Evolv Technology reveals employees “engaged in misconduct” during sales

WALTHAM, Mass.—Evolv Technology, a manufacturer of AI-based weapons detection technology, has announced that employees “engaged in misconduct” during sales transactions during a nearly two-year period, following a preliminary committee investigation into its sales practices.

As a result, there will be a delay in the release of Evolv’s Q3 financial results, ending Sept. 30, 2024.

In a release, Evolv revealed that an ad hoc committee of independent directors (the committee) of the Board of Directors, under the direction of the Board, is conducting an internal investigation that is focused on the company’s sales practices, including whether certain sales of products and subscriptions to channel partners and end users were subject to extra-contractual terms and conditions that impacted revenue recognition and other metrics, and if so, when senior company personnel became aware of these issues.

“While the committee’s investigation is ongoing, the committee has made a preliminary determination that certain sales, including sales to one of its largest channel partners, were subject to extra-contractual terms and conditions, some of which were not shared with the company’s accounting personnel, and that certain company personnel engaged in misconduct in connection with those transactions,” the company stated.

In addition, these extra-contractual terms and conditions were withheld from Evolv’s Audit Committee as well as its independent registered public accounting firm, PricewaterhouseCoopers.

As a result of these preliminary findings, the committee determined that the accounting for certain sales transactions was inaccurate and that, among other things, revenue was prematurely or incorrectly recognized in connection with financial statements prepared for the periods between the second quarter of 2022 and the second quarter of 2024.

The committee determined that these misstatements impacted certain financial statements prepared for these periods, and that the recognition of revenue in the proper periods will impact each of those financial statements.

Currently, the committee estimates that, on a net basis through June 30, 2024, sales transactions at issue “have resulted in premature or incorrect revenue recognition of approximately $4 million to $6 million.”

The committee anticipates that the vast majority of this revenue was prematurely rather than incorrectly recognized but noted that the estimate is “preliminary and subject to change pending the conclusion of the investigation.” Evolv noted that other previously reported metrics that are a function of revenue were also misstated because of these revenue misstatements.

Based on the committee’s recommendation, the board determined that Evolv’s previously issued consolidated financial statements and other financial data for the fiscal years ended Dec. 31, 2022, and Dec. 31, 2023, contained in its annual report and its condensed consolidated financial statements for the quarters and year-to-date periods ended June 30, 2022, Sept. 30, 2022, March 31, 2023, June 30, 2023, Sept. 30, 2023, March 31, 2024 and June 30, 2024, contained in its quarterly reports should no longer be relied upon because of these misstatements.

“We recognize the importance of timely and accurate financial disclosures and are working expeditiously to conclude our thorough investigation,” the board said. “The board is committed to taking whatever remedial actions are necessary, so that the company can provide reliable information to our key stakeholders.”

The board continued, “The fundamentals of our business remain strong. We are seeing demand for our products and services that is in line with our internal forecasts and consistent with our long-term expectations of advancing our distribution model and achieving the Rule of 40.”

Evolv has self-reported these issues to the Division of Enforcement of the U.S. Securities and Exchange Commission (SEC), which had been conducting a previously disclosed and unrelated investigation. The company noted that it continues to cooperate with the SEC investigation, and that it would provide further updates as soon as the internal investigation is complete.

Evolv’s technology has come under question of late, as the New York Daily News reported that the New York Department of Investigation recently launched a probe into NYC Mayor Eric Adams’ efforts to install the company’s weapons scanners in the Metropolitan Transit Authority (MTA) subway system.

The New York City Police Department (NYPD) deployed AI-powered weapons screening solutions – developed by Evolv - at the Fulton St. subway station on July 26, marking the first time such technology was implemented in the 119-year history of the NYC subway system as part of a 30-day pilot program to detect weapons carried by travelers into the Metropolitan Transit Authority's (MTA) subway system.

Evolv’s scanners were tested at 30 NYC subway stations in the weeks leading up to the July 26 rollout.

According to the New York Daily News, the Department of Investigation is looking into how the administration vetted Evolv before allowing it to install its weapons detection technology at various locations.

This week, the NYPD announced that the 30-day pilot program turned up 12 knives and no guns. The NYPD also said Evolv’s scanners registered 118 false positive scans over the 30-day period.