UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
WASHINGTON, D.C. 20549
______________________
FORM
10-K/A______________________
(Amendment #1)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
10-K
| | | | | |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
December 31, 2020or
☐ TRANSITION REPORT UNDER SECTION 13 2022
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | | | | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
001-39753______________________
NewHold Investment Corp.
001-39417
EVOLV TECHNOLOGIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
______________________
Delaware
| | 84-4473840
| | | |
Delaware | 84-4473840 |
(State of Other Jurisdiction of Incorporation or other jurisdiction of
incorporation or organization)Organization) | | (I.R.S. Employer
Identification No.) |
12141 Wickchester Lane
Houston, TX
| | 77079
|
500 Totten Pond Road, 4th Floor, Waltham, MA | 02451 |
(Address of principal executive offices)Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
(212) 653-0153(781) 374-8100
Securities registered pursuant to Section 12(b) of the Act:
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Title of each classEach Class | | Trading Symbol(s) | | Name of each exchange Each Exchange
on which registeredWhich Registered |
Units, each consisting ofCommon Stock, Par Value $0.0001 Per Share Warrants to purchase one share of Common Stock and one Warrant to acquire one-half of a share of Common Stock
| | EVLV EVLVW
| | The Nasdaq CapitalStock Market LLC |
Class A Common Stock, par value $0.0001 per share
| | The Nasdaq CapitalStock Market LLC
|
Warrants
| | The Nasdaq Capital Market LLC
|
Securities registered pursuant to Section 12(g) of the Act: None.None Indicate by check mark if the registrant is a well-knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐o Indicate by check mark whether the registrantRegistrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-TS-T (§232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submit such files). Yes ☒x No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratednon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-212b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filero | | £
| | Accelerated filero
| Non-accelerated filer x | £
|
| | Non-accelerated filer
| | S
| | Smaller reporting companyx
| | S
|
| | | | | | Emerging Growth Company
| | S
growth company x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐o No ☐x Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b-2 of the Exchange Act). Yes ☒o No ☐x The
registrant was not a public company as of June30, 2020 and therefore it cannot calculate the aggregate market value of its voting and non-votingthe registrant's common equitystock held by non-affiliatesnon-affiliates of the registrant as of such date. June 30, 2022, based on the closing price of $2.66 per share as reported on The Nasdaq Stock Market LLC, was approximately $252,201,649.
As of March
22, 2020, there were 17,250,000 23, 2023, the registrant had 147,963,093 shares of the Company’s Class A common stock, par value $0.0001 per share, and 4,312,500shares of the Company’s Class B common stock, par value $0.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
NEWHOLD INVESTMENT CORP.
EXPLANATORY NOTE
NewHold Investment Corp. (the “Company,” “NewHold,” “we”, “our” or “us”) is filing this Amendment No. 1Certain portions of the information required to itsbe furnished pursuant to Part III of this Annual Report on Form 10-K/A (this “Amendment”) to amend its Annual Report on Form 10-K10-K will be set forth in, and incorporated by reference from, the registrant’s definitive proxy statement for the period ended December 31, 2020, originallyannual meeting of stockholders which will be filed with the Securities and Exchange Commission (“SEC”no later than 120 days after the end of the fiscal year ended December 31, 2022.
TABLE OF CONTENTS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Annual Report on Form 10-K, other than statements of historical fact, including, without limitation, statements regarding our results of operations and financial position, business strategy, plans and prospects, our relationship with significant manufacturers and suppliers, our ability to obtain new customers and retain existing customers, existing and prospective products, research and development costs, timing and likelihood of success, macroeconomic and market trends, and plans and objectives of management for future operations and results, are forward-looking statements. The words “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions are intended to identify forward-looking statements though not all forward-looking statement use these word or expressions.
The forward-looking statements in this Annual Report on Form 10-K are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, without limitation the important factors discussed in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K, as any such factors may be updated from time to time in its other filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements in this Annual Report on Form 10-K are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, it may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed as exhibits to this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Annual Report on Form 10-K, whether as a result of any new information, future events or otherwise.
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:
•We are an early stage company with a history of losses and may not achieve or maintain profitability in the future.
•Our limited operating history and rapid growth makes evaluating our current business and prospects difficult.
•Our reliance on reseller partners to generate a growing portion of our revenue.
•Increases in component costs, long lead times, supply shortages, and supply changes could disrupt our supply chain and have an adverse effect on our business, financial condition, and operating results.
•We depend on a third-party contract manufacturer for substantially all of our manufacturing needs. If this third-party manufacturer, or any of our limited or sole source suppliers, experiences any delay, disruption, or quality control problems in their operations, we could lose market share and our brand may suffer.
•The AI-based weapons detection for security screening market is new and evolving and may not grow as expected or may develop more slowly or differently than we expect. Additionally, the security screening industry in which we operate requires us to continue to develop new products and innovations to meet constantly evolving customer demands and which could adversely affect market adoption of our products.
•The failure of our products to detect threats could result in injury or loss of life, which could harm our brand, reputation, and results of operations.
•The loss of designation of our Evolv Express system as a Qualified Anti-Terrorism Technology under the Homeland Security SAFETY Act could result in adverse reputational and financial consequences.
•If our customers are unable to implement our products successfully, or if we fail to effectively assist our customers in installing our products and provide effective ongoing support and training, customer perceptions of our products may be impaired, or our reputation and brand may suffer.
•The security screening industry is competitive, and we expect to face increasing competition in many aspects of our business, which could cause our operating results to suffer.
•Any failure to obtain, maintain, protect, or enforce our intellectual property rights could impair our competitive position and ability to generate revenues and cause us to lose valuable assets.
•We have generated substantially all our revenue to date from the sale of a single solution.
•We may experience significant delays in the design, production and launch of our security screening solutions, and we may be unable to successfully commercialize products on our planned timelines.
•Changes in our product mix may impact our gross margins and financial performance.
•Our failure to meet our customers’ price expectations would adversely affect our business and results of operations.
•Our business model is predicated, in part, on building a customer base that will generate a recurring stream of revenues through the sale of our products and services. If that recurring stream of revenues does not develop as expected, including due to the inability of the customer to implement our products or if our business model changes as the industry evolves, our operating results may be adversely affected.
•We may become subject to litigation.
•We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
PART I
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. We are democratizing security by making it seamless for facility operators to address the chronic epidemic of escalating gun violence, mass shootings and terrorist attacks in a cost-effective manner while improving the visitor experience.
Unlike traditional walk-through metal detectors, our touchless security screening solutions use AI software, software-as-a-service (“SaaS”) cloud services, and advanced sensors to reliably detect weapons that could be a threat to a crowd of visitors while significantly reducing nuisance alarms from harmless personal items. 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.
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 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. 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.
Our touchless security screening systems have screened over 500 million visitors worldwide 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”). 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 offer our products for lease or purchase and utilize a multi-year security-as-a-service subscription pricing model that delivers ongoing value to customers, generates predictable revenue and creates expansion and upsell opportunities.
Our Industry
We believe that most people associate security screening with airports, courthouses, and prisons. These facilities represent a small fraction of the total number of gathering spaces where mass shootings, terrorist attacks, and other forms of armed violence might occur, but they have historically had a disproportionate impact on the design and implementation of security screening technology. These specialized facilities are typically required by law to meet specific screening regulations using products built to meet technical standards designed for these environments. Many of these standards and regulations were designed in the pre-digital era of the last century.
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. 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. We believe the solution is to deliver technology that provides both.
Security screening at most venues and facilities has historically been designed around metal detectors that require visitors to enter in single-file lines after submitting their bags and pocket contents to manual inspection. This process is usually supported by multiple security guards who perform manual bag inspections, hand wand scans, and hands-on body ‘pat downs’ to resolve the large numbers of alarms, frequently false positives, generated by the metal detectors. This complex process has numerous shortcomings such asnuisance 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. 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. The result is a slow, frustrating process that fails to deliver the security it promises. The root causes are outdated technical standards, old analog technology, and the inability of humans to fully compensate for these deficiencies.
Our touchless security screening technology overcomes the limitations of legacy security screening methods and processes. We define touchless security screening as a screening process that reliably detects weapons and other threats in a way that allows most people to enter venues and facilities while walking at a normal pace together with their party, without requiring manual bag or body inspections. 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.
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. 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. 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. Due to these macro trends, we believe that venues and facilities that already conduct security screening will feel increasingly compelled to consider alternatives. 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.
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,
•Distribution Facilities,
•LargeWorkplaces,
•Arts & Entertainment Venues,
•Government Offices,
•Hospitality Facilities, and
•Houses of Worship.
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.
Most venues and facilities in our target segments do not fall under government regulations that mandate the adoption of security screening systems that conform to specific standards. We estimate that these unregulated facilities represent over 90% of the total worldwide market opportunity for security screening technology and represent the best opportunity for rapid adoption of our innovative weapon screening products.
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. 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. 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. 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. 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.
•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 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 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. 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
capacity based upon demand. 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 believe that our target account list represents the best immediate growth opportunities for our business. Over time we plan to adjust our target account list to reflect current market conditions and the capabilities of our products. We plan to continue to execute advertising, content marketing, lead generation, and sales development activities to our target account list to create qualified sales opportunities.
•Promote Awareness by Gathering and Leveraging Our Customer Community
Our business model presents significant opportunities to bring incremental value to existing customers over time. 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 are continuing to develop and expand our customer success function within the global revenue organization to focus on helping customers successfully deploy our products and cultivate referrals, expansion, and upsell opportunities. We are also investing in programs to help our customers connect with each other to share best practices on a regional and vertical industry basis. 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. 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.
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. Our solutions use digital processing and artificial intelligence to differentiate between real weapon threats and harmless items like cell phones and keys. The Evolv Cortex AI™ software platform provides the digital brain of our solutions. Unlike analog alternatives, our solutions classify threats based on classification models that improve over time as we process more real-world data. Evolv Cortex AI also makes it possible to integrate new kinds of sensors and data sources and integrate our solutions with other platforms and applications.
•Large and Growing Data Set
The vast amounts of data collected by our products during each screening process constitute a large and diverse repository of digital machine learning training data for weapons and common non-threat items. This proprietary data set is essential in training our software to accurately classify a broad set of threats and non-threats under a wide variety of real-world conditions. We expect that this data set will continue to grow as our products are deployed in more venues and facilities. As the data set grows, we expect that our detection capabilities will continue to improve. In turn, we expect our customers to benefit from these improvements through regular software updates under our subscription business model. 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 touchless security screening. These technologies serve as the foundation of our products.
Our key innovations include:
•Technology to process radio frequency (“RF”) electromagnetic data across multiple frequencies to detect size, composition, and shape of metal objects while in motion.
•Technology to classify and differentiate the electromagnetic signature of weapons from harmless items such as smartphones and keys.
•Technology to isolate relevant electromagnetic signals in the presence of external interference and noise generated by environmental factors such as structural metal, wind, and other factors.
•Technology to process hundreds of thousands of sensor data points for each individual passing through security screening system while walking at a normal pace.
•Technology to isolate a detected threat carried by an individual among an unstructured, overlapping flow of visitors walking through the system at a normal pace.
•Technology to isolate the spatial location of detected threats and correlate this spatial data with digital imagery to provide a clear visual indicator to help security guards quickly and intuitively resolve any system alarms.
•In addition to these core detection-related innovations, we have developed a purpose-built, proprietary housing for our advanced sensor arrays that features an attractive, welcoming, and customizable industrial design and supports a wide variety of indoor and outdoor configurations. We have also created cloud services to capture and present rich analytics and insights, support for remote system monitoring, remote system upgrades as new capabilities become available, and remote system diagnostics, and mobile application access. This technology platform is the basis of our future products and is critical to enhancing our existing offerings. Elements of these technologies and processes are protected by our know-how and by multiple patents or pending patent applications.
We have also designed our platform with application programming interfaces (“APIs”) that allow integration and interoperability with complementary third-party security solutions such as biometric authentication, video management software, threat intelligence, messaging, and mass-notification systems. For example, we have used our APIs to integrate Evolv Express alerts to the Motorola Solutions Avigilon Control Center platform as well as to deployed venue access control systems. 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. The overall result is screening that is up to ten times faster than old screening processes. 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 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.
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.
•Key Strategic Partners
We have signed strategic partnership agreements with Motorola Solutions, STANLEY Securitas, and Johnson Controls. 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. 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. Our resellers, who have extensive experience in physical security technologies and processes, provide marketing, sales, systems integration, and local support services for customers across an array of vertical markets and regions. They also bring an existing base of customers into which we can drive awareness of and ultimately sell our touchless security screening products. 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. 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 engineering team is led by accomplished and visionary technologists and scientists who have many years of experience in relevant fields. 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. 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.
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.
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. 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. 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™ provides 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. 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.
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. In some situations, we also sell our products under a purchase-subscription agreement by which the customer agrees to pay a one-time upfront fee for the equipment and a mandatory multi-year subscription term with a related fee for access to our software and cloud services. 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.
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. Two customers each accounted for more than 10% of our total revenue for the year ended December 31, 2022, and no single customer accounted for more than 10% of our total revenue for the year ended December 31, 2021.
Research and Development
We believe that the touchless security screening market is poised for rapid technological advancements across software, cloud services, and sensors. We invest significant resources into ongoing research and development programs because we believe our ability to maintain and extend our market position depends, in part, on breakthrough technologies that offer a unique value proposition for our customers and differentiation versus our competitors. Our research and development team, which is responsible for both the development of new products and improvements to our existing product portfolio, consists of talented and dedicated engineers, technicians, scientists, and professionals with experience from a wide variety of the world’s leading physical security, cybersecurity, and software technology organizations. 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.
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. 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. 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.
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. We drive awareness for the Company, our security screening products, and our customers’ successes through public relations and communications efforts that span mainstream, business, social media and trade press across the security sector generally and in key verticals such as education, healthcare, professional sports as well as tourist sites, performing arts and entertainment, theme parks, industrial workplaces, and municipal governments. 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 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. Columbia Tech also provides a variety of services including sourcing off-the-shelf components, manufacturing custom components/assemblies, final product assembly and integration, end of line testing and quality assurance per our specifications, material and finished goods inventory, and direct global shipping to our customers.
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. 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. We attempt to protect our intellectual property rights, both in the United States and abroad, through a combination of patent, trademark, copyright, and trade secret laws, as well as nondisclosure and invention assignment agreements with our consultants and employees and through non-disclosure agreements with our vendors and business partners. However, our contractual provisions may not always be effective at preventing unauthorized parties from obtaining our intellectual property and proprietary technology.
Unpatented research, development, know-how and engineering skills make an important contribution to our business, but we pursue patent protection when we believe it is possible and consistent with our overall strategy for safeguarding intellectual property. 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.
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. Further, the laws of certain countries may not protect intellectual property or proprietary rights to the same extent as the laws of the U.S., and, therefore, in certain jurisdictions, we may be unable to protect our intellectual property and proprietary technology.
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. 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.
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. Although we believe these licenses are sufficient for the operation of our business, these licenses typically limit our use of the third parties’ intellectual property to specific uses and for specific time periods.
From time to time, we have faced, and we expect to face in the future, allegations by third parties, including our competitors, that we have infringed their trademarks, copyrights, patents and other intellectual property rights or challenging the validity or enforceability of our intellectual property rights. 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. 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. None of our employees are subject to a collective bargaining agreement or represented by a labor union.
Diversity and Inclusion. We value the diversity of our employees and are committed to providing an engaging and inclusive atmosphere for all employees that promotes productivity and encourages creativity and innovation. We strive to maintain a highly skilled and diverse workforce where employees are hired, retained, compensated, and promoted based on their performance and contribution to the Company.
Employee Development and Retention. The attraction, development and retention of our employees is a key focus for our Company. 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 believe that maintaining a work environment that recognizes effort and teamwork, values mutual respect and open communication, and demonstrates care and concern for our employees is essential to an engaged and productive workforce. 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. 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.
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.
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. 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. Treasury Department, Office of Foreign Assets Control (“OFAC”) and the U.S. 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. In recent years, the United States government has a renewed focus on export control matters. For example, the Export Control Reform Act of 2018 and regulatory guidance thereunder have imposed additional controls and may result in the imposition of further additional controls, on the export of certain “emerging and foundational technologies.” Our current and future products may be subject to these heightened regulations, which could increase our compliance costs.
See Part I, Item 1A, “Risk Factors — 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” for additional information about the environmental, health and safety laws, and regulations that apply to our business.
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 25,5, 2021 (the “Original Filing”“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”). Pursuant to the Merger Agreement, Merger Sub was merged with and into Legacy Evolv, with Legacy Evolv surviving the merger as a wholly owned subsidiary of the Company. Upon the closing of the Merger, we changed our name to Evolv Technologies Holdings, Inc.
Additional Information
Our Internet address is https://evolvtechnology.com. At our Investor Relations website https://ir.evolvtechnology.com, we make available free of charge a variety of information for investors, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the SEC. 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.
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. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business
We have a history of losses. We have not been profitable historically and may not achieve or maintain profitability in the future.
We have a history of losses. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly evolving industries. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from expectations, our business could suffer and the trading price of our stock may decline.
We have incurred net losses of $86.4 million and $10.9 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $192.2 million.
We are not certain whether or when we will obtain a high enough volume of sales of our products to sustain or increase our growth or achieve or maintain profitability in the future. We expect our costs to increase in future periods, which could negatively affect our future operating results if our revenue does not increase. In particular, we expect to continue to expend substantial financial and other resources on:
•research and development related to our products, including investments in expanding our research and development team;
•sales and marketing, including a significant expansion of our sales organization, both direct and through channel partners;
•continued expansion of our business into new and adjacent vertical markets; and
•general administration expenses, including legal and accounting expenses related to being a public company.
These investments may not result in increased revenue or growth in our business. If we are unable to increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position, and results of operations will be harmed, and we may not be able to achieve or maintain profitability over the long term. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our financial performance may be harmed, and we may not be able to achieve or maintain profitability in the future.
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. In addition, the sales cycle can last several months from initial engagement to contract negotiation and execution, culminating in delivery of our products to our customers, and this sales cycle can be even longer, less predictable and more resource-intensive for both larger volume sales as well as sales to customers in certain market segments. Customers may also require additional internal approvals or seek to pilot our products for a longer trial period before deciding to purchase our solutions. As a result, the timing of individual sales can be difficult to predict. In some
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. 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.
Any of the above factors, individually or in the aggregate, may result in significant fluctuations in our financial and other operating results from period to period. These fluctuations could result in our failure to meet our operating plan or the expectations of investors or analysts for any period. If we fail to meet such expectations for these or other reasons, the trading price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.
We rely on reseller partners to generate a growing portion of our revenue, both in the United States and in emerging international markets which are generally slower to develop. If we fail to maintain successful relationships with our
reseller partners, or if our partners fail to perform, our ability to market, sell and distribute our products will be limited, and our business, financial position and results of operations will be harmed.
In addition to our direct sales force, we rely on our reseller partners to sell our products. We expect to continue to focus on generating sales to new and existing customers through our reseller partners as a part of our growth strategy. We provide our reseller partners with specific training and programs to assist them in selling and supporting our products, but there can be no assurance that these steps will be effective. 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. Our agreements with our reseller partners are generally non-exclusive and these partners may also market, sell and support products that are competitive with us and may devote more resources to the marketing, sales and support of such competitive products. These partners may have incentives to promote our competitors’ products to the detriment of ours or may cease selling our products altogether. Our reseller partners may cease or de-emphasize the marketing of our products with limited or no notice and with little or no penalty. Our agreements with our reseller partners may generally be terminated for any reason by either party with advance notice prior to each annual renewal date. It cannot be certain that we will retain these reseller partners or that we will be able to secure additional or replacement reseller partners. The loss of one or more of our significant reseller partners or a decline in the number or size of orders from them could harm our operating results. In addition, any new reseller partner requires extensive training and may take several months or more to achieve productivity. Our reseller partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our reseller partners misrepresent the functionality of our products, subscriptions or services to customers or violate laws or our corporate policies.
If we fail to effectively manage our existing resellers, or if our reseller partners are unsuccessful in fulfilling the orders for our products, or if we are unable to enter into arrangements with, and retain a sufficient number of, high quality reseller partners in each of the regions in which it sells products and keep them motivated to sell our products, our ability to sell our products and operating results will be harmed. The termination of our relationship with any significant reseller partner may also adversely impact our sales and operating results.
We may not be successful in our strategy to move away from purchase subscription contracts in favor of pure subscription contracts, which could have an adverse impact on our business, financial position and results of operations.
We are transitioning our go-to-market strategy to focus on 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. 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. This strategy depends in part on our ability to drive increased pure subscription contracts through our reseller partners. During 2022, the majority of our sales, and the vast majority of sales made through our reseller partners, were in the form of purchase subscription contracts. We and/or our resellers may not be as successful at marketing pure subscription contracts to prospective end-use customers, which would negatively impact our sales growth.
As part of this overall strategy, we entered into a distributor licensing agreement with Columbia Tech in March 2023. 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. 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. Further, Columbia Tech does not regularly act in the capacity of a distributor for the products it manufactures. If Columbia Tech fails to perform as required under the distributor licensing agreement, this could impair the reputation of our company and our products, our relationships with resellers, our
ability to earn revenue from SaaS subscription contracts, and our ability to receive license fees from our contract manufacturer.
Increases in component costs, long lead times, supply shortages, and supply changes could disrupt our supply chain and have an adverse effect on our business, financial condition, and operating results.
We acquire certain of our materials, which are critical to the ongoing operation and future growth of our business, from several third parties, both foreign and domestic. Generally, our third-party contract manufacturers contract directly with component suppliers, and we rely on our contract manufacturers to manage their supply chains. If our contract manufacturers experience any supply chain disruptions or our relationships with our contract manufacturers terminate, we could experience delays, which could negatively impact our business, customer relationships, and margins. We also source some materials and components directly from suppliers. While most components and materials for our products are available from multiple suppliers, certain of those items are only available from limited or sole sources. Should any of these suppliers become unavailable or inadequate, or impose terms unacceptable to us, such as increased pricing terms, we could be required to spend a significant amount of time and expense to develop alternate sources of supply, and may not be successful in doing so on terms acceptable to it, or at all. 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. While there are several potential manufacturers for most of these products, all our products are currently manufactured, assembled, tested and, packaged by a third-party manufacturer located in Massachusetts. In most cases, we rely on this manufacturer to procure components and, in some cases, provide manufacturing engineering work. 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.
We also use a third-party contract manufacturer located in Massachusetts as a second source for the production of a key sensor component used in our touchless security screening systems. If our third-party contract manufacturers experience a delay, disruption, or quality control problems in its operations or if the third-party contract manufacturers do not renew or terminate our agreement with them, our operations could be significantly disrupted and our product shipments could be delayed. Qualifying new manufacturers and commencing volume production is expensive and time consuming. Ensuring that a contract manufacturer is qualified to manufacture our products or components to our standards is time consuming. In addition, there is no assurance that contract manufacturers can scale their production of our products or components at the volumes and in the quality that we require. If contract manufacturers are unable to do these things, we may have to move production for the products or components to a new or existing third-party manufacturer, which would take significant effort and our business, results of operations and financial condition could be materially adversely affected.
As we contemplate moving manufacturing into different jurisdictions, we may be subject to additional and significant challenges in ensuring that quality, processes, and costs, among other issues, are consistent with our expectations. 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 it to take on additional risk for potential failures of our products.
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. As a result, the loss of a limited or sole source supplier could adversely affect our relationships with our customers and our results of operations and financial condition.
Our third-party contract manufacturers' facilities, and our suppliers’ and our customers’ facilities, are vulnerable to disruption due to natural or other disasters, including climate-related events, strikes and other events beyond our control.
A major earthquake, fire, tsunami, hurricane, cyclone, or other disaster, such as a major flood, seasonal storms, drought, extreme temperatures, nuclear event, or terrorist attack affecting our facilities or the areas in which we are located, or affecting those of our customers or third-party manufacturers or suppliers, could significantly disrupt our or their operations and delay or prevent product shipment or installation during the time required to repair, reinforce, rebuild or replace our or their damaged manufacturing facilities. These delays could be lengthy and costly. Climate change may contribute to increased frequency or intensity of certain of these events, as well as contribute to chronic changes in the physical environment (such as changes to ambient temperature and precipitation patterns or sea-level rise) that may impair the operating conditions of these facilities, or otherwise adversely impact our operations. If our third-party contract manufacturers', suppliers’, or customers’ facilities are negatively impacted by such a disaster, production, shipment, and installation of our products could be delayed, which can impact the period in which it recognizes the revenue related to that product sale. Additionally, customers may delay purchases of our products until operations return to normal. Even if we can respond quickly to a disaster, the continued effects of the disaster could create uncertainty in our business operations. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil, labor strikes, war, including Russia's invasion of Ukraine and the related geopolitical impacts, or the outbreak of epidemic diseases (including the on-going COVID-19 pandemic) could have a negative effect on our operations and sales.
We recognize a substantial portion of our revenue ratably over the term of our agreements with customers and, as a result, downturns or upturns in sales may not be immediately reflected in our operating results.
We recognize a substantial portion of our revenue ratably over the terms of our agreements with customers, which generally occurs over a four-year period. As a result, a substantial portion of the revenue that we report in each period will be derived from the recognition of deferred revenue relating to agreements entered into during previous periods. Consequently, a decline in new sales or renewals in any one period may not be immediately reflected in our revenue results for that period. This decline, however, will negatively affect our revenue in future periods. Accordingly, the effect of significant downturns in sales and market acceptance of our products, and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. Our model also makes it difficult to rapidly increase our revenue through additional sales in any period, as revenue from new customers generally will be recognized over the term of the applicable agreement.
We also intend to increase our investment in research and development, sales and marketing and general and administrative functions and other areas to grow our business. These costs are generally expensed as incurred (with the exception of sales commissions), as compared to our revenue, a substantial portion of which is recognized ratably in future periods. 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.
The AI-based weapons detection for security screening market is new and evolving and may not grow as expected or may develop more slowly or differently than we expect. If the market does not grow as we expect, or if we cannot expand our solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at an accelerated rate, and we may incur operating losses.
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. To date, enterprise and corporate security budgets have allocated a majority of dollars to conventional security solutions, such as lower priced walk-through metal detectors. 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.
Further, sophisticated attackers are skilled at adapting to new technologies and developing new methods of breaching organizations’ security systems, and changes in the nature of security threats could result in a shift in budgets away from products such as ours. In addition, while recent high visibility attacks at publicly and privately-owned venues and schools have increased market awareness of mass shootings, terrorist, or other attacks, if such attacks were to decline, or enterprises or governments perceived that the general level of attacks has declined, our ability to attract new customers and expand our sales to existing customers could be materially and adversely affected. If products such as ours are not viewed by organizations as necessary, or if customers do not recognize the benefit of our products as a critical element of an effective security strategy, our revenue may not grow as quickly as expected, or may decline, and the trading price of our stock could suffer.
In addition, it is difficult to predict customer adoption and retention rates, customer demand for our products, the size and growth rate of the market for AI-based weapons detection for security screening, the entry of competitive products or the success of existing competitive products. Any expansion in our market depends on a number of factors, including the cost, performance and perceived value associated with our products and those of our competitors. If these products do not achieve widespread adoption or there is a reduction in demand for products in our market caused by a lack of customer acceptance, technological challenges, regulatory restrictions, competing technologies or products, decreases in corporate spending, weakening economic conditions or otherwise, it could result in reduced customer orders, early terminations, reduced customer retention rates or decreased revenue, any of which would adversely affect our business operations and financial results. You should consider our business and prospects in light of the risks and difficulties it may encounter in this new and evolving market.
If we are unable to acquire new customers, our future revenues and operating results will be harmed. Likewise, potential customer turnover in the future, or costs we incur to retain our existing customers, could materially and adversely affect our financial performance.
Our success depends on our ability to acquire new customers in new and existing vertical markets, and in new and existing geographic markets. If we are unable to attract a sufficient number of new customers, we may be unable to generate revenue growth at desired rates. The physical security solutions market is competitive and many of our competitors have substantial financial, personnel and other resources that they utilize to develop solutions and attract customers. As a result, it may be difficult for us to add new customers to our customer base. Competition in the marketplace may also lead us to win fewer new customers or result in us providing discounts and other commercial incentives. 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. 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. If customers in other countries do not perceive the threat of firearms and weapons to be significant enough to justify the purchase of our products, we will be unable to establish a meaningful business outside the United States. If we are unable to attract a sufficient number of new customers outside the United States, we may be unable to generate future revenue growth at desired rates in the long term.
If we are unable to sell additional existing and new products to our customers and maintain and grow our customer retention rates, our future revenue and operating results will be harmed.
Our future success depends, in part, on our ability to expand the deployment of our products with existing customers by selling them additional Evolv Express systems. This may require increasingly sophisticated and costly sales efforts and may not result in additional sales. In addition, the rate at which our customers purchase additional products depends on a number of factors, including the perceived need for additional touchless security screening solutions as well as general economic conditions. If our efforts to sell additional products to our customers are not successful, our business may suffer.
If our products fail or are perceived to fail to detect threats such as a firearm or other potential weapon or explosive device, or if our products contain undetected errors or defects, these failures or errors could result in injury or loss of life, which could harm our brand and reputation and have an adverse effect on our business and results of operations.
If our products fail or are perceived to fail to detect and prevent attacks or if our products fail to identify and respond to new and increasingly complex and unpredictable methods of attacks, our business and reputation may suffer. There is no guarantee that our products will detect and prevent all attacks, especially in light of the rapidly changing security landscape to which it must respond, as well as unique factors that may be present in our customers’ operating environments. Additionally, our products may falsely detect items that do not actually represent threats. These false positives may impair the perceived reliability of our products, and may therefore adversely impact market acceptance of our products, and could result in negative publicity, loss of customers and sales and increased costs to remedy any problem.
Our products, which are complex, may also contain undetected errors or defects when first introduced or as new versions are released. We have experienced these errors or defects in the past in connection with new products and product upgrades. We expect that these errors or defects will be found from time to time in the future in new or enhanced products after commercial release. Defects may result in increased vulnerability to attacks, cause our products to fail to detect security threats, or temporarily interrupt our products’ ability to screen visitors in a customer’s location. Any errors, defects, disruptions in service or other performance problems with our products may damage our customers’ business and could harm our reputation. If our products fail to detect security threats for any reason, including failures due to customer personnel or security processes, it may result in significant costs, the attention of our key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew or cause other significant customer relations problems to arise.
We may also be subject to liability claims for damages related to errors or defects in our products. For example, if our products fail to detect weapons or explosive devices that are subsequently used by terrorists, criminals or unbalanced individuals to cause casualties at a high profile, public venue, we could incur financial damages and our reputation could also be significantly harmed. A material liability claim or other occurrence that harms our reputation or decreases market acceptance of our products may harm our business and operating results. Although we have limitation of liability provisions in our terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state, or local laws or ordinances, or unfavorable judicial decisions in the United States or other countries. The sale and support of our products also entails the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation, divert or distract management’s time and other resources, and harm our business and reputation.
The loss of designation of our Evolv Express system as a Qualified Anti-Terrorism Technology under the Homeland Security SAFETY Act could result in adverse reputational and financial consequences.
Our Evolv Express system has been awarded the U.S. Department of Homeland Security ("DHS") SAFETY Act Designation as a Qualified Anti-Terrorism Technology. Technologies that are awarded the SAFETY Act Designation have undergone rigorous use and review to restatemeet and/or exceed the DHS' performance standards that include examination of test results for weapons detection, operational use and effectiveness, manufacturing and quality assurance practices, and customer feedback.
Any amendments or interpretive guidance related to the SAFETY Act may affect our ability to retain our SAFETY Act Designation, may increase the costs of compliance, and/or may negatively impact our ability to attract new customers. Because we view our SAFETY Act Designation as a differentiating factor among our industry peers, if laws and regulations change relating to the SAFETY Act or if we fail to comply with the SAFETY Act's requirements, our business, financial condition, results of operations, and stock price could be materially and adversely affected.
If we do not successfully anticipate market needs and enhance our existing products or develop new products that meet those needs on a timely basis, we may not be able to compete effectively and our ability to generate revenues will suffer.
Our customers face evolving security risks that require them to adapt to increasingly complex infrastructures that incorporate a variety of security solutions. We face significant challenges in ensuring that our products effectively identify and respond to these security risks without disrupting the performance of our customers’ infrastructures. 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. Even if we are able to anticipate, develop and commercially introduce enhancements and new products, there can be no assurance that enhancements or new products will achieve widespread market acceptance.
New products, as well as enhancements to our existing products, could fail to attain sufficient market acceptance for many reasons, including:
•delays in releasing new products, or product enhancements;
•failure to accurately predict market demand and to supply products that meet this demand in a timely fashion;
•inability to protect against new types of attacks or techniques used by terrorists or other threat sources;
•defects in our products, errors or failures of our products;
•negative publicity or perceptions about the performance or effectiveness of our products;
•introduction or anticipated introduction of competing products by our competitors;
•installation, configuration, sensitivity setting, or usage errors by our customers; and
•easing or changing of regulatory requirements at the federal, state, and/or local levels related to security or other aspects of our business.
If we fail to anticipate market requirements or fail to develop and introduce product enhancements or new products to meet those needs in a timely manner, it could cause us to lose existing customers and prevent us from gaining new customers, which would significantly harm our business, financial condition and results of operations.
While we continue to invest significant resources in research and development to enable our products to continue to address the security risks that our customers face, the introduction of products embodying new technologies could also render our existing products or services obsolete or less attractive to customers. If we spend significant time and effort on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected.
Our business model is predicated, in part, on building a customer base that will generate a recurring stream of revenues through the sale of our subscription contracts. If that recurring stream of revenues does not develop as expected, or if our business model changes as the industry evolves, our operating results may be adversely affected.
Our business model is dependent, in part, on our ability to maintain and increase subscriptions for our proprietary products as they generate recurring revenues. Existing and future customers of our products may not purchase our subscriptions for our proprietary products at the same rate at which customers currently purchase those subscriptions. If our current and future customers purchase a lower volume of our subscriptions for our proprietary products, our recurring revenue stream relative to our total revenues would be reduced and our operating results would be adversely affected.
A portion of our revenue is generated by sales to government entities and such sales are subject to a number of challenges and risks.
Approximately 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. Selling to government entities can be highly competitive, expensive, and time-consuming, and often requires significant upfront time and expense without any assurance that it will win a sale. Government demand and payment for our solutions may also be impacted by changes in fiscal or contracting policies, changes in government programs or applicable requirements, the adoption of new laws or regulations or changes to existing laws or regulations, public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solutions. 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. 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. Any failure by us or our reseller partners to safeguard and maintain the confidentiality of such information could subject us to liability and reputational harm, which could materially and adversely affect our results of operations and financial performance. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit may cause the government to shift away from our solutions and may result in a reduction of revenue, fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely impact our results or operations.
Downturns in general economic and market conditions and reductions in spending may reduce demand for our products and services and may impact third parties on which we rely, which could harm our revenue, results of operations, and cash flows, and could make it difficult to predict revenue for a particular period.
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. Further worsening, broadening or protracted extension of an economic downturn could have a material negative impact on our business, revenue, results of operations and cash flows. In addition, concerns regarding continued budgetary challenges in the United States and Europe, increasing interest rates in the United States and around the world, a sustained inflationary environment, recessionary pressures, geopolitical turmoil (including Russia's invasion of Ukraine) and terrorism in many parts of the world, and the effects of climate change have and may continue to put pressure on global economic conditions and physical security concerns. If we do not succeed in convincing customers that our products should be an integral part of their overall approach to security and that a fixed portion of their annual security budgets should be allocated to our products, general reductions in security spending by our customers are likely to have a disproportionate impact on our business, results of operations and financial condition. 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. 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.
We also face risks from financial difficulties or other uncertainties experienced by our suppliers, channel partners or other third parties on which we rely. If our partners and suppliers are negatively impacted by declining economic conditions or circumstances arising from military conflicts and such third parties are unable to supply us with required materials or components or otherwise assist us in operating our business, our business could be harmed. In addition, military conflicts, such as Russia's invasion of Ukraine, have and could continue to disrupt or otherwise adversely impact our operations and those of third parties upon which we rely. Related sanctions, export controls, and other actions have and may in the future be initiated by nations including the United States, the EU, China, or Russia (such as potential cyberattacks, disruption of energy flows, and others), which could adversely affect our business and/or our supply chain.
Uncertainty about future economic conditions and market volatility also makes it difficult to forecast operating results and to make decisions about future investments. Future or continued economic weakness for us or our customers, failure of our customers and markets to recover from such weakness, customer financial difficulties and reductions in spending on security systems could have a material adverse effect on demand for our products, and consequently on our business, financial condition and results of operations.
Our brand, reputation and ability to attract, retain, and serve our customers are dependent in part upon the reliable performance of our products, infrastructure, and employees.
Our brand, reputation and ability to attract, retain, and serve our customers are dependent in part upon the reliable performance of, and the ability of our existing customers and new customers to access and use, our solutions, including real-time analytics and intelligence. We have experienced, and may in the future experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, equipment failure, human or software errors, capacity constraints, and fraud or cybersecurity attacks. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time.
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. Damage to our reputation and the cost of remedying these problems could negatively affect our business, financial condition and operating results. Additionally, our third-party hosting suppliers have no obligations to renew their agreements with us on commercially reasonable terms or at all, and certain of the agreements governing these relationships may be terminated by either party at any time. If we are unable to maintain, renew, or expand our agreements with these providers on commercially reasonable terms, we may experience costs or downtime as we transition our operations.
Any disruptions or other performance problems with our products could harm our reputation and business and may damage our customers’ businesses. Interruptions in our service delivery might reduce our revenue, cause us to issue credits to customers, subject us to potential liability and cause customers not to renew their subscription purchases of our products.
If we do not effectively expand, train, and retain qualified sales and marketing personnel, we may be unable to acquire new customers or sell additional products to successfully pursue our growth strategy.
We depend significantly on our sales force to attract new customers and expand sales to existing customers. As a result, our ability to grow our revenue depends in part on our success in recruiting, training, and retaining sufficient numbers of sales personnel to support our growth, particularly in the United States and, to a more limited extent, internationally. 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. 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. Based on our past experience, it takes approximately six to 12 months before a new sales force member operates at target performance levels, depending on their role. However, we may be unable to achieve or maintain our target performance levels with large numbers of new sales personnel as quickly as we have done in the past. Our failure to hire a sufficient number of qualified sales force members and train them to operate at target performance levels may materially and adversely impact our projected growth rate.
If we are not able to maintain and enhance our brand or reputation as an industry leader, our business and operating results may be adversely affected.
We believe that maintaining and enhancing our reputation as the leader in next-generation AI-based weapons detection for security screening is critical to our relationship with our existing end-user customers and reseller partners and our ability to attract new customers and reseller partners. The successful promotion of our brand will depend on multiple factors, including our marketing efforts, our ability to continue to deliver a superior customer experience and develop high-quality features for our products and our ability to successfully differentiate our products from those of our competitors. Our brand promotion activities may not be successful or yield increased revenue. Additionally, the performance of our reseller partners may affect our brand and reputation if customers do not have a positive experience with our products as implemented by our reseller partners or with the implementation generally. The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new geographies and vertical markets and as more sales are generated through our reseller partners. 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.
If our customers are unable to implement our products successfully, or if we fail to effectively assist our customers in installing our products and provide effective ongoing support and training, customer perceptions of our products may be impaired or our reputation and brand may suffer.
Our products are deployed in a wide variety of indoor and outdoor environments, including large venues with multiple entry points. Some of our customers have experienced difficulties implementing our products in the past and may experience implementation difficulties in the future. If our customers are unable to implement our products successfully, customer perceptions of our products may be impaired or our reputation and brand may suffer.
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.
Successful deployment and operation of our products depend on the knowledge and skill of the customer security personnel or implementation contractors charged with setting up, configuring, monitoring, and troubleshooting the equipment in their own environment. Many of our customers experience relatively high turnover in their security personnel, creating opportunities for knowledge and skill gaps that can result, and have resulted, in configuration, sensitivity setting, or operational errors that allow prohibited threats into customer facilities. In these situations, customers can perceive, and have perceived, that our products have failed to perform as designed until and unless we have been able to demonstrate otherwise. There can be no assurance that we or our implementation partners will successfully isolate and identify failures due to customer error in the future, and this 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.
Our customers depend in large part on customer support delivered by us to resolve issues relating to the use of our products. However, even with our support, our customers are ultimately responsible for effectively using our products and ensuring that their staff is properly trained in the use of our products. The failure of our customers to correctly use our products, or our failure to effectively assist customers in installing our products and provide effective ongoing support and training, may result in an increase in the vulnerability of our customers’ facilities and visitors to security threats. We are also in the process of expanding our customer success and support organizations, including the engagement and training of third-party contractors. It can take significant time and resources to recruit, hire and train qualified technical support and service employees and contractors. We may not be able to keep up with demand, particularly if the sales of our products exceed our internal forecasts. 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. 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.
We are dependent on the continued services and performance of our senior management and other key employees, as well as on our ability to successfully hire, train, manage and retain qualified personnel, especially those in sales and marketing and research and development.
Our future performance depends on the continued services and contributions of our senior management, particularly Peter George, our President and Chief Executive Officer, and other key employees to execute on our business plan and to identify and pursue new opportunities and product innovations. We do not maintain key man insurance for any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. Our senior management and key employees are generally employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of the services of our senior management, particularly Mr. George and our founders, or other key employees for any reason could significantly delay or prevent our development or the achievement of our strategic objectives and harm our business, financial condition, and results of operations.
Our ability to successfully pursue our growth strategy will also depend on our ability to attract, motivate and retain our personnel, especially those in sales and marketing and research and development. We face escalating compensation demands from new and prospective employees, as well as intense competition for these employees from numerous technology, software and other companies, especially in certain geographic areas in which we operate, and we cannot ensure that we will be able to attract, motivate and/or retain additional qualified employees in the future. If we are unable to attract new employees and retain our current employees, we may not be able to adequately develop and maintain new products, or market our existing products at the same levels as our competitors and it may, therefore, lose customers and market share. our failure to attract and retain personnel, especially those in sales and marketing, research and development and engineering positions, could have an adverse effect on our ability to execute our business objectives and, as a result, our ability to compete could decrease, our operating results could suffer and our revenue could decrease. Even if we are able to identify and recruit a sufficient number of new hires, these new hires will require significant training before they achieve full productivity and they may not become productive as quickly as we would like, or at all.
We incorporate technology and components from third parties into our products, and our inability to obtain or maintain rights to the technology could harm our business.
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 may not be able to rely on indemnification obligations of third parties if some of our agreements with our suppliers and licensors may be terminated for convenience by them. If we are unable to obtain or maintain rights to any of this technology because of intellectual property infringement claims brought by third parties against our suppliers and licensors or against us, or if we are unable to continue to obtain such technology or enter into new agreements on commercially reasonable terms, our ability to develop and sell products, subscriptions and services containing such technology could be severely limited, and our business could be harmed. Disputes with suppliers and licensors over uses or terms could result in the payment of additional royalties or penalties by us, cancellation or non-renewal of the underlying license or litigation. In the event that we cannot renew and/or expand existing licenses, we may be required to discontinue or limit our use of the operations, products, or offerings that include or incorporate the licensed intellectual property. Any such discontinuation or limitation could have a material and adverse impact on our business, financial condition, and results of operation. Additionally, if we are unable to obtain necessary technology and components from third parties, including certain sole suppliers, we may be forced to acquire or develop alternative technology or components, which may require significant time, cost and effort and may be of lower quality or performance standards. This would limit or delay our ability to offer new or competitive products and increase our costs of production. If alternative technology or components cannot be obtained or developed, we may not be able to offer certain functionality as part of our products, subscriptions and services. 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.
We have used “open source” software in connection with the development and deployment of our software products, and we expect to continue to use open source software in the future. Open source software is licensed by its authors or other third parties under open source licenses, which in some instances may subject us to certain unfavorable conditions, including requirements that we offer our products that incorporate the open source software for no cost, that we make publicly available all or part of the source code for any modifications or derivative works we create based upon, incorporating or using the open source software, or that we license such modifications or derivative works under the terms of the particular open source license.
Companies that incorporate open source software into their products have, from time to time, faced claims challenging the use of open source software and compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source licensing terms. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, we cannot guarantee that we will be successful, that all open source software is reviewed prior to use in our products, that our developers have not incorporated open source software into our products that we are unaware of or that they will not do so in the future.
Furthermore, there are an increasing number of open source software license types, almost none of which have been interpreted by U.S. or foreign courts, resulting in a dearth of guidance regarding the proper legal interpretation of such licenses. As a result, there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our products and services. If we are held to have breached or failed to fully comply with all the terms and conditions of an open source software license, we could face infringement claims or other liability, or be required to seek costly licenses from third parties to continue providing our offerings on terms that are not economically feasible, if at all, to re-engineer all or a portion of our products, to discontinue or delay the provision of our offerings if re-engineering could not be accomplished on a timely basis or to make generally available, in source code form, our proprietary code. Further, in addition to risks related to license requirements, use of certain open source software carries greater technical and legal risks than does the use of third-party commercial software. For example, open source software is generally provided without any support or warranties or other contractual protections regarding infringement or the quality of the code, including the existence of security vulnerabilities. To the extent that our products depends upon the successful operation of open source software, any undetected errors or defects in open source software that we use could prevent the deployment or impair the functionality of our systems and injure our reputation. In
addition, the public availability of such software may make it easier for others to compromise our products. Any of the foregoing risks could materially and adversely affect our business, financial condition and results of operations.
We may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations or otherwise harm our operating results.
We may in the future acquire or invest in, businesses, products, or technologies that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. We may not be able to fully realize the anticipated benefits of any future acquisitions or anticipated benefits may not transpire. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated.
There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or integrate the acquired personnel, operations, products, services and technologies successfully or effectively manage the combined business following the acquisition and our management may be distracted from operating our business. 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.
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. Generally, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our business, results of operations and financial condition.
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. 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.
Our future success and competitive position depend in part on our ability to protect our intellectual property and proprietary technologies. To safeguard these rights, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual protections in the United States and other jurisdictions, all of which provide only limited protection and may not now or in the future provide us with a competitive advantage. We maintain a program of identifying technology appropriate for patent protection. Our practice is to require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individuals during their work for us and require that all proprietary information disclosed will remain confidential. Such agreements may not be enforceable in full or in part in all jurisdictions and any breach could have a negative effect on our business and our remedy for such breach may be limited.
We own or co-own seven issued U.S. patents and thirteen issued foreign patents and have fifteen pending or allowed patent applications relating to our products. It cannot be certain that any patents will issue from any patent applications, that patents that issue from such applications will give us the protection that we seek or that any such patents will not be challenged, invalidated, or circumvented. Any patents that may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be enforceable in actions against alleged infringers. We have registered the Evolv Express® and Evolv Edge® names and logos in the United States and certain other countries. We also have registrations and/or pending applications for additional marks in the United States and other countries; however, we cannot be certain that any future trademark registrations will be issued for pending or future applications or that any registered trademarks will be enforceable or provide adequate protection of our proprietary rights. We also license software from third parties for integration into our products, including open source software and other software available on commercially reasonable terms. We cannot be certain that such third parties will maintain such software or continue to make it available. If we are unable to maintain sufficient intellectual property protection for our proprietary technologies or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors and other third parties could develop and commercialize technologies similar or identical to ours, and our ability to successfully commercialize our technologies may be impaired.
While we take steps to protect our intellectual property, the steps we take may be inadequate to prevent infringement, misappropriation, or other violations of our intellectual property rights. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our patents or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our offerings may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States, and mechanisms for enforcement of intellectual property rights in some foreign countries may be inadequate. Changes in the law or adverse court rulings may also negatively affect our ability to prevent others from using our technology. To the extent we expand our international activities, our exposure to unauthorized copying and use of our technology and proprietary information may increase.
We may be required to spend significant resources to monitor and protect our intellectual property rights. From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results, and financial condition. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation, could delay further sales or the implementation of our products and offerings, impair the functionality of our products and offerings, delay introductions of new features or enhancements, result in our substituting inferior or more costly technologies into our products and offerings, or injure our reputation.
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. 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. If we do infringe a third party’s rights and are unable to provide a sufficient workaround, we may need to negotiate with holders of those rights to obtain a license to those rights or otherwise settle any infringement claim as a party that makes a claim of infringement against us may obtain an injunction preventing us from shipping products containing the allegedly infringing technology. As the number of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.
Future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence or protection. There can be no assurance that we will not be found to infringe or otherwise violate any third-party intellectual property rights or to have done so in the past.
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.
In addition, royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Some licenses may also be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of the foregoing events could seriously harm our business, financial condition, and results of operations.
Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results. Moreover, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our ordinary shares. We expect that the occurrence of infringement claims is likely to grow as the market for our products and solutions grows. Accordingly, our exposure to damages resulting from infringement claims could increase and this could further exhaust our financial and management resources.
Confidentiality arrangements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our employees, licensees, independent contractors, advisors, suppliers, reseller partners, and customers. However, we cannot guarantee that we have entered into such agreements with each party that may have or has had access to our trade secrets or proprietary technology and processes. Further, despite these efforts, these arrangements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our technologies that we consider proprietary. In addition, if others independently develop equivalent knowledge, methods, and know-how, we would not be able to assert trade secret rights against such parties. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary information will be effective.
Moreover, policing unauthorized use of our technologies, trade secrets and intellectual property and enforcing a claim that a party illegally disclosed or misappropriated a trade secret are difficult, expensive, time-consuming, and the outcome is unpredictable. In addition, effective trade secret protection may not be available in every country in which our products are available or where we have employees or independent contractors as some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be materially and adversely harmed. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and employment laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Our products and services may be affected from time to time by design and manufacturing defects that could adversely affect our business and result in harm to our reputation.
Our touchless security screening systems are complex and may contain undetected defects or errors when first introduced or as enhancements are released that, despite testing, are not discovered until after a product has been used. This could result in delayed market acceptance of those products or claims from resellers, customers, or others, which may result in litigation, increased end user warranty, support and repair or replacement costs, damage to our reputation and business, or significant costs and diversion of support and engineering personnel to correct the defect or error. We may from time to time become subject to warranty or product liability claims related to product quality issues that could lead us to incur significant expenses.
Evolv attempts to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or applicable laws in existence or enacted in the future.
The sale and support of our products entails the risk of product liability claims. 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.
If the general level of physical threats/attacks declines, or is perceived by our current or potential customers to have declined, our business could be harmed.
Our business is substantially dependent on enterprises and governments recognizing that mass shootings, terrorist attacks and similar security threats are not necessarily effectively prevented by conventional security products such as walk-through metal detectors. High visibility attacks on prominent enterprises and governments have increased market awareness of the problem of security threats and help to provide an impetus for enterprises and governments to devote resources to protecting against security threats, such as testing our products, purchasing them and broadly deploying them within their organizations. 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. 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.
The sales prices for our products and services may decline for a variety of reasons, including competitive pricing pressures, discounts, a change in our mix of products and services, anticipation of the introduction of new products or promotional programs. Competition continues to increase in the market segments in which we participate, and we expect competition to further increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product and service offerings may reduce the price of products that compete with theirs or may bundle them with other products and services. Additionally, currency fluctuations in certain countries and regions may negatively impact prices that partners and customers are willing to pay in those countries and regions. We cannot be certain that we will be successful in developing and introducing new products with enhanced functionality on a timely basis, or that our new product offerings, if introduced, will enable it to maintain our prices and gross profits at levels that will allow us to maintain positive gross margins and achieve profitability.
Because our products may collect and store visitor and related information and images, domestic and international privacy and cyber security concerns, and other laws and regulations, could result in additional costs and liabilities to us or inhibit sales of our products.
We may be affected by cyber-attacks and other means of gaining unauthorized access to our products, systems, and data. For instance, cyber criminals or insiders may target us or third parties with which we have business relationships to obtain data, or in a manner that disrupts our operations or compromises our products or the systems into which our products are integrated. 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. While we take measures to protect the security of personal information, it is possible that our security controls over personal information and other practices we follow may not prevent the unauthorized access to, or the unintended release of, personal information. In addition, we do not know whether our current practices will be deemed sufficient under applicable laws or whether new regulatory requirements might make our current practices insufficient. If there is a breach of our computer systems and we know or suspect that certain personal information has been accessed, or used inappropriately, we may need to inform the affected individual and may be subject to significant fines and penalties. In the event of a breach we could face government scrutiny or consumer class actions.
Cybersecurity incidents directed at us or our third-party vendors can range from errors on the part of our personnel to uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures known as advanced persistent threats. Cybersecurity incidents are also constantly evolving, increasing the difficulty of detecting and successfully defending against them. In the ordinary course of our business, we and our third-party vendors collect and store personal information, as well as our proprietary business information and intellectual property and that of our customers and employees. Additionally, we rely on third-parties and their security procedures for the secure storage, processing, maintenance, and transmission of information that is critical to our operations. Despite measures designed to prevent, detect, address, and mitigate cybersecurity incidents, such incidents may occur to us or our third-party providers and, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties, including personal information of our customers and employees) and the disruption of business operations. We have experienced and expect to continue to experience attempted routine cyber-attacks of our information technology networks, such as through phishing scams and ransomware. Although none of these actual or attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have such an impact in the future. For example, we are at risk for interruptions, outages and breaches of: operational systems, including business, financial, accounting, product development, data processing or production processes, owned by us or our third-party vendors or suppliers; facility security systems, owned by us or our third-party vendors or suppliers; in-product technology owned by us or our third-party vendors or suppliers; the integrated software in our solutions; or customer or other data that we process or our third-party vendors or suppliers process on our behalf. Such cyber incidents could materially disrupt operational systems; result in loss of intellectual property, trade secrets or other proprietary or competitively sensitive information; compromise certain information of customers, employees, suppliers, or others; jeopardize the security of our facilities; or affect the performance of in-product technology and the integrated software in our solutions.
A cyber incident could be caused by disasters, insiders (through inadvertence or with malicious intent) or malicious third parties (including nation-states or nation-state supported actors) using sophisticated, targeted methods to circumvent firewalls, encryption, and other security defenses, including hacking, fraud, trickery, or other forms of deception. The techniques used by cyber attackers change frequently and may be difficult to detect for long periods of time. Although we maintain information technology measures designed to protect us against intellectual property theft, data breaches and other cyber incidents, such measures will require updates and improvements, and we cannot guarantee that such measures will be adequate to detect, prevent or mitigate cyber incidents.
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. Defending against claims or litigation based on any security breach or incident, regardless of their merit, will be costly and may cause reputation harm. In addition, we may incur significant costs for remediation that may include liability for stolen assets or information, repair of system damage, and compensation to customers, employees, and business partners. 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. 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. In the United States, we are subject to laws in all states and numerous territories that require notification. Complying with such numerous and complex regulations in the event of unauthorized access would be expensive and difficult, and failure to comply with these regulations could subject us to regulatory scrutiny and additional liability.
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, our reseller partners and our customers are subject to a number of domestic and international laws and regulations that apply to cloud services and the internet generally. 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. The regulatory framework for online services, data privacy and cyber security issues worldwide can vary substantially from jurisdiction to jurisdiction, is rapidly evolving and is likely to remain uncertain for the foreseeable future. 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. 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. As we seek to expand our business, we are, and may increasingly become subject to various laws, regulations, and standards, and may be subject to contractual obligations relating to data privacy and security in the jurisdictions in which we operate. Any significant change to applicable laws, regulations or industry practices, or how each is interpreted, regarding the use or disclosure of personal information, or regarding the manner in which the express or implied consent of customers for the use and disclosure of personal information is obtained, could require us to modify our products and features, possibly in a material manner and subject to increased compliance costs, which may limit our ability to develop new products and features that make use of the personal information that our customers voluntarily share. Any failure, or perceived failure, by us to comply with any federal or state privacy or security laws, regulations, industry self-regulatory principles, or codes of conduct, regulatory guidance, orders to which we may be subject, or other legal obligations relating to data privacy or security could adversely affect our reputation, brand and business, and may result in claims, liabilities, proceedings or actions against us by governmental entities, customers or others. Any such claims, proceedings or actions could hurt our reputation, brand, and business, force us to incur significant expenses in defense of such proceedings or actions, distract our management, increase our costs of doing business, result in a loss of customers and result in the imposition of monetary penalties.
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, the FTC and many state attorneys general are interpreting federal and state consumer protection laws to impose standards
for the online collection, use, dissemination, and security of data. Such standards require us to publish statements that describe how we handle personal data and choices individuals may have about the way we handle their personal data. If such information that we publish is considered untrue or inaccurate, we may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences. Moreover, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal data secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. State consumer protection laws provide similar causes of action for unfair or deceptive practices.
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. A business required to comply with BIPA is not permitted to sell, lease, trade or otherwise profit from biometric identifiers or biometric information it collects, and is also under obligations to have a written policy with respect to the retention and destruction of all biometric identifiers and biometric information; ensure that it informs the subject of the collection and the purpose of the collection and obtains consent for such collection; and obtain consent for any disclosure of biometric identifiers or biometric information. Individuals are afforded a private right of action under BIPA and may recover statutory damages equal to the greater of $1,000 per incident or actual damages and reasonable attorneys’ fees and costs. Several class action lawsuits have been brought under BIPA, as the statute is broad and still being interpreted by the courts. Additionally, a number of other proposals exist for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and materially adversely affect our business. To the extent that regulation of data privacy and cybersecurity continues to increase, we may incur additional compliance costs and may be exposed to increased noncompliance risk.
In addition, many state legislatures have adopted legislation that regulates how businesses operate online, including measures relating to privacy, data security, and data breaches. Such legislation includes the California Consumer Privacy Act (“CCPA”), which came into effect in 2020, increases privacy rights for California consumers and imposes obligations on companies that process their personal information. Among other things, the CCPA gives California consumers expanded rights related to their personal information, including the right to access and delete their personal information and receive detailed information about how their personal information is used and shared. The CCPA also provides California consumers the right to opt-out of certain sales of personal information and may restrict the use of cookies and similar technologies for advertising purposes. The CCPA prohibits discrimination against individuals who exercise their privacy rights, and provides for civil penalties for violations enforceable by the California Attorney General as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action is expected to increase the likelihood of, and risks associated with, data breach litigation. Additionally, the California Privacy Rights Act (the “CPRA”), which substantially amends the CCPA, went into effect on January 1, 2023 and becomes enforceable on July 1, 2023. 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, comprehensive privacy statutes that share similarities with the CCPA have been enacted in Virginia (effective January 1, 2023), Colorado (effective July 1, 2023), Connecticut (effective July 1, 2023), and Utah (effective December 31, 2023). These comprehensive state privacy laws may increase our compliance costs and potential liability, particularly in the event of a data breach, and could have a material adverse effect on our business, including how we use personal information, our financial condition, and the results of our operations or prospects.
Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. This legislation may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment in resources to compliance programs, could impact strategies and availability of previously useful data, and could result in increased compliance costs and/or changes in business practices and policies.
In addition, some laws may require us to notify governmental authorities and/or affected individuals of data breaches involving certain personal information or other unauthorized or inadvertent access to or disclosure of such information. We may need to notify governmental authorities and affected individuals with respect to such incidents. For example, laws in all 50 U.S. states may require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach may be difficult and costly. We also may be contractually required to notify consumers or other counterparties of a
security breach. Regardless of our contractual protections, any actual or perceived security breach or breach of our contractual obligations could harm our reputation and brand, expose us to potential liability or require us to expend significant resources on data security and in responding to any such actual or perceived breach.
Internationally, virtually every jurisdiction in which we operate and has customers and/or have prospective customers to which we market has established its own data security and privacy legal frameworks with which we, our reseller partners or our customers must comply. Further, many federal, state and foreign government bodies and agencies have introduced, and are currently considering, additional laws and regulations, including related to the development and integration of AI, machine learning, and additional emerging data technologies. If passed, we will likely incur additional expenses and costs associated with complying with such laws, as well as face heightened potential liability if we are unable to comply with these laws.
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”). 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. Non-compliance with the EU GDPR and UK GDPR can trigger steep fines of up to the greater of (i) 4% of total worldwide annual turnover and (ii) €20 million. Separate EU and UK laws and regulations (and national implementations thereof) govern the protection of consumers and of electronic communications and these are also evolving. For instance, the current European laws that cover the use of cookies and similar technology and marketing online or by electronic means are under reform. A draft of the new ePrivacy Regulation extends the strict opt-in marketing rules with limited exceptions to business-to-business communications, alters rules on third-party cookies, web beacons and similar technology and significantly increases penalties. We cannot yet determine the impact such future laws, regulations, and standards may have on our business. Such laws and regulations are often subject to differing interpretations and may be inconsistent among jurisdictions. Compliance with the EU GDPR and UK GDPR, and other such laws, may incur substantial expense and we may be required to make significant changes in our business operations and product and services development, all of which may adversely affect our revenues and our business.
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. On July 16, 2020, the Court of Justice of the European Union (“CJEU”) invalidated the EU-US Privacy Shield Framework (“Privacy Shield”) under which personal data could be transferred from the EEA to US entities who had self-certified under the Privacy Shield scheme.
The CJEU further noted that reliance on the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield) alone may not necessarily be sufficient in all circumstances and that transfers must be assessed on a case-by-case basis. European court and regulatory decisions subsequent to the CJEU decision of July 16, 2020 have taken a restrictive approach to international data transfers. The UK regulator has adopted a similar approach to data export outside of the UK and, on March 21, 2022, the international data transfer agreement and the international data transfer addendum to the European Commission’s standard contractual clauses for international data transfers came into force. The UK regulator also recommends, consistent with the European Commission approach, a transfer risk assessment is undertaken. Use of such standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures is currently uncertain. As the enforcement landscape further develops, and supervisory authorities issue further guidance on international data transfers, we could suffer additional costs, complaints and/or regulatory investigations or fines; we may have to stop using certain tools and vendors and make other operational changes and/or it could otherwise affect the manner in which we provide our services, and could adversely affect our business, operations, and financial condition.
We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection to the extent possible. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or with our existing practices or the features of our products and may conflict with other rules or regulations, making enforcement, and thus compliance requirements, ambiguous, uncertain, and potentially inconsistent. 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. Any of these events could cause us to incur significant costs in investigating and defending such claims and, if found liable, pay significant damages. Further, these proceedings and any subsequent adverse outcomes may cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.
We may also be subject to claims of liability or responsibility for the actions of third parties with whom we interact or upon whom it relies in relation to various products, including but not limited to vendors and business partners. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our products, which could have an adverse effect on our business. Any inability to adequately address privacy and/or data concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business.
Separately, there are increasing concerns regarding how AI and machine learning can result in unintentional bias or discrimination, including on the basis of race, ethnicity, gender, or other protected classes. Regulators and other governmental bodies are increasingly focused on mitigating or controlling for bias and discrimination in the context of AI and machine learning. 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.
The costs of compliance with, and other burdens imposed by, the laws, rules, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Even the perception of privacy or discrimination concerns, whether or not valid, may harm our reputation, inhibit adoption of our products by current and future customers, or adversely impact our ability to attract and retain workforce talent. Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement action against us, including fines, imprisonment of company officials and public censure, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could have a material adverse effect on our operations, financial performance and business. We may also have costs associated with engaging with stakeholders, including investors, insurance providers, and other capital providers, on such issues.
Our operating results may be harmed if we are required to collect sales and use or other related taxes for our products in jurisdictions where it has not historically done so.
Taxing jurisdictions, including state, local and foreign taxing authorities, have differing rules and regulations governing sales and use or other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. While we believe that we are in material compliance with our obligations under applicable taxing regimes, one or more states, localities or countries may seek to impose additional sales or other tax collection obligations on us, including for past sales by us or our reseller partners. It is possible that we could face sales tax audits and that such audits could result in tax-related liabilities for which it has not accrued. A successful assertion that it should be collecting additional sales or other taxes on our products in jurisdictions where it has not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our products or otherwise harm our business and operating results.
In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations (such as the recent United States Inflation Reduction Act which, among other changes, introduced a 15% corporate minimum tax on certain United States corporations and a 1% excise tax on certain stock redemptions by United States corporations), including those relating to income tax nexus, jurisdictional mix of profits at varying statutory tax rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made. 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,
(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.
Our ability to utilize net operating loss carryforwards as well as research and development tax credit carryforwards to offset future taxable income may be subject to certain limitations and we could be subject to tax audits or examinations that could result in a loss of our net operating loss carryforwards as well as research and development credits and/or cash tax exposures.
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. 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. Additionally, as of December 31, 2022 and 2021, we had gross United Kingdom net operating loss carryforwards of approximately $2.3 million and $1.5 million, respectively, that will not expire. As of December 31, 2022, we had gross U.S. federal and state research and development and other tax credit carryforwards of $2.5 million and $1.6 million, respectively, which may be available to offset future tax liabilities and the majority of which begin to expire in 2033 and 2029, respectively. As of December 31, 2021, we had gross U.S. federal and state research and development and other tax credit carryforwards of $3.3 million and $2.1 million, respectively, which may be available to offset future tax liabilities and the majority of which begin to expire in 2033 and 2029, respectively.
These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset our future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in our equity ownership over a three-year period, the corporation’s ability to use our pre-change net operating loss carryforwards and other pre-change tax attributes to offset our post-change income may be limited. 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. 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. If we determine that an ownership change has occurred and our ability to use our historical net operating loss and tax credit carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.
Our cash and cash equivalents could be adversely affected if the financial institutions at which we hold our cash and cash equivalents fail.
Market conditions impacting financing institutions could impact our ability to access some or all of our cash, cash equivalents and marketable securities, and we may be unable to obtain alternative funding when and as needed and on acceptable terms, if at all. The performance of the capital markets affects the values of funds that are held in marketable securities. These assets are subject to market fluctuations and various developments, including, without limitation, rating agency downgrades that may impair their value. Further, a bankruptcy of one of the banks in which or through which we hold or invest our cash reserves, might prevent us from accessing all or a portion of that cash for an uncertain period of time if at all.
We maintain substantially all of our cash and cash equivalents in accounts with U.S. and multi-national financial institutions, including Silicon Valley Bank ("SVB"), and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. For example, on March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. The FDIC created a successor bridge bank, Silicon Valley Bridge Bank, N.A. (“SVBB”), and all deposits of SVB were transferred to SVBB under a systemic risk exception approved by the Federal Reserve, the U.S. Treasury Department, and the FDIC. While the Federal Reserve, the U.S. Treasury Department, and the FDIC announced in a joint statement on March 12, 2023 that all SVB deposits, including both insured and uninsured amounts, would be available in full to account holders, a similar failure of any of the financial institutions where we maintain our cash and cash equivalents could impact our ability to access uninsured funds in a timely manner or at all. There is no guarantee that the Federal Reserve Board, the U.S. Treasury Department and the FDIC will provide access to uninsured funds in the future in the event of the closure of any other banks or financial institutions in a timely fashion or at all. Any inability to access or delay in accessing these funds could adversely affect our business, financial position, and liquidity.
If we do not effectively diversify our bank deposits and investment portfolio, the value and liquidity of our investments may fluctuate substantially which could affect our access to capital and results of operations in a material way. Furthermore, our access to our cash and cash equivalents in amounts adequate to finance our operations could be significantly impaired if the financial institutions with which we have arrangements directly face liquidity constraints or failures. Investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any material decline in available funding or our ability to access our cash and cash equivalents could adversely impact our results of operations and liquidity.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our products, improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to it, if at all. 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.
As of December 31, 2022, we had total outstanding debt of $29.7 million under our Credit Agreement with SVB (“2022 SVB Credit Agreement”), as amended. In connection with the closure of SVB on March 10, 2023 and the creation of SVBB, SVBB assumed all loans that were previously held by SVB. SVBB continues to hold the Company’s term loans under the same existing terms and covenants which were in place with SVB. Subject to the limits contained in the 2022 SVB Credit Agreement, we may incur additional indebtedness in the future. Our leverage (including additional indebtedness that we might incur in the future) could have important consequences to us, including:
•exposing us to the risk of increased interest rates as our borrowings under our current debt facilities are at (and any borrowings in the future might be at) variable rates;
•making it more difficult for us to make payments on our debt;
•limiting our ability to pay future dividends;
•increasing our vulnerability to downturns in our business, the security screening industry or the general economy and limiting our flexibility in planning for, or reacting to, changes in our business;
•requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;
•restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•requiring us to comply with financial and operational covenants as well as liquidity and leverage covenants, restricting us, among other things, from placing liens on our assets, making investments, incurring debt, making payments to our equity or debt holders and engaging in transactions with affiliates;
•limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, product development, debt service requirements, acquisitions, and general corporate or other purposes;
•preventing us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our product offerings; and
•placing us at a competitive disadvantage compared to our competitors who may be less leveraged.
Consequences of the indebtedness that we have borrowed (and any indebtedness that we might borrow in the future) may require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund operations, capital expenditures, and future business opportunities. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we would be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all. Further, our ability to issue additional debt could be adversely affected by other factors, including market conditions. The failure by us or our subsidiaries to comply with financial covenants or other restrictions contained in the agreements governing our indebtedness could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations and could further exacerbate the risks to our financial condition described above. Upon the occurrence of an event of default under any of the agreements governing our indebtedness, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements. If any of our indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern.
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 have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of personnel with an appropriate level of internal controls and accounting knowledge, training and experience commensurate with our financial reporting requirements. Additionally, the limited personnel resulted in our inability to consistently establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, among other things, insufficient segregation of duties in our finance and accounting functions. 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. Specifically, we did not design and maintain controls to timely analyze and account for debt modifications and extinguishments, convertible notes, warrant instruments, non-routine complex revenue transactions including the leasing of products and transfer of inventory for leased assets into property plant and equipment, merger transactions, and the accounting and valuation of earn out liabilities.
•We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including segregation of duties and controls over the preparation and review of account reconciliations and journal entries.
•We did not design and maintain effective controls to ensure the recording of revenue transactions in the appropriate period.
•We did not design and maintain effective controls over the completeness and accuracy of accounts payable and accrued liabilities.
These material weaknesses resulted in audit adjustments and certain immaterial misstatements in the Evolv financial statements to prepaid and other current assets, accounts payable and accrued liabilities, long-term and short-term debt, convertible notes, contingent earn-out liabilities, change in fair value of contingent earn-out liability, equity, commission assets, contract asset, revenue, deferred revenue, accounts receivable, inventory, property plant and equipment, cost of sales and various expense line items and related financial statement disclosures as of and for the periodyears ended December 31, 2019, 2020 (ii) itsand 2021. The material weakness related to accounting for warrant instruments, the classification of various accounts in the consolidated financial statements asand the presentation and disclosure of items in the consolidated statement of cash flows also resulted in the revision of the Company's previously issued 2020 annual financial statements, 2021 quarterly and annual financial statements, and quarterly financial statements for the periodsthree months ended September 30, 2020March 31, 2022. See Note 1 to our consolidated financial statements for the year ended December 31, 2022 contained elsewhere in this Annual Report on Form 10-K. 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. These IT deficiencies did not result in a misstatement to the consolidated financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined these deficiencies in the aggregate constitute a material weakness.
We have continued implementation of a plan to remediate these material weaknesses. These remediation measures are ongoing and include hiring additional accounting, internal audit, and IT personnel to bolster our reporting, technical accounting, and IT capabilities. We are in the process of designing and implementing controls to formalize roles and review responsibilities to align with our team’s skills and experience and designing and implementing controls over segregation of duties. We have engaged outside consultants to assist us in these efforts. We added, and continue to add, finance personnel, including a Chief Financial Officer and a Chief Accounting Officer, to strengthen our internal accounting team, to provide oversight, structure and reporting lines, and to provide additional review over our disclosures. We are in the process of designing and implementing controls related to (i) the period-end financial reporting process and the classification of various accounts in our consolidated financial statements, (ii) timely identification and accounting for non-routine, unusual or complex transactions, including controls over the preparation and review of accounting memoranda addressing these matters, and (iii) its balance sheet asrevenue recognition, including non-routine complex revenue transactions that may also include the leasing of August 4, 2020 and its pro forma balance sheet asproducts, the recording of August 4, 2020,revenue transactions in the accompanying notesappropriate period, and the completeness and accuracy of accounts payable and accrued liabilities. We are in the process of designing and maintaining formal accounting policies, procedures, and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of account reconciliations and journal entries. We are in the process of designing and implementing information technology general controls, including controls over program change management, the review and update of user access rights and privileges, controls over batch jobs and data backups, and program development approvals and testing. In April 2022, we went live on a new Enterprise Resource Planning ("ERP") system and have implemented, and continue to implement, IT general controls related to the new system.
While we are undertaking efforts to remediate these material weaknesses, the material weaknesses will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively. 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. The effectiveness of our internal control over financial reporting is subject to various 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. 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 includedwithin the time periods specified by the rules and regulations of the SEC, could be adversely affected which, in this Amendment, including describingturn, may adversely affect our reputation and business and the trading price of our common stock.
As a public company, we are required, pursuant to Section 404(a) of the Sarbanes-Oxley Act, to furnish a report by management on the effectiveness of our internal control over financial reporting for each Annual Report on Form 10-K filed with the SEC. This assessment includes disclosure of any material weaknesses identified by our management in internal control over financial reporting. Once we cease to be an emerging growth company, our independent registered public accounting firm will also be required, pursuant to Section 404(a) of the Sarbanes-Oxley Act, to attest to the effectiveness of our internal control over financial reporting in each annual report on Form 10-K to be filed with the SEC. We are also required to disclose material changes made in our internal control over financial reporting on a quarterly basis. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC, the stock exchange on which our securities are listed or other regulatory authorities, which would require additional financial and management resources. Compliance with Section 404 requires that we incur substantial costs and expend significant management efforts.
Any failure to implement new or improved controls, or difficulties encountered in their implementation, could result in errors in our consolidated financial statements that could result in a restatement
of our financial statements and
its impact on previously reported amounts.The restatement resultscould cause us to fail to meet our reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our common stock. In addition, any such failures could result in litigation or regulatory actions by the SEC or other regulatory authorities, loss of investor confidence, delisting of our securities and harm to our reputation and financial condition, or diversion of financial and management resources from the Company’s prioroperation of our business.
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.
We are required to comply with anti-corruption and anti-bribery laws in the jurisdictions in which we operate, including the Foreign Corrupt Practices Act, or FCPA, in the United States, the UK Bribery Act, or the Bribery Act, and other similar laws in other countries in which we do business. As a result of doing business in foreign countries, including through reseller partners and agents, we will be exposed to a risk of violating anti-corruption laws. Some of the international locations in which we will operate have developing legal systems and may have higher levels of corruption than more developed nations. 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. We may deal with both governments and state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. The FCPA further requires us to keep and maintain books and records that accurately reflect transactions and dispositions of assets and to maintain a system of internal accounting controls. The Bribery Act also prohibits “commercial” bribery not involving foreign officials, facilitation payments, and the receipt of bribes, while providing a defense to a charge of failure to prevent bribery to companies that demonstrate they had in place adequate procedures to prevent bribery.
We are also required to comply with applicable export controls and economic and trade sanctions laws and regulations, such as those administered and enforced by OFAC, the U.S. Department of State, and the U.S. Department of Commerce. Our global operations expose us to the risk of violating, or being accused of violating these laws.
Although we have adopted policies and procedures reasonably designed to promote compliance with such laws, there can be no assurance that such policies or procedures will work effectively at all times or protect us against liability under these or other laws for its outstandingactions taken by our employees, reseller partners and other third parties who are acting on our behalf with respect to our business. 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. In addition, investigations of any actual or alleged violations of such laws or policies related to us could harm our business, financial condition, results of operations, cash flows and prospects.
The long-term impacts of the COVID-19 pandemic, or other similar public health developments, could have an adverse effect on business, results of operations, and financial condition.
We face various risks and uncertainties related to the uncertain, ongoing impact of COVID-19, and the possibility of other public health developments, which has led to disruption and volatility in the global economy and capital markets, increasing the cost of capital and adversely impacting access to capital. It has, and may continue to, disrupt third-party contract manufacturers and supply chain. We may also experience customer payment delays for our products which could negatively impact our results of operations. We may also experience some delays in installation of our products at customers’ facilities, which could lead to postponed revenue recognition for those transactions.
The long-term effects of COVID-19 on the global economy and on us are difficult to assess or predict and may include a further decline in the market prices of our products, risks to employee health and safety, risks for the deployment of our products and services and reduced sales in geographic locations impacted. Any of these factors may have a material and adverse effect on our business operations and results of operations.
Risks Related to Our Common Stock and Warrants
The market price of our common stock and warrants is likely to be highly volatile, and you may lose some or all of your investment.
The 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.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies.
Certain of our warrants are accounted for as liabilities and the changes in value of such warrants could have a material effect on our financial results.
On April 12, 2021, the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement regarding the accounting and reporting considerations for warrants issued
in connection with its initial public offering in August 2020 as components of equity instead of as derivative liabilities. The warrant agreement governing the warrants includes a provision that provides for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant.Upon review of theby special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” promulgated by(the “SEC Statement”). Specifically, the SEC Statement focused on April 12, 2021 (the “SEC Staff Statement”),certain settlement terms and provisions related to certain tender offers following a business combination, which terms are similar to those contained in the Company’s management furtherwarrant agreement governing our public warrants.
We evaluated the
warrants, with assistance from valuation and accounting
consultants, under Accounting Standards Codification (“ASC”) Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Section 815-40-15 addresses equity versus liability treatment
and classification of
equity-linked financial instruments, includingour public warrants and
states that a warrant may be classifieddetermined to classify such warrants as
a component of equity only if, among other things, the warrant is indexedderivative liabilities measured at fair value, with changes in fair value each period reported in earnings. Due to the
issuer’s common stock. Under ASC Section 815-40-15, a warrant is not indexed to the issuer’s common stock if the terms of the warrant require an adjustment to the exercise price upon a specified event and that event is not an input to therecurring fair value
of the warrant. Basedmeasurement, we expect that we will recognize non-cash gains or losses on
management’s evaluation, the Company’s audit committee, in consultation with management concluded that the Company’sour public warrants
are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40-15 because the characteristics of the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares.As a result of the above, the Company is required to measure the fair value of the warrants at the end of each reporting period and recognize changes inthat the fair value from the prior period in the Company’s operating results for the current period, and to restate its financial statements accordingly.
amount of such gains or losses could be material.
The Company’s
prior accounting
for the warrants as components of equity instead of as derivative liabilities did not have any effect on the Company’s previously reported operating expenses, cash flows, cash or total stockholders’ equity.In connection with the restatement, the Company’s management reassessed the effectiveness of its disclosure controls and procedures as of December 31, 2020 and September 30, 2020. As a result of that reassessment and in lighttreatment of the SEC Staff Statement, the Company’s management determined that its disclosure controls and procedures as of December 31, 2020 and September 30, 2020 were not effective solely as a result of its classification of the warrants as components of equity instead of as derivative liabilities. For more information, see Item 9A included in this Amendment.
The Company has not amended its previously filed Form 10-Q as of and for the periods ended September 30, 2020 or its Current Reports on Form 8-K for the balance sheet and pro forma balance sheet as of August 4, 2020 affected by the restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Amendment and the financial statements and related financial information contained in such previously filed reports should no longer be relied upon.
The restatement is more fully described in Note 2 of the notes to the condensed financial statements included herein.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits (in Exhibits 31.1 to 32.2) to this Amendment under Item 15 of Part IV hereof.
Except as described above, this Amendment does not amend, update or change any other items or disclosures contained in the Original Filing, and accordingly, this Amendment does not reflect or purport to reflect any information or events occurring after the original filing date or modify or update those disclosures affected by subsequent events. Accordingly, this Amendment should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Original Filing. Unless the context otherwise requires, references to “warrants” in this Amendment refers to both NewHold’s public warrants and NewHold’s Private Placement Warrants (as defined herein).
NEWHOLD INVESTMENT CORP.
Annual Report on Form 10-K for the Period Ended December 31, 2020
i
CERTAIN TERMS
References to “the Company,” “NewHold,” “our,” “us” or “we” refer to NewHold Investment Corp., a blank check company incorporated in Delaware on January24, 2020. References to our “Sponsor” refer to NewHold Industrial Technology Holdings LLC, a Delaware limited liability company. References to our “IPO” refer to the initial public offering of NewHold Investment Corp., which closed on August4, 2020 (the “IPO Closing Date”).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. The statements contained in this report that are not purely historical are forward-looking statements. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about our:
• ability to complete our initial business combination;
• success in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination;
• officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving our initial business combination, as a result of which they would then receive expense reimbursements;
• potential ability to obtain additional financing to complete our initial business combination;
• pool of prospective target businesses;
• the ability of our officers and directors to generate a number of potential investment opportunities;
• potential change in control if we acquire one or more target businesses for stock;
• the potential liquidity and trading of our securities;
• the lack of a market for our securities;
• use of proceeds not held in the trust account or available to us from interest income on the trust account balance; or
• financial performance following our initial public offering.
The forward-looking statements contained in this report are based on our current expectationsinterpretation of the SEC Statement and beliefs concerning future developmentsother guidance and their potential effectsmay change in light of any further interpretive guidance, as may be applicable.
Certain of our earn-out shares and founder shares are accounted for as liabilities and the changes in value of such shares could have a material effect on us. There can be no assurance that future developments affecting us will be thoseour financial results.
We evaluated the accounting treatment of our earn-out shares and founder shares and determined to classify such shares as liabilities measured at fair value, with changes in fair value each period reported in earnings. Due to the recurring fair value measurement, we expect that we have anticipated. These forward-looking statements involvewill recognize non-cash gains or losses on our earn-out and founder shares each reporting period and that the amount of such gains or losses could be material.
Volatility in our share price could subject us to securities class action litigation.
In the past, securities class action litigation has often been brought against a numbercompany following a decline in the market price of risks, uncertainties (someits securities or the completion of a merger. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which are beyondcould harm our control)business.
Because we do not anticipate paying any cash dividends in the foreseeable future, capital appreciation, if any, would be your sole source of gain.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and we do not anticipate declaring or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described underpaying any cash dividends for the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or shouldforeseeable future. As a result, capital appreciation, if any, of our assumptions prove incorrect, actual resultscommon stock would be your sole source of gain on an investment in such shares for the foreseeable future.
Future sales of common stock may vary in material respects from those projected in these forward-looking statements. We undertake no obligationcause the market price of our securities to update or revise any forward-looking statements, whether as a resultdrop significantly, even if our business is doing well.
Certain of new information, future events or otherwise, except as may be required under applicable securities laws and/or if and when management knows or has a reasonable basis on which to concludeour stockholders that previously disclosed projections are no longer reasonably attainable.
ii
PART I
ITEM 1. BUSINESS
Introduction
We are a blank check company incorporatedhold Founder Shares were in the State of Delaware on January 24, 2020 for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, with one or more target businesses.
On August 4, 2020, we consummated our initial public offering (the “IPO”) of 15,000,000 units (the “Units”), each Unit consisting of one share of Class A common stockpast subject to lock-up restrictions that have expired. The Founder Shares are also subject to certain share-performance-based vesting provisions whereas 50% of the Company, par value $0.0001 per share (the “Class A Common Stock”) and one-half of one redeemable warrant of the Company (each, a “Warrant”), each whole Warrant entitling the holder thereof to purchase one share of Class A Common Stock for $11.50 per share (subject to adjustment). The Units were soldFounder Shares vested at a price of $10.00 per Unit, and the IPO generated gross proceeds of $150,000,000. Pursuant to an Underwriting Agreement, dated July 30, 2020 (the “Underwriting Agreement”), by and between the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters (the “Underwriters”), we granted the Underwriters a 45-day option to purchase up to 2,250,000 additional Units solely to cover over-allotments, if any
On August 4, 2020, simultaneously with the closing of the IPO, we consummated the private placement (“Private Placement”) with the Sponsor and certain funds and accounts managed by Magnetar Financial LLC, UBS O’Connor LLC, and Mint Tower Capital Management B.V. (collectively the “Anchor Investors”) of 5,250,000 warrants (the “Private Warrants”) at a price of $1.00 per Private Warrant, generating gross proceeds to the Company of $5,250,000. The Private Warrants are identical to the Warrants (as defined below) sold in the IPO except that the Private Warrants will be non-redeemable and may be exercised on a cashless basis, in each case so long as they continue to be held by the Sponsor, the anchor investors or their permitted transferees. Additionally, our Sponsor and anchor investors have agreed not to transfer, assign, or sell anyMerger, 25% of the Private WarrantsFounder Shares shall vest on or underlying securities (except in limited circumstances, as described inbefore the Registration Statement) until the date that is 30 days after the date we complete our initial business combination. The Sponsor and anchor investors were granted certain demand and piggyback registration rights in connection with the purchasefifth anniversary of the Private Warrants.
Subsequently, on August 12, 2020, the Underwriters exercised the over-allotment option in full, and the closing of the issuance and sale of the additional 2,250,000 Units (the “Over-Allotment Units”) occurred on August 14, 2020. The issuance by the Company of the Over-Allotment Units at a price of $10.00 per unit resulted in total gross proceeds of $22,500,000. On August 14, 2020, simultaneously with the issuance and sale of the Over-Allotment Units, the Company consummated the sale of an additional 450,000 Private Warrants (the “Over-Allotment Private Placement” and, together with the IPO Private Placement, the “Private Placements”), generating gross proceeds of $450,000. The Private Warrants issued in the Over-Allotment Private Placement were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as the transaction did not involve a public offering.
As of August 14, 2020, a total of $172,500,000 of the net proceeds from the sale of the Units in the IPO (including the Over-Allotment Units) and the Private Placements were deposited in a trust account established for the benefit of the Company’s public stockholders at UBS Financial Services, Inc. with Continental Stock Transfer & Trust Company acting as trustee. None of the funds held in trust will be released from the trust account, other than interest income to pay any tax obligations, until the earlier of (i) the consummation of the Company’s initial business combination and (ii) the Company’s failure to consummate a business combination by August 4, 2022.
In February 2020, we issued an aggregate of 4,312,500 founder shares to our sponsor for an aggregate purchase price of $25,000 in cash, or approximately $0.006 per share. In July 2020, our sponsor forfeited 920,000 founder shares and the anchor investors purchased 920,000 founder shares for an aggregate purchase price of approximately $5,333, or approximately $0.006 per share. The number of founder shares issued was determined based on the expectation that such founder shares would represent 20% of the outstanding shares upon completion of our IPO. These Class B shares will automatically convert into shares of Class A common stock at the time of our initial business combination as described herein. In the case that additional shares of Class A common stock, or equity-linked securities, are issued or deemed issued in excess of the amounts offered in our IPO and related to the closing of the initial business combination, the ratio at which shares of Class B common stock shall convert into shares of Class A common stock will be adjusted (unless the holders of a majority of the outstanding shares of
1
Class B common stock agree to waive such adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as-converted basis, 20% of the sum of the total number of all shares of common stock outstanding upon the completion of our IPO plus all shares of Class A common stock and equity-linked securities issued or deemed issued in connection with the initial business combination (excluding any shares or equity-linked securities issued, or to be issued, to any seller in the initial business combination, any private placement-equivalent warrants issued to our sponsor or its affiliates upon conversion of loans made to us).
On September 22, 2020, we announced that holders of the Company’s units may elect to separately trade the shares of Class A common stock and warrants included in its units, commencing on or about September 22, 2020. The shares of Class A common stock and warrants will trade on the Nasdaq Capital Market (“Nasdaq”) under the symbols NHIC and NHICW, respectively. Units not separated will continue to trade on Nasdaq under the symbol NHICU. After separation, the shares of Class A common stock and warrants may be recombined to create units.
Business Combination Agreement
On March 5, 2021, NewHold entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, NHIC Sub Inc., a Delaware corporation and a wholly owned subsidiary of NewHold (“Merger Sub”), and Evolv Technologies, Inc. dba Evolv Technology, Inc., a Delaware corporation (“Evolv”).
Pursuant to the terms of the Merger Agreement, a business combination between NewHold and Evolv (the “Evolv Business Combination”) will be effected through the merger of Merger Sub with and into Evolv, with Evolv surviving the merger as a wholly owned subsidiary of NewHold (the “Merger”). The Board of Directors of NewHold (the “Board”) has unanimously (i) approved and declared advisable the Merger Agreement, the Merger and the other transactions contemplated thereby and (ii) resolved to recommend approval of the Merger Agreement and related matters by the stockholders of NewHold.
Treatment of Evolv Securities:
Preferred Stock. Immediately prior to the effective time of the Merger (the “Effective Time”) and subject to the consent of the holders of Evolv’s preferred stock, par value $0.001 per share (the “Evolv Preferred Stock”), each issued and outstanding share of Evolv Preferred Stock shall be converted into shares of the common stock, par value $0.001 per share, of Evolv (the “Evolv Common Stock”) at the then-applicable conversion rates.
Convertible Notes. Immediately prior to the Effective Time, each issued and outstanding convertible promissory note of Evolv (the “Evolv Convertible Notes”) will be automatically converted into shares of Evolv Common Stock in accordance with the then-applicable conversion rates.
Warrants. With the exception of a warrant to purchase 6,756,653 shares of Evolv Common Stock (the “Finback Warrant”), immediately prior to the Effective Time, Evolv shall cause each outstanding warrant to purchase shares of Evolv capital stock to be exercised in full on a cash or cashless basis or terminated without exercise. With respect to the Finback Warrant, the portion that is vested immediately prior to the Effective Time shall be either exercised in full on a cash or cashless basis or terminated as of the Effective Time, while the portion that is unvested as of immediately prior to the Effective Time shall be automatically converted into a warrant to purchase shares of the Class A common stock, par value $0.0001 per share, of NewHold (the “NewHold Common Stock”), proportionately adjusted for the Exchange Ratio (as defined below). All Evolv warrants that are converted into shares of Evolv Common Stock are hereafter referred to as the “Evolv Warrants.”
Common Stock. At the Effective Time, each share of Evolv Common Stock (including shares outstanding as a result of the conversion of the Evolv Preferred Stock, the Evolv Convertible Notes and the Evolv Warrants but excluding shares the holders of which perfect rights of appraisal under Delaware law) will be converted into the right to receive such number of shares of NewHold Common Stock equal to the Exchange Ratio and a number of Earn-Out Shares (as defined below). The Exchange Ratio is defined in the Merger Agreement to be 125,000,000 divided by the number of outstanding shares of Evolv Common Stock and options to purchase shares of Evolv Common Stock as of immediately prior to the Effective Time, after giving effect to the conversion of the Evolv Preferred Stock, Evolv Convertible Notes and Evolv Warrants and as further adjusted pursuant to the Merger Agreement.
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Stock Options. At the Effective Time, each outstanding option to purchase shares of Evolv Common Stock shall be converted into an option to purchase shares of NewHold Common Stock equal to the number of shares subject to such option prior to the Effective Time multiplied by the Exchange Ratio, with the per share exercise price equal to the exercise price prior to the Effective Time divided by the Exchange Ratio.
Earn-Out Shares. Following the closing of the merger, former holders of shares of Evolv Common Stock (including shares received as a result of the Evolv Preferred Stock conversion, Evolv Convertible Notes conversion and Evolv Warrants conversion), former holders of Evolv stock options shall be entitled to receive their pro rata share of up to 15,000,000 additional shares of NewHold Common Stock (the “Earn-Out Shares”)Closing if within a five- year period following the signing date of the Merger Agreement, the closing share price of the NewHold Common Stockcommon stock equals or exceeds any of three thresholds$12.50 over any 20 trading days within a 30-day30-day trading period (each, a “Triggering Event”) and in respect of a former holder of Evolv stock options, the holder continues to provide services to NewHoldremaining 25% will vest on or one of its subsidiaries atbefore the time of such Triggering Event.
The Merger Agreement contains customary representations, warranties and covenantsfifth anniversary of the parties thereto. The consummationClosing if the closing share price of the proposed Evolv Business Combination iscommon stock equals or exceeds $15.00 over any 20 trading days within any 30-day trading period.
Now that these lock-up restrictions have expired, such stockholders are not restricted from selling shares of our common stock held by them that were previously subject to
certainthe lock-up restrictions, other than by applicable securities laws. Sales of our common stock as restrictions end and vesting conditions
as further describedare satisfied may make it more difficult for us to sell equity securities in the
Merger Agreement.For more information about the Merger Agreementfuture at a time and the proposed Evolv Business Combination, see our Current Report on Form 8-K filed with the SEC on March 8, 2021, and the Evolv Disclosure Statementat a price that we will file with the SEC. Unless specifically stated, this Annual Report does not give effect to the proposed Evolve Business Combination and does not contain the risks associated with the proposed Evolv Business Combination. Such risks and effects relating to the proposed Evolv Business Combination will be included in the Evolv Disclosure Statement. INVESTORS AND SECURITY HOLDERS OF NHIC ARE URGED TO READ THESE MATERIALS (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS IN CONNECTION WITH THE MERGER THAT NHIC WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT NHIC, EVOLV AND THE MERGER. The preliminary proxy statement, the definitive proxy statement and other relevant materials in connection with the merger (when they become available), and any other documents filed by us with the SEC, may be obtained free of charge at the SEC’s website (www.sec.gov) or by writing to us at 12141 Wickchester Lane, Houston, TX 77079.
General
Overview
We are a newly organized blank check company incorporated on January 24, 2020 as a Delaware corporation and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses, which we refer to throughout this annual report as our initial business combination. We have not selected any specific business combination target and we have not, nor has anyone on our behalf, initiated any substantive discussions, directly or indirectly, with any business combination target.
We will concentrate on sourcing business combination opportunities with industrial technology businesses, with particular emphasis on those that align with several key themes commonly referred to as “Industry 4.0.” Our management team will target business-to-business sectors whose industry structure is being fundamentally reshaped by technology. They believe that companies in these sectors that are using advanced data analytics, software, artificial intelligence, and cutting edge instrumentation and process automation to make their processes “intelligent” have a significant competitive advantage over those that have not yet embraced such solutions.
We are not, however, required to complete our initial business combination with an industrial technology business and, as a result, we may pursue a business combination outside of that industry. We will seek to acquire businesses that we believe are fundamentally sound but would benefit from a public listing to execute their financial, operational, and strategic plans.
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We believe that the opportunity within industrial technology businesses is driven by several key trends, including:
• Flexible Mass Production. Commercial customers demand increasing variety and customization resulting in businesses requiring more flexible manufacturing and logistics solutions.
• Speed and Agility to Market. Increasing digitization of the selling experience necessitates reducing a product’s time to market and increasing its speed of delivery.
• Supply Chain Optimization. Effective use of technology is allowing companies to more efficiently and effectively manage complex supply chains without increases in inventory.
• Efficiency and Productivity Gains. Organizations continually face pressures from their stakeholders to further reduce costs and environmental impact while increasing output and financial returns.
• Design and Manufacturing Optimization. Designers and engineers desire the ability to economically manufacture a product that very closely matches its optimal design.
• Energy Efficiency. All energy users are demanding the latest in efficiency technology, both to reduce cost and to demonstrate attention to their carbon footprint.
According to KPMG, enterprise spend on intelligent automation, defined as “technologies that enable the transformation and automation of business processes by leveraging any combination of software robotics, cloud, artificial intelligence and smart machines,” is expected to reach $231.9 billion by 2025 (KPMG, Ready, set, fail? Avoiding setbacks in the intelligent automation race, 2018 and KPMG, Easing the pressure points: The state of intelligent automation, 2019). Organizations have invested significant capital to modernize their production processes in recent years. According to Capgemini Research Institute, manufacturers globally made 30% of their factories “smart” from 2018 to 2019, and plan to transform 40% more from 2020 to 2025 (Capgemini, Smart Factories at Scale, 2019).
Consistent with this strategy, we have identified the following general criteria and guidelines that we believe are important in evaluating prospective target businesses. We will focus on these criteria and guidelines in evaluating acquisition opportunities, but we may decide to enter into our initial business combination with a target business that does not meet these criteria and guidelines.
• Companies that operate in industries and sectors that are ripe for technological disruption or are currently undergoing technological transformations. We plan to identify sectors that are in the process of or have significant potential to adopt an industrial technology solution. We will seek to acquire a business that operates within an industry that is witnessing at least one or more trends, mentioned above, which we believe are driving the opportunity within industrial technology.
• Companies with an attractive and defensible competitive position. We will target companies with market positions and technologies that we believe offer long-term competitive advantages. These could include proprietary technology, a market leading product suite, unique processes, strong market share, or a culture of innovation that we believe is enduring and unique.
• Companies with high revenue growth, or with the potential for high revenue growth. We will seek to acquire businesses that have or are believed to achieve significant revenue growth primarily driven by either adopting or providing an industrial technology solution to disrupt the existing paradigm or increase its market position in the end markets in which it serves. To validate future demand, we look for businesses that can clearly demonstrate a compelling return on investment by either adopting or providing an industrial technology solution and the size of the addressable opportunity.
• Companies that exhibit the ability to deliver significant operating leverage and future free cash flow whether they may or may not be profitable currently. We will seek to acquire businesses that already have, or have the potential to generate consistent and increasing free cash flow. We do not require the target businesses to be profitable at the time of acquisition, but expect gross margins and contribution margins to be above, or at least in line with, relevant competitors. We view businesses with high gross margins and contribution margins favorably as these businesses possess the potential to deliver significant operating leverage and free cash flow when fully scaled.
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• Knowledgeable management teams with relevant industry experience and proven track record of developing or deploying a technology solution. We aim to target businesses with expert management teams that have specialized knowledge of their respective industry sector and are active leaders in developing or deploying technology to provide a solution for a problem or challenge within their respective industry sector.
• Benefit from being a public company. We intend to acquire a company that will benefit from being publicly traded and can effectively utilize the broader access to capital and public profile that are associated with being a publicly traded company.
These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular initial business combination may be based, to the extent relevant, on these general guidelines as well as other considerations, factors and criteria that our management may deem relevant.
Competitive Strengths
Accomplished Leadership Team with Relevant Investment, Public Company and Prior Successful SPAC Experience
Our team has over 60 years of combined private equity experience, complemented by extensive public market expertise that includes successful execution of three prior SPAC business combinations. Kevin Charlton, our Chief Executive Officer, served as an executive officer of, and played an integral role throughout all phases of the SPAC process for Hennessy Capital Acquisition Corp., Hennessy Capital Acquisition Corp. II and Hennessy Capital Acquisition Corp. III, including the initial public offering, deal sourcing, due diligence, deal structuring, financing, and back-end execution of the initial business combinations.
History of Successfully Sourcing and Executing Transactions as a Team
NewHold Enterprises, a private investment firm founded in 2017 which controls our sponsor, has completed two platform acquisitions and two add-ons since its inception. Messrs. Charlton, Baynes-Reid and Deutsch also previously executed five transactions at River Hollow Partners, the predecessor to NewHold Enterprises, all proprietarily sourced.
Established Track Record of Sourcing Proprietary Opportunities Suitable for both Private and Public Investing
NewHold Enterprises principals have sourced 325 potential opportunities since its inception in 2017, the vast majority outside of traditional sale processes, funded through a proprietary network of family offices and high net worth individuals. Additionally, Mr. Charlton, in his role as President and Chief Operating Officer of the first three Hennessy Capital SPAC vehicles, was a part of a team that developed a unique SPAC-centered deal sourcing model, which resulted in over 400 targets evaluated over the life of Hennessy Capital Acquisition Corp., Hennessy Capital Acquisition Corp. II and Hennessy Capital Acquisition Corp. III.
Access to NewHold Enterprises’ Proprietary Network of Family Offices and High Net Worth Individuals
NewHold Enterprises sources capital from a series of family offices, each with generally over $1 billion of assets under management, and serves as a direct investing platform for such investors, allowing them to leverage their infrastructure and complement their traditional private equity book. NewHold Enterprises’ network currently consists of more than 100 family offices and more than 95 high net worth investors.
Extensive Experience of Investing in Middle-Market Growth Assets
Our team has extensive experience sourcing and investing in middle market growth companies through private and public investment vehicles. Our focus on flexible hold periods and ownership structures enhances the optionality companies have to focus on operations and integration, and better aligns financial incentives with progressive growth initiatives. Our vehicle and strategy is complementary to NewHold Enterprises’ diversified industrials business. With our IPO, we seek to offer growth equity to industrial technology companies looking for an alternative to traditional private equity.
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Initial Business Combination
Nasdaq rules require that we must complete one or more business combinations having an aggregate fair market value of at least 80% of the value of the assets held in the trust account (excluding the deferred underwriting commissions and taxes payable on the interest earned on the trust account) at the time of our signing a definitive agreement in connection with our initial business combination. Our board of directors will make the determination as to the fair market value of our initial business combination. If our board of directors is not able to independently determine the fair market value of our initial business combination, we will obtain an opinion from an independent investment banking firm that is a member of FINRA or an independent accounting firm with respect to the satisfaction of such criteria. While we consider it unlikely that our board of directors will not be able to make an independent determination of the fair market value of our initial business combination, it may be unable to do so if it is less familiar or experienced with the business of a particular target or if there is a significant amount of uncertainty as to the value of a target’s assets or prospects. We anticipate structuring our initial business combination either (i) in such a way so that the post-transaction company in which our public stockholders own shares will own or acquire 100% of the equity interests or assets of the target business or businesses, or (ii) in such a way so that the post-transaction company owns or acquires less than 100% of such interests or assets of the target business in order to meet certain objectives of the target management team or stockholders, or for other reasons. However, we will only complete an initial business combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act of 1940, as amended, or the “Investment Company Act”. Even if the post-transaction company owns or acquires 50% or more of the voting securities of the target, our stockholders prior to the initial business combination may collectively own a minority interest in the post-transaction company, depending on valuations ascribed to the target and us in the initial business combination. For example, we could pursue a transaction in which we issue a substantial number of new shares in exchange for all of the outstanding capital stock of a target. In this case, we would acquire a 100% controlling interest in the target. However, as a result of the issuance of a substantial number of new shares, our stockholders immediately prior to our initial business combination could own less than a majority of our outstanding shares subsequent to our initial business combination. If less than 100% of the equity interests or assets of a target business or businesses are owned or acquired by the post-transaction company, the portion of such business or businesses that is owned or acquired is what will be taken into account for purposes of Nasdaq’s 80% of net assets test. If the initial business combination involves more than one target business, the 80% of net assets test will be based on the aggregate value of all of the transactions and we will treat the target businesses together as the initial business combination for purposes of a tender offer or for seeking stockholder approval, as applicable.
Sourcing of Potential Business Combination Targets
The NewHold team believes that it is critical to find a transaction where the SPAC offers a unique solution to the seller in comparison to its alternatives. We have found in prior SPACs that it is critical to obtain exclusivity earlier in the process than with other types of transactions, and if the seller is considering a range of transactions, they will only engage with us if the SPAC offers advantages that are critical to their strategy. This requires that our team source a significant number of transactions in order to populate our deal pipeline. We will then apply a series of screens to determine if the potential target is appropriate for a SPAC. These screens would include:
• Does the company have financial reporting that is ready for the public markets?
• Would the strategy of the company benefit from the public markets?
• Is the management team prepared for and interested in the demands of a public listing?
• Given the peer group relevant for the target, is the valuation that a SPAC transaction would offer the seller of interest to them?
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Our Business Combination Process
In evaluating prospective business combinations, we expect to conduct a thorough due diligence review process that will encompass, among other things, a review of historical and projected financial and operating data, meetings with management and their advisors (if applicable), on-site inspection of facilities and assets, discussion with customers and suppliers, legal reviews and other reviews as we deem appropriate. We willThese sales could also utilize our expertise in evaluating operating projections, financial projections and determiningcause the appropriate return expectations given the risk profile of the target business.
We are not prohibited from pursuing our initial business combination with a company that is affiliated with our sponsor, officers or directors. In the event we seek to complete our initial business combination with a company that is affiliated with our sponsor, officers or directors, we, or a committee of independent directors, will obtain an opinion from an independent investment banking firm that is a member of FINRA or an independent accounting firm that our initial business combination is fair to our company from a financial point of view.
Our officers and directors will indirectly own founder shares and/or private placement warrants following our IPO. Because of this ownership, our officers and directors may have a conflict of interest in determining whether a particular target business is an appropriate business with which to effectuate our initial business combination. Further, eachtrading price of our officerscommon stock to fall and directors may have a conflict of interest with respect to evaluating a particular business combination if the retention or resignation of any such officers and directors were to be included by a target business as a condition to any agreement with respect to our initial business combination. For additional information regarding our executive officers’ and directors’ business affiliations and potential conflicts of interest, see “Management — Directors and Executive Officers” and “Management — Conflicts of Interest.”
Each of our officers and directors presently has, and any of them in the future may have additional, fiduciary or contractual obligations to other entities pursuant to which such officer or director is or will be required to present a business combination opportunity. Accordingly, if any of our officers or directors becomes aware of a business combination opportunity which is suitable for an entity to which he or she has then-current fiduciary or contractual obligations to present the opportunity to such entity, he or she will honor his or her fiduciary or contractual obligations to present such opportunity to such entity. We believe, however, that the fiduciary duties or contractual obligations of our officers or directors will not materially affect our ability to complete our initial business combination. Our amended and restated certificate of incorporation will provide that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of our company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonablemake it more difficult for us to pursue, and to the extent the director or officer is permitted to refer that opportunity to us without violating another legal obligation.
Our sponsor and our officers and directors, other than Marc Saiontz and Neil Glat, have agreed not to participate in the formation of, or become an officer or director of, any other special purpose acquisition company with a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, until we have entered into a definitive agreement regarding our initial business combination or we have failed to complete our initial business combination within 24 months after the closingsell shares of our IPO, as such may be extended by stockholder approval. Marc Saiontz and Neil Glat have agreed not to participate in the formation of, or become an officer or director of, any other industrial-focused special purpose acquisition company with a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, until we have entered into a definitive agreement regarding our initial business combination or we have failed to complete our initial business combination within 24 months after the closing of our IPO, as such may be extended by stockholder approval.
Our Management Team
Members of our management team are not obligated to devote any specific number of hours to our matters but they intend to devote as much of their time as they deem necessary to our affairs until we have completed our initial business combination. The amount of time that any member of our management team will devote in any time period will vary based on whether a target business has been selected for our initial business combination and the current stage of the business combination process.
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We believe our management team’s operating and transaction experience and relationships with companies will provide us with a substantial number of potential business combination targets. Over the course of their careers, the members of our management team have developed a broad network of contacts and corporate relationships in various industries. This network has grown through the activities of our management team sourcing, acquiring and financing businesses, our management team’s relationships with sellers, financing sources and target management teams and the experience of our management team in executing transactions under varying economic and financial market conditions. See the section of this annual report entitled “Management” for a more complete description of our management team’s experience.
In addition, the members of our board of directors have significant executive management and public company experience. Over the course of their careers, the members of our management team and board of directors have developed a broad network of contacts and corporate relationships that we believe will be useful for sourcing acquisition opportunities. This network has been developed through our management team’s experience in:
• sourcing, acquiring, operating, developing, growing, financing and selling businesses; and
• executing transactions under varying economic and financial market conditions.
This network has provided our management team with a flow of referrals that have resulted in numerous transactions. We believe that the network of contacts and relationships of our management team will provide us with an important source of acquisition opportunities. In addition, we anticipate that target business candidates will also be brought to our attention from various unaffiliated sources, including investment bankers, private investment funds and other intermediaries. Target businesses may be brought to our attention by such unaffiliated sources as a result of being solicited by us through calls or mailings. These sources may also introduce us to target businesses in which they think we may be interested on an unsolicited basis, since many of these sources will have read this annual report and know the types of businesses we are targeting. Our officers and directors, as well as their affiliates, may also bring to our attention target business candidates that they become aware of through their business contacts as a result of formal or informal inquiries or discussions they may have, as well as attending trade shows or conventions.
Status as a Public Company
We believe our structure will make us an attractive business combination partner to target businesses. As a public company, we offer a target business an alternative to the traditional initial public offering through a merger or other business combination with us. Following an initial business combination, we believe the target business would have greater access to capital and additional means of creating management incentives that are better aligned with stockholders’ interests than it would as a private company. A target business can further benefit by augmenting its profile among potential new customers and vendors and aid in attracting talented employees. In a business combination transaction with us, the owners of the target business may, for example, exchange their shares of stock in the target business for our shares of Class A common stock (or shares of a new holding company) or for a combination of our shares of Class A common stock and cash, allowing us to tailor the consideration to the specific needs of the sellers.
Although there are various costs and obligations associated with being a public company, we believe target businesses will find this method a more expeditious and cost effective method to becoming a public company than the typical initial public offering. The typical initial public offering process takes a significantly longer period of time than the typical business combination transaction process, and there are significant expenses in the initial public offering process, including underwriting discounts and commissions, marketing and road show efforts that may not be present to the same extent in connection with an initial business combination with us.
Furthermore, once a proposed initial business combination is completed, the target business will have effectively become public, whereas an initial public offering is always subject to the underwriters’ ability to complete the offering, as well as general market conditions, which could delay or prevent the offering from occurring or could have negative valuation consequences. Following an initial business combination, we believe the target business would then have greater access to capital and an additional means of providing management incentives consistent with stockholders’ interests and the ability to use its shares as currency for acquisitions. Being a public company can offer further benefits by augmenting a company’s profile among potential new customers and vendors and aid in attracting talented employees.
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While we believe that our structure and our management team’s backgrounds will make us an attractive business partner, some potential target businesses may view our status as a blank check company, such as our lack of an operating history and our ability to seek stockholder approval of any proposed initial business combination, negatively.
We are an “emergingemerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our shares less attractive to investors.
We are an emerging growth company, as defined in
Section 2(a)the Jumpstart Our Business Startups Act of
the Securities Act,2012 (the “JOBS Act”). For as
modified by the JOBS Act. As such,long as we
are eligiblecontinue to
be an emerging growth company, we may take advantage of
certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth
companies”companies,” including
but not limited to, not being required to complyexemption from compliance with the
independent registered public accounting firmauditor attestation requirements of Section
404404(b) of the
Sarbanes-OxleySarbanes-Oxley Act
of 2002, reduced disclosure obligations regarding executive compensation
in our periodic reports and proxy statements, and exemptions from the requirements of holding a
non-bindingnonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the prices of our securities may be more volatile.In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period.
We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO,the initial public offering, (b) in which we have total annual gross
revenue of at least
$1.07$1.235 billion or (c) in which we are deemed to be a large accelerated filer
which means the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, andor (2) the date on which we have issued more than $1.0 billion in
non-convertiblenon-convertible debt
securities during the prior
three-yearthree-year period.
Financial Position
With approximately $172,579,000 in
In addition, under the
Trust AccountJOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as
of December 31, 2020, of which $166,541,500 is available for a Business Combination, assuming no redemptions and after payment of $6,037,500 of deferred underwriting fees, before fees and expenses associated with our Business Combination, we offer a target business a variety of options such as creating a liquidity event for its owners, providing capital for the potential growth and expansion of its operations or strengthening its balance sheet by reducing its debt or leverage ratio. Because we are ablethose standards apply to
complete our Business Combination using our cash, debt or equity securities, or a combination of the foregoing, weprivate companies. We have
the flexibilityelected to use
the most efficient combination that will allow us to tailor the consideration to be paid to the target business to fit its needsthis extended transition period for complying with new or revised accounting standards and,
desires. However, we have not taken any steps to secure third party financing and there can be no assurance it will be available to us.Effecting Our Initial Business Combination
We are not presently engaged in, and we will not engage in, any operations for an indefinite period of time following our IPO. We intend to effectuate our initial business combination using cash from the proceeds of our IPO and the private placement of the private placement warrants, the proceeds of the sale of our shares in connection with our initial business combination (pursuant to backstop agreements that we entered into following the consummation of our IPO or otherwise), shares issued to the owners of the target, debt issued to bank or other lenders or the owners of the target, or a combination of the foregoing. We may seek to complete our initial business combination with a company or business that may be financially unstable or in its early stages of development or growth, which would subject us to the numerous risks inherent in such companies and businesses.
If our initial business combination is paid for using equity or debt securities, or not all of the funds released from the trust account are used for payment of the consideration in connection with our initial business combination or used for redemptions of our Class A common stock, we may apply the balance of the cash released to us from the trust account for general corporate purposes, including for maintenance or expansion of operations of the post-transaction company, the payment of principal or interest due on indebtedness incurred in completing our initial business combination, to fund the purchase of other companies or for working capital.
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We may seek to raise additional funds through a private offering of debt or equity securities in connection with the completion of our initial business combination, and we may effectuate our initial business combination using the proceeds of such offering rather than using the amounts held in the trust account. In addition, we intend to target businesses larger than we could acquire with the net proceeds of our IPO and the sale of the private placement warrants, and may as a result be required to seek additional financing to complete such proposed initial business combination. Subject to compliance with applicable securities laws, we would expect to complete such financing only simultaneously with the completion of our initial business combination. In the case of an initial business combination funded with assets other than the trust account assets, our proxy materials or tender offer documents disclosing the initial business combination would disclose the terms of the financing and, only if required by law, we would seek stockholder approval of such financing. There are no prohibitions on our ability to raise funds privately or through loans in connection with our initial business combination. At this time, we are not a party to any arrangement or understanding with any third party with respect to raising any additional funds through the sale of securities or otherwise.
There is no current basis for investors in our Class A shares to evaluate the possible merits or risks of the target business with which we may ultimately complete our initial business combination. Although our management will assess the risks inherent in a particular target business with which we may combine, we cannot assure you that this assessment will result in our identifying all risks that a target business may encounter. Furthermore, some of those risks may be outside of our control, meaning that we can do nothing to control or reduce the chances that those risks will adversely impact a target business.
Sources of Target Businesses
We anticipate that target business candidates will be brought to our attention from various unaffiliated sources, including investment bankers and investment professionals. Target businesses may be brought to our attention by such unaffiliated sources as a result of being solicited by us by calls or mailings. These sources may also introduce us to target businesses in which they think we may be interested on an unsolicited basis, since many of these sources will have read this annual report and know what types of businesses we are targeting. Our officers and directors, as well as our sponsor and their affiliates, may also bring to our attention target business candidates that they become aware of through their business contacts as a result of formal or informal inquiries or discussions they may have, as well as attending trade shows or conventions. In addition, we expect to receive a number of proprietary deal flow opportunities that would not otherwise necessarily be available to us as a result of the business relationships of our officers and directors and our sponsor and their respective industry and business contacts as well as their affiliates. While we do not presently anticipate engaging the services of professional firms or other individuals that specialize in business acquisitions on any formal basis, we may engage these firms or other individuals in the future, in which event we may pay a finder’s fee, consulting fee, advisory fee or other compensation to be determined in an arm’s length negotiation based on the terms of the transaction. We will engage a finder only to the extent our management determines that the use of a finder may bring opportunities to us that may not otherwise be available to us or if finders approach us on an unsolicited basis with a potential transaction that our management determines is in our best interest to pursue. Payment of finder’s fees is customarily tied to completion of a transaction, in which case any such fee will be paid out of the funds held in the trust account. In no event, however, will our sponsor or any of our existing officers or directors, or any entity with which our sponsor or officers are affiliated, be paid any finder’s fee, reimbursement, consulting fee, monies in respect of any payment of a loan or other compensation by the company prior to, or in connection with any services rendered for any services they render in order to effectuate, the completion of our initial business combination (regardless of the type of transaction that it is). None of our sponsor, executive officers or directors, or any of their respective affiliates, will be allowed to receive any compensation, finder’s fees or consulting fees from a prospective business combination target in connection with a contemplated initial business combination. We have agreed to pay an affiliate of our sponsor a total of $15,000 per month for office space, utilities and secretarial and administrative support and to reimburse our sponsor for any out-of-pocket expenses related to identifying, investigating and completing an initial business combination. Some of our officers and directors may enter into employment or consulting agreements with the post-transaction company following our initial business combination. The presence or absence of any such fees or arrangements will not be used as a criterion in our selection process of an initial business combination candidate.
We are not prohibited from pursuing an initial business combination with a company that is affiliated with our sponsor, executive officers or directors, or making the acquisition through a joint venture or other form of shared ownership with our sponsor, executive officers or directors. In the event we seek to complete an initial business
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combination with a target that is affiliated with our sponsor, executive officers or directors, we, or a committee of independent directors, would obtain an opinion from an independent investment banking which is a member of FINRA or a qualified independent accounting firm that such an initial business combination is fair to our company from a financial point of view. We are not required to obtain such an opinion in any other context.
As more fully discussed in the section of this annual report entitled “Management — Conflicts of Interest,” if any of our officers or directors becomes aware of an initial business combination opportunity that falls within the line of business of any entity to which he or she has pre-existing fiduciary or contractual obligations, he or she may be required to present such business combination opportunity to such entity prior to presenting such business combination opportunity to us. Our officers and directors currently have certain relevant fiduciary duties or contractual obligations that may take priority over their duties to us.
