Executive Summary / Key Takeaways

• AI-Powered Security Market Expansion: Evolv Technologies is at the forefront of a rapidly expanding AI-based physical security market, driven by increasing demand for frictionless, effective threat detection in diverse venues. Its core Evolv Express and new eXpedite systems offer differentiated technology.
• Strong Q2 2025 Performance & Raised Outlook: The company reported robust Q2 2025 results, including 29% year-over-year revenue growth to $32.5 million and 27% ARR growth to $110.5 million. Management raised its full-year 2025 revenue guidance to $132-$135 million (27-30% YOY growth) and expects positive full-year adjusted EBITDA with mid-single-digit margins.
• Strategic Shift to Direct Sales & Subscription Focus: Evolv is strategically moving towards a direct purchase subscription model, phasing out distribution fulfillment. This shift, while creating near-term gross margin headwinds, is expected to drive higher Annual Recurring Revenue (ARR), lifetime value, and cash flow per unit over the long term.
• Legal & Regulatory Overhangs Resolved: Significant legal and regulatory uncertainties have been largely addressed, with the DOJ investigation concluded and a class action lawsuit settled in principle, removing key distractions and de-risking the investment thesis.
• Enhanced Liquidity & Path to Cash Flow Positive: A new $75 million non-dilutive credit facility strengthens the balance sheet, supporting the subscription model's growth. The company achieved positive operating cash flow of $2.1 million in Q2 2025 and remains on track for positive free cash flow in Q4 2025.

The Imperative of AI-Powered Security

Evolv Technologies Holdings, Inc. (NASDAQ:EVLV) is pioneering a transformative approach to human security, leveraging advanced artificial intelligence (AI) to create safer, faster, and more enjoyable experiences across a wide array of public and private spaces. From iconic sports venues and entertainment arenas to schools, hospitals, and industrial workplaces, Evolv's mission is to democratize security in an era of escalating gun violence and evolving threats. This mission positions the company at the heart of a burgeoning market, where the demand for effective yet non-intrusive security solutions is paramount.

The market opportunity for AI-based weapons detection is substantial and largely untapped. Evolv currently protects approximately 6,600 entrances, a mere fraction of the hundreds of thousands of entrances across the country that could benefit from such technology. For instance, Evolv is deployed in only about 1% of U.S. school buildings, and adoption in hospitals remains in the low single digits. This early stage of market penetration, coupled with a societal shift towards frictionless security, underscores the enormous potential for growth, akin to the early adoption phase of electric vehicles a decade ago.

Technological Differentiation and Innovation

Evolv's competitive edge is fundamentally rooted in its proprietary AI-powered technology, which forms the backbone of its "Evolv Safer Experience System." This system is designed to address critical security needs while enhancing the user experience.

The flagship product, Evolv Express, utilizes advanced sensors, AI-powered software, and cloud services to consistently detect firearms, improvised explosive devices, and tactical knives. Crucially, it differentiates these threats from common harmless items like cell phones and keys, significantly reducing false alarms. The system also visualizes the precise location of potential threats, enabling security personnel to conduct targeted, minimally intrusive secondary screenings. This capability translates into tangible benefits: faster throughput for visitors, reduced operational burden on security staff, and a more positive, less intimidating security experience.

Expanding its ecosystem, Evolv launched Evolv eXpedite in Q4 2024, an autonomous AI-based bag screening solution. This system works in conjunction with Evolv Express, providing a layered approach to security for concealed weapons detection in high-clutter environments. Evolv eXpedite has quickly gained traction, securing 20 customers by Q2 2025, including a significant Q3 order for over 100 systems. While still scaling to full cost efficiency as a new product, eXpedite promises to drive broader customer adoption, higher attach rates, and stronger subscription stickiness by integrating seamlessly into a single cloud portal with Express.

Beyond hardware, Evolv Insights offers a powerful software analytics dashboard, providing customers with self-serve access to valuable visitor data. This includes arrival patterns, throughput volumes, system detection performance, alarm statistics, and threat-type analysis. This data-driven approach allows customers to inform and optimize their security operations, further enhancing the value proposition.

Recent innovations also include the Evolv Flex "certified pre-owned" (CPO) program, launched in Q2 2025. This program repurposes returned or upgraded first-generation Evolv Express units, allowing the company to reach more price-sensitive buyers and expand into new market segments. Additionally, Evolv Visual Gun Detect is a newer offering designed to identify brandished or open-carry weapons, generating new pipeline opportunities and sometimes serving as an initial entry point for customers not yet ready for concealed weapons detection. The company plans to announce one or two new digital and/or physical product offerings by year-end 2024, further extending the Evolv ecosystem and expanding customer lifetime value.

