
Whenever possible we seek to form relationships with the leading resellers in each region in order to secure access to the most valuable existing customer relationships and the best talent pool available in each region. • Visionary and Experienced Management Team and Advisors Our management team and board of directors blend a range of skills and backgrounds from technology, cybersecurity, materials science, artificial intelligence, military, and law enforcement.
Using a variety of published industry reports and government data, we estimate that the above facilities together comprise nearly 400,000 sites and nearly 700,000 individual thresholds where our security screening products could potentially be deployed. We estimate that this market represents over $20 billion in potential weapon screening system sales annually.
Using a variety of published industry reports and government data, we estimate that the above facilities together comprise nearly 400,000 sites and approximately 700,000 individual thresholds where our security screening products could potentially be deployed. We estimate that this market represents over $20 billion in potential weapon screening system sales annually.
This means that visitors can walk through our solution without stopping, without removing personal items from their pockets or bags, and without having to form a single file line. Our products significantly reduce the number of false positive alarms, allowing security staff to focus their attention on high probability threats.
This means that most visitors can walk through our solution without stopping, without removing personal items from their pockets or bags, and without having to form a single file line. Our products significantly reduce the number of false positive alarms, allowing security staff to focus their attention on high probability threats.
ITEM 1. BUSINESS Company Overview Evolv Technologies Holdings, Inc. (“we,” “us,” “our,” the “Company” and “Evolv”) is a global leader in Artificial Intelligence (“AI”)-based weapons detection for security screening. Our mission is to make the world a safer and more enjoyable place to live, work, learn, and play.
ITEM 1. BUSINESS Company Overview Evolv Technologies Holdings, Inc. (“we,” “us,” “our,” the “Company” and “Evolv”) is a leader in Artificial Intelligence (“AI”)-based weapons detection for security screening. Our mission is to make the world a safer and more enjoyable place to live, work, learn, and play.
A variety of security screening technologies compete with our proprietary technologies, including, but not limited to walk-through metal detectors, handheld metal detector wands, and passive or active weapon screening systems based on magnetic field sensing, millimeter wave or terahertz imaging technology.
A variety of security screening technologies compete with our proprietary technologies, including, but not limited to legacy walk-through metal detectors, handheld metal detector wands, and passive or active weapon screening systems based on magnetic field sensing, millimeter wave or terahertz imaging technology.
We believe that these strategic partners will provide us with significant leverage and reach that will allow us to rapidly scale our business and guide customers to success. • Distribution Capabilities We have developed distribution network consisting of dozens of value-added resellers.
We believe that these strategic partners will provide us with significant leverage and reach that will allow us to rapidly scale our business and guide customers to success. • Distribution Capabilities We have developed a distribution network consisting of dozens of value-added resellers.
We offer training programs to enhance the knowledge, skills and advancement opportunities for our employees. We focus on maintaining a solid pipeline of talent throughout our organization and continually developing the capabilities and skills needed for the future of our business. Work Environment.
We offer training programs to enhance the knowledge, skills, and advancement opportunities for our employees. We focus on maintaining a solid pipeline of talent throughout our organization and we are continually developing the capabilities and skills needed for the future of our business. Work Environment.
We have established a successful pattern of targeting and winning lighthouse customers in specific vertical industries and then leveraging that success to solicit referrals at other venues and facilities across the metropolitan area in other vertical industries.
We have established a successful pattern of targeting and winning lighthouse customers in specific vertical industries and then leveraging that success to solicit referrals at other venues and facilities across that metropolitan area in other vertical industries.
Our advisors are renowned industry leaders with experience at the United States Secret Service, the Federal Bureau of Investigation (“FBI”), the U.S. military, the TSA, the United States Department of Homeland Security, the United States Intelligence Community and United States Congress.
Our advisors are renowned industry leaders with experience at the United States Secret Service, the Federal Bureau of Investigation (“FBI”), the U.S. military, the TSA, the United States Department of Homeland Security (the "DHS"), the United States intelligence community, and United States Congress.
While most of the intellectual property we use is developed and owned by us, we also use a combination of proprietary, open-source and third-party licensed software in connection with our services.
While most of the intellectual property we use is developed and owned by us, we also use a combination of proprietary, open-source and third-party licensed software in connection with our products and services.
We believe our market opportunity has both a security screening opportunity as well as an adjacent market expansion opportunity as follows: Security Screening Opportunity We estimate that our primary market opportunity is for weapon screening at venues and facilities in the following segments: • Educational Institutions, • Hospitals & Health Care Facilities, • Professional Sports Venues, • Industrial Warehouses, 7 Table of Contents • Distribution Facilities, • Large Workplaces, • Arts & Entertainment Venues, • Government Offices, • Hospitality Facilities, and • Houses of Worship.
We believe our market opportunity has both a security screening opportunity as well as an adjacent market expansion opportunity as follows: Security Screening Opportunity We estimate that our primary market opportunity is for weapon screening at venues and facilities in the following segments: • educational institutions including schools, • hospitals & health care facilities, • professional sports venues, • industrial warehouses, • distribution facilities, 7 Table of Contents • large workplaces, • arts & entertainment venues, • government offices, • hospitality facilities, and • houses of worship.
Our primary areas of focus in research and development include, but are not limited to: • Enhanced system usability, operator ergonomics, form factor options, and mobility to drive further efficiencies and opportunities in a variety of operating environments; • Continued improvement of the detection algorithm performance including assessing the ability to detect new threats; • Additional system sensors and fusion with a variety of other data inputs to expand venue insights, analytics applications and operational performance; 12 Table of Contents • New applications that digitally transform operations in and adjacent to the arrival experience at venues and facilities; and • Integrations into venue security infrastructure and operating systems.
Our primary areas of focus in research and development include, but are not limited to: • Enhanced system usability, operator ergonomics, form factor options, and mobility to drive further efficiencies and opportunities in a variety of operating environments; • Continued improvement of the detection algorithm performance, including assessing the ability to detect new threats; • Additional system sensors and fusion with a variety of other data inputs to expand venue insights, analytics applications, and operational performance; • New applications that digitally transform operations in and adjacent to the arrival experience at venues and facilities; and • Integrations into venue security infrastructure and operating systems.
Legacy screening technologies effectively detect metal, but they also generate numerous false alarms for harmless items. To bring down the false alarm rate, security teams proactively divert personal items away from the metal detectors into manual bag check processes that are vulnerable to human frailty and relatively easy for a determined attacker to defeat.
Legacy screening technologies effectively detect metal, but they also generate numerous false alarms for harmless items. To bring down the false alarm rate, security teams proactively divert personal items away from the metal detectors into manual bag check processes that are vulnerable to human error and relatively easy for a determined attacker to defeat.
Our Market Opportunity We believe that the current macro trends in firearms ownership, mass shootings, and pandemic awareness suggest that the need for effective security screening processes has never been greater and will continue to grow for the foreseeable future. In the United States, there are over 460 million privately-owned guns in circulation.
Our Market Opportunity We believe that the current macro trends in firearms ownership and mass shootings suggest that the need for effective security screening processes has never been greater and will continue to grow for the foreseeable future. In the United States, there are over 460 million privately-owned guns in circulation.
All of our products are built to our specification, work instructions and testing protocols. Inventory levels are managed with our manufacturing partners to ensure an adequate supply is on hand to meet business forecasts. Intellectual Property Our ability to drive innovation in the security screening market depends in part upon our ability to protect our core technology and intellectual property.
All of our products are built to our specifications, work instructions, and testing protocols. Inventory levels are managed with our manufacturing partners to ensure an adequate supply is on hand to meet business forecasts. Intellectual Property Our ability to drive innovation in the security screening market depends in part upon our ability to protect our core technology and intellectual property.
The result is a visitor experience that is more like walking through a shoplifting prevention system at a department store than an airport security checkpoint. • Significant Cost Savings Because our technology generates fewer nuisance alarms and scans visitors so quickly, far fewer security guards and equipment is required.
The result is a visitor experience that is more like walking through a department store shoplifting prevention system than an intrusive airport security checkpoint. • Significant Cost Savings Because our technology generates fewer nuisance alarms and scans visitors so quickly, far fewer security guards and equipment is required.
Many resellers offer third-party physical security products including cameras, access control systems, and video monitoring systems in their respective territories and regions, which provides an opportunity to cross-sell our touchless security screening products to a broad, existing customer base that has purchased these other products.
Many partners offer third-party physical security products including cameras, access control systems, and video monitoring systems in their respective territories and regions, which provides an opportunity to cross-sell our touchless security screening products to a broad, existing customer base that has purchased these other products.
Department of Commerce, we are prohibited from engaging in transactions involving certain persons and certain designated countries or territories, including Cuba, Iran, Syria, North Korea, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, unless authorized by OFAC or otherwise exempt from the regulations.
Department of State, we are prohibited from engaging in transactions involving certain persons and certain designated countries or territories, including Cuba, Iran, Syria, North Korea, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, unless authorized by OFAC or otherwise exempt from the regulations.
We believe that we are well-positioned to compete in our industry based on these core competencies and on the following competitive strengths: • Unmatched Detection Effectiveness Based on Artificial Intelligence Software Based on feedback from our customers, we believe that real-world screening operations based on our products detect more actual weapon threats with fewer nuisance alarms than similar screening operations based on old walk-through metal detectors.
We believe that we are well-positioned to compete in our industry based on these core competencies and on the following competitive strengths: • Unmatched Detection Effectiveness Based on Artificial Intelligence Software Based on feedback from our customers, we believe that real-world screening operations using our products detect more actual weapon threats with fewer nuisance alarms than similar screening operations based on conventional walk-through metal detectors.
Our commercialization efforts are managed by individuals with prior successes in building and scaling both direct and indirect, channel-driven sales organizations. • Self-Reinforcing Adoption Cycle We believe that as we acquire more customers and deploy more of our products, we gather more digital data that helps us improve the detection accuracy and performance of our systems and provide deeper analytic insights to our customers.
Our commercialization efforts are managed by individuals with prior successes in building and scaling both direct and indirect, reseller-driven global sales organizations. • Self-Reinforcing Adoption Cycle We believe that as we acquire more customers and deploy more of our products, we gather more digital data that helps us improve the detection accuracy and performance of our systems and provide deeper analytic insights to our customers.
Further, we believe that venues and facilities that have previously chosen not to implement security screening due to concerns about cost, effectiveness, or visitor experience impact will feel increasingly compelled to introduce security screening for the first time.
Further, we believe that venues and facilities that have previously chosen not to implement security screening due to concerns about cost, effectiveness, and/or visitor experience impact will feel increasingly compelled to introduce our modern security screening for the first time.
We plan to continue to cultivate field level collaboration between our direct sales team and our resellers to develop the ability of the resellers to find, develop, close, and service customers independently. • Concentrate Marketing and Sales Effort in Specific Target Accounts in Specific Vertical Industries Through our experience to date we have developed a proprietary list of target vertical industries, developed a list of target accounts within those industries, and identified target decision-makers in our target accounts.
We plan to continue to cultivate field level collaboration between our direct sales team and our resellers to develop the ability of the resellers to find, develop, close, and/or support customers independently. • Concentrate Sales and Marketing Effort in Specific Target Accounts in Specific Vertical Industries Through our experience to date, we have developed a proprietary list of target vertical industries, developed a list of target accounts within those industries, and identified target decision-makers in our target accounts.
Corporate Background On July 16, 2021, we consummated the business combination (the “Merger”) contemplated by the Agreement and Plan of Merger, as amended on March 5, 2021 (the “Merger Agreement”), with NHIC Sub Inc. (“Merger Sub”), a wholly-owned subsidiary of NHIC, which is our legal predecessor, and Evolv Technologies, Inc. dba Evolv Technology, Inc. (“Legacy Evolv”).
Corporate Background 14 Table of Contents On July 16, 2021, we consummated the business combination (the “Merger”) contemplated by the Agreement and Plan of Merger, as amended on March 5, 2021 (the “Merger Agreement”), with NHIC Sub Inc. (“Merger Sub”), a wholly-owned subsidiary of NHIC, which is our legal predecessor, and Evolv Technologies, Inc. dba Evolv Technology, Inc. (“Legacy Evolv”).
Our patents and patent applications are directed to, among other things, security screening, threat detection and discrimination, imaging systems and related technologies. In addition to patents owned or co-owned by us, we have in-licensed ninety-five patents, including but not limited to metamaterials, RF imaging, compressive sensing, and signal processing, for security related applications.
Our patents and patent applications are directed to, among other things, security screening, threat detection and discrimination, imaging systems, and related technologies. In addition to patents owned or co-owned by us, we have in-licensed 95 patents, including but not limited to metamaterials, RF imaging, compressive sensing, and signal processing, for security related applications.
We are not presently a party to any such legal proceedings that, in the opinion of our management, would individually or taken together have a material adverse effect on our business, financial condition, results of operations or cash flows. Human Capital Our employees are critical to our success.
We are not presently a party to any such legal proceedings that, in the opinion of our management, would individually or taken together have a material adverse effect on our business, financial condition, results of operations or cash flows. 13 Table of Contents Human Capital Our employees are critical to our success.
Each of these strategic partners has a globally recognized brand, a large distribution network, systems integration and support capabilities, and customer networks full of potential prospects for our touchless security screening solutions. Both Motorola Solutions and Stanley Security are investors in the Company.
Each of these strategic partners has a globally recognized brand, a large distribution network, systems integration and support capabilities, and customer networks full of potential prospects for our touchless security screening solutions. Both Motorola Solutions and Stanley Security were early investors in the Company.
To augment the reach of our distribution network, we also intend to grow our direct sales efforts focused primarily on serving major accounts and expanding our footprint.
To augment the reach of our distribution network, we also intend to increase our direct sales efforts focused primarily on serving major accounts and expanding our footprint.
We strive to provide pay and comprehensive benefits that help meet the varying needs of our employees. Our total rewards package includes market-competitive pay, equity compensation, unlimited time off, tuition reimbursement, and other comprehensive and competitive benefits.
Competitive Pay and Benefits . We strive to provide pay and comprehensive benefits that help meet the varying needs of our employees. Our total rewards package includes market-competitive pay, equity compensation, unlimited time off, tuition reimbursement, 401(k) match, and other comprehensive and competitive benefits.
We have developed a playbook for executing this pattern through orchestration of our direct sales resources and channel partners in a manner that we believe will continue to scale as we develop the available market. • Expand and Activate Our Channel Strategy We have a global distribution network consisting of dozens of value-added resellers.
We have developed a playbook for executing this pattern through orchestration of our direct sales resources and reseller partners in a manner that we believe will continue to scale as we develop the available markets. • Expand and Activate Our Reseller Strategy We have a global distribution network consisting of dozens of value-added resellers.
This complex process has numerous shortcomings such as nuisance alarm fatigue, ambiguous alarms, frequent human error, frustrating delays, invasive contact, high labor costs, transient security staff, and lack of data insights. The historical emphasis on technical detection performance using outdated standards tested in isolation has drawn attention away from performance of the screening process as a whole system.
This cumbersome process has numerous shortcomings such as nuisance alarm fatigue, ambiguous alarms, frequent human error, frustrating delays, invasive contact, high labor costs, inattentive and transient security staff, and lack of data insights. The historical emphasis on technical detection performance using outdated standards tested in isolation has drawn attention away from performance of the screening process as a holistic system.
In furtherance of this objective, we provide regular Code of Business Conduct training for our employees to identify and prevent misconduct and report situations that violate our policies and/or negatively impact our work environment. We investigate and take prompt action to correct conduct that is inconsistent with our Code of Business Conduct and other policies. Competitive Pay and Benefits .