Selection of a Target Business and Structuring of our Initial Business Combination
Nasdaq rules require that we must complete one or more business combinations having an aggregate fair market value of at least 80% of the value of the assets held in the trust account (excluding the deferred underwriting commissions and taxes payable on the interest earned on the trust account) at the time of our signing a definitive agreement in connection with our initial business combination. The fair market value of our initial business combination will be determined by our board of directors based upon one or more standards generally accepted by the financial community, such as discounted cash flow valuation, a valuation based on trading multiples of comparable public businesses or a valuation based on the financial metrics of M&A transactions of comparable businesses. If our board of directors is not able to independently determine the fair market value of our initial business combination, we will obtain an opinion from an independent investment banking firm that is a member of FINRA or an independent accounting firm with respect to the satisfaction of such criteria. While we consider it unlikely that our board of directors will not be able to make an independent determination of the fair market value of our initial business combination, it may be unable to do so if it is less familiar or experienced with the business of a particular target or if there is a significant amount of uncertainty as to the value of a target’s assets or prospects. We do not intend to purchase multiple businesses in unrelated industries in conjunction with our initial business combination. Subject to this requirement, our management will have virtually unrestricted flexibility in identifying and selecting one or more prospective target businesses, althoughtherefore, we will not be permitted to effectuate our initial business combination with another blank check company or a similar company with nominal operations.
In any case, we will only complete an initial business combination in which we own or acquire 50% or more of the outstanding voting securities of the target or otherwise acquire a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act. If we own or acquire less than 100% of the equity interests or assets of a target business or businesses, the portion of such business or businesses that are owned or acquired by the post-transaction company is what will be taken into account for purposes of Nasdaq’s 80% of net assets test. There is no basis for investors in our IPO to evaluate the possible merits or risks of any target business with which we may ultimately complete our initial business combination.
To the extent we effect our initial business combination with a company or business that may be financially unstable or in its early stages of development or growth we may be affected by numerous risks inherent in such company or business. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors.
In evaluating a prospective business target, we expect to conduct a thorough due diligence review, which may encompass, among other things, meetings with incumbent management and employees, document reviews, interviews of customers and suppliers, inspection of facilities, as well as a review of financial and other information that will be made available to us.
The time required to select and evaluate a target business and to structure and complete our initial business combination, and the costs associated with this process, are not currently ascertainable with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which our initial business combination is not ultimately completed will result in our incurring losses and will reduce the funds we can use to complete another business combination.
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Lack of Business Diversification
For an indefinite period of time after the completion of our initial business combination, the prospects for our success may depend entirely on the future performance of a single business. Unlike other entities that have the resources to complete business combinations with multiple entities in one or several industries, it is probable that we will not have the resources to diversify our operations and mitigate the risks of being in a single line of business. In addition, we intend to focus our search for an initial business combination in a single industry. By completing our initial business combination with only a single entity, our lack of diversification may:
• subject us to negative economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact on the particular industry in which we operate after our initial business combination, and
• cause us to depend on the marketing and sale of a single product or limited number of products or services.
Limited Ability to Evaluate the Target’s Management Team
Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting our initial business combination with that business, our assessment of the target business’ management may not prove to be correct. In addition, the future management may not have the necessary skills, qualifications or abilities to manage a public company. Furthermore, the future role of members of our management team, if any, in the target business cannot presently be stated with any certainty. The determination as to whether any of the members of our management team will remain with the combined company will be made at the time of our initial business combination. While it is possible that one or more of our directors will remain associated in some capacity with us following our initial business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to our initial business combination. Moreover, we cannot assure you that members of our management team will have significant experience or knowledge relating to the operations of the particular target business.
We cannot assure you that any of our key personnel will remain in senior management or advisory positions with the combined company. The determination as to whether any of our key personnel will remain with the combined company will be made at the time of our initial business combination.
Following an initial business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that additional managers will have the requisite skills, knowledge or experience necessary to enhance the incumbent management.
Stockholders May Not Have the Ability to Approve Our Initial Business Combination
We may conduct redemptions without a stockholder vote pursuant to the tender offer rules of the SEC. However, we will seek stockholder approval if it is required by law or applicable stock exchange rule, or we may decide to seek stockholder approval for business or other legal reasons. Presented in the table below is a graphic explanation of the types of initial business combinations we may consider and whether stockholder approval is currently required under Delaware law for each such transaction.
Type of Transaction
| | Whether
Stockholder
Approval is
Required
|
Purchase of assets
| | No
|
Purchase of stock of target not involving a merger with the company
| | No
|
Merger of target into a subsidiary of the company
| | No
|
Merger of the company with a target
| | Yes
|
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Under Nasdaq’s listing rules, stockholder approval would be required for our initial business combination if, for example:
• we issue shares of Class A common stock that will be equal to or in excess of 20% of the number of shares of our Class A common stock then outstanding;
• any of our directors, officers or substantial stockholders (as defined by Nasdaq rules) has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the target business or assets to be acquired or otherwise and the present or potential issuance of common stock could result in an increase in outstanding common shares or voting power of 5% or more; or
• the issuance or potential issuance of common stock will result in our undergoing a change of control.
Permitted Purchases of our Securities
If we seek stockholder approval of our initial business combination and we do not conduct redemptions in connection with our initial business combination pursuant to the tender offer rules, our initial stockholders, directors, officers, advisors or their affiliates may purchase public shares or public warrants in privately negotiated transactions or in the open market either prior to or following the completion of our initial business combination. There is no limit on the number of shares our initial stockholders, directors, officers, advisors or their affiliates may purchase in such transactions, subject to compliance with applicable law and Nasdaq rules. However, they have no current commitments, plans or intentions to engage in such transactions and have not formulated any terms or conditions for any such transactions. If they engage in such transactions, they will not make any such purchases when they are in possession of any material non-public information not disclosed to the seller or if such purchases are prohibited by Regulation M under the Exchange Act. We do not currently anticipate that such purchases, if any, would constitute a tender offer subject to the tender offer rules under the Exchange Actsame new or a going-private transaction subject to the going-private rules under the Exchange Act; however, if the purchasers determine at the time of any such purchasesrevised accounting standards as other public companies that the purchases are subject to such rules, the purchasers will comply with such rules. Any such purchases will be reported pursuant to Section 13 and Section 16 of the Exchange Act to the extent such purchasers are subject to such reporting requirements. None of the funds held in the trust account will be used to purchase public shares or public warrants in such transactions prior to completion of our initial business combination.
The purpose of any such purchases of shares could be to vote such shares in favor of the initial business combination and thereby increase the likelihood of obtaining stockholder approval of the initial business combination or to satisfy a closing condition in an agreement with a target that requires us to have a minimum net worth or a certain amount of cash at the closing of our initial business combination, where it appears that such requirement would otherwise not be met. The purpose of any such purchases of public warrants could be to reduce the number of public warrants outstanding or to vote such warrants on any matters submitted to the warrantholders for approval in connection with our initial business combination. Any such purchases of our securities may result in the completion of our initial business combination that may not otherwise have been possible. In addition, if such purchases are made, the public “float” of our shares of Class A common stock or warrants may be reduced and the number of beneficial holders of our securities may be reduced, which may make it difficult to maintain or obtain the quotation, listing or trading of our securities on a national securities exchange.
Our sponsor, officers, directors and/or their affiliates anticipate that they may identify the stockholders with whom our sponsor, officers, directors or their affiliates may pursue privately negotiated purchases by either the stockholders contacting us directly or by our receipt of redemption requests submitted by stockholders following our mailing of proxy materials in connection with our initial business combination. To the extent that our sponsor, officers, directors, advisors or their affiliates enter into a private purchase, they would identify and contact only potential selling stockholders who have expressed their election to redeem their shares for a pro rata share of the trust account or vote against our initial business combination, whether or not such stockholder has already submitted a proxy with respect to our initial business combination. Our sponsor, officers, directors, advisors or their affiliates will only purchase shares if such purchases comply with Regulation M under the Exchange Act and the other federal securities laws.
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Any purchases by our sponsor, officers, directors and/or their affiliates who are affiliated purchasers under Rule 10b-18 under the Exchange Act will only be made to the extent such purchases are able to be made in compliance with Rule 10b-18, which is a safe harbor from liability for manipulation under Section 9(a)(2) and Rule 10b-5 of the Exchange Act. Rule 10b-18 has certain technical requirements that must be complied with in order for the safe harbor to be available to the purchaser. Our sponsor, officers, directors and/or their affiliates will not make purchases of common stock if the purchases would violate Section 9(a)(2) or Rule 10b-5 of the Exchange Act. Any such purchases will be reported pursuant to Section 13 and Section 16 of the Exchange Act to the extent such purchases are subject to such reporting requirements.
Redemption Rights for Public Stockholders upon Completion of our Initial Business Combination
We will provide our public stockholders with the opportunity to redeem all or a portion of their shares of Class A common stock upon the completion of our initial business combination at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account as of two business days prior to the consummation of the initial business combination including interest earned on the funds held in the trust account and not previously released to us to pay our taxes or to fund our working capital requirements, divided by the number of then outstanding public shares, subject to the limitations described herein. The amount in the trust account is initially anticipated to be approximately $10.00 per public share. The per-share amount we will distribute to investors who properly redeem their shares will not be reduced by the deferred underwriting commissions we will pay to the underwriters. Our sponsor, officers, directors, special advisor and an employee of an affiliate of our sponsor have entered into a letter agreement with us, pursuant to which they have agreed to waive their redemption rights with respect to any founder shares and any public shares held by them in connection with the completion of our initial business combination.
Manner of Conducting Redemptions
We will provide our public stockholders with the opportunity to redeem all or a portion of their shares of Class A common stock upon the completion of our initial business combination either (i) in connection with a stockholder meeting called to approve the initial business combination or (ii) by means of a tender offer. The decision as to whether we will seek stockholder approval of a proposed initial business combination or conduct a tender offer will be made by us, solely in our discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would require us to seek stockholder approval under the law or stock exchange listing requirement. Under Nasdaq rules, asset acquisitions and stock purchases would not typically require stockholder approval while direct mergers with our company where we do not survive and any transactions where we issue more than 20% of our outstanding common stock or seek to amend our amended and restated certificate of incorporation would require stockholder approval. If we structure an initial business combination with a target company in a manner that requires stockholder approval, we will not have discretion as to whether to seek a stockholder vote to approve the proposed initial business combination. We may conduct redemptions without a stockholder vote pursuant to the tender offer rules of the SEC unless stockholder approval is required by law or stock exchange listing requirements or we choose to seek stockholder approval for business or other legal reasons. So long as we obtain and maintain a listing for our securities on Nasdaq, we will be required to comply with such rules.
If a stockholder vote is not required and we do not decide to hold a stockholder vote for business or other legal reasons, we will, pursuant to our amended and restated certificate of incorporation:
• conduct the redemptions pursuant to Rule 13e-4 and Regulation 14E of the Exchange Act, which regulate issuer tender offers, and
• file tender offer documents with the SEC prior to completing our initial business combination which contain substantially the same financial and other information about the initial business combination and the redemption rights as is required under Regulation 14A of the Exchange Act, which regulates the solicitation of proxies.
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Upon the public announcement of our initial business combination, we or our sponsor will terminate any plan established in accordance with Rule 10b5-1 to purchase shares of our Class A common stock in the open market if we elect to redeem our public shares through a tender offer, to comply with Rule 14e-5 under the Exchange Act.
In the event we conduct redemptions pursuant to the tender offer rules, our offer to redeem will remain open for at least 20 business days, in accordance with Rule 14e-1(a) under the Exchange Act, and we will not be permitted to complete our initial business combination until the expiration of the tender offer period. In addition, the tender offer will be conditioned on public stockholders not tendering more than a specified number of public shares which are not purchased by our sponsor, which number will be based on the requirement thatemerging growth companies.
Even after we
may not redeem public shares in an amount that would cause our net tangible assets to be less than $5,000,001 (so that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement which may be contained in the agreement relating to our initial business combination upon consummation of our initial business combination and after payment of underwriters’ fees and commissions. If public stockholders tender more shares than we have offered to purchase, we will withdraw the tender offer and not complete the initial business combination.If, however, stockholder approval of the transaction is required by law or stock exchange listing requirement, or we decide to obtain stockholder approval for business or other legal reasons, we will, pursuant to our amended and restated certificate of incorporation:
• conduct the redemptions in conjunction with a proxy solicitation pursuant to Regulation 14A of the Exchange Act, which regulates the solicitation of proxies, and not pursuant to the tender offer rules, and
• file proxy materials with the SEC.
In the event that we seek stockholder approval of our initial business combination, we will distribute proxy materials and, in connection therewith, provide our public stockholders with the redemption rights described above upon completion of the initial business combination.
If we seek stockholder approval, we will complete our initial business combination only if a majority of the outstanding shares of common stock voted are voted in favor of the initial business combination. A quorum for such meeting will consist of the holders present in person or by proxy of shares of outstanding capital stock of the company representing a majority of the voting power of all outstanding shares of capital stock of the company entitled to vote at such meeting. Our initial stockholders will count toward this quorum and pursuant to the letter agreement, our sponsor, officers, directors, special advisor and an employee of an affiliate of our sponsor have agreed to vote their founder shares and any public shares purchased during or after our IPO (including in open market and privately negotiated transactions) in favor of our initial business combination. For purposes of seeking approval of the majority of our outstanding shares of common stock voted, non-votes will have no effect on the approval of our initial business combination once a quorum is obtained. As a result, in addition to the founder shares held by our sponsor, officers, directors and special advisor and that employee, we would need only approximately 11.6%, of the 17,250,000 public shares outstanding to be voted in favor of an initial business combination (assuming only a quorum is present at the meeting) in order to have our initial business combination approved (assuming the over-allotment option is not exercised). In addition, as a result of the founder shares and private placement warrants that the anchor investors may hold (directly or indirectly), they may have different interests with respect to a vote on an initial business combination than other public stockholders. We intend to give approximately 30 days (but not less than 10 days nor more than 60 days) prior written notice of any such meeting, if required, at which a vote shall be taken to approve our initial business combination. These quorum and voting thresholds, and the voting agreements of our sponsor, officers, directors, special advisor and such employee may make it more likely that we will consummate our initial business combination. Each public stockholder may elect to redeem its public shares irrespective of whether they vote for or against the proposed transaction.
Our amended and restated certificate of incorporation will provide that in no event will we redeem our public shares in an amount that would cause our net tangible assets to be less than $5,000,001 (so that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement which may be contained in the agreement relating to our initial business combination upon consummation of our initial business combination and after payment of underwriters’ fees and commissions. For example, the proposed initial business combination may require: (i) cash consideration to be paid to the target or its owners, (ii) cash to be transferred to the target for working capital or other general corporate purposes or (iii) the retention of cash to satisfy other
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conditions in accordance with the terms of the proposed initial business combination. In the event the aggregate cash consideration we would be required to pay for all shares of Class A common stock that are validly submitted for redemption plus any amount required to satisfy cash conditions pursuant to the terms of the proposed initial business combination exceed the aggregate amount of cash available to us, we will not complete the initial business combination or redeem any shares, and all shares of Class A common stock submitted for redemption will be returned to the holders thereof.
Limitation on Redemption upon Completion of our Initial Business Combination if we Seek Stockholder Approval
Notwithstanding the foregoing, if we seek stockholder approval of our initial business combination and we do not conduct redemptions in connection with our initial business combination pursuant to the tender offer rules, our amended and restated certificate of incorporation will provide that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from seeking redemption rights with respect to more than an aggregate of 15% of the shares sold in our IPO, which we refer to as the “Excess Shares.” Such restriction shall also be applicable to our affiliates. We believe this restriction will discourage stockholders from accumulating large blocks of shares, and subsequent attempts by such holders to use their ability to exercise their redemption rights against a proposed initial business combination as a means to force us or our management to purchase their shares at a significant premium to the then-current market price or on other undesirable terms. Absent this provision, a public stockholder holding more than an aggregate of 15% of the shares sold in our IPO could threaten to exercise its redemption rights if such holder’s shares are not purchased by us or our management at a premium to the then-current market price or on other undesirable terms. By limiting our stockholders’ ability to redeem no more than 15% of the shares sold in our IPO without our prior consent, we believe we will limit the ability of a small group of stockholders to unreasonably attempt to block our ability to complete our initial business combination, particularly in connection with an initial business combination with a target that requires as a closing condition that we have a minimum net worth or a certain amount of cash. However, we would not be restricting our stockholders’ ability to vote all of their shares (including Excess Shares) for or against our initial business combination.
Tendering Stock Certificates in Connection with a Tender Offer or Redemption Rights
We may require our public stockholders seeking to exercise their redemption rights, whether they are record holders or hold their shares in “street name,” to either tender their certificates to our transfer agent prior to the date set forth in the tender offer documents or proxy materials mailed to such holders, or up to two business days prior to the vote on the proposal to approve the initial business combination in the event we distribute proxy materials, or to deliver their shares to the transfer agent electronically using the Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, at the holder’s option. The tender offer or proxy materials, as applicable, that we will furnish to holders of our public shares in connection with our initial business combination will indicate whether we are requiring public stockholders to satisfy such delivery requirements. Accordingly, a public stockholder would have from the time we send out our tender offer materials until the close of the tender offer period, or up to two days prior to the vote on the initial business combination if we distribute proxy materials, as applicable, to tender its shares if it wishes to seek to exercise its redemption rights. Given the relatively short exercise period, it is advisable for stockholders to use electronic delivery of their public shares.
There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC System. The transfer agent will typically charge the tendering broker $80.00 and it would be up to the broker whether or not to pass this cost on to the redeeming holder. However, this fee would be incurred regardless of whether or not we require holders seeking to exercise redemption rights to tender their shares. The need to deliver shares is a requirement of exercising redemption rights regardless of the timing of when such delivery must be effectuated.
The foregoing is different from the procedures used by many blank check companies. In order to perfect redemption rights in connection with their business combinations, many blank check companies would distribute proxy materials for the stockholders’ vote on an initial business combination, and a holder could simply vote against a proposed initial business combination and check a box on the proxy card indicating such holder was seeking to exercise his or her redemption rights. After the initial business combination was approved, the company would
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contact such stockholder to arrange for him or her to deliver his or her certificate to verify ownership. As a result, the stockholder then had an “option window” after the completion of the initial business combination during which he or she could monitor the price of the company’s stock in the market. If the price rose above the redemption price, he or she could sell his or her shares in the open market before actually delivering his or her shares to the company for cancellation. As a result, the redemption rights, to which stockholders were aware they needed to commit before the stockholder meeting, would become “option” rights surviving past the completion of the initial business combination until the redeeming holder delivered its certificate. The requirement for physical or electronic delivery prior to the meeting ensures that a redeeming holder’s election to redeem is irrevocable once the initial business combination is approved.
Any request to redeem such shares, once made, may be withdrawn at any time up to the date set forth in the tender offer materials or the date of the stockholder meeting set forth in our proxy materials, as applicable. Furthermore, if a holder of a public share delivered its certificate in connection with an election of redemption rights and subsequently decides prior to the applicable date not to elect to exercise such rights, such holder may simply request that the transfer agent return the certificate (physically or electronically). It is anticipated that the funds to be distributed to holders of our public shares electing to redeem their shares will be distributed promptly after the completion of our initial business combination.
If our initial business combination is not approved or completed for any reason, then our public stockholders who elected to exercise their redemption rights would not be entitled to redeem their shares for the applicable pro rata share of the trust account. In such case, we will promptly return any certificates delivered by public holders who elected to redeem their shares.
If our initial proposed initial business combination is not completed, we may continue to try to complete an initial business combination with a different target until 24 months from the closing of our IPO.
Redemption of Public Shares and Liquidation if no Initial Business Combination
Our amended and restated certificate of incorporation provides that we will have only 24 months from the closing of our IPO to complete our initial business combination. If we are unable to complete our initial business combination within such 24-month period, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter subject to lawfully available funds therefor, redeem 100% of the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay our taxes or to fund our working capital requirements (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. There will be no redemption rights or liquidating distributions with respect to our warrants, which will expire worthless if we fail to complete our initial business combination within the 24-month time period.
Our initial stockholders have agreed to waive their rights to liquidating distributions from the trust account with respect to any founder shares held by them if we fail to complete our initial business combination within 24 months from the closing of our IPO. However, if our sponsor, our officers or directors or the anchor investors acquire public shares in or after our IPO, they will be entitled to liquidating distributions from the trust account with respect to such public shares if we fail to complete our initial business combination within the allotted 24-month time period.
Our sponsor, officers, directors, special advisor and an employee of an affiliate of our sponsor have agreed, pursuant to a written agreement with us, that they will not propose any amendment to our amended and restated certificate of incorporation (i) to modify the substance or timing of the ability of holders of our public shares to seek redemption in connection with our initial business combination or our obligation to redeem 100% of our public shares if we do not complete our initial business combination within 24 months from the closing of our IPO or (ii) with respect to any other provision relating to stockholders’ rights or pre-initial business combination activity, unless we provide our public stockholders with the opportunity to redeem their shares of Class A common stock
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upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay our taxes and/or to fund our working capital requirements, divided by the number of then outstanding public shares. However, we may not redeem our public shares in an amount that would cause our net tangible assets to be less than $5,000,001 upon consummation of our initial business combination and after payment of underwriters’ fees and commissions (so that we are not subject to the SEC’s “penny stock” rules). If this optional redemption right is exercised with respect to an excessive number of public shares such that we cannot satisfy the net tangible asset requirement (described above), we would not proceed with the amendment or the related redemption of our public shares at such time.
We expect that all costs and expenses associated with implementing our plan of dissolution, as well as payments to any creditors, will be funded from amounts remaining out of the approximately $1,500,000 of proceeds held outside the trust account, although we cannot assure you that there will be sufficient funds for such purpose. We will depend on sufficient interest being earned on the proceeds held in the trust account to pay any tax obligations we may owe or for working capital purposes (provided that the funds released for working capital purposes may not exceed $250,000 annually). However, if those funds are not sufficient to cover the costs and expenses associated with implementing our plan of dissolution, to the extent that there is any interest accrued in the trust account not required to pay taxes on interest income earned on the trust account balance, we may request the trustee to release to us an additional amount of up to $100,000 of such accrued interest to pay those costs and expenses.
If we were to expend all of the net proceeds of our IPO and the sale of the private placement warrants, other than the proceeds deposited in the trust account, and without taking into account interest, if any, earned on the trust account, the per-share redemption amount received by stockholders upon our dissolution would be approximately $10.00. The proceeds deposited in the trust account could, however, become subject to the claims of our creditors which would have higher priority than the claims of our public stockholders. We cannot assure you that the actual per-share redemption amount received by stockholders will not be substantially less than $10.00. Under Section 281(b) of the DGCL, our plan of dissolution must provide for all claims against us to be paid in full or make provision for payments to be made in full, as applicable, if there are sufficient assets. These claims must be paid or provided for before we make any distribution of our remaining assets to our stockholders. While we intend to pay such amounts, if any, we cannot assure you that we will have funds sufficient to pay or provide for all creditors’ claims.
Although we will seek to have all vendors, service providers, prospective target businesses or other entities with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of our public stockholders, there is no guarantee that they will execute such agreements or even if they execute such agreements that they would be prevented from bringing claims against the trust account including but not limited to fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with respect to a claim against our assets, including the funds held in the trust account. If any third party refuses to execute an agreement waiving such claims to the monies held in the trust account, our management will perform an analysis of the alternatives available to it and will only enter into an agreement with a third party that has not executed a waiver if management believes that such third party’s engagement would be significantly more beneficial to us than any alternative. Examples of possible instances where we may engage a third party that refuses to execute a waiver include the engagement of a third-party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a service provider willing to execute a waiver. We are not aware of any product or service providers who have not or will not provide such waiver other than the underwriters of our IPO and our independent registered public accounting firm.
In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Our sponsor has agreed that it will be liable to us if and to the extent any claims by a third party for services rendered or products sold to us, or a prospective target business with which we have entered into a written letter of intent, confidentiality or similar agreement or business combination agreement, reduce the
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amount of funds in the trust account to below the lesser of (i) $10.00 per public share and (ii) the actual amount per public share held in the trust account as of the date of the liquidation of the trust account, if less than $10.00 per share due to reductions in the value of the trust assets, less taxes payable and up to $250,000 per year for working capital purposes, if any, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the trust account (whether or not such waiver is enforceable) nor will it apply to any claims under our indemnity of the underwriters of our IPO against certain liabilities, including liabilities under the Securities Act. However, we have not asked our sponsor to reserve for such indemnification obligations, nor have we independently verified whether our sponsor has sufficient funds to satisfy its indemnity obligations and believe that our sponsor’s only assets are securities of our company. Therefore, we cannot assure you that our sponsor would be able to satisfy those obligations. None of our officers or directors will indemnify us for claims by third parties including, without limitation, claims by vendors and prospective target businesses.
In the event that the proceeds in the trust account are reduced below (i) $10.00 per public share or (ii) such lesser amount per public share held in the trust account as of the date of the liquidation of the trust account, due to reductions in value of the trust assets, in each case net of the amount of interest which may be withdrawn to pay taxes and up to $250,000 per year for working capital purposes, if any, and our sponsor asserts that it is unable to satisfy its indemnification obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether to take legal action against our sponsor to enforce its indemnification obligations. While we currently expect that our independent directors would take legal action on our behalf against our sponsor to enforce its indemnification obligations to us, it is possible that our independent directors in exercising their business judgment may choose not to do so if, for example, the cost of such legal action is deemed by the independent directors to be too high relative to the amount recoverable or if the independent directors determine that a favorable outcome is not likely. We have not asked our sponsor to reserve for such indemnification obligations and we cannot assure you that our sponsor would be able to satisfy those obligations. Accordingly, we cannot assure you that due to claims of creditors the actual value of the per-share redemption price will not be less than $10.00 per public share.
We will seek to reduce the possibility that our sponsor will have to indemnify the trust account due to claims of creditors by endeavoring to have all vendors, service providers, prospective target businesses or other entities with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the trust account. Our sponsor will also not be liable as to any claims under our indemnity of the underwriters of our IPO against certain liabilities, including liabilities under the Securities Act. We will have access to up to approximately $1,500,000 from the proceeds of our IPO with which to pay any such potential claims (including costs and expenses incurred in connection with our liquidation, currently estimated to be no more than approximately $100,000). In the event that we liquidate and it is subsequently determined that the reserve for claims and liabilities is insufficient, stockholders who received funds from our trust account could be liable for claims made by creditors. In the event that our offering expenses exceed our estimate of $750,000, we may fund such excess with funds from the funds not to be held in the trust account. In such case, the amount of funds we intend to be held outside the trust account would decrease by a corresponding amount. Conversely, in the event that the offering expenses are less than our estimate of $750,000, the amount of funds we intend to be held outside the trust account would increase by a corresponding amount.
Under the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. The pro rata portion of our trust account distributed to our public stockholders upon the redemption of our public shares in the event we do not complete our initial business combination within 24 months from the closing of our IPO may be considered a liquidating distribution under Delaware law. If the corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution.
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Furthermore, if the pro rata portion of our trust account distributed to our public stockholders upon the redemption of our public shares in the event we do not complete our initial business combination within 24 months from the closing of our IPO, is not considered a liquidating distribution under Delaware law and such redemption distribution is deemed to be unlawful (potentially due to the imposition of legal proceedings that a party may bring or due to other circumstances that are currently unknown), then pursuant to Section 174 of the DGCL, the statute of limitations for claims of creditors could then be six years after the unlawful redemption distribution, instead of three years, as in the case of a liquidating distribution. If we are unable to complete our initial business combination within 24 months from the closing of our IPO, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter subject to lawfully available funds therefor, redeem 100% of the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay our taxes or to fund our working capital requirements (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. Accordingly, it is our intention to redeem our public shares as soon as reasonably possible following our 24th month and, therefore, we do not intend to comply with those procedures. As such, our stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of our stockholders may extend well beyond the third anniversary of such date.
Because we will not be complying with Section 280, Section 281(b) of the DGCL requires us to adopt a plan, based on facts known to us at such time that will provide for our payment of all existing and pending claims or claims that may be potentially brought against us within the subsequent 10 years. However, because we are a blank check company, rather than an operating company, and our operations will be limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from our vendors (such as lawyers, investment bankers, etc.) or prospective target businesses. As described above, pursuant to the obligation contained in our underwriting agreement, we will seek to have all vendors, service providers, prospective target businesses or other entities with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the trust account. As a result of this obligation, the claims that could be made against us are significantly limited and the likelihood that any claim that would result in any liability extending to the trust account is remote. Further, our sponsor may be liable only to the extent necessary to ensure that the amounts in the trust account are not reduced below (i) $10.00 per public share or (ii) such lesser amount per public share held in the trust account as of the date of the liquidation of the trust account, due to reductions in value of the trust assets, in each case net of the amount of interest withdrawn to pay taxes and up to $250,000 per year for working capital purposes, if any, and will not be liable as to any claims under our indemnity of the underwriters of our IPO against certain liabilities, including liabilities under the Securities Act. In the event that an executed waiver is deemed to be unenforceable against a third party, our sponsor will not be responsible to the extent of any liability for such third-party claims.
If we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return $10.00 per share to our public stockholders. Additionally, if we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover some or all amounts received by our stockholders. Furthermore, our board of directors may be viewed as having breached its fiduciary duty to our creditors and/or may have acted in bad faith, thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons.
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Our public stockholders will be entitled to receive funds from the trust account only upon the earlier to occur of: (i) the completion of our initial business combination, (ii) the redemption of any public shares properly tendered in connection with a stockholder vote to amend any provisions of our amended and restated certificate of incorporation (A) to modify the substance or timing of the ability of holders of our public shares to seek redemption in connection with our initial business combination or our obligation to redeem 100% of our public shares if we do not complete our initial business combination within 24 months from the closing of our IPO or (B) with respect to any other provision relating to stockholders’ rights or pre-initial business combination activity, and (iii) the redemption of all of our public shares if we are unable to complete our business combination within 24 months from the closing of our IPO, subject to applicable law. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account. In the event we seek stockholder approval in connection with our initial business combination, a stockholder’s voting in connection with the initial business combination alone will not result in a stockholder’s redeeming its shares to us for an applicable pro rata share of the trust account. Such stockholder must have also exercised its redemption rights as described above. These provisions of our amended and restated certificate of incorporation, like all provisions of our amended and restated certificate of incorporation, may be amended with a stockholder vote.
Comparison of Redemption or Purchase Prices in Connection with Our Initial Business Combination and if We Fail to Complete Our Initial Business Combination
The following table compares the redemptions and other permitted purchases of public shares that may take place in connection with the completion of our initial business combination and if we are unable to complete our initial business combination within 24 months from the closing of our IPO.
| | Redemptions in
Connection with our Initial Business Combination
| | Other Permitted
Purchases of Public Shares by us or our Affiliates
| | Redemptions if we fail to
Complete an Initial
Business Combination
|
Calculation of redemption price
| | Redemptions at the time of our initial business combination may be made pursuant to a tender offer or in connection with a stockholder vote. The redemption price will be the same whether we conduct redemptions pursuant to a tender offer or in connection with a stockholder vote. In either case, our public stockholders may redeem their public shares for cash equal to the aggregate amount then on deposit in the trust account as of two business days prior to the consummation of the initial business combination (which is initially anticipated to be $10.00 per public share), including interest earned on the funds held in the trust account and not previously released to us to pay our taxes or to fund our working capital requirements, divided by the number of then outstanding public shares, subject to the limitation that
| | If we seek stockholder approval of our initial business combination, our sponsor, directors, officers, advisors or their affiliates may purchase shares in privately negotiated transactions or in the open market prior to or following completion of our initial business combination. There is no limit to the prices that our sponsor, directors, officers, advisors or their affiliates may pay in these transactions.
| | If we are unable to complete our initial business combination within 24 months from the closing of our IPO, we will redeem all public shares at a per-share price, payable in cash, equal to the aggregate amount, then on deposit in the trust account (which is initially anticipated to be $10.00 per public share), including interest earned on the funds held in the trust account and not previously released to us to pay our taxes or to fund our working capital requirements (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares.
|
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| | Redemptions in
Connection with our Initial Business Combination
| | Other Permitted
Purchases of Public Shares by us or our Affiliates
| | Redemptions if we fail to
Complete an Initial
Business Combination
|
| | no redemptions will take place, if all of the redemptions would cause our net tangible assets to be less than $5,000,001 upon consummation of our initial business combination and any limitations (including but not limited to cash requirements) agreed to in connection with the negotiation of terms of a proposed initial business combination.
| | | | |
Impact to remaining stockholders
| | The redemptions in connection with our initial business combination will reduce the book value per share for our remaining stockholders, who will bear the burden of the deferred underwriting commissions and the taxes payable.
| | If the permitted purchases described above are made there would be no impact to our remaining stockholders because the purchase price would not be paid by us.
| | The redemption of our public shares if we fail to complete our initial business combination will reduce the book value per share for the shares held by our initial stockholders, who will be our only remaining stockholders after such redemptions.
|
Competition
In identifying, evaluating and selecting a target business for our initial business combination, we may encounter intense competition from other entities having a business objective similar to ours, including other blank check companies, private equity groups and leveraged buyout funds, and operating businesses seeking strategic business combinations. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Moreover, many of these competitors possess greater financial, technical, human and other resources than we do. Our ability to acquire larger target businesses will be limited by our available financial resources. This inherent limitation gives others an advantage in pursuing the initial business combination of a target business. Furthermore, our obligation to pay cash in connection with our public stockholders who exercise their redemption rights may reduce the resources available to us for our initial business combination and our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Either of these factors may place us at a competitive disadvantage in successfully negotiating an initial business combination.
Periodic Reporting and Financial Information
We will provide stockholders with audited financial statements of the prospective target business as part of the tender offer materials or proxy solicitation materials sent to stockholders to assist them in assessing the target business. In all likelihood, these financial statements will need to be prepared in accordance with, or reconciled to, GAAP, or IFRS, depending on the circumstances, and the historical financial statements may be required to be audited in accordance with the standards of the PCAOB. These financial statement requirements may limit the pool of potential targets we may conduct an initial business combination with because some targets may be unable to provide such statements in time for us to disclose such statements in accordance with federal proxy rules and complete our initial business combination within the prescribed time frame. We cannot assure you that any particular target business identified by us as a potential business combination candidate will have financial statements prepared in accordance with GAAP or that the potential target business will be able to prepare its financial statements in
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accordance with the requirements outlined above. To the extent that these requirements cannot be met, we may not be able to acquire the proposed target business. While this may limit the pool of potential business combination candidates, we do not believe that this limitation will be material.
We are required to evaluate our internal control procedures for the fiscal year ending December 31, 2020 as required by the Sarbanes-Oxley Act. Only in the event we are deemed to be a large accelerated filer or an accelerated filer, and no longer qualify as an emerging growth company, will we be requiredmay still qualify as a “smaller reporting company,” which would allow us to have our internal control procedures audited. A target company may not be intake advantage of many of the same exemptions from disclosure requirements including exemption from compliance with the provisionsauditor attestation requirements of Section 404(b) of the Sarbanes-OxleySarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding adequacyexecutive compensation in our periodic reports and proxy statements.
We cannot predict if investors will find our common stock less attractive because it may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our market price may be more volatile.
General Risk Factors
Increasing attention to, and evolving expectations for, environmental, social, and governance (“ESG”) initiatives could increase our costs, harm our reputation, or otherwise adversely impact our business.
Companies across industries are facing increasing scrutiny from a variety of stakeholders related to their internal controls. The development of the internal controls of any such entityESG practices. Expectations regarding voluntary ESG initiatives and disclosures may result in increased costs (including but not limited to achieveincreased costs related to compliance, with the Sarbanes-Oxley Act may increase the timestakeholder engagement, contracting and costs necessary to complete any such business combination. We have no current intention of filing a Form 15 to suspend our reportinginsurance), changes in demand for certain offerings, enhanced compliance or disclosure obligations, or other obligations under the Exchange Act prior or subsequentadverse impacts to the consummation of our initial business combination.We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our shares of Class A common stock that are held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Employees
We currently have 3 officers. These individuals are not obligated to devote any specific number of hours to our matters but they intend to devote as much of their time as they deem necessary to our affairs until we have completed our initial business combination. The amount of time they will devote in any time period will vary based on whether a target business has been selected for our initial business combination and the stage of the initial business combination process we are in. We do not intend to have any full-time employees prior to the completion of our initial business combination.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to make disclosures under this Item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our executive offices are located at 12141 Wickchester Lane, Houston, TX 77079, and our telephone number is (212) 653-0153. Our executive offices are provided to us by our sponsor. Commencing on August 4, 2020, we have paid an affiliate of our sponsor a total of $15,000 per month for office space, utilities and secretarial and administrative support. We consider our current office space adequate for our current operations.
ITEM 3. LEGAL PROCEEDINGS
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are not currently a party to any material litigation or other legal proceedings brought against us. We are also not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our business, financial condition, or results of operations.
While we may at times engage in voluntary initiatives (such as voluntary disclosures, certifications, or goals, among others) to improve the ESG profile of our company and/or offerings or to respond to stakeholder demands, such initiatives may be costly and may not have the desired effect. Expectations around companies’ management of ESG matters continues to evolve rapidly, in many instances due to factors that are out of our control. We may experience pressure to make commitments relating to ESG matters that affect us; however, we may not agree that particular initiatives will be appropriate for our business, and we may not be able to implement such initiatives because of potential costs or technical or operational obstacles, which may adversely impact our reputation or stakeholder relations. If we do not, or are perceived by stakeholders to not, take sufficient action to respond to ESG matters, we may be subject to investor or regulator engagement on our ESG initiatives and disclosures, even if such initiatives are currently voluntary.
Certain market participants, including major institutional investors and capital providers, use third-party benchmarks and scores to assess companies’ ESG profiles in making investment or voting decisions. Unfavorable ESG ratings could lead to increased negative investor sentiment towards us, which could negatively impact our share price as well as our access to and cost of capital. To the extent ESG matters negatively impact our reputation, it may also impede our ability to compete as effectively to attract and retain employees or customers, which may adversely impact our operations. In addition, we expect there will likely be increasing levels of regulation, disclosure-related and otherwise, with respect to ESG matters. For example, the SEC has proposed requirements to disclose a variety of climate-related information, in addition to other rules, which could require us to incur significant costs for monitoring and compliance. This and other regulations will likely lead to increased costs as well as scrutiny that could heighten all of the risks identified in this risk factor. Additionally, many of our customers and suppliers may be subject to similar expectations, which may augment or create additional risks, including risks that may not be known to us.
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.
We believe that a critical component to our success has been our mission-driven company culture based on our shared commitment to make the world a safer place to live, work, learn, and play, which we believe fosters innovation, teamwork, passion for customers and focus on execution, and facilitates critical knowledge transfer, knowledge sharing and professional growth. We have invested substantial time and resources in building our team within this company culture. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. As we grow and develop our public company infrastructure and processes,
we may find it difficult to maintain these important aspects of our company culture. If we fail to maintain our company culture, our business may be adversely impacted.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
U.S. generally accepted accounting principles (GAAP) are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported results of operations and could affect the reporting of transactions already completed before the announcement of such change.
If securities or industry analysts do not publish research or reports about us, or publish negative reports, our stock price and trading volume could decline.
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. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our common stock, change their opinion, or reduce their target stock price on us, our stock price would likely decline. 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 4. 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 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. 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
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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INFORMATION ABOUT OUR DIRECTORS & EXECUTIVE OFFICERS
For information regarding our directors and executive officers, see Part III, Item 10, “Directors, Executive Officer and Corporate Governance.”
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our units began to trade on The Nasdaq Capital
Market or Nasdaq, under the symbol “NHICU” on August 4, 2020. On September 22, 2020, we announced that holdersInformation
Shares of
the Company’s units may elect to separately trade the shares of Class A common stockour Common Stock and warrants
included in its units, commencing on or about September 22, 2020. The shares of Class A common stock and warrants will trade on the Nasdaq Capital Market (“Nasdaq”) under the symbols NHIC and NHICW, respectively. Units not separated will continue to tradebegan trading on Nasdaq under the symbol
NHICU. After separation, the shares of Class A“EVLV” and “EVLVW,” respectively, on July 16, 2021. Prior to that time, there was no established public trading market for our common stock
and warrants may be recombined to create units.or warrants.
As of
December 31, 2020,March 23, 2023, there were
17,250,000 of our shares of Class A common stock147,963,093 issued and outstanding
heldshares of our common stock by approximately
30095 stockholders
of record and 4,312,500 shares of Class B common stock held by 1 stockholder of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of shares of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividends
Dividend Policy
We have
notnever declared or paid any cash dividends on our
common stockcapital stock. We currently intend to
dateretain all available funds and future earnings, if any, for the operation and expansion of our business and do not
intend to pay cash dividends prior to the completion of an initial business combination. The payment of cashanticipate declaring or paying any dividends in the
foreseeable future. Any future
determination related to our dividend policy will be
dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be withinmade at the discretion of our board of directors
at such time. It isafter considering our financial condition, results of operations, capital requirements, business prospects and other factors the
present intention of our board of directors
deems relevant, and subject to
retain all earnings, ifthe restrictions contained in any
for use infinancing instruments. The terms of our
business operations and, accordingly, our board of directors does not anticipate declaring anyexisting term loan agreement preclude us from paying cash dividends
in the foreseeable future. In addition, our board of directors is not currently contemplating and does not anticipate declaring any share dividends in the foreseeable future. Further, if we incur any indebtedness, ourwithout consent. Our ability to declare dividends may
also be limited by restrictive covenants
we may agreepursuant to
in connection therewith.Securities Authorized for Issuance Under Equity Compensation Plans
None.
any other future debt financing agreements.
Recent Sales of Unregistered
Equity Securities
In February 2020, we issued an aggregate of 4,312,500 founder shares to our sponsor for an aggregate purchase price of $25,000 in cash, or approximately $0.006 per share. In July 2020, our sponsor forfeited 920,000 founder shares and the anchor investors purchased 920,000 founder shares for an aggregate purchase price of approximately $5,333, or approximately $0.006 per share. The number of founder shares issued was determined based on the expectation that such founder shares would represent 20% of the outstanding shares upon completion of our IPO. These Class B shares will automatically convert into shares of Class A common stock at the time of our initial business combination as described herein.
On August 4, 2020, simultaneously with the consummation of the IPO, we consummated the private placement (“Private Placement”) with the Sponsor and certain funds and accounts managed by Magnetar Financial LLC, UBS O’Connor LLC, and Mint Tower Capital Management B.V. (collectively the “Anchor Investors”) of 5,250,000 warrants (the “Private Warrants”) at a price of $1.00 per Private Warrant, generating gross proceeds to the Company of $5,250,000. The Private Warrants are identical to the Warrants (as defined below) sold in the IPO except that the Private Warrants will be non-redeemable and may be exercised on a cashless basis, in each case so long as they continue to be held by the Sponsor, the anchor investors or their permitted transferees. On August 14, 2020, simultaneously with the issuance and sale of the Over-Allotment Units, the Company consummated the sale of an additional 450,000 Private Warrants (the “Over-Allotment Private Placement” and, together with the IPO Private Placement, the “Private Placements”), generating gross proceeds of $450,000. Additionally, our Sponsor and anchor investors have agreed not to transfer, assign, or sell any of the Private Warrants or underlying securities (except in
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limited circumstances, as described in the Registration Statement) until the date that is 30 days after the date we complete our initial business combination. The Sponsor and anchor investors were granted certain demand and piggyback registration rights in connection with the purchase of the Private Warrants.
Use of Proceeds
On August 4, 2020, simultaneously with the consummation of the IPO, we consummated the private placement (“Private Placement”) with the Sponsor and certain funds and accounts managed by Magnetar Financial LLC, UBS O’Connor LLC, and Mint Tower Capital Management B.V. (collectively the “Anchor Investors”) of 5,250,000 warrants (the “Private Warrants”) at a price of $1.00 per Private Warrant, generating gross proceeds to the Company of $5,250,000. On August 14, 2020, simultaneously with the issuance and sale of the Over-Allotment Units, the Company consummated the sale of an additional 450,000 Private Warrants (the “Over-Allotment Private Placement” and, together with the IPO Private Placement, the “Private Placements”), generating gross proceeds of $450,000. The Private Warrants are identical to the Warrants (as defined below) sold in the IPO except that the Private Warrants will be non-redeemable and may be exercised on a cashless basis, in each case so long as they continue to be held by the Sponsor, the anchor investors or their permitted transferees. Additionally, our Sponsor and anchor investors have agreed not to transfer, assign, or sell any of the Private Warrants or underlying securities (except in limited circumstances, as described in the Registration Statement) until the date that is 30 days after the date we complete our initial business combination. The Sponsor and anchor investors were granted certain demand and piggyback registration rights in connection with the purchase of the Private Warrants.
A total of $172,500,000 of the net proceeds from the sale of Units in the IPO and the private placement on August 4, 2020 were placed in a trust account established for the benefit of the Company’s public stockholders at UBS Financial Services, Inc. maintained by Continental Stock Transfer & Trust Company, acting as trustee. None of the funds held in trust will be released from the trust account, other than interest income to pay any tax obligations, until the earlier of (i) the consummation of the Company’s initial business combination and (ii) the Company’s failure to consummate a business combination by August 4, 2022.
On February 20, 2020, the Company issued an unsecured promissory note to the Company’s Sponsor (the “Promissory Note”), pursuant to which the Company may borrow up to an aggregate principal amount of $300,000. The Promissory Note was non-interest bearing and payable on the earlier of (i) the consummation of the Initial Public Offering or (iii) the abandonment of the Initial Public Offering. As of August 4, 2020, the Company had borrowed an aggregate of approximately $47,000 under the Promissory Note, which was repaid in connection with the closing of the Initial Public Offering, on August 4, 2020.
For a description of the use of the proceeds generated in our initial public offering, see below Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
ITEM 6.
SELECTED FINANCIAL DATAAs a smaller reporting company, we are not required to make disclosures under this Item.
[RESERVED]25
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
You should read the following discussion and analysis of the Company’sour financial condition and results of operations should be read in conjunctiontogether with our audited consolidated financial statements and therelated notes related thereto which are included elsewhere in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain information contained in the10-K. This discussion contains forward-looking statements based upon current plans, expectations and analysis set forth below includes forward-looking statements.beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-lookingforward-looking statements as a result of manyvarious factors, including those set forth under “Special“Risk Factors” and in other parts of this Annual Report on Form 10-K.
During the year ended December 31, 2022, we identified immaterial errors in our previously issued financial statements. We have corrected the amounts as presented in this Item 7 accordingly. Please refer to Notes 1 and 21 to the financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
On July 16, 2021, we consummated the business combination (the “Merger”), contemplated by the Agreement and Plan of Merger, dated March 5, 2021, with NHIC Sub Inc. (“Merger Sub”), a wholly-owned subsidiary of NewHold Investment Corp. (“NHIC”), a special purpose acquisition company, which is our legal predecessor, and Evolv Technologies, Inc. dba Evolv Technology, Inc. (“Legacy Evolv”), as amended by that certain First Amendment to Agreement and Plan of Merger dated June 5, 2021 by and among NHIC, Merger Sub and Legacy Evolv (the “Amendment” and as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub was merged with and into Legacy Evolv, with Legacy Evolv surviving the merger as a wholly owned subsidiary of NHIC. Upon the closing of the Merger, NHIC changed its name to Evolv Technologies Holdings, Inc. Evolv Technologies Holdings, Inc. became the successor entity to NHIC pursuant to Rule 12g-3(a) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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. 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. Unlike conventional walk-through metal detectors, our products use advanced sensors, artificial intelligence software, and cloud services to reliably detect guns, improvised explosives, and large knives while ignoring harmless items like phones and keys. 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. We believe that we have screened more people through advanced systems than any organization other than the United States Transportation Security Administration (“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. We offer our products for purchase and primarily under a multi-year security-as-a-service subscription pricing model that delivers ongoing value to customers, generates predictable revenue and creates expansion and upsell opportunities.
Since our inception, we have incurred significant operating losses. 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. We generated a net loss of $86.4 million and $10.9 million for the years ended December 31, 2022 and 2021, respectively. We expect to continue to incur operating losses as we focus on growing and establishing recurring commercial sales of our products, including growing our sales and marketing teams, scaling our manufacturing operations, and continuing research and development efforts to develop new products and further enhance our existing products.
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. Until such time, if ever, as we can generate substantial revenue sufficient to achieve profitability, we expect to finance our operations through cash generated from operations and debt financings. In July 2021, we received gross proceeds of $300.0 million from our PIPE Investment as well as $84.9 million in proceeds, net of redemptions received from the closing of the Merger. In December 2022, we entered into a debt facility with Silicon Valley Bank which will allow us to borrow up to $75 million. However, we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we are unable to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the further development and commercialization efforts of one or more of our products, or may be forced to reduce or terminate our operations. See “Liquidity and Capital Resources.”
NewHold Investment Corporation Merger
On July 16, 2021, we completed the Merger, pursuant to the Agreement and Plan of Merger, dated as of March 5, 2021, and amended by the First Amendment to Agreement and Plan of Merger (the “Merger Agreement”), dated as of June 5, 2021. Upon the closing of the Merger, NHIC changed its name to Evolv Technologies Holdings, Inc. and the officers of NHIC, the legal predecessor company, resigned. The officers of Legacy Evolv became the officers of the Company, and the Company listed its shares of common stock, par value $0.0001 per share, on Nasdaq under the symbol “EVLV”.
Additional information regarding the Merger Agreement appears in Note Regarding Forward-Looking Statements,”3 of our consolidated financial statements for the year ended December 31, 2022.
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.
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; the continued effects of the COVID-19 pandemic and other public health emergencies; the Russian invasion of Ukraine and related geopolitical impacts; and a possible economic recession. 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. 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. Our products are designed to empower venues and facilities to realize the full benefits of touchless security screening, including a rapid visitor throughput and minimal security staff to screened visitor physical contact. We expect that our results of operations, including revenue, will fluctuate for the foreseeable future as venues and facilities continue to shift away from conventional security screening processes towards touchless security screening or consider security screening processes for the first time. The degree to which potential and current customers recognize these benefits and invest in our products will affect our financial results.
Pricing, Product Cost and Margins
To date, most of our revenue has been generated by sales of products which represented approximately 58% of our total revenue for each of the years ended December 31, 2022 and 2021. The remaining revenue was generated from subscription sales and services for our products. Going forward, we expect our products to be adopted in a variety of vertical industry markets and geographic regions, primarily within the United States. With the further development, enhancement, and maintenance of our analytics platform, which we refer to as Evolv Insights, as well as our plan to lead increasingly with our subscription offering, we expect subscription revenue as a percentage of total revenue to increase in future periods.
Pricing may also vary by region due to market-specific dynamics. As a result, our financial performance depends, in part, on the mix of sales/bookings/business in different markets during a given period. In addition, we are subject to price competition, and our ability to compete in key markets will depend on the success of our investments in new technologies and cost improvements as well as our ability to efficiently and reliably introduce cost-effective touchless security screening products to our customers.
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. Our performance is significantly dependent on the investment we make in our research and development efforts and on our ability to be at the forefront of the security screening industry. It is essential that we continually identify and respond to rapidly evolving customer requirements, develop, and introduce innovative new products, enhance existing products and generate customer demand for our products. 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. 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. 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.
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. 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. 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. 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.
Services Revenue
Services revenue includes subscription-based SaaS and maintenance revenue related to products sold to customers, as well as installation and training services. Revenue for installation and training are recognized upon transfer of control of these services, which are normally rendered over a short duration. Maintenance consists of technical support, bug fixes, and when-and-if available threat updates. SaaS and maintenance revenue is recognized ratably over the period of the arrangement, which is typically four years.
Cost of Revenue
We recognize cost of revenue in the same manner that the related revenue is recognized.
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.
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 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.
Our estimate of costs to service the warranty obligations is based on historical experience and expectations of future conditions. As of December 31, 2022, the warranty reserve was less than $0.1 million.
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. 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.
We expect our gross margins to fluctuate over time, depending on the factors described above.
Research and Development
Our research and development expenses represent costs incurred to support activities that advance the development of innovative security screening technologies, new product platforms, as well as activities that enhance the capabilities of our existing product platforms. Our research and development expenses consist primarily of salaries and bonuses, employee benefits, stock-based compensation, prototypes, design expenses, and consulting and contractor costs. 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.
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 our sales and marketing costs will increase for the year ending December 31, 2023 compared to the year ended December 31, 2022 due to an expected increase in customer facing headcount as we build out our sales, business development, and customer support capabilities.
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 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.
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.
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.
Loss on Extinguishment of Debt
Loss on extinguishment of debt relates to a modification of the 2021 Convertible Notes (as defined below) due to an agreement with noteholders to receive an additional 1,000,000 shares of NHIC common stock as further consideration for the conversion of such notes consistent with the terms thereof, and interest due to each investor would automatically convert into shares of the same class and series of capital stock of the Company issued to other investors in the financing at a conversion price equal to 80% of the price per share paid by the other investors. This modification of the 2021 Convertible Notes was accounted for as an extinguishment.
Upon the closing of the Merger, the Convertible Notes automatically converted into 4,408,672 shares of the Company’s common stock and the holders of the Convertible Notes also received the right to receive 1,000,000 shares of NHIC common stock. Upon the conversion of the Convertible Notes, the carrying value of the debt, including unamortized debt discount, and the related derivative liability and accrued interest were derecognized. The shares of common stock issued upon conversion of Convertible Notes were recorded at implied fair value of the Company’s common stock with the resulting difference being accounted for as a loss on extinguishment.
Change in Fair Value of Derivative Liability
In August through September 2019 and in September 2020, we issued Convertible Notes to several investors (the “2020 Convertible Notes”) that provided a conversion option whereby upon the closing of a specified financing event the notes would automatically convert into shares of the same class and series of our capital stock issued to other investors in the financing at a conversion price equal to 85% and 80%, respectively, of the price per share of the securities paid by the other investors. This conversion option was determined to be an embedded derivative that was required to be bifurcated and accounted for separately from the notes. The derivative liability was initially recorded at fair value upon issuance of the notes and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability are recognized in the consolidated statements of operations and comprehensive loss. In October 2019, the specified financing event was consummated, as such the 2020 Convertible Notes issued August through September 2019 were converted into shares of Series B-1 Preferred Stock and the derivative liability was extinguished.
In January and February 2021, we entered into a Convertible Note Purchase Agreement (the “2021 Convertible Notes”) with various investors for gross proceeds of $30.0 million with a stated interest rate of 8.0% per annum. The 2021 Convertible Notes provided a conversion option whereby upon the closing of a Qualified Financing event, in which the aggregate gross proceeds totaled at least $100.0 million, the 2021 Convertible Notes would automatically convert into shares of the same class and series of capital stock of the Company issued to other investors in the financing at a conversion price equal to 80% of the price per share paid by the other investors. The conversion option met the definition of an embedded derivative and was required to be bifurcated and accounted for separately from the notes. The proceeds from the 2021 Convertible Notes were allocated between the derivative liability and included in long-term liabilities on the Company’s consolidated balance sheet. The difference between the initial carrying value of the notes and the stated value of the notes represented a discount that was accreted to interest expense over the term of the Convertible Notes using the effective interest method.
In June 2021, we modified the 2021 Convertible Notes to grant the holders an additional 1,000,000 shares of NHIC common stock as further consideration upon the automatic conversion of the notes upon closing of the Merger. The modification of the 2021 Convertible Notes resulted in the recognition of a derivative liability for the fair value of the 1,000,000 NHIC shares as of June 21, 2021 as well as a bifurcated embedded derivative for conversion feature into shares of the same class and series of capital stock of the Company issued to other investors in the financing at a conversion price equal to 80% of the price per share paid by the other investors.
Upon the closing of the Merger, the Convertible Notes automatically converted into 4,408,672 shares of the Company’s common stock and the holders of the 2021 Convertible Notes also received 1,000,000 shares of the Company’s common stock, as noted above. Upon the conversion of the Convertible Notes, the carrying value of the debt of $32.8 million, and the related derivative liability of $19.7 million and accrued interest of $0.2 million were derecognized resulting in a loss on extinguishment of debt of $0.9 million recorded in other income (expense), net in the consolidated statements of operations and comprehensive loss.
Change in Fair Value of Contingent Earn-out Liability
In connection with the Merger and pursuant to the Merger Agreement, certain of Legacy Evolv’s initial shareholders are entitled to receive additional shares of our common stock upon us achieving certain milestones. The earn-out arrangement with the Legacy Evolv shareholders is 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.
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. 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.
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. Accordingly, we recorded the warrants at fair value upon the closing of the Merger with the offset to additional paid-in capital.
Change in Fair Value of Common Stock Warrant Liability
We classify certain warrants for the purchase of shares of our common stock as a liability on our consolidated balance sheets as these warrants are freestanding financial instruments that may require us to adjust the exercise price and number of shares that is not consistent with a fixed-for-fixed option pricing model. The warrant liability is initially recorded at fair value on the issuance date of each warrant and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the common stock warrant liability are recognized as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss. Changes in fair value of the common stock warrant liability will continue to be recognized until the warrants are exercised, expire, or qualify for equity
classification. In connection with the closing of the Merger, all common stock warrants that were issued prior to the closing of the Merger were converted into shares of the Company’s common stock.
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. 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 its deferred tax assets.
Results 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 | % |
*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. Further, during the year ended December 31, 2022, a higher relative mix of sales contracts were in the form of purchase subscription sales compared to leases.
We believe there are several key trends driving increased adoption of our solutions and growth in our product 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) acceleration in our customer acquisition activities as highlighted by the addition of 295 new customers during the year ended December 31, 2022 compared to 84 new customers during the year ended December 31, 2021, (iii) the expansion of our existing customers' initial Evolv Express deployments to their other owned venues and locations, and (iv) growing momentum with our channel partners which helps us extend our reach in certain geographies or vertical markets.
The decrease in product gross profit and gross profit margin during the year ended December 31, 2022 compared to the year ended December 31, 2021 is attributable to several factors. We experienced strong demand across our education and healthcare customers for single lane configurations of Evolv Express due to limitations in the lobby size typical of customers in those markets. These configurations generate lower gross profit than our dual lane configurations of Evolv Express due to a lower average sale price. Further, a higher percentage of sales were made through our channel partners, which are generally at a lower average sale price, and therefore a lower gross margin, during the year ended December 31, 2022 compared to the prior year. Product gross profit and gross profit margin were also adversely impacted by marketing and sponsorship arrangements with certain customers (which are reflected as an offset to revenue), increases in shipping costs, and the costs associated with the write-off of scrap inventory incurred without corresponding revenue. We expect to see improvement in our product gross profit margins as we continue to engineer our product with lower cost components. We also expect to see improvements in product gross margin to the extent shipping costs and high demand materials costs decline when global supply chain disruptions ease.
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
contract model during the year ended December 31, 2022 compared to the year ended December 31, 2021. Subscription gross profit margin increased primarily as the result of our ability to leverage our fixed costs over a higher revenue base.
Service Revenue
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| Service revenue | $ | 5,641 | | $ | 1,959 | | $ | 3,682 | | 188 % |
| Cost of service revenue | $ | 4,422 | | $ | 2,584 | | $ | 1,838 | | 71 % |
| Gross profit - Service revenue | $ | 1,219 | | $ | (625) | | $ | 1,844 | | (295) % |
| Gross profit margin - Service revenue | 22 % | | (32) % | | N/A | | 54 % |
The increase in service revenue, cost of service revenue, and service gross profit are primarily due to the increased number of purchase subscription units deployed during the year ended December 31, 2022 compared to the year ended December 31, 2021, as well as an increase in the number of installation and training services performed. Service gross profit margin increased primarily as the result of our ability to leverage our fixed costs over a higher revenue base.