For investors, Evolv's technological differentiation is a critical moat. Its ability to offer superior detection, operational efficiency, and data-driven insights drives customer adoption and fosters a predictable, recurring revenue stream through its subscription models. The continuous innovation, particularly with Gen2 upgrades and the eXpedite launch, aims to increase average revenue per user (ARPU) and enhance customer stickiness, solidifying Evolv's market leadership.

A History of Resilience and Strategic Evolution

Evolv's journey since its founding in 2013 has been marked by both pioneering innovation and significant challenges. Co-founder Mike Ellenbogen was instrumental in its early development, establishing a foundation in physical security. Strategic partnerships, such as the 2020 OEM agreement with Motorola Solutions (MSI), expanded Evolv's market reach. The company's public listing in July 2021 through a business combination with NHIC provided capital for growth.

A pivotal strategic shift occurred in March 2023 with the distribution and licensing agreement with Columbia Tech, Evolv's primary contract manufacturer. This model initially accelerated gross margin expansion by reducing one-time product revenue and increasing high-margin license fees. However, the period from late 2023 through early 2025 presented substantial headwinds. Regulatory inquiries from the FTC (October 2023) and SEC (February 2024) regarding marketing practices, coupled with "slanted media coverage," lengthened sales cycles and introduced market uncertainty.

An internal investigation in September 2024 uncovered materially inaccurate accounting, leading to a restatement of financial statements and a voluntary document request from the U.S. Department of Justice (DOJ). This period necessitated significant leadership changes, including a new CEO in December 2024, and new CFO, Chief Accounting Officer, General Counsel, Chief Revenue Officer, and VP of Supply Chain in early 2025. A workforce reduction in January 2025 aimed to improve profitability and cash flow.

Crucially, Evolv has largely moved past these challenges. The FTC settlement was reached in December 2024, the DOJ informed the company on August 7, 2025, that it was no longer the subject of its investigation, and a class action lawsuit reached a settlement in principle on August 5, 2025, with Evolv's direct financial exposure limited to $1 million, primarily covered by D&O insurance. These resolutions, coupled with comprehensive remediation efforts in internal controls and corporate culture, demonstrate management's commitment to addressing past issues and building a stronger, more resilient organization. This resilience and the successful resolution of major overhangs de-risk the investment thesis, allowing the company to fully focus on its growth trajectory.

Competitive Landscape: Differentiated AI in a Crowded Field

Evolv operates in a dynamic and increasingly competitive security technology market. While the AI-based weapons detection segment is still emerging, it features a mix of specialized players and larger, diversified incumbents. Evolv's positioning is that of a technology leader, particularly in AI-driven, touchless screening solutions.

Direct competitors include established players like OSI Systems (OSIS), Johnson Controls (JCI), and ADT Inc. (ADT). These companies offer broader security portfolios, often integrating AI with traditional methods. For instance, OSI Systems provides extensive security screening and inspection systems, including X-ray and AI-enhanced detection. While OSI Systems benefits from a broader market reach and established global relationships, Evolv's dedicated touchless AI design offers a qualitatively more seamless and potentially faster user experience, which is a key differentiator in high-traffic, customer-focused environments. Financially, Evolv's TTM Gross Profit Margin of 56.13% compares favorably to OSI Systems' 34% and Johnson Controls' 35%, suggesting a more efficient cost structure for its core offerings. However, Evolv's TTM Operating Profit Margin of -57.76% and Net Profit Margin of -73.04% reflect its growth stage and heavy R&D investment, contrasting with the positive operating and net margins of its larger, more diversified rivals (OSIS: 13% operating, 9% net; JCI: 11% operating, 7% net).

Johnson Controls, with its focus on smart building ecosystems, leverages AI for comprehensive security solutions. While JCI can offer bundled services and benefits from economies of scale, Evolv's proprietary AI technology emphasizes advanced analytics and real-time insights through platforms like Evolv Insights, positioning it as a leader in data-informed security. This specialization allows Evolv to excel in niche, high-growth segments, though JCI's scale likely provides superior net margins.

ADT Inc. is a strong brand in residential and commercial security, offering AI-enhanced monitoring. Evolv's systems provide a more advanced, AI-centric approach for large-scale public environments, offering notably faster and more accurate threat detection without physical interaction. ADT's TTM Gross Profit Margin of 83% suggests a different business model, likely more service-oriented, which contributes to its strong recurring revenue base. Evolv's focus on proactive, data-driven insights differentiates it in scenarios requiring real-time analytics, while ADT benefits from its established brand and widespread installation network.