In furtherance of this objective, we provide a regular Code of Business Conduct training for our employees to identify and prevent misconduct and report situations that violate our policies and/or negatively impact our work environment. We investigate and take prompt action to correct conduct that is inconsistent with our Code of Business Conduct and other policies.
Our marketing strategies are focused on supporting sales growth by (1) driving awareness; (2) developing comprehensive sales and marketing content, tools, and campaigns for each stage of the sales process; (3) scaling those campaigns via our global distribution network, and (4) building our sales pipeline.
Our marketing strategies are focused on supporting sales growth by (1) driving awareness; (2) developing comprehensive sales and marketing content, tools, and campaigns for each stage of the sales process; (3) scaling those campaigns via our global distribution network, and (4) building our sales pipeline through demand generation efforts.
The total scanning costs are up to 70% lower with our products, allowing venues to reduce overall operational costs and making security screening financially feasible at more venues and events. 10 Table of Contents • Digital Access and Analytic Insights Evolv Insights™ provides our customers self-serve access, insights regarding visitor flow and arrival curves, location specific performance, system detection performance and alarm statistics, and comparisons across multiple business dimensions.
We believe the total scanning costs are up to 70% lower with our products, allowing venues to reduce overall operational costs and making security screening financially feasible at more venues and events. • Digital Access and Analytic Insights Evolv Insights ® provides our customers self-serve access, insights regarding visitor flow and arrival curves, location specific performance, system detection performance and alarm statistics, and comparisons across multiple business dimensions.
We initially manage the supply chain for key components and materials, and then, in some cases, set up supply agreements in conjunction with our contract manufacturer to enable stable supply and redundancy where applicable. Component purchasing is managed by our contract manufacturer’s sourcing team under a vendor list approved by us to leverage the buying power of their global scale.
We initially manage the supply chain for key components and materials, and then, in some cases, set up supply agreements in conjunction with Columbia Tech to enable stable supply and redundancy where applicable. Component purchasing is managed by Columbia Tech's sourcing team under a vendor list approved by us to leverage the buying power of their global scale.
We intend to realize this value by seeking referrals from existing customers and partners to other prospective qualified customers, selling additional capacity to existing customers, and selling new add-on products and services to existing customers.
We intend to realize this value by seeking referrals from existing customers and partners to other prospective qualified customers, selling additional capacity to existing customers, and selling new add-on 8 Table of Contents products and services to existing customers.
This includes market leaders such as Motorola Solutions, STANLEY Securitas, and Johnson Controls, as well as smaller regional resellers. STANLEY Security, which was acquired by Securitas, was also an early investor in the Company. We intend to continue to develop our distribution network by adding further geographic coverage and sales 8 Table of Contents capacity based upon demand.
This includes market leaders such as Motorola Solutions, STANLEY Securitas, and Johnson Controls, as well as smaller regional resellers. STANLEY Security, which was acquired by Securitas, and Motorola Solutions were also early investors in the Company. We intend to continue to develop our distribution network by adding further geographic coverage and sales capacity based upon demand.
This limited functionality has unfortunately led many unregulated facilities to avoid security screening altogether rather than run the risk of creating a prison-like visitor experience for their valued customers and employees. We believe that forcing venues to choose between better security and an enjoyable visitor experience is unacceptable.
This limited functionality has unfortunately led many unregulated facilities either to avoid security screening altogether or to employ outdated technology rather than risk creating a prison-like visitor experience for their valued customers and employees. We believe that forcing venues to choose between better security and an enjoyable visitor experience is unacceptable.
Using Evolv Insights, organizations use the powerful dashboards and metrics provided to inform their security decisions, operationalize the way their security and venue operations teams make staffing and traffic flow decisions to avoid overcrowding, rebalance security and operational resources, and improve the overall experience for their guests.
Using Evolv Insights, organizations use the powerful dashboards and metrics provided to inform their security decisions, operationalize the way their security and venue operations teams make staffing and traffic flow decisions to avoid overcrowding, rebalance security and operational resources, and improve the overall experience for their guests. Sales Models We sell our solutions under two primary sales models.
We believe that the number of Evolv Express solutions deployed is closely correlated to our revenues. Evolv Insights™ Analytics Application We collect a significant amount of anonymous data from every visitor that passes through one of our Evolv Express solutions. This data allows us to generate analytics that appear in our Evolv Insights™ application.
Evolv Insights Analytics Application We collect a significant amount of anonymous data from every visitor that passes through one of our Evolv Express solutions. This data allows us to generate analytics that appear in our Evolv Insights application.
As of December 31, 2022, we employed approximately 225 people, of which 223 are full-time employees. We also engage numerous consultants and contractors to supplement our permanent workforce. A majority of our employees are engaged in research and development and selling functions. We consider our relationship with our employees to be in good standing.
As of December 31, 2023, we employed 293 people, substantially all of whom are full-time employees. We also engage numerous consultants and contractors to supplement our permanent workforce. A majority of our employees are engaged in research and development and selling functions. We consider our relationship with our employees to be in good standing.
Our SEC filings are available to the public over the Internet at the SEC's website at http://www.sec.gov. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. 15 Table of Contents
Our SEC filings are available to the public over the Internet at the SEC's website at http://www.sec.gov. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC. We use our Investor Relations website as a means of disclosing material information.
Government Regulations We are subject to various laws, regulations, and permitting requirements of federal, state, and local authorities, related to health and safety, anti-corruption, and export controls.
Government Regulations We are subject to various laws, regulations, and permitting requirements of federal, state, and local authorities, related to health and safety, anti-corruption, and export controls. We believe that we are in material compliance with all such laws, regulations, and permitting requirements.
Our touchless security screening systems have screened over 500 million visitors worldw ide since our inception . We believe that we have screened more visitors through advanced AI-based detection systems in the United States than any organization, other than the United States Transportation Security Administration (“TSA”).
We believe that we have screened more visitors through advanced AI-based detection systems in the United States than any organization, other than the United States Transportation Security Administration (“TSA”).
As of December 31, 2022, we own or co-own seven issued United States patents, thirteen issued foreign patents and have fifteen pending or allowed patent applications. In addition, we have five registered United States trademarks, one pending United States trademark applications, twenty-eight registered foreign trademarks and seventeen pending foreign trademark applications.
As of December 31, 2023, we own or co-own eight issued United States patents, 24 issued foreign patents and have 24 pending or allowed patent applications. In addition, we have five registered United States trademarks, five pending United States trademark applications, 36 registered foreign trademarks and nine pending foreign trademark applications.
Regulated facilities like airports and prisons usually have a local monopoly on the services they provide and therefore have historically been incentivized to emphasize technical regulatory compliance at the expense of the visitor experience. Security technology providers have historically focused on serving this regulated market and developed technology that meets the regulatory requirements, but without regard to the visitor experience.
Regulated facilities like airports and prisons usually have a local monopoly on the services they provide and therefore have historically been incentivized to emphasize technical regulatory compliance at the expense of the visitor experience.
Licensing Model We primarily sell our solutions under a subscription agreement that bundles our AI-software, cloud services, and advanced sensor equipment. We refer to this subscription as “security-as-a-service,” or “SaaS.” The SaaS agreement provides customers access to our solution for a defined time, usually with a multi-year term, annual pre-payment installments, and no right of cancellation.
We offer a pure subscription agreement that bundles our AI-software, cloud services, and advanced sensor equipment. The SaaS agreement generally provides customers access to our solution for a defined time, usually with a multi-year term, annual pre-payment installments, and no right of cancellation for convenience.
Our internal marketing team develops content in multiple formats and delivery methods to facilitate marketing campaigns and sales enablement. Manufacturing and Suppliers Our physical products are manufactured via a third-party contract manufacturer, Columbia Tech, based in the United States with international quality certifications, such as ISO9001:2015. We design the products and processes and internally manufacture the initial engineering prototypes.
Our internal marketing team develops content in multiple formats and delivery methods to facilitate marketing campaigns and sales enablement. 12 Table of Contents Manufacturing and Suppliers Our physical products are manufactured by our primary third-party contract manufacturer, Columbia Tech, based in the United States with international quality certifications, such as ISO 9001:2015.
According to the Gun Violence Archive, in 2022 there were close to 700 mass shootings in the United States. Based on our experience with customers , we believe that consumers are and will remain uncomfortable with traditional high-touch security screening processes.
According to the Gun Violence Archive, in 2023 there were over 650 mass shootings in the United States. Based on our experience with customers , we believe that visitors are and will remain uncomfortable with traditional high-touch security screening processes. We believe that visitors and security staff alike will continue to prefer a touchless security screening process in the future.
Our engineering team is led by accomplished and visionary technologists and scientists who have many years of experience in relevant fields.
Our engineering and digital 10 Table of Contents products teams are led by accomplished and visionary technologists and scientists who have many years of experience in relevant fields.
Bribery Act 2010, as well as the laws of the countries where we do business. We are also subject to various trade restrictions, including trade and economic sanctions and export controls, imposed by governments around the world with jurisdiction over our operations. For example, in accordance with trade sanctions administered by the U.S.
We are also subject to various trade restrictions, including trade and economic sanctions and export controls, imposed by governments around the world with jurisdiction over our operations. For example, in accordance with trade sanctions administered by the U.S. Treasury Department, Office of Foreign Assets Control (“OFAC”) and the U.S.
We believe that we are in material compliance with all such laws, regulations, and permitting requirements. 14 Table of Contents Anti-Corruption Export and Trade Matters We are subject to anti-corruption laws and regulations imposed by governments around the world with jurisdiction over our operations, including the U.S. Foreign Corrupt Practices Act and the U.K.
Anti-Corruption Export and Trade Matters We are subject to anti-corruption laws and regulations imposed by governments around the world with jurisdiction over our operations, including the U.S. Foreign Corrupt Practices Act (the "FCPA") and the U.K. Bribery Act 2010 (the "Bribery Act"), as well as the laws of the countries where we do business.
Under this arrangement, we have granted a license of our intellectual property to Columbia Tech, and Columbia Tech will contract directly with certain of our resellers to fulfill sales demand where the end-user customer requires the contract to be in form of a hardware purchase.
Under this arrangement, we have granted a license of our intellectual property to Columbia Tech, which contracts directly with certain of our resellers to fulfill sales demand where the end-user customer prefers to purchase the hardware equipment. Columbia Tech pays us a hardware license fee for each system it manufactures and sells under this agreement.
Notwithstanding these efforts, there can be no assurance that we will adequately protect our intellectual property or that it will provide any competitive advantage. 13 Table of Contents Intellectual property laws, procedures, and restrictions provide only limited protection and any of our intellectual property or proprietary rights may be challenged, invalidated, circumvented, infringed, misappropriated, or otherwise violated.
Intellectual property laws, procedures, and restrictions provide only limited protection and any of our intellectual property or proprietary rights may be challenged, invalidated, circumvented, infringed, misappropriated, or otherwise violated.
To this end, in March 2023, we entered into a distributor licensing agreement with Columbia Tech, a wholly owned subsidiary of Coghlin Companies, who currently serves as our primary contract manufacturer.
For end-user customers that prefer to purchase our hardware outright, we offer our distributor licensing model based on a distributor licensing agreement (the "Distribution and License Agreement") we entered into with Columbia Electrical Contractors, Inc. ("Columbia Tech") in March of 2023. Columbia Tech, a wholly-owned subsidiary of Coghlin Companies, currently serves as our primary contract manufacturer.
Our Products Since our founding in 2013, we have developed an extensive portfolio of proprietary technologies that form the foundation of our integrated security screening products, which are comprised of artificial intelligence software, cloud services, and advanced sensors. 11 Table of Contents Evolv Express Our flagship product is Evolv Express, a touchless security screening system designed to quickly detect firearms, improvised explosive devices, and large tactical knives in unstructured people flows.
Our Products Since our founding in 2013, we have developed an extensive portfolio of proprietary technologies that form the foundation of our integrated security screening products, which are comprised of artificial intelligence software, cloud services, and advanced sensors.
We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives and maintain our competitive position.
We intend to pursue additional intellectual property protection to the extent we believe it would advance our business objectives and maintain our competitive position. Notwithstanding these efforts, there can be no assurance that we will adequately protect our intellectual property or that it will provide any competitive advantage.
We believe that visitors and security staff alike will continue to prefer a fully touchless security screening process in the future. We believe that many venues and facilities have reluctantly chosen to operate without security screening because of the inherent shortcomings of old screening methods like walk through metal detectors.
We believe that many venues and facilities have reluctantly chosen to operate without security screening because of the inherent shortcomings of old screening methods like walk through metal detectors. Due to these macro trends, we believe that venues and facilities that already conduct security screening will feel increasingly compelled to consider alternatives.
Our internal manufacturing and supply chain teams work collaboratively with both our internal engineering department and Columbia Tech to scale up the prototypes for commercialization through a phase gate product launch process. There have been significant efforts made over the last several years with Columbia Tech to scale up our production.
We also utilize other third-party manufacturers for the production of certain components. We design our products and processes and internally manufacture the initial engineering prototypes. Our internal manufacturing and supply chain teams work collaboratively with both our internal engineering department and Columbia Tech to scale up the prototypes for commercialization through a phase gate product launch process.
Our Customers Our customers include many iconic venues across a wide variety of industries including education, healthcare, professional sports, notable performing arts and entertainment venues, major tourist destinations and cultural attractions, large industrial workplaces, and houses of worship. The majority of our customer agreements include non-cancelable multi-year commitments.
However, except in limited circumstances, we do not plan to offer this sales model in future periods. 11 Table of Contents Our Customers Our customers include many iconic venues across a wide variety of industries including education, healthcare, professional sports, notable performing arts and entertainment venues, major tourist destinations and cultural attractions, large industrial workplaces, and houses of worship.
Sales and Marketing We sell our security screening products through both our own direct sales force and through a global distribution network consisting of dozens of value-added resellers. Our resellers sell our products to our joint customers, for whom they also perform installation, systems integration, and local support and maintenance services, with backup services provided by our internal support teams.
Our partners sell our products to our joint customers, for whom they may also perform installation, systems integration, and local support and maintenance services, with backup services provided by our internal support teams.
We also directly offer short term rental agreements for our solutions and allow certain reseller partners to offer rental terms to customers under certain conditions.
We also directly offer short-term rental agreements for our solutions and allow certain reseller partners to offer rental terms to customers under certain conditions. We also have historically sold our systems under a purchase subscription model, where customers purchase the hardware from us, and we provide a multi-year security-as-a-service subscription.
Our buyers are naturally collaborative on security best practices due to their vested interest in collective deterrence and the likelihood that any security event will have a negative collective impact at the metropolitan, regional, or industry level. Competition We have experienced, and expect to continue to experience, competition from a number of companies, including other vendors of security screening systems.
Our buyers are naturally collaborative on security best practices due to their vested interest in collective deterrence and the likelihood that any security event will have a negative collective impact at the metropolitan, regional, or industry level. • Extend Our Value Proposition with Additional Products and Digital Capabilities Our customers turn to our solutions first and foremost for increased security at the thresholds of the entrances of their venues.
In these instances, we will still contract directly with the reseller to provide a multi-year security-as-a-service subscription to the end-users. • Develop Initial Customer Successes in Specific Target Metropolitan Areas Decision-makers at our prospective customers are often professionally connected to decision-makers at other prospective customers in different vertical industries within a specific target metropolitan area.