Research and Development Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| Personnel related (including stock-based compensation) | $ | 14,568 | | $ | 7,345 | | $ | 7,223 | | 98 % |
| Materials and prototypes | 652 | | 1,837 | | (1,185) | | | (65) | |
| Professional fees | 2,806 | | 1,562 | | 1,244 | | | 80 | |
| Other | 745 | | 714 | | 31 | | | 4 | |
| $ | 18,771 | | $ | 11,458 | | $ | 7,313 | | | 64 | % |
The increase in personnel related expenses is due to an increase in payroll costs and stock-based compensation resulting primarily from a full year of expense related to new employees hired in our research and development function during the year ended December 31, 2021 and, to a lesser extent, new hires during the year ended December 31, 2022. 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. The increase in professional fees primarily relates to consulting costs incurred for product development and engineering.
Sales and Marketing Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2022 | | 2021 | | $ Change | | % Change |
| Personnel related (including stock-based compensation) | $ | 31,591 | | | $ | 17,382 | | | $ | 14,209 | | | 82 | % |
| Direct marketing | 5,457 | | | 4,292 | | | 1,165 | | 27 | |
| Travel and entertainment | 3,327 | | | 1,652 | | | 1,675 | | 101 | |
| Professional fees | 1,446 | | | 874 | | | 572 | | 65 | |
| Other | 4,818 | | | 1,899 | | | 2,919 | | 154 | |
| $ | 46,639 | | | $ | 26,099 | | | $ | 20,540 | | | 79 | % |
The increase in personnel related expenses is due to an increase in payroll costs and stock-based compensation resulting primarily from a full year of expense related to new employees hired in our sales and marketing functions during the year ended December 31, 2021, and to a lesser extent, new hires during the year ended December 31, 2022, as well as
an increase in commission expense related to higher sales during the year ended December 31, 2022 compared to the prior year. 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. 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 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.
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. Stock compensation expense included in general and administrative expenses was $7.6 million for the year ended December 31, 2022 compared to $2.8 million for the year ended December 31, 2021. The increase in professional fees is due to an increase in accounting, audit, tax, and legal services provided to the Company to support public company requirements. The increase in insurance costs is due primarily to director and officer insurance expense in relation to being a public company. The increase in non-income taxes is due to a sales tax contingency liability as we may owe additional sales and use taxes in various jurisdictions. The increase in other expenses is due primarily to $2.1 million increase of certain one-time expenses, a $0.5 million increase in IT and software subscription costs, a $0.3 million increase in depreciation and amortization expense, and $0.2 million of expense related to Express units donated through Give Evolv, offset by $0.7 million of non-capitalizable transaction costs incurred during the year ended December 31, 2021 related to the Merger.
Loss From Impairment of Property and Equipment
Impairment of property and equipment was $1.2 million and $1.9 million for the years ended December 31, 2022 and 2021, respectively. As we transition existing domestic customers to our current Express model, we are removing Edge units and Express prototype units from service, which results in the impairment of the remaining economic value of such units.
Interest Expense
Interest expense was $0.7 million for the year ended December 31, 2022, compared to $6.1 million for the year ended December 31, 2021. The decrease was primarily due to interest expense on the Convertible Notes during the year ended December 31, 2021. The Convertible Notes converted to the Company’s common stock upon closing of the Merger in July 2021.
Interest Income
Interest income of $3.2 million for the year ended December 31, 2022 related primarily to interest earned on money market funds. No interest income was earned for the year ended December 31, 2021.
Loss on Extinguishment of Debt
Loss on extinguishment of debt of $12.7 million for the year ended December 31, 2021 related to a modification of the 2021 Convertible Notes due to an agreement with noteholders to receive an additional 1,000,000 shares of NHIC common stock as further consideration for the conversion of such notes.
Change in Fair Value of Derivative Liability
Change in fair value of the derivative liability was $(1.7) million for the year ended December 31, 2021, resulting from an increase in the fair value of the Company's stock given the pending Merger. The derivative liability was derecognized in connection with the closing of the Merger in July 2021.
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 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. 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. The public warrant liability was established in connection with the closing of the Merger in July 2021.
Change in Fair Value of Common Stock Warrant Liability
Change in the fair value of the common stock warrant liability was $(0.9) million for the year ended December 31, 2021, resulting from the conversion of the common stock warrant liability upon the closing of the Merger in July 2021 and mark-to-market adjustments prior to the closing of the Merger.
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 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. We continue to assess all positive and negative evidence, including our future taxable income by jurisdiction based on our recent historical operating results, the expected timing of reversal of temporary differences, various tax planning strategies that we may be able to enact in future periods, the impact of potential operating changes on our business and our forecasted results from operations in future periods based on available information at the end of each reporting period. To the extent that we are able to reach the conclusion that deferred tax assets are realizable based on any combination of the above factors in any given tax jurisdiction, a reversal of all or some related portion of our existing valuation allowances may occur.
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. 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 cash outflows from operating activities of $74.7 million and $56.8 million during the years ended December 31, 2022 and 2021, respectively.
We maintain substantially all of our cash and cash equivalents in accounts with U.S. and multi-national financial institutions, including SVB, and our deposits at these institutions exceed insured limits. On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. The FDIC created a successor bridge bank, SVBB, and all deposits of SVB were transferred to SVBB under a systemic risk exception approved by the Federal Reserve, the U.S. Treasury Department, and the FDIC. On March 12, 2023, the Federal Reserve, the U.S. Treasury Department, and the FDIC announced in a joint statement that all SVB deposits, including both insured and uninsured amounts, would be available in full to account holders. The Company does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. However, we are currently assessing our banking relationships and the related concentration of deposits at any single financial institution, and are considering options available to reduce concentration risk.
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. 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. We may require additional capital to respond to the expected growth in the demand for equipment purchases to support our "leased equipment" offering, technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions, or unforeseen circumstances and in either the short-term or long-term may determine to engage in debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. 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. 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.
PIPE Investment and Proceeds from the closing of the Merger
In March 2021, prior to the completion of the Merger, we entered into subscription agreements (collectively, the "PIPE Investment") with certain parties subscribing for shares of our common stock. In July 2021, we received gross proceeds of $300.0 million from the PIPE Investment, as well as $84.9 million in proceeds, net of redemptions received in connection with the closing of the Merger.
Financing Arrangements
In September and December of 2020, we issued a total of $4.0 million of convertible notes (the “2020 Convertible Notes”). In January and February 2021, we issued a total of $30.0 million of convertible notes with a maturity date of September 2021 (the "2021 Convertible Notes").
In December 2020, we entered into a $10.0 million credit agreement with JPMorgan Chase Bank, N.A. (“JPM Credit Agreement”) with a maturity date of December 3, 2024, and a revolving line of credit of up to $10.0 million with a maturity date of December 3, 2022. Under the terms of the JPM Credit Agreement, we received proceeds of $10.0 million. We fully repaid all borrowings under the JPM Credit Agreement and terminated the JPM Credit Agreement in November 2022.
Upon the closing of the Merger, the Convertible Notes automatically converted into 4,408,672 shares of the Company’s common stock and the holders of the 2021 Convertible Notes also received the right to receive 1,000,000 shares of the Company’s common stock, as noted above. Upon the conversion of the Convertible Notes, the carrying value of the debt of $32.8 million and the related derivative liability of $19.7 million and accrued interest of $0.2 million were derecognized resulting in a loss on extinguishment of debt of $0.9 million recorded in other income (expense), net, which was recorded during the year ended December 31, 2021.
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. 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
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"). Each 2022 SVB Term Loan will mature on the 36-month anniversary of the extension thereof. The obligations under the 2022 SVB Credit Agreement are secured by a perfected security interest in substantially all of the Company's assets, with the exception of intellectual property, pursuant to the terms of the 2022 SVB Credit Agreement. 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. Each 2022 SVB Term Loan advance may be prepaid in full, subject to certain conditions, with payment of (calculated, in each case, based on the then-outstanding principal amount of such 2022 SVB Term Loan advance subject to prepayment) a prepayment premium equal to (i) 1.0% if prepaid on or prior to December 21, 2023; (ii) 0.75% if prepaid after December 21, 2023 but on or prior to December 21, 2024; (iii) 0.50% if prepaid after December 21, 2024 but on or prior to December 21, 2025; and (iv) 0.0% if prepaid after December 21, 2025.
The 2022 SVB Credit Agreement includes certain customary covenants, including a covenant that requires the Company to maintain all of its operating accounts, depository accounts and excess cash with SVB. Upon the occurrence of an event of default, SVB may, among other remedies, declare all obligations under the 2022 SVB Credit Agreement immediately due and payable. The Company has sufficient liquidity to repay all obligations under the 2022 SVB Credit Agreement, if necessary.
In connection with the closure of SVB on March 10, 2023 and the creation of SVBB, SVBB assumed all loans that were previously held by SVB. 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. 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 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 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. See Note 6 to our consolidated financial statements for the year ended December 31, 2022.
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 | |
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.
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, 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.
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, 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.
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.
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.
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, 2021, cash provided by financing activities was $377.8 million, primarily consisting of $300.0 million from the issuance of common stock in connection with the PIPE investment, $84.9 million of proceeds, net of redemptions, from the closing of the Merger, $31.9 million from the issuance of long-term debt, net of issuance costs, and $0.9 million from the exercise of stock options, partially offset by $34.1 million in net cash outflows from the payment of offering costs in connection with the Merger, $5.4 million for the repayment of principal on long term debt and $0.4 million for the repayment of financing obligations.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form
10-K.Overview
10-K.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are a blank check company incorporatedreasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on January 24, 2020an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We derive revenue from (1) subscription arrangements accounted for as a Delaware corporation and formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar Business Combination with one or more businesses or entities. We intend to effectuate our initial Business Combination using cashoperating leases, (2) from the proceeds of the Initial Public Offering and the sale of products, inclusive of SaaS and maintenance, and (3) professional services. Our arrangements are generally noncancelable and nonrefundable after ownership passes to the Private Placement Warrants,customer. Revenue is recognized net of sales tax.
Product Revenue
We derive a portion of our capital stock, debtrevenue 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. 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 our subscription becomes more valuable to our business.
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 and maintenance elements over the contractual lease term. 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. The non-lease components relate to (1) distinct services, such as SaaS, maintenance, installation and training, 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. 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.
Services Revenue
We provide SaaS, maintenance, installation and training services for our products. Revenue for installation and training are recognized upon transfer of control of these services, which are normally rendered over a short duration. Maintenance consists of technical support, bug fixes and when-and-if available threat updates. SaaS and maintenance revenue is recognized ratably over the period of the arrangement.
Revenue from Channel Partners
A portion of our revenue is generated by sales in conjunction with our channel partners. When we transact with a channel partner, our contractual arrangement is with the channel partner and not with the end-use customer. 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. Our contracts may include multiple performance obligations when customers purchase a combination of
cash, stockproducts and
debt.The outbreak of the COVID-19 coronavirus has resulted inservices. When our customer arrangements have multiple performance obligations that contain a widespread health crisis that has adversely affected the economies and financial markets worldwide, and potential target companies may defer or end discussions for a potential business combination with us whether or not COVID-19 affects their business operations. The extent to which COVID-19 impacts our search for a business combination will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. We may be unable to complete a business combination if continued concerns relating to COVID-19 restrict travel, limiting our ability to conduct meetings to negotiate and consummate transactions in a timely manner with potential investors, target company’s personnel, or vendors and services providers.
On August 4, 2020, simultaneously with the consummation of the IPO, we consummated the private placement (“Private Placement”) with the Sponsor and certain funds and accounts managed by Magnetar Financial LLC, UBS O’Connor LLC, and Mint Tower Capital Management B.V. (collectively the “Anchor Investors”) of 5,250,000 warrants (the “Private Warrants”) at a price of $1.00 per Private Warrant, generating gross proceeds to the Company of $5,250,000. On August 14, 2020, simultaneously with the issuance and sale of the Over-Allotment Units, the Company consummated the sale of an additional 450,000 Private Warrants (the “Over-Allotment Private Placement” and, together with the IPO Private Placement, the “Private Placements”), generating gross proceeds of $450,000. The Private Warrants are identical to the Warrants (as defined below) sold in the IPO except that the Private Warrants will be non-redeemable and may be exercised on a cashless basis, in each case so long as they continue to be held by the Sponsor, the anchor investors or their permitted transferees. Additionally, our Sponsor and anchor investors have agreed not to transfer, assign, or sell any of the Private Warrants or underlying securities (except in limited circumstances, as described in the Registration Statement) until the date that is 30 days after the date we complete our initial business combination. The Sponsor and anchor investors were granted certain demand and piggyback registration rights in connection with the purchase of the Private Warrants.
Results of Operations
Our only activities from January 24, 2020 (inception) through August 4, 2020 were organizational activities, those necessary to consummate the Initial Public Offering, described below. Subsequent to August 4, 2020 our activities include seeking to identify a target company for a Business Combination. We do not expect to generate any operating revenues until after the completion of our Business Combination. We generate non-operating income in the form of income on investments held in the Trust Account. We are incurring expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance),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. For multiple performance obligation arrangements that do not contain a lease, we allocate the contract’s transaction price to each performance obligation on a relative SSP basis.
Stock-Based Compensation
We measure stock-based option awards granted to employees, consultants and directors based on their fair value on the date of grant using the Black-Scholes option-pricing model. Compensation expense for
due diligence expenses.Forthose awards is recognized, net of estimated forfeitures, over the requisite service period, from January 24, 2020 (inception) through December 31, 2020,which is generally the vesting period of the respective award.
Prior to the closing of the Merger, the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, which uses the following inputs: (1) the fair value per share of the common stock issuable upon exercise of the option, (2) the expected term of the option, (3) expected volatility of the price of the common stock, (4) the risk-free interest rate, and (5) the expected dividend yield.
After the closing of the Merger, we had net lossdetermine the fair value of approximately $11,912,000, which consistedeach share of operating costscommon stock underlying stock-based awards based on the closing price of approximately $1,030,000 offsetour common stock as reported by incomeNasdaq on investments heldthe date of grant.
The Black-Scholes option-pricing model uses as inputs the fair value of our common shares and assumptions we make for the volatility of our common shares, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. The Company has historically been a private company and continues to lack sufficient company-specific historical and implied volatility information. 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.
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. The significant assumptions utilized in the Trust Accountcalculation are based on the achievement of approximately $79,000certain stock price milestones including volatility, risk-free rate of return, likelihood of a change in control, and costsexpected remaining term. For potential common stock issuances related to a stock price milestones, the fair value was determined based on our expectations of achieving such a milestone and the simulated estimated stock price on the expected date of achievement.
We believe our assumptions are reasonable based on available information, our experience, knowledge, and judgments. These estimates can be affected by factors that are difficult to predict including future (1) EVLV closing price per share on the Nasdaq, (2) estimated stock price volatility over the earn-out period, and (3) risk free rates. 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.
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. The significant assumptions utilized in the calculation are based on the achievement of certain stock price milestones including volatility, risk-free rate of return, likelihood of a change in control, and expected remaining term.
We believe our assumptions are reasonable based on available information, our experience, knowledge, and judgments. These estimates can be affected by factors that are difficult to predict including future (1) EVLV closing price per share on the Nasdaq, (2) estimated stock price volatility over the contingently issuable common shares period, and (3) risk free rates. 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 contingently issuable common stock and could result in material changes in future periods.
Valuation of Common Stock Warrant Liability and Public Warrant Liability
We classify certain warrants to purchase shares of our common stock (the “Common Stock Warrant”) as liabilities on our consolidated balance sheets as these warrants are free-standing financial instruments that may require us to adjust the exercise price and number of shares that is not consistent with a fixed-for-fixed option pricing model. The warrant liability associated with each of these warrants was initially recorded at fair value on the issuance date of warrants of $390,000each warrant and
26
other expense for the change is subsequently remeasured to fair value at each balance sheet date. Changes in fair value of the warrantwarrants are recognized as a component of other income (expense), net in our statements of operations and comprehensive loss. We will continue to adjust the liability for $10,571,000. Includedchanges in fair value until the operating costswarrants are exercised, expire or qualify for equity classification.
For the common stock warrant, we utilized the Black-Scholes option-pricing model, which incorporates assumptions and estimates to value the warrant liability. Key estimates and assumptions impacting the fair value measurement include (1) the fair value per share of approximately $1,030,000the underlying shares of applicable series of stock issuable upon exercise of the Warrants, (2) the remaining contractual term of the Warrants, (3) the risk-free interest rate, (4) the expected dividend yield and (5) the expected volatility of the price of the underlying applicable common stock. Prior to the closing of the Merger, we assessed these assumptions and estimates on a quarterly basis as additional information impacting the assumptions is approximately $706,000obtained. We estimate the fair value per share of professional, consulting, diligencethe underlying stock based in part on the results of third-party valuations and other costs relatedadditional factors deemed relevant. Upon the closing of the Merger, the common stock warrant net settled and converted to evaluating business combination candidates, approximately $166,000 for professional, compliance, listing and insurance costs associatedcommon stock. As of December 31, 2021, we no longer have common stock warrants classified as liabilities.
In connection with the
Company’s public reporting, approximately $83,000 for taxes (a portionclosing of
the Merger, we assumed the Public Warrants to purchase shares of common stock, which
canwere classified as a liability, as the Public Warrants do not meet the criteria to be
reimbursed from the Trust Account), and approximately $75,000 paidindexed to our
Sponsor for Administrative Support Agreement, among other costs.As discussed further in Note 2 tocommon stock. Accordingly, we recorded the condensed financial statements, the Company previously accounted for its outstanding public and private warrants as components of equity instead of as derivative liabilities. The warrant agreement governing the warrants includes a provision that provides for potential changes to the settlement amounts dependentPublic Warrants at fair value upon the characteristicsclosing of the holder ofMerger with a corresponding adjustment to additional paid-in capital. After the warrant. Upon review of the “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” promulgated by the SEC on April 12, 2021, the Company’s management further evaluated the accounting for its public and private warrants under Accounting Standards Codification (“ASC”) Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Section 815-40-15 and concluded that that the Company’s warrants are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40-15 and therefore should be classified as derivative liabilities and not in equity.
As a result of the above, the Company is required to measureinitial 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.
Valuation of Inventory
Inventory is valued at the lower of cost or net realizable value. Cost is computed using the weighted average method. We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, record charges to write down inventories to their estimated net realizable value, after evaluating historical sales, future demand, our estimates of forecasted net revenue, market conditions and expected product life cycles. A significant change in the timing or level of demand for our products as compared to forecasted amounts may result in recording additional write-offs. Such charges are classified as cost of product revenue in the statements of operations and comprehensive loss. Any write-down of inventory to net realizable value creates a new cost basis.
Capitalized Software
Software development costs consist of certain consulting costs and compensation expenses for employees who devote time to the development of our internal-use software and software embedded in products to be sold or leased, as well as certain upgrades and enhancements that are expected to result in enhanced functionality. We amortize these development costs over the estimated useful life of four years. We determined that a four year life is appropriate for our capitalized software based on our best estimate of the useful life of the software after considering factors such as continuous developments in the technology, obsolescence, and anticipated life of the service offering before significant upgrades. Management evaluates the useful lives of these assets on a quarterly basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
We determine the amount of software costs to be capitalized based on the amount of time spent by our developers and consultants on projects in the application stage of development. There is judgment in estimating the time allocated to a particular project in the application stage. A significant change in the time spent on each project could have a material impact on the amount capitalized and related amortization expense in subsequent periods.
Leases
To determine the residual value estimates and useful life of equipment that we lease to our customers, we are required to make judgments about future events that are subject to risks and uncertainties outside of their control, such as inventory levels of new equipment, changing consumer preferences, new technology and mandatory regulations. 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. 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.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We meet the definition of an “emerging growth company” and have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private
warrants at the end of each reporting period and recognize changes in the fair value from the prior period in the Company’s operating results for the current period as it has done by restatement in this current filing as of December 31, 2020 and for the period from January 24, 2020 (inception) to December 31, 2020 and will be required in each reporting period going forward. The period from January 4, 2020 (inception) to December 31, 2020, as restated, reflect other income (expense) from change in fair value of the warrant liability of $10,571,000 and other income (expense) of approximately $390,000 of expenses associated with issuance of the warrants underlying the warrant liability. The periods from January 4, 2020 (inception) to September 30, 2020, as restated, and for the three months ended September 30, 2020, as restated, reflect other income from change in fair value of the warrant liability of $1,480,000 and other income (expense) of approximately $390,000 of expenses associated with issuance of the warrants underlying the warrant liability in each period.The Company’s prior accounting for the warrants as components of equity instead of as derivative liabilities did not have any effect on the Company’s previously reported operating expenses, cash flows, cash or total stockholders’ equity.
Liquidity and Capital Resources
We consummated our Initial Public Offering of 17,250,000 Units, including the full exercise by the underwriter of its over-allotment option in the amount of 2,250,000 Units, at a price of $10.00 per Unit, generating gross proceeds of $172,500,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 5,250,000 Private Placement Warrants to our Sponsor, at $1.00 per Private Placement Warrant, generating gross proceeds of $5,250,000. On August 14, 2020, simultaneously with the issuance and sale of the Over-Allotment Units, the Company consummated the sale of an additional 450,000 Private Warrants (the “Over-Allotment Private Placement” and, together with the IPO Private Placement, the “Private Placements”), generating gross proceeds of $450,000.
Transaction costs amounted to approximately $9,986,500 consisting of $3,450,000 of underwriting fees, $6,037,500 of deferred underwriting fees and approximately $499,000 of other offering costs.
For the period from January 24, 2020 (inception) through December 31, 2020, cash used in operating activities was approximately $454,000. Net loss of approximately $11,912,000 was affected by other expense for the change in the fair value of the warrant liability of $10,571,000 as well as the costs associated with the issuance of the warrants of $390,000 and income earned on investments held in the Trust Account of approximately $79,000 and costs of issuing public and private warrants of approximately $390,000. Changes in operating assets and liabilities provided approximately $576,000 of cash for operating activities.
As of December 31, 2020, we had investments held in the Trust Account of $172,579,000 consisting of U.S. government treasury bills which matured on February 4, 2021. Upon maturity, the proceeds were invested in U.S. government treasury bills maturing on May 6, 2021. At December 31, 2020, income of approximately
27
$79,000 was available to us to pay taxes which were accrued at approximately $83,000. Through December 31, 2020, however, we did not withdraw any interest earned on the Trust Account to pay our taxes. We intend to use substantially all of the funds held in the Trust Account, to acquire a target business and to pay our expenses relating thereto. To the extent that our capital stock is used in whole or in part as consideration to effect a Business Combination, the remaining funds held in the Trust Account will be used as working capital to finance the operations of the target business. Such working capital funds could be used in a variety of ways including continuing or expanding the target business’ operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders’ fees which we had incurred prior to the completion of our Business Combination if the funds available to us outside of the Trust Account were insufficient to cover such expenses.
As of December 31, 2020, we had cash of approximately $1,328,000. We intend to use the funds held outside the Trust Account for identifying and evaluating prospective acquisition candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses, reviewing corporate documents and material agreements of prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the Business Combination.
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the initial stockholders or an affiliate of the initial stockholders, or certain of our officers and directors or their affiliates may, but are not obligated to, loan us funds as may be required. If we complete our initial Business Combination, we would repay such loaned amounts. In the event that our initial Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from our Trust Account would be used for such repayment. Up to $1,500,000 of notes may be convertible into Private Placement Warrants, at a price of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants.
We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, if our estimate of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination. Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant number of our public shares upon consummation of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the completion of our Business Combination. If we are unable to complete our Business Combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the Trust Account. In addition, following our Business Combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2020. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
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Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities other than an agreement to pay our Sponsor a monthly fee of $10,000 for office space, utilities and secretarial and administrative support. We began incurring these fees on August 4, 2020 and will continue to incur these fees monthlycompanies until the earlier of the completiondate we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the Business Combination and our liquidation.
The underwriters are entitled to a deferred fee of 3.5% of the gross proceeds of the Initial Public Offering, or $6,037,500. The deferred fee will be payable in cash to the underwriters solelyextended transition period provided in the event thatJOBS Act. As a result of this election, we complete a Business Combination from the amounts held in the Trust Account,will not be subject to the termssame new or revised accounting standards as other public companies that are not emerging growth companies and our consolidated financial statements may not be comparable to other public companies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our operations are primarily within the United States, and we transact primarily in United States dollars. Therefore, we do not have any material foreign currency exposure. We are exposed to market risks in the ordinary course of our business. 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.
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. 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.
We 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. 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. 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.
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
underwriting agreement.Critical Accounting Policies
The preparationestimates required, we believe the effects of inflation on our results of operations and financial condition have been immaterial. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EVOLV TECHNOLOGIES HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Evolv Technologies Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evolv Technologies Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, of convertible preferred stock and stockholders' equity (deficit) and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and related disclosures2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2022.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 24, 2023
We have served as the Company’s auditor since 2015.
EVOLV TECHNOLOGIES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 229,783 | | | $ | 307,492 | |
| Restricted cash | — | | | 400 | |
| Accounts receivable, net | 31,920 | | | 6,477 | |
| Inventory | 10,257 | | | 2,890 | |
| Current portion of contract assets | 2,852 | | | 1,459 | |
| Current portion of commission asset | 3,384 | | | 1,645 | |
| Prepaid expenses and other current assets | 14,388 | | | 10,757 | |
| Total current assets | 292,584 | | | 331,120 | |
| Restricted cash, noncurrent | 275 | | | 275 | |
| Contract assets, noncurrent | 1,386 | | | 3,418 | |
| Commission asset, noncurrent | 5,655 | | | 3,719 | |
| Property and equipment, net | 44,707 | | | 23,783 | |
| Operating lease right-of-use assets | 1,673 | | | — | |
| Other assets | 1,835 | | | 542 | |
| Total assets | $ | 348,115 | | | $ | 362,857 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 18,194 | | | $ | 6,045 | |
| Accrued expenses and other current liabilities | 11,545 | | | 9,551 | |
| Current portion of deferred revenue | 18,273 | | | 6,599 | |
| Current portion of deferred rent | — | | | 135 | |
| Current portion of long-term debt | 10,000 | | | 2,000 | |
| Current portion of operating lease liabilities | 1,114 | | | — | |
| Total current liabilities | 59,126 | | | 24,330 | |
| Deferred revenue, noncurrent | 17,695 | | | 2,475 | |
| Deferred rent, noncurrent | — | | | 333 | |
| Long-term debt, noncurrent | 19,683 | | | 7,945 | |
| Operating lease liabilities, noncurrent | 892 | | | — | |
| Contingent earn-out liability | 14,218 | | | 21,206 | |
| Contingently issuable common stock liability | 3,392 | | | 5,264 | |
| Public warrant liability | 6,124 | | | 11,030 | |
| Total liabilities | 121,130 | | | 72,583 | |
| Commitments and contingencies (Note 20) | | | |
| | | |
| Stockholders’ equity: | | | |
| Preferred stock, $0.0001 par value; 100,000,000 authorized at December 31, 2022 and December 31, 2021; no shares issued and outstanding at December 31, 2022 and December 31, 2021 | — | | | — | |
| Common stock, $0.0001 par value; 1,100,000,000 shares authorized at December 31, 2022 and December 31, 2021, 145,204,974 and 142,745,021 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | 15 | | | 14 | |
| Additional paid-in capital | 419,190 | | | 396,064 | |
| Accumulated other comprehensive income (loss) | (10) | | | — | |
| Accumulated deficit | (192,210) | | | (105,804) | |
| Stockholders’ equity | 226,985 | | | 290,274 | |
| Total liabilities and stockholders’ equity | $ | 348,115 | | | $ | 362,857 | |
The accompanying notes are an integral part of these consolidated financial statements.
EVOLV TECHNOLOGIES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Revenue: | | | |
| Product revenue | $ | 31,985 | | | $ | 13,631 | |
| Subscription revenue | 17,569 | | | 7,803 | |
| Service revenue | 5,641 | | | 1,959 | |
| Total revenue | 55,195 | | | 23,393 | |
| Cost of revenue: | | | |
| Cost of product revenue | 41,575 | | | 12,279 | |
| Cost of subscription revenue | 7,469 | | | 4,501 | |
| Cost of service revenue | 4,422 | | | 2,584 | |
| Total cost of revenue | 53,466 | | | 19,364 | |
| Gross profit | 1,729 | | | 4,029 | |
| Operating expenses: | | | |
| Research and development | 18,771 | | | 11,458 | |
| Sales and marketing | 46,639 | | | 26,099 | |
| General and administrative | 37,719 | | | 19,869 | |
| Loss from impairment of property and equipment | 1,161 | | | 1,869 | |
| Total operating expenses | 104,290 | | | 59,295 | |
| Loss from operations | (102,561) | | | (55,266) | |
| Other income (expense), net: | | | |
| Interest expense | (712) | | | (6,068) | |
| Interest income | 3,165 | | | — | |
| Other expense, net | (64) | | | (617) | |
| Loss on extinguishment of debt | — | | | (12,685) | |
| Change in fair value of derivative liability | — | | | (1,745) | |
| Change in fair value of contingent earn-out liability | 6,988 | | | 47,360 | |
| Change in fair value of contingently issuable common stock liability | 1,872 | | | 6,406 | |
| Change in fair value of public warrant liability | 4,906 | | | 12,606 | |
| Change in fair value of common stock warrant liability | — | | | (879) | |
| Total other income (expense), net | 16,155 | | | 44,378 | |
| Net loss | $ | (86,406) | | | $ | (10,888) | |
| | | |
| Weighted average common shares outstanding – basic and diluted | 143,858,668 | | | 71,662,694 | |
| Net loss per share - basic and diluted | $ | (0.60) | | | $ | (0.15) | |
| | | |
| Net income (loss) | $ | (86,406) | | | $ | (10,888) | |
| Other comprehensive income (loss) | | | |
| Cumulative translation adjustment | (10) | | | — | |
| Total other comprehensive income (loss) | (10) | | | — | |
| Total comprehensive income (loss) | $ | (86,416) | | | $ | (10,888) | |
The accompanying notes are an integral part of these consolidated financial statements.
EVOLV TECHNOLOGIES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Convertible
Preferred Stock | | | Common Stock | | Additional
Paid-in
Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated
Deficit | | Total
Stockholders’
Equity (Deficit) |
| Shares (1) | | Amount | | | Shares (1) | | Amount | | | | |
| Balances at December 31, 2020 | 77,340,057 | | | $ | 75,877 | | | | 9,846,830 | | | $ | 1 | | | $ | 10,110 | | | $ | — | | | $ | (94,916) | | | $ | (84,805) | |
| Issuance of warrants to purchase common stock | — | | | — | | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Issuance of common stock upon exercise of stock options | — | | | — | | | | 4,276,327 | | | — | | | 915 | | | — | | | — | | | 915 | |
| Issuance of common stock upon vesting of restricted stock units | — | | | — | | | | 2,625 | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation expense | — | | | — | | | | — | | | — | | | 8,106 | | | — | | | — | | | 8,106 | |
| Repurchase of common stock upon settlement of related party note | — | | | — | | | | (43,665) | | | — | | | — | | | — | | | — | | | — | |
| Conversion of convertible preferred stock into common stock in connection with the closing of the Merger | (77,340,057) | | | (75,877) | | | | 80,833,007 | | | 8 | | | 75,869 | | | — | | | — | | | 75,877 | |
| Issuance of common stock in connection with the closing of the Merger | — | | | — | | | | 10,391,513 | | | 1 | | | 84,944 | | | — | | | — | | | 84,945 | |
| Issuance of common stock in connection with the consummation of the PIPE Investment | — | | | — | | | | 30,000,000 | | | 3 | | | 299,997 | | | — | | | — | | | 300,000 | |
| Issuance of common stock for net settlement of common stock and preferred stock warrants upon settlement of the Merger | — | | | — | | | | 2,029,712 | | | — | | | 880 | | | — | | | — | | | 880 | |
| Issuance of common stock for the conversion of convertible notes | — | | | — | | | | 5,408,672 | | | 1 | | | 53,644 | | | — | | | — | | | 53,645 | |
| Issuance of public warrants in connection with the closing of the Merger | — | | | — | | | | — | | | — | | | (23,636) | | | — | | | — | | | (23,636) | |
| Payment of deferred offering costs in connection with the closing of the Merger and PIPE Investment | — | | | — | | | | — | | | — | | | (36,075) | | | — | | | — | | | (36,075) | |
| Initial fair value of contingent earn-out liability recognized upon the closing of the Merger | — | | | — | | | | — | | | — | | | (67,021) | | | — | | | — | | | (67,021) | |
| Initial fair value of contingently issuable common stock liability recognized upon the closing of the Merger | — | | | — | | | | — | | | — | | | (11,670) | | | — | | | — | | | (11,670) | |
| Net income/(loss) | — | | | — | | | | — | | | — | | | — | | | — | | | (10,888) | | | (10,888) | |
| Balances at December 31, 2021 | — | | | — | | | | 142,745,021 | | | 14 | | | 396,064 | | | — | | | (105,804) | | | 290,274 | |
| Issuance of common stock upon exercise of stock options | — | | | — | | | | 1,894,179 | | | 1 | | | 827 | | | — | | | — | | | 828 | |
| Issuance of common stock upon vesting of restricted stock units | — | | | — | | | | 565,774 | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation expense | — | | | — | | | | — | | | — | | | 22,299 | | | — | | | — | | | 22,299 | |
| Cumulative translation adjustment | — | | | — | | | | — | | | — | | | — | | | (10) | | | — | | | (10) | |
| Net income/(loss) | — | | | — | | | | — | | | — | | | — | | | — | | | (86,406) | | | (86,406) | |
| Balances at December 31, 2022 | — | | | — | | | | 145,204,974 | | | $ | 15 | | | $ | 419,190 | | | $ | (10) | | | $ | (192,210) | | | $ | 226,985 | |
______________________
| | | | | |
| (1) | The shares of the Company’s convertible preferred stock and common stock, prior to the Merger (as defined in Note 3) have been retrospectively restated to reflect the exchange ratio of 0.378 established in the Merger as described in Note 3. |
The accompanying notes are an integral part of these consolidated financial statements.
EVOLV TECHNOLOGIES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (86,406) | | | $ | (10,888) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 5,465 | | | 2,895 | |
| Write-off of inventory | 1,582 | | | 2,132 | |
| Adjustment to property and equipment for sales type leases | (625) | | | (91) | |
| Loss from impairment of property and equipment | 1,161 | | | 1,869 | |
| Loss on disposal of property and equipment | — | | | 617 | |
| Stock-based compensation | 22,498 | | | 9,596 | |
| Non-cash interest expense | 55 | | | 5,245 | |
| Non-cash lease expense | 811 | | | — | |
| Provision recorded for allowance for doubtful accounts | 150 | | | (13) | |
| Loss on extinguishment of debt | — | | | 12,685 | |
| Change in fair value of derivative liability | — | | | 1,745 | |
| Change in fair value of common stock warrant liability | — | | | 879 | |
| Change in fair value of earn-out liability | (6,988) | | | (47,360) | |
| Change in fair value of contingently issuable common stock | (1,872) | | | (6,406) | |
| Change in fair value of public warrant liability | (4,906) | | | (12,606) | |
| Changes in operating assets and liabilities | | | |
| Accounts receivable | (25,593) | | | (5,063) | |
| Inventory | (8,495) | | | (3,436) | |
| Commission assets | (3,675) | | | (3,072) | |
| Contract assets | 639 | | | (4,877) | |
| Other assets | (419) | | | 32 | |
| Prepaid expenses and other current assets | (3,174) | | | (9,148) | |
| Accounts payable | 7,661 | | | 765 | |
| Deferred revenue | 26,887 | | | 4,832 | |
| Deferred rent | — | | | 457 | |
| Warranty Reserve | — | | | (42) | |
| Accrued expenses and other current liabilities | 1,462 | | | 2,472 | |
| Operating lease liability | (946) | | | — | |
| Net cash used in operating activities | (74,728) | | | (56,781) | |
| Cash flows from investing activities: | | | |
| Development of internal-use software | (2,720) | | | (1,028) | |
| Purchases of property and equipment | (21,473) | | | (16,557) | |
| Proceeds from sale of property and equipment | 312 | | | — | |
| Net cash used in investing activities | (23,881) | | | (17,585) | |
| Cash flows from financing activities: | | | |
| Proceeds from exercise of stock options | 827 | | | 915 | |
| Proceeds from issuance of common stock from the PIPE Investment | — | | | 300,000 | |
| Proceeds from the closing of the Merger | — | | | 84,945 | |
| Payment of offering costs from the closing of the Merger and PIPE Investment | — | | | (34,132) | |
| Repayment of financing obligations | — | | | (359) | |
| Proceeds from long-term debt, net of issuance costs | 29,683 | | | 31,882 | |
| Repayment of principal on long-term debt | (10,000) | | | (5,422) | |
| 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 | |
| Cash, cash equivalents and restricted cash | | | |
| Cash, cash equivalents and restricted cash at beginning of period | 308,167 | | | 4,704 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 230,058 | | | $ | 308,167 | |
| Supplemental disclosure of cash flow information | | | |
| | | | | | | | | | | |
| Cash paid for interest | $ | 581 | | | $ | 850 | |
| Supplemental disclosure of non-cash activities | | | |
| | | |
| Capital expenditures incurred but not yet paid | 7,552 | | | 2,936 | |
| Capitalization of stock compensation | 205 | | | 53 | |
| | | |
| Deferred offering costs included in accounts payable | — | | | 1,943 | |
| Conversion of convertible preferred stock to common stock | — | | | 75,877 | |
| Initial fair value of contingent earn-out liability recognized in connection with the closing of the Merger | — | | | 67,021 | |
| Initial fair value of contingently issuable common stock liability recognized in connection with the closing of the Merger | — | | | 11,670 | |
| Conversion of common stock warrants to common stock in connection with the closing of the Merger | — | | | 880 | |
| Initial fair value of public warrants in connection with the closing of the Merger | — | | | 23,636 | |
| Reconciliation of cash, cash equivalents and restricted cash: | | | |
| Cash and cash equivalents | $ | 229,783 | | | $ | 307,492 | |
| Restricted cash | — | | | 400 | |
| Restricted cash, noncurrent | 275 | | | 275 | |
| Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 230,058 | | | $ | 308,167 | |
The accompanying notes are an integral part of these consolidated financial statements.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Basis of Presentation
Evolv Technologies Holdings, Inc. (the “Company”), a Delaware corporation, is a global leader in AI-based weapons detection for security screening. The Company’s mission is to make the world a safer and more enjoyable place to work, learn, and play. The Company is democratizing security by making it seamless for gathering spaces to address the chronic epidemic of escalating gun violence, mass shootings and terrorist attacks in a cost-effective manner while improving the visitor experience. The Company is headquartered in Waltham, Massachusetts.
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 wholly owned subsidiaries, which include Evolv Technologies, Inc., Evolv Technologies UK Ltd. and Give Evolv LLC. References to “NHIC” refer to the company prior to the consummation of the Merger (as defined in Note 3) and references to “Legacy Evolv” refer to Evolv Technologies, Inc. dba Evolv Technology, Inc. prior to the consummation of the Merger.
Risks and uncertainties
The Company is subject to risks and uncertainties common to early-stage companies in the human security industry including, but not limited to, the successful development, commercialization, marketing and sale of existing and new products, market fluctuations and the impact on operating results and financial risks, protection of proprietary knowledge and patent risks, dependence on key personnel, competition, technological challenges, cybersecurity risks, customer demand, and management of growth. Potential risks and uncertainties also include, without limitation, uncertainties regarding the duration and magnitude of the impact of the COVID-19 pandemic, including variants, on the Company’s business and the economy in general.
COVID-19 has, and may continue to, disrupt third-party contract manufacturer and supply chain. We may also experience customer payment delays for our products which could negatively impact our results of operations. We may also experience some delays in installation of our products at customers’ facilities, which could lead to postponed revenue recognition for those transactions. We have experienced supply chain challenges due to the COVID-19 pandemic. The long-term effects of COVID-19 on the global economy and on us are difficult to assess or predict and may include a further decline in the market prices of our products, risks to employee health and safety, risks for the deployment of our products and services, and reduced sales in geographic locations impacted.
Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
All share and per share amounts contained herein for periods prior to the Merger have been retroactively adjusted to give effect to the Exchange Ratio (as defined in Note 3), unless otherwise indicated.
Revision of Prior Period Financial Statements
In preparing the condensed consolidated financial statements as of and for the three and six months ended June 30, 2022, the Company identified errors in its previously issued financial statements whereby (a) certain expenses that were cost of subscription revenue related and cost of service revenue related were inaccurately classified as sales and marketing expenses on the consolidated statements of operations and comprehensive loss, (b) certain equipment under lease or held for lease was inaccurately classified as inventory on the consolidated balance sheets and a portion of the cash outflows related to the equipment under lease or held for lease were misclassified between operating and investing cash flows on the consolidated statements of cash flows, and (c) the vesting of warrants related to the Business Development Agreement disclosed in Note 16 were not accounted for accurately. The identified errors impacted the Company's previously issued
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020 annual financial statements, 2021 quarterly and annual financial statements, and quarterly financial statements for the three months ended March 31, 2022. The Company has made adjustments to the prior period amounts presented in these financial statements accordingly. Additionally, the Company has made adjustments to correct for other previously identified immaterial errors. The Company evaluated the errors and determined that the related impacts were not material to any previously issued annual or interim financial statements. The impact of the revisions to the quarterly periods ending June 30, 2021 and September 30, 2021 are presented in the Company's Quarterly Reports on Form 10-Q for the periods ending June 30, 2022 and September 30, 2022, respectively. The impacts of the revisions to the periods presented in this Annual Report on Form 10-K are included in Note 21. The impact of the revisions to the quarterly periods ending March 31, 2022 and March 31, 2021 are presented in Note 22.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and incomethe reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include but are not limited to calculating the standalone selling price for revenue recognition, the valuation of inventory, the accrual of sales tax contingencies, the expensing and capitalization of costs associated with internal-use software, stock-based awards, the valuation of the contingent earn-out liability, the valuation of the contingently issuable common stock, the valuation of common stock for the periods reported.prior to the Company listing its shares on Nasdaq, the valuation of the derivative liability, the valuation of the common stock warrant liability and the valuation of the preferred stock warrant liability. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could materially differ from those estimates.
Risk of Concentrations of Credit, Significant Customers and Significant Suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash equivalents, restricted cash, and accounts receivable, net. We maintain substantially all of our cash and cash equivalents with U.S. and multi-national financial institutions, including Silicon Valley Bank ("SVB"), and our deposits at these institutions are in excess of the Federal Deposit Insurance Corporation ("FDIC") insurance limit. On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. The FDIC created a successor bridge bank, Silicon Valley Bridge Bank, N.A. (“SVBB”), and all deposits of SVB were transferred to SVBB under a systemic risk exception approved by the Federal Reserve, the U.S. Treasury Department, and the FDIC. While the Federal Reserve, the U.S. Treasury Department, and the FDIC announced in a joint statement on March 12, 2023 that all SVB deposits, including both insured and uninsured amounts, would be available in full to account holders, a similar failure of a depository institution could impact access to our cash and cash equivalents and could adversely impact our operating liquidity and financial performance. Other than cash and cash equivalents held at SVB, the Company maintains its cash, cash equivalents and restricted cash with financial institutions that management believes to be of high credit quality.
Significant customers are those which represent more than 10% of the Company’s total revenue or accounts receivable, net balance at each respective balance sheet date. No single customer represented more than 10% of the Company's total revenue for the year ended December 31, 2021. The following table presents customers that represent 10%
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or more of the Company’s total revenue for the year ended December 31, 2022. Both customers shown are channel partners of the Company.
| | | | | |
| Year Ended December 31, 2022 |
| Motorola Solutions, Inc. | 20.9 | % |
| Customer A | 10.1 | % |
| 31.0 | % |
The following table presents customers that represent 10% or more of the Company’s accounts receivable, net. Each customer shown is a channel partner of the Company.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Motorola Solutions, Inc. | 39.0 | % | | 18.2 | % |
| Customer B | | | 11.8 | % |
| Customer C | 16.0 | % | | |
| 55.0 | % | | 30.0 | % |
The Company relies on third parties for the supply and manufacture of its products as well as third-party logistics providers. In instances where these parties fail to perform their obligations, the Company may be unable to find alternative suppliers to satisfactorily deliver its products to its customers on time, if at all, which could have identifieda material adverse effect on the Company’s operating results, financial condition and cash flows and damage its customer relationships.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash as reported on the consolidated statement of cash flows consists of the following
critical accounting policies:Deferred Offering Costs:
(in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 229,783 | | $ | 307,492 |
| Restricted cash | 275 | | 675 |
| Total cash, cash equivalents, and restricted cash | $ | 230,058 | | $ | 308,167 |
The Company
compliesconsiders all short-term, highly liquid investments purchased with
an original maturity of three months or less at the
requirementsdate of
purchase to be cash equivalents. Restricted cash relates to a letter of credit on the
FASB ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “Expenses of Offering.” Costs incurredCompany’s office lease in
connection with preparation for the Offering (approximately $9,986,000) including underwriters’ discount paid and deferred of approximately $9,488,000. Such costs were allocated among the equity and warrant liability components and approximately $9,596,000 has been charged to equity for the equity components and approximately $390,000 has been charged to other expense for the warrant liability components upon completion of the Public Offering.Common Stock Subject to Possible Redemption
As discussed in Note 3,Waltham, Massachusetts, all of the 17,250,000 public shares sold as part of Unitswhich is included in restricted cash, noncurrent in the Public Offering contain a redemption feature which allows forconsolidated balance sheet as of December 31, 2022. As the redemptionletter of public shares if the Company holds a stockholder vote or therecredit is a tender offer for shares in connection with a Business Combination. In accordance with FASB ASC 480, redemption provisions not solely within the controlreduced restricted cash is reclassified to cash and cash equivalents.
Fair Value Measurements of Financial Instruments
Certain assets and liabilities of the Company requireare carried at fair value under GAAP. Fair value is defined as the securityexchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of alldisclosed in one of the entity’s equity instruments,following three levels of the fair value hierarchy, of which the first two are excluded fromconsidered observable and the provisionslast is considered unobservable:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
•Level 3 — Unobservable inputs that are supported by little or no market activity that are significant to determining the Company didfair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
The Company’s cash equivalents, restricted cash, derivative liability, contingent earn-out liability, contingently issuable common stock liability and its common stock warrant liability are carried at fair value, determined according to the fair value hierarchy described above (see Note 4). The carrying values of the Company’s accounts receivable, net, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. The carrying value of the Company’s long-term debt approximates its fair value (a Level 2 measurement) at each balance sheet date due to its variable interest rate, which approximates a market interest rate.
Assets that are measured at fair value on a nonrecurring basis primarily relate to property and equipment. We do not
specify a maximum redemption threshold, its charter provides that in no event will it redeem its public shares in an amount that would cause its net tangible assets (stockholders’ equity)periodically adjust carrying value to
be less than $5,000,001 upon the closing of a Business Combination.The Company recognizes changes in redemptionfair value immediately as they occurfor property and adjustsequipment. Rather, the carrying value of the securitiesasset is reduced to its fair value when we determine that impairment has occurred.
Contingent Earn-out
In connection with the Merger and pursuant to the Merger Agreement, certain of the Legacy Evolv’s shareholders and Legacy Evolv Service Providers are entitled to receive additional shares of the Company’s common stock (the “Earn-Out Shares”) upon the Company achieving certain milestones:
•Triggering Event I – a one-time issuance of a number of Earn-Out Shares equal to 5,000,000 shall occur if, by March 8, 2026, the price of the Company’s common stock is greater than $12.50 per share for any 20 trading days within any 30 trading day period.
•Triggering Event II – a one-time issuance of a number of Earn-Out Shares equal to 5,000,000 shall occur if, by March 8, 2026, the price of the Company’s common stock is greater than $15.00 per share for any 20 trading days within any 30 trading day period.
•Triggering Event III – a one-time issuance of a number of Earn-Out Shares equal to 5,000,000 shall occur if, by March 8, 2026, the price of the Company’s common stock is greater than $17.50 per share for any 20 trading days within any 30 trading day period.
In accordance with ASC 815 – Derivatives and Hedging, the earn-out arrangement with the Legacy Evolv shareholders is accounted for as a liability and subsequently remeasured at each reporting date with changes in fair value recorded as a change in fair value of contingent earn-out liability in other income (expense), net in the consolidated statements of operations and comprehensive loss. When the Triggering Events have been achieved and the Earn-Out Shares are issued, the Company will reclassify the corresponding amount from a liability to additional paid-in-capital and common stock at par value of $0.0001 per share.
The estimated fair value of the contingent earn-out shares was determined using a Monte Carlo simulation that simulated the future path of the Company’s stock price over the earn-out period. The significant assumptions utilized in the calculation are based on the achievement of certain stock price milestones including projected stock price, volatility, drift rate, percentage of change in control and expected term.
The contingent earn-out liability is categorized as a Level 3 fair value measurement (see Note 4) because the Company estimates projections during the earn-out period utilizing unobservable inputs, including various potential pay-out scenarios. Contingent earn-out payments involve certain assumptions requiring significant judgment and actual results may differ from assumed and estimated amounts.
The Earn-Out Shares issued to employees, officers, directors, and non-employees are based on achievement of certain target share price contingencies and for the employees and officers, subject to continued employment, (the “Earn-
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Out Service Providers”) represents share-based compensation and is included in additional paid-in capital on the Company’s balance sheet. Corresponding stock-based compensation expense is recorded in the consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or by the nature of the services provided by consultants are classified. As a condition to being issued Earn-Out Shares, the Earn-Out Service Providers must still be providing services to the Company on the date of the issuance of the shares. If the relationship with the service provider is terminated prior to the issuance of the Earn-Out Shares, the shares will be redistributed to the remaining participants in the Earn-Out Shares.
Contingently Issuable Common Stock
Prior to the Merger, NewHold Industrial Technology Holdings, LLC, the sponsor of the NHIC special purpose acquisition company owned 4,312,500 shares of NHIC Class B common stock (the “Founder Shares). Upon the closing of the merger, NHIC Class A and Class B common stock became the Company’s common stock. The Founder Shares outstanding were subject to certain share-performance-based vesting provisions as follows:
•Vesting Provision I – 1,897,500 shares of the Company’s common stock shall vest and no longer be subject to forfeiture as of the Merger;
•Vesting Provision II – if within five years following the closing of the Merger, the last reported sale price of the Company’s common stock equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30 trading day period, then 948,750 shares of the Company’s common stock shall vest and no longer be subject to forfeiture and
•Vesting Provision III – if within five years following the closing of the Merger, the last reported sale price of the Company’s common stock equals or exceeds $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period, then 948,750 shares of the Company’s common stock) shall vest and no longer be subject to forfeiture.
The remaining 517,500 Founder Shares were contributed to Give Evolv LLC.
If Vesting Provision II and/or Vesting Provision III are not satisfied, the corresponding number of shares specified shall be forfeited and no longer issued and outstanding. If there is a Change of Control event prior to Vesting Provision II and/or Vesting Provision III are satisfied, the Founder shares are no longer subject to forfeiture and shall vest immediately upon the occurrence of a Change of Control event.
In accordance with ASC 815 – Derivatives and Hedging, the contingently issuable common stock is accounted for as a liability and subsequently remeasured at each reporting date with changes in fair value recorded as change in fair value of contingently issuable common stock liability in other income (expense), net in the consolidated statements of operations and comprehensive loss. When the Vesting Provisions have been achieved and the contingently issuable common shares are issued, the Company will reclassify the corresponding amount from a liability to additional paid-in-capital and common stock at par value of $0.0001 per share.
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 earn-out period. The assumptions utilized in the calculation are based on the achievement of certain stock price milestones including expected stock price volatility, risk-free rate of return, likelihood of change in control, and remaining term.
The contingently issuable common shares are categorized as a Level 3 fair value measurement (see Note 4) because the Company estimates projections during the earn-out period utilizing unobservable inputs, including various potential pay-out scenarios. Contingently issuable shares involve certain assumptions requiring significant judgment and actual results may differ from assumed and estimated amounts.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Public Warrant Liability
In connection with the closing of the Merger, the Company assumed warrants to purchase shares of common stock (the “Public Warrants”) and are classified as a liability pursuant to ASC 815 – Derivatives and Hedging as the equity derivative scope exception was not met.
Leases as a Lessee
Prior to January 1, 2022, the Company accounted for leases in accordance with ASC 840, Leases. At lease inception, the Company determined if an arrangement was an operating or capital lease. For operating leases, the Company recognized rent expense, inclusive of rent escalation, on a straight-line basis over the lease term.
Effective on January 1, 2022, the Company accounts for leases in accordance with ASC 842, Leases. At contract inception, the Company determines if an arrangement is or contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If determined to be or contain a lease, the lease is assessed for classification as either an operating or finance lease at the lease commencement date, defined as the date on which the leased asset is made available for use by the Company (when the Company is the lessee). Where the Company is the lessee, for each lease with a term greater than twelve months, the Company records a right-of-use asset and lease liability.
A right-of-use asset represents the economic benefit conveyed to the Company by the right to use the underlying asset over the lease term. A lease liability represents the obligation to make lease payments arising from the use of the asset over the lease term. Lease liabilities are measured at lease commencement and calculated as the present value of the future lease payments in the contract using the rate implicit in the contract, when available. If an implicit rate is not readily determinable, the Company uses an incremental borrowing rate measured as the rate at which the Company could borrow, on a fully collateralized basis, a commensurate loan in the same currency over a period consistent with the lease term at the commencement date. Right-of-use assets are measured as the amount of the initial lease liability plus initial direct costs and prepaid lease payments, less lease incentives granted by the lessor. The lease term is measured as the noncancelable period in the contract, adjusted for any options to extend or terminate when it is reasonably certain the Company will extend the lease term via such options based on an assessment of economic factors present as of the lease commencement date. The Company elected the practical expedient to not recognize leases with a lease term of twelve months or less.
Components of a lease are split into three categories: lease components, non-lease components, and non-components. The fixed and in-substance fixed contract consideration (including any consideration related to non-components) are allocated, based on the respective relative fair values, to the lease components and non-lease components. The Company has elected the practical expedient to account for lease and non-lease components together as a single lease component for all underlying assets and allocate all of the contract consideration to the lease component only.
The Company’s operating leases are presented in the consolidated balance sheet as operating lease right-of-use assets, classified as noncurrent assets, and operating lease liabilities, classified as current and noncurrent liabilities. Operating lease expense is recognized on a straight-line basis over the lease term. Variable costs associated with a lease, such as maintenance and utilities, are not included in the measurement of the lease liabilities and right-of-use assets but rather are expensed when the events determining the amount of variable consideration to be paid have occurred.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined using the weighted average method. The Company regularly reviews inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, records charges to write down inventories to their estimated net realizable value, after evaluating historical sales, future demand, market conditions and expected product life cycles. Such charges are classified as product cost of revenues in the consolidated statement of operations and comprehensive loss. Any write-down of inventory to net realizable value creates a new cost basis. The Company recorded $1.6 million and $2.1 million in inventory write-offs during the years ended December 31, 2022 and 2021, respectively. These write-offs primarily relate to Edge units and prior generation Express units, as the Company is no longer selling these products, as well as other inventory that was determined to be obsolete or unsellable.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are recognized using the straight-line method over the estimated useful life of each asset, as follows:
| | | | | |
| Estimated Useful Life |
| Computers and telecommunications equipment | 3 years |
| Lab equipment | 5 years |
| Software | 4 years |
| Furniture and fixtures | 5 years |
| Leasehold improvements | Shorter of remaining lease term or useful life |
| Leased equipment | 4-7 years |
| Internal-use software | 4 years |
Estimated useful lives are periodically assessed to determine if changes are appropriate. Leasehold improvements are depreciated using the straight-line method over the lesser of the lease term or its estimated economic useful life. Lease terms are used based upon the initial lease agreement and do not consider potential renewals or extensions until such time that the renewals or extensions are contracted. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation are eliminated from the consolidated balance sheet and any resulting gains or losses are included in the consolidated statements of operations and comprehensive loss in the period of disposal. Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service.
The Company’s leases for leased equipment generally are 48 months. The Company’s subscription contracts are generally classified as operating leases because title does not transfer and they do not meet any of the other criteria per Accounting Standards Codification 842 – Leases (“ASC 842”).
The Company evaluates property and equipment for obsolescence and impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized in loss from operations and comprehensive loss when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss is based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. The Company recorded impairment losses of $1.2 million and $1.9 million during the years ended December 31, 2022 and 2021, respectively. These impairment losses related primarily to Edge and Express prototype units that were taken out of service and retired.
The Company capitalizes certain software development costs, including consulting costs and compensation expenses for employees who devote time to the development projects, beginning upon completion of the preliminary project stage (in relation to internal-use software) or upon establishment of technological feasibility (in relation to software embedded in products to be sold or leased), and through the date the software is ready for its intended use. The Company records software development costs in property and equipment, net. Costs incurred in the preliminary stages of development activities and post implementation are expensed in the period incurred and are recorded in research and development expense in the consolidated statements of operations and comprehensive loss. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Once the project is available for general release, capitalization ceases, and the asset can begin amortization. Capitalized software costs are amortized on a straight-line basis over their estimated useful life, which is generally four years, and are recorded in cost of subscription revenue and cost of service revenue in the consolidated statements of operations and comprehensive loss.
Debt Issuance Costs
The Company capitalizes certain legal, accounting, and other third-party fees that are directly associated with the issuance of debt as debt issuance costs. Debt issuance costs are recorded as a direct reduction of the carrying amount of the associated debt on the consolidated balance sheet and amortized as interest expense on the consolidated statement of operations and comprehensive loss using the effective interest method.
Segment Information
The Company determined that it has one operating segment after considering the Company’s organizational structure and the information regularly reviewed and evaluated by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company has determined that its CODM is its President and Chief Executive Officer. The CODM reviews the financial information on a consolidated basis for purposes of evaluating financial performance and allocating resources. On the basis of these factors, the Company determined that it operates and manages its business as one operating segment, that develops, manufactures, markets and sells security screening products and specific services, and accordingly has one reportable segment for financial reporting purposes.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification 606 – Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In order to achieve this core principle, the Company applies the following five steps when recording revenue: (1) identify the contract, or contracts, with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, performance obligations are satisfied.
The Company derives revenue from (1) subscription arrangements accounted for as operating leases under ASC 842 (and ASC 840, Leases ("ASC 840") prior to the adoption of ASC 842) and (2) from the sale of products, inclusive of SaaS and maintenance and (3) professional services. The Company’s arrangements are generally noncancelable and nonrefundable after ownership passes to the customer. Revenue is recognized net of sales tax.