Indirect competitors include providers of traditional metal detectors (e.g., Garrett (GTX), CEIA) and biometric access systems. These alternatives often present a lower-cost, simpler solution, appealing to price-sensitive customers or those in lower-threat environments. However, Evolv's technology consistently demonstrates superior capabilities, leading to "revisitation of previously lost opportunities" where customers initially opted for cheaper, less informative "red light, green light" systems but are now replacing them with Evolv Express. This indicates a growing recognition of Evolv's superior detection, end-user experience, and integration capabilities.

Evolv's competitive advantages, or moats, are its proprietary AI technology and robust data analytics. These enable enhanced threat detection and operational efficiency, fostering customer loyalty and recurring revenue. While Evolv's smaller scale and potential supply chain dependencies (despite U.S. assembly and diversified raw material sourcing) present vulnerabilities, high barriers to entry in the form of R&D requirements, regulatory approvals, and specialized technological expertise help protect its market position. The company's strategic partnerships, such as with Motorola, further extend its reach and leverage established distribution networks.

Operational Momentum and Financial Trajectory

Evolv's Q2 2025 financial results underscore a business gaining significant operational momentum and moving towards a more predictable and scalable model. The company reported total revenue of $32.5 million, marking a robust 29% increase year-over-year. Sequentially, revenue grew 2%, which would have been approximately 5% excluding one-time favorable impacts in Q1 2025. This growth was fueled by strong new customer acquisition and expanding deployments within its installed base.

Annual Recurring Revenue (ARR) reached $110.5 million as of June 30, 2025, reflecting a healthy 27% year-over-year growth. The Remaining Performance Obligation (RPO), a key indicator of future contracted revenue, stood at $275 million, up from $261 million in Q1 2025. This growing backlog provides strong revenue visibility and predictability.

Profitability metrics are also showing significant improvement. Adjusted gross margin for Q2 2025 was 55%. Excluding a non-cash $1.8 million inventory reserve related to first-generation Evolv Express parts, the adjusted gross margin would have been approximately 60%. Adjusted operating expenses declined 19% year-over-year to $21.6 million, reflecting successful cost reduction actions and improving operating leverage. Consequently, Evolv reported positive adjusted EBITDA of $2 million in Q2 2025, translating to a 6% adjusted EBITDA margin. This marks the third consecutive quarter of positive adjusted EBITDA.

Cash flow generation has seen a dramatic turnaround. Operating cash flow improved significantly to a positive $2.1 million in Q2 2025, a stark contrast to the $21.6 million used in the same period last year. This improvement is attributed to tighter inventory management, stronger collections activity, and insurance reimbursements.

Total cash, cash equivalents, and marketable securities increased sequentially by $2 million to $37 million in Q2 2025, marking the first sequential increase in nine months.

Operational achievements further reinforce this positive trajectory. Evolv welcomed over 60 new customers in Q2 2025, expanding its global customer base to over 1,000. The company has surpassed 7,000 active subscriptions and is targeting at least 8,000 by year-end 2025. A significant portion of new business, with 54-56% of Q2 booked units and ARR coming from existing customers, validates strong customer trust and the value proposition. Customers are also showing early signs of upgrading to the Gen2 Express platform, often before their initial Gen1 contracts expire, which typically resets to new four-year commitments, enhancing customer stickiness and RPO.

Strategic Shifts and Market Penetration

Evolv is undergoing a strategic evolution in its go-to-market model, shifting its direct purchase activity from distribution fulfillment to direct fulfillment (purchase subscription model). This move is a calculated long-term value play, enabled by the company's improved financial foundation and the capital efficiency of its Gen2 Express systems. While this transition creates a near-term gross margin headwind, as the full system cost is recognized immediately, it is expected to deliver higher revenue, lifetime value, cash flow, and, most importantly, higher ARR on a per-unit basis over the contract term. This shift also simplifies the customer experience with a single purchase order and gives Evolv greater control over pricing and service. As a result, IP license fees from the distribution model are expected to be phased out in the second half of 2025.

The company is also deepening its penetration across key vertical markets:

• Education: Evolv expanded its presence into 20 new school districts in Q2 2025. A notable Q3 win includes a $15 million contract with Gwinnett County Public Schools, Georgia's largest district, serving approximately 180,000 students. School boards are increasingly funding security technology through operating budgets and capital projects, moving beyond one-time grants like ESSER, which embeds Evolv's solutions more deeply into standard purchasing motions. Evolv Express is now deployed in 20 of the 100 largest U.S. school districts and over 1,300 school buildings, screening over 850,000 students and visitors daily.
• Healthcare: Evolv secured wins with major institutions like Ohio State University Wexner Medical Center, Virginia Mason Franciscan Health, and Broward Health. This reflects growing demand for seamless security solutions in hospitals, especially with California's new law mandating automated weapons detection by March 2027. Evolv now operates in 500 hospital buildings across the U.S., with daily visitor screenings nearing 900,000.
• Sports & Entertainment: The company secured a marquee win with Inter Miami CF for their new Miami Freedom Park stadium, deploying both Gen2 Express and eXpedite. Other wins include FC Cincinnati and NBA training facilities. Evolv supported the FIFA Club World Cup 2 with over 100 systems under a short-term subscription. Long-standing customers like Nissan Stadium and Gillette Stadium upgraded to Gen2 with new multiyear contracts, reaffirming Evolv's value in high-traffic venues.
• Industrial Workplace: A significant win with a Fortune 50 company, deploying Evolv's technology across industrial distribution facilities and corporate headquarters, establishes a strong foothold for broader enterprise-wide expansion.
• Public Transit: Following trials in New York City subways, Evolv is seeing inbound interest from other cities like Los Angeles for public transit security, representing a potential vertical expansion opportunity not currently included in its Total Addressable Market (TAM).