Our Growth Strategy The key elements of our growth strategy within our target market include the following: • Develop Initial Customer Successes in Specific Target Metropolitan Areas Decision-makers at our prospective customers are often professionally connected to decision-makers at other prospective customers in different vertical industries within a specific target metropolitan area.
We believe that digitally transforming the visitor experience at the entry point to venues and facilities will be a critically important innovation in physical security. We believe that our solutions will not only make venues and facilities safer and more enjoyable, but also more efficient, more informed about their visitors’ needs, and ultimately more profitable.
We are focused on delivering value in the spaces in and around the physical threshold of venues and facilities. We believe that digitally transforming the visitor experience at the entry point to venues and facilities will be a critically important innovation in physical security.
Research and Development We believe that the touchless security screening market is poised for rapid technological advancements across software, cloud services, and sensors.
The majority of our customer agreements include non-cancelable multi-year commitments. Two customers each accounted for more than 10% of our total revenue for both the year ended December 31, 2023 and the year ended December 31, 2022. Research and Development We believe that the touchless security screening market is poised for rapid technological advancements across software, cloud services, and sensors.
Other specific integrations to date include the Milestone Video Management System and Titan HST Mass Notification System. • High Screening Throughput Our unique detection methodology results in fewer nuisance alarms and allows visitors to walk through in unstructured flows, without emptying their pockets and without surrendering their bags for manual inspection.
We have also designed our platform with application programming interfaces (“APIs”) that allow integration and interoperability with complementary third-party security solutions such as brandished gun detection, biometric authentication, video management software, threat intelligence, messaging, and mass-notification systems. • High Screening Throughput Our unique detection methodology results in fewer nuisance alarms and allows visitors to walk through in unstructured flows, without emptying their pockets and without surrendering their bags for manual inspection.
Evolv Express currently supports a maximum screening throughput of 4,000 people per hour. Evolv Express became commercially available in October 2019. The number of Evolv Express solutions deployed across our customer base grew from 703 at December 31, 2021 to 2,267 at December 31, 2022.
The number of Evolv Express solutions deployed across our customer base grew from 2,267 at December 31, 2022 to 4,505 at December 31, 2023. We believe that the number of Evolv Express solutions deployed is closely correlated to our revenues.
Our innovative technology not only enhances security but makes screening up to ten times faster at up to a 70% lower total cost than traditional alternatives. Our products also deliver a largely touchless screening experience — a capability that has become an increasingly important consumer demand. Our products also provide unique analytic insights about security screening performance and visitor flows.
Our innovative technology not only enhances security but makes screening up to ten times faster, which is capable of delivering up to a 70% lower total cost than traditional alternatives.
Removed
Due to these macro trends, we believe that venues and facilities that already conduct security screening will feel increasingly compelled to consider alternatives.
Added
We believe that our solutions will not only make venues and facilities safer and more enjoyable, but also more efficient, more informed about their visitors’ needs, and ultimately more profitable. Our touchless security screening systems have screened over one billion visitors since 2019 worldw ide since our inception .
Removed
Our Growth Strategy The key elements of our growth strategy within our target market include the following: • Lead with our "Pure Subscription" Sales Model During the year ending December 31, 2023, we intend to begin exclusively leading with our "pure subscription" sales model, where the customer leases our hardware, as opposed to purchasing the hardware outright, and enters into a multi-year security-as-a-service subscription.
Added
Security technology providers have historically focused on serving this regulated market and, as a result, developed solutions to meet the regulatory requirements without regard to the visitor experience.
Removed
The pure subscription model aligns more closely with the SaaS nature of our business and results in a more predictable and consistent recurring revenue stream as compared to the purchase subscription model. However, we recognize that some end-user customers will still prefer to purchase our hardware outright.
Added
In addition to increased security posture, we believe our solutions also provide for an enhanced visitor experience, lower overall security costs, enhanced employee retention and unprecedented insights into visitor and security data through our Evolv Insights solution. Our customers often look to us to provide additional applications and services that extend the security perimeter beyond the threshold of their venues.
Removed
Columbia Tech will pay us a hardware license fee for each system sold under this agreement.
Added
To that end, we believe there is an opportunity to introduce new applications and services that solve adjacent security challenges being faced by our customers. As we adapt to customer demands, we may introduce new applications and services to the market via our own internal product development, partnering with third parties, or through acquisitions.

… 13 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

178 edited+66 added−64 removed222 unchanged
Biggest changeThe trading price of our common stock as well as warrants is likely to be highly volatile and may be subject to wide fluctuations in response to a variety of factors, including the following: • the impact of COVID-19 pandemic or a future outbreak of disease or similar public health concern on our business; • changes in financial markets or macroeconomic conditions, including, for example, due to the effects of recession or slow economic growth in the United States and abroad, rising inflation and interest rates, fuel prices, international currency fluctuations, corruption, political instability, acts of war, including the conflict involving Russia and Ukraine, and acts of terrorism; • the inability to maintain the listing of our shares of common stock on the NASDAQ; • the inability to recognize the anticipated benefits of the Merger, which may be affected by, among other things, competition, our ability to grow and manage growth profitability, and retain our key employees; • changes in applicable laws or regulations; • risks relating to the uncertainty of our projected financial information; and • risks related to the organic and inorganic growth of our business and the timing of expected business milestones.
Biggest changeThe trading price of our common stock as well as warrants has been highly volatile since their initial listing on the NASDAQ and may continue to fluctuate widely in response to a variety of factors, including the following: • actual or anticipated fluctuations in our financial condition and results of operations; • the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; • failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; • changes in financial markets or macroeconomic conditions, including, for example, due to the effects of recession or slow economic growth in the United States and abroad, high inflation and interest rates, bank failures, fuel prices, international currency fluctuations, corruption, political instability, acts of war, including the conflicts in Europe and the Middle East, and acts of terrorism; • changes in market valuations of similar companies; • the impact of a pandemic (such as COVID-19 or variants thereof), epidemic or a similar future outbreak of disease or public health concern on our business; • competition in our industry, our ability to grow and manage growth profitability, and retain our key employees; • lawsuits threatened or filed against us; • anticipated or actual changes in laws, or regulations or government policies applicable to our business; • increases in compliance or enforcement inquiries and government inquiries or investigations (such as the ongoing SEC and FTC matters); • risks related to the organic and inorganic growth of our business and the timing of expected business milestones; • short sales, hedging, and other derivative transactions involving our common stock; and • the other factors described in this "Risk Factors" section of this Annual Report on Form 10-K.
In some 16 Table of Contents cases, sales have occurred in a quarter subsequent to when anticipated, or have not occurred at all, which can significantly impact our quarterly financial results and make it more difficult to meet market expectations.
In some cases, sales have occurred in a 16 Table of Contents quarter subsequent to when anticipated, or have not occurred at all, which can significantly impact our quarterly financial results and make it more difficult to meet market expectations.
These factors may have a meaningful negative impact on future revenues and operating results. While our immediate focus is on the United States market, our long-term success in part depends on our ability to acquire new customers outside the United States. The United States has significantly more privately owned firearms than any other country.
These factors may have a meaningful negative impact on our future revenues and operating results. While our immediate focus is on the United States market, our long-term success in part depends on our ability to acquire new customers outside the United States. The United States has significantly more privately owned firearms than any other country.
Furthermore, the continued weakness and uncertainty in worldwide credit markets, including the sovereign debt situation in certain countries in the European Union, or EU, may adversely impact the ability of our customers to adequately fund their expected capital expenditures, which could lead to delays or cancellations of planned purchases of our products.
Furthermore, the continued weakness and uncertainty in worldwide credit markets, including the sovereign debt situation in certain countries in the European Union ("the "EU") may adversely impact the ability of our customers to adequately fund their expected capital expenditures, which could lead to delays or cancellations of planned purchases of our products.
At this time, we cannot predict the success of such efforts or the outcome of our assessment of the remediation efforts. We can give no assurance that our efforts will remediate these material weaknesses in our internal control over financial reporting, or that additional material weaknesses will not be identified in the future.
At this time, we cannot predict the success of our remediation efforts or the outcome of our assessment of such efforts. We can give no assurance that our efforts will remediate these material weaknesses in our internal control over financial reporting, or that additional material weaknesses will not be identified in the future.
The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost 40 Table of Contents limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error and the risk of fraud.
The effectiveness of our internal control over financial reporting is subject to various 40 Table of Contents inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error and the risk of fraud.
Failure to comply with applicable anti-corruption legislation, export controls, economic sanctions and other governmental laws and regulations could result in fines, criminal penalties and materially adversely affect our business, financial condition and results of operations.
Failure to comply with applicable anti-corruption legislation, export controls, economic sanctions and other governmental laws and regulations could result in fines and criminal penalties and materially adversely affect our business, financial condition, and results of operations.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us. We do not have any control over these analysts.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us. We do not have any control over these analysts reports.
Acquisitions also increase the risk of unforeseen legal liability, including for potential shareholder suits or potential violations of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses that are not discovered by due diligence during the acquisition process or new regulatory restrictions at the federal, state, or local levels.
Acquisitions also increase the risk of unforeseen legal liability, including potential shareholder suits or potential violations of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses that are not discovered by due diligence during the acquisition process or new regulatory restrictions at the federal, state, or local levels.
If we are unable to remediate the material weaknesses, our ability to record, process and report financial information accurately, and to prepare the consolidated financial statements within the time periods specified by the rules and regulations of the SEC, could be adversely affected which, in turn, may adversely affect our reputation and business and the trading price of our common stock.
If we are unable to remediate the material weaknesses, our ability to record, process, and report financial information accurately, and to prepare the consolidated financial statements within the time periods specified by the rules and regulations of the SEC, could continue to be adversely affected which, in turn, may adversely affect our reputation and business and the trading price of our common stock.
Further, due to concerns about data security and integrity, a growing number of legislative and regulatory bodies have adopted breach notification and other requirements in the event that information subject to such laws is accessed by unauthorized persons and additional regulations regarding the use, access, accuracy and security of such data are possible.
Due to concerns about data security and integrity, a growing number of legislative and regulatory bodies have adopted breach notification and other requirements in the event that information subject to such laws is accessed by unauthorized persons and additional regulations regarding the use, access, accuracy, and security of such data are possible.
Our operating results may fluctuate for a variety of reasons, including our failure to close large volume opportunity customer sales. A meaningful portion of our revenue is generated by product sales to new customers and sales of additional products to existing customers. The timing of certain large volume opportunities can impact the Company’s results from quarter to quarter.
Our operating results may fluctuate for a variety of reasons, including our failure to close large volume opportunity customer sales. A meaningful portion of our revenue is generated by product sales to new customers and sales of additional products to existing customers. The timing of certain large volume opportunities can impact our results from quarter to quarter.
Many federal, state, local and foreign government bodies and agencies have adopted or are considering adopting laws, rules and regulations regarding the collection, processing, use, storage and disclosure of information, web browsing and geolocation data collection, data analytics, facial recognition, cyber security and breach response and notification procedures.
Many federal, state, local, and foreign government bodies and agencies have adopted or are considering adopting laws, rules and regulations regarding the collection, use, storage, disclosure and other processing of information, web browsing and geolocation data collection, data analytics, facial recognition, cyber security, and breach response and notification procedures.
As a result, the loss of a limited or sole source supplier could adversely affect our manufacturing capacity, and relationships with our customers, as well as our results of operations and financial condition. We depend on a third-party contract manufacturer for the production of our touchless security screening systems.
As a result, the loss of a limited or sole source supplier could adversely affect our manufacturing capacity, and relationships with our customers, as well as our results of operations and financial condition. We depend on our primary third-party contract manufacturer for the production of our touchless security screening systems.
Accordingly, increasing sales of our products to government entities may be more challenging than selling to commercial organizations, especially given extensive certification, clearance and security requirements. Government agencies may have statutory, contractual or other legal rights to terminate contracts with us or reseller partners.
Accordingly, increasing sales of our products to government entities may be more challenging than selling to commercial organizations, especially given extensive certification, compliance, clearance, and security requirements. Government agencies may have statutory, contractual, or other legal rights to terminate contracts with us or reseller partners.
For example, in 2021 we established a new wholly owned subsidiary of Evolv Technologies Holdings, Inc., Give Evolv LLC, a Delaware limited liability company, to (1) promote our core mission in locations that might not otherwise be able to afford our weapons detection security screening systems and related products and services, 36 Table of Contents (2) make public venues and institutions safer for all patrons, students, visitors, and other attendees, and (3) carry out charitable efforts consistent with the foregoing mission, for which historical tax data does not exist.
For example, in 2021 we established a new wholly owned subsidiary of Evolv Technologies Holdings, Inc., Give Evolv LLC, a Delaware limited liability company, to (1) promote our core mission in locations that might not otherwise be able to afford our weapons detection security screening systems and related products and services, 37 Table of Contents (2) make public venues and institutions safer for all patrons, students, visitors, and other attendees, and (3) carry out charitable efforts consistent with the foregoing mission, for which historical tax data does not exist.
A reduction in the threat landscape could increase our sales cycles and harm our business, results of operations and financial condition. If we are unable to compete effectively with new entrants and other potential competitors, our sales and profitability could be adversely affected.
A reduction in the security threat landscape could increase our sales cycles and harm our business, results of operations, and financial condition. If we are unable to compete effectively with new entrants and other potential competitors, our sales and profitability could be adversely affected.
Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant costs and harm our business and operating results. Third parties may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us.
Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant costs and harm to our business and operating results. Third parties may in the future assert claims of infringement, misappropriation, or other violations of intellectual property rights against us.
Any product liability claim brought against it, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.
Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.
Additionally, these material weaknesses could result in a misstatement of substantially all of our accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. • In addition to the foregoing, we did not design and maintain effective controls over information technology (“IT”) general controls for information systems that are relevant to the preparation of our consolidated financial statements, specifically, with respect to: (i) program change management controls for financial systems to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored, and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.
Additionally, these material weaknesses could result in a misstatement of substantially all of 39 Table of Contents our accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. • In addition to the foregoing, we did not design and maintain effective controls over information technology (“IT”) general controls for information systems that are relevant to the preparation of our consolidated financial statements, specifically, with respect to: (i) program change management controls for financial systems to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized, and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored, and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.
An adverse outcome of a dispute may require us to: • pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights • make substantial payments for legal fees, settlement payments or other costs or damages; • cease selling, making, licensing or using products that are alleged to infringe or misappropriate the intellectual property of others; • expend additional development resources to attempt to redesign our products or otherwise develop non-infringing technology, which may not be successful; • enter into potentially unfavorable royalty or license agreements to obtain the right to use necessary technologies or intellectual property rights; • take legal action or initiate administrative proceedings to challenge the validity and scope of the third-party rights or to defend against any allegations of infringement; and • indemnify our partners and other third parties.
An adverse outcome of a dispute may require us to: • pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights; • make substantial payments for legal fees, settlement payments or other costs or damages; • cease selling, making, licensing, or using products that are alleged to infringe or misappropriate the intellectual property of others; • expend additional development resources to attempt to redesign our products or otherwise develop non-infringing technology, which may not be successful; • enter into potentially unfavorable royalty or license agreements to obtain the right to use necessary technologies or intellectual property rights; 30 Table of Contents • take legal action or initiate administrative proceedings to challenge the validity and scope of the third-party rights or to defend against any allegations of infringement; and • indemnify our partners and other third parties.
The FCPA prohibits us or any third party acting on our behalf from promising, authorizing, making, offering, or providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage.
The FCPA prohibits us or any third party acting on our behalf from corruptly promising, authorizing, making, offering, or providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage.