Product Revenue
The Company derives revenue from the sale of its Express equipment and related add-on accessories to customers. Revenue is recognized when control of the product has transferred to the customer. Transfer of control occurs when the Company has transferred title and risk of loss and has a present right to payment for the equipment, which follows the terms of each customer contract. Products are predominately sold with distinct services, which are described in the services section below.
Subscription Revenue - Leases as Lessor
In addition to selling our products directly to customers, we also derive revenue from leasing our equipment, which we classify as subscription revenue. Lease terms are typically four years, generally do not include unilateral options by either the Company or our customer to extend, terminate or to purchase the underlying asset, 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 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 variable lease payments as a part of these arrangements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounting provisions we use to classify transactions as sales-type are: (i) whether the lease transfers ownership of the equipment by the end of the lease term, (ii) whether the lease grants the customer an option to purchase the equipment and the customer is reasonably certain to do so, (iii) whether the lease term is for the major part of the economic life of the underlying equipment, (iv) whether the present value of the lease payments, and any residual value guaranteed by the customer that is not already reflected in the lease payments, is equal to or greater than substantially all of the fair market value of the equipment at the commencement of the lease, and (v) whether the equipment is specific to the customer and of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term. Leasing arrangements meeting any of these conditions are accounted for as sales-type leases and revenue attributable to the lease component is recognized in a manner consistent with product revenue and the related equipment is derecognized with the associated expense presented as a cost of revenue. Leasing arrangements that do not meet the criteria for classification as a sales-type lease will be accounted for as a direct-financing lease if the following two conditions are met: (i) the present value of the lease payments, and any residual value guaranteed by the customer that is not already reflected in the lease payments and any other third party unrelated to the Company, is equal to or greater than substantially all of the fair market value of the equipment at the commencement of the lease, and (ii) it is probable that the Company will collect the lease payments and amounts necessary to satisfy a residual value guarantee. Leasing arrangements that do not meet any of the sales-type lease or direct-financing lease classification criteria are accounted for as operating leases and revenue is recognized straight-line over the term of the lease.
The Company considers the economic life of most of our products to be seven years. The Company believes seven years is representative of the period during which the equipment is expected to be economically usable by one or more users, with normal service, for the purpose for which it is intended. The unguaranteed residual value is estimated to be the value at the end of the lease term based on the anticipated fair market value of the units. The Company mitigates residual value risk of our leased equipment by performing regular management and maintenance, as necessary.
Generally, lease arrangements include both lease and non-lease components. The lease component relates to the customer’s right-to-use the equipment over the lease term. The non-lease components relate to (1) distinct services, such as SaaS and maintenance, (2) any add-on accessories, and (3) installation and training. Installation and training are included in service revenue as described below, and add-on accessories are included in product revenue. Because the equipment, SaaS, and maintenance components of a subscription arrangement are recognized as revenue over the same time period and in the same pattern, the Company elected the practical expedient to aggregate non-lease components with the associated lease component and account for the combined component as an operating lease for all underlying asset classes. In the evaluation of whether the lease component (equipment) or the non-lease components associated with the lease component (SaaS and maintenance) is the predominant component, the Company determined that the lease component is predominant as we believe the customer would ascribe more value to the use of the security equipment than that of the SaaS and maintenance services. Therefore, the Company accounts for the combined lease component under ASC 842. The equipment lease and SaaS/maintenance performance obligations are classified as a single category of subscription revenue in the consolidated statements of operations and comprehensive loss. The installation and training services represent distinct services provided to customers. These activities are considered separate performance obligations to the customer and therefore are considered non-lease components. As installation and training services are performed prior to lease commencement, the timing and pattern of transfer for these services differ from that of the lease component and are not eligible to be combined.
We exclude from variable payments all lessor costs that are explicitly required to be paid directly by a lessee on behalf of the lessor to a third party. Revenue related to leases entered into with related parties were $0.6 million and less than $0.1 million during the years ended December 31, 2022 and 2021, respectively.
Installation and training are generally billed to the lessee as part of the lease contract billing, according to various contractual terms. The installation and training costs incurred by the Company are accounted for as a fulfillment cost and are included in the cost of services revenue in the consolidated statements of operations and comprehensive loss.
Services Revenue
The Company provides SaaS, maintenance, installation and training services for our products. Revenue for installation and training are recognized upon transfer of control of these services, which are normally rendered over a short duration. Maintenance consists of technical support, bug fixes and when-and-if available threat updates. SaaS and maintenance revenue is recognized ratably over the period of the arrangement.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from Channel Partners
A portion of the Company’s revenue is also generated by sales to its channel partners. When the Company transacts with a channel partner, its contractual arrangement is with the channel partner and not with the end-use customer. In these transactions, the channel partner is considered the customer; the Company has discretion over the pricing to the channel partner and maintains overall control of the inventory and sales process to the channel partner. Right of return does not generally exist. Whether the Company transacts with a channel partner and receives the order from a channel partner or directly from an end-use customer, its revenue recognition policy and resulting pattern of revenue recognition is the same.
Transaction Price
The transaction price is the amount of consideration that the Company expects to be entitled for providing goods and services under a contract, which can include both fixed and variable consideration. The Company may also provide discounts to customers which reduce the transaction price. From time-to-time, the Company may offer customers the option to purchase additional goods and services at a fixed price. In these circumstances, the Company assesses whether these offers constitute a material right, and if so, the Company would account for the material right as a separate performance obligation. Other types of variable consideration are not considered significant. The Company does not normally provide for rights of returns to customers on product sales and, therefore, does not record a provision for returns. Amounts paid or payable to customers, including those related to sponsorship arrangements, are recognized as a reduction of the transaction price, and therefore, of revenue unless the payment is in exchange for a distinct good or service.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct product or service to a customer that is both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available, and is distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract.
Equipment is sold or leased with embedded software, which is considered a single performance obligation. Maintenance, which includes future updates, security threat updates, and minor bug fixes on a when-and-if available basis, is considered a single performance obligation. SaaS, which include data-driven security information and analytics insights, is also considered a performance obligation. Installation and training are considered separate performance obligations and are included within service revenue. Any add-on accessories are also considered separate performance obligations and are included in product revenue.
Payment terms
Payment terms for customer orders are typically 30 days after the shipment or installation of the product. Generally, the Company’s contracts do not contain a significant financing component.
Multiple Performance Obligations within an Arrangement
The Company’s contracts may include multiple performance obligations when customers purchase a combination of products and services. When the Company’s customer arrangements have multiple performance obligations that contain an equipment lease for the customer’s use as well as distinct services that are delivered simultaneously, the Company allocates the arrangement consideration between the lease deliverables and non-lease deliverables based on the relative estimated SSP of each distinct performance obligation. For multiple performance obligation arrangements that do not contain a lease, the Company allocates the contract’s transaction price to each performance obligation on a relative SSP basis. The Company determines SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, the Company estimates the SSP taking into account available information such as market conditions, internally approved pricing guidelines, and observable pricing data such as standard cost metrics related to the performance obligation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company measures all stock-based awards granted to employees, officers, directors and non-employees based on their fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The Company classifies stock-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or by the nature of the services provided by consultants are classified. The Company issues stock-based awards with service-based vesting conditions and records the expense for these awards using the straight-line method. Forfeitures are accounted for as they occur.
In January 2021, the Company granted warrants (the "Finback Common Stock Warrants") exercisable for 2,552,913 shares of common stock at an exercise price of $0.42 per share to Finback Evolv OBH, LLC ("Finback"), a consulting group affiliated with one of the Company's shareholders. The Finback Common Stock Warrants vest upon meeting certain sales criteria as defined in a business development agreement (the "Finback BDA") which has a term of three years. The Finback Common Stock Warrants expire in January 2031. The Finback Common Stock Warrants are accounted for under ASC 718 Compensation - Stock Compensation as the warrants vest upon certain performance conditions being met.
Prior to the closing of the Merger, there was not a public market for the shares of the Company’s common stock. The Company’s determination of the fair value of stock options on the date of grant utilized the Black-Scholes option-pricing model and was impacted by its common stock price, as determined by the Board of Directors with input from the Company’s management, as well as changes in assumptions regarding a number of subjective variables. These variables included, but were not limited to, the expected term that options remained outstanding, the expected common stock price volatility over the term of the option awards, risk-free interest rates, and expected dividends. The Company valued its common stock taking into consideration its most recently available valuation of common stock performed by third parties as well as additional factors since the date of the most recent contemporaneous valuation through the date of grant. After the closing of the Merger, the Company determines the fair value of each share of common stock underlying stock-based awards based on the closing price of the Company’s common stock as reported by Nasdaq on the date of grant.
Pursuant to the Merger Agreement, the Company will issue 15,000,000 earn-out shares of the Company’s common stock to Legacy Evolv shareholders and Legacy Evolv Service Providers including employees, officers, directors and non-employees based on the achievement of certain target share price contingencies and subject to continued employment. The company classifies the share-based compensation arrangement with Legacy Evolv Service Providers as equity on its balance sheet and corresponding stock-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or by the nature of the services provided by consultants are classified. Of the total 15,000,000 earn-out shares of the Company’s common stock, 2,849,587 earn-out shares can be earned by the Legacy Evolv Service Providers and are subject to the stock-based compensation guidance. As a condition for Earn-Out Shares being issued to Earn-Out Service Providers, the service provider must be providing services to the Company on the date of the issuance of the shares. If the relationship with the service provider is terminated prior to the issuance of the Earn-Out Shares, the shares will be redistributed to the remaining participants in the Earn-Out Shares.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes.
The Company assesses the likelihood that its deferred tax assets will be recovered from future sources of income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by analyzing past operating results, estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
The Company evaluates at the end of each reporting
period. Increasesperiod whether some or
decreasesall the undistributed earnings of its foreign subsidiaries are permanently reinvested. The Company would recognize deferred income tax liabilities to the extent that management asserts that undistributed earnings of its foreign subsidiaries are not permanently reinvested and will not be permanently reinvested in the
carrying amountfuture. As of
redeemable common stock are affected by adjustments to additional paid-in capital. Accordingly, at December 31,
2020, 14,077,350 of2022 and 2021, the
17,250,000 public shares were classified outside of permanent equity.Company had no foreign earnings in any foreign jurisdictions.
Net
Income (Loss)Loss per
Share Attributable to Common
ShareNet income (loss)Stockholders
Basic net loss per
share attributable to common
sharestockholders is computed by dividing
the net
income (loss) applicableloss attributable to common stockholders by the weighted average number of
shares of common
stockshares outstanding for the period.
The Company has not consideredDiluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders for the
effect ofimpact to the
warrants sold in the Public Offering and Private Placement to purchase an aggregate of 14,325,000 shares of Class A common stock in the calculation of diluted income (loss)extent a denominator adjustment is required. Diluted net loss per share
since their inclusion would be anti-dilutive under the treasury stock method. As a result, diluted income (loss) perattributable to common
sharestockholders is
the same as basic loss per common share for the period.The Company’s statement of operations includes a presentation of income (loss) per share for common stock subject to redemption in a manner similar to the two-class method of income (loss) per share. Net income (loss) per share, basic and diluted for Class A common stock is calculatedcomputed by dividing the interest income earned on the
29
funds in the Trust Account,diluted net of income tax expense and franchise tax expense,loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purposes of Class Athis calculation, outstanding stock options, convertible preferred stock, convertible notes, warrants to purchase common stock, outstandingand warrants to purchase preferred stock are considered potential dilutive common shares.
In periods in which the Company reported a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their original issuance. Neteffect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the years ended December 31, 2022 and 2021.
Recently Adopted Accounting Pronouncements
The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected not to “opt out” to the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (1) irrevocably elects to “opt out” of such extended transition period or (2) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for nonpublic companies.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as subsequently amended (collectively “ASC 842”). The guidance amends the existing accounting standards for lease accounting, including requirements for lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expanding disclosure requirements regarding leasing arrangements. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income (loss)statement. Lessors are required to classify leases as a sales-type, direct financing, or operating lease. A lease is a sales-type lease if it effectively transfers control of the underlying asset to the lessee as indicated by any one of five criteria being met. All leases that are not sales-type or direct financing leases will be classified as operating leases. In July 2018, the FASB issued additional guidance, which offers a transition option to entities adopting ASC 842 in which entities can elect to apply the new guidance using a modified retrospective approach at the beginning of the year in which the new lease standard is adopted. The Company utilized this transition option whereby financial information for prior periods presented before the ASC 842 effective date will not be updated. In November 2019, the FASB issued ASU 2019-10 deferring the effective date for private entities (also applicable for public companies that qualify as emerging growth companies) for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. In June 2020, the FASB
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issued ASU 2020-05 which further defers the effective date for private entities for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The Company adopted this guidance effective January 1, 2022. ASC 842 provides several optional practical expedients in transition. The Company applied the ‘package of practical expedients’ which allow the Company to not reassess whether existing or expired arrangements contain a lease, the lease classification of existing or expired leases, or whether previous initial direct costs would qualify for capitalization under ASC 842.
The adoption of ASC 842 resulted in the recognition of operating lease liabilities of $3.0 million and operating right-of-use assets of $2.5 million, along with the write-off of certain deferred rent balances of $0.5 million within the Company’s consolidated balance sheets as of January 1, 2022. The adoption did not have a significant impact on the Company’s consolidated statements of operations and comprehensive loss and consolidated statements of cash flows.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various areas related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and clarifies and amends existing guidance to improve consistent application. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2020 and for interim periods within those fiscal years. For non-public entities, the guidance is effective for annual reporting periods beginning after December 15, 2021 and for interim periods within years beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance effective January 1, 2022 and the adoption of this guidance did not have a material impact on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies and clarifies certain calculation and presentation matters related to convertible and equity and debt instruments. Specifically, ASU 2020-06 removes requirements to separately account for conversion features as a derivative under ASC Topic 815 and removing the requirement to account for beneficial conversion features on such instruments. ASU 2020-06 also provides clearer guidance surrounding disclosure of such instruments and provides specific guidance for how such instruments are to be incorporated in the calculation of Diluted EPS. The guidance under ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company adopted this guidance effective January 1, 2022 and the adoption of this guidance did not have a material impact on its consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326) (“ASU 2016-13”). The new standard adjusts the accounting for assets held at amortized cost basis, including marketable securities accounted for as available for sale, and trade receivables. The standard eliminates the probable initial recognition threshold and requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For public entities except smaller reporting companies, the guidance is effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. In November 2019, the FASB issued ASU No. 2019-10, which deferred the effective date for non-public entities and smaller reporting companies to annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early application is allowed. The Company adopted this guidance effective January 1, 2023, and does not expect that adoption of the guidance will have a material impact on its consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company adopted this guidance effective January 1, 2023, and does not expect that adoption of the guidance will have a material impact on its consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Merger with NHIC
On July 16, 2021, we consummated the business combination (the “Merger”), contemplated by the Agreement and Plan of Merger, dated March 5, 2021, with NHIC Sub Inc. (“Merger Sub”), a wholly-owned subsidiary of NewHold Investment Corp. (“NHIC”), a special purpose acquisition company, which is our legal predecessor, and Evolv Technologies, Inc. dba Evolv Technology, Inc. (“Legacy Evolv”), as amended by that certain First Amendment to Agreement and Plan of Merger dated June 5, 2021 by and among NHIC, Merger Sub and Legacy Evolv (the “Amendment” and as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub was merged with and into Legacy Evolv, with Legacy Evolv surviving the Merger as a wholly owned subsidiary of NHIC. Upon the closing of the Merger, NHIC changed its name to Evolv Technologies Holdings, Inc. Evolv Technologies Holdings, Inc. became the successor entity to NHIC pursuant to Rule 12g-3(a) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The transaction was accounted for as a “reverse recapitalization” in accordance with GAAP. Under this method of accounting, NHIC was treated as the “acquired” company for financial reporting purposes. This determination was primarily because subsequent to the Merger, Legacy Evolv’s shareholders have a majority of the voting power of the combined company, Legacy Evolv comprises all of the ongoing operations of the combined entity, Legacy Evolv comprises a majority of the governing body of the combined company, and Legacy Evolv’s senior management comprises all of the senior management of the combined company. Accordingly, for accounting purposes, this transaction was treated as the equivalent of Legacy Evolv issuing shares for the net assets of NHIC, accompanied by a recapitalization. The shares and net loss per common share, basicprior to the Merger, have been retroactively restated as shares reflecting the Exchange Ratio established in the Merger. The net assets of NHIC were recorded at historical costs, with no goodwill or other intangible assets recorded. Operations prior to the Reverse Recapitalization are those of Legacy Evolv.
Evolv had previously indicated that it would list units (consisting of one share of common stock and diluted, forone-half of one warrant) on Nasdaq under the ticker symbol EVLVU, in continuation of the listing of the units NHIC sold in its initial public offering on August 4, 2020 under the ticker symbol NHICU. In September 2021, our transfer agent separated the units into the component shares and warrants at the closing of the Merger, and as a result the Evolv units were not made eligible to settle through the facilities of The Depository Trust Company. Accordingly, all trades in the units from July 19, 2021 (the first trading day after the completion of the Merger) until August 24, 2021 were settled between brokers in the shares and warrants underlying the units. Trading in ticker symbol EVLVU was halted on August 24, 2021, and no trades in the units were permitted or occurred since that date. The units were delisted from Nasdaq effective September 10, 2021.
Upon closing of the Merger each share of NHIC Class B common stock issued and outstanding immediately prior to the effective time of the Merger, which totaled 10,391,513 shares held by the NHIC Initial Shareholders (“Initial Shareholders”), was automatically converted into one validly-issued share of our common stock.
In addition, pursuant to the Merger Agreement, certain Legacy Evolv Shareholders became entitled to receive up to 15,000,000 shares of common stock as earn-out shares.
Upon closing of the Merger:
•all of 24,359,107 shares of Legacy Evolv’s Series A-1 convertible preferred stock were converted into an equivalent number of shares of Legacy Evolv common stock on a one-to-one basis;
•all of 3,484,240 shares of Legacy Evolv’s Series A convertible preferred stock were converted into an equivalent number of shares of Legacy Evolv common stock on a two-to-one basis;
•all of 34,129,398 shares of Legacy Evolv’s Series B-1 convertible preferred stock were converted into an equivalent number of shares of Legacy Evolv common stock on a one-to-one basis; and
•all of 15,367,312 shares of Legacy Evolv’s Series B convertible preferred stock were converted into an equivalent number of shares of Legacy Evolv common stock on a one-to-one basis.
On the closing date of the Merger, each share of Legacy Evolv common stock then issued and outstanding was canceled and the holders thereof in exchange received 94,192,534 shares of the Company’s common stock, which is equal
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to 0.378 newly-issued shares of the Company’s common stock for each share of Legacy Evolv common stock (the “Exchange Ratio”).
All outstanding warrants exercisable for common stock in Legacy Evolv (other than warrants that expired, were exercised, or were deemed automatically net exercised immediately prior to the Merger) were exchanged for warrants exercisable for the Company’s common stock with the same terms and conditions except adjusted by the Exchange Ratio.
All outstanding stock options of Legacy Evolv common stock, totaling 57,938,375 stock options, were canceled and the holders thereof in exchange received options to receive 0.378 shares of the Company’s common stock for a total of 21,891,254 stock options. The modification of the stock options to reflect the exchange ratio did not result in an incremental compensation expense upon closing of the Merger.
Prior to the completion of the Merger, the Company entered into subscription agreements (collectively, the “PIPE Investment”) with certain parties subscribing for shares of the Company’s common stock (the “Subscribers”) pursuant to which the Subscribers agreed to purchase. Pursuant to the PIPE Investment, the Company issued 30,000,000 shares of common stock for a purchase price of $10.00 per share with gross proceeds of $300.0 million.
The proceeds, net of redemptions, received from the Merger were $84.9 million and gross proceeds received from the PIPE investment were $300.0 million. Based on the number of shares of common stock outstanding on July 16, 2021 (in each case, not giving effect to any shares issuable upon exercise of warrants, options, or earn-out shares), Legacy Evolv shareholders owned approximately 92.7% of the common stock of the Company and NHIC shareholders owned approximately 7.3%.
During the year ended December 31, 2021, the Company recorded $36.1 million of offering costs related to third-party legal, accounting, and other professional services to consummate the Merger. These offering costs are recorded as a reduction of additional paid-in capital upon the close of the Merger in the Company’s consolidated balance sheets. The Company expensed $0.7 million of offering costs related to the issuance of the Company’s contingently issuable common stock.
4. Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Money market funds | $ | 149,971 | | | $ | — | | | $ | — | | | $ | 149,971 | |
| $ | 149,971 | | | $ | — | | | $ | — | | | $ | 149,971 | |
| Liabilities: | | | | | | | |
| Long-term debt including current portion | $ | — | | | $ | 29,683 | | | $ | — | | | $ | 29,683 | |
| Contingent earn-out liability | — | | | — | | | 14,218 | | | 14,218 | |
| Contingently issuable common stock liability | — | | | — | | | 3,392 | | | 3,392 | |
| Public Warrant liability | 6,124 | | | — | | | — | | | 6,124 | |
| $ | 6,124 | | | $ | 29,683 | | | $ | 17,610 | | | $ | 53,417 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Money market funds | $ | 297,536 | | | $ | — | | | $ | — | | | $ | 297,536 | |
| $ | 297,536 | | | $ | — | | | $ | — | | | $ | 297,536 | |
| Liabilities: | | | | | | | |
| Long-term debt including current portion | $ | — | | | $ | 9,945 | | | $ | — | | | $ | 9,945 | |
| Contingent earn-out liability | — | | | — | | | 21,206 | | | 21,206 | |
| Contingently issuable common stock liability | — | | | — | | | 5,264 | | | 5,264 | |
| Public Warrant liability | 11,030 | | | — | | | — | | | 11,030 | |
| $ | 11,030 | | | $ | 9,945 | | | $ | 26,470 | | | $ | 47,445 | |
As of December 31, 2022 and December 31, 2021, money market funds are included in cash and cash equivalents on the consolidated balance sheets.
The Company may also value its non-financial assets and liabilities, including items such as inventories and property and equipment, at fair value on a non-recurring basis if it is determined that impairment has occurred. Such fair value measurements use significant unobservable inputs and are classified as Level 3.
The fair value classification of the public warrant liability as of December 31, 2021 has been updated to Level 1. During each of the years ended December 31, 2022 and 2021, there were no transfers between Level 1, Level 2, and Level 3.
Valuation of Common Stock Warrant
As defined and described in Note 13, the Company issued a 2019 SVB common stock warrant, a 2020 SVB common stock warrant, and a 2020 JPM common stock warrant (collectively the "Common Stock Warrants") for the purchase of Legacy Evolv's common stock. In connection with the closing of the Merger, all of the outstanding Common Stock Warrants were converted into shares of the Company's common stock.
The Company used the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the warrant liability. Key estimates and assumptions impacting the fair value measurement include (1) the fair value per share of the underlying shares of applicable series of stock issuable upon exercise of the Common Stock Warrants, (2) the remaining contractual term, (3) the risk-free interest rate, (4) the expected dividend yield and (5) expected volatility of the price of the underlying applicable common stock. The Company estimated the fair value per share of the underlying applicable series of stock based, in part, on the results of third-party valuations and additional factors deemed relevant. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the Common Stock Warrants. The Company estimated a zero expected dividend yield based on the fact that the Company has never paid or declared dividends and does not intend to do so in the foreseeable future. As the Company was a private company up until the closing of the Merger and lacked company-specific historical and implied volatility information of its stock, the expected stock volatility was based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the Common Stock Warrants.
The following table provides a rollforward of the common stock warrant liability (in thousands):
| | | | | |
| Balance at December 31, 2020 | $ | 1 | |
| Change in fair value | 879 | |
| Conversion of common stock warrant to common stock upon the closing of the Merger | (880) | |
| Balance at December 31, 2021 | $ | — | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valuation of Derivative Liability Related to Convertible Notes
In September and December 2020, the Company entered into a Convertible Note Purchase Agreement (the “2020 Convertible Notes”). The 2020 Convertible Notes provided a conversion option whereby upon the closing of a specified financing event the Convertible Notes would automatically convert into shares of the same class and series of capital stock of the Company issued to other investors in the financing at a conversion price equal to 80% of the price per share of the securities paid by the other investors. This conversion option was determined to be an embedded derivative and was required to be bifurcated and accounted for separately from the 2020 Convertible Notes. The fair value of the derivative liability was determined based on inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
Upon the closing of the 2020 Convertible Notes, management determined that the probability of completing the specified financing event was 100%; thus, the value of the automatic conversion option was deemed to be 20% of the fair value of the capital stock to be issued upon conversion of the 2020 Convertible Notes, or $1.0 million. This amount represented the fair value of the embedded derivative at issuance.
In January and February 2021, the Company entered into a Convertible Note Purchase Agreement (the “2021 Convertible Notes”). The 2021 Convertible Notes provided a conversion option whereby upon the closing of a specified financing event, the 2021 Convertible Notes would automatically convert into shares of the same class and series of capital stock of the Company issued to other investors in the financing at a conversion price equal to lower of 80% of the price per share of the securities paid by the other investors or price per share at which shares are issued and sold in connection with the conversion or cancellation of convertible notes (other than the 2021 Convertible Notes) or simple agreements for future equity (“SAFEs”) of the Company in such Qualified Financing. This conversion option was determined to be an embedded derivative and was required to be bifurcated and accounted for separately from the 2021 Convertible Notes. The fair value of the derivative liability was determined based on inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
Upon the closing of the 2021 Convertible Notes, management determined that the probability of completing the specified financing event was 80%; thus, the value of the automatic conversion option was deemed to be 20% of the fair value of the capital stock to be issued upon conversion of the 2021 Convertible Notes, or $7.0 million. This amount represented the fair value of the embedded derivative at issuance. At the closing of the Merger, the fair value of the derivative liability was $9.2 million. On June 21, 2021, the Company modified the 2021 Convertible Notes to grant the holders an additional 1,000,000 shares of NHIC common stock as further consideration upon the automatic conversion of the notes upon closing of the Merger. The modification of the 2021 Convertible Notes resulted in the recognition of an additional $9.8 million derivative liability for the fair value of the 1,000,000 NHIC shares as of June 21, 2021. Prior to the closing of the Merger, the change in fair value of the derivative liability was $0.5 million.
The following table provides a rollforward of the derivative liability (in thousands):
| | | | | |
| Balance at December 31, 2020 | $ | 1,000 | |
| Initial fair value of the embedded derivative | 16,986 | |
| Change in fair value | 1,745 | |
| Settlement of derivative liability upon the closing of the Merger | (19,731) | |
| Balance at December 31, 2021 | $ | — | |
Valuation of Contingent Earn-out
Pursuant to the Merger Agreement, the Legacy Evolv shareholders, immediately prior to the Merger, were entitled to receive additional shares of the Company’s common stock upon the Company achieving certain milestones as described in Note 2. The Company’s contingent earn-out shares were recorded at fair value as contingent earn-out liability on the closing of the Merger and are remeasured at each reporting period. As of December 31, 2022, no milestones have been achieved.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the contingent earn-out is calculated using a Monte Carlo analysis in order to simulate the future path of the Company’s stock price over the earn-out period. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the liability’s estimated value. The significant assumptions used in the Monte Carlo model as of December 31, 2022 were as follows: 90% expected stock price volatility, a risk-free rate of return of 4.2%, a 25% likelihood of change in control, and a remaining term of 3.2 years.
The following table provides a rollforward of the contingent earn-out liability (in thousands):
| | | | | |
| Balance at December 31, 2020 | $ | — | |
| Initial fair value of the instrument | 68,566 | |
| Change in fair value | (47,360) | |
| Balance at December 31, 2021 | $ | 21,206 | |
| Change in fair value | (6,988) | |
| Balance at December 31, 2022 | $ | 14,218 | |
Valuation of Contingently Issuable Common Stock
Prior to the Merger, certain NHIC shareholders owned 4,312,500 Founder Shares. 1,897,500 shares vested at the closing of the Merger, 517,500 shares were transferred back to NHIC and then contributed to Give Evolv LLC and the remaining 1,897,500 outstanding shares shall vest upon the Company achieving certain milestones (see Note 2). The Company’s contingently issuable common stock was recorded at fair value as contingent shares on the closing of the Merger and will be remeasured at each reporting period. As of December 31, 2022, no milestones have been achieved.
The fair value of the contingently issued common shares are determined using a Monte Carlo analysis in order to simulate the future path of the Company’s stock price over the vesting period. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the liability’s estimated value. The significant assumptions used in the Monte Carlo model as of December 31, 2022 were as follows: 90% expected stock price volatility, a risk-free rate of return of 4.2%, a 25% likelihood of change in control, and a remaining term of 3.6 years.
The following table provides a rollforward of the contingently issuable common shares (in thousands):
| | | | | |
| Balance at December 31, 2020 | $ | — | |
| Initial fair value of the instrument | 11,670 | |
| Change in fair value | (6,406) | |
| Balance at December 31, 2021 | $ | 5,264 | |
| Change in fair value | (1,872) | |
| Balance at December 31, 2022 | $ | 3,392 | |
Valuation of Public Warrant Liability
Upon the closing of the Merger, the Company assumed the Public Warrants to purchase shares of the Company’s common stock. The Public Warrants are publicly traded and the initial fair value of the public warrants were based on the closing price as reported by dividingNasdaq on the date of the Merger and remeasured at each reporting period.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a rollforward of the public warrant liability (in thousands):
| | | | | |
| Balance at December 31, 2020 | $ | — | |
| Initial fair value of the instrument | 23,636 | |
| Change in fair value | (12,606) | |
| Balance at December 31, 2021 | $ | 11,030 | |
| Change in fair value | (4,906) | |
| Balance at December 31, 2022 | $ | 6,124 | |
5. Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification 606 – Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In order to achieve this core principle, the Company applies the following five steps when recording revenue: (1) identify the contract, or contracts, with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, performance obligations are satisfied.
The Company derives revenue from (1) subscription arrangements generally accounted for as operating leases under ASC 842 (and ASC 840 prior to adoption of ASC 842) and (2) from the sale of products, inclusive of SaaS and maintenance and (3) professional services. The Company’s 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.
Remaining Performance Obligations
The following table includes estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied or partially satisfied as of December 31, 2022.
| | | | | | | | | | | | | | | | | |
| Less than 1 year | | Greater than 1 year | | Total |
| Product revenue | $ | 8,686 | | | $ | — | | | $ | 8,686 | |
| Subscription revenue | 26,763 | | | 57,602 | | | 84,365 | |
| Service revenue | 13,969 | | | 37,541 | | | 51,510 | |
| Total revenue | $ | 49,418 | | | $ | 95,143 | | | $ | 144,561 | |
The amount of minimum future leases is based on expected income recognition. As of December 31, 2022, future minimum payments on noncancelable leases are as follows (in thousands):
| | | | | |
| Year Ending December 31: | |
| |
| 2023 | 26,763 | |
| 2024 | 25,412 | |
| 2025 | 21,388 | |
| 2026 | 10,689 | |
| Thereafter | 113 | |
| $ | 84,365 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contract Balances from Contracts with Customers
Contract assets arise from unbilled amounts in customer arrangements when revenue recognized exceeds the amount billed to the customer and the Company’s right to payment is conditional and not only subject to the passage of time. As of December 31, 2022 and December 31, 2021, the Company had $2.9 million and $1.5 million in current portion of contract assets and $1.4 million and $3.4 million in contract assets, noncurrent on the consolidated balance sheets, respectively.
Contract liabilities represent the Company’s obligation to transfer goods or services to a customer for which it has received consideration (or the amount is due) from the customer. The Company has a contract liability related to service revenue, which consists of amounts that have been invoiced but that have not been recognized as revenue. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue and amounts expected to be recognized as revenue beyond 12 months of the balance sheet date are classified as deferred revenue, noncurrent. The Company recognized revenue of $6.6 million during the year ended December 31, 2022 that was included in the 2021 deferred revenue balance. The Company recognized revenue of $2.3 million during the year ended December 31, 2021 that was included in the 2020 deferred revenue balance.
The following table provides a rollforward of deferred revenue (in thousands):
| | | | | |
| Balance at December 31, 2020 | $ | 4,242 | |
| Revenue recognized in relation to the beginning of the year contract liability balance | (2,300) | |
| Revenue deferred | 7,132 | |
| Balance at December 31, 2021 | $ | 9,074 | |
| Revenue recognized in relation to the beginning of the year contract liability balance | (6,632) | |
| Revenue deferred | 33,526 | |
| Balance at December 31, 2022 | $ | 35,968 | |
The following table presents the Company’s components of lease revenue (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2022 | | 2021 |
| Revenue from sales-type leases | $ | 1,123 | | | $ | — | |
| Interest income on lease receivables | 224 | | | — | |
| Lease income - operating leases | 17,569 | | | 7,803 | |
| Total lease revenue | $ | 18,916 | | | $ | 7,803 | |
The revenue from sales-type leases is related to the Evolv Express units where the lease term is for the major part of the economic life of the underlying equipment and is classified as product revenue in the consolidated statements of operations and comprehensive loss. The interest income on lease receivables is classified as other income (expense), net in the consolidated statements of operations and comprehensive loss. The lease income from operating leases is related to the leased equipment under subscription arrangements and is classified as subscription revenue in the consolidated statements of operations and comprehensive loss.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregated Revenue
The following table presents the Company’s revenue by revenue stream (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2022 | | 2021 |
| Product revenue | $ | 31,985 | | | $ | 13,631 | |
| Leased equipment | 17,569 | | | 7,803 | |
| SaaS, maintenance, and other revenue | 4,665 | | | 846 | |
| Professional services | 976 | | | 1,113 | |
| Total revenue | $ | 55,195 | | | $ | 23,393 | |
The following table presents the Company's revenue by geographical region based on customer location (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended
December 31, |
| 2022 | | 2021 |
| United States | $ | 53,815 | | | $ | 22,254 | |
| Foreign | 1,380 | | | 1,139 | |
| Total revenue | $ | 55,195 | | | $ | 23,393 | |
Contract Acquisition Costs
The Company incurs and pays commissions on product sales. The Company applies the practical expedient for contracts less than one year to expense the commission costs in the period in which they were incurred. Commissions on product sales and services are expensed in the period in which the related revenue is recognized. Commissions on subscription arrangements and maintenance are expensed ratably over the life of the contract. The Company had a deferred asset related to commissions of $9.0 million and $5.4 million as of December 31, 2022 and December 31, 2021, respectively. During the years ended December 31, 2022 and 2021, the Company amortized commission expense of $4.1 million and $2.7 million, respectively.
Give Evolv LLC
Upon the closing of the Merger, the NHIC Founders transferred 517,500 shares of its common stock to Evolv NewHold Benefit LLC (“ENHB”), which represented the initial contribution to be used to pay for the donation of Evolv’s Express units to public venues and institutions, primarily schools in locations that might not otherwise be able to afford weapon detection security screening systems and related products and services. In September 2021, ENHB was renamed to Give Evolv LLC (“Give Evolv”). Give Evolv is deemed an entity under common control and a consolidating entity as it is under the same management as the Company. As such, the shares held by Give Evolv are not considered outstanding or issued.
For such arrangements, Give Evolv generally purchases the related products and services from Evolv through an intercompany transaction using the available donated proceeds from the transfer of common stock upon the closing of the Merger. Evolv will be responsible for the delivery of the units, in addition to providing related services, such as installation, training, and maintenance. Consideration transferred to Evolv for the related products and services may be in the form of common stock or cash. Shares of common stock may be sold to generate funds for the purposes of paying for the donated goods and services. The sales transactions between Evolv and Give Evolv eliminate in consolidation.
During the year ended December 31, 2022, the Company donated six Evolv Express units to schools, resulting in $0.2 million in general and administrative expense in the Company’s consolidated statements of operations and comprehensive loss. No Evolv Express units were donated during the year ended December 31, 2021.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Leases
Company Headquarters (Waltham, MA)
In April 2021, the Company entered a sublease agreement for office and storage space for its corporate headquarters located at 500 Totten Pond Road in Waltham, MA. The sublease expires on October 31, 2024. The Company is required to maintain a minimum cash balance of $0.3 million as a security deposit on the space which is classified as restricted cash, non-current on the consolidated balance sheets. The Company pays for its proportionate share of building operating expenses and taxes that are treated as variable costs and excluded from the measurement of the lease. The sublease grants the Company an option to extend the term for an additional three years at the then fair market rent by giving the landlord nine months written notice. The Company was not reasonably certain to exercise the option to extend the lease and therefore the extension term was excluded from the measurement of the lease.
Storage Facilities
The Company additionally leases three storage spaces on a month-to-month basis that are classified as short-term leases.
Operating lease cost recognized during the year ended December 31, 2022 was $1.0 million. Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2022 was $1.1 million.
The weighted-average remaining lease term and discount rate as of December 31, 2022 were as follows:
| | | | | |
| Weighted average remaining lease term | 1.8 years |
| Weighted average discount rate | 6.95 | % |
Future annual lease payments under non-cancelable operating leases as of December 31, 2022 were as follows (in thousands):
| | | | | |
| Year Ended December 31: | |
| |
| 2023 | 1,149 | |
| 2024 | 981 | |
| Total future lease payments | 2,130 | |
| Less: imputed interest | (124) | |
| Present value of operating lease liability | $ | 2,006 | |
Rent expense recognized in accordance with ASC 840 for the year ended December 31, 2021 was approximately $0.9 million.
Future annual lease payments under non-cancelable operating leases as of December 31, 2021 under ASC 840 were as follows (in thousands):
| | | | | |
| Year Ended December 31: | |
| 2022 | $ | 1,116 | |
| 2023 | 1,150 | |
| 2024 | 981 | |
| Total | $ | 3,247 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Accounts Receivable
Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts were as follows (in thousands):
| | | | | |
| Allowance for Doubtful Accounts |
| Balance at December 31, 2020 | $ | (63) | |
| Provisions | (50) | |
| Write-offs, net of recoveries | 63 |
| Balance at December 31, 2021 | $ | (50) | |
| Provisions | (150) | |
| Write-offs, net of recoveries | — |
| Balance at December 31, 2022 | $ | (200) | |
8. Inventory
Inventory consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Raw materials | $ | 2,334 | | | $ | 1,050 | |
| Finished goods | 7,923 | | | 1,840 | |
| Total | $ | 10,257 | | | $ | 2,890 | |
9. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Prepaid deposits | $ | 9,666 | | | $ | 7,273 | |
| Prepaid subscriptions | 897 | | | 411 | |
| Current portion of net investment in sales-type leases | 337 | | | 206 | |
| Prepaid insurance | 2,374 | | | 2,625 | |
| Other | 1,114 | | | 242 | |
| Total | $ | 14,388 | | | $ | 10,757 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Computers and telecom equipment | $ | 599 | | | $ | 40 | |
| Lab equipment | 871 | | | 568 | |
| Furniture and fixtures | 111 | | | 37 | |
| Leasehold improvements | 542 | | | 491 | |
| Leased equipment | 35,983 | | | 20,797 | |
| Capitalized software | 4,150 | | | 1,146 | |
| Sales demo equipment | 2,340 | | | 1,938 | |
Equipment held for lease1 | 7,826 | | | 2,250 | |
| Construction in progress | 71 | | | — | |
| 52,493 | | | 27,267 | |
| Less: Accumulated depreciation and amortization | (7,786) | | | (3,484) | |
| $ | 44,707 | | | $ | 23,783 | |
1Represents equipment that has not yet been deployed to a customer and, accordingly, is not being depreciated.
As of December 31, 2022 and 2021, the net book value of capitalized software was $3.5 million and $1.1 million, respectively. These amounts include $0.2 million and less than $0.1 million of capitalized stock compensation costs. Depreciation expense and amortization expense related to property and equipment was $5.5 million and $2.9 million for the years ended December 31, 2022 and 2021, respectively, which included amortization expense of capitalized software of $0.6 million and less than $0.1 million for the years ended December 31, 2022 and 2021, respectively.
Leased equipment and the related accumulated depreciation were as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Leased equipment | $ | 35,983 | | | $ | 20,797 | |
| Accumulated depreciation | (5,802) | | | (2,631) | |
| Leased equipment, net | $ | 30,181 | | | $ | 18,166 | |
Depreciation expense related to leased units was $4.3 million and $2.5 million during the years ended December 31, 2022 and 2021, respectively. Depreciable lives are generally 7 years, consistent with the Company’s planned and historical usage of the equipment subject to operating leases.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Accrued employee compensation and benefits expense | $ | 7,225 | | | $ | 5,692 | |
| Accrued professional services and consulting | 722 | | | 1,114 | |
| Accrued sales tax | 1,680 | | | 1,204 | |
| | | |
| Accrued property tax | 54 | | | 302 | |
| Other | 1,864 | | | 1,239 | |
| $ | 11,545 | | | $ | 9,551 | |
12. Long-term Debt
The components of the Company’s long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Term loans payable | $ | 30,000 | | | $ | 10,000 | |
| Less: Unamortized discount | (317) | | | (55) | |
| 29,683 | | | 9,945 | |
| Less: Current portion of long-term debt | 10,000 | | | 2,000 | |
| Long-term debt, net of discount | $ | 19,683 | | | $ | 7,945 | |
Term Loan Agreements
JPMorgan Chase Bank, N.A.(“JPM”) Credit Agreement
In December 2020, the Company entered into a $10.0 million credit agreement with JPMorgan Chase Bank, N.A. (“JPM Credit Agreement”) with a maturity date of December 3, 2024 and a revolving line of credit of up to $10.0 million with a maturity date of December 3, 2022.
Principal and interest on the JPM Credit Agreement was payable monthly commencing on July 1, 2022. The JPM Credit Agreement accrued interest at an annual rate calculated as the greater of (A) the Wall Street Journal Prime Rate plus 2.25% or (B) 5.5%. The revolving line of credit accrued interest at an annual rate calculated as the greater of (A) the Wall Street Journal Prime Rate plus 1.25% or (B) 4.5%. Upon closing, the Company issued warrants to purchase 377,837 shares of common stock to the lender with an exercise price of $0.42 per share with a fair value of $0.1 million on the date of issuance. The Company incurred debt issuance costs of $0.1 million equal to the fair value of the warrants in connection with the JPM Credit Agreement. These costs were recorded as debt discount and were amortized to interest expense, using the effective interest method, over the term of the loan. Upon the closing of the Merger, the warrants were converted into shares of the Company's common stock. The Company’s obligations under the JPM Credit Agreement are secured by a first-priority security interest in all of its assets, including intellectual property.
We fully repaid all borrowings and accrued interest under the JPM Credit Agreement and terminated the JPM Credit Agreement in November 2022.
Silicon Valley Bank Credit Agreement
In December 2022, the Company entered into a loan and security agreement with Silicon Valley Bank (the "2022 SVB Credit Agreement") in order to finance purchases of hardware to be leased to customers. 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
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
hardware purchases made to support leasing transactions with the Company's 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). Each 2022 SVB Term Loan will mature on the 36-month anniversary of the extension thereof. The obligations under the 2022 SVB Credit Agreement are secured by a perfected security interest in substantially all of the Company's assets, with the exception of intellectual property, pursuant to the terms of the 2022 SVB Credit Agreement. 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. Each 2022 SVB Term Loan advance may be prepaid in full, subject to certain conditions, with payment of (calculated, in each case, based on the then-outstanding principal amount of such 2022 SVB Term Loan advance subject to prepayment) a prepayment premium equal to (i) 1.0% if prepaid on or prior to December 21, 2023; (ii) 0.75% if prepaid after December 21, 2023 but on or prior to December 21, 2024; (iii) 0.50% if prepaid after December 21, 2024 but on or prior to December 21, 2025; and (iv) 0% if prepaid after December 21, 2025.
In connection with the closure of SVB on March 10, 2023 and the subsequent creation of SVBB (see Note 2), SVBB assumed all loans that were previously held by SVB. SVBB continues to hold the Company’s term loans under the same existing terms and covenants which were in place with SVB.
As of December 31, 2022, the unamortized debt discount and debt issuance costs were $0.3 million. As of December 31, 2022, the accrued interest on the 2022 SVB Credit Agreement was less than $0.1 million, which is included in accrued expenses and other current liabilities in the consolidated balance sheet. Interest expense related to the 2022 SVB Credit Agreement totaled less than $0.1 million for the year ended December 31, 2022. The interest rate in effect as of December 31, 2022 was 8.50% for the 2022 SVB Credit Agreement.
As of December 31, 2022, future principal payments on long-term debt are as follows (in thousands):
| | | | | |
| Year Ending December 31, | |
| 2023 | $ | 10,000 | |
| 2024 | 10,000 | |
| 2025 | 10,000 | |
| $ | 30,000 | |
Convertible Note
In September 2020, the Company entered into the 2020 Convertible Notes with an investor for gross proceeds of $2.0 million with a stated interest rate of 6.0% per annum. An additional $2.0 million in gross proceeds were made available in December 2020 upon achievement of the integration milestone, whereby the Company successfully created software utilizing the investor’s application programming interface. The 2020 Convertible Notes provided a conversion option whereby upon the closing of a Qualified Financing event, in which the aggregate gross proceeds of the issuance of preferred stock totaled at least $10.0 million, the notes would automatically convert into shares of the same class and series of capital stock of the Company issued to other investors in the financing at a conversion price equal to 80% of the price per share paid by the other investors. The conversion option met the definition of an embedded derivative and was required to be bifurcated and accounted for separately from the notes. The proceeds from the 2020 Convertible Notes were allocated between the derivative liability, with a fair value at issuance of $1.0 million, and the notes, with an initial carrying value of $3.0 million, and included in long-term liabilities on the Company’s consolidated balance sheet. The difference between the initial carrying value of the notes and the stated value of the notes represented a discount that was accreted to interest expense over the term of the Convertible Notes using the effective interest method. This derivative liability was derecognized as of December 31, 2021 as the liability was settled pursuant to the closing of the merger. Interest expense related to the 2020 Convertible Notes totaled $0.3 million for the year ended December 31, 2021.
In January and February 2021, the Company entered into the 2021 Convertible Notes with various investors for gross proceeds of $30.0 million with a stated interest rate of 8.0% per annum. The 2021 Convertible Notes provided a conversion option whereby upon the closing of a Qualified Financing event, in which the aggregate gross proceeds totaled
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at least $100.0 million, the notes would automatically convert into shares of the same class and series of capital stock of the Company issued to other investors in the financing at a conversion price equal to 80% of the price per share paid by the other investors. The conversion option met the definition of an embedded derivative and was required to be bifurcated and accounted for separately from the notes. The proceeds from the 2021 Convertible Notes were allocated between the derivative liability, with a fair value at issuance of $7.0 million, and the notes, with an initial carrying value of $23.0 million, and included in long-term liabilities on the Company’s consolidated balance sheet. The difference between the initial carrying value of the notes and the stated value of the notes represented a discount that was accreted to interest expense over the term of the Convertible Notes using the effective interest method. This derivative liability was derecognized as of December 31, 2021 as the liability was settled pursuant to the closing of the merger.
In June 2021, the Company modified the 2021 Convertible Notes to grant the holders an additional 1,000,000 shares of NHIC common stock as further consideration upon the automatic conversion of the notes upon closing of the Merger. This modification of the notes resulted in an extinguishment and the Company recognized a loss on extinguishment of the 2021 Convertible Notes of $11.8 million. The $26.7 million carrying value of the notes at June 21, 2021 was derecognized and replacement notes with an initial carrying value of $29.6 million were recorded. Additionally, in the extinguishment accounting, a derivative liability of $19.2 million was recognized, which represents the value of the 1,000,000 NHIC shares as well as a bifurcated embedded derivative for the conversion option.
Upon the closing of the Merger, the Convertible Notes automatically converted into 4,408,672 shares of the Company’s common stock and the holders of the 2021 Convertible Notes also received the right to receive 1,000,000 shares of the Company’s common stock, as noted above. Upon the conversion of the Convertible Notes, the carrying value of the debt of $32.8 million, and the related derivative liability of $19.7 million and accrued interest of $0.2 million were derecognized resulting in a loss on extinguishment of debt of $0.9 million recorded in other income (loss)(expense). Interest expense related to the 2021 Convertible Notes totaled $4.9 million for the year ended December 31, 2021.
13. Warrants
In February 2019, in connection with the 2019 Term Loan Advance, the Company issued a warrant to SVB for the purchase of 28,338 shares of common stock at an exercise price of $0.24 per share (the “2019 SVB common stock warrant”). The 2019 SVB common stock warrant was immediately exercisable and expires in February 2029. The warrant was classified as an equity instrument and recorded at its fair value of less than $0.1 million on the date of issuance through additional paid-in-capital. In connection with the closing of the Merger, all of the outstanding 2019 SVB common stock warrants were converted into shares of the Company’s common stock.
In March 2020, in connection with the 2020 Term Loan Advance, the Company issued a warrant to SVB for the purchase of 279,974 shares of common stock at an exercise price of $0.40 per share (the “2020 SVB common stock warrant”). The 2020 SVB common stock warrant was immediately exercisable and expires in March 2030. The warrant was classified as an equity instrument and recorded at its fair value of less than $0.1 million on the date of issuance through additional paid-in-capital. In connection with the closing of the Merger, all of the outstanding 2020 SVB common stock warrants were converted into shares of the Company’s common stock.
In December 2020, in connection with the JPM Term Loan, the Company issued a warrant to JPM for the purchase of 377,837 shares of common stock at an exercise price of $0.42 per share (the “2020 JPM common stock warrant”). The 2020 JPM common stock warrant was immediately exercisable and expires in December 2030. The warrant was classified as an equity instrument and recorded at its fair value of $0.1 million on the date of issuance through additional paid-in-capital. In connection with the closing of the Merger, all of the outstanding 2020 JPM common stock warrants were converted into shares of the Company’s common stock.
In January 2021, the Company granted the Finback Common Stock Warrants. Upon the closing of the Merger, the vested Finback Common Stock Warrants automatically converted into 131,713 shares of the Company’s common stock. As of December 31, 2022, none of the vested Finback Common Stock Warrants were exercised.
In connection with the closing of the Merger, the Company assumed the Public Warrants for the purchase of 14,325,000 shares of common stock at an exercise price of $11.50. The Public Warrants are immediately exercisable and expire in July 2026. The Public Warrants are classified as a liability and recorded at its fair value of $23.6 million on the date of the closing of the Merger with an offset to additional paid-in-capital and are subsequently remeasured to fair value
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at each reporting date based on the publicly available trading price. The change in fair value of the public warrant liability of $4.9 million was recognized for the year ended December 31, 2022 as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss.
As of December 31, 2022 and 2021, warrants to purchase the following classes of Preferred Stock and common stock outstanding consisted of the following in the tables below. The warrants outstanding as of December 31, 2021 have been updated to reflect the vested Finback Common Stock Warrants automatically converted to the Company's common stock upon the closing of the Merger:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Issuance Date | | Contractual
Term
(in years) | | Underlying Equity
Instrument | | Balance Sheet
Classification | | Shares Issuable
Upon Exercise
of Warrant | | Weighted
Average
Exercise Price |
| January 13, 2021 | | 10 | | Common stock | | Equity | | 2,421,200 | | | $ | 0.42 | |
| July 16, 2021 | | 5 | | Common stock | | Liability | | 14,324,994 | | | $ | 11.50 | |
| | | | | | | | 16,746,194 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Issuance Date | | Contractual
Term
(in years) | | Underlying Equity
Instrument | | Balance Sheet
Classification | | Shares Issuable
Upon Exercise
of Warrant | | Weighted
Average
Exercise Price |
| January 13, 2021 | | 10 | | Common stock | | Equity | | 2,421,200 | | | $ | 0.42 | |
| July 16, 2021 | | 5 | | Common stock | | Liability | | 14,324,994 | | | $ | 11.50 | |
| | | | | | | | 16,746,194 | | | |
14. Convertible Preferred Stock and Preferred Stock
Prior to the Merger, Legacy Evolv had issued Series A convertible preferred stock (“Series A Preferred Stock”), Series A-1 convertible preferred stock (“Series A-1 Preferred Stock”), Series B convertible preferred stock (“Series B Preferred Stock”), and Series B-1 convertible preferred stock (“Series B-1 Preferred Stock”), collectively referred to as the “Preferred Stock”.
Pursuant to the Merger Agreement, immediately prior to the Merger, each share of Legacy Evolv’s Series A-1, Series B-1, and Series B preferred stock outstanding converted to Legacy Evolv common stock on a 1:1 conversion ratio. Pursuant to the Merger Agreement, immediately prior to the Merger, each share of Legacy Evolv’s Series A preferred stock outstanding converted to Legacy Evolv common stock on a 2:1 conversion ratio. On the closing date of the Merger, each share of Legacy Evolv common stock then issued and outstanding was canceled and the holders thereof in exchange received shares of Evolv Technologies Holdings, Inc. equal to 0.378 shares for each share of Legacy Evolv common stock. As of December 31, 2022 and 2021, the Company had no preferred stock outstanding as all convertible preferred stock converted to common stock upon closing of the Merger.
15. Common Stock
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, subject to the preferential dividend rights of Preferred Stock. As of December 31, 2022 and 2021, no cash dividends had been declared or paid.
As of December 31, 2022 and 2021, the Company had reserved 79,795,376 and 75,876,664 shares, respectively, of common stock for the conversion of the outstanding Preferred Stock, exercise of outstanding stock options, vesting of outstanding restricted stock units and performance stock units, vesting of contingent earn-out shares, vesting of contingently issuable common stock, granting of awards under the Company’s 2021 Equity Incentive Plan (see Note 16), issuance of shares under the 2021 Employee Stock Purchase Plan (see Note 16), and the exercise of outstanding warrants (see Note 13).
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Stock-Based Compensation
2013 Equity Incentive Plan
The Company’s 2013 Equity Incentive Plan (the “2013 Plan”) provides for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards and other stock-based awards to employees, officers, directors, and non-employees of the Company. Per the initial terms of the 2013 Plan, up to 1,077,704 shares of common stock may be issued. The Company does not intend to issue any additional awards under the 2013 Plan.
2021 Equity Incentive Plan
The Company’s 2021 Equity Incentive Plan (the “2021 Plan”) provides for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards, restricted stock units, performance stock units, and other stock-based awards to employees, officers, directors, and non-employees of the Company. A total of 21,177,295 shares of common stock were initially authorized under the 2021 Plan, subject to annual evergreen increases of up to 5% of total common shares outstanding as of the end of the prior year. As of December 31, 2022, 17,388,913 shares were available for future grant under the 2021 Plan. Shares, units, and options that are expired, forfeited, canceled, or otherwise terminated without having been fully exercised will be available for future grant under the 2021 Plan. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for future grants.
The 2021 Plan is administered by the Board of Directors or, at the discretion of the Board of Directors, by a committee of the Board of Directors. The exercise prices, vesting and other restrictions are determined at the discretion of the Board of Directors, or its committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of a share of common stock on the date of grant and the term of the stock option may not be greater than ten years. Stock options granted to employees, officers, members of the Board of Directors and non-employees vesting terms are determined on an individual basis on the date of grant. Prior to the closing of the Merger, the Company’s Board of Directors valued the Company’s common stock, taking into consideration its most recently available valuation of common stock performed by third parties as well as additional factors which may have changed since the date of the most recent contemporaneous valuation through the date of grant. After the closing of the Merger, the fair value of each share of common stock underlying stock-based awards is based on the closing price of our common stock as reported by Nasdaq on the date of grant.
Stock Options
The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Risk-free interest rate | 1.6 | % | | 0.7 | % |
| Expected term (in years) | 6.1 | | 6.0 |
| Expected volatility | 75.0 | % | | 31.4 | % |
| Expected dividend yield | 0.0 | % | | 0.0 | % |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the Company’s stock option activity since December 31, 2020 (in thousands, except for share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Shares | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual Term | | Aggregate
Intrinsic Value |
| | | | | (in years) | | |
| Outstanding as of December 31, 2020 | 18,770,767 | | $ | 0.36 | | | | | |
| Granted | 6,472,725 | | 0.42 | | | | | |
| Exercised | (2,806,961) | | 0.33 | | | | | |
| Exercised upon settlement of related party note | (1,469,366) | | 0.24 | | | | | |
| Forfeited | (198,035) | | 0.37 | | | | | |
| Outstanding as of December 31, 2021 | 20,769,130 | | $ | 0.39 | | | | | |
| Granted | 2,262,925 | | 3.49 | | | | | |
| Exercised | (1,896,975) | | 0.43 | | | | | |
| Forfeited | (738,256) | | 0.42 | | | | | |
| Outstanding as of December 31, 2022 | 20,396,824 | | 0.73 | | | 7.18 | | $ | 39,891 | |
| | | | | | | |
| Vested and expected to vest as of December 31, 2022 | 20,396,824 | | $ | 0.73 | | | 7.18 | | $ | 39,891 | |
| Options exercisable as of December 31, 2022 | 13,510,205 | | $ | 0.38 | | | 6.61 | | $ | 29,872 | |
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock.
The weighted average grant date fair value of stock options granted was $2.32 and $0.14 during the years ended December 31, 2022 and 2021, respectively. The aggregate intrinsic value of the stock options exercised was $4.4 million and $18.5 million during the years ended December 31, 2022 and 2021, respectively.
Restricted Stock Units
The following table summarizes the Company’s restricted stock units activity since December 31, 2020:
| | | | | | | | | | | |
| Number of
Shares | | Grant Date Fair
Value |
| | | |
| Outstanding as of December 31, 2020 | — | | — | |
| Granted | 2,013,110 | | 6.76 | |
| Vested | (2,625) | | 7.01 | |
| Forfeited | (58,561) | | 7.01 | |
| Outstanding as of December 31, 2021 | 1,951,924 | | 6.76 | |
| Granted | 7,613,472 | | $ | 3.26 | |
| Vested | (565,774) | | 6.72 | |
| Forfeited | (1,497,677) | | 5.15 | |
| Outstanding as of December 31, 2022 | 7,501,945 | | $ | 3.54 | |
During the year ended December 31, 2022, the aggregate grant-date fair value of restricted stock units issued under the 2021 Plan was $24.9 million. Restricted stock units generally vest ratably over a three year period subject to the
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grantee's continued service through the applicable vesting date. During the year ended December 31, 2022, the total fair value of shares vested was $3.8 million.
Performance Stock Units
The following table summarizes the Company's performance stock units activity since December 31, 2021:
| | | | | | | | | | | |
| Number of
Shares | | Grant Date Fair
Value |
| | | |
| Outstanding as of December 31, 2021 | — | | | $ | — | |
| Granted | 947,000 | | | 2.65 | |
| Vested | — | | | — | |
| Forfeited | (83,000) | | | 2.65 | |
| Outstanding as of December 31, 2022 | 864,000 | | | $ | 2.65 | |
During the year ended December 31, 2022, the aggregate grant-date value of performance stock units issued under the 2021 Plan was $2.5 million. Based upon the terms of the award agreements, 50% of the applicable units shall vest on January 1, 2023 and 50% on January 1, 2024, provided that the Company has achieved a certain performance goal for fiscal year 2022 and subject to the grantee’s continued service through the applicable vesting date.
