Good afternoon, and welcome to the Evolv Technology Fourth Quarter Earnings Results Conference Call. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's call, Brian Norris, Vice President of Investor Relations for Evolv Technologies. Please go ahead, sir.

Thank you, Melisa, and good afternoon, everyone, and welcome to the call. I'm joined here today by Peter George, our Chief Executive Officer; and Mario Ramos, our Chief Financial Officer and Chief Risk Officer. This afternoon, after the market closed, we issued a press release announcing our fourth quarter results and our business outlook for 2022. This press release is available on major news outlets as well as on the IR section of our website. Please note that during this afternoon's call, we will be referring to an accompanying investor presentation, which can also be found on our Investor Relations website. As highlighted on Slide 2 of today's presentation, during today's call, we will make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 21E of the Securities Exchange Act of 1934 and the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events. All forward-looking statements are subject to material risks, uncertainties and assumptions, some of which are beyond our control. Actual events or financial results may differ materially from those forward-looking statements as a result of a number of risks and uncertainties, including, without limitation, the risk factors set forth from the caption Risk Factors and our prospectus filed with the SEC on September 3, 2021, and in other documents filed it or furnished to the SEC from time to time. Forward-looking statements made today represent our views as of March 14, 2022. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected on those statements will be achieved when will occur. Except as may be required by applicable law, we…

Thanks, Brian, and thank you, everyone, for joining us today. We're pleased to share the highlights of our fourth quarter and full year results as well as our strategy and goals for 2022. But before we do that, let me take a moment here on Slide 4 to remind every one of our mission, which is to democratize security, making venues, facilities and people everywhere, more secure and making the world a safer and more enjoyable place to work, learn and play. Moving to Slide 5. There are powerful secular growth trends that continue to drive the need to digitally transform facility safety and the visitor experience. The current accelerating trends in firearms ownership, pandemic awareness and anxiety are converging and driving increasing focus, visitor safety and the visitor experience. We know the public is demanding a better way to gather again. They do want to visit venues again, but they want to do it safely, safe from the threat of gun violence and safe from health risk like COVID. They want to have a frictionless and touchless venue experience and they want that experience to be personal, informed and smart. Moving to Slide 6. I believe today's imperative an urgent need is to make everyone and everywhere safer. It's our shared belief that the pandemic has forever changed the way we live, how we work and where we play, that the world has become a more unpredictable and scary place. And that with that, people have an elevated sense of anxiety about gathering again and that's not going to change anytime soon. We know that gun violence in the United States is at historic highs as evidenced by close to 700 mass shootings in 2021. I personally spend lots of time in the field listening to our customers. And…

Thank you. As Peter mentioned, we continue to benefit from strong secular growth trends. Highlighted on Slide 13, revenue in 2021 was $23.7 million, up 395% year-over-year. This reflected strong customer adoption. Revenues pro forma for a change in our revenue recognition assumptions would have been $25 million. This reflects the impact of the adjustment we had in the fourth quarter of 2021 to our stand-alone selling price assumption. That change is a result of the recent rollout of the newest Evolv Express platform and the advancements in the Evolv Cortex AI software. This change means that for accounting purposes based on ASC 606, a greater percentage of the value of our customer contracts is allocated to software versus hardware. This impacts the manner and timing of our revenue recognition for accounting purposes. Though I want to be clear, there have not been any changes to the way we market and sell our products. Have this change in revenue recognition not been made, our revenue in 2021 would have been $25 million instead of the $23.7 million we actually reported. We have included a table with more information in the appendix. We reported total recurring revenue, which reflects both subscription revenue and the recurring portion of the service revenue of $9.8 million in 2021, reflecting growth of 180% over 2020. We're also highlighting here annual recurring revenue, or ARR, which represents monthly subscription revenue and the recurring service revenue related to purchase subscriptions normalized to a 1-year period. ARR at December 31, 2021, grew to $12.9 million, up 220% over December 31, 2020. TCV, or Total Contract Value of orders booked was $53.8 million, reflecting growth of 148% year-over-year. TCV will convert to revenue as we install Evolv Express at customer sites. We no longer plan to guide to TCV,…

Thank you, Mario. At this time, we'd like to open the call up for Q&A.

And we'll first go to the line of Shaul Eyal with Cowen.

Thank you. So just to recap, what would have been the potential revenue guide, but for fiscal '22, but for the accounting adjustment that you're taking the company through?

Yes, '22, we didn't talk about an adjusted number in '22, what we said is if all of '21 had been -- had used the same SSP assumption that we used in the fourth quarter for the entirety of of 2021, our guidance would have been a revenue growth of 58%. So if you look in the appendix of the earnings deck, you can see the lower revenue number that we're talking about of $19.7 million for 2021. We didn't provide what 2022 would have been under the old assumption.

Got it. Got it. And as we think about fiscal '22 when the investment that you're putting into the company. I know typically, maybe you're not guiding towards headcount, but how should we be thinking about fiscal '22 ending from a headcount perspective give or take with some sort of a range?

We hired about 100 people in 2021. So we had a big investment in people and infrastructure during the year that we went public. Our plan for 2022 is to add about 70 to 75 more heads. So we should be close to 200 people, 250 people before -- as we exit 2022.

We'll go to Mike Latimore with Northland Capital Markets.

The diversity of bookings look great this quarter. I guess in terms of the -- just the sales environment, what are you seeing from a sales cycle standpoint, are things moving quickly, slowing relative to 6 months ago?