We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, without limitation: • unanticipated costs or liabilities associated with the acquisition; • incurrence of acquisition-related costs, which would be recognized as a current period expense; • inability to generate sufficient revenue to offset acquisition or investment costs; • inability to maintain relationships with customers and partners of the acquired business; • difficulty of incorporating acquired technology and rights into our platform and of maintaining quality and security standards consistent with our brand; • delays in customer purchases due to uncertainty related to any acquisition; • the potential loss of key employees; • use of resources that are needed in other parts of our business and diversion of management and employee resources; • inability to recognize acquired deferred revenue in accordance with our revenue recognition policies; and • use of substantial portions of our available cash and equity or the incurrence of debt to consummate the acquisition.
We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including, without limitation: • unanticipated costs or liabilities associated with the acquisition; • incurrence of acquisition-related costs, which would be recognized as a current period expense; • inability to generate sufficient revenue to offset acquisition or investment costs; 28 Table of Contents • inability to maintain relationships with customers and partners of the acquired business; • difficulty of incorporating acquired technology and rights into our platform and of maintaining quality and security standards consistent with our brand; • delays in customer purchases due to uncertainty related to any acquisition; • the potential loss of key employees; • use of resources that are needed in other parts of our business and diversion of management and employee resources; • inability to recognize acquired deferred revenue in accordance with our revenue recognition policies; and • use of substantial portions of our available cash and equity or the incurrence of debt to consummate the acquisition.
These laws, rules and regulations address a range of issues including data privacy and cyber security, breach notification and restrictions or technological requirements regarding the collection, processing, use, storage, protection, disclosure, retention or transfer of data.
These laws, rules, and regulations address a range of issues including data privacy and cyber security, breach notification and restrictions or technological requirements regarding the collection, use, storage, protection, disclosure, retention, transfer, or other processing of data.
If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (including local laws) or export controls and economic and trade sanctions laws and regulations, we may be subject to criminal and civil penalties and other remedial measures, which could harm our business, financial condition, results of operations, cash flows and prospects.
If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (including local laws) or export controls and economic and trade sanction laws and regulations, we may be subject to criminal and civil penalties and other remedial measures, which could harm our business, financial condition, results of operations, cash flows, and prospects.
The GDPR imposes comprehensive data privacy compliance obligations in relation to our collection, processing, sharing, disclosure, transfer and other use of data relating to an identifiable living individual or “personal data”, including a principal of accountability and the obligation to demonstrate compliance through policies, procedures, training, and audit.
The GDPR imposes comprehensive data privacy compliance obligations in relation to our collection, processing, sharing, disclosure, transfer, and other use of data relating to an identifiable living individual or “personal data,” including a principal of accountability and the obligation to demonstrate compliance through policies, procedures, training, and audit.
Our revenue depends significantly on general economic conditions and the level of concern regarding physical security and the public’s willingness to attend live events or otherwise gather in numbers. Economic weakness, customer financial difficulties and constrained spending on security measures may result in decreased revenue and earnings.
Our revenue depends significantly on general economic conditions and the level of concern regarding physical security, which impacts the public’s willingness to attend live events or otherwise gather in numbers. Economic weakness, customer financial difficulties and constrained spending on security measures may result in decreased revenue and earnings.
Under this arrangement, we have granted a license of our intellectual property to Columbia Tech, who will contract directly with certain of our resellers to fulfill the sales demand where the end-user customer requires the contract to be in form of a hardware purchase, instead of leasing our hardware.
Under this arrangement, we have granted a license of our intellectual property to Columbia Tech, who contracts directly with certain of our resellers to fulfill the sales demand where the end-user customer requires the contract to be in form of a hardware purchase, instead of leasing our hardware.
In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control, but that would not be material to the consolidated financial statements for the year ended December 31, 2022.
In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control, but that would not be material to the consolidated financial statements for the year ended December 31, 2023.
Although we are seeking to expand and diversify our contract manufacturer relationships, our current reliance on one contract manufacturing involves several risks, including: • unexpected increases in manufacturing and repair costs; • inability to control the quality and reliability of finished products; • inability to control delivery schedules; • potential liability for expenses incurred by the third-party contract manufacturer in reliance on our forecasts that later prove to be inaccurate; • potential lack of adequate capacity to manufacture all of part of the products we require; • the occurrence of unforeseen force majeure events; and • potential labor unrest or unavailability affecting the ability of the third-party manufacturers to produce our products.
Although we are seeking to expand and diversify our contract manufacturer relationships, our current reliance on one contract manufacturer involves several risks, including: • unexpected increases in manufacturing and repair costs; • inability to control the quality and reliability of finished systems ; • inability to control delivery schedules; • potential liability for expenses incurred by the third-party contract manufacturer in reliance on our forecasts that later prove to be inaccurate; • potential lack of adequate capacity to manufacture all components or parts of the products we require; • potential labor unrest or unavailability affecting the ability of the third-party manufacturers to produce our systems; and • the occurrence of unforeseen force majeure events affecting the third-party manufacturer.
Any failure or perceived failure by us to comply with our privacy policies, privacy-related obligations to customers or other 35 Table of Contents third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized access to or unintended release of personally identifiable information or other customer data, may result in governmental enforcement actions, litigation, or public statements against us by consumer advocacy groups or others.
Any failure or perceived failure by us to comply with our privacy policies, privacy-related obligations to customers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized access to or unintended release of personally identifiable information or other customer data, may result in governmental enforcement actions, litigation, or public statements against us by consumer advocacy groups or others.
The successful assertion of one or more large claims against us that exceed available insurance coverage, denial of coverage as to any specific claim, or any change or cessation in our insurance policies and coverages, including premium increases or the imposition of large deductible requirements, could have a material adverse effect on our business, results of operations, and financial condition.
The successful assertion of one or more large claims against us that exceed available insurance coverage, denial of coverage as to any specific claim, or any change or cessation in our insurance policies and coverages, including premium increases or the imposition of large 33 Table of Contents deductible requirements, could have a material adverse effect on our business, results of operations, and financial condition.
There are also laws and regulations governing the collection and use of biometric information, such as fingerprints and face prints. For example, Illinois Biometric Information Privacy Act (“BIPA”) applies to the collection and use of “biometric identifiers” and “biometric information” which include finger and face prints.
There are also laws and regulations governing the collection and use of biometric information, such as fingerprints and face prints. For example, the Illinois' Biometric Information Privacy Act (“BIPA”) applies to the collection and use of “biometric identifiers” and “biometric information” which include finger and face prints.
We have not determined if we have experienced Section 382 ownership changes as of December 31, 2022 and if a portion of our net operating loss and tax credit carryforwards is subject to an annual limitation under Section 382.
We have not determined if we have experienced Section 382 ownership changes as of December 31, 2023 and if a portion of our net operating loss and tax credit carryforwards is subject to an annual limitation under Section 382.
In Europe and the UK, we are subject to the European Union General Data Protection Regulation (the “EU GDPR”) and to the United Kingdom General Data Protection Regulation and Data Protection Act 2018 (collectively, the “UK GDPR”) (the EU GDPR and UK GDPR together referred to as the “GDPR”).
For example, in Europe and the United Kingdom ("UK"), we are subject to the European Union General Data Protection Regulation (the “EU GDPR”) and to the United Kingdom General Data Protection Regulation and Data Protection Act 2018 (collectively, the “UK GDPR”) (the EU GDPR and UK GDPR together referred to as the “GDPR”).
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could harm our business.
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection, information security, and product marketing and our actual or perceived failure to comply with such obligations could harm our business.
Interruptions in our systems or the third-party systems on which we rely, whether due to system failures, computer viruses, physical or electronic break-ins, or other factors, could affect the security or availability of our products, network infrastructure, cloud infrastructure and website. 24 Table of Contents Problems with the reliability or security of our systems could harm our reputation.
Interruptions in our systems or the third-party systems on which we rely, whether due to system failures, computer viruses, physical or electronic break-ins, or other factors, could affect the security or availability of our products, network infrastructure, cloud infrastructure, and website. Problems with the reliability or security of our systems could harm our reputation.
If our acquisitions do not ultimately yield expected returns, we may be required to take charges to our operating results based on our impairment assessment process, which could harm our results of operations. 28 Table of Contents Our intellectual property rights are valuable and any inability to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
If our acquisitions do not ultimately yield expected returns, we may be required to take charges to our operating results based on our impairment assessment process, which could harm our results of operations. Our intellectual property rights are valuable and any inability to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
Additional factors that impact our ability to acquire new customers include the perceived need for AI-based weapons detection for security solutions, the size of our prospective customers’ security budgets, the availability of government funding, the utility and efficacy of our existing and new products, whether proven or perceived, and general economic conditions.
Additional factors that impact our ability to acquire new customers and retain existing customers include the perceived need for AI-based weapons detection for security solutions, the size of our prospective customers’ security budgets, the availability of government funding, the utility and efficacy of our existing and new products or product enhancements, whether proven or perceived, and general economic conditions.
This material weakness contributed to the following additional material weaknesses: • We did not design and maintain effective controls over the period-end financial reporting process to achieve complete, accurate and timely financial accounting, reporting and disclosures, including the classification of various accounts in the consolidated financial statements and the presentation and disclosure of items in the consolidated statement of cash flows. • We did not design and maintain processes and controls to analyze, account for and disclose non-routine, unusual or complex transactions.
These material weaknesses contributed to the following additional material weaknesses: • We did not design and maintain effective controls over the period-end financial reporting process to achieve complete, accurate, and timely financial accounting, reporting and disclosures, including the classification of various accounts in the financial statements and the presentation and disclosure of items in the consolidated statements of cash flows. • We did not design and maintain processes and controls to analyze, account for and disclose non-routine, unusual or complex transactions.
Any failure by our customers to appropriately implement our products or any failure of our products to effectively integrate and operate within our customers’ operating environments could result in customer dissatisfaction, impact the 25 Table of Contents perceived reliability of our products, result in negative press coverage, negatively affect our reputation and harm our financial results.
Any failure by our customers to appropriately implement our products or any failure of our products to effectively integrate and operate within our customers’ operating environments could result in customer dissatisfaction, impact the perceived reliability of our products, result in negative press coverage, negatively affect our reputation, and harm our financial results.
We are likely to recognize the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than it expects, which could adversely affect our operating results.
We are likely to recognize the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect, which could adversely affect our operating results.
While we minimize any physical bias in our product’s identification of threats because the product’s AI does not process or analyze individuals physical characteristics, we may not be able to identify such issues in advance, or if identified, we may not be able to identify mechanisms for effectively mitigating such issues.
While we minimize any physical bias in our product’s identification of threats because the product’s AI does not process or analyze an individual's physical characteristics, we may not be able to identify such issues in advance, or if identified, we may not be able to identify mechanisms for effectively mitigating such issues.
We are also subject to EU and UK and rules with respect to cross-border transfers of personal data out of the EEA and the UK, respectively. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA and the UK to the United States.
We are also subject to EU and UK rules with respect to cross-border transfers of personal data out of the European Economic Area (the "EEA") and the UK, respectively. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA and the UK to the United States.
For example, while we expect our third-party contract manufacturers to be responsible for penalties assessed on us because of excessive failures of the products or warranty claims, there is no assurance that we will be able to collect 19 Table of Contents such reimbursements from these manufacturers, which causes it to take on additional risk for potential failures of our products.
For example, while we expect our third-party contract manufacturers to be responsible for penalties assessed on us because of excessive failures of the products or warranty claims, there is no assurance that we will be able to collect such reimbursements from these manufacturers, which causes us to take on additional risk for potential failures of our products.
We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in a material misstatement of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
We may identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in a material misstatement of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
As a result, our margins, market share and results of operations could be significantly harmed. Our use of “open source” software could subject our proprietary software to general release, negatively affect our ability to offer our products and subject us to possible litigation.
As a result, our margins, market share and results of operations could be significantly harmed. 27 Table of Contents Our use of “open source” software could subject our proprietary software to general release, negatively affect our ability to offer our products and subject us to possible litigation.
If security threats were to decline, or enterprises or governments perceived that the general level of security threats has declined, our ability to attract new customers and expand sales of our products to existing customers 31 Table of Contents could be materially and adversely affected.
If security threats were to decline, or enterprises or governments perceived that the general level of security threats has declined, our ability to attract new customers and expand sales of our products to existing customers could be materially and adversely affected.
Organizations 20 Table of Contents that use these security products may be satisfied with them or slow to adapt to technical advances and, as a result, these organizations may not adopt our solutions in addition to, or in lieu of, security products they currently use.
Organizations that use these security products may be satisfied with them or slow to adapt to technical advances and, as a result, these organizations may not adopt our solutions in addition to, or in lieu of, security products they currently use.
In addition, the training and integration of a large number of sales and marketing personnel in a short time requires the allocation of significant internal resources. We invest significant time and resources in training new sales force personnel to understand our products, platform and our growth strategy.
In addition, the training and integration of a large number of sales and marketing personnel in a short time requires the allocation of significant internal resources. We invest significant time and resources in training new sales force 25 Table of Contents personnel to understand our products, platform, and our growth strategy.
As a result, we must continually modify and improve our products in response to changes in our customers’ infrastructures. 22 Table of Contents We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop product enhancements or new products to meet such needs or opportunities in a timely manner, if at all.
As a result, we must continually modify and improve our products in response to changes in our customers’ infrastructures. We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop product enhancements or new products to meet such needs or opportunities in a timely manner, if at all.
General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses and impairment of investments.
General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and 24 Table of Contents associated expenses and impairment of investments.
We also face risks from financial difficulties or other uncertainties experienced by our suppliers, channel partners or other third parties on which we rely.
We also face risks from financial difficulties or other uncertainties experienced by our suppliers, reseller partners, or other third parties on which we rely.
Expectations around companies’ management of ESG matters continues to evolve rapidly, in many instances due to factors that are out of our control.
Expectations around companies’ management of ESG matters continue to evolve rapidly, in many instances due to factors that are out of our control.
We believe our future success will depend in large part on the growth, if any, in the market for AI-based weapons detection for security screening solutions. This market is new and evolving, and as such, it is difficult to predict important market trends, including our potential growth, if any.
We believe our future success will depend in large part on the growth, if any, in the market for AI-based weapons detection for security screening solutions. This market is new and evolving, and as such, it is difficult to predict important 20 Table of Contents market trends, including our potential growth, if any.
They may also assert such claims against our customers or reseller partners, whom we typically 29 Table of Contents indemnify against claims that our products infringe, misappropriate, or otherwise violate the intellectual property rights of third parties.
They may also assert such claims against our customers or reseller partners, whom we typically indemnify against claims that our products infringe, misappropriate, or otherwise violate the intellectual property rights of third parties.
The number of our sales and marketing personnel increased from 91 as of December 31, 2021 to 97 as of December 31, 2022. We expect to continue to expand our sales and marketing personnel and face a number of challenges in achieving our hiring and integration goals. There is intense competition for individuals with sales training and experience.
The number of our sales and marketing personnel increased from 97 as of December 31, 2022 to 139 as of December 31, 2023. We expect to continue to expand our sales and marketing personnel and face a number of challenges in achieving our hiring and integration goals. There is intense competition for individuals with sales training and experience.
If we cannot maintain our company culture as it grows, we could lose the innovation, teamwork, passion and focus on execution that we believe contributes to our success and our business may be harmed.
If we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion, and focus on execution that we believe contributes to our success and our business may be harmed.
Additionally, in unusual circumstances, if it were to need to rely on our sales engineers to provide post-sales support while we are growing our service organization, our sales productivity may be negatively impacted. Accordingly, any failure by us to provide satisfactory maintenance and technical support services could have a material and adverse effect on our business and results of operations.