2021 Employee Stock Purchase Plan
In July 2021, the Company’s Board of Directors adopted the 2021 Employee Stock Purchase Plan (“2021 ESPP”), which was subsequently approved by the Company’s stockholders and became effective on July 16, 2021. The 2021 ESPP authorizes the initial issuance of up to 3,435,748 shares of the Company’s common stock to eligible employees of the Company or, as designated by the Company’s Board of Directors, employees of a related company. The 2021 ESPP provides that the number of shares reserved and available for issuance under the 2021 ESPP will automatically increase each January 1, beginning on January 1, 2022 and ending on (and including) January 1, 2032, by an amount equal to the lesser of (i) 1% of the outstanding number of shares of common stock on the immediately preceding December 31 and (ii) such smaller number of shares as determined by the Company’s Board of Directors. As of December 31, 2022, 4,863,198 shares of the Company’s common stock were available for future issuance. The Company’s Board of Directors may from time to time grant or provide for the grant to eligible employees of options to purchase common stock under the 2021 ESPP during a specific offering period. As of December 31, 2022, no offerings have been approved.
Finback Common Stock Warrants
The Company utilized a Black-Scholes pricing model to determine the grant-date fair value of the Finback Common Stock Warrants. The assumptions used are presented in the following table:
| | | | | |
| Warrants - Black Scholes | |
| Risk-free interest rate | 0.4 | % |
| Expected term (in years) | 3.0 |
| Expected volatility | 23.9 | % |
| Expected dividend yield | — | % |
On the date of issuance, the Finback Common Stock Warrants were valued at $19.5 million.
Upon the closing of the Merger, vested Finback Common Stock Warrants automatically converted into 131,713 shares of the Company’s common stock. As of December 31, 2022, 830,216 Finback Common Stock Warrants were exercisable at a total aggregate intrinsic value of $1.8 million. The remaining 1,590,984 Finback Common Stock Warrants are unvested and have a total unrecognized grant date fair value of $12.1 million. As of December 31, 2022, none of the Finback common stock warrants were exercised. The Company recognizes compensation expense for the Finback
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Warrants when the warrants become vested based on meeting the certain sales criteria. During the years ended December 31, 2022 and 2021, the Company recorded $4.5 million and $2.3 million, respectively, of stock-based compensation expense within sales and marketing expense related to the Finback Common Stock Warrants.
Stock-Based Compensation
Stock-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Cost of revenue | $ | 829 | | $ | 143 |
| Research and development | 4,009 | | 878 |
| Sales and marketing | 10,038 | | 5,735 |
| General and administrative | 7,622 | | 2,840 |
| Total stock-based compensation expense | $ | 22,498 | | $ | 9,596 |
Stock-based compensation expense by award type recognized in the consolidated statements of operations and comprehensive loss was as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Stock options | $ | 1,594 | | $ | 628 |
| Earn-out shares | 6,499 | | 5,334 |
| Warrants | 4,523 | | 2,297 |
| RSUs and PSUs | 9,882 | | 1,337 |
| Total stock-based compensation expense | $ | 22,498 | | $ | 9,596 |
Total unrecognized compensation expense related to stock options and restricted stock units as of December 31, 2022, was $25.9 million, which is expected to be recognized over a weighted average period of 2.3 years. Total unrecognized compensation expense related to earn-out shares associated with the share-based compensation arrangement as of December 31, 2022, was $2.6 million, which is expected to be recognized over a weighted average period of 0.8 years.
17. Income Taxes
The components of the Company’s loss before income tax expense are as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| United States | $ | (85,760) | | | $ | (10,430) | |
| Foreign | (646) | | | (458) | |
| Loss before income tax provision | $ | (86,406) | | | $ | (10,888) | |
There is no provision for income taxes for the years ended December 31, 2022 and 2021 because the Company has historically incurred net operating losses and maintains a full valuation allowance against its deferred tax assets.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective tax rate differs from the U.S. federal statutory rate primarily due to the full valuation allowance maintained on the Company’s net deferred tax assets for the years ended December 31, 2022 and 2021 and as a result of non-deductible items for the year ended December 31, 2022 related to the closing of the Merger. A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Federal statutory income tax rate | 21.0 % | | 21.0 % |
| State income taxes, net of federal benefit | 3.5 | | | 19.2 | |
| Federal and state research and development tax credits | (1.2) | | | 9.7 | |
| Loss on extinguishment of debt | — | | | (24.5) | |
| Merger transaction costs | — | | | (1.3) | |
| Change in fair value of contingent earn-out liability and contingently issuable common stock liability | 3.4 | | | 126.7 | |
| Change in fair value of derivative liability | — | | | (3.4) | |
| Non-deductible convertible notes interest | — | | | (10.2) | |
| Change in valuation allowance | (23.6) | | | (140.7) | |
| Change in tax rate | (0.1) | | | (0.5) | |
| Stock-based compensation | (0.2) | | | 4.3 | |
| Non-deductible compensation | (2.6) | | | — | |
| Permanent differences | (0.2) | | | (0.4) | |
| Other | — | | | 0.1 | |
| Effective income tax rate | 0.0 | % | | 0.0 | % |
Net deferred tax assets consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 36,518 | | $ | 25,461 |
| Research and development tax credit carryforwards | 3,836 | | 4,910 |
| Capitalized research and development costs | 9,965 | | 8,436 |
| Accrued expenses | 6,660 | | 3,722 |
| Deferred revenue | 8,884 | | 2,270 |
| Lease liability | 490 | | — |
| Other | 106 | | 43 |
| Total deferred tax assets | 66,459 | | 44,842 |
| Valuation allowance | (64,570) | | | (43,966) | |
| Total deferred tax assets, net of valuation allowance | 1,889 | | 876 |
| Deferred tax liabilities: | | | |
| Depreciation and amortization | (1,464) | | | (860) | |
| Right of use lease asset | (409) | | — |
| Other | (16) | | (16) |
| Total deferred tax liabilities | (1,889) | | (876) |
| Net deferred tax assets | $ | — | | $ | — |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2022 and December 31, 2021, the Company 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. The Company 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. Additionally, as of December 31, 2022 and December 31, 2021, the Company had gross United Kingdom net operating loss carryforwards of approximately $2.3 million and $1.5 million, respectively, that will not expire. As of December 31, 2022, the Company had gross U.S. federal and state research and development and other tax credit carryforwards of $2.5 million and $1.6 million, respectively, which may be available to offset future tax liabilities and the majority of which begin to expire in 2033 and 2029, respectively. As of December 31, 2021, the Company had gross U.S. federal and state research and development and other tax credit carryforwards of $3.3 million and $2.1 million, respectively, which may be available to offset future tax liabilities and the majority of which begin to expire in 2033 and 2029, respectively.
Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income or tax liabilities. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization.
The Company considered the significant negative evidence of its history of cumulative net operating losses incurred since inception, as well as other positive and negative evidence bearing upon its ability to realize the deferred tax assets, and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2022 and 2021. If or when recognized, the tax benefits related to any reversal of the valuation allowance on deferred tax assets as of December 31, 2022, will be accounted for as follows: approximately $62.1 million will be recognized as a reduction of income tax expense and $2.5 million will be recorded as an increase in equity. The Company reevaluates the positive and negative evidence at each reporting period.
Changes in the valuation allowance for deferred tax assets related primarily to the increase in net operating loss carryforwards and capitalized R&D costs and were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Valuation allowance as of beginning of year | $ | 43,966 | | $ | 26,275 |
| Additions charged to provision for income taxes | 20,320 | | 15,534 |
| Additions charged to equity | 332 | | 2,155 |
| Currency translation and other | (48) | | 2 |
| Valuation allowance as of end of year | $ | 64,570 | | $ | 43,966 |
As of December 31, 2022 and 2021, the Company had not recorded any amounts for unrecognized tax benefits. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of December 31, 2022 and 2021, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the Company’s consolidated statements of operations and comprehensive loss. The Company files income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
course of business, the Company is subject to examination by federal, state, and non-US jurisdictions, where applicable. The Company is open to future tax examinations in the US under statute from 2019 to the present; however, carryforward attributes that were generated prior to 2019 may still be adjusted upon examination by federal, state, or local tax authorities if they either have been or will be used in a future period. The Company is also open for future tax examinations under statute from 2020 to the present in the UK. The Company has not received notice of examination in any jurisdictions for any tax year open under statute.
18. Net Loss per Share
Basic and diluted net loss per share attributable to Class Acommon stockholders was calculated as follows (in thousands, except share and per share amounts):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Numerator: | | | |
| Net income (loss) attributable to common stockholders – basic and diluted | $ | (86,406) | | | $ | (10,888) | |
| | | |
| Denominator: | | | |
| Weighted average common shares outstanding - basic and diluted | 143,858,668 | | 71,662,694 |
| Net loss per share attributable to common stockholders – basic and diluted | $ | (0.60) | | | $ | (0.15) | |
The following potentially dilutive outstanding securities were excluded from the computation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive or issuance of such shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Options issued and outstanding | 20,396,824 | | | 20,769,130 | |
| Public Warrants to purchase common stock | 14,324,994 | | | 14,324,994 | |
| | | |
| | | |
| | | |
| Warrants to purchase common stock (Finback)** | 2,421,200 | | | 2,421,200 | |
| Unvested restricted stock units | 7,501,945 | | | 1,951,924 | |
| Unvested performance stock units | 864,000 | | | — | |
| Earn-out shares* | 15,000,000 | | | 15,000,000 | |
| Contingently issuable common stock* | 1,897,500 | | | 1,897,500 | |
| | | |
| 62,406,463 | | | 56,364,748 | |
*Issuance of Earn-out shares and Contingently issuable common stock are contingent upon the satisfaction of certain conditions, which were not satisfied by the end of the period
**Includes 830,216 vested warrants and 1,590,984 unvested warrants as of December 31, 2022.
19. Related Party Transactions
Nonrecourse Promissory Note with Officer
In August 2020, the Company entered into a $0.4 million promissory note with an officer with the proceeds being used to exercise options for 1,469,366 shares of common stock at a price of $0.24 per share. The promissory note bore interest at the Wall Street Journal Prime Rate and was secured by the underlying shares of common stock that were issued upon the exercise of the stock options. The promissory note was treated as nonrecourse as the loan was only secured by the common stock issued from the exercise of the stock options. As such, (i) the underlying stock option grant was still considered to be outstanding and the shares of common stock were not considered issued and outstanding for accounting purposes until the loan was repaid in full or otherwise forgiven and (ii) no receivable was recorded for the promissory note
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on the Company’s consolidated balance sheets. As such, the promissory note effectively extended the maturity date of the option grant for the life of the loan, this change is treated as a stock option modification. The incremental fair value from the stock option modification was deemed immaterial. The interest on this nonrecourse loan is also considered nonrecourse. As the Company has no intent to collect interest, no accrued interest was recorded.
In June 2021, the Company agreed to repurchase 43,665 shares of common stock valued at $8.05 per share of common stock held by the officer of the Company. In exchange for the repurchase of the common stock by the weighted average numberCompany, the $0.4 million promissory note held by the officer was considered repaid in full.
Business Development Agreement with Finback
In January 2021, the Company granted the Finback Common Stock Warrants. During the year ended December 31, 2022 and 2021, the Company recorded $4.5 million and $2.3 million, respectively, of stock-based compensation expense within sales and marketing expense for the Finback Common Stock Warrants.
In connection with the Merger and pursuant to the Merger Agreement, in addition to earn-out shares of Class Ballocated to Finback based on its common stock outstandingownership percentage as of the Merger date, Finback is entitled to receive a proportional share of earn-out shares based upon its remaining unvested warrants as of the Merger Date. During the year ended December 2021, $1.5 million stock-based compensation expense was recorded within sales and marketing expense for the period. Net income (loss) availableearn-out shares allocated to Finback related to the unvested warrants. During the year ended December 31, 2022, no stock-based compensation expense was recorded within sales and marketing expense for the earn-out shares allocated to Finback.
Original Equipment Manufacturer Partnership Agreement with Motorola Solutions, Inc.
In December 2020, the Company entered into an original equipment manufacturer partnership agreement (the “Distribution Agreement”) with Motorola Solutions, Inc. ("Motorola"), an investor in the Company. In June 2021, the partnership agreement was amended by the Amended and Restated Distribution Agreement (the “Amended and Restated Distribution Agreement”). Motorola sells Motorola-branded premium products based on the Evolv Express platform through their worldwide network of over 2,000 resellers and integration partners, and has integrated the Evolv Express platform with Motorola products. During the year ended December 31, 2022 and 2021, revenue from Motorola’s distributor services was $11.6 million and $0.6 million, respectively. As of December 31, 2022 and 2021, accounts receivable related to Motorola’s distributor services was $12.5 million and $1.2 million, respectively.
Reseller Agreement with Stanley Black & Decker
In June 2020, the Company entered into a reseller agreement (the “Reseller Agreement”) with Stanley Black & Decker whereby Stanley Black & Decker, directly or through its affiliates, resells the Company's products. During the year ended December 31, 2022 and 2021, revenue from Stanley Black & Decker’s reseller services was $1.9 million and less than $0.1 million, respectively. As of December 31, 2022 and 2021, accounts receivable related to Stanley Black & Decker’s reseller services was $2.2 million and less than $0.1 million, respectively.
20. Commitments and Contingencies
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its Board of Directors and certain of its executive officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their role, status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not currently aware of any indemnification claims and has not accrued any liabilities related to such obligations in its consolidated financial statements as of December 31, 2022 or 2021.
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities. At each classreporting date, the Company evaluates whether or not a potential loss amount or a potential range of common stockholdersloss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses the costs related to such legal proceedings as followsincurred.
21. Revision of Prior Period Financial Statements
As discussed in Note 1, in preparing the condensed consolidated financial statements as of and for the three and six months ended June 30, 2022, the Company identified errors in its previously issued financial statements whereby (a) certain expenses that were cost of subscription revenue related and cost of service revenue related were inaccurately classified as sales and marketing expenses on the consolidated statements of operations and comprehensive loss, (b) certain equipment under lease or held for lease was inaccurately classified as inventory on the consolidated balance sheets and a portion of the cash outflows related to the equipment under lease or held for lease were misclassified between operating and investing cash flows on the consolidated statements of cash flows, and (c) the vesting of warrants related to the Business Development Agreement disclosed in Note 16 were not accounted for accurately. The identified errors impacted the Company's previously issued 2020 annual financial statements, 2021 quarterly and annual financial statements, and quarterly financial statements for the three months ended March 31, 2022. The Company has made adjustments to the prior period amounts presented in these financial statements accordingly. Additionally, the Company has made adjustments to correct for other previously identified immaterial errors. The Company evaluated the errors and determined that the related impacts were not material to any previously issued annual or interim financial statements. The impacts of the revisions to the quarterly periods ending June 30, 2021 and September 30, 2021 are presented in the Company's Quarterly Reports on Form 10-Q for the periods ending June 30, 2022 and September 30, 2022, respectively. The impact of the revisions to the quarterly periods ending March 31, 2022 and March 31, 2021 are presented in Note 22. The impact of the revisions to the periods presented in this Annual Report on Form 10-K are as follows (in thousands):
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revised Consolidated Balance Sheets
| | | | | | | | | | | |
| December 31, 2021 |
| As Previously Reported | Adjustment | As Revised |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 307,492 | | $ | — | | $ | 307,492 | |
| Restricted cash | 400 | | — | | 400 | |
| Accounts receivable, net | 6,477 | | — | | 6,477 | |
| Inventory | 5,140 | | (2,250) | | 2,890 | |
| Current portion of contract assets | 1,459 | | — | | 1,459 | |
| Current portion of commission asset | 1,645 | | — | | 1,645 | |
| Prepaid expenses and other current assets | 11,047 | | (290) | | 10,757 | |
| Total current assets | 333,660 | | (2,540) | | 331,120 | |
| Restricted cash, noncurrent | 275 | | — | | 275 | |
| Contract assets, noncurrent | 3,418 | | — | | 3,418 | |
| Commission asset, noncurrent | 3,719 | | — | | 3,719 | |
| Property and equipment, net | 21,592 | | 2,191 | | 23,783 | |
| | | |
| Other assets | 401 | | 141 | | 542 | |
| Total assets | $ | 363,065 | | $ | (208) | | $ | 362,857 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 6,363 | | $ | (318) | | $ | 6,045 | |
| Accrued expenses and other current liabilities | 9,183 | | 368 | | 9,551 | |
| Current portion of deferred revenue | 6,690 | | (91) | | 6,599 | |
| Current portion of deferred rent | 135 | | — | | 135 | |
| Current portion of long-term debt | 2,000 | | — | | 2,000 | |
| | | |
| Total current liabilities | 24,371 | | (41) | | 24,330 | |
| Deferred revenue, noncurrent | 2,475 | | — | | 2,475 | |
| Deferred rent, noncurrent | 333 | | — | | 333 | |
| Long-term debt, noncurrent | 7,945 | | — | | 7,945 | |
| | | |
| Contingent earn-out liability | 20,809 | | 397 | | 21,206 | |
| Contingently issuable common stock liability | 5,264 | | — | | 5,264 | |
| Public warrant liability | 11,030 | | — | | 11,030 | |
| Total liabilities | 72,227 | | 356 | | 72,583 | |
| | | |
| Stockholders’ equity: | | | |
| Convertible preferred stock | — | | — | | — | |
| Common stock | 14 | | — | | 14 | |
| Additional paid-in capital | 395,563 | | 501 | | 396,064 | |
| | | |
| Accumulated deficit | (104,739) | | (1,065) | | (105,804) | |
| Stockholders’ equity | 290,838 | | (564) | | 290,274 | |
| Total liabilities and stockholders’ equity | $ | 363,065 | | $ | (208) | | $ | 362,857 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| December 31, 2020 |
| As Previously Reported | Adjustment | As Revised |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 4,704 | | $ | — | | $ | 4,704 | |
| | | |
| Accounts receivable, net | 1,401 | | — | | 1,401 | |
| Inventory | 2,742 | | (1,156) | | 1,586 | |
| | | |
| Current portion of commission asset | 562 | | — | | 562 | |
| Prepaid expenses and other current assets | 900 | | 641 | | 1,541 | |
| Total current assets | 10,309 | | (515) | | 9,794 | |
| | | |
| | | |
| Commission asset, noncurrent | 1,730 | | — | | 1,730 | |
| Property and equipment, net | 9,316 | | 752 | | 10,068 | |
| | | |
| Other assets | — | | 173 | | 173 | |
| Total assets | $ | 21,355 | | $ | 410 | | $ | 21,765 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 4,437 | | $ | — | | $ | 4,437 | |
| Accrued expenses and other current liabilities | 3,727 | | 484 | | 4,211 | |
| Current portion of deferred revenue | 3,717 | | 45 | | 3,762 | |
| Current portion of deferred rent | 11 | | — | | 11 | |
| Current portion of financing obligations | 227 | | — | | 227 | |
| | | |
| | | |
| Total current liabilities | 12,119 | | 529 | | 12,648 | |
| Deferred revenue, noncurrent | 480 | | — | | 480 | |
| | | |
| Financing obligation, noncurrent | 132 | | — | | 132 | |
| Long-term debt, noncurrent | 16,432 | | — | | 16,432 | |
| Derivative Liability | 1,000 | | — | | 1,000 | |
| | | |
| | | |
| | | |
| | | |
| Common stock warrant liability | 1 | | — | | 1 | |
| Total liabilities | 30,164 | | 529 | | 30,693 | |
| | | |
| Stockholders’ equity: | | | |
| Convertible preferred stock | 75,877 | | — | | 75,877 | |
| Common stock | 1 | | — | | 1 | |
| Additional paid-in capital | 9,194 | | 916 | | 10,110 | |
| | | |
| Accumulated deficit | (93,881) | | (1,035) | | (94,916) | |
| Stockholders’ equity | (84,686) | | (119) | | (84,805) | |
| Total liabilities and stockholders’ equity | $ | 21,355 | | $ | 410 | | $ | 21,765 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revised Consolidated Statements of Operations and Comprehensive Loss
| | | | | | | | | | | | | | | | | |
| Year Ended
December 31, 2021 |
| As Previously Reported | | Adjustment | | As Revised |
| Revenue: | | | | | |
| Product revenue | $ | 13,917 | | | $ | (286) | | | $ | 13,631 | |
| Subscription revenue | 7,855 | | | (52) | | | 7,803 | |
| Service revenue | 1,920 | | | 39 | | | 1,959 | |
| Total revenue | 23,692 | | | (299) | | | 23,393 | |
| Cost of revenue: | | | | | |
| Cost of product revenue | 12,471 | | | (192) | | | 12,279 | |
| Cost of subscription revenue | 3,644 | | | 857 | | | 4,501 | |
| Cost of service revenue | 936 | | | 1,648 | | | 2,584 | |
| Total cost of revenue | 17,051 | | | 2,313 | | | 19,364 | |
| Gross profit | 6,641 | | | (2,612) | | | 4,029 | |
| Operating expenses: | | | | | |
| Research and development | 11,416 | | | 42 | | | 11,458 | |
| Sales and marketing expense | 27,404 | | | (1,305) | | | 26,099 | |
| General and administrative | 20,013 | | | (144) | | | 19,869 | |
| Loss from impairment of property and equipment | 1,869 | | | — | | | 1,869 | |
| Total operating expenses | 60,702 | | | (1,407) | | | 59,295 | |
| Loss from operations | (54,061) | | | (1,205) | | | (55,266) | |
| Other income (expense), net: | | | | | |
| Interest expense, net | (6,095) | | | 27 | | | (6,068) | |
| Interest income | — | | | — | | | — | |
| Loss on disposal of property and equipment | (617) | | | — | | | (617) | |
| 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 | 46,212 | | | 1,148 | | | 47,360 | |
| Change in fair value of contingently issuable common stock liability | 6,406 | | | — | | | 6,406 | |
| Change in fair value of public warrant liability | 12,606 | | | — | | | 12,606 | |
| Change in fair value of common stock warrant liability | (879) | | | — | | | (879) | |
| Total other income (expense), net | 43,203 | | | 1,175 | | | 44,378 | |
| Net loss | $ | (10,858) | | | $ | (30) | | | $ | (10,888) | |
| | | | | |
| Weighted average common shares outstanding - basic and diluted | 71,662,694 | | | — | | | 71,662,694 | |
| Net loss per share - basic and diluted | $ | (0.15) | | | $ | — | | | $ | (0.15) | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revised Consolidated Statements of Cash Flows
| | | | | | | | | | | |
| Year Ended
December 31, 2021 |
| As Previously Reported | Adjustment | As Revised |
| Cash flows from operating activities: | | | |
| Net loss | $ | (10,858) | | $ | (30) | | $ | (10,888) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 2,895 | | — | | 2,895 | |
| Write-off of inventory | 2,132 | | — | | 2,132 | |
| Adjustment to property and equipment for sales type leases | (91) | | — | | (91) | |
| Loss from impairment of property and equipment | 1,869 | | — | | 1,869 | |
| Loss on disposal of property and equipment | 617 | | — | | 617 | |
| Stock-based compensation | 8,511 | | 1,085 | | 9,596 | |
| Non-cash interest expense | 5,245 | | — | | 5,245 | |
| | | |
| Provision recorded for allowance for doubtful accounts | (13) | | — | | (13) | |
| 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 common stock warrant liability | 879 | | — | | 879 | |
| Change in fair value of earn-out liability | (46,212) | | (1,148) | | (47,360) | |
| Change in fair value of contingently issuable common stock | (6,406) | | — | | (6,406) | |
| Change in fair value of public warrant liability | (12,606) | | — | | (12,606) | |
| Changes in operating assets and liabilities | | | |
| Accounts receivable | (5,063) | | — | | (5,063) | |
| Inventory | (17,479) | | 14,043 | | (3,436) | |
| Commission assets | (3,072) | | — | | (3,072) | |
| Contract assets | (4,877) | | — | | (4,877) | |
| Other assets | — | | 32 | | 32 | |
| Prepaid expenses and other current assets | (10,079) | | 931 | | (9,148) | |
| Accounts payable | (7) | | 772 | | 765 | |
| Deferred revenue | 4,968 | | (136) | | 4,832 | |
| Deferred rent | 457 | | — | | 457 | |
| Warranty reserve | (42) | | — | | (42) | |
| Accrued expenses and other current liabilities | 5,174 | | (2,702) | | 2,472 | |
| | | |
| Net cash used in operating activities | (69,628) | | 12,847 | | (56,781) | |
| Cash flows from investing activities: | | | |
| Development of internal-use software | (1,028) | | — | | (1,028) | |
| Purchases of property and equipment | (3,710) | | (12,847) | | (16,557) | |
| Net cash used in investing activities | (4,738) | | (12,847) | | (17,585) | |
| Cash flows from financing activities: | | | |
| | | |
| Proceeds from exercise of stock options | 915 | | — | | 915 | |
| Proceeds from issuance of common stock from the PIPE Investment | 300,000 | | — | | 300,000 | |
| Proceeds from the closing of the Merger | 84,945 | | — | | 84,945 | |
| Payment of offering costs from the closing of the Merger and PIPE Investment | (34,132) | | — | | (34,132) | |
| Repayment of financing obligations | (359) | | — | | (359) | |
| Proceeds from long-term debt, net of issuance costs | 31,882 | | — | | 31,882 | |
| Repayment of principal on long-term debt | (5,422) | | — | | (5,422) | |
| Net cash provided by financing activities | 377,829 | | — | | 377,829 | |
| | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 303,463 | | — | | 303,463 | |
| Cash, cash equivalents and restricted cash | | | |
| Cash, cash equivalents and restricted cash at beginning of period | 4,704 | | — | | 4,704 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 308,167 | | $ | — | | $ | 308,167 | |
| Supplemental disclosure of non-cash activities | | | |
| Transfer of inventory to property and equipment | $ | 12,949 | | $ | (12,949) | | $ | — | |
| Capital expenditures incurred but not yet paid | 347 | | 2,589 | | 2,936 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| Issuance of equity classified warrants | 1 | | (1) | | — | |
| Deferred offering costs included in accounts payable | 1,932 | | 11 | | 1,943 | |
| Conversion of convertible preferred stock to common stock | 75,877 | | — | | 75,877 | |
| Initial fair value of contingent earn-out liability recognized in connection with the closing of the Merger | 67,021 | | — | | 67,021 | |
| Initial fair value of contingently issuable common stock liability recognized in connection with the closing of the Merger | 11,670 | | — | | 11,670 | |
| Conversion of common stock warrants to common stock in connection with the closing of the Merger | 880 | | — | | 880 | |
| Initial fair value of public warrants in connection with the closing of the Merger | 23,636 | | — | | 23,636 | |
| | | |
22. Unaudited Quarterly Financial Information
The following tables summarize the consolidated quarterly results of operations for 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Total revenue | | $ | 8,710 | | | $ | 9,070 | | | $ | 16,530 | | | $ | 20,885 | |
| Gross profit | | 897 | | | 553 | | | 225 | | | 54 | |
| Net loss | | (13,801) | | | (25,686) | | | (18,615) | | | (28,304) | |
| Net loss per share - basic and diluted | | $ | (0.10) | | | $ | (0.18) | | | $ | (0.13) | | | $ | (0.20) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Total revenue | | $ | 3,693 | | | $ | 4,678 | | | $ | 8,424 | | | $ | 6,598 | |
| Gross profit | | 449 | | | 728 | | | 3,467 | | | (615) | |
| Net income (loss) | | (13,506) | | | (22,977) | | | 20,807 | | | 4,788 | |
| Net income (loss) per share - basic | | $ | (1.29) | | | $ | (1.93) | | | $ | 0.17 | | | $ | 0.03 | |
| Net income (loss) per share - diluted | | (1.29) | | | (1.93) | | | 0.14 | | | 0.03 | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize the impact of the revisions described in Note 21 to the periods ending March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, 2022 |
| As Previously Reported | | Adjustment | | As Revised |
| Revenue: | | | | | |
| Product revenue | $ | 5,194 | | | $ | — | | | $ | 5,194 | |
| Subscription revenue | 3,020 | | | (16) | | | 3,004 | |
| Service revenue | 501 | | | 11 | | | 512 | |
| Total revenue | 8,715 | | | (5) | | | 8,710 | |
| Cost of revenue: | | | | | |
| Cost of product revenue | 5,576 | | | (370) | | | 5,206 | |
| Cost of subscription revenue | 1,065 | | | 477 | | | 1,542 | |
| Cost of service revenue | 448 | | | 617 | | | 1,065 | |
| Total cost of revenue | 7,089 | | | 724 | | | 7,813 | |
| Gross profit | 1,626 | | | (729) | | | 897 | |
| Operating expenses: | | | | | |
| Research and development | 4,286 | | | (111) | | | 4,175 | |
| Sales and marketing expense | 12,053 | | | (2,381) | | | 9,672 | |
| General and administrative | 11,093 | | | (276) | | | 10,817 | |
| Loss from impairment of property and equipment | 96 | | | — | | | 96 | |
| Total operating expenses | 27,528 | | | (2,768) | | | 24,760 | |
| Loss from operations | (25,902) | | | 2,039 | | | (23,863) | |
| Other income (expense), net: | | | | | |
| Interest expense | (142) | | | — | | | (142) | |
| Interest income | 209 | | | (141) | | | 68 | |
| | | | | |
| | | | | |
| Change in fair value of contingent earn-out liability | 4,226 | | | (1,148) | | | 3,078 | |
| Change in fair value of contingently issuable common stock liability | 1,472 | | | — | | | 1,472 | |
| Change in fair value of public warrant liability | 5,586 | | | — | | | 5,586 | |
| | | | | |
| Total other income (expense), net | 11,351 | | | (1,289) | | | 10,062 | |
| Net loss | $ | (14,551) | | | $ | 750 | | | $ | (13,801) | |
| | | | | |
| Weighted average common shares outstanding - basic and diluted | 142,878,406 | | | — | | | 142,878,406 | |
| Net loss per share - basic and diluted | $ | (0.10) | | | $ | — | | | $ | (0.10) | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, 2021 |
| As Previously Reported | | Adjustment | | As Revised |
| Revenue: | | | | | |
| Product revenue | $ | 2,502 | | | $ | (235) | | | $ | 2,267 | |
| Subscription revenue | 1,300 | | | (73) | | | 1,227 | |
| Service revenue | 197 | | | 2 | | | 199 | |
| Total revenue | 3,999 | | | (306) | | | 3,693 | |
| Cost of revenue: | | | | | |
| Cost of product revenue | 2,229 | | | (13) | | | 2,216 | |
| Cost of subscription revenue | 595 | | | 148 | | | 743 | |
| Cost of service revenue | 127 | | | 158 | | | 285 | |
| Total cost of revenue | 2,951 | | | 293 | | | 3,244 | |
| Gross profit | 1,048 | | | (599) | | | 449 | |
| Operating expenses: | | | | | |
| Research and development | 3,612 | | | 128 | | | 3,740 | |
| Sales and marketing expense | 3,684 | | | (1,076) | | | 2,608 | |
| General and administrative | 2,899 | | | 153 | | | 3,052 | |
| | | | | |
| Total operating expenses | 10,195 | | | (795) | | | 9,400 | |
| Loss from operations | (9,147) | | | 196 | | | (8,951) | |
| Other income (expense), net: | | | | | |
| Interest expense, net | (2,447) | | | 53 | | | (2,394) | |
| | | | | |
| | | | | |
| Change in fair value of derivative liability | (1,425) | | | — | | | (1,425) | |
| | | | | |
| | | | | |
| | | | | |
| Change in fair value of common stock warrant liability | (736) | | | — | | | (736) | |
| Total other income (expense), net | (4,608) | | | 53 | | | (4,555) | |
| Net loss | $ | (13,755) | | | $ | 249 | | | $ | (13,506) | |
| | | | | |
| Weighted average common shares outstanding - basic and diluted | 10,443,323 | | | — | | | 10,443,323 | |
| Net loss per share - basic and diluted | $ | (1.32) | | | $ | 0.03 | | | $ | (1.29) | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| Three Months Ended
March 31, 2022 |
| As Previously Reported | Adjustment | As Revised |
| Cash flows from operating activities: | | | |
| Net loss | $ | (14,551) | | $ | 750 | | $ | (13,801) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 948 | | 138 | | 1,086 | |
| Write-off of inventory | 324 | | — | | 324 | |
| Adjustment to property and equipment for sales type leases | (321) | | (304) | | (625) | |
| Loss from impairment of property and equipment | 96 | | — | | 96 | |
| | | |
| Stock-based compensation | 5,190 | | (1,263) | | 3,927 | |
| Non-cash interest expense | 5 | | — | | 5 | |
| Non-cash lease expense | 197 | | — | | 197 | |
| | | |
| | | |
| | | |
| | | |
| Change in fair value of earn-out liability | (4,226) | | 1,148 | | (3,078) | |
| Change in fair value of contingently issuable common stock | (1,472) | | — | | (1,472) | |
| Change in fair value of public warrant liability | (5,586) | | — | | (5,586) | |
| Changes in operating assets and liabilities | | | |
| Accounts receivable | (2,112) | | — | | (2,112) | |
| Inventory | (6,985) | | 5,675 | | (1,310) | |
| Commission assets | (351) | | — | | (351) | |
| Contract assets | 108 | | — | | 108 | |
| Other assets | — | | 141 | | 141 | |
| Prepaid expenses and other current assets | (5,280) | | (291) | | (5,571) | |
| Accounts payable | (1,867) | | 1,012 | | (855) | |
| Deferred revenue | 2,778 | | (201) | | 2,577 | |
| Deferred rent | (468) | | 468 | | — | |
| | | |
| Accrued expenses and other current liabilities | (2,065) | | (368) | | (2,433) | |
| Operating lease liability | (229) | | (468) | | (697) | |
| Net cash used in operating activities | (35,867) | | 6,437 | | (29,430) | |
| Cash flows from investing activities: | | | |
| Development of internal-use software | (646) | | (82) | | (728) | |
| Purchases of property and equipment | (323) | | (6,366) | | (6,689) | |
| Net cash used in investing activities | (969) | | (6,448) | | (7,417) | |
| Cash flows from financing activities: | | | |
| | | |
| Proceeds from exercise of stock options | 216 | | 11 | | 227 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Net cash provided by financing activities | 216 | | 11 | | 227 | |
| | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (36,620) | | — | | (36,620) | |
| Cash, cash equivalents and restricted cash | | | |
| Cash, cash equivalents and restricted cash at beginning of period | 308,167 | | — | | 308,167 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 271,547 | | $ | — | | $ | 271,547 | |
| Supplemental disclosure of non-cash activities | | | |
| Transfer of inventory to property and equipment | $ | 4,620 | | $ | (4,620) | | $ | — | |
| Capital expenditures incurred but not yet paid | 1,693 | | 698 | | 2,391 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
EVOLV TECHNOLOGIES HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | |
| Three Months Ended
March 31, 2021 |
| As Previously Reported | Adjustment | As Revised |
| Cash flows from operating activities: | | | |
| Net loss | $ | (13,755) | | $ | 249 | | $ | (13,506) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 452 | | — | | 452 | |
| | | |
| | | |
| | | |
| | | |
| Stock-based compensation | 1,082 | | (773) | | 309 | |
| Non-cash interest expense | 2,344 | | — | | 2,344 | |
| | | |
| Provision recorded for allowance for doubtful accounts | (63) | | — | | (63) | |
| | | |
| Change in fair value of derivative liability | 1,425 | | — | | 1,425 | |
| Change in fair value of common stock warrant liability | 736 | | — | | 736 | |
| | | |
| | | |
| | | |
| Changes in operating assets and liabilities | | | |
| Accounts receivable | (874) | | — | | (874) | |
| Inventory | (433) | | (47) | | (480) | |
| Commission assets | (391) | | — | | (391) | |
| Contract assets | (119) | | — | | (119) | |
| Other assets | — | | 7 | | 7 | |
| Prepaid expenses and other current assets | (4,104) | | 377 | | (3,727) | |
| Accounts payable | 1,194 | | (235) | | 959 | |
| Deferred revenue | (621) | | (185) | | (806) | |
| Deferred rent | (11) | | — | | (11) | |
| | | |
| Accrued expenses and other current liabilities | 1,100 | | 206 | | 1,306 | |
| | | |
| Net cash used in operating activities | (12,038) | | (401) | | (12,439) | |
| Cash flows from investing activities: | | | |
| | | |
| Purchases of property and equipment | (2,522) | | 401 | | (2,121) | |
| Net cash used in investing activities | (2,522) | | 401 | | (2,121) | |
| Cash flows from financing activities: | | | |
| | | |
| Proceeds from exercise of stock options | 455 | | — | | 455 | |
| | | |
| | | |
| | | |
| Repayment of financing obligations | (359) | | — | | (359) | |
| Proceeds from long-term debt, net of issuance costs | 31,882 | | — | | 31,882 | |
| | | |
| Net cash provided by financing activities | 31,978 | | — | | 31,978 | |
| | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 17,418 | | — | | 17,418 | |
| Cash, cash equivalents and restricted cash | | | |
| Cash, cash equivalents and restricted cash at beginning of period | 4,704 | | — | | 4,704 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 22,122 | | $ | — | | $ | 22,122 | |
| Supplemental disclosure of non-cash activities | | | |
| | | |
| Capital expenditures incurred but not yet paid | — | | 1,335 | | 1,335 | |
| Issuance of equity classified warrants | 1 | | — | | 1 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
23. Benefit Plans
The Company established a defined contribution savings plan under Section 401(k) of the Code. This plan covers all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company did not make any matching contributions to the plan during the years ended December 31,
2020 and for the period from January 24, 2020 (inception) to December 31, 2020, as restated: | | For the Period from January 24, 2020 (date of inception) to December 31, 2020 (As Restated) |
Net income available to Class A common stockholders: | | | | |
Income on trust account | | $ | 79,000 | |
Less: Income and franchise taxes to the extent of income | | | (79,000 | ) |
Net income attributable to Class A common stockholders | | $ | — | |
Net income available to Class B common stockholders: | | | | |
Net loss | | $ | (11,912,000 | ) |
Less: amount attributable to Class A common stockholders | | | — | |
Net (loss) attributable to Class B common stockholders | | $ | (11,912,000 | ) |
Net income (loss) available to each class of common stockholders is as follows for the three months ended September 30, 2020 and for the period from January 24, 2020 (date of inception) to September 30, 2020 (as restated):
| | Three months Ended September 30, 2020 (As Restated) | | For the Period From January 24, 2020 (date of inception) to September 30, 2020 (As Restated) |
Net income available to Class A common stockholders: | | | | | | | | |
Interest income | | $ | 26,000 | | | $ | 26,000 | |
Less: Income and franchise taxes | | | (26,000 | ) | | | (26,000 | ) |
Net income attributable to Class A common stockholders | | $ | — | | | $ | — | |
| | | | | | | | | |
Net income available to Class B common stockholders: | | | | | | | | |
Net loss | | $ | (119,000 | ) | | $ | (121,000 | ) |
Add: Change in warrant liability | | | 1,480,000 | | | | 1,480,000 | |
Less: Costs of warrant issuance | | | (390,000 | ) | | | (390,000 | ) |
Less: amount attributable to Class A common stockholders | | | — | | | | — | |
Net (loss) attributable to Class B common stockholders | | $ | 971,000 | | | $ | 969,000 | |
Warrant Liability
The Company accounts for warrants as either equity-classified2022 or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance FASB ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
2021. 30
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. Costs associated with issuing the warrants accounted for as liabilities are charged to operations when the warrants are issued. The fair value of the warrants was estimated using a Monte Carlo simulation approach.
Recent Accounting Standards
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to make disclosures under this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and the notes thereto begin on page F-1 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND
PROCEDURES.EvaluationPROCEDURES
Limitations on effectiveness of
Disclosure Controlscontrols and
ProceduresOn April 12, 2021, the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), the “Statement.” In the Statement, the SEC indicates its view that certain terms of the warrants issued in connection with a SPAC Initial Public Offering (“Public Warrants”) and private placement warrants typically issued by a SPAC (“Private Warrants”) call for such warrants to be accounted for as liabilities and not as equity. The Company has previously recorded such warrants as equity. The Company has reviewed this guidance from the SEC and concluded that it will account for its public and private warrants as a warrant liability and not in equity. This determination (liability vs. equity) has caused the Company to restate previously issued financial statements that showed the warrants as equity. Therefore, our management concluded that we did notprocedures
We maintain
effective internal control over financial reporting as of December 31, 2020 and September 30, 2020, due to a material weakness in our internal control over financial reporting related to a lack of an effectively designed control over the evaluation of settlement features used to determine the classification of warrant instruments.Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as that term is defined in Rules 13a-15 (e)13a-15(e) and 15d-15 (e)15d-15(e) under the Exchange Act) were not effective as of December 31, 2020 and September 30, 2020, due solely to the material weakness in our internal control over financial reporting described above. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Annual Report on Form 10-K present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Disclosure controls are procedures that are designed with the objective of ensuringto ensure that information required to be disclosed in our reports filed under the Exchange Act such as this Report, is recorded, processed, summarized and reported within the time periodperiods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuringforms, and that such information is accumulated and communicated to our management, including the chiefour principal executive officer and chiefprincipal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our current chief executive officerdisclosures. In designing and
31
chief financial officer (our “Certifying Officers”), the effectiveness of evaluating our disclosure controls and procedures, as of December 31, 2020, pursuant to Rule 13a-15(b) under the Exchange Act. Based uponmanagement recognizes that evaluation, our Certifying Officers concluded that, as of December 31, 2020, our disclosure controls and procedures were not effective.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosureany controls and procedures, no matter how well conceiveddesigned and operated, can provide only reasonable not absolute, assurance thatof achieving the objectives of the disclosure controls and procedures are met. Further,desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits must be consideredof our controls and procedures relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation
Evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all
Our management, with the participation of our
control deficienciesprincipal executive officer and
instancesprincipal financial officer, evaluated, as of
fraud, if any. The designthe end of
the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures
also(as that term is
based partlydefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on
certain assumptions aboutthat evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the
likelihoodreasonable assurance level as of
future events, and there can be no assurance that any design will succeedDecember 31, 2022, due to the material weaknesses in
achieving its stated goals under all potential future conditions.our internal control over financial reporting as described below.
Management’s
Annual Report on Internal
ControlsControl Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, including our principal executive officer and principal financial officer, conducted an assessment as of December 31, 2022 of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2022, our internal control over financial reporting was not effective due to the material weaknesses described below.
Material Weaknesses and Remediation Measures Taken
We identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of personnel with an appropriate level of internal controls and accounting knowledge, training and experience commensurate with our financial reporting requirements. Additionally, the limited personnel resulted in our inability to consistently establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, among other things, insufficient segregation of duties in our finance and accounting functions. 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 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. Specifically, we did not design and maintain controls to timely analyze and account for debt modifications and extinguishments, convertible notes, warrant instruments, non-routine complex revenue transactions including the leasing of products and transfer of inventory for leased assets into property plant and equipment, merger transactions, and the accounting and valuation of earn out liabilities.
•We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including segregation of duties and controls over the preparation and review of account reconciliations and journal entries.
•We did not design and maintain effective controls to ensure the recording of revenue transactions in the appropriate period.
•We did not design and maintain effective controls over the completeness and accuracy of accounts payable and accrued liabilities.
These material weaknesses resulted in audit adjustments and certain immaterial misstatements in the Evolv financial statements to prepaid and other current assets, accounts payable and accrued liabilities, long-term and short-term debt, convertible notes, contingent earnout liabilities, change in fair value of contingent earn-out liability, equity, commission assets, contract asset, revenue, deferred revenue, accounts receivable, inventory, property plant and equipment, cost of sales and various expense line items and related financial statement disclosures as of and for the years ended December 31, 2019, 2020 and 2021. The material weakness related to accounting for warrant instruments, the classification of various accounts in the consolidated financial statements and the presentation and disclosure of items in the consolidated statements of cash flows also resulted in the revision of the Company's previously issued 2020 annual financial statements, 2021 quarterly and annual financial statements, and quarterly financial statements for the three months ended March 31, 2022. 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. These IT deficiencies did not result in a misstatement to the consolidated financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined these deficiencies in the aggregate constitute a material weakness.
Remediation Plan for the Material Weaknesses
We continue to be focused on designing and implementing effective internal controls to improve our internal control over financial reporting and remediate the material weaknesses. Our efforts include a number of actions:
•We have hired additional accounting, internal audit, and IT personnel, to bolster our reporting, technical accounting, internal control, and IT capabilities. Additionally, we are in the process of designing and implementing controls to formalize roles and review responsibilities to align with our team’s skills and experience and designing and implementing controls over segregation of duties and have engaged outside consultants to assist us in these efforts.
•We added finance personnel to the organization, including a Chief Financial Officer and a Chief Accounting Officer to strengthen our internal accounting team, to provide oversight, structure and reporting lines, and to provide additional review over our disclosures.
•We are in the process of designing and implementing controls related to the period-end financial reporting process and controls over the classification of various accounts in our consolidated financial statements, including the presentation and disclosure of items in the consolidated statements of cash flows.
•We are in the process of designing and implementing controls to timely identify and account for non-routine, unusual or complex transactions, including controls over the preparation and review of accounting memorandum addressing these matters.
•We are in the process of designing and implementing controls related to revenue recognition, including non-routine complex revenue transactions that may also include the leasing of products and the recording of revenue transactions in the appropriate period.
•We are in the process of designing and implementing controls over the completeness and accuracy of accounts payable and accrued liabilities.
•We are in the process of designing and maintaining formal accounting policies, procedures, and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of account reconciliations and journal entries.
•We are in the process of designing and implementing information technology general controls, including controls over program change management, the review and update of user access rights and privileges, controls over batch jobs and data backups, and program development approvals and testing. To this end, we implemented a new Enterprise Resource Planning ("ERP") system in April 2022 and have implemented, and continue to implement, IT general controls related to the new system.
The process of designing and maintaining effective internal control over financial reporting is a continuous effort that requires management to anticipate and react to changes in our business, economic and regulatory environments and to expend significant resources. As we continue to evaluate our internal control over financial reporting, we may take additional actions to remediate the material weaknesses or modify the remediation actions described above.
While we continue to devote significant time and attention to these remediation efforts, the material weaknesses will not be considered remediated until management completes the design and implementation of the actions described above and the controls operate for a sufficient period of time, and management has concluded, through testing, that these controls are effective.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form
10-K10-K does not include
aan attestation report of
our independent registered accounting firm on management’s assessment regarding internal control over financial reporting
or an attestation report of our independent registered public accounting firm due to
a transition periodthe exemption from such requirements established by rules of the SEC for
newly publicemerging growth companies.
Changes in Internal Control over Financial Reporting
There
Other than with respect to the material weaknesses and remediation efforts described above, there were no changes in our internal control over financial reporting (as
such term is defined in Rules
13a-15(f)13a-15(f) and
15d-15(f) of15d-15(f) under the Exchange Act) during the
most recent fiscal quarter
ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting except as described below.In order to remediate the material weakness in internal controls described above relative to accounting for public and private warrants, the Company has retained experts in valuation with specialized knowledge of warrants in order to properly record and periodically remeasure this liability.
reporting.
ITEM 9B. OTHER INFORMATION
None.
32
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The following table sets forth information about our directors and executive officers as of March [•], 2021.
Name
| | Age
| | Position
| | | | | | | | | | |
Kevin Charlton
Name | | 54
Age | | Position |
| Executive Officers: | | | | |
| Peter George | | 64 | | President and Chief Executive Officer |
Thomas J. Sullivan
Mark Donohue | | 57
49 | | Chief Financial Officer |
| Anthony John De Rosa | | 50 | | Chief Revenue Officer |
| Anil Chitkara | | 55 | | Chief Growth Officer and Founder |
| Michael Ellenbogen | | 58 | | Chief Innovation Officer, Founder, and Director |
| Non-Employee Directors: | | | | |
| Alan Cohen | | 62 | | Chairman of the Board of Directors |
Charles Goldman
Kevin Charlton | | 51
57 | | Director Vice Chairman of the Board of Directors |
Charlie Baynes-Reid
Neil Glat | | 45
55 | | Chief Operating Officer
Director |
Adam Deutsch
Merline Saintil | | 34
46 | | Chief Financial Officer
Director |
Marc Saiontz
John Kedzierski | | 47
44 | | Director |
Kathleen Harris
Kimberly Sheehy | | 58 | | Director |
Brian Mathis
Mark Sullivan | | 53
68 | | Director |
Neil Glat
Bilal Zuberi | | 52
46 | | Director |
Suzy Taherian
| | 51
| | Director
|
Executive Officers
Peter G. George.Peter G. George has served as our President and Chief Executive Officer since July 2021. Prior to that, Mr. George served as Legacy Evolv’s Chief Executive Officer and President since January 2020. Prior to assuming the role of Chief Executive Officer at Legacy Evolv, Mr. George served as Chief Commercial Officer of Legacy Evolv from February 2019 to December 2019. Prior to joining Legacy Evolv, Mr. George served as President, Chief Executive Officer and Chairman of Fidelis Cybersecurity, a company focused on threat and data breach detection, from March 2008 to August 2019. Mr. George also served as the Chief Executive Officer of Empow Cybersecurity, a company offering intelligent, AI and natural language processing solutions to reduce false positives during threat detection, from March 2018 to November 2018. Mr. George serves on the Board of Directors of Corero Network Security PLC (LON: CNS), including its Compensation Committee, since January 2019. Mr. George received a Bachelor of Arts degree in History from the College of the Holy Cross in 1981.
Mark Donohue. Mark Donohue has been our Chief Financial Officer since June 2022. Prior to joining the Company, Mr. Donohue, served as Chief Financial Officer of Vestmark, Inc. (“Vestmark”), a provider of SaaS-based portfolio management and trading tools for financial advisors and institutions where he oversaw Vestmark’s Financial Planning, Corporate Development, Accounting, and Investor Relation departments, from August 2018 to May 2022. Prior to his time at Vestmark, Mr. Donohue served at Rapid7, Inc. (“Rapid7”), a provider of security analytics and automation, in several senior roles including Vice President of Finance, Corporate Development, and Treasury & Investor Relations, from February 2016 to August 2018. Before his time at Rapid7, Mr. Donohue held multiple Director level positions at Cisco Systems in which he was involved in strategy, finance and business operations and Starent Networks, Corp., in which he was involved in investor relations and treasury roles, and held senior roles at International Data Corporation, Ferris Baker Watts Inc., Teradyne, Inc. and Quantum Corporation. He earned a BS in Business Administration & Finance from the University of New Hampshire, and received both his MBA and MS in Finance from Boston College’s Wallace E. Carroll Graduate School of Management.
Anthony John De Rosa.Anthony John De Rosa has been our Chief Revenue Officer since July 2021. Prior to that, Mr. De Rosa served as Legacy Evolv’s Chief Revenue Officer since October 2020. From April 2015 to September 2020, Mr. De Rosa was the Chief Revenue Officer of Orbital Insight, Inc., a remote sensing and artificial intelligence company focused on using satellite imagery and computer vision to create time series analytics, and engaging in geospatial analytics. From November 2002 to March 2015, Mr. De Rosa served as the Senior Managing Director of Eze Software Group, a trading, portfolio management and compliance software company in the investment management sector. Mr. De
Rosa received a Bachelor of Science degree in Economics from Lehigh University of Business in 1995 and was part of the Executive Management Program at Stanford University’s Graduate School of Business in 2018.
Anil R. Chitkara.Anil R. Chitkara has been our Chief Growth Officer since April 2022, and previously served as Head of Corporate Development since July 2021. Prior to that, Mr. Chitkara co-founded Legacy Evolv with Michael Philip Ellenbogen July 2013, serving as Legacy Evolv’s Head of Corporate Development since that time. Prior to co-founding Legacy Evolv, Mr. Chitkara was the Senior Vice President, Market Development for Oco, Inc., a business analytics software provider that was subsequently acquired by Deloitte, from January 2007 to June 2011. Prior to joining Oco, Inc., Mr. Chitkara was the Vice President of Parametric Technology Corporation, a company currently offering a variety of augmented reality, industrial IoT, PLM and CAD solutions, from May 2001 to January 2007. Mr. Chitkara received a Bachelor of Science degree in Business Administration from Boston University in 1989 and a Master of Business Administration degree from the Tuck School of Business at Dartmouth College in 1994.
Michael Philip Ellenbogen.Michael Philip Ellenbogen has been our Chief Innovation Officer since July 2021. Prior to that, Mr. Ellenbogen co-founded Legacy Evolv with Anil R. Chitkara in July 2013 and served as Legacy Evolv’s Head of Advanced Technology since January 2020. Prior to that, Mr. Ellenbogen served as the Legacy Evolv’s Chief Executive Officer from August 2013 to January 2020. Prior to co-founding Evolv, Mr. Ellenbogen was the founder, President and Chief Executive Officer of Reveal Imaging Technologies, an X-ray imaging systems company focusing on automated explosives detection, from 2002 to 2010. Prior to joining Reveal, Mr. Ellenbogen was the Vice President of Research & Development and Business Development of PerkinElmer Detection Systems, a provider of X-ray-based security technologies, from 1994 to 2002. During his 25-plus year career in the security industry, Mr. Ellenbogen has proven his expertise in product and business development, as well as stakeholder value creation. In addition, Mr. Ellenbogen is an inventor with 20 awarded patents. Mr. Ellenbogen received a Bachelor of Science degree in Physics from Colgate University in 1986.
Non-Employee Directors
Alan Cohen.Alan Cohen has been the Chairman of the Evolv’s Board of Directors (Evolv’s “Board”) since July 2021. Mr. Cohen is a veteran executive and board member with over 25 years of experience working with technology companies. Since 2019, Mr. Cohen has been a partner at DCVC, a venture capital firm. Prior to that, Mr. Cohen was Chief Commercial Officer for Illumio, a cybersecurity software firm, from 2014 to 2018. Mr. Cohen has served on the boards of directors of numerous DCVC portfolio companies specializing in physical and cybersecurity, payments, AI, and enterprise sectors and has been an advisor and investor in multiple billion-dollar companies. Mr. Cohen received a Bachelor of Arts degree in English from SUNY Buffalo in 1981, a Master of Arts degree in English from the University of Vermont in 1984, a Master of Arts degree in International Affairs and Economics from the American University School of International Service in 1986 and Master of Business Administration degree with a focus on Finance from New York University in 1990. We believe Mr. Cohen is qualified to serve on Evolv’s Board based on his experience working with technology companies and the leadership roles he has held.
Kevin Charlton.Kevin Charlton CEO. Kevinhas been a director on Evolv’s Board since July 2021, and currently serves as Chairman of the Compensation Committee. In addition, Mr. Charlton is our Chief Executive Officer.serves as Chairman of Give Evolv LLC. Mr. Charlton has been the Co-ChairmanCo-Chairman of NewHold Enterprises LLC since 2017 and has spent more than 20 years in private equity. Prior to NewHold Enterprises, Mr. Charlton was the Co-Founder of River Hollow Partners from June 2013 through April 2017. From January 2014 through February 2015, Mr. Charlton was the President and Chief Operating Officer of Hennessy Capital Acquisition Corp., a $115 million NASDAQ-listed SPAC that merged with Blue Bird Corporation (NASDAQ: BLBD), the school bus manufacturer, in February 2015. From July 2015 through February 2017, he then served as President, Chief Operating Officer and Vice Chairman of the Board of Directors of Hennessy Capital Acquisition Corp. II, a $200 million NASDAQ-listed SPAC that merged with Daseke, Inc. (NASDAQ: DSKE), in February 2017. From July 2017 through October 2019, Mr. Charlton served as President, Chief Operating Officer and Vice Chairman of the Board of Directors of Hennessy Capital Acquisition Corp. III, a $275 million NYSE-listed SPAC that merged with NRC Group (NYSE: NRCG) in October 2018. Prior to NewHold, Mr. Charlton was with JPMorgan (NYSE: JPM), Investcorp, and Macquarie (ASX: MQG). Mr. Charlton has served on more than 25 Boards of Directors in all relevant roles, and in almost all cases as Chairman or Lead Director on behalf of the majority owner. Prior to his career in private equity, Mr. Charlton was with McKinsey and Company in New York and NASA Headquarters in Washington, DC. Mr. Charlton has been Chairman of American AllWaste LLC since May 2018, and currently serves on the BoardsBoard of Daseke, Inc. (NASDAQ: DSKE), a heavy haul trucking company that he took public in February 2017; Spirit Realty Capital (NYSE: SRC), a triple net commercial REIT that he took public in 2012; has been Chairman of American AllWaste LLC since May 2018; and serves on the Boards of Macro Energy LLC, a high efficiency lighting company.company and F&S Tools, a high-end tooling manufacturer. In addition, from January 2014 through October 2019, Mr. Charlton currently servesserved in various roles for Hennessy Capital Acquisition Corp I, II, and III, including as the Chairman of F&S Precision Holdings, Inc., a company that does precision tooling for plastic injection molding. Mr. Charlton has successfully sold companies to both strategicPresident, Chief Operating Officer, and financial investors, maximized value through the staged exit to separate buyers, and taken companies public, including companies in the manufacturing, distribution, business services, transportation, real estate, consumer products, and food and beverage sectors. He has a long history of working in partnership with management to develop and execute a strategic agenda.Vice Chairman. Mr. Charlton received his Bachelor’s degree in Aerospace Engineering cum laude from Princeton University in 1988, his Master of Science in Aerospace Engineering with Distinction from the University of Michigan in 1990, and his Master of Business Administration with Honors from the Kellogg School at Northwestern University in 1995.Charlie Baynes-Reid, COO. Charlie Baynes-Reid is our Chief Operating Officer. Mr. Baynes-Reid is a founding partner and Managing Director of NewHold Enterprises, having spent more than 20 years in private equity and principal investing, both as a legal advisor and as an investor. Mr. Baynes-Reid has extensive experience working with portfolio companies on acquisitions and divestures, consolidation strategies, debt financing and refinancing, capital markets and exit strategies through private sales, public mergers, and initial public offerings (or IPOs). He also has significant knowledge of core legal and regulatory considerations relating to both domestic as well as complex cross border transactions and his sector experience includes companies focusing on logistics, business services, real estate, diversified industrials, renewable energy, and financial services. Qualifying as a lawyer in the United Kingdom in 2001 with Simmons & Simmons law firm practicing in the Corporate Finance Group, he worked in London and Tokyo before moving to the Minter Ellison law firm in Sydney focusing on mergers and acquisitions. He joined Macquarie (ASX: MQG) in 2005, working primarily on acquisitions, based initially in Sydney. In 2007,
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he relocated to Macquarie’s New York office, where he focused on principal investments and capital markets transactions across multiple jurisdictions, before becoming one of the founding partners of River Hollow Partners in early 2014, where he continues to serve as a partner and General Counsel. Since 2017, Mr. Baynes-Reid has been a Founding Partner, Managing Director and General Counsel for NewHold Enterprises LLC. Mr. Baynes-Reid received his LLB Honors degree in Business Law from City University, London and is dual-qualified as an English lawyer and a member of the New York Bar. Mr. Baynes-Reid currently serves as the Chairman of Macro Energy LLC, the first NewHold Enterprises industrial technology platform, which he helped launch, is on the Board of NewHold AEC Corp. and Powerful Foods LLC, and is a Board observer for Luna Pharmaceuticals, Inc.
