Additional information regarding the Merger Agreement appears in Note 3 of our condensed consolidated financial statements in Item 1. Part I of this Report.
Additional information regarding COVID-19 risks appear in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2021.
Key Factors Affecting Our Operating Results
Adoption of our Security Screening Products
Pricing, Product Cost and Margins
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.
Additional information regarding Contingently Issuable Common Stock vesting provisions and accounting treatment appear in Note 2 of our consolidated financial statements for the year ended December 31, 2021 of our Annual Report on Form 10-K.
Components of Results of Operations
obligations are classified as a single category of subscription revenue in our condensed consolidated statements of operations and comprehensive loss.
We recognize cost of revenue in the same manner that the related revenue is recognized.
Cost of product revenue consists primarily of costs paid to third party manufacturers, labor costs, shipping costs, amortization expense related to internal-use software, and stock-based compensation expense.
Cost of subscription revenue consists primarily of labor costs, shipping costs, amortization expense related to internal-use software, depreciation expense related to leased units, and stock-based compensation expense.
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;
• 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
Loss From Impairment of Property and Equipment
Interest expense includes cash interest paid on our long-term debt and amortization of deferred financing fees and costs.
Interest income relates to interest earned on our lease receivables for our Evolv Express units.
Change in Fair Value of Derivative Liability
Change in Fair Value of Contingent Earn-out Liability
Change in Fair Value of Contingently Issuable Common Stock Liability
Change in Fair Value of Public Warrant Liability
Change in Fair Value of Common Stock Warrant Liability
Comparison of the Three Months Ended March 31, 2022 and 2021
The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021 (in thousands):
Revenue, Cost of Revenue and Gross Profit
The increase in service revenue is primarily due to the increased number of purchase subscription units deployed in the preceding twelve months and increased installation and training related to the Evolv Express units. The decrease in gross profit is due the increase in field services costs associated with the Evolv Express units.
Loss From Impairment of Property and Equipment
Interest income was $0.2 million for the three months ended March 31, 2022. There was no interest income for the three months ended March 31, 2021. This related to the interest earned our lease receivables for our Evolv Express units.
Change in Fair Value of Derivative Liability
Change in Fair Value of Contingent Earn-out Liability
issuance through period end is due to mark to market fluctuations driven by a decrease in stock price, resulting in income recognized in other income (expense), net in our condensed consolidated statements of operations and comprehensive loss.
Change in Fair Value of Contingently Issuable Common Stock Liability
Change in Fair Value of Public Warrant Liability
Change in Fair Value of Common Stock Warrant Liability
PIPE Investment and Proceeds from the closing of the Merger
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 in connection with the closing of the Merger.
Material Cash Requirements for Known Contractual and Other Obligations
Changes in operating assets and liabilities (16,471) (4,259) Net cash used in operating activities $ (35,867) $ (12,038)
The $16.5 million change in operating assets and liabilities for the three months ended March 31, 2022 are primarily related to the following:
? $7.0 million increase in inventory primarily due to increased production of
units to meet customer demand;
$5.3 million increase in prepaid expenses and other current assets primarily
? due to an increase in prepaid deposits related to orders placed for Express
? $2.1 million increase in accounts receivable primarily due to higher sales
driven by an increase in customers and the timing of billings to customers;
$2.1 million decrease in accrued expenses and other current liabilities
? primarily due to the payment of 2021 compensation, bonuses and commissions paid
during the three months ended March 31, 2022;
? $1.9 million decrease in accounts payable due to the timing of invoicing and
? $0.5 million decrease in deferred rent due to the write-off of our deferred
rent balances upon the adoption of the new lease standard;
? $0.4 million increase in commission assets primarily due to a continued shift
? $0.2 million decrease in operating lease liabilities due to the payments made
on our operating lease, partially offset by
? $2.8 million increase in deferred revenue primarily due to an increase in
The $4.3 million change in operating assets and liabilities for the three months ended March 31, 2021 are primarily related to the following:
? $4.1 million increase in prepaid expenses and other current assets primarily
due to prepaid subscriptions and insurance;
? $1.0 million increase in commission assets and deferred revenue primarily due
to a continued shift towards a subscription-based model;
? $0.9 million increase in accounts receivable primarily due to higher sales
driven by an increase in customers and the timing of billings to customers;
$0.4 million increase in inventory primarily due to lower shipments to
? customers in the first quarter of the year compared to the fourth quarter of
the year and due to an increase in the production of Express units to meet
customer demand, partially offset by
$2.3 million increase in accrued expenses and other current liabilities and
accounts payable primarily due to an increase in research and development and
? general and administrative expenses due to the growth in our business, the
anticipation of the closing of the Merger, and the timing of vendor invoicing
During the three months ended March 31, 2021, cash used in investing activities was $2.5 million, consisting of the purchases of property and equipment.
During the three months ended March 31, 2022, cash provided by financing activities was $0.2 million, consisting of $0.2 million from the exercise of stock options.
Critical Accounting Policies and Estimates
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