Additionally, in unusual circumstances, if we needed to rely on our sales engineers to provide post-sales support while growing our service organization, our sales productivity may be negatively impacted. Accordingly, any failure by us to provide satisfactory maintenance and technical support services could have a material and adverse effect on our business and results of operations.
Any actual or alleged security breaches or alleged violations of federal or state laws or regulations relating to privacy and data security could result in mandated user notifications, litigation, government investigations, regulatory action, significant fines, and expenditures; divert management’s attention from operations; deterring people from using our platform; damage our brand and reputation; and a materially adversely affect our business, results of operations, and financial condition.
In addition to potential noncompliance, any actual or alleged security breaches or alleged violations of federal or state laws or regulations relating to privacy and data security could result in mandated user notifications, litigation (including class actions), government investigations, regulatory action, significant fines, and expenditures; divert management’s attention from operations; deterring people from using our platform; damage our brand and reputation; and a materially adversely affect our business, results of operations, and financial condition.
Furthermore, existing laws and regulations are constantly evolving, and new laws and regulations that apply to our business are being introduced at every level of government in the United States, as well as internationally.
Furthermore, new laws and regulations that apply to our business are being introduced at every level of government in the United States, as well as internationally.
We incorporate technology and components from third parties into our products. We cannot be certain that our suppliers and licensors are not infringing the intellectual property rights of third parties or that the suppliers and licensors have sufficient rights to the technology in all jurisdictions in which it may sell our products.
We cannot be certain that our suppliers and licensors are not infringing the intellectual property rights of third parties or that the suppliers and licensors have sufficient rights to the technology in all jurisdictions in which it may sell our products.
As of December 31, 2022 and 2021, we had gross federal net operating losses of $20.1 million and $20.1 million that are subject to expire at various dates beginning in 2033, and federal net operating losses of $124.3 million and $79.7 million, which have no expiration date and can be used to offset up to 80% of future taxable income in any one tax period, respectively.
As of December 31, 2023 and 2022, we had gross federal net operating losses of $20.1 million and $20.1 million that are subject to expire at various dates beginning in 2033, and federal net operating losses of $142.4 million and $124.3 million, which have no expiration date and can be used to offset up to 80% of future taxable income in any one tax period, respectively.
A portion of our revenue is generated by sales to government entities and such sales are subject to a number of challenges and risks. Approx imately 4% and 1% of our revenue was generated by sales to government entities during the years ended December 31, 2022 and December 31, 2021, respectively.
A portion of our revenue is generated by sales to government entities and such sales are subject to a number of challenges and risks. Approx imately 4% of our revenue was generated by sales to government entities during each of the years ended December 31, 2023 and December 31, 2022, respectively.
If we are unable to obtain adequate financing or financing on terms satisfactory to it when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected. We face risks related to our indebtedness.
If we are unable to obtain adequate financing or financing on terms satisfactory to it when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected.
The evolution of technology systems introduces ever more complex security risks that are difficult to predict and defend against. An increasing number of companies, including those with significant online operations, have recently disclosed breaches of their security, some of which involved sophisticated tactics and techniques allegedly attributable to criminal enterprises or nation-state actors.
Our reliance on ever-evolving technology systems introduces ever more complex security risks that are difficult to predict and defend against. An increasing number of companies, including those with significant online operations, have recently disclosed breaches of their security, some of which involved sophisticated tactics and techniques allegedly attributable to criminal enterprises or nation-state actors.
To the extent that we are unsuccessful in hiring, training and retaining adequate support resources, our ability to provide adequate and timely support to our customers may be negatively impacted, and our customers’ satisfaction with our products may be adversely affected.
To the extent that we are unsuccessful in hiring, training, and retaining adequate support resources, our ability to provide adequate and timely support to our customers may be negatively impacted, and our 26 Table of Contents customers’ satisfaction with our products may be adversely affected.
In addition, because we currently use third-party contract manufacturers to produce our touchless security screening systems and certain key components, increases in the prices charged may have an adverse effect on our results of operations, as we may be unable to find a contract manufacturer who can supply us at a lower price.
In addition, because we curren tly use third-party contract manufacturers to produce our touchless security screening systems and certain key components, increases in the prices charged may have a n adverse effect on our results of operations, as we may be unable to find contract manufacturers who can supply us at a lower price.
ITEM 1A. RISK FACTORS Our business involves significant risks and uncertainties, some of which are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face.
ITEM 1A. RISK FACTORS Our business involves significant risks and uncertainties, some of which are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K.
If we are unable to develop and maintain effective sales incentive programs for our third-party reseller partners, we may not be able to incentivize these partners to sell our products to customers and, in particular, to high profile public and private venues and institutions.
In addition, our reseller partners may be unsuccessful in marketing, selling, and supporting our products. If we are unable to develop and maintain effective sales incentive programs for our third-party reseller partners, we may not be able to incentivize these partners to sell our products to customers and, in particular, to high profile public and private venues and institutions.
Further, in the course of providing our solutions to government 23 Table of Contents entities, our employees and those of our reseller partners may be exposed to sensitive government information.
Further, in the course of providing our solutions to government entities, our employees and those of our reseller partners may be exposed to sensitive government information.
We also had gross state net operating loss carryforwards of $103.8 million and $75.8 million for the years ended December 31, 2022 and 2021, respectively, which may be available to offset future state taxable income and which begin to expire in 2033.
We also had gross state net operating loss carryforwards of $142.4 million and $103.8 million for the years ended December 31, 2023 and 2022, respectively, which may be available to offset future state taxable income and which begin to expire in 2033.
In addition, a significant portion of the purchase price of companies it acquires may be allocated to goodwill and other intangible assets, which must be assessed for impairment at least annually.
In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other intangible assets, which must be assessed for impairment at least annually.
In the United States, there are numerous federal and state data privacy and security laws, rules, and regulations governing the collection, use, disclosure, retention, security, transfer, storage, and other processing of personal data, including federal and state data privacy laws, data breach notification laws, and consumer protection laws.
For example, in the United States, there are numerous federal and state data privacy and security laws, rules, and regulations governing the collection, use, disclosure, retention, security, transfer, storage, and other processing of personal information, including federal and state data privacy laws, data breach notification laws, and consumer protection laws. The U.S.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Revenue Recognition.” In addition to the sales cycle-related fluctuations noted above, our financial results, including our billings and deferred revenue, will continue to vary as a result of numerous factors, many of which are outside of our control and may be difficult to predict, including: • our ability to attract and retain new customers; • our ability to sell additional Evolv Express systems to existing customers; • unforeseen changes or delays in our supply chain or third-party manufacturing partners; • our ability to expand into adjacent and complementary markets; • changes in customer or reseller partner requirements or market needs; • changes in the growth rate of the next-generation touchless security screening market; • the timing and success of new product introductions by us or our competitors, or any other change in the competitive landscape of the next-generation touchless security screening market, including consolidation among our customers or competitors or significant price competition; • a disruption in, or termination of, any of our relationships with reseller partners; • our ability to successfully expand our business globally; • reductions in customer retention rates, especially at subscription term expiration; • changes in our pricing policies or those of our competitors; • changes in financial markets or macroeconomic conditions, including, for example, due to the effects of the ongoing recession or slow economic growth in the United States and abroad, rising inflation and interest rates, fuel prices, international currency fluctuations, corruption, political instability, acts of war, including the conflict involving Russia and Ukraine, and acts of terrorism; • general economic conditions in our markets, including recessionary pressures; • future accounting pronouncements or changes in our accounting policies or practices; • the amount and timing of our operating costs, including cost of goods sold; • the impact of the COVID-19 pandemic and the emergence of new variants or a future outbreak of disease or similar public health concern on our existing and new customers, partners, employees, and supply chain; and • increases or decreases in our revenue and expenses caused by fluctuations in foreign currency exchange rates.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Revenue Recognition.” In addition to the sales cycle-related fluctuations noted above, our financial results, including our billings and deferred revenue, may continue to vary from period to period as a result of numerous factors, many of which are outside of our control and may be difficult to predict, including: • our ability to attract and retain new customers; • our ability to sell additional Evolv Express systems to existing customers; • unforeseen changes or delays in our supply chain or third-party manufacturing partners; • our ability to expand into adjacent and complementary markets; • changes in customer or reseller partner requirements or market needs; • changes in the growth rate of the next-generation touchless security screening market; • the timing and success of new product introductions by us or our competitors, or any other change in the competitive landscape of the next-generation touchless security screening market, including consolidation among our customers or competitors or significant price competition; • a disruption in, or termination of, any of our relationships with reseller partners; • our ability to successfully expand our business globally; • reductions in customer retention rates, especially at subscription term expiration; • changes in our pricing policies or those of our competitors; • changes in financial markets or macroeconomic conditions, including, for example, due to the effects of recessionary trends, slow economic growth, or political elections in the United States and abroad, inflation and high interest rates, fuel prices, international currency fluctuations, corruption, political instability, continuing social concerns and divisions in the United States and abroad, acts of war, including the conflicts in Europe and the Middle East , and acts of terrorism, both domestic and international ; • future accounting pronouncements or changes in our accounting policies or practices; • the amount and timing of our operating costs, including cost of goods sold; • the impact of any pandemic, epidemic, or future outbreak of disease or similar public health concern, such as COVID-19 (including the emergence of any new variants of COVID-19) on our existing and new customers, partners, employees, and supply chain; and • increases or decreases in our revenue and expenses caused by fluctuations in foreign currency exchange rates.
If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
If one or more of these analysts cease 45 Table of Contents coverage of our company or fail to regularly publish reports about us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand and reputation, our business and operating results may be adversely affected.
To the extent that these activities yield increased revenue, such increase in revenue may not offset the corresponding increase in expenses we incur. If we do not successfully maintain and enhance our brand and reputation, our business and operating results may be adversely affected.
Columbia Tech will pay us a hardware license fee for each system sold under this agreement. In these instances, we will still contract directly with the reseller to provide a multi-year security-as-a-service subscription to the end-users. Columbia Tech is an independent entity subject to its own unique operational and financial risks which are out of our control.
Columbia Tech pays us a hardware license fee for each Evolv Express system it manufactures and sells under this agreement. In these instances, we still contract directly with the reseller to provide a multi-year security-as-a-service subscription to the end-users. Columbia Tech is an independent entity subject to its own unique operational and financial risks which are out of our control.
We also may be contractually required to notify consumers or other counterparties of a 34 Table of Contents security breach.
We also may be contractually required to notify consumers or other counterparties of a security breach.
The CPRA restricts use of certain categories of sensitive personal information that we handle; further restricts the use of cross-context behavioral advertising techniques on which our products may rely in the future; establishes restrictions on the retention of personal information; expands the types of data breaches subject to the private right of action; and establishes the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines.
Additionally, the CPRA, which substantially amends the CCPA, went into effect on January 1, 2023 and restricts use of certain categories of sensitive personal information that we handle; further restricts the use of cross-context behavioral advertising techniques on which our products may rely in the future; establishes restrictions on the retention of personal information; expands the types of data breaches subject to the private right of action; and establishes the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines.

… 228 more changes not shown on this page.

Item 2. Properties

Properties — owned and leased real estate

2 edited+0 added−0 removed0 unchanged
Biggest changeITEM 2. PROPERTIES Our corporate headquarters is located in an approximately 32,200 square foot facility that we sublease in Waltham, Massachusetts. Our sublease of this facility expires on October 31, 2024. Our executive offices are located at 500 Totten Pond Road, 4th Floor, Waltham, MA 02451 under the foregoing sublease.
Biggest changeITEM 2. PROPERTIES Our corporate headquarters is located in an approximately 49,100 square foot facility that we sublease in Waltham, Massachusetts. Our sublease of this facility expires on October 31, 2024, subject to an option to extend through October 31, 2027 with written notice.
We believe that our office space is adequate for our current needs and, should we need additional space, we believe we will be able to obtain additional space on commercially reasonable terms.
Our executive offices are located at 500 Totten Pond Road, 4th Floor, Waltham, MA 02451 under the foregoing sublease. We believe that our office space is adequate for our current needs and, should we need additional space, we believe we will be able to obtain additional space on commercially reasonable terms.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+5 added−0 removed0 unchanged
Biggest changeITEM 3. LEGAL PROCEEDINGS We are from time to time subject to various claims, lawsuits, and other legal and administrative proceedings arising in the ordinary course of business. We are not currently engaged in any litigation of a material nature or criminal proceedings. See Note 20 to our consolidated financial statements for the year ended December 31, 2022.
Biggest changeITEM 3. LEGAL PROCEEDINGS We are from time to time subject to various claims, lawsuits, and other legal and administrative proceedings arising in the ordinary course of business. We are not currently engaged in any litigation of a material nature or criminal proceedings.
Added
From time to time, we receive government regulatory inquiries and requests for information relating to our marketing practices and our approach is to be cooperative and educate them about our company and products. For example, the FTC has requested information about certain aspects of our marketing practices.
Added
We are complying with the FTC's requests and have been cooperating with them to answer their questions and educate them about our mission. Furthermore, in February 2024, we received a subpoena from the SEC, Division of Enforcement, requesting that we produce certain documents and information, much of which is similar to the documents and information previously requested by the FTC.
Added
We are cooperating with the FTC and SEC with respect to the investigations, and there can be no assurance whether there will be further information requests or potential enforcement or litigation, which is necessarily uncertain as of the filing of this Form 10-K.
Added
See Part I, Item IA, "Risk Factors - We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection, information security, and product marketing and our actual or perceived failure to comply with such obligations could harm our business " for additional information.
Added
See also Note 19 (Commitments and Contingencies) to our consolidated financial statements for the year ended December 31, 2023 for additional information.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

1 edited+0 added−0 removed5 unchanged
Biggest changeHolders of Records As of March 23, 2023, there were 147,963,093 issued and outstanding shares of our common stock by approximately 95 stockholders of record.
Biggest changeHolders of Records As of February 28, 2024, there were 152,182,633 issued and outstanding shares of our common stock by approximately 60 stockholders of record.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

96 edited+41 added−77 removed43 unchanged
Biggest changeResults of Operations Comparison of the Years Ended December 31, 2022 and 2021 The following table summarizes our results of operations for the years ended December 31, 2022 and 2021 (in thousands): Year Ended December 31, 2022 2021 $ Change % Change Revenue: Product revenue $ 31,985 $ 13,631 $ 18,354 135 % Subscription revenue 17,569 7,803 9,766 125 Service revenue 5,641 1,959 3,682 188 Total revenue 55,195 23,393 31,802 136 Cost of revenue: Cost of product revenue 41,575 12,279 29,296 239 Cost of subscription revenue 7,469 4,501 2,968 66 Cost of service revenue 4,422 2,584 1,838 71 Total cost of revenue 53,466 19,364 34,102 176 Gross profit 1,729 4,029 (2,300) (57) Operating expenses: Research and development 18,771 11,458 7,313 64 Sales and marketing 46,639 26,099 20,540 79 General and administrative 37,719 19,869 17,850 90 Loss from impairment of property and equipment 1,161 1,869 (708) (38) Total operating expenses 104,290 59,295 44,995 76 Loss from operations (102,561) (55,266) (47,295) 86 Other income (expense), net: Interest expense (712) (6,068) 5,356 (88) Interest income 3,165 — 3,165 * Other expense, net (64) (617) 553 (90) Loss on extinguishment of debt — (12,685) 12,685 * Change in fair value of derivative liability — (1,745) 1,745 * Change in fair value of contingent earn-out liability 6,988 47,360 (40,372) (85) Change in fair value of contingently issuable common stock liability 1,872 6,406 (4,534) (71) Change in fair value of public warrant liability 4,906 12,606 (7,700) (61) Change in fair value of common stock warrant liability — (879) 879 * Total other income (expense), net 16,155 44,378 (28,223) (64) Net loss $ (86,406) $ (10,888) $ (75,518) 694 % 53 Table of Contents *N/A – Not meaningful Revenue, Cost of Revenue and Gross Profit Product Revenue Year Ended December 31, 2022 2021 $ Change % Change Product revenue $ 31,985 $ 13,631 $ 18,354 135 % Cost of product revenue $ 41,575 $ 12,279 $ 29,296 239 % Gross profit - Product revenue $ (9,590) $ 1,352 $ (10,942) (809) % Gross profit margin - Product revenue (30) % 10 % N/A (40) % The increases in product revenue and cost of product revenue are primarily due to the increase in product sales of Evolv Express units, which include the significant increase in the adoption of Evolv Express units by schools, healthcare facilities, hotels, casinos, and professional sports arenas.