Adam Deutsch, CFO. Adam Deutsch is our Chief Financial Officer. Mr. Deutsch has served as the Vice President of NewHold Enterprises since 2018. Prior to joining NewHold, Mr. Deutsch served as Vice President and was a founding member of River Hollow Partners from September 2013 through December 2017. Prior to that, Mr. Deutsch spent five years at Laurus Capital, where he participated in over 30 transactions involving extensive restructuring of distressed businesses, including various take-private transactions and reverse mergers. He has guided numerous companies through the identification and implementation of strategic growth initiatives, with an emphasis on empowering managers as a means to driving value. Mr. Deutsch began his career in the UBS (SWX: UBSG) retail banking group. Mr. Deutsch earned a Bachelor of Arts degree from Vassar College, and an MBA with Honors from the Columbia Business School. He has served as Chief Financial Officer of Macro Energy LLC since 2014, and sits on the Board of American AllWaste LLC and F&S Precision Holdings, Inc.
Thomas J. Sullivan, Chairman. Thomas Sullivan is the Chairman of the Board as of the date hereof. Mr. Sullivan has over 30 years of experience in finance and operations. Mr. Sullivan has served as a partner with Standard General L.P., a New York-based investment firm that manages event-driven opportunity funds, since June 2016 where he is responsible for portfolio management of Standard General’s SG Special Situations Fund L.P.. He has served on numerous boards for over 20 years and has broad leadership skills and extensive operational and financial restructuring experience as well as experience in the fields of private equity and capital markets. He is currently a member of the Board of Trustees of Spirit MTA REIT (NASDAQ: SMTA) and Investcorp Credit Management BDC, Inc. (NASDAQ: ICMB). He previously served as a director of Hennessy Acquisition Corp. II, a NASDAQ-listed SPAC, from July 2015 to February 2017. From 2009 to 2015, Mr. Sullivan was the Managing Partner of Smallwood Partners, LLC, a financial advisory services firm. From 1996 to 2008, Mr. Sullivan served as a Managing Director of Investcorp International, Inc., a global middle market private equity firm, where he was a member of the U.S. Investment Committee and a Senior Partner on the Post-Acquisition Team. Prior to his time at Investcorp, he served as Vice President and Treasurer of The Leslie Fay Companies. Previously, Mr. Sullivan was a Senior Manager in the Turnaround and Restructuring Group and a Senior and Staff Account of Arthur Anderson & Co. Mr. Sullivan holds a Bachelor’s degree from Villanova University. We believe that Mr. SullivanCharlton is qualified to serve on our board of directorsEvolv’s Board based on his broad private equity and public company experienceexperience.
Neil Glat.Neil Glat has been a director on Evolv’s board since July 2021. He was appointed in December 2021 as Co-President, Americas for SPORTFIVE, a global sports, entertainment, and transaction expertise.Charles Goldman, Vice Chairman. Charles Goldman has served as one of our directors since inception and is the Vice Chairman of the Board as of the date hereof.marketing agency. From September 2019 to Present, Mr. GoldmanGlat has been the Co-Founder and Co-Chairman of NewHold Enterprises since 2017, and has spent more than 20 years in private equity. Prior to NewHold Enterprises, Mr. Goldman worked at Mill Road Capital from 2005 until 2017, where he was a founding partner, JPMorgan Partners, including Chase Capital Partners, and Chemical Venture Partners. Mr. Goldman is Chairman of the Board of NewHold AEC Corp. and serves on the board of American AllWaste LLC. Mr. Goldman’s private equity career includes extensive experience in deal sourcing, structuring, debt-financing, and portfolio company management. He has led transactions including buyouts of public and private companies, growth equity, structured investments and investments in public companies. In addition to his deal sourcing and structuring responsibilities, Mr. Goldman has extensive experience serving as a board member and working in partnership with management, and has worked with companies in industries including aerospace, automotive, business services, retail and telecommunications. In addition to his work at Mill Road and JPMorgan Partners, Mr. Goldman worked at Ascend Media where he was an Executive Vice President and at Dillon, Read & Co. where he was an investment banking analyst. Mr. Goldman received Bachelor of Arts and Bachelor of Sciences degrees from the College of Arts and Sciences and The Wharton School of the University of Pennsylvania, respectively. Mr. Goldman also received an MBA from the Harvard Business School. We believe that Mr. Goldman is qualified to serve on our board of directors based on his expertise in the financial services and industrial technology industries.
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Neil Glat. Neil Glat is one of our independent directors and chairs the Nominating Committee as of the date hereof. From September 2019 through March 2020, Mr. Glat was a Senior Advisor to the New York Jets, as well as a Managing Member of NG Strategies, LLC.LLC and has been serving on advisory boards and
providing strategic advice to sports, media, and technology businesses. From April 2012 through August 2019, Mr. Glat served as
the President of
the New York Jets, and, from September 2019 to March 2020, he was a Senior Advisor to the New York Jets. Prior to that, Mr. Glat was a senior executive at the National Football League for 15 years, where he oversaw corporate development and strategy,
in addition to having top-tierand has previous experience in management consulting at McKinsey & Company and investment banking at Dillon, Read & Co. Mr. Glat is currently
a Senior Advisor for Arctos Sports Partners, a private equity platform focused on the professional sports industry. He also is on the Board of ASM Global, a
privately-heldprivately-held company which is the world’s largest stadium, arena, convention center,
theater, and venue management company and which was formed by the
recent merger of SMG and AEG
Facilities.Facilities, and serves on the Board of NewHold Investment Corp. II (including as Chair of the Nominating Governance Committee), a publicly-traded, industrial technology SPAC, since 2021. He previously served on the board of NewHold Investment Corp. I, a publicly-traded SPAC, from July 2020 to July 2021. In addition, Mr. Glat serves on many philanthropic boards. Mr. Glat has extensive operating and strategic experience in sports, entertainment, media, and hospitality. During his more than 25 years in combined tenures at the New York Jets, the National Football League, and professional service firms, Mr. Glat has consistently focused on, among other things, driving revenue growth, increasing consumer engagement, identifying new businesses, encouraging innovation, developing
forward-lookingforward-looking strategies, and executing strategic transactions and deals. Mr. Glat earned a Bachelor of Sciences
degree in Economics from The Wharton School at the University of Pennsylvania and a JD from Harvard Law School. We believe that Mr. Glat is qualified to serve on
our board of directorsEvolv’s Board based on his
extensive operational, managerial, strategic,experience in sports (in particular with professional sports franchises) and
financial experience.Kathleen Harris. Kathleen Harrisrelated industries and the leadership roles he has had.
Merline Saintil.Merline Saintil has been a director on Evolv’s Board since July 2021. Ms. Saintil has served as a technology and business executive at Fortune 500 and privately-held companies, including Intuit, Yahoo, PayPal, Adobe, Joyent, and Sun Microsystems. From 2019 to 2020, she was the Chief Operating Officer, R&D-IT of Change Healthcare Inc. Prior to that, Ms. Saintil held the position of Head of Operations, Product & Technology with Intuit Inc. from November 2014 until August 2018. Ms. Saintil has served on the Boards of Directors of TD Synnex Corp. (NYSE: SNX) since 2021, Rocket Lab USA, Inc. (NASDAQ: RKLB) since 2021, Symbotic Inc. (NASDAQ: SYM) since 2021, GitLab Inc. (NASDAQ: GTLB) since 2020, Lightspeed Commerce Inc. (NYSE: LSPD) from 2020 to 2022, ShotSpotter Inc. (NASDAQ: SSTI) from 2019 to 2021, Banner Corporation (NASDAQ: BANR) from 2017 to 2022, and Alkami Technology, Inc. (NASDAQ: ALKT) from 2010 to 2022. She is onea member of our independent directors and chairs the Audit Committee asat TD Synnex. She is the Chair of the date hereof.Compensation Committee at Rocket Lab and member of the Compensation Committee at GitLab. She is the Chair of the Nominating and Corporate Governance Committee at Symbotic. Ms. HarrisSaintil has more than 30received numerous accolades during her career, most recently being named Women Inc.’s 2019 Most Influential Corporate Board Director. In prior years, of experience in investment management and fundamental research in public equity markets, as well as operational management of a private company. Ms. Harris has been the Chief Financial Officer of Dinges Fire Company, a Midwest fire equipment distributor, since February 2018. Prior to joining Dinges Fire Company, she was an investment analyst for hedge fund SDK Capital, specializingranked one of the Most Powerful Women Engineers in long/short analysis of U.S. companies from January 2015 through February 2018. From 1995 to 2004,the World by Business Insider magazine, she was recognized as a partner for Oechsle International Advisors,Women of Influence 2017 by Silicon Valley Business Journal and she has earned a Lifetime Achievement Award from Girls in Tech. She is certified in Cybersecurity Oversight by the National Association of Corporate Directors and the Carnegie Mellon Software Engineering Institute. Ms. Harris wasSaintil earned a portfolio manager and equity analyst for institutional clients invested in non-US and emerging markets. From 1990 to 1995, Ms. Harris was international portfolio manager and analyst for the State of Wisconsin Investment Board. Her research expertise spans company, industry, and market analysis including health care, telecommunications, consumer staples, consumer discretionary, and industrial groups across U.S., European, Asian, and emerging markets. Ms. Harris began her career as analyst and portfolio manager at The Northern Trust Company in Chicago. She successfully completed the Chartered Financial Analyst program in 1988 and earned her Bachelor of SciencesScience degree in Computer Science from theFlorida A&M University in 1998 and a Master of IllinoisScience degree in 1984Software Engineering Management from Carnegie Mellon University in 2005, and an MBA from the University of Chicago in 1987.has completed Stanford Directors’ College and Harvard Business School’s executive education program. We believe that Ms. HarrisSaintil is qualified to serve on our board of directorsEvolv’s Board based on her extensive financial, operational,broad corporate background and principal investing experience.Brian Mathis. Brian P. Mathis is oneservice on the boards of our independent directors of technology public companies. Our Board of Directors do not believe that Ms. Saintil’s outside boards (5 in total, including Evolv) or other commitments limit her ability to devote sufficient time and chairs the Compensation Committeeattention to her duties as a director of the date hereof. Since January 2011, Mr. MathisCompany. Ms. Saintil has been a founding partnerdemonstrated that she has effectively balanced her responsibilities of Pine Street Alternative Asset Management LP and brings significant alternative asset investment experience, including hedge fund, private equity, and venture capital experience. Previously, Mr. Mathis was a Co-Managing Partner of Provident Group Asset Management, LLC where he was a member of the investment committee and primarily responsible for portfolio construction and capital raising. Before joining PGAM, Mr. Mathis was a Managing Director at Advent Capital Management, responsible for business development and marketing of their multi-strategy, credit, and convertible hedge fund strategies. Prior to Advent, Mr. Mathis was a Director at Pacific Alternative Asset Management Company (PAAMCO), a fund of hedge funds with over $7.5 billion of assets under management. At PAAMCO, he was a member of the Investment Management Committee, evaluating directional hedge fund strategies, portfolio asset allocation and guiding strategic initiatives for the firm, including establishing PAAMCO’s London office. Prior to PAAMCO, Mr. Mathis was a Vice President at JPMorgan (NYSE: JPM) serving in various private equity groups focusing on investments in the hedge fund space, later-stage venture/growth capital, and mid-cap LBOs, as well as private equity placements. Mr. Mathis served on the Board of Directors/Advisors for PlusFunds (observer), Eastport Operating Partners LP, Edison Schools, LinksCorp, and Bell Sports. Mr. Mathis receivedDirectors.
John Kedzierski. John Kedzierski has been a Bachelordirector on Evolv’s Board since January 2022. He replaced Mahesh Saptharishi as Motorola’s representative on the Board of Business Administration degree from the University of Michigan Business School and a JD/MPA from Harvard Law School and the John F. Kennedy School of Government, Harvard University, respectively. We believe that Mr. Mathis is qualified to serve on our board of directors based on his extensive principal investing and capital markets experience.Marc Saiontz. Marc Saiontz is one of our independent directors as of the date hereof. Mr. Saiontz is a private equity investor and entrepreneur.Directors. He is currently Senior Vice President and General Manager of Video Security and Access Control at Motorola, since July 2019. He is responsible for product management, research and development, and sales for the founderVideo Security and Access Control business. Immediately prior to leading the Video Security and Access Control business, Mr. Kedzierski was Corporate Vice President of the private investment firm SnowBridge Capital.Systems and Infrastructure products from October 2017 to July 2019. From September 2015 to October 2017, Mr. Saiontz has extensive experience working with foundersKedzierski was Corporate Vice President and CEOsGeneral Manager of leading middle market businesses, having invested in many private companies over his career, with significant roles as ChairmanNorth America Services and lead director on behalf of the
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majority investor in numerous of those companies. Mr. Saiontz joined the private equity firm American Securities in 1996 as one of the earliest investment professionals. In December 2018, Mr. Saiontz transitioned to a Senior Adviser until May 2019, after serving as a Managing Director for over 10 years. Prior to joining American Securities, Mr. Saiontz worked with Morgan Stanley Capital Partners, where he focused on private equity investments. Mr. Saiontz received a Bachelor of Sciences degree in Economics from the Wharton School of the University of Pennsylvania in 1995 and an MBA from Stanford University’s Graduate School of Business in 2001. We believe that Mr. Saiontz is qualified to serve on our board of directors based on his extensive strategic and investing experience.
Suzy Taherian. Suzy Taherian is one of our independent directors as of the date hereof. Ms. Taherian has over 25 years of experience acting as Chief Financial Officer, Chief Operating Officer, and acting Chief Financial Officer for global industrial companies. She started her career as a consultant with Accenture, advising large companies on implementation of ERP systems to optimize operations. She later held various senior finance roles for 16 years at Exxon and Chevron. Since January 2020, Ms. Taherian has been an advisor to TKCapital, a private equity firm with investments in industrial companies. Additionally, Ms. Taherian has served as Chief Financial Officer of several industrial companies — from February 2017 through December 2019, at Kinetic Systems Inc., a global engineering and construction firm; from July 2016 through January 2017, at RePower, a national software company; from June 2015 through June 2016, at NobleIron, a publicly-traded construction equipment rental company (TSX:NIR); and from April 2013 through May 2015, at eCullet, a national manufacturer of glass. Over her career, she has worked on financings of over $4.5 billion and M&A transactions of over $2.5 billion. She previously served on numerous boards such as Glass to Glass, a joint venture with Owens Illinois which is the world’s largest glass manufacturer, and Chevron Federal Credit Union, which has over $1 billion in assets. She previously served on boards of various nonprofits (including a homeless shelter and a school) and is an active community leader and was appointed as the Contra Costa County Library Commissioner, advocating for literacy and education for 1million residents of the county. Since 2019, she has been on the Steering Committee of CFO Leadership Council, a national organization of Chief Financial Officers. Additionally, Ms. Taherian has been an adjunct professor at UC Davis Graduate School of Management for last 9 years, teaching courses on International Finance and International Business. Ms. TaherianCommercial Markets. He holds a Bachelor of Science degree in MechanicalComputer Engineering from UC Davisthe University of Illinois at Urbana-Champaign, and an MBAa Master of Business Administration from theNorthwestern University’s Kellogg School of Management, Northwestern University.Management. We believe that Ms. TaherianMr. Kedzierski is qualified to serve on our board of directorsEvolv’s Board based on her 25 years ofhis broad experience asworking in security and technology.
Kimberly Sheehy.Kimberly Sheehy has been a finance executive with industrial companies.Special Advisor
Nicholas Petruska. Nicholas Petruska serves as a special advisordirector on Evolv’s Board since July 2021. From March 2019 to May 2020, she was the Company and focuses primarily on issues of transaction execution. Mr. Petruska has served as the Executive Vice President, Chief Financial Officer and Secretary of Hennessy Capital Acquisition Corp. IV (NASDAQ: HCAC) since its formation. Mr. Petruska advised Hennessy Capital I, which merged with School Bus Holdings Inc. in February 2015 and is now known as Blue Bird Corporation (NASDAQ: BLBD). FromResMan LLC, a privately-owned software company providing software solutions to multi-family residential property managers. Previously, from April 20152018 to February 2017, Mr. PetruskaMarch 2019, she served as Chief Financial Officer of Hennessy II, which merged with Daseke in February 2017 and is now known as DasekeLori’s Gifts, Inc. (NASDAQ: DSKE)., a privately-owned retail company serving hospitals throughout the United States. From March 2017November 2015 to October 2018, Mr. Petruska2017, Ms. Sheehy served as the Chief Financial Officer of StackPath, LLC, an edge
computing platform provider, and from November 2012 to October 2015, Ms. Sheehy served as Chief Financial
& Administrative Officer of
Hennessy III, which merged with NRC GroupCyrusOne Inc. (NASDAQ: CONE), a public high-growth real estate investment trust specializing in
October 2018. From July 2012 to July 2014, Mr. Petruska served as an associateengineering, building and managing data center properties. She has also held various senior roles at
CHS Capital, a Chicago-based middle market private equity investment firm, where he evaluated leveraged buyouts and structured equity investments across multiple sectors and monitored certain portfolio companies of CHS. From January 2010 to July 2012, Mr. Petruska served as an investment banking analyst for Morgan Stanley (NYSE: MS) in the mergers and acquisitions and corporate finance groups with a focusCincinnati Bell Inc. Ms. Sheehy serves on
diversified industrials and consumer retail. He holds a B.S. degree, summa cum laude, from Miami University with majors in Finance and Decision Sciences.Number and Terms of Office of Officers and Directors
Our board of directors consists of 7 directors and is divided into three classes with only one class of directors being elected in each year and each class (except for those directors appointed prior to our first annual meeting of stockholders) serving a three-year term. In accordance with Nasdaq corporate governance requirements, we are not required to hold an annual meeting until one year after our first fiscal year end following our listing on Nasdaq. The term of office of the first class of directors, consisting of Neil Glat and Kathleen Harris, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Marc Saiontz and Brian Mathis will expire at the second annual meeting of stockholders. The term of office of the third class of directors, consisting of Charles Goldman, Thomas Sullivan and Suzy Taherian, will expire at the third annual meeting of stockholders.
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Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our bylaws as it deems appropriate. Our bylaws provide that our officers may consist of a Chief Executive Officer, a Chief Financial Officer, a Secretary and such other officers (including, without limitation, a Chairman of the Board, Presidents, Vice Presidents, Assistant Secretaries and a Treasurer) as may be determined by the board of directors.
Director Independence
Nasdaq listing standards require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that each of Suzy Taherian, Thomas Sullivan, Neil Glat, Marc Saiontz, Kathleen Harris and Brian Mathis are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors will have regularly scheduled meetings at which only independent directors are present.
Officer and Director Compensation
None of our officers has received any cash compensation for services rendered to us. Commencing on August 4, 2020, we have paid an affiliate of our sponsor a total of $15,000 per month for office space, utilities and secretarial and administrative support. Upon completion of our initial business combination or our liquidation, we will cease paying these monthly fees. No other compensation of any kind, including any finder’s fee, reimbursement, consulting fee or monies in respect of any payment of a loan, will be paid by us to our sponsor, officers and directors, or any affiliate of our sponsor or officers, prior to, or in connection with any services rendered in order to effectuate, the consummation of our initial business combination (regardless of the type of transaction that it is). However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Our audit committee will review on a quarterly basis all payments that were made to our sponsor, officers or directors, or our or their affiliates. Any such payments prior to an initial business combination will be made using funds held outside the trust account. Other than quarterly audit committee review of such payments, we do not expect to have any additional controls in place governing our reimbursement payments to our directors and executive officers for their out-of-pocket expenses incurred in connection with identifying and consummating an initial business combination.
After the completion of our initial business combination, directors or members of our management team who remain with us may be paid consulting or management fees from the combined company. All of these fees will be fully disclosed to stockholders, to the extent then known, in the tender offer materials or proxy solicitation materials furnished to our stockholders in connection with a proposed initial business combination. We have not established any limit on the amount of such fees that may be paid by the combined company to our directors or members of management. It is unlikely the amount of such compensation will be known at the time of the proposed initial business combination, because the directors of the post-combination business will be responsible for determining officer and director compensation. Any compensation to be paid to our officers will be determined, or recommended to the board of directors for determination, either by a compensation committee constituted solely by independent directors or by a majority of the independent directors on our board of directors.
We do not intend to take any action to ensure that members of our management team maintain their positions with us after the consummation of our initial business combination, although it is possible that some or all of our officers and directors may negotiate employment or consulting arrangements to remain with us after our initial business combination. The existence or terms of any such employment or consulting arrangements to retain their positions with us may influence our management’s motivation in identifying or selecting a target business but we do not believe that the ability of our management to remain with us after the consummation of our initial business combination will be a determining factor in our decision to proceed with any potential business combination. We are not party to any agreements with our officers and directors that provide for benefits upon termination of employment.
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Committees of the Board of Directors
Our board of directors will have two standing committees: an audit committee and a compensation committee. Subject to phase-in rules and a limited exception, Nasdaq rules and Rule 10A-3as the Chair of the Exchange Act require thatAudit Committee of Shift Technologies Inc. (Nasdaq: SFT) and the audit committeeBoard of a listed company be comprised solely of independent directors,Directors and Nasdaq rules require thatas the compensation committee of a listed company be comprised solely of independent directors.
Audit Committee
Effective as of August 4, 2020, we have established an audit committeeChair of the board of directors. Suzy Taherian, Brian MathisAudit Committee and Kathleen Harris serve as members of our audit committee, and Kathleen Harris will chair the audit committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least three members of the audit committee, all of whom must be independent. Each of Suzy Taherian, Brian Mathis and Kathleen Harris meet the independent director standard under Nasdaq listing standards and under Rule 10-A-3(b)(1) of the Exchange Act.
Each member of the audit committee is financially literateCompensation Committee and our boardNominating and Corporate Governance Committee of directorsCVB Financial Corp (NASDAQ: CVBF). In addition, Ms. Sheehy has determined that Kathleen Harris qualifies as an “audit committee financial expert” as definedbeen a Certified Public Accountant since 1990. Ms. Sheehy earned a Bachelor of Science degree in applicable SEC rules.
We will adopt an audit committee charter, which will detail the principal functions of the audit committee, including:
• the appointment, compensation, retention, replacement, and oversight of the work of the independent registered public accounting firm engaged by us;
• pre-approving all audit and permitted non-audit services to be provided by the independent registered public accounting firm engaged by us, and establishing pre-approval policies and procedures;
• setting clear hiring policies for employees or former employees of the independent registered public accounting firm, including but not limited to, as required by applicable laws and regulations;
• setting clear policies for audit partner rotation in compliance with applicable laws and regulations;
• obtaining and reviewing a report, at least annually, from the independent registered public accounting firm describing (i) the independent registered public accounting firm’s internal quality-control procedures, (ii) any material issues raised by the most recent internal quality-control review, or peer review,University of the audit firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues and (iii) all relationships between the independent registered public accounting firm and us to assess the independent registered public accounting firm’s independence;
• reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and
• reviewing with management, the independent registered public accounting firm, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reportsCincinnati in 1989. We believe that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.
Compensation Committee
Effective as of August 4, 2020, we have established a compensation committee of the board of directors. Brian Mathis, Marc Saiontz, and Neil Glat serve as members of our compensation committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least two members of the compensation committee, all of whom must be independent. Each of Brian Mathis, Marc Saiontz, and Neil Glat are independent, and Brian Mathis will chair the compensation committee.
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We will adopt a compensation committee charter, which will detail the principal functions of the compensation committee, including:
• reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, if anyMs. Sheehy is paid by us, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation;
• reviewing and approving on an annual basis the compensation, if any is paid by us, of all of our other officers;
• reviewing on an annual basis our executive compensation policies and plans;
• implementing and administering our incentive compensation equity-based remuneration plans;
• assisting management in complying with our proxy statement and annual report disclosure requirements;
• approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our officers and employees;
• if required, producing a report on executive compensation to be included in our annual proxy statement; and
• reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
Notwithstanding the foregoing, as indicated above, other than the payment to an affiliate of our sponsor of $15,000 per month, for up to 24 months, for office space, utilities and secretarial and administrative support, no compensation of any kind, including finders, consulting or other similar fees, will be paid to any of our existing stockholders, officers, directors or any of their respective affiliates, prior to, or for any services they render in order to effectuate the consummation of an initial business combination. Accordingly, it is likely that prior to the consummation of an initial business combination, the compensation committee will only be responsible for the review and recommendation of any compensation arrangements to be entered into in connection with such initial business combination.
The charter will also provide that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.
Nominating Committee
Effective as of August 4, 2020, we have established a nominating committee of the board of directors, which consists of Neil Glat, Thomas Sullivan and Suzy Taherian, each of whom is an independent director under Nasdaq’s listing standards. Neil Glat chairs the nominating committee. The nominating committee is responsible for overseeing the selection of persons to be nominatedqualified to serve on ourEvolv’s board based on her extensive executive, managerial, accounting and public company experience.
Mark Sullivan.Mark Sullivan has been a director on Evolv’s Board since July 2021. Since January 2018, Mr. Sullivan has been the owner of directors. The nominating committee considers persons identifiedMark Sullivan Consulting in St. Petersburg Beach, Florida. Prior to that, Mr. Sullivan was a Principal at Global Security and Innovative Strategies from February 2013 to December 2017. Before entering the private sector, Mr. Sullivan was a federal agent for 35 years, 30 years as a special agent with the U.S. Secret Service, serving in a variety of leadership roles. He was appointed Director of the Secret Service by its members, management, stockholders, investment bankersthe President in May 2006 and others.Guidelines for Selecting Director Nominees
The guidelines for selecting nominees, which are specifiedserved in that position until February 2013. Mr. Sullivan served on the Board of Directors of Command Security Corporation (now known as Prosegur Compania de Seguridad SA (BME:PSG)), a full-service security solutions company, from July 2013 to January 2019. Mr. Sullivan received his Bachelor of Science degree in Criminal Justice from St. Anselm College in 1977. We believe Mr. Sullivan is qualified to serve on Evolv’s Board based on his experience working in security services, both in the Nominating Committee Charter, generally providepublic and private sectors.
Bilal Zuberi.Bilal Zuberi has been a director on Evolv’s Board since July 2021. Since May 2013, Mr. Zuberi has been a partner at Lux Capital, a firm that personsinvests in technology start-ups. At Lux Capital, Mr. Zuberi has led Lux’s investments in Applied Intuition, OpenSpace, Saildrone, Nozomi Networks, DesktopMetal (NYSE: DM), Zededa, Ironclad, Aurora Solar, Fiddler, Commure, Copia Automation, Cloaked, Kinetic Automation, Happiest Baby, Lumafield, Paradigm Inc, and Tendo. Prior to be nominated:• should have demonstrated notable or significant achievementsjoining Lux Capital, Mr. Zuberi was a principal at General Catalyst Partners from October 2008 to May 2013, where he led the firm’s investments in deep tech, including energy, robotics, medtech, and hardware and software systems. Before becoming an investor, he co-founded GEO2 Technologies in January 2004. Earlier in his career, Mr. Zuberi was a management consultant at The Boston Consulting Group from September 2003 to May 2004, where he advised management teams in complex business education or public service;
• should possess the requisite intelligence, education and experience to makestrategy issues. Mr. Zuberi is a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and
• should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interestsmember of the stockholders.
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The nominating committee will consider a numberAdvisory Board of qualifications relating to managementthe Lemelson Foundation and leadership experience, background and integrity and professionalism in evaluating a person’s candidacy for membershiphas served on the boardboards of directors. The nominating committee may requiremultiple private companies, including serving as a member of certain skills or attributes,of such as financial or accounting experience, to meet specific board needs that arise from time to timecompanies’ audit and willcompensation committees. Mr. Zuberi has also consider the overall experience and makeup of its members to obtain a broad and diverse mix of board members. The nominating committee does not distinguish among nominees recommended by stockholders and other persons.
Compensation Committee Interlocks and Insider Participation
None of our officers currently serves, or in the past year has served as a member of Desktop Metal Inc.’s (NYSE: DM) Board of Directors and Audit Committee since December 2020. Mr. Zuberi received a Bachelor of Science degree in Chemistry from The College of Wooster in 1998 and a Ph.D. in Physical Chemistry (with a focus in materials and analytical chemistry) from the compensation committeeMassachusetts Institute of any entity that has one or more officers servingTechnology in 2003. We believe Mr. Zuberi is qualified to serve on our board of directors.
Evolv’s Board based on his experience working with physical infrastructure and technology companies.
Code of
Business Conduct and Ethics
We have
adopted a
written Code of
Business Conduct and Ethics
applicable to our directors, officers and employees. You are able to review these documents by accessing our public filings at the SEC’s web site at www.sec.report. In addition, a copy of the Code of Ethics will be provided without charge upon request from us. We intend to disclose any amendments to or waivers of certain provisions of our Code of Ethics in a Current Report on Form 8-K.Conflicts of Interest
Each of our officers and directors presently has, and any of them in the future may have additional, fiduciary or contractual obligations to other entities pursuant to which such officer or director is or will be required to present a business combination opportunity. Accordingly, if any of our officers or directors becomes aware of a business combination opportunity which is suitable for an entity to which he or she has then-current fiduciary or contractual obligations to present the opportunity to such entity, he or she will honor his or her fiduciary or contractual obligations to present such opportunity to such entity. We believe, however, that the fiduciary duties or contractual obligations of our officers or directors will not materially affect our ability to complete our initial business combination. Our amended and restated certificate of incorporation will provide that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of our company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonable for us to pursue, and to the extent the director or officer is permitted to refer that opportunity to us without violating another legal obligation.
Our sponsor and our officers and directors, other than Marc Saiontz and Neil Glat, have agreed not to participate in the formation of, or become an officer or director of, any other special purpose acquisition company with a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, until we have entered into a definitive agreement regarding our initial business combination or we have failed to complete our initial business combination within 24 months after the closing of our IPO, as such may be extended by stockholder approval. Marc Saiontz and Neil Glat have agreed not to participate in the formation of, or become an officer or director of, any other industrial-focused special purpose acquisition company with a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, until we have entered into a definitive agreement regarding our initial business combination or we have failed to complete our initial business combination within 24 months after the closing of our IPO, as such may be extended by stockholder approval. Potential investors should also be aware of the following other potential conflicts of interest:
• None of our officers or directors is required to commit his or her full time to our affairs and, accordingly, may have conflicts of interest in allocating his or her time among various business activities.
• In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to us as well as the other entities with which they are affiliated. Our management may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
• Our sponsor, officers, directors, special advisor and an employee of an affiliate of our sponsor have agreed to waive their redemption rights with respect to any founder shares and any public shares held by them in connection with the consummation of our initial business combination, and the anchor investors have agreed to waive their redemption rights with respect to their founder shares in such situation.
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Additionally, our initial stockholders have agreed to waive their rights to liquidating distributions from the trust account with respect to any founder shares held by them if we fail to consummate our initial business combination within 24 months after the closing of our IPO, although they will be entitled to such liquidating distributions with respect to any public shares they hold if we fail to complete our initial business combination within the prescribed time frame. If we do not complete our initial business combination within such applicable time period, the proceeds of the sale of the private placement warrants held in the trust account will be used to fund the redemption of our public shares, and the private placement warrants will expire worthless. With certain limited exceptions, the founder shares will not be transferable, assignable by our sponsor or the anchor investors until the earlier of: (A) one year after the completion of our initial business combination or (B) subsequent to our initial business combination, (x) if the last reported sale price of our Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial business combination, or (y) the date on which we complete a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. With certain limited exceptions, the private placement warrants and the Class A common stock underlying such warrants, will not be transferable, assignable or saleable by our sponsor or the anchor investors (as applicable) or their permitted transferees until 30 days after the completion of our initial business combination. Since our sponsor and officers and directors may directly or indirectly own common stock and warrants following our IPO, our officers and directors may have a conflict of interest in determining whether a particular target business is an appropriate business with which to effectuate our initial business combination. Permitted transferees of the founder shares would be subject to the same restrictions.
• Our officers and directors may have a conflict of interest with respect to evaluating a particular business combination if the retention or resignation of any such officers and directors was included by a target business as a condition to any agreement with respect to our initial business combination.
• Our sponsor, officers or directors may have a conflict of interest with respect to evaluating a business combination and financing arrangements as we may obtain loans from our sponsor or an affiliate of our sponsor or any of our officers or directors to finance transaction costs in connection with an intended initial business combination. Up to $100,000 of such loans may be convertible into warrants at a price of $1.00 per warrant at the option of the lender. Such warrants would be identical to the private placement warrants, including as to exercise price, exercisability and exercise period.
The conflicts described above may not be resolved in our favor.
In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if:
• the corporation could financially undertake the opportunity;
• the opportunity is within the corporation’s line of business; and
• it would not be fair to our company and its stockholders for the opportunity not to be brought to the attention of the corporation.
Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. Furthermore, our amended and restated certificate of incorporation will provide that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of our company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonable for us to pursue, and to the extent the director or officer is permitted to refer that opportunity to us without violating another legal obligation.
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Below is a table summarizing the entities to which our executive officers and directors currently have fiduciary duties or contractual obligations:
Individual
| | Entity
| | Entity’s Business
| | Affiliation
|
Kevin Charlton
| | NewHold Enterprises, Industrial Holding Company
| | Investment firm
| | Co-Chairman
|
| | Spirit Realty Capital
| | Real estate investment trust (REIT)
| | Director
|
| | Daseke, Inc.
| | Transportation and Logistics
| | Director
|
| | American AllWaste LLC
| | Growth platform focused on non-hazardous liquid waste industry
| | Chairman
|
| | F&S Precision Holdings, Inc.
| | Precision tooling for plastic injection molding
| | Chairman
|
| | Macro Energy LLC
| | Provider of lighting solutions
| | Director
|
Thomas J. Sullivan
| | Investcorp Credit Management BDC, Inc.
| | Credit manager
| | Director
|
| | Spirit MTA REIT
| | Real estate investment trust
| | Director
|
Charles Goldman
| | NewHold Enterprises LLC
| | Investment firm
| | Co-Chairman
|
| | American AllWaste LLC
| | Growth platform focused on non-hazardous liquid waste industry
| | Director
|
| | NewHold AEC Corp.
| | Architecture and engineering services
| | Chairman
|
Charlie Baynes-Reid
| | NewHold Enterprises LLC
| | Investment firm
| | Managing Director and General Counsel
|
| | River Hollow Partners, LLC
| | Investment firm
| | General Counsel
|
| | Macro Energy LLC
| | Provider of lighting solutions
| | Director
|
| | Powerful Foods LLC
| | Food and beverage company
| | Director
|
| | NewHold AEC Corp.
| | Architecture and engineering services
| | Director
|
| | American AllWaste LLC
| | Growth platform focused on non-hazardous liquid waste industry
| | General Counsel
|
Adam Deutsch
| | NewHold Enterprises LL
| | Investment firm
| | Vice President
|
| | American AllWaste LLC
| | Growth platform focused on non-hazardous liquid waste industry
| | Director
|
| | Macro Energy LLC
| | Provider of lighting solutions
| | Chief Financial Officer
|
| | F&S Precision Holdings, Inc.
| | Precision tooling for plastic injection molding
| | Director
|
Marc Saiontz
| | Snowbridge Capital
| | Investment firm
| | Director
|
| | Beachy, Inc.
| | Information technology and services
| | Director
|
Kathleen Harris
| | Dinges Partners Group
| | Fire equipment company
| | Chief Financial Officer and Director
|
Brian Mathis
| | Pine Street Alternative Asset Management LP
| | Asset management firm
| | Partner
|
Neil Glat
| | NG Strategies, LLC
| | Strategic consulting firm
| | Managing Member
|
| | ASM Global Parent, Inc.
| | Venue management
| | Director
|
Accordingly, if any of the above executive officers or directors becomes aware of a business combination opportunity which is suitable for any of the above entities to which he or she has current fiduciary or contractual obligations, he or she will honor his or her fiduciary or contractual obligations to present such business combination opportunity to such entity, and only present it to us if such entity rejects the opportunity.
We are not prohibited from pursuing an initial business combination with a company that is affiliated with our sponsor, officers or directors. In the event we seek to complete our initial business combination with such a
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company, we, or a committee of independent directors, would obtain an opinion from an independent investment banking firm that is a member of FINRA or from an independent accounting firm, that such an initial business combination is fair to our company from a financial point of view.
In the event that we submit our initial business combination to our public stockholders for a vote, pursuant to the letter agreement, our sponsor, officers, directors, special advisor and an employee of an affiliate of our sponsor have agreed to vote any founder shares held by them and any public shares purchased during or after the offering (including in open market and privately negotiated transactions) in favor of our initial business combination.
Limitation on Liability and Indemnification of Officers and Directors
Our amended and restated certificate of incorporation will provide that our officers and directors will be indemnified by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended. In addition, our amended and restated certificate of incorporation will provide that our directors will not be personally liable for monetary damages to us or our stockholders for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized unlawful payments of dividends, unlawful stock purchases or unlawful redemptions, or derived an improper personal benefit from their actions as directors.
We will enter into agreements with our officers and directors to provide contractual indemnification in addition to the indemnification provided for in our amended and restated certificate of incorporation. Our bylaws also will permit us to secure insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such indemnification. We will purchase a policy of directors’ and officers’ liability insurance that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors.
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant to these indemnification provisions.
We believe that these provisions, the directors’ and officers’ liability insurance and the indemnity agreements are necessary to attract and retain talented and experienced officers and directors.
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PRINCIPAL STOCKHOLDERS
Our sponsor, officers, directors, special advisor and an employee of an affiliate of our sponsor have agreed (A) to vote any shares owned by them in favor of any proposed initial business combination and (B) not to redeem any shares in connection with a stockholder vote to approve a proposed initial business combination. Further, the anchor investors entered into separate agreements with us, the combined effect of which is that, if the anchor investors, collectively, do not own 4,000,000 public shares on the date of any stockholder vote with respect to an initial business combination or the business day immediately prior to the consummation of our initial business combination, certain or all of the anchor investors will be required to transfer to our sponsor a pro rata portion of the founder shares they purchased prior to our IPO. In addition, each anchor investor is subject to any forfeiture of their founder shares on the same terms as the founder shares held by our sponsor may be forfeited in connection with our business combination, provided such forfeiture shall not reduce the number of founder shares held by such anchor investor below 25% of the founder shares purchased by such anchor investor prior to our IPO.
There can be no assurance as to the amount of equity the anchor investors will retain, if any, upon the consummation of our initial business combination. In the event that the anchor investors purchase such units (either in our IPO or after) and vote them in favor of our initial business combination, it is possible that no votes from other public stockholders would be required to approve our initial business combination, depending on the number of shares that are present at the meeting to approve such transaction. As a result of the founder shares and private placement warrants that the anchor investors may hold (directly or indirectly), they may have different interests with respect to a vote on an initial business combination than other public stockholders.
Our sponsor and our executive officers and directors are deemed to be our “promoters” as such term is defined under the federal securities laws.
Restrictions on Transfers of Founder Shares and Private Placement Warrants
The founder shares, private placement warrants and any shares of Class A common stock issued upon conversion or exercise thereof are each subject to transfer restrictions pursuant to lock-up provisions in a letter agreement with us to be entered into by our sponsor, officers, directors, special advisor and an employee of an affiliate of our sponsor (or a subscription agreement in the case of each of the anchor investors). Those lock-up provisions provide that such securities are not transferable or salable (i) in the case of the founder shares, until the earlier of (A) one year after the completion of our initial business combination or (B) subsequent to our initial business combination, (x) if the last reported sale price of our Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial business combination, or (y) the date on which we complete a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property, and (ii) in the case of the private placement warrants and the Class A common stock underlying such warrants, until 30 days after the completion of our initial business combination, except in each case (a) to our officers or directors, any affiliates or family members of any of our officers or directors, any members of our sponsor, or any affiliates of our sponsor; (b) in the case of an individual, by gift to a member of the individual’s immediate family or to a trust, the beneficiary of which is a member of the individual’s immediate family, an affiliate of such person or to a charitable organization; (c) in the case of an individual, by virtue of laws of descent and distribution upon death of the individual; (d) in the case of an individual, pursuant to a qualified domestic relations order; (e) by private sales or transfers made in connection with the consummation of an initial business combination at prices no greater than the price at which the shares or warrants were originally purchased; (f) in the event of our liquidation prior to the completion of our initial business combination; or (g) by virtue of the laws of Delaware or our sponsor’s limited liability company agreement upon dissolution of our sponsor; or (h) in the case of an anchor investor, to such anchor investor’s affiliates, or any investment fund or other entity controlled or managed by such anchor investor, or to any investment manager or investment advisor of such anchor investor or an affiliate of any such investment manager or investment advisor, provided, however, that in the case of clauses (a) through (e), (g) or (h), these permitted transferees must enter into a written agreement agreeing to be bound by these transfer restrictions and the other restrictions contained in the letter agreements and by the same agreements entered into by our sponsor, officers, directors, special advisor or such employee or the anchor investors, as the case may be, with respect to such securities (including provisions relating to voting, the trust account and liquidation distributions described elsewhere in this annual report).
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Registration Rights
The holders of the founder shares, private placement warrants and warrants that may be issued upon conversion of working capital loans (and any shares of Class A common stock issuable upon the exercise of the private placement warrants and warrants that may be issued upon conversion of working capital loans and upon conversion of the founder shares) will be entitled to registration rights pursuant to a registration rights agreement to be signed prior to or on the effective date of our IPO, requiring us to register such securities for resale (in the case of the founder shares, only after conversion to our Class A common stock). The holders of the majority of these securities are entitled to make up to three demands, excluding short form demands, that we register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to our completion of our initial business combination and rights to require us to register for resale such securities pursuant to Rule 415 under the Securities Act. We will bear the expenses incurred in connection with the filing of any such registration statements.
Conflicts of Interest
Investors should be aware of the following potential conflicts of interest:
• None of our officers and directors is required to commit their full time to our affairs and, accordingly, they may have conflicts of interest in allocating their time among various business activities.
• In the course of their other business activities, our officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to our company as well as the other entities with which they are affiliated. Our management has pre-existing fiduciary duties and contractual obligations and may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
• Our officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by our company.
• The insider shares owned by our officers and directors will be released from escrow only if a business combination is successfully completed and subject to certain other limitations. Additionally, our officers and directors will not receive distributions from the trust account with respect to any of their insider shares if we do not complete a business combination. In addition, our officers and directors may loan funds to us after the IPO and may be owed reimbursement for expenses incurred in connection with certain activities on our behalf which would only be repaid if we complete an initial business combination. For the foregoing reasons, the personal and financial interests of our directors and executive officers may influence their motivation in identifying and selecting a target business, completing a business combination in a timely manner and securing the release of their shares.
In general, officers and directors of a corporation incorporated under the laws of the State of Delaware are required to present business opportunities to a corporation if:
• the corporation could financially undertake the opportunity;
• the opportunity is within the corporation’s line of business; and
• it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation.
In addition, when exercising powers or performing duties as a director, the director is required to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account, without limitation the nature of the company, the nature of the decision and the position of the director and the nature of the responsibilities undertaken by him. A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
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As set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of their position. However, in some instances what would otherwise be a breach of this duty can be forgiven and/or authorized in advance by the stockholders provided that there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles of association or alternatively by stockholder approval at general meetings. A director shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the company, disclose the interest to the board of the company.
As set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of their position. However, in some instances what would otherwise be a breach of this duty can be forgiven and/or authorized in advance by the stockholders provided that there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles of association or alternatively by stockholder approval at general meetings.
Accordingly, as a result of multiple business affiliations, our officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when our board evaluates a particular business opportunity with respect to the above-listed criteria. We cannot assure you that any of the above mentioned conflicts will be resolved in our favor. Furthermore, most of our officers and directors have pre-existing fiduciary obligations to other businesses of which they are officers or directors. To the extent they identify business opportunities which may be suitable for the entities to which they owe pre-existing fiduciary obligations, our officers and directors will honor those fiduciary obligations. Accordingly, it is possible they may not present opportunities to us that otherwise may be attractive to us unless the entities to which they owe pre-existing fiduciary obligations and any successors to such entities have declined to accept such opportunities.
In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations, each of our officers and directors has contractually agreed, pursuant to a written agreement with us, until the earliest of a business combination, our liquidation or such time as he ceases to be an officer or director, to present to our company for our consideration, prior to presentation to any other entity, any suitable business opportunity which may reasonably be required to be presented to us, subject to any pre-existing fiduciary or contractual obligations he might have.
In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote their respective insider shares in favor of any proposed business combination. In addition, they have agreed to waive their respective rights to participate in any liquidation distribution with respect to those shares of common stock acquired by them prior to the IPO. If they purchased shares of common stock in the IPO or in the open market, however, they would be entitled to participate in any liquidation distribution in respect of such shares but have agreed not to convert such shares (or sell their shares in any tender offer) in connection with the consummation of our initial business combination or an amendment to our amended and restated memorandum and articles of association relating to pre-business combination activity.
All ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be on terms believed by us to be no less favorable to us than are available from unaffiliated third parties. Such transactions will require prior approval by our audit committee and a majority of our uninterested “independent” directors, or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our audit committee and a majority of our disinterested “independent” directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties.
To further minimize conflicts of interest, we have agreed not to consummate our initial business combination with an entity that is affiliated with any of our officers, directors or initial stockholders, unless we have obtained (i) an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated stockholders from a financial point of view and (ii) the approval of a majority of our disinterested and independent directors (if we have any at that time). Furthermore, in no event will any of our initial stockholders, officers, directors, special advisors or their respective affiliates be paid any finder’s fee, consulting fee or other similar compensation prior to, or for any services they render in order to effectuate, the consummation of our initial business combination.
46
Code of Ethics
We adopted a code of conduct and ethics applicableapplies to our directors, officers, and employees, in accordance with applicable federal securities laws. The code of ethics codifies the business and ethical principles that govern all aspects ofincluding our business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a)principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted a current copy of the Securities Exchange ActCode of 1934, as amended, orBusiness Conduct and Ethics on our website, www.evovltechnology.com, in the Exchange Act, requires“Investor Relations” section under “Governance.” In addition, we intend to post on our executive officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our shares of common stock and other equity securities. These executive officers, directors, and greater than 10% beneficial ownerswebsite all disclosures that are required by law or the rules of Nasdaq concerning any amendments to, or waivers from, any provision of the Code of Business Conduct and Ethics. We granted no waivers in fiscal 2022.
The remaining information required by this item will appear in our definitive proxy statement to be filed with the SEC
regulation to furnish us with copies of all Section 16(a) forms filedwithin 120 days after December 31, 2022, which information is incorporated herein by
such reporting persons.Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners were filed in a timely manner.
reference.
ITEM 11. EXECUTIVE COMPENSATION
Employment Agreements
We have not entered into any employment agreements AND DIRECTOR COMPENSATION
The information required by this item will appear in our definitive proxy statement to be filed with
our executive officers and have not made any agreements to provide benefits upon termination of employment.Executive Officers and Director Compensation
No executive officer has received any cash compensation for services rendered to us. No compensation of any kind, including finders, consulting or other similar fees, will be paid to any of our existing stockholders, including our directors, or any of their respective affiliates, prior to, or for any services they render in order to effectuate, the consummation of a business combination. However, such individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. ThereSEC within 120 days after December 31, 2022, which information is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expensesincorporated herein by anyone other than our board of directors and audit committee, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged.
reference. 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized For Issuance under Equity Compensation Plans (As of December 31, 2022)
| | | | | | | | | | | | | | | | | | | | |
| Plan category: | | Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants, and Rights | | Weighted-Average
Exercise Price of
Outstanding Options,
Warrants, and Rights (6) | | Number of Securities
Available for Future
Issuance Under Equity
Compensation Plans
(excludes securities
reflected in first column) (2) |
| Equity compensation plans approved by security holders | (1) | 28,762,769 | | | $ | 0.73 | | | 22,252,111 | |
| Restricted Stock Units | (3) | 7,501,945 | | | N/A | | 17,388,913 | |
| Performance Stock Units | (4) | 864,000 | | | N/A | | 17,388,913 | |
| Options to Purchase Common Stock | (5) | 20,396,824 | | | $ | 0.73 | | | 17,388,913 | |
| Equity compensation plans not approved by security holders | | — | | | N/A | | N/A |
(1)Consists of the Evolv Technologies Holdings, Inc. 2021 Incentive Award Plan (“2021 Plan”), Evolv Technologies Holdings, Inc. 2021 Employee Stock Purchase Plan (“ESPP”), and the Evolv Technologies, Inc. 2013 Employee, Director, and Consultant Equity Incentive Plan (“2013 Plan”).
(2)The following table sets forth as of March 22, 2021 Plan provides for an annual increase to the number of shares available for issuance thereunder on the first day of commoneach calendar year beginning on January 1, 2022 and ending on and including January 1, 2032, equal to the lesser of (A) 5% of the shares of Common Stock outstanding as of the last day of the immediately preceding fiscal year and (B) such lesser number of shares as determined by our board of directors. The ESPP provides for an annual increase to the number of shares available for issuance thereunder on the first day of each calendar year beginning on January 1, 2022 and ending on and including January 1, 2032, equal to the lesser of (A) 1% of the shares of Common Stock outstanding as of the last day of the immediately preceding fiscal year and (B) such lesser number of shares as determined by our board of directors. No additional awards will be granted under the 2013 Plan and, as a result, no shares remain available for issuance for new awards under the 2013 Plan.
(3)Consists of 146,899 outstanding restricted stock beneficially owned by (i) each person who is known by usunits under the 2013 Plan and 7,355,046 outstanding restricted stock units under the 2021 Plan.
(4)Consists of 864,000 outstanding performance stock units under the 2021 Plan.
(5)Consists of 18,133,899 outstanding options to be the beneficial owner of more than five percent of our issued and outstandingpurchase shares of common stock (ii) each of our officersunder the 2013 Plan and directors; and (iii) all of our officers and directors as a group. As of March 22, 2021, we had 17,250,000 Class A and 4,312,500 Class B2,262,925 outstanding options to purchase shares of common stock issued and outstanding.Unless otherwise indicated, we believe that all persons named inunder the table have sole voting and investment power with respect to all shares2021 Plan.
(6)As of common stock beneficially owned by them. The following table does not reflect recordDecember 31, 2022, the weighted-average exercise price of beneficial ownership of any shares of common stock issuable upon exercise ofoutstanding options under the warrants, as the warrants are not exercisable within 60 days of March 22, 2021.Name and Address of Beneficial Owner(1) | | Number of
Shares Beneficially Owned(2) | | Percentage of Outstanding Shares |
NewHold Industrial Technology Holdings LLC(3) | | 2,525,000 | | 11.1 | % |
Kevin Charlton(3) | | 2,660,000 | | 11.8 | % |
Thomas J. Sullivan | | 50,000 | | * | |
Charles Goldman(3) | | 2,660,000 | | 11.8 | % |
Charlie Baynes-Reid(3) | | 2,625,000 | | 11.6 | % |
Adam Deutsch(3) | | 2,592,500 | | 11.5 | % |
Nick Petruska | | 200,000 | | 1.1 | % |
Marc Saiontz | | 32,500 | | * | |
Kathleen Harris | | 40,000 | | * | |
Brian Mathis | | 35,000 | | * | |
Neil Glat | | 35,000 | | * | |
Suzy Taherian | | 32,500 | | * | |
UBS O’Connor LLC(2)(4) | | 345,000 | | 1.6 | % |
Magnetar Financial LLC(2)(5) | | 345,000 | | 1.6 | % |
Mint Tower Capital Management B.V.(2)(6) | | 230,000 | | 1.1 | % |
All directors and executive officers as a group (10 individuals) | | 3,187,500 | | 14.6 | % |
The remaining information required by NewHold Enterprises. Investment and voting decisions for NewHold Enterprises are made by Kevin Charlton, Charles Goldman, Charlie Baynes-Reid and Adam Deutsch. Each of our officers and directors has an economic interestthis item will appear in our Sponsor. 2,525,000 of the shares beneficially owned by each of Kevin Charlton, Charles Goldman, Charlie Baynes-Reid and Adam Deutsch consist of the shares owned by our sponsor. Each of Kevin Charlton, Charles Goldman, Charlie Baynes-Reid and Adam Deutsch disclaims any pecuniary interest in such shares exceptdefinitive proxy statement to the extent of their beneficial interest in NewHold Enterprises.
48
Our initial stockholders (including the anchor investors) beneficially own 20% of the issued and outstanding shares of our common stock. Because of this ownership block, our initial stockholders may be able to effectively influence the outcome of all matters requiring approval by our stockholders, including the election of directors, amendments to our amended and restated certificate of incorporation and approval of significant corporate transactions, including approval of our initial business combination.
In February 2020, our sponsor purchased 4,312,500 founder shares for an aggregate purchase price of $25,000, or approximately $0.006 per share. In July 2020, our sponsor transferred an aggregate of 867,500 founder shares, including to the following persons: (i) 32,500 founder shares to each of Marc Saiontz and Suzy Taherian, two of our independent directors, (ii) 35,000 founder shares to each of Neil Glat and Brian Mathis, two of our independent directors, (iii) 40,000 founder shares to Kathleen Harris, one of our independent directors, (iv) 50,000 founder shares to Thomas Sullivan, one of our independent directors, (v) 67,500 founder shares to Adam Deutsch, our Chief Financial Officer, (vi) 100,000 founder shares to Charlie Baynes-Reid, our Chief Operating Officer, (vii) 135,000 founder shares to each of Kevin Charlton and Charles Goldman, our Chief Executive Officer and director, respectively, and (viii) 200,000 founder shares to Nick Petruska, our special advisor. In July 2020, our sponsor forfeited 920,000 founder shares and the anchor investors purchased 920,000 founder shares for an aggregate purchase price of approximately $5,333, or approximately $0.006 per share.
All of the insider shares issued and outstanding prior to the IPO were placed in escrow with Continental Stock Transfer & Trust Company, as escrow agent, until (1) with respect to 50% of the insider shares, the earlier of six months after the date of the consummation of our initial business combination and the date on which the closing price of our shares of common stock equals or exceeds $12.50 per share (as adjusted for share splits, share capitalizations, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing after our initial business combination and (2) with respect to the remaining 50% of the insider shares, six months after the date of the consummation of our initial business combination, or earlier, in either case, if, subsequent to our initial business combination, we consummate a liquidation, merger, share exchange or other similar transaction which results in all of our stockholders having the right to exchange their shares for cash, securities or other property.
During the escrow period, the holders of these shares will not be able to sell or transfer their securities except (i) for transfers to our officers, directors or their respective affiliates (including for transfers to an entity’s members upon its liquidation), (ii) to relatives and trusts for estate planning purposes, (iii) by virtue of the laws of descent and distribution upon death, (iv) pursuant to a qualified domestic relations order, (v) by certain pledges to secure obligations incurred in connection with purchases of our securities, (vi) by private sales made at or prior to the consummation of a business combination at prices no greater than the price at which the shares were originally purchased or (vii) to us for no value for cancellation in connectionfiled with the consummation of our initial business combination, in each case (except for clause (vii)) where the transferee agrees to the terms of the escrow agreement, but will retain all other rights as our stockholders, including, without limitation, the right to vote their shares of common stock and the right to receive cash dividends, if declared. If dividends are declared and payable in shares of common stock, such dividends will also be placed in escrow. If we are unable to effect a business combination and liquidate the trust account, none of our initial stockholders will receive any portion of the liquidation proceeds with respect to their insider shares.
SEC within 120 days after December 31, 2022, which information is incorporated herein by reference.49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In February 2020,
The information required by this item will appear in our
sponsor purchased 4,312,500 founder shares for an aggregate purchase price of $25,000, or approximately $0.006 per share. In July 2020, our sponsor transferred an aggregate of 867,500 founder shares, including to the following persons: (i) 32,500 founder shares to each of Marc Saiontz and Suzy Taherian, two of our independent directors, (ii) 35,000 founder shares to each of Neil Glat and Brian Mathis, two of our independent directors, (iii) 40,000 founder shares to Kathleen Harris, one of our independent directors, (iv) 50,000 founder shares to Thomas Sullivan, one of our independent directors, (v) 67,500 founder shares to Adam Deutsch, our Chief Financial Officer, (vi) 100,000 founder shares to Charlie Baynes-Reid, our Chief Operating Officer, (vii) 135,000 founder shares to each of Kevin Charlton and Charles Goldman, our Chief Executive Officer and director, respectively, and (viii) 200,000 founder shares to Nick Petruska, our special advisor. In July 2020, our sponsor forfeited 920,000 founder share and the anchor investors purchased 920,000 founder shares for an aggregate purchase price of approximately $5,333, or approximately $0.006 per share. The number of founder shares issued was determined based on the expectation that such founder shares would represent 20% of the outstanding shares upon completion of our IPO. The per share purchase price of the founder shares was determined by dividing the amount of cash contributed to the company by the aggregate number of founder shares issued. The founder shares (including the Class A common stock issuable upon exercise thereof) may not, subject to certain limited exceptions, be transferred, assigned or sold by the holder.In February 2020, our sponsor agreed to loan us up to $300,000definitive proxy statement to be used for a portion of the expenses of our IPO pursuant to a promissory note. As of August 4, 2020, we had borrowed approximately $47,000 under the promissory note, including approximately $3,000 for costs paid directly by our sponsor. The note was non-interest bearing, unsecured and was paid promptly after our IPO on August 4, 2020.
Commencing on August 4, 2020, we have paid an affiliate of our sponsor a total of $15,000 per month for office space, utilities and secretarial and administrative support. Upon completion of our initial business combination or our liquidation, we will cease paying these monthly fees.
On August 4, 2020, simultaneouslyfiled with the consummation of the IPO, we consummated the private placement (“Private Placement”) with the Sponsor and certain funds and accounts managedSEC within 120 days after December 31, 2022, which information is incorporated herein by Magnetar Financial LLC, UBS O’Connor LLC, and Mint Tower Capital Management B.V. (collectively the “Anchor Investors”) of 5,250,000 warrants (the “Private Warrants”) at a price of $1.00 per Private Warrant, generating gross proceeds to the Company of $5,250,000. On August 14, 2020, simultaneously with the issuance and sale of the Over-Allotment Units, the Company consummated the sale of an additional 450,000 Private Warrants (the “Over-Allotment Private Placement” and, together with the IPO Private Placement, the “Private Placements”), generating gross proceeds of $450,000.