Yes. So I think the last time we spoke, we said that our sales cycle is contracting to about 90 days. It's still there. Two things changed for us in Q4 and in the beginning of Q1. In Q4, Omicron showed up in the middle of December. We moved from being -- having most everybody in the office to being fully remote again, and unfortunately, so did our customers. So our customers were back home. And we saw a slowdown a little bit in TCV, but mostly in the ability to deploy systems. So the sales cycle didn't change, but our customers went home and it was hard to reach them. And of course, when they got their facilities down, we couldn't install system. So we ended up deploying 136 systems in Q4, but we left about 100 systems in backlog in TCV exiting the year. So we had pretty robust bookings. It's just we couldn't get them installed. So that's one thing. The second thing we did in Q4, and this really talks to the sales cycle. We mentioned we had a significant investment in the channel in Q4, and they represented a significant portion of our business. That slowed down our sales cycle by about 30 days because we don't have direct control of the channel like we do when we work directly. So we're now planning as we go forward through that experience. We're planning on making sure instead of having 3x the pipeline to make our plan, we want to have 4x the pipeline, and we want to make sure we have an extra month to plan for because of the channel engagement part of the business. Having said that, you started out by talking about diversification we had a great quarter in K-12, in health care, in municipalities, places we weren't traditionally in and the channel helped us open up those markets. So -- it was the big investments to make in Q4, we know it's going to pay big dividends in 2022.

And I guess in a lot of those markets you just mentioned you're not really replacing a metal detector, you're kind of going in greenfield?

You bet. And so as you know, a $20 billion TAM, $18 billion is greenfield and all of these markets or places, there traditionally isn't metal detector. So 90% of our deals continue to be uncontested. When we have to compete there, it's normally a metal detector company, and we like our win rate when we have to compete with them.

Yes, yes. And then just on the accounting change, does that relate to just the purchase subscription model or the purchase subscription and product-only model?

So right. So the purchase subscription where we're selling equipment upfront to a client is the one that gets impacted by that.

And Mike, just to be super clear on this, this is us following gap. This is not about us changing rules. This is -- I mean this is us adhering to generally accepted accounting principles in the United States. And so what we are finding is that a greater percentage of our revenue is attributable to our SaaS offering, which is a great thing for a growing test business like ours. And so that's what you're seeing. This is a great thing long term.

Next, we'll go to Brian Ruttenbur with Imperial Capital.

So I want to just clarify the guidance and how you're going to report going forward. Are you still going to have -- because you mentioned or have written $29 million to $31 million in total revenue and $27 million to $28 million of that is recurring. Are you still going to have product subscription and services revenue, is there all going to be subscription and then other category?

So to be clear, Brian, it's not of that. The $27 million to $28 million annual recurring revenue is a stand-alone metric just taking annualized revenue for the last month of the year, times 12, right? So December, what we expect December subscription recurring revenue to be and annualizing that. So it's not one is the part of the other. The $29 million to $31 million represents the revenue we generate throughout the year from both product and subscription. We'll continue to do that. There is no change at this time.

Okay. That was obvious. I appreciate you pointing that out. And then you talk -- the second part of the question also on financials. You talked about the first half being weaker than the second half. Can we talk a little bit about seasonality? I think that you had an extremely strong third quarter. Is that how you see it as the peak in the third quarter and then maybe a little drop off in the fourth quarter?

Yes. I think that's probably a fair statement. We're still very early on. Obviously, we're learning about seasonality. But just by the sheer number of off days in the fourth quarter and distractions by clients because of the holidays, I wouldn't be surprised if we have a similar pattern into this year.

Okay. And then in terms of the onetime charge that was related to the write-off of the -- I guess it's the first generation Evolv system, roughly $6 million. Is that correct?

Not that big. It was $1.6 million.

$1.6 million.

It's yes, it's basically -- they're the old generation units most of whom was based in the U.S. that we proactively swapped out for clients. Part of the reason we did that is because the new units allow clients to have greater functionality on our software platform. So -- but -- and we were able to extend contracts as well. So there was a benefit to the company, but short term, it meant that we had to write off those units.

Okay. Is there any other older units that could be written off in 2022? Or is this all cleaned out?

This is cleaned out.

And Brian, you may remember that Edge product was our first generation product. It was millimeter wave, and it was a metered product, meaning you went through 1 at a time. Once we introduced Express, it was our second generation, everyone wanted to go to that. And so we've allowed them to do that. So we have no more write-offs with Edge anymore.

Yes. And Brian, just to be clear, we do still have some of those units in the field. There are about 75 units, mostly international. But again, we don't expect to be writing them off, they'll continue to operate. The U.S. is a different decision because of our platform.

And our last question is from Rob Galvin.

Rob, it's Brian Norris. You line is open, if you wanted to ask a question on the call.

Can you guys hear me?

Yes, yes.

Sorry, I think it was on mute. This is Rob Galvin on for Brad Reback. I'm just wondering if you expect to raise additional money or if you think that you can get to cash flow neutral with the -- cash flow neutral -- with the current model?

Yes, we do expect to get cash flow neutral Rob, not only do we expect to do that with the current improvement acceleration of the business. But we have a lot of flexibility to raise additional capital or slow the cash burn like the third-party financing I talked about for some clients. We're really kind of at the early stage of evaluating that. Obviously, that might preserve cash for us to do even more things. But the bottom line is we don't expect to raise any additional capital.

Rob, any follow-up question? Or are you good?

No, that was it.

Okay. Terrific. I'm going to turn it over to Peter George, our CEO for some closing remarks.

All right. We love -- we want to thank everyone for joining us today. We're really excited about our performance in 2021 and very enthusiastic about the future of the company. So thank you, everyone, for joining us. We look forward to the next earnings call. Thanks, everyone.

Bye-bye.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing Service. You may now disconnect.