Biggest changeThese reclassifications were made to align the presentation of professional services with the Company's internal reporting and analysis. 54 Table of Contents Results of Operations Comparison of the Years Ended December 31, 2023 and 2022 The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands): Year Ended December 31, 2023 2022 $ Change % Change Revenue: Product revenue $ 21,977 $ 31,985 $ (10,008) (31) % Subscription revenue 37,247 17,569 19,678 112 Service revenue 16,141 4,331 11,810 273 License fee and other revenue 5,053 1,310 3,743 286 Total revenue 80,418 55,195 25,223 46 Cost of revenue: Cost of product revenue 26,667 41,575 (14,908) (36) Cost of subscription revenue 14,991 7,469 7,522 101 Cost of service revenue 3,982 2,200 1,782 81 Cost of license fee and other revenue 949 2,222 (1,273) (57) Total cost of revenue 46,589 53,466 (6,877) (13) Gross profit 33,829 1,729 32,100 1,857 Operating expenses: Research and development 24,455 18,771 5,684 30 Sales and marketing 55,223 46,639 8,584 18 General and administrative 42,091 37,719 4,372 12 Loss from impairment of property and equipment 322 1,161 (839) (72) Total operating expenses 122,091 104,290 17,801 17 Loss from operations (88,262) (102,561) 14,299 14 Other income (expense), net: Interest expense (654) (712) 58 8 Interest income 6,227 3,165 3,062 97 Other expense, net (84) (64) (20) (31) Loss on extinguishment of debt (626) — (626) * Change in fair value of contingent earn-out liability (14,901) 6,988 (21,889) (313) Change in fair value of contingently issuable common stock liability (3,138) 1,872 (5,010) (268) Change in fair value of public warrant liability (4,765) 4,906 (9,671) (197) Total other income (expense), net (17,941) 16,155 (34,096) (211) Loss before income taxes (106,203) (86,406) (19,797) (23) % Provision for income taxes (51) — (51) * Net loss $ (106,254) $ (86,406) $ (19,848) (23) % *N/A – Not meaningful 55 Table of Contents Revenue, Cost of Revenue and Gross Profit We believe there are several key trends that are continuing to drive increased adoption of our solutions and growth in our sales, including (i) escalating gun violence, which has created stronger demand for security screening solutions for customers and prospects in our key vertical markets, (ii) customer acquisition activities which led to the addition of 280 new customers during the year ended December 31, 2023 and 295 new customers during the year ended December 31, 2022, compared to 84 new customer during the year ended December 31, 2021, (iii) the expansion of our existing customers' initial Evolv Express deployments to other venues and locations, and (iv) growing momentum with our reseller partners which helps us extend our reach in certain geographies or vertical markets.
Financing Activities During the year ended December 31, 2022, cash provided by financing activities was $20.5 million, consisting of $29.7 million of proceeds from long-term debt, net of issuance costs, and $0.8 million of proceeds from the exercise of stock options, offset by $10.0 million of debt repayments.
During the year ended December 31, 2022, cash provided by financing activities was $20.5 million, consisting of $29.7 million of proceeds from long-term debt, net of issuance costs, and $0.8 million of proceeds from the exercise of stock options, offset by $10.0 million of debt repayments.
Because the equipment lease, SaaS, and maintenance components of a subscription arrangement are recognized as revenue over the same time period and in the same pattern, the equipment lease and SaaS/maintenance performance obligations are classified as a single category of subscription revenue in our consolidated statements of operations and comprehensive loss.
Because the equipment lease, SaaS, and maintenance components of a subscription arrangement are recognized as revenue over the same time period and in the same pattern, the equipment lease and SaaS/maintenance performance obligations are classified as a single category of subscription revenue in our consolidated statements of operations and comprehensive loss.
Those 1,897,500 outstanding contingently issuable common shares are accounted for as a liability and subsequently remeasured at each reporting date with changes in fair value recorded as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.
The 1,897,500 outstanding contingently issuable common shares are accounted for as a liability and subsequently remeasured at each reporting date with changes in fair value recorded as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.
References to “NHIC” refer to the company prior to the consummation of the Merger and references to “Legacy Evolv” refer to Evolv Technologies, Inc. dba Evolv Technology, Inc. prior to the consummation of the Merger. Business Overview We are a global leader in AI-based weapons detection for security screening.
References to “NHIC” refer to the company prior to the consummation of the Merger and references to “Legacy Evolv” refer to Evolv Technologies, Inc. dba Evolv Technology, Inc. prior to the consummation of the Merger. Business Overview We are a leader in AI-based weapons detection for security screening.
Non-cash expenses for the year ended December 31, 2022 are primarily attributable to $22.5 million of stock-based compensation expense, $5.5 million of depreciation and amortization, $1.6 million of write-off of inventory, and $1.2 million of loss from impairment of property and equipment, offset by $13.8 million of an aggregate change in fair value of the earn-out liability, contingently issuable common stock warrant liability, and public warrant liability.
Non-cash expenses for the year ended December 31, 2022 were primarily attributable to $22.5 million of stock-based compensation expense, $5.5 million of depreciation and amortization, $1.6 million of write-off of inventory, and $1.2 million of loss from impairment of property and equipment, offset by $13.8 million of an aggregate change in fair value of the earn-out liability, contingently issuable common stock warrant liability, and public warrant liability.
Our gross profit and gross margin are, or may be, influenced by a number of factors, including: • Market conditions that may impact our pricing; • Product mix changes between established products and new products; • Mix between purchase subscription sales and pure subscription sales; • Our cost structure for manufacturing operations, including contract manufacturers, relative to volume, and our product support obligations; • Our ability to maintain our costs on the components that go into the manufacture of our product; and • Write-offs of inventory.
Our gross profit and gross margin are, or may be, influenced by a number of factors, including: • Market conditions that may impact our pricing; • Product mix changes between established products and new products; • Mix of sales between our pure subscription, purchase subscription, and distributor licensing sales models; • Our cost structure for manufacturing operations, including contract manufacturers, relative to volume, and our product support obligations; • Our ability to maintain our costs on the components that go into the manufacture of our products; and • Write-offs of inventory.
Continued Investment and Innovation We believe that we are a global leader in AI-based weapons detection for security screening, offering transformative technologies that enable higher throughput, a more frictionless visitor experience, and substantial cost savings through our product innovations.
Continued Investment and Innovation We are a leader in AI-based weapons detection for security screening, offering transformative technologies that enable higher throughput, a more frictionless visitor experience, and substantial cost savings through our product innovations.
We expect our general and administrative expenses will remain relatively consistent for the year ending December 31, 2023 compared to the year ended December 31, 2022 as we look to leverage previous investments made in people and processes.
We expect our general and administrative expenses will remain relatively consistent for the year ending December 31, 2024 compared to the year ended December 31, 2023 as we look to leverage previous investments made in people and processes.
In connection with the closing of the Merger, we assumed the Public Warrants to purchase shares of common stock, which were classified as a liability, as the Public Warrants do not meet the criteria to be indexed to our common stock.
Valuation of Public Warrant Liability In connection with the closing of the Merger, we assumed the Public Warrants to purchase shares of common stock, which were classified as a liability, as the Public Warrants do not meet the criteria to be indexed to our common stock.
Changes in operating assets and liabilities for the year ended December 31, 2022 are primarily related to the following: • $25.6 million increase in accounts receivable primarily due to higher sales and the timing of billings to customers; • $8.5 million increase in inventory primarily due to increased production of units to meet customer demand; • $3.7 million increase in commission assets due to a higher volume of sales; • $3.2 million increase in prepaid expense and other current assets primarily due to deposits paid to the Company's contract manufacturer; offset by • $26.9 million increase in deferred revenue due to a higher volume of sales; and • $7.7 million increase in accounts payable primarily due to amounts payable to the Company's contract manufacturer.
Changes in operating assets and liabilities for the year ended December 31, 2022 are primarily related to the following: • $26.9 million increase in deferred revenue due to a higher volume of sales; • $7.7 million increase in accounts payable primarily due to amounts payable to the Company's contract manufacturer; offset by • $25.6 million increase in accounts receivable primarily due to higher sales and the timing of billings to customers; 61 Table of Contents • $8.5 million increase in inventory primarily due to increased production of units to meet customer demand; • $3.7 million increase in commission assets due to a higher volume of sales; and • $3.2 million increase in prepaid expenses and other current assets primarily due to deposits paid to the Company's contract manufacturer.
Many of these locations, such as professional sports venues, educational institutions, and healthcare facilities, are moving toward a more frictionless security screening experience. We believe that we are well-positioned to take advantage of this opportunity due to our proprietary technologies and global distribution capabilities.
Many of these locations, such as professional sports venues, educational institutions, and healthcare facilities, are moving toward a more frictionless security screening experience. We are well-positioned to take advantage of this opportunity due to our proprietary technologies and distribution capabilities.
Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or 47 Table of Contents maintain profitability.
Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.
The interest rate applicable to the SVB Term Loans is the greater of (a) the Wall Street Journal Prime Rate plus 1.0% or (b) 7.25% per annum. Interest and principal under the SVB Credit Agreement are payable monthly.
The interest rate applicable to the SVB Term Loans was the greater of (a) the Wall Street Journal Prime Rate plus 1.0% or (b) 7.25% per annum. Interest and principal under the SVB Credit Agreement was payable monthly.
Subscription gross profit margin increased primarily as the result of our ability to leverage our fixed costs over a higher revenue base.
Subscription gross profit margin increased slightly as the result of our ability to leverage our fixed costs over a higher revenue base.
This not only enhances security at venues and facilities but also improves the visitor experience by making screening up to ten times faster than alternatives at up to 70% lower total cost. Our products have screened over 500 million visitors worldwide since our inception.
This not only enhances security at venues and facilities but also improves the visitor experience by making screening up to ten times faster than alternatives at up to 70% lower total cost. Our products have screened over one billion visitors worldwide since our inception.
Subscription Revenue Subscription revenue is comprised of revenue derived from leasing Express and Edge units to our customers. Lease terms are typically four years and customers generally pay either a quarterly or annual fixed payment for the lease, SaaS, and maintenance elements over the contractual lease term.
Subscription Revenue Subscription revenue consists of revenue derived from leasing Evolv Express and Evolv Edge units to our customers. Lease terms are typically four years and customers generally pay either a quarterly or annual fixed payment for the lease, SaaS, and maintenance elements over the contractual lease term.
Cost of Services Revenue Cost of services revenue consists of costs related to installation and training services, an allocated portion of internal-use software amortization expense, and maintenance costs related to units purchased by customers. Maintenance costs consists primarily of labor (including stock-based compensation), spare parts, field service repair costs, equipment, and supplies.
Maintenance costs consist primarily of labor (including stock-based compensation), spare parts, shipping costs, field service repair costs, equipment, and supplies. Cost of Service Revenue Cost of services revenue consists of maintenance costs related to units purchased by customers and an allocated portion of internal-use software amortization expense.
However, because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing teams worldwide.
However, because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing team.
Our ability to generate revenue and achieve cost improvements sufficient to achieve profitability will depend on the successful further development and commercialization of our products. We generated revenue of $55.2 million and $23.4 million for the years ended December 31, 2022 and 2021, respectively.
Our ability to generate revenue and achieve cost improvements sufficient to achieve profitability will depend on the successful further development and commercialization of our products. We generated revenue of $80.4 million and $55.2 million for the years ended December 31, 2023 and 2022, respectively.
Based on the results of our analysis, we may adjust the estimated residual values and useful lives of individual assets of our revenue generating equipment each year.
Based on the results of our analysis, we 65 Table of Contents may adjust the estimated residual values and useful lives of individual assets of our revenue generating equipment each year.
Change in Fair Value of Contingently Issuable Common Stock Liability Change in the fair value of the contingently issuable common stock liability was $1.9 million and $6.4 million for the years ended December 31, 2022 and 2021, respectively, resulting from quarterly mark-to-market adjustments.
Change in Fair Value of Contingently Issuable Common Stock Liability The change in the fair value of the contingently issuable common stock liability was $(3.1) million and $1.9 million for the years ended December 31, 2023 and 2022, respectively, resulting from quarterly mark-to-market adjustments.
While these factors continue to evolve, we plan to remain flexible and to optimize our business as appropriate and allocate resources, as necessary. Adoption of our Security Screening Products We believe the world will continue to focus on the safety and security of people in the places where they gather.
Risk Factors of this Annual Report on Form 10-K. While these factors continue to evolve, we plan to remain flexible and optimize our business as appropriate and allocate resources, as necessary. Adoption of our Security Screening Products We believe the world will continue to focus on the safety and security of people in the places where they gather.
Our contracts may include multiple performance obligations when customers purchase a combination of products and services. When our customer arrangements have multiple performance obligations that contain a lease as well as distinct services that are delivered simultaneously, we allocate the arrangement consideration between the lease deliverables and non-lease deliverables based on the relative estimated SSP of each distinct performance obligation.
When our customer arrangements have multiple performance obligations that contain a lease as well as distinct services that are delivered simultaneously, we allocate the arrangement consideration between the lease deliverables and non-lease deliverables based on the relative estimated SSP of each distinct performance obligation.
Investing Activities During the year ended December 31, 2022, cash used in investing activities was $23.9 million, consisting of $21.5 million for the purchase of property and equipment, primarily related to the purchase of Express units to be leased to customers, and $2.7 million for the development of internal-use software, offset by $0.3 million of proceeds from the sale of property and equipment. 60 Table of Contents During the year ended December 31, 2021, cash used in investing activities was $17.6 million, primarily consisting of $16.6 million for the purchases of property and equipment and $1.0 million for the development of internal-use software.
During the year ended December 31, 2022, cash used in investing activities was $23.9 million, consisting of $21.5 million for the purchase of property and equipment, primarily related to the purchase of Express units to be leased to customers, and $2.7 million for the development of internal-use software, offset by $0.3 million of proceeds from the sale of property and equipment.
In particular, global events such as public health emergencies, including the COVID-19 pandemic and its variants, international political turmoil, including Russia's invasion of Ukraine, ongoing supply chain disruptions, and prolonged inflation and rising interest rates have resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital.
In particular, global events such as public health emergencies, including the COVID-19 pandemic and its variants, international political turmoil, including in Europe and the Middle East, and related international sanctions, supply chain disruptions, and prolonged inflation and rising interest rates have resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital.