Our sponsor, officers and directors, or any of their respective affiliates, will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Our audit committee will review on a quarterly basis all payments that were made to our sponsor, officers, directors or our or their affiliates and will determine which expenses and the amount of expenses that will be reimbursed. There is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred by such persons in connection with activities on our behalf.
In addition, in order to finance transaction costs in connection with an intended initial business combination, our sponsor or an affiliate of our sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required. If we complete our initial business combination, we would repay such loaned amounts. In the event that our initial business combination does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our trust account would be used for such repayment. Up to $100,000 of such loans may be convertible into warrants, at a price of $1.00 per warrant at the option of the lender. Such warrants would be identical to the private placement warrants, including as to exercise price, exercisability and exercise period. The terms of such loans by our officers and directors, if any, have not been determined and no written agreements exist with respect to such loans. We do not expect to seek loans from parties other than our sponsor or an affiliate of our sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our trust account.
As more fully discussed in the section of this annual report entitled “Management — Conflicts of Interest,” if any of our officers or directors becomes aware of an initial business combination opportunity that falls within the
reference. 50
line of business of any entity to which he or she has then-current fiduciary or contractual obligations, he or she will honor his or her fiduciary or contractual obligations to present such business combination opportunity to such other entity. Our officers and directors currently have certain relevant fiduciary duties or contractual obligations that may take priority over their duties to us.
Other than the foregoing, no compensation of any kind, including any finder’s fee, reimbursement, consulting fee or monies in respect of any payment of a loan, will be paid by us to our sponsor, officers and directors, or any affiliate of our sponsor or officers, prior to, or in connection with any services rendered in order to effectuate, the consummation of an initial business combination (regardless of the type of transaction that it is). However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Our audit committee will review on a quarterly basis all payments that were made to our sponsor, officers, directors or our or their affiliates and will determine which expenses and the amount of expenses that will be reimbursed. There is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred by such persons in connection with activities on our behalf.
We have entered into a registration rights agreement with respect to the private placement warrants, the warrants issuable upon conversion of working capital loans (if any) and the shares of Class A common stock issuable upon exercise of the foregoing and upon conversion of the founder shares.
Related Party Policy
Our Code of Ethics requires us to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interests, except under guidelines approved by the board of directors (or the audit committee). Related-party transactions are defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year, (2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of our shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.
We also require each of our directors and executive officers to annually complete a directors’ and officers’ questionnaire that elicits information about related party transactions.
Our audit committee, pursuant to its written charter, will be responsible for reviewing and approving related-party transactions to the extent we enter into such transactions. All ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be on terms believed by us to be no less favorable to us than are available from unaffiliated third parties. Such transactions will require prior approval by our audit committee and a majority of our uninterested “independent” directors, or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our audit committee and a majority of our disinterested “independent” directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties. Additionally, we require each of our directors and executive officers to complete a directors’ and officers’ questionnaire that elicits information about related party transactions.
These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.
To further minimize potential conflicts of interest, we have agreed not to consummate a business combination with an entity which is affiliated with any of our initial stockholders unless we obtain an opinion from an independent investment banking firm that the business combination is fair to our unaffiliated stockholders from a financial point of view. Furthermore, in no event will any of our existing officers, directors or initial stockholders, or any entity with which they are affiliated, be paid any finder’s fee, consulting fee or other compensation prior to, or for any services they render in order to effectuate, the consummation of a business combination.
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Director Independence
Nasdaq listing standards require that a majority of our board of directors be independent. For a description of the director independence, see above Part III, Item 10 — Directors, Executive Officers and Corporate Governance.
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTANT’S FEES AND SERVICES
Public Accounting Fees
During
The information required by this item will appear in our definitive proxy statement to be filed with the period from January 24, 2020 (inception) throughSEC within 120 days after December 31, 2020,2022, which information is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
The following documents are included on pages 68 through 119 attached hereto and are filed as part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules.
All financial statement schedules for the firm of WithumSmith+Brrown PC, has acted as our principal independent registered public accounting firm. Company have been included in the consolidated financial statements or the related footnotes, or are either inapplicable or not required.
(a)(3) Exhibits.
The following is a summarylist of fees paidexhibits filed as part of this Annual Report on Form 10-K.
EXHIBIT INDEX
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit
No. | | Description | | Form | | File Number | | Exhibit | | Filing Date | | Filed/Furnished
Herewith |
| 2.1 | | | | Form 8-K | | 001-39417 | | 2.1 | | March 8, 2021 | | |
| 2.2 | | | | Form 8-K | | 001-39417 | | 2.2 | | July 22, 2021 | | |
| 3.1 | | | | Form 10-Q | | 001-39417 | | 3.1 | | November 15, 2021 | | |
| 3.2 | | | | Form 8-K | | 001-39417 | | 3.2 | | July 22, 2021 | | |
| 4.1 | | | | Form S-4/A | | 333-255017 | | 4.4 | | June 9, 2021 | | |
| 4.2 | | | | Form S-1/A | | 333-233299 | | 4.3 | | July 27, 2020 | | |
| 4.3 | | | | Form S-1/A | | 333-233299 | | 4.4 | | July 27, 2020 | | |
| 4.4 | | | | Form 10-K | | 001-39417 | | 4.4 | | March 28, 2022 | | |
| 10.1# | | | | Form 8-K | | 001-39417 | | 10.1 | | March 8, 2021 | | |
| 10.2# | | | | Form 8-K | | 001-39417 | | 10.2 | | March 8, 2021 | | |
| 10.3# | | | | Form S-4/A | | 333-255017 | | 10.10 | | June 9, 2021 | | |
| 10.4# | | | | Form S-4/A | | 333-255017 | | 10.11 | | June 9, 2021 | | |
| 10.5# | | | | Form S-4/A | | 333-255017 | | 10.12 | | June 9, 2021 | | |
| 10.6# | | | | Form 8-K | | 001-39417 | | 10.1 | | May 19, 2022 | | |
| 10.7# | | | | Form S-8 | | 333-259961 | | 99.1 | | September 21, 2021 | | |
| 10.8# | | | | Form S-8 | | 333-259961 | | 99.2 | | September 21, 2021 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.9# | | | | | | | | | | | | * |
| 10.10# | | | | Form 10-Q | | 001-39417 | | 10.1 | | November 15, 2021 | | |
| 10.11# | | | | Form 10-Q | | 001-39417 | | 10.1 | | November 9, 2022 | | |
| 10.12# | | | | Form S-8 | | 333-259961 | | 99.3 | | September 21, 2021 | | |
| 10.13# | | | | Form 8-K | | 001-39417 | | 10.1 | | March 2, 2023 | | |
| 10.14† | | | | Form 8-K | | 001-39417 | | 10.1 | | December 21, 2022 | | |
| 10.15# | | | | Form 8-K | | 001-39417 | | 10.1 | | October 31, 2022 | | |
| 21.1 | | | | Form 10-K | | 001-39417 | | 21.1 | | March 28, 2022 | | |
| 23.1 | | | | | | | | | | | | * |
| 31.1 | | | | | | | | | | | | * |
| 31.2 | | | | | | | | | | | | * |
| 32.1 | | | | | | | | | | | | ** |
| 32.2 | | | | | | | | | | | | ** |
| 101.INS | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | * |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | * |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | | | | | * |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | * |
| 101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document. | | | | | | | | | | * |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | * |
| 104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | | | | | | | | | | * |
* Filed herewith.
** Furnished herewith.
# Management contract or compensatory plan, contract or arrangement.
† Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted
schedule or exhibit will be
paidfurnished to
WithumSmith+Brown, PC for services rendered.Audit Fees. Audit fees consist of fees billed for professional services rendered for the audit of our year-end financial statements and services that are normally provided by WithumSmith+Brown, PC in connection with regulatory filings. The aggregate fees billed by WithumSmith+Brown, PC for professional services rendered for the audit of our annual financial statements, review of the financial information included in our Forms 10-Q for the respective periods, the registration statement, the closing 8-K and other required filings with the SEC in the amount of $70,555 for the period from January 24, 2020 (inception) through December 31, 2020. The above amounts include interim procedures and audit fees, as well as attendance at audit committee meetings.
Audit-Related Fees. We did not pay WithumSmith+Brown, PC for consultations concerning financial accounting and reporting standards for the year ended December 31, 2020 and for the period from January 24, 2020 (inception) through December 31, 2020.
Tax Fees. We did not pay WithumSmith+Brown, PC for tax planning and tax advice for the year ended December 31, 2020 and for the period from January 24, 2020 (inception) through December 31, 2020.
All Other Fees. We did not pay WithumSmith+Brown, PC for other services for the year ended December 31, 2020 and for the period from January 24, 2020 (inception) through December 31, 2020.
Pre-Approval of Services
Since our audit committee had not yet been formed when the work commenced in 2020, the audit committee was not able to pre-approve all of the foregoing services, although all such services were approved by our board of directors. All services subsequent to the formation of the audit committee have been approved by the audit committee.
upon request. 52
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following are filed with this report:
(1) The financial statements listed on the Financial Statements’ Table of Contents
(2) Not applicable
(b) Exhibits
The following exhibits are filed with this report. Exhibits which are incorporated herein by reference can be obtained from the SEC’s website at sec.gov.
Exhibit No.
| | Description
|
3.1
| | Certificate of Amendment to Certificate of Incorporation dated February 28, 2020 (incorporated by reference to Exhibit 3.3 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
3.2
| | Form of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.4 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
3.3
| | By Laws (incorporated by reference to Exhibit 3.5 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.1
| | Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.2
| | Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.2 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.3
| | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.4
| | Form of Warrant Agreement between Continental Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 4.4 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.1
| | Form of Letter Agreement among the Registrant and its officers and directors and NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.1 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.2
| | Promissory Note, dated February 20, 2020, issued to NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.2 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.3
| | Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 10.3 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.4
| | Form of Registration Rights Agreement between the Registrant and certain security holders (incorporated by reference to Exhibit 10.4 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.5
| | Subscription Agreement, dated February 28, 2020, between the Registrant and NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.5 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.6
| | Form of Private Placement Warrants Subscription Agreement between the Registrant and NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.6 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.7
| | Form of Indemnity Agreement (incorporated by reference to Exhibit 10.7 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.8
| | Form of Administrative Support Agreement by and between the Registrant and NewHold Enterprises (Management) LLC (incorporated by reference to Exhibit 10.8 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.9
| | Form of Subscription Agreement by and among the Registrant, NewHold Industrial Technology Holdings LLC and each of the Anchor Investors (incorporated by reference to Exhibit 10.9 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
53
Item 16. Form 10-K Summary 54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.authorized.
| | NEWHOLD INVESTMENT CORP.
| | | | | | |
| | EVOLV TECHNOLOGIES HOLDINGS, INC. |
Dated: May 14, 2021
| | By:
| | /s/ Kevin Charlton
|
| Date: March 24, 2023 | By: | Name:
| | Kevin Charlton
/s/ Mark Donohue |
| | Title:
| | Chief Executive Officer
Mark Donohue |
| | | | |
| | By:
| | /s/ Adam Deutsch
|
| | Name:
| | Adam Deutsch
|
| | Title:
| | Chief Financial Officer |
55
EXHIBIT INDEX
Exhibit No.
| | Description
|
3.1
| | Certificate of Amendment to Certificate of Incorporation dated February 28, 2020 (incorporated by reference to Exhibit 3.3 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
3.2
| | Form of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.4 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
3.3
| | By Laws (incorporated by reference to Exhibit 3.5 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.1
| | Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.2
| | Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.2 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.3
| | Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
4.4
| | Form of Warrant Agreement between Continental Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 4.4 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.1
| | Form of Letter Agreement among the Registrant and its officers and directors and NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.1 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.2
| | Promissory Note, dated February 20, 2020, issued to NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.2 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.3
| | Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company, LLC and the Registrant (incorporated by reference to Exhibit 10.3 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.4
| | Form of Registration Rights Agreement between the Registrant and certain security holders (incorporated by reference to Exhibit 10.4 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.5
| | Subscription Agreement, dated February 28, 2020, between the Registrant and NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.5 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.6
| | Form of Private Placement Warrants Subscription Agreement between the Registrant and NewHold Industrial Technology Holdings LLC (incorporated by reference to Exhibit 10.6 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.7
| | Form of Indemnity Agreement (incorporated by reference to Exhibit 10.7 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.8
| | Form of Administrative Support Agreement by and between the Registrant and NewHold Enterprises (Management) LLC (incorporated by reference to Exhibit 10.8 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
10.9
| | Form of Subscription Agreement by and among the Registrant, NewHold Industrial Technology Holdings LLC and each of the Anchor Investors (incorporated by reference to Exhibit 10.9 filed with the Form S-1/A filed by the Registrant on July 23, 2020).
|
24.1*
| | Power of Attorney (included on the signature pages herein).
|
31.1*
| | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
| | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1*
| | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2*
| | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
56
Exhibit No.
| | Description
|
101.INS
| | XBRL Instance Document
|
101.SCH
| | XBRL Taxonomy Extension Schema Document
|
101.CAL
| | XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
| | XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
| | XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
| | XBRL Taxonomy Extension Presentation Linkbase Document
|
57
NEWHOLD INVESTMENT CORP.
INDEX TO FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
NewHold Investment Corp.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of NewHold Investment Corp. (the “Company”) as of December 31, 2020, the related statements of operations, changes in stockholders’ equity and cash flows for the period from January 24, 2020 (inception) through December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the period from January 24, 2020 (inception) through December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Restatement of Financial Statements
As discussed in Note 2 to the financial statements, the Securities and Exchange Commission issued a public statement entitled Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “Public Statement”) on April 12, 2021, which discusses the accounting for certain warrants as liabilities. The Company previously accounted for its warrants as equity instruments. Management evaluated its warrants against the Public Statement, and determined that the warrants should be accounted for as liabilities. Accordingly, the 2020 financial statements have been restated to correct the accounting and related disclosure for the warrants.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ WithumSmith+Brown, PC
We have served as the Company’s auditor since 2020.
New York, New York
May 14, 2021
F-2
NEWHOLD INVESTMENT CORP.
BALANCE SHEET
(As Restated)
| | December 31, 2020 |
ASSETS | | | | |
Current assets: | | | | |
Cash | | $ | 1,328,000 | |
Prepaid expenses and other assets | | | 184,000 | |
Total current assets | | | 1,512,000 | |
Cash and investments held in trust account | | | 172,579,000 | |
| | | | | |
Total assets | | $ | 174,091,000 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable and accrued liabilities | | $ | 677,000 | |
Accrued income and franchise taxes | | | 83,000 | |
Total current liabilities | | | 760,000 | |
Other liabilities: | | | | |
Warrant liability | | | 21,519,000 | |
Deferred underwriting compensation | | | 6,038,000 | |
Total liabilities | | | 28,317,000 | |
| | | | | |
Common stock subject to possible redemption; 14,077,350 shares (at approximately $10.00 per share) | | | 140,774,000 | |
| | | | | |
Commitments and contingencies | | | | |
| | | | | |
Stockholders’ equity: | | | | |
Preferred stock, $0.0001 par value; 1,000,000 authorized shares; none issued or outstanding | | | — | |
Class A common stock, $0.0001 par value; 45,000,000 authorized shares; 3,172,650 issued and outstanding (excluding 14,077,350, subject to possible redemption) | | | — | |
Class B common stock, $0.0001 par value, 5,000,000 authorized shares 4,312,500 shares issued and outstanding | | | — | |
Additional paid-in-capital | | | 16,912,000 | |
Retained earnings (accumulated deficit) | | | (11,912,000 | ) |
Total stockholders’ equity | | | 5,000,000 | |
| | | | | |
Total liabilities and stockholders’ equity | | $ | 174,091,000 | |
See accompanying notes to financial statements
F-3
NEWHOLD INVESTMENT CORP.
STATEMENT OF OPERATIONS
(As Restated)
| | For the
Period from
January 24, 2020
(inception) to
December 31, 2020 |
Revenues | | $ | — | |
General and administrative expenses | | | 1,030,000 | |
Loss from operations | | | (1,030,000 | ) |
Other income (expense) | | | | |
Income on Trust Account | | | 79,000 | |
Cost of issuance of public and private warrants | | | (390,000 | ) |
Change in fair value of warrant liability | | | (10,571,000 | ) |
Total other expense, net | | | (10,882,000 | ) |
Income before provision for income tax | | | (11,912,000 | ) |
Provision for income tax | | | — | |
Net loss | | $ | (11,912,000 | ) |
| | | | | |
Two Class Method for Per Share Information: | | | | |
| | | | | |
Weighted average Class A common shares outstanding – basic and diluted | | | 17,114,000 | |
Net income per Class A common share – basic and diluted | | $ | 0.00 | |
Weighted average Class B common shares outstanding – basic and diluted | | | 4,007,500 | |
Net loss per Class B common share – basic and diluted | | $ | (2.97 | ) |
See accompanying notes to financial statements
F-4
NEWHOLD INVESTMENT CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the period from January 24, 2020 (inception) to December 31, 2020
(As Restated)
| | Common Stock | | Additional
Paid-in
Capital | | Retained
Earnings
(Accumulated
Deficit) | | Stockholders’
Equity |
| | | Class A
Shares | | Amount | | Class B
Shares | | Amount | |
Balance, January 24, 2020, (inception) | | — | | | $ | — | | | — | | | $ | — | | $ | — | | | $ | — | | | $ | — | |
Sale of shares to Sponsor at $0.006 per share | | — | | | | — | | | 4,312,500 | | | | — | | | 25,000 | | | | — | | | | 25,000 | |
Forfeiture of 920,000 shares of Class B common stock | | — | | | | — | | | (920,000 | ) | | | — | | | — | | | | — | | | | — | |
Issuance of 920,000 shares of Class B common stock to Anchor investor | | — | | | | — | | | 920,000 | | | | — | | | 5,000 | | | | — | | | | 5,000 | |
Sale of Units to the public at $10.00 per Unit | | 17,250,000 | | | | 2,000 | | | — | | | | — | | | 172,498,000 | | | | — | | | | 172,500,000 | |
Underwriters’ discount and offering expenses | | — | | | | — | | | — | | | | — | | | (9,596,000 | ) | | | — | | | | (9,596,000 | ) |
Sale of 5,700,000 Private Placement Warrants at $1.00 per warrant, at fair value, $0.77 | | — | | | | — | | | — | | | | — | | | 4,364,000 | | | | — | | | | 4,364,000 | |
Cash received in excess of fair value of warrants | | — | | | | — | | | — | | | | — | | | 1,336,000 | | | | — | | | | 1,336,000 | |
Initial classification of warrant liability | | — | | | | — | | | — | | | | — | | | (10,948,000 | ) | | | — | | | | (10,948,000 | ) |
Class A common stock subject to possible redemption | | (14,077,350 | ) | | | (2,000 | ) | | — | | | | — | | | (140,772,000 | ) | | | — | | | | (140,774,000 | ) |
Net loss | | — | | | | — | | | — | | | | — | | | — | | | | (11,912,000 | ) | | | (11,912,000 | ) |
Balance, December 31, 2020 | | 3,172,650 | | | $ | — | | | 4,312,500 | | | $ | — | | $ | 16,912,000 | | | $ | (11,912,000 | ) | | $ | 5,000,000 | |
See accompanying notes to financial statements
F-5
NEWHOLD INVESTMENT CORP.
STATEMENT OF CASH FLOWS
(As Restated)
| | For the
period from
January 24,
2020
(date of inception)
to December 31,
2020 |
Cash flows from operating activities: | | | | |
Net loss | | $ | (11,912,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Income earned on the Trust Account | | | (79,000 | ) |
Cost of warrant issuance included in financing activities | | | (390,000 | ) |
Change in fair value of warrant liability | | | (10,571,000 | ) |
Changes in operating assets and liabilities: | | | | |
Increase in prepaid expenses and other assets | | | (184,000 | ) |
Increase in accounts payable and accrued liabilities | | | 677,000 | |
Increase in accrued income and franchise taxes and rounding | | | 83,000 | |
Net cash used in operating activities | | | (454,000 | ) |
| | | | | |
Cash flows from investing activities: Cash deposited in Trust Account | | | (172,500,000 | ) |
| | | | | |
Cash flows from financing activities: | | | | |
Proceeds from sale of stock to Sponsor and Anchor Investor | | | 30,000 | |
Proceeds from Note payable to Sponsor | | | 47,000 | |
Proceeds from sale of Public Offering Units | | | 172,500,000 | |
Proceeds from sale of Private Placement Warrants | | | 5,700,000 | |
Payment of underwriting discounts | | | (3,450,000 | ) |
Payment of offering costs | | | (498,000 | ) |
Payment of Note payable to Sponsor | | | (47,000 | ) |
Net cash provided by financing activities | | | 174,282,000 | |
| | | | | |
Net increase in cash | | | 1,328,000 | |
Cash at beginning of period | | | — | |
Cash at end of period | | $ | 1,328,000 | |
| | | | | |
Supplemental disclosure of non-cash financing activities: | | | | |
Deferred underwriting compensation | | $ | 6,038,000 | |
Class A common stock subject to possible redemption – initial value | | $ | 152,368,000 | |
Initial classification of warrant liability | | $ | 10,948,000 | |
Change in value of Class A common stock subject to redemption | | $ | (11,594,000 | ) |
See accompanying notes to financial statements
F-6
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Organization and General:
NewHold Investment Corp. (the “Company”) was incorporated in Delaware on January 24, 2020 as NewHold Industrial Corp. and on February 14, 2020 changed its name to NewHold Investment Corp. The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (a “Business Combination”). The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act,” as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
At December 31, 2020, the Company had not commenced any operations. All activity for the period from January 24, 2020 (inception) to December 31, 2020 relates to the Company’s formation and the initial public offering (“Public Offering”) described below, and subsequent to the Public Offering, searching for a potential business combination. The Company will not generate any operating revenues until after completion of its initial Business Combination, at the earliest. The Company expects to generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the Public Offering.
The Company has selected December 31st as its fiscal year end.
Sponsor and Financing:
The Company’s sponsor is NewHold Industrial Technology Holdings LLC, a Delaware limited liability company (the “Sponsor”). The registration statement for the Public Offering (as described in Note 3) was declared effective by the United States Securities and Exchange Commission (the “SEC”) on July 30, 2020. The Company intends to finance a Business Combination with proceeds from the $172,500,000 Public Offering (Note 3) and a $5,700,000 Private Placement (as defined in Note 4), net of expenses. Upon the closing of the Public Offering and the Private Placement, $172,500,000 was deposited in a trust account (the “Trust Account”).
The Trust Account:
The funds in the Trust Account are to be invested only in U.S. government treasury bills with a maturity of one hundred and eighty five (185) days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940 which invest only in direct U.S. government obligations. Funds will remain in the Trust Account until the earlier of (i) the consummation of its initial Business Combination or (ii) the distribution of the Trust Account as described below. The remaining funds outside the Trust Account may be used to pay for business, legal and accounting due diligence on prospective acquisition targets and continuing general and administrative expenses.
The Company’s amended and restated certificate of incorporation provides that, other than the withdrawal of interest to pay tax obligations and up to $250,000 per year for working capital purposes, if any, (less up to $100,000 of interest to pay dissolution expenses), none of the funds held in the Trust Account will be released until the earliest of: (a) the completion of the initial Business Combination, (b) the redemption of any public shares properly submitted in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation (i) to modify the substance or timing of the ability of holders of the public shares to seek redemption in connection with our initial business combination or the Company’s obligation to redeem 100% of the public shares if the Company does not complete the initial Business Combination within 24 months from the closing of the Public Offering or (ii) with respect to any other provision relating to stockholders’ rights or pre-Business Combination activity, and (c) the redemption of the public shares if the Company is unable to complete the initial Business Combination within 24 months from the closing of the Public Offering, subject to applicable law. The proceeds deposited in the Trust Account could become subject to the claims of creditors, if any, which could have priority over the claims of the Company’s public stockholders.
F-7
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS (cont.)
Business Combination:
The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Public Offering, although substantially all of the net proceeds of the Public Offering are intended to be generally applied toward consummating a Business Combination with a Target Business. As used herein, “Target Business” is one or more target businesses that together have a fair market value equal to at least 80% of the balance in the Trust Account (less deferred underwriting commissions and any taxes payable on interest earned) at the time of signing a definitive agreement in connection with the Company’s initial Business Combination. There is no assurance that the Company will be able to successfully effect a Business Combination.
The Company, after signing a definitive agreement for a Business Combination, will either (i) seek stockholder approval of the Business Combination at a meeting called for such purpose in connection with which stockholders may seek to redeem their shares, regardless of whether they vote for or against the Business Combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including interest but less taxes payable and amounts released for working capital, or (ii) provide stockholders with the opportunity to have their shares redeemed by the Company by means of a tender offer (and thereby avoid the need for a stockholder vote) for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including interest but less taxes payable and amounts released to the Company for working capital. The decision as to whether the Company will seek stockholder approval of the Business Combination or will allow stockholders to sell their shares in a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would otherwise require the Company to seek stockholder approval unless a vote is required by the rules of the Nasdaq Capital Market. If the Company seeks stockholder approval, it will complete its Business Combination only if a majority of the outstanding shares of Class A and Class B common stock voted are voted in favor of the Business Combination. However, in no event will the Company redeem its public shares in an amount that would cause its net tangible assets to be less than $5,000,001 upon consummation of a Business Combination. In such case, the Company would not proceed with the redemption of its public shares and the related Business Combination, and instead may search for an alternate Business Combination.
If the Company holds a stockholder vote or there is a tender offer for shares in connection with a Business Combination, a public stockholder will have the right to redeem its shares for an amount in cash equal to its pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the initial Business Combination, including interest but less taxes payable and amounts released to the Company for working capital. As a result, such shares of Class A common stock will be recorded at redemption amount and classified as temporary equity upon the completion of the Public Offering, in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 480, “Distinguishing Liabilities from Equity.” In August 2020, the Company deposited an aggregate of $172,500,000 from the proceeds of the Public Offering, including the underwriters’ exercise of their overallotment option and the sale of $5,700,000 for the Private Placement Warrants, net of expenses.
The Company will have 24 months (until August 4, 2022) from the closing date of the Public Offering to complete its initial Business Combination. If the Company does not complete a Business Combination within this period of time, it shall (i) cease all operations except for the purposes of winding up; (ii) as promptly as reasonably possible, but not more than ten business days thereafter subject to lawfully available funds therefor, redeem 100% of the public shares of Class A common stock for a per share pro rata portion of the Trust Account, including interest, but less taxes payable and amounts released for working capital (less up to $100,000 of such net interest to pay dissolution expenses) and (iii) as promptly as possible following such redemption, dissolve and liquidate the
F-8
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS (cont.)
balance of the Company’s net assets to its creditors and remaining stockholders, as part of its plan of dissolution and liquidation. The initial stockholders have entered into letter agreements with us, pursuant to which they have waived their rights to participate in any redemption with respect to their initial shares; however, if the initial stockholders or any of the Company’s officers, directors or affiliates acquire shares of Class A common stock in or after the Public Offering, they will be entitled to a pro rata share of the Trust Account upon the Company’s redemption or liquidation in the event the Company does not complete a Business Combination within 24 months from the closing of the Public Offering.
In the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the price per Unit in the Public Offering.
NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company previously accounted for its outstanding public and private warrants as components of equity instead of as derivative liabilities. The warrant agreement governing the warrants includes a provision that provides for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant.
Upon review of the “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs)” promulgated by the SEC on April 12, 2021, the Company’s management further evaluated the warrants under Accounting Standards Codification (“ASC”) Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Section 815-40-15 addresses equity versus liability treatment and classification of equity-linked financial instruments, including warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed to the issuer’s common stock. Under ASC Section 815-40-15, a warrant is not indexed to the issuer’s common stock if the terms of the warrant require an adjustment to the exercise price upon a specified event and that event is not an input to the fair value of the warrant. An instrument would be considered indexed to an entity’s own stock if its settlement amount were equal the difference between the fair value of a fixed number of the entity’s equity shares and a fixed monetary amount or an instrument that includes variables that would be inputs to the fair value of a fixed-for-fixed forward or option on equity shares. Based on management’s evaluation, the Company’s audit committee, in consultation with management, concluded that the Company’s warrants are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40-15 because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares.
As a result of the above, the Company is reclassifying the warrants as derivative liabilities in its previously issued financial statements. Under this accounting treatment, the Company is required to measure the fair value of the warrants at the end of each reporting period and recognize changes in the fair value from the prior period in the Company’s operating results for the current period. The financial statements as of and for the periods ended September 30, 2020 included in the Company’s Form 10-Q for September 30, 2020 are hereby similarly restated (below) without the filing of an amended Form 10-Q or amended Forms 8-K as permitted by guidance published by the SEC.
In addition, the impact to the balance sheet as of August 4, 2020 prepared in connection with the Public Offering and filed in a current report on Form 8-K with the SEC on August 10, 2020, pro forma to reflect the underwriters’ exercise in full of their overallotment option (the “Form 8-K) related to the impact of accounting for warrants as liabilities at fair value resulted in approximately a $10,948,000 million increase to the warrant liabilities line item at August 4, 2020 and an offsetting decrease to the Class A common stock subject to redemption. There is no change to total stockholders’ equity at any reported balance sheet date. In addition, the Company has recorded approximately $390,000 of costs to the statement of operations at inception of the warrants to reflect approximately $390,000 of warrant issuance costs.
F-9
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (cont.)
The Company’s accounting for the warrants as components of equity instead of as derivative liabilities did not have any effect on the Company’s previously reported operating expenses, cash flows, cash or total stockholders’ equity.
| | As Previously
Reported | | Adjustments | | As Restated |
December 31, 2020 | | | | | | | | | | | | |
Balance sheet at December 31, 2020 (audited): | | | | | | | | | | | | |
Warrant Liability | | $ | — | | | $ | 10,948,000 | | | $ | 21,519,000 | |
| | | | | | | | 10,571,000 | | | | | |
Class A common stock subject to possible redemption | | | 162,293,000 | | | | (10,948,000 | ) | | | 140,774,000 | |
| | | | | | | | (10,571,000 | ) | | | | |
Additional paid-in capital | | | 5,951,000 | | | | 390,000 | | | | 16,912,000 | |
| | | | | | | | 10,571,000 | | | | | |
Retained earnings (accumulated deficit) | | | (951,000 | ) | | | (390,000 | ) | | | (11,912,000 | ) |
| | | | | | | | (10,571,000 | ) | | | | |
| | | | | | | | | | | | | |
Statement of Operations for the Period from January 24,
2020 (inception) to December 31, 2020 (audited) | |
Other expense – Costs of issuance of warrants | | | — | | | | (390,000 | ) | | | (390,000 | ) |
Other expense – Change in value of warrant liability | | | — | | | | (10,571,000 | ) | | | (10,571,000 | ) |
Total other income (expense) | | | 79,000 | | | | (390,000 | ) | | | (10,882,000 | ) |
| | | | | | | | (10,571,000 | ) | | | | |
Net income (loss) | | | (951,000 | ) | | | (390,000 | ) | | | (11,912,000 | ) |
| | | | | | | | (10,571,000 | ) | | | | |
Net income (loss) per Class B common share, basic and diluted | | | (0.24 | ) | | | (2.73 | ) | | | (2.97 | ) |
| | | | | | | | | | | | | |
Statement of Cash Flows for the Period from January 24,
2020 (inception) to December 31, 2020 (audited) | |
Cost of warrant issuance included in financing activities | | | — | | | | (390,000 | ) | | | (390,000 | ) |
Change in fair value of warrant liability | | | — | | | | (10,571,000 | ) | | | (10,571,000 | ) |
| | As Previously
Reported | | Adjustments | | As Restated |
September 30, 2020: | | | | | | | | | | | | |
Balance sheet at September 30, 2020 (unaudited): | | | | | | | | | | | | |
Warrant Liability | | $ | — | | | $ | 10,948,000 | | | $ | 9,468,000 | |
| | | | | | | | (1,480,000 | ) | | | | |
Class A common stock subject to possible redemption | | | 163,128,000 | | | | 9,468,000 | | | | 153,660,000 | |
Additional paid-in capital | | | 5,121,000 | | | | 390,000 | | | | 4,031,000 | |
| | | | | | | | (1,480,000 | ) | | | | |
Retained earnings (accumulated deficit) | | | (2,000 | ) | | | (390,000 | ) | | | 969,000 | |
| | | | | | | | 1,480,000 | | | | | |
| | | | | | | | | | | | | |
Statement of Operations for the Three months ended
September 30, 2020 (unaudited) | |
Other income – Change in value of warrant liability | | | — | | | | 1,480,000 | | | | 1,480,000 | |
Other income – Costs of issuance of warrants | | | — | | | | (390,000 | ) | | | (390,000 | ) |
Net income (loss) | | | (119,000 | ) | | | 1,090,000 | | | | 971,000 | |
Net income (loss) per Class B common share, basic
and diluted | | | (0.03 | ) | | | 0.26 | | | | 0.23 | |
F-10
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (cont.)
| | As Previously
Reported | | Adjustments | | As Restated |
Statement of Operations for the Period from January 24,
2020 (inception) to September 30, 2020 (unaudited) | |
Other income – Change in value of warrant liability | | — | | | 1,480,000 | | | 1,480,000 | |
Other income – Costs of issuance of warrants | | — | | | (390,000 | ) | | (390,000 | ) |
Other income (expense) | | 26,000 | | | 1,090,000 | | | 1,116,000 | |
Net income (loss) | | (121,000 | ) | | 1,480,000 | | | 969,000 | |
| | | | | | (390,000 | ) | | | |
Net income (loss) per Class B common share-basic and diluted | | (0.03 | ) | | 0.25 | | | 0.22 | |
| | |
Statement of Cash Flows for the Period from January 24,
2020 (inception) to September 30, 2020 and for the
Three months ended September 30, 2020 | |
Cost of warrant issuance included in financing
activities | | — | | | (390,000 | ) | | (390,000 | ) |
Change in fair value of warrant liability | | — | | | (1,480,000 | ) | | (1,480,000 | ) |
| | |
Statement of Cash Flows for the Three months ended
September 30, 2020 | |
Cost of warrant issuance included in financing
activities | | — | | | (390,000 | ) | | (390,000 | ) |
Change in fair value of warrant liability | | — | | | (1,480,000 | ) | | (1,480,000 | ) |
Net income (loss) available to each class of common stockholders is as follows for the three months ended September 30, 2020 and for the period from January 24, 2020 (date of inception) to September 30, 2020, as restated:
| | Three months
Ended
September 30,
2020
(As Restated) | | For the
Period From
January 24,
2020 (date of
inception) to
September 30,
2020
(As Restated) |
Net income available to Class A common stockholders: | | | | | | | | |
Interest income | | $ | 26,000 | | | $ | 26,000 | |
Less: Income and franchise taxes | | | (26,000 | ) | | | (26,000 | ) |
Net income attributable to Class A common stockholders | | $ | — | | | $ | — | |
| | | | | | | | | |
Net income available to Class B common stockholders: | | | | | | | | |
Net loss | | $ | (119,000 | ) | | $ | (121,000 | ) |
Add: Change in warrant liability | | | 1,480,000 | | | | 1,480,000 | |
Less: Costs of warrant issuance | | | — | | | | (390,000 | ) |
Less: amount attributable to Class A common stockholders | | | — | | | | — | |
Net (loss) attributable to Class B common stockholders | | $ | 1,361,000 | | | $ | 969,000 | |
December31, 2020 — The following table presents information about the Company’s warrant liabilities that are measured at fair value on a recurring basis at December 31, 2020 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value.
F-11
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (cont.)
Description | | December 31,
2020 | | Quoted Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Other
Unobservable
Inputs
(Level 3) |
Warrant Liabilities: | | | | | | | | | | | | |
Public Warrants | | $ | 12,851,000 | | $ | — | | $ | — | | $ | 12,851,000 |
Private Placement Warrants | | $ | 8,668,000 | | $ | — | | $ | — | | $ | 8,668,000 |
Warrant liability at December 31, 2020 | | $ | 21,519,000 | | | | | | | | $ | 21,519,000 |
September30, 2020 — The following table presents information about the Company’s warrant liabilities that are measured at fair value on a recurring basis at September 30, 2020 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value.
Description | | September 30,
2020 | | Quoted Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Other
Unobservable
Inputs
(Level 3) |
Warrant Liabilities: | | | | | | | | | | | | |
Public Warrants | | $ | 5,705,000 | | $ | — | | $ | — | | $ | 5,705,000 |
Private Placement Warrants | | $ | 3,763,000 | | $ | — | | $ | — | | $ | 3,763,000 |
Warrant liability at September 30, 2020 | | $ | 9,468,000 | | | | | | | | $ | 9,468,000 |
The Company utilizes an independent valuation consultant that uses a Monte Carlo simulation model to value the warrants at each reporting period, with changes in fair value recognized in the statement of operations. The estimated fair value of the warrant liability is determined using Level 3 inputs. Inherent in a binomial options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.
The warrant liabilities are not subject to qualified hedge accounting.
There were no transfers between Levels 1, 2 or 3 during the period ended December 31, 2020.
The following table provides quantitative information regarding Level 3 fair value measurements:
December31, 2020:
Private Placement Warrants | | At
August 4
2020
(Initial
Measurement) | | As of
December 31,
2020 |
Stock price | | $ | 9.62 | | | $ | 10.01 | |
Strike price | | $ | 11.50 | | | $ | 11.50 | |
Term (in years) | | | 5.0 | | | | 5.0 | |
Volatility | | | 14.36 | % | | | 20.66 | % |
Risk-free rate | | | 0.275 | % | | | 0.469 | % |
Fair value of private placement warrants | | $ | 0.77 | | | $ | 1.52 | |
F-12
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (cont.)
Public Warrants | | At
August 4
2020
(Initial
Measurement) | | As of
December 31,
2020 |
Stock price | | $ | 9.63 | | | $ | 10.01 | |
Strike price | | $ | 11.50 | | | $ | 11.50 | |
Term (in years) | | | 5.0 | | | | 5.0 | |
Volatility | | | 15.0 | % | | | 15.0 | % |
Risk-free rate | | | 0.275 | % | | | 0.469 | % |
Fair value of public warrants | | $ | 0.76 | | | $ | 1.49 | |
The following table presents the changes in the fair value of warrant liabilities at December 31, 2020, as restated:
| | Public | | Private Placement | | Warrant Liabilities |
Initial measurement on August 4, 2020, pro forma for overallotment | | $ | 6,584,000 | | $ | 4,364,000 | | $ | 10,948,000 |
Change in valuation inputs or other assumptions | | | 6,267,000 | | | 4,304,000 | | | 10,571,000 |
Fair value as of December 31, 2020 | | $ | 12,851,000 | | $ | 8,668,000 | | $ | 21,519,000 |
September30, 2020:
Private Placement Warrants | | At
August 4
2020
(Initial
Measurement) | | As of
September 30,
2020 |
Stock price | | $ | 9.63 | | | $ | 9.75 | |
Strike price | | $ | 11.50 | | | $ | 11.50 | |
Term (in years) | | | 5.0 | | | | 5.0 | |
Volatility – post announcement | | | 15.0 | % | | | 12.68 | % |
Risk-free rate | | | 0.275 | % | | | .351 | % |
Fair value of private placement warrants | | $ | 0.77 | | | $ | 0.67 | |
Public Warrants | | At
August 4
2020
(Initial Measurement) | | As of
September 30,
2020 |
Stock price | | $ | 9.63 | | | $ | 9.76 | |
Strike price | | $ | 11.50 | | | $ | 11.50 | |
Term (in years) | | | 5.0 | | | | 5.0 | |
Volatility – post announcement | | | 15.0 | % | | | 15.0 | % |
Risk-free rate | | | 0.275 | % | | | .351 | % |
Fair value of private placement warrants | | $ | 0.77 | | | $ | 0.66 | |
F-13
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (cont.)
The following table presents the changes in the fair value of warrant liabilities at September 30, 2020, as restated:
| | Public | | Private Placement | | Warrant Liabilities |
Initial measurement on August 4, 2020, pro forma for overallotment | | $ | 6,584,000 | | | $ | 4,364,000 | | | $ | 10,948,000 | |
Change in valuation inputs or other assumptions | | | (879,000 | ) | | | (601,000 | ) | | | (1,480,000 | ) |
Fair value as of September 30, 2020 | | $ | 5,705,000 | | | $ | 3,763,000 | | | $ | 9,468,000 | |
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”).
In connection with the Company’s assessment of going concern considerations in accordance with ASU 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” as of December 31, 2020, management has determined that the Company’s current liquidity is sufficient to fund the working capital needs of the Company until at least one year from the date of issuance of the audited financial statements.
All dollar amounts are rounded to the nearest thousand dollars.
Emerging Growth Company
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Cash and Cash Equivalents:
The Company considers all highly liquid instruments with original maturities of three months or less when acquired, to be cash equivalents. The Company had no cash equivalents at December 31, 2020.
Deferred Offering Costs:
The Company complies with the requirements of the FASB ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “ExpensesSecurities Exchange Act of Offering.” Costs incurred in connection with preparation for the Offering (approximately $9,986,000) including underwriters’ discount paid and deferred of approximately $9,488,000. Such costs were allocated among the equity and warrant liability components and approximately $9,596,0001934, this report has been charged to equity forsigned below by the equity components and approximately $390,000 has been charged to other expense for the warrant liability components upon completionfollowing persons on behalf of the Public Offering.
F-14
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Common Stock Subject to Possible Redemption:
As discussed in Note 3, all of the 17,250,000 public shares sold as part of Unitsregistrant in the Public Offering contain a redemption feature which allows for the redemption of public shares if the Company holds a stockholder vote or there is a tender offer for shares in connection with a Business Combination. In accordance with FASB ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemptioncapacities and liquidation of all of the entity’s equity instruments, are excluded from the provisions of FASB ASC 480. Although the Company did not specify a maximum redemption threshold, its charter provides that in no event will it redeem its public shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001 upon the closing of a Business Combination.
The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of the securities at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by adjustments to additional paid-in capital. Accordingly, at December 31, 2020, 14,077,350 of the 17,250,000 Class A common shares were classified outside of permanent equity.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. The Company has not considered the effect of the warrants sold in the Public Offering and Private Placement to purchase an aggregate of 14,325,000 shares of Class A common stock in the calculation of diluted income (loss) per share, since their inclusion would be anti-dilutive under the treasury stock method. As a result, diluted income (loss) per common share is the same as basic loss per common share for the period.
The Company’s statement of operations includes a presentation of income (loss) per share for common stock subject to redemption in a manner similar to the two-class method of income (loss) per share. Net income (loss) per share, basic and diluted for Class A common stock is calculated by dividing the interest income earned on the funds in the Trust Account, net of income tax expense and franchise tax expense, by the weighted average number of shares of Class A common stock outstanding since their original issuance. Net income (loss) per common share, basic and diluted, for shares of Class B common stock is calculated by dividing the net income (loss), less income attributable to Class A common stock, by the weighted average number of shares of Class B common stock outstanding for the period. Net income (loss) available to each class of common stockholders is as follows for the period from January 24, 2020 (inception) to December 31, 2020, as restated:
| | For the
Period from
January 24,
2020 (date
of inception)
to December 31,
2020
(As restated) |
Net income available to Class A common stockholders: | | | | |
Income on trust account | | $ | 79,000 | |
Less: Income and franchise taxes to the extent of income | | | (79,000 | ) |
Net income attributable to Class A common stockholders | | $ | — | |
Net income available to Class B common stockholders: | | | | |
Net loss | | $ | (11,912,000 | ) |
Less: amount attributable to Class A common stockholders | | | — | |
Net (loss) attributable to Class B common stockholders | | $ | (11,912,000 | ) |
F-15
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Financial Instruments:
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the financial statements primarily due to their short-term nature.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed as of December 31, 2020, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Income Taxes:
The Company follows the asset and liability method of accounting for income taxes under FASB ASC, 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company’s general and administrative costs are generally considered start-up costs and are not currently deductible. During the period from January 24, 2020 (inception) to December 31, 2020, the Company recorded no current income tax expense. The Company’s effective tax rate for the period from January 24, 2020 (inception) to December 31, 2020 was approximately 0.09% which differs from the expected income tax rate primarily due to the approximately $947,000 of start-up costs (discussed above). At December 31, 2020, the Company has a deferred tax asset of approximately $200,000 and has recorded a valuation allowance of $200,000 because its realization is uncertain.
FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2020. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at December 31, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
| | | | | | | | |
| Signature | Title | Date |
| /s/ Peter George | President, Chief Executive Officer and Director (Principal Executive Officer) | March 24, 2023 |
| Peter George | | |
| | |
| /s/ Mark Donohue | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 24, 2023 |
| Mark Donohue | | |
| | |
| /s/ Alan Cohen | Chairman of the Board | March 24, 2023 |
| Alan Cohen | | |
| | |
| /s/ Kevin Charlton | Director | March 24, 2023 |
| Kevin Charlton | | |
| | |
| /s/ Michael Ellenbogen | Director | March 24, 2023 |
| Michael Ellenbogen | | |
| | |
| /s/ Neil Glat | Director | March 24, 2023 |
| Neil Glat | | |
| | |
| /s/ Merline Saintil | Director | March 24, 2023 |
| Merline Saintil | | |
| | |
| /s/ John Kedzierski | Director | March 24, 2023 |
| John Kedzierski | | |
| | |
| /s/ Kimberly Sheehy | Director | March 24, 2023 |
| Kimberly Sheehy | | |
| | |
| /s/ Mark Sullivan | Director | March 24, 2023 |
| Mark Sullivan | | |
| | |
| /s/ Bilal Zuberi | Director | March 24, 2023 |
| Bilal Zuberi | | |
F-16
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Warrant Liability
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. Costs of issuing warrants are charged to operations.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. Costs associated with issuing the warrants accounted for as liabilities are charged to operations when the warrants are issued. The fair value of the warrants was estimated using a Monte Carlo simulation approach.
Recent Accounting Pronouncements:
Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.
Subsequent Events:
Management has evaluated subsequent events occurring after the date of the financial statements up to May 14, 2021, the date the financial statements were available to be issued to determine if there were any such events or transactions that require potential adjustment to or disclosure in the financial statements. The Company has concluded that all such events that would require adjustment or disclosure have been recognized or disclosed. See Note 8.
NOTE 4 — PUBLIC OFFERING
In August 2020, the Company closed on the Public Offering, including the full exercise of the underwriters’ overallotment option, of an aggregate 17,250,000 units at a price of $10.00 per unit (the “Units”). Each Unit consists of one share of the Company’s Class A common stock, $0.0001 par value and one-half of one redeemable warrant (the “Warrants”). Each whole Warrant offered in the Public Offering is exercisable to purchase one share of our Class A common stock for $11.50 per share. Only whole Warrants may be exercised. Under the terms of the warrant agreement, the Company has agreed to use its best efforts to file a new registration statement under the Securities Act, following the completion of the Company’s initial Business Combination. No fractional shares will be issued upon exercise of the Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share, the Company will, upon exercise, round down to the nearest whole number the number of shares of Class A common stock to be issued to the Warrant holder. Each Warrant will become exercisable on the later of 30 days after the completion of the Company’s initial Business Combination or 12 months from the closing of the Public Offering and will expire five years after the completion of the Company’s initial Business Combination or earlier upon redemption or liquidation. However, if the Company does not complete its initial Business Combination on or prior to the 24-month period allotted to complete the Business Combination, the Warrants will expire at the end of such period. If the Company is unable to deliver registered shares of Class A common stock to the holder upon exercise of a Warrant during the exercise period, there will be no net cash settlement of these Warrants and the Warrants will expire worthless, unless they may be exercised on a cashless basis in the circumstances described
130
F-17
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 4 — PUBLIC OFFERING (cont.)
in the warrant agreement. Once the Warrants become exercisable, the Company may redeem the outstanding Warrants in whole and not in part at a price of $0.01 per Warrant upon a minimum of 30 days’ prior written notice of redemption, only in the event that the last sale price of the Company’s shares of Class A common stock equals or exceeds $18.00 per share for any 20 trading days within the 30-trading day period ending on the third trading day before the Company sends the notice of redemption to the Warrant holders.
In addition, if the Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of its initial Business Combination at an issue price or effective issue price of less than $9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the initial stockholders or their affiliates, without taking into account any Founder Shares held by them, as applicable, prior to such issuance) (the “newly issued price”), the exercise price of the Warrants and the Private Placement Warrants (as defined below) will be adjusted (to the nearest cent) to be equal to 115% of the newly issued price.
The Company paid an underwriting discount of 2.0% of the per Unit price to the underwriters at the closing of the Public Offering (an aggregate fee of $3,450,000 including the exercise of the underwriter’s overallotment option).
In addition, the Company expects to pay an underwriting commission of 3.5% of the per Unit price to the underwriters (an aggregate of approximately $6,038,000), which commission was deposited in the Trust Account at the closing of the Public Offering and will be released to the underwriters only upon and concurrently with completion of the Company’s initial Business Combination.
NOTE 5 — RELATED PARTY TRANSACTIONS
Founder Shares
In February 2020, the Sponsor purchased 4,312,500 shares of Class B common stock (the “Founder Shares”) for $25,000, or approximately $0.006 per share. In July 2020, the Sponsor transferred an aggregate of 867,500 founder shares, including to the following persons: (i) 32,500 founder shares to each of Marc Saiontz and Suzy Taherian, two of the Company’s independent director nominees, (ii) 35,000 founder shares to each of Neil Glat and Brian Mathis, two of the Company’s independent director nominees, (iii) 40,000 founder shares to Kathleen Harris, one of the Company’s independent director nominees, (iv) 50,000 founder shares to Thomas Sullivan, one of the Company’s independent director nominees, (v) 67,500 founder shares to Adam Deutsch, the Company’s Chief Financial Officer, (vi) 100,000 founder shares to Charlie Baynes-Reid, the Company’s Chief Operating Officer, (vii) 135,000 founder shares to each of Kevin Charlton and Charles Goldman, the Company’s Chief Executive Officer and director, respectively, and (viii) 200,000 founder shares to Nick Petruska, the Company’s special advisor. Also in July 2020 the Sponsor forfeited 920,000 shares of Class B common stock and certain funds and accounts managed by Magnetar Financial LLC, UBS O’Connor LLC, and Mint Tower Capital Management B.V (collectively, the “Anchor Investor”) purchased 920,000 shares of Class B common stock from the Company for an aggregate purchase price of approximately $5,333, or approximately $0.006 per share resulting in the Company’s initial stockholders holding an aggregate of 4,312,500 Founder Shares. The Founder Shares are identical to the Class A common stock included in the Units being sold in the Public Offering except that the Founder Shares automatically convert into shares of Class A common stock at the time of the initial Business Combination and are subject to certain transfer restrictions, as described in more detail below.
The Company’s initial stockholders and Anchor Investors have agreed not to transfer, assign or sell any of its Founder Shares until the earlier of (A) one year after the completion of the Company’s initial Business Combination, or (B), subsequent to the Company’s initial Business Combination, if (x) the last sale price of the Company’s Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Company’s initial Business Combination or (y) the date on which the Company completes a liquidation, merger, stock exchange or other similar transaction after the initial Business Combination that results in all of the Company’s stockholders having the right to exchange their shares of Class A common stock for cash, securities or other property.
F-18
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 5 — RELATED PARTY TRANSACTIONS (cont.)
Private Placement Warrants
The Sponsor and the Anchor Investors purchased from the Company an aggregate of 5,700,000 warrants at a price of $1.00 per warrant, a purchase price of $5,700,000 in a private placement that occurred simultaneously with the completion of the Public Offering (the “Private Placement Warrants”), including the underwriters’ full exercise of their overallotment option. Each Private Placement Warrant entitles the holder to purchase one share of Class A common stock at $11.50 per share. The purchase price of the Private Placement Warrants was added to the proceeds from the Public Offering held in the Trust Account pending completion of the Company’s initial Business Combination. The Private Placement Warrants (including the Class A common stock issuable upon exercise of the Private Placement Warrants) are not transferable, assignable or salable until 30 days after the completion of the initial Business Combination and they will be non-redeemable so long as they are held by the Sponsor or the Anchor Investors or their permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor or the Anchor Investors or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the warrants included in the Units being sold in the Public Offering. Otherwise, the Private Placement Warrants have terms and provisions that are identical to those of the Warrants being sold as part of the Units in the Public Offering and have no net cash settlement provisions.
If the Company does not complete a Business Combination, then the proceeds from the sale of the Private Placement Warrants will be part of the liquidating distribution to the public stockholders and the Private Placement Warrants issued to the Sponsor will expire worthless.
Registration Rights
The Company’s initial stockholders and the holders of the Private Placement Warrants will be entitled to registration rights pursuant to a registration rights agreement to be signed on or before the date of the prospectus for the Public Offering. These holders will be entitled to make up to three demands, excluding short form registration demands, that the Company register such securities for sale under the Securities Act. In addition, these holders will have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. The Company will bear the expenses incurred in connection with the filing of any such registration statements. There will be no penalties associated with delays in registering the securities under the proposed registration rights agreement.
Related Party Loans
In February 2020, the Sponsor agreed to loan the Company an aggregate of $300,000 by drawdowns against the issuance of an unsecured promissory note (the “Note”) to cover expenses related to the Public Offering. The Note was non-interest bearing and payable promptly after the earlier of the date on which the Company consummates the Public Offering and the date on which the Company determines not to conduct the Public Offering. Through August 4, 2020, the Company drew down approximately $47,000 under the Note, including approximately $3,000 for costs paid directly by the Sponsor. On August 4, 2020, approximately $47,000 was outstanding under the Note which was fully repaid in August 2020.
Working Capital Loans
In order to finance transaction costs in connection with a Business Combination, the Sponsor, an affiliate of the Sponsor, or certain of the Company’s officers and directors or their affiliates may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of such Working Capital
F-19
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 5 — RELATED PARTY TRANSACTIONS (cont.)
Loans may be convertible into warrants of the post Business Combination entity. The warrants would be identical to the Private Placement Warrants. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. As of December 31, 2020, no Working Capital Loans were outstanding.
Administrative Support Agreement
The Company has agreed to pay $15,000 a month for office space, utilities and secretarial and administrative support to an affiliate of the Sponsor. Services commenced on the date the securities were first listed on the Nasdaq Capital Market and will terminate upon the earlier of the consummation by the Company of an initial Business Combination or the liquidation of the Company. During the period from January 24, 2020 (inception) through December 31, 2020, the Company has paid $75,000 for such administrative fees and no amount was payable at that date.
NOTE 6 — TRUST ACCOUNT AND FAIR VALUE MEASUREMENT
The Company complies with FASB ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
Upon the closing of the Public Offering and the Private Placement, a total of approximately $172,500,000 was deposited into the Trust Account. The proceeds in the Trust Account must be invested in either U.S. government treasury bills with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940, as amended, and that invest solely in U.S. government treasury obligations.
At December 31, 2020 the proceeds of the Trust Account were invested primarily in U.S. government treasury bills maturing in February 2021 yielding interest of approximately 0.1% per year. The Company classifies its U.S. government treasury bills and equivalent securities as held-to-maturity in accordance with FASB ASC 320, “Investments — Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity U.S. government treasury bills are recorded at amortized cost on the accompanying December 31, 2020 balance sheet and adjusted for the amortization of discounts.
The following table presents information about the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2020 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. Since all of the Company’s permitted investments at December 31, 2020 consisted of U.S. government treasury bills and money market funds that invest only in U.S. government treasury bills, fair values of its investments are determined by Level 1 inputs utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities as follows:
Description | | Carrying
value at
December 31,
2020 | | Gross
Unrealized
Holding Gains | | Quoted Price
Prices in
Active Markets
(Level 1) |
Assets: | | | | | | | | | |
Cash and money market funds | | $ | 1,000 | | $ | — | | $ | 1,000 |
U.S. government treasury bills | | | 172,578,000 | | | — | | | 172,578,000 |
Total | | $ | 172,579,000 | | $ | — | | $ | 172,579,000 |
In February 2021, new U.S. government treasury securities were purchased maturing in May 2021 and yielding interest of less than 0.1%.
F-20
NEWHOLD INVESTMENT CORP.
Notes to Financial Statements
NOTE 7 — STOCKHOLDERS’ EQUITY
Common Stock
The authorized common stock of the Company is 50,000,000 shares, including 45,000,000 shares of Class A common stock, par value, $0.0001, and 5,000,000 shares of Class B common stock, par value, $0.0001. The Company may (depending on the terms of the Business Combination) be required to increase the authorized number of shares at the same time as its stockholders vote on the Business Combination to the extent the Company seeks stockholder approval in connection with its Business Combination. Holders of the Company’s Class A and Class B common stock vote together as a single class and are entitled to one vote for each share of Class A and Class B common stock they own. At December 31, 2020, there were 4,312,500 shares of Class B common stock issued and outstanding and 3,172,650 shares of Class A common stock issued and outstanding (excluding 14,077,350 shares subject to possible redemption).
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.0001, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At December 31, 2020, there were no shares of preferred stock issued or outstanding.
NOTE 8 — COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties – COVID-19
Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company and/or a target company’s financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 9 — SUBSEQUENT EVENT – MERGER AGREEMENT AND RELATED ITEMS
Management has evaluated subsequent events occurring after the date of the financial statements but before the financial statements were available to be issued on May 14, 2021 to determine if there were any such events or transactions that require potential adjustment to or disclosure in the financial statements. The Company has concluded that all such events that would require adjustment or disclosure have been recognized or disclosed.
Merger Agreement
On March 5, 2021, NewHold Investment Corp., (“NewHold”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among NewHold, NHIC Sub Inc., a Delaware corporation and a wholly owned subsidiary of NewHold (“Merger Sub”), and Evolv Technologies, Inc. dba Evolv Technology, Inc., a Delaware corporation (“Evolv”). Pursuant to the terms of the Merger Agreement, a business combination between NewHold and Evolv will be effected through the merger of Merger Sub with and into Evolv, with Evolv surviving the merger as a wholly owned subsidiary of NewHold (the “Merger”). The Board of Directors of NewHold (the “Board”) has unanimously (i) approved and declared advisable the Merger Agreement, the Merger and the other transactions contemplated thereby and (ii) resolved to recommend approval of the Merger Agreement and related matters by the stockholders of NewHold.
Evolv is engaged in the business of providing artificial intelligence touchless security screening. Evolv is based in Waltham, Massachusetts.
More complete information about the Merger Agreement and related Support Agreement, Amended and Restated Insider Letter Agreement, form of Subscription Agreement and Stockholder Agreement are filed with the Current Report on Form 8-K filed on March 8, 2021.
F-21