These strategic initiatives, coupled with the proven ability of Evolv Express to screen over 3 million people daily and tag approximately 500 firearms every day, demonstrate a clear path to deeper market penetration and diversified revenue streams.

Liquidity, Outlook, and Risk Mitigation

Evolv's financial foundation has significantly strengthened, providing ample liquidity to fuel its growth strategy. As of June 30, 2025, the company held $36.9 million in cash, cash equivalents, and marketable securities. Further bolstering its position, Evolv secured a new $75 million Senior Secured Credit Facility with MidCap Financial Trust on July 29, 2025. This non-dilutive facility includes an initial $30 million term loan (with $26.6 million net proceeds received at closing), a $30 million delayed draw facility available for two years, and a $15 million revolving line of credit, all with five-year terms. Management expects this, combined with future operational cash flow, to be sufficient for at least the next twelve months, with no current plans for dilutive equity financing. Interest expense from this facility is projected at approximately $250,000 per month for the latter half of 2025.

Management has expressed strong confidence in the business, raising its full-year 2025 guidance. Total revenue is now expected to grow by 27% to 30%, reaching between $132 million and $135 million, an increase from previous estimates. Adjusted gross margin for the remainder of 2025 is projected to be in the 54% to 56% range, reflecting the strategic shift to in-house purchase fulfillment and the scaling costs of the newer eXpedite product. The company anticipates delivering positive full-year adjusted EBITDA in 2025 with mid-single-digit margins and remains committed to achieving positive cash flow in Q4 2025. Capital expenditures for 2025 are expected to be in the $20 million to $25 million range to support the pure subscription model. The company also aims to finish 2025 with approximately 8,000 units deployed.

While Evolv has made significant strides, certain risks warrant attention. The Senior Secured Credit Facilities include customary financial covenants, such as minimum annual recurring revenue, minimum EBITDA (effective in H2 2027), and minimum liquidity. A breach of these covenants could accelerate debt repayment, though management is confident in its ability to comply. The company's history of net losses means it maintains a full valuation allowance against deferred tax assets, and the utilization of net operating loss (NOL) and R&D tax credit carryforwards may be subject to limitations under Section 382 of the Internal Revenue Code.

Evolv has proactively addressed internal control weaknesses identified during its restatement process, implementing new leadership, enhanced hiring, training, and control procedures, including a new deal review policy and IT controls. While SEC inquiries related to past marketing practices are ongoing, the resolution of the DOJ investigation and the class action lawsuit significantly reduce the overall legal and regulatory overhang. The company's U.S.-assembled products, with a low percentage of Chinese components for its flagship Express system, mitigate direct tariff impacts, and its relationship with primary contract manufacturer Columbia Tech remains stable. Evolv also acknowledges the evolving legal frameworks for AI governance and is committed to ethical deployment and compliance, actively monitoring potential legislative impacts like Florida's proposed ban on AI for firearm detection in public spaces.

Conclusion

Evolv Technologies is emerging as a resurgent force in the physical security landscape, driven by its innovative AI-powered solutions and a renewed strategic focus. The company's ability to overcome significant legal and operational challenges, coupled with strong Q2 2025 financial performance and a raised full-year outlook, paints a compelling picture of a business poised for predictable, high-growth. By prioritizing its subscription model, expanding its technological ecosystem with products like eXpedite, and deepening market penetration across critical verticals, Evolv is solidifying its competitive moat.

The strategic shift to direct purchase fulfillment, while impacting near-term gross margins, is a calculated move to maximize long-term ARR and shareholder value. With a strengthened balance sheet, a clear path to positive cash flow, and a leadership team committed to integrity and disciplined execution, Evolv is well-positioned to capitalize on the enormous, untapped market for AI-based weapons detection. Investors looking for exposure to a company transforming public safety with cutting-edge technology, and demonstrating a clear trajectory towards sustainable profitability, should find Evolv's story increasingly compelling.