The 2022 SVB Credit Agreement provides for an initial term loan advance of $30.0 million, which is approximately equivalent to the value of all hardware purchases made to support leasing transactions with our customers through the SVB Closing Date, with the opportunity to obtain, within 18 months after the SVB Closing Date, additional 58 Table of Contents term loan advances, subject to the satisfaction of certain conditions, in an aggregate principal amount equal to $20.0 million, (subject to an increase of an additional $25.0 million upon the satisfaction of certain conditions and approval from SVB) (collectively, the "2022 SVB Term Loans" and each a "2022 SVB Term Loan").
The 2022 SVB Credit Agreement provided for an initial term loan advance of $30.0 million, which was approximately equivalent to the value of all hardware purchases made to support leasing transactions with our customers through December 21, 2022 (the "SVB Closing Date"), with the opportunity to obtain, within 18 months after the SVB Closing Date, additional term loan advances, subject to the satisfaction of certain conditions, in an aggregate principal amount equal to $20.0 million, (subject to an increase of an additional $25.0 million upon the satisfaction of certain conditions and approval from SVB).
Liquidity and Capital Resources Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures and general corporate needs. We expect these needs to continue as we develop and grow our business. As of December 31, 2022, we had $229.8 million in cash and cash equivalents.
Liquidity and Capital Resources Our primary requirements for liquidity and capital are working capital, inventory management, capital expenditures, and general corporate needs. We expect these needs to continue as we develop and grow our business. As of December 31, 2023, we had $118.5 million in cash, cash equivalents, and marketable securities.
We generated a net loss of $86.4 million and $10.9 million for the years ended December 31, 2022 and 2021, respectively.
We generated a net loss of $106.3 million and $86.4 million for the years ended December 31, 2023 and 2022, respectively.
The increase in professional fees primarily relates to consulting costs incurred for product development and engineering.
The year-over-year increase in professional fees was primarily due to consulting costs incurred for product development and engineering.
We anticipate fulfilling such commitments with our existing cash and cash equivalents, as well as cash and cash equivalents obtained through operations and proceeds from long-term debt. Cash and cash equivalents amounted to $229.8 million as of December 31, 2022.
We anticipate fulfilling such commitments with our existing cash and cash equivalents, as well as cash and cash equivalents obtained through operations and, if necessary, proceeds from long-term debt. Cash, cash equivalents, and marketable securities amounted to $118.5 million as of December 31, 2023.
Valuation of Contingently Issuable Common Stock Liability The estimated fair value of the contingently issuable common shares was determined using a Monte Carlo simulation that simulated the future path of the Company’s stock price over the vesting period.
Valuation of Contingent Earn-out Liability The estimated fair value of the contingent earn-out shares is determined using a Monte Carlo simulation that simulated the future path of the Company’s stock price over the earn-out period.
Change in Fair Value of Contingent Earn-out Liability Change in fair value of the contingent earn-out liability was $7.0 million and $47.4 million for the years ended December 31, 2022 and 2021, respectively, resulting from quarterly mark-to-market adjustments. The contingent earn-out liability was established in connection with the closing of the Merger in July 2021.
Change in Fair Value of Contingent Earn-out Liability The change in fair value of the contingent earn-out liability was $(14.9) million and $7.0 million for the years ended December 31, 2023 and 2022, respectively, resulting from quarterly mark-to-market adjustments.
The increase in travel and entertainment expense is due to an increase in travel costs for in-person sales personnel meetings and events. The increase in professional fees primarily relates to consulting costs incurred for training and website development.
The increase in travel and entertainment expense was due to an increase in travel costs for in-person sales personnel meetings and events. Professional fees increased primarily due to an increase in marketing consulting costs.
Our customers include many iconic venues across a wide variety of industries including major sports stadiums and arenas, notable performing arts and entertainment venues, major tourist destinations and cultural attractions, hospitals, large industrial workplaces, schools, and prominent houses of worship.
We believe that we have screened more people through advanced systems than any organization other than the TSA. Our customers include many iconic venues across a wide variety of industries including major sports stadiums and arenas, notable performing arts and entertainment venues, major tourist destinations and cultural attractions, hospitals, large industrial workplaces, schools, and prominent houses of worship.
The non-lease components relate to (1) distinct services, such as installation, training, SaaS, and maintenance, and (2) any add-on accessories. Installation and training are included in service revenue as described below, and add-on accessories are included in product revenue as described above.
Lease arrangements generally include both lease and non-lease components. The non-lease components relate to (1) distinct services, including professional services, SaaS, and maintenance, and (2) any add-on accessories. Professional services are included in license fees and other revenue as described below, and add-on accessories are included in product revenue as described above.
Cash Flows The following table sets forth a summary of cash flows for the periods presented: Year Ended December 31, 2022 2021 Net cash used in operating activities $ (74,728) $ (56,781) Net cash used in investing activities (23,881) (17,585) Net cash provided by (used in) financing activities 20,510 377,829 Effect of exchange rate changes on cash and cash equivalents (10) — Net increase (decrease) in cash, cash equivalents and restricted cash $ (78,109) $ 303,463 59 Table of Contents Operating Activities Year Ended December 31, 2022 2021 Net loss $ (86,406) $ (10,888) Non-cash (income) expense 17,331 (28,813) Changes in operating assets and liabilities (5,653) (17,080) Net cash used in operating activities $ (74,728) $ (56,781) Net loss increased from $10.9 million for the year ended December 31, 2021 to $86.4 million for the year ended December 31, 2022 as a result of the factors described in "Results of Operations" above.
See Note 6 to our consolidated financial statements for the year ended December 31, 2023. 60 Table of Contents Cash Flows The following table sets forth a summary of cash flows for the periods presented: Year Ended December 31, 2023 2022 Net cash used in operating activities $ (9,801) $ (74,728) Net cash used in investing activities (123,113) (23,881) Net cash provided by (used in) financing activities (29,664) 20,510 Effect of exchange rate changes on cash and cash equivalents (43) (10) Net increase (decrease) in cash, cash equivalents and restricted cash $ (162,621) $ (78,109) Operating Activities Year Ended December 31, 2023 2022 Net loss $ (106,254) $ (86,406) Non-cash expense 59,754 17,331 Changes in operating assets and liabilities 36,699 (5,653) Net cash used in operating activities $ (9,801) $ (74,728) Net loss increased to $106.3 million for the year ended December 31, 2023 from $86.4 million for the year ended December 31, 2022 as a result of the factors described in "Results of Operations" above.
We believe that investment in our security screening products will contribute to long-term revenue growth, but it may adversely affect our near-term profitability. Components of Results of Operations Revenue We derive revenue from (1) subscription arrangements generally accounted for as operating leases, (2) the sale of products, inclusive of SaaS and maintenance, and (3) professional services.
We believe that investment in our security screening products will contribute to long-term revenue growth, but it may adversely affect our near-term profitability. 50 Table of Contents Components of Results of Operations Revenue We derive revenue from (1) subscription arrangements generally accounted for as operating leases, including SaaS and maintenance, (2) the sale of products, (3) SaaS and maintenance related to products sold to customers either by Evolv or by Columbia Tech pursuant to the Distribution and License Agreement, (4) license fees related to the Distribution and License Agreement, and (5) professional services, including installation, training, and event support.
The contingently issuable common stock liability was established in connection with the closing of the Merger in July 2021. Change in Fair Value of Public Warrant Liability Change in the fair value of the public warrant liability was $4.9 million and $12.6 million for the years ended December 31, 2022 and 2021, respectively, resulting from quarterly mark-to-market adjustments.
Change in Fair Value of Public Warrant Liability The change in the fair value of the public warrant liability was $(4.8) million and $4.9 million for the years ended December 31, 2023 and 2022, respectively, resulting from quarterly mark-to-market adjustments.
Change in Fair Value of Contingently Issuable Common Stock Liability Prior to the Merger, certain NHIC shareholders owned 4,312,500 shares of Founder Shares. 1,897,500 shares vested at the closing of the Merger, 1,897,500 shares shall vest upon us achieving certain milestones and 517,500 shares were contributed to Give Evolv LLC.
Upon the closing of the Merger, NHIC Class A and Class B common stock became the Company's common stock. 1,897,500 Founder Shares vested at the closing of the Merger, 1,897,500 Founder Shares are contingently issuable and shall vest upon the Company achieving certain milestones, and 517,500 Founder Shares were contributed to Give Evolv LLC.
We are required to maintain a minimum cash balance of $0.3 million as a security deposit on the leased space which is classified as restricted cash, non-current on the consolidated balance sheet as of December 31, 2022. Total future minimum lease payments under this noncancelable operating lease amount to $2.1 million.
The amendment did not impact the term of the lease. We are required to maintain a minimum cash balance of $0.3 million as a security deposit on the leased space which is classified as restricted cash, current on the consolidated balance sheet as of December 31, 2023.
Accordingly, we recorded the Public Warrants at fair value upon the closing of the Merger with a corresponding adjustment to additional paid-in capital.
Accordingly, we recorded the Public Warrants at fair value upon the closing of the Merger with a corresponding adjustment to additional paid-in capital. After the initial measurement, the fair value of the Public Warrants is subsequently remeasured quarterly based on the listed market price on the Nasdaq of such Public Warrants.
We have disciplines related to the management and maintenance of our leased equipment designed to manage the risk associated with the residual values of our revenue generating equipment. We periodically review and adjust, as appropriate, the estimated residual values and useful lives of existing revenue generating equipment for the purposes of recording depreciation expense.
We have disciplines related to the management and maintenance of our leased equipment designed to manage the risk associated with the residual values of our revenue generating equipment.
We expect our cash and cash equivalents, together with cash we expect to generate from future operations, will be sufficient to fund our operating expenses and capital expenditure requirements for a period of at least twelve months from the date of this Annual Report on Form 10-K.
The Company does not believe it is exposed to any unusual credit risk or deposit concentration risk beyond the ordinary credit risk associated with commercial banking relationships. 59 Table of Contents We expect our cash, cash equivalents, and marketable securities, together with cash we expect to generate from future operations, will be sufficient to fund our operating expenses and capital expenditure requirements for a period of at least twelve months from the date of this Annual Report on Form 10-K.
Our arrangements are generally noncancelable and nonrefundable after ownership passes to the customer for product sales and upon installation or delivery for subscriptions. Revenue is recognized net of sales tax. Product Revenue We derive a portion of our revenue from the sale of our Express equipment (and prior to 2022, our Edge equipment) and related add-on accessories to customers.
Maintenance consists of preventative maintenance, technical support, bug fixes, and when-and-if available threat updates. Our arrangements are generally noncancelable and nonrefundable after ownership passes to the customer. Revenue is recognized net of sales tax. Product Revenue We derive a portion of our revenue from the sale of our Evolv Express equipment and related add-on accessories to customers.
Cost of Subscription Revenue Cost of subscription revenue consists primarily of shipping costs, an allocated portion of internal-use software amortization expense, depreciation expense related to leased units, and maintenance costs related to leased units. Maintenance costs consist primarily of labor (including stock-based compensation), spare parts, shipping costs, field service repair costs, equipment, and supplies.
Cost of Product Revenue Cost of product revenue consists primarily of costs paid to our third-party manufacturer and other suppliers, labor costs (including stock-based compensation), and shipping costs. 51 Table of Contents Cost of Subscription Revenue Cost of subscription revenue consists primarily of depreciation expense related to leased units, an allocated portion of internal-use software amortization expense, shipping costs, and maintenance costs related to leased units.
Interest Income Interest income relates to interest earned on money market funds and interest earned on our lease receivables for our Evolv Express units recognized as sales type leases.
Interest Expense Interest expense includes cash interest paid on long-term debt and amortization of deferred financing fees and costs. Interest Income Interest income relates to interest earned on money market funds and treasury bills, and interest earned on our lease receivables for our Evolv Express units recognized as sales-type leases.
If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.
If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected. Financing Arrangements In December 2020, we entered into a $10.0 million credit agreement with JPMorgan Chase Bank, N.A.
Lease terms are typically four years and customers generally pay either a quarterly or annual fixed payment for the lease and maintenance elements over the contractual lease term.
Lease terms are typically four years and customers generally pay either a quarterly or annual fixed payment for the lease, SaaS, and maintenance elements over the contractual lease term. Equipment leases are generally classified as operating leases and recognized ratably over the duration of the lease. There are no contingent lease payments as a part of these arrangements.
Loss From Impairment of Property and Equipment Impairment of property and equipment relates to Edge units and Express prototype units that are removed from service and retired as we transition our domestic customers to our most current Express units. Interest Expense Interest expense includes cash interest paid on our debt and amortization of deferred financing fees and costs.
Loss From Impairment of Property and Equipment Loss from impairment of property and equipment relates to (i) leased Evolv Edge units and Evolv Express prototype units that are removed from service and retired as we transition our domestic customers to our most current Evolv Express units and (ii) damaged or destroyed leased units.
We incurred a net loss of $86.4 million and $10.9 million for the years ended December 31, 2022 and 2021, respectively.
We incurred a net loss of $106.3 million and $86.4 million for the years ended December 31, 2023 and 2022, respectively. We incurred cash outflows from operating activities of $9.8 million and $74.7 million during the years ended December 31, 2023 and 2022, respectively.
General and Administrative General and administrative expenses consist primarily of personnel-related expenses associated with our executive, finance, investor relations, legal, information technology, and human resources functions, as well as professional fees for legal, audit, accounting and other consulting services, stock-based compensation, and sales tax contingencies.
We expect our sales and marketing costs will increase for the year ending December 31, 2024 compared to the year ended December 31, 2023 primarily due to an expected increase in customer facing headcount to support higher sales volume. 52 Table of Contents General and Administrative General and administrative expenses consist primarily of personnel-related expenses associated with our executive, finance, investor relations, legal, information technology, and human resources functions, as well as professional fees for legal, audit, accounting and other consulting services, stock-based compensation, and sales tax contingencies.
Product Revenue We derive a portion of our revenue from the sale of our Express equipment (and prior to 2022, our Edge equipment) and related add-on accessories to customers. Revenue is recognized when control of the product has transferred to the customer, which follows the terms of each contract.
Revenue is recognized when control of the product has transferred to the customer, which follows the terms of each contract. Subscription Revenue Subscription revenue is comprised of revenue derived from leasing Evolv Express and Evolv Edge units to our customers.
As used in this Annual Report on Form 10-K, unless otherwise indicated or the context otherwise requires, references to “we,” “us,” “our,” the “Company” and “Evolv” refer to the consolidated operations of Evolv Technologies Holdings, Inc. and its subsidiaries.
Our results of operations for the year ended December 31, 2021, including a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, has been reported previously in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 24, 2023, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As used in this Annual Report on Form 10-K, unless otherwise indicated or the context otherwise requires, references to “we,” “us,” “our,” the “Company” and “Evolv” refer to the consolidated operations of Evolv Technologies Holdings, Inc. and its subsidiaries.
Whether we transact with a channel partner and receive the order from a channel partner or directly from an end-use customer, our revenue recognition policy and resulting pattern of revenue recognition is the same. Standalone Selling Price We allocate the transaction price to each distinct performance obligation based on the standalone selling price (“SSP”) of each product or service.
When we transact with a reseller partner, our contractual arrangement is with the reseller partner and not with the end-use customer. Whether we transact with a reseller partner and receive the order from a reseller partner or directly from an end-use customer, our revenue recognition policy and resulting pattern of revenue recognition is the same.
Gross margin is the percentage obtained by dividing gross profit by our revenue.
Gross Profit and Gross Margin Our gross profit is calculated based on the difference between our revenues and cost of revenues. Gross margin is the percentage obtained by dividing gross profit by our revenue.
Equipment leases are generally classified as operating leases as they do not meet any of the sales-type lease criteria per ASC 842 and recognized ratably over the duration of the lease. There are no contingent lease payments as a part of these arrangements. Generally, lease arrangements include both lease and non-lease components.
Equipment leases are generally classified as operating leases and recognized ratably over the duration of the lease. There are no contingent lease payments as a part of these arrangements. Lease arrangements generally include both lease and non-lease components. The non-lease components relate to (1) distinct services, including professional services, SaaS, and maintenance, and (2) any add-on accessories.
We entered into a lease agreement for additional office space starting May 1, 2021 through October 31, 2024, with the option to extend through October 31, 2027 with written notice.
We are party to a lease agreement for office space for the period from May 1, 2021 through October 31, 2024, with the option to extend through October 31, 2027 with written notice. During the year ended December 31, 2023, we amended the lease agreement to add additional square footage within the same building.
Income Taxes There is no provision for income taxes for the years ended December 31, 2022 and 2021 because we have historically incurred net operating losses and maintain a full valuation allowance against our deferred tax assets.
We have historically incurred net operating losses and maintain a full valuation allowance against our deferred tax assets.
We expect research and development costs will increase for the year ending December 31, 2023 compared to the year ended December 31, 2022 primarily due to incremental investments in headcount and programs we are making to support our new product development efforts. 50 Table of Contents Sales and Marketing Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing, customer success, business development, and strategy functions, as well as costs related to trade shows and events, and stock-based compensation.
We expect research and development costs will increase for the year ending December 31, 2024 compared to the year ended December 31, 2023 primarily due to incremental investments in headcount and programs we are making to support our new product development efforts.
Therefore, we estimate our expected share volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded share price. 62 Table of Contents Valuation of Contingent Earn-out Liability The estimated fair value of the contingent earn-out shares is determined using a Monte Carlo simulation that simulated the future path of the Company’s stock price over the earn-out period.
Therefore, we estimate our expected share volatility based on a mix of company-specific historical volatility and historical volatility of a publicly traded set of peer companies. We expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded share price.
We fully repaid all borrowings under the JPM Credit Agreement and terminated the JPM Credit Agreement in November 2022.
We fully repaid all borrowings under the JPM Credit Agreement and terminated the JPM Credit Agreement in November 2022. In December 2022, we entered into the 2022 SVB Credit Agreement in order to finance purchases of hardware to be leased to customers.
We have provided a valuation allowance for all of our deferred tax assets as a result of our historical net losses in the jurisdictions in which we operate.
For the year ended December 31, 2022, the ETR was primarily impacted by the full valuation allowance maintained on the Company’s net deferred tax assets and non-taxable fair value adjustments. We have provided a valuation allowance for all of our net deferred tax assets as a result of our historical net losses in the jurisdictions in which we operate.
SVBB continues to hold the Company’s term loans under the same existing terms and covenants which were in place with SVB. Material Cash Requirements for Known Contractual and Other Obligations The following is a description of commitments for capital expenditures and other known and reasonably likely cash requirements as of December 31, 2022 .
Material Cash Requirements for Known Contractual and Other Obligations The following is a description of commitments for capital expenditures and other known and reasonably likely cash requirements as of December 31, 2023 .
Non-cash expenses for the year ended December 31, 2021 are primarily attributable to a $12.7 million loss on debt extinguishment related to the 2021 Convertible Notes, $5.2 million of non-cash interest expense primarily related to the accretion of the debt discount associated with the 2021 Convertible Notes, $9.6 million of stock-based compensation expense, $2.9 million of depreciation and amortization, and $4.0 million of loss from impairment of property and equipment and inventory, offset by $63.7 million of an aggregate change in fair value of the derivative liability, common stock warrant liability, earn-out liability, contingently issuable common stock liability, and public warrant liability.
Non-cash expenses for the year ended December 31, 2023 were primarily attributable to $24.2 million of stock-based compensation expense, $9.9 million of depreciation and amortization, $1.6 million of write-off of inventory, and $22.8 million of an aggregate change in fair value of the earn-out liability, contingently issuable common stock warrant liability, and public warrant liability.
Subscription Revenue Year Ended December 31, 2022 2021 $ Change % Change Subscription revenue $ 17,569 $ 7,803 $ 9,766 125 % Cost of subscription revenue $ 7,469 $ 4,501 $ 2,968 66 % Gross profit - Subscription revenue $ 10,100 $ 3,302 $ 6,798 206 % Gross profit margin - Subscription revenue 57 % 42 % N/A 15 % The increases in subscription revenue, cost of subscription revenue, and subscription gross profit are primarily due to growth in our customer base and a higher number of leased Evolv Express units deployed under our pure subscription 54 Table of Contents contract model during the year ended December 31, 2022 compared to the year ended December 31, 2021.
Subscription Revenue Year Ended December 31, 2023 2022 $ Change % Change Subscription revenue $ 37,247 $ 17,569 $ 19,678 112 % Cost of subscription revenue $ 14,991 $ 7,469 $ 7,522 101 % Gross profit - Subscription revenue $ 22,256 $ 10,100 $ 12,156 120 % Gross profit margin - Subscription revenue 60 % 57 % N/A 2 % The increases in subscription revenue, cost of subscription revenue and subscription gross profit are primarily due to growth in our customer base for the year ended December 31, 2023, compared to the year ended December 31, 2022, which was due to a gradual transition to our pure subscription contract model and a higher number of active Evolv Express units deployed under our pure subscription model.
Changes in assumptions and estimates used in our analysis, or future results that vary from assumptions used in the analysis, could affect the fair value of the contingent earn-out and could result in material changes in future periods.
Changes in assumptions and estimates used in our analysis, or future results that vary from assumptions used in the analysis, could affect the fair value of the contingent earn-out and could result in material changes in future periods. 64 Table of Contents Valuation of Contingently Issuable Common Stock Liability The estimated fair value of the contingently issuable common shares was determined using a Monte Carlo simulation that simulated the future path of the Company’s stock price over the vesting period.
Revenue is recognized when control of the product has transferred to the customer, which follows the terms of each contract. We expect product revenue to decline as a percentage of our overall revenue over time as more customers enter full subscription transactions with us and as the subscription becomes more valuable to our business.
Revenue is recognized when control of the product has transferred to the customer, which follows the terms of each contract. We expect product revenue to continue declining as a percentage of our overall revenue as we continue focusing our go-to-market strategy on pure subscription contracts and contracts under our distributor licensing model.
Stock compensation expense included in research and development expenses was $4.0 million for the year ended December 31, 2022 compared to $0.9 million for the year ended December 31, 2021. The decrease in materials and prototype costs is due to the transition from prototype production to standard manufacturing of the Evolv Express.
Stock compensation expense was $4.3 million for the year ended December 31, 2023, compared to $4.0 million for the year ended December 31, 2022. Additionally, we experienced an increase in materials and prototype costs due to an increase in design and engineering costs in connection with the development of the next generation of our Evolv Express system.
General and Administrative Expenses Year Ended December 31, 2022 2021 $ Change % Change Personnel related (including stock-based compensation) $ 17,369 $ 7,213 $ 10,156 141 % Professional fees 8,715 5,527 3,188 58 Insurance costs 4,514 2,365 2,149 91 Non-income taxes 540 1,316 (776) (59) Other 6,581 3,448 3,133 91 $ 37,719 $ 19,869 $ 17,850 90 % The increase in personnel related expenses is due to an increase in payroll costs and stock-based compensation resulting from expanding our administrative team during the years ended December 31, 2022 and 2021.
General and Administrative Expenses Year Ended December 31, 2023 2022 $ Change % Change Personnel related (including stock-based compensation) $ 23,145 $ 17,369 $ 5,776 33 % Professional fees 6,712 8,715 (2,003) (23) Insurance costs 3,424 4,514 (1,090) (24) Other 8,810 7,121 1,689 24 $ 42,091 $ 37,719 $ 4,372 12 % The increase in personnel related expenses was due to an increase in payroll costs and stock-based compensation as a result of expanding our administrative team during the year ended December 31, 2023.
After the initial measurement, the fair value of the Public Warrants is subsequently remeasured quarterly based on the listed market price on the Nasdaq of such Public Warrants. 63 Table of Contents Valuation of Inventory Inventory is valued at the lower of cost or net realizable value. Cost is computed using the weighted average method.
Valuation of Inventory Inventory is valued at the lower of cost or net realizable value. Cost is computed using the weighted average method.
SaaS and maintenance revenue is recognized ratably over the period of the arrangement, which is typically four years. 49 Table of Contents Cost of Revenue We recognize cost of revenue in the same manner that the related revenue is recognized.
Cost of Revenue We recognize cost of revenue in the same manner that the related revenue is recognized.
On December 21, 2022 (the “SVB Closing Date”), we entered into a loan and security agreement by and among the Company, Legacy Evolv, and SVB (the "2022 SVB Credit Agreement") in order to finance purchases of hardware to be leased to customers.
Loss on Extinguishment of Debt In December 2022, the Company entered into a loan and security agreement (the "2022 SVB Credit Agreement") with Silicon Valley Bank ("SVB") in order to finance purchases of hardware to be leased to customers. On March 10, 2023, SVB was closed by California state regulators and the FDIC was appointed as receiver.
Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States.
The effect of the loss of EGC status and the impact of the adoption of new accounting pronouncements is discussed further in Note 2 to our consolidated financial statements in this Annual Report on Form 10-K. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States.
Change in Fair Value of Public Warrant Liability In connection with the closing of the Merger, the Company assumed a warrant to purchase shares of common stock (the “Public Warrants”). We assessed the features of these warrants and determined that they qualify for classification as a liability.
We assessed the features of these warrants and determined that they qualify for classification as a liability.
The increase in other expenses is primarily due to $1.4 million of increased shipping costs related to demo units and $1.0 million of certain one-time expenses, including a $0.4 million one-time payment to a former employee.
Other expense decreased primarily due to $1.0 million of certain-one-time expenses incurred during the year ended December 31, 2022, including a $0.4 million one-time payment to former employees.
Changes in operating assets and liabilities for the year ended December 31, 2021 are primarily related to the following: • $5.1 million increase in accounts receivable primarily due to higher sales and the timing of billings to customers; • $3.4 million increase in inventory primarily due to increased production of units to meet customer demand; • $9.1 million increase in prepaid expense and other current assets primarily due to an increase in director and officer insurance premiums as a result of becoming a public company and an increase in deposits paid to the Company's contract manufacturer; • $4.9 million increase in contract assets due to a higher volume of sales; • $3.1 million increase in commission assets due to a higher volume of sales; offset by • $4.8 million increase in deferred revenue due to a higher volume of sales; and • $2.5 million increase in accrued expenses and other current liabilities due to an increase in sales and marketing and general and administrative expenses due to the growth in our business and operating as a public company, the timing of vendor invoicing and payments, and the increase in our sales tax contingency liability.
Changes in operating assets and liabilities for the year ended December 31, 2023 are primarily related to the following: • $35.5 million increase in deferred revenue to a higher volume of sales; • $8.9 million decrease in accounts receivable primarily due to the Company's transition away from the purchase model, under which upfront billings to customers are generally higher; and • $3.7 million increase in accrued expenses and other current liabilities, related to accrued consulting and professional fees and an accrual for purchase order cancellation fees, offset by • $6.0 million decrease in accounts payable (excluding the non-cash portion related to capital expenditures incurred but not yet paid) due primarily to the timing of vendor payments; • $2.6 million increase in prepaid expense and other current assets due to an increase in vendor deposits; and • $2.4 million increase in commission assets due to a higher volume of sales.
Stock compensation expense included in sales and marketing expenses was $10.0 million for the year ended December 31, 2022 compared to $5.7 million for the year ended December 31, 2021. The increase in direct marketing is primarily due to an increase in trade shows and events, which have begun to return to pre-pandemic levels.
Stock compensation expense was $9.4 million for the year ended December 31, 2023, compared to $10.0 million for the year ended December 31, 2022. The decrease in advertising and direct marketing expense was primarily attributable to lower spending at trade shows.
Key Factors Affecting Our Operating Results We believe that our performance and future success depend on many factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the "Risk Factors" section of this Annual Report on Form 10-K.
See “ Liquidity and Capital Resources .” Key Factors Affecting Our Operating Results We believe that our performance and future success depend on many factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the "Risk Factors" section of this Annual Report on Form 10-K. 49 Table of Contents General Economic and Market Conditions We expect that our results of operations, including our revenue and cost of revenue, may fluctuate or continue to fluctuate based on, among other things, the impact of rising inflation and interest rates on business spending; supply chain issues and the impacts on our manufacturing capabilities; public health emergencies; geopolitical conflicts and war, including the conflicts in Europe and the Middle East; and recessionary trends.
Income Taxes Our income tax provision consists of an estimate for U.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in tax law.
Accordingly, we recorded the warrants at fair value upon the closing of the Merger as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss with the offset to additional paid-in capital. 53 Table of Contents Income Taxes Our income tax provision consists of an estimate for federal, state, and foreign income taxes based on enacted rates in the jurisdictions in which we operate, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in tax law.

… 134 more changes not shown on this page.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+1 added−2 removed1 unchanged
Biggest changeWe had cash, cash equivalents and restricted cash totaling $230.1 million as of December 31, 2022. Cash equivalents were invested primarily in money market funds. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, issued by the U.S. government or liquid money market funds.
Biggest changeOur investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, issued by the U.S. government or liquid money market funds. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments.
Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. We cannot assure that our results of operations and financial condition will not be materially impacted by inflation in the future. 65 Table of Contents
Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. We cannot assure that our results of operations and financial condition will not be materially impacted by inflation in the future. 66 Table of Contents
Based upon a sensitivity analysis, a hypothetical 100 basis point increase in interest rates would have increased our interest income by $2.3 million for the year ended December 31, 2022, and a 100 basis point decrease in interest rates would have decreased our interest income by $1.4 million for the year ended December 31, 2022.
Based upon a sensitivity analysis, a hypothetical 100 basis point increase in interest rates would have increased our interest income by $1.3 million for the year ended December 31, 2023, and a 100 basis point decrease in interest rates would have decreased our interest income by $1.3 million for the year ended December 31, 2023.
Inflation Risk Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation on our results of operations and financial condition have been immaterial.
Inflation Risk Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we do not believe the effects of inflation have had a material impact on our results of operations and financial condition.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and to a lesser extent, inflation risk.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and to a lesser extent, inflation risk. The following analysis provides quantitative information regarding these risks.
We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy.
We utilize external investment managers who adhere to the guidelines of our investment policy.
Removed
The following analysis provides quantitative information regarding these risks. 64 Table of Contents Interest Rate Risk Our exposures to market risk for changes in interest rates relate primarily to our cash and cash equivalents balances and our debt arrangements which bear floating interest rates. A rising interest rate environment will increase the amount of interest paid on our loans.
Added
Interest Rate Risk Our exposure to market risk for changes in interest rates relate to our cash, cash equivalents and marketable securities balances. We had cash, cash equivalents, and marketable securities totaling $118.5 million as of December 31, 2023. Cash equivalents are invested primarily in money market funds. Marketable securities are invested in U.S. treasury bills.
Removed
We do not hedge our exposure to changes in interest rates. At December 31, 2022, we had $29.7 million in variable rate debt outstanding. Based upon a sensitivity analysis, a hypothetical 100 basis point increase or decrease in interest rates would not have had a material impact on our interest expense for the year ended December 31, 2022.

Other EVLV 10-K year-over-year comparisons