Quarterly report pursuant to Section 13 or 15(d)

Revenue Recognition

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Revenue Recognition
 3 Months Ended
Mar. 31, 2024
Revenue Recognition and Deferred Revenue [Abstract]  
Revenue Recognition 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, including SaaS and maintenance, (2) the sale of products, (3) SaaS and maintenance related to products sold to customers either by Evolv or by Columbia Tech pursuant to the Distribution and License Agreement (as defined below), (4) license fees related to the Distribution and License Agreement (as defined below), and (5) professional services, including installation, training, and event support. Maintenance consists of preventative maintenance, technical support, bug fixes, and when-and-if available threat updates. Our arrangements are generally noncancelable and nonrefundable after ownership passes to the customer. Revenue is recognized net of sales tax.

Distribution and License Agreement

In March 2023, the Company entered into a distributor licensing agreement (the “Distribution and License Agreement”) with Columbia Electrical Contractors, Inc. (“Columbia Tech”). Columbia Tech, a wholly-owned subsidiary of Coghlin Companies, which serves as the Company's primary contract manufacturer. Under this arrangement, the Company has granted a license of its intellectual property to Columbia Tech, which contracts directly with certain of the Company's resellers to fulfill sales demand where the end-user customer prefers to purchase the hardware equipment as opposed to lease the equipment. Columbia Tech pays the Company a hardware license fee for each system it manufactures and sells under the agreement. In these instances, the Company still contracts directly with the reseller to provide a multi-year SaaS and maintenance subscription to the end-users.

The Company has assessed whether it operates as the principal or as an agent in relation to the sale of product made by Columbia Tech to the Company's resellers pursuant to the Distribution and License Agreement. The Company considered various factors, including but not limited to, inventory risk, discretion in establishing pricing, and which entity is primarily responsible for fulfillment. Based on an evaluation of the facts and circumstances, the Company concluded that Columbia Tech is the principal in the arrangement. The Company therefore does not recognize revenue in relation to sales of product pursuant to the Distribution and License Agreement, but does recognize revenue in relation to license fees received from Columbia Tech and the SaaS and maintenance subscription contracts.

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 March 31, 2024.
Less than 1 year 1 - 2 years More than 2 years Total
Product revenue $ 998  $ —  $ —  $ 998 
Subscription revenue 63,890  56,850  65,829  186,569 
Service revenue 22,261  21,691  22,112  66,064 
License fee and other revenue 436  1  2  439 
Total revenue $ 87,585  $ 78,542  $ 87,943  $ 254,070 
The amount of minimum future leases is based on expected income recognition. As of March 31, 2024, future minimum payments on noncancelable leases are as follows (in thousands):
Year Ending December 31:
2024 (nine months remaining) $ 48,486 
2025 58,972 
2026 47,647 
2027 27,312 
2028 4,033 
Thereafter 119 
$ 186,569 
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 March 31, 2024 and December 31, 2023, the Company had $2.5 million and $3.7 million in current portion of contract assets and $0.3 million and $0.5 million in contract assets, noncurrent on the condensed 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 $17.3 million during the three months ended March 31, 2024 that was included in the December 31, 2023 deferred revenue balance. The Company recognized revenue of $6.9 million during the three months ended March 31, 2023 that was included in the December 31, 2022 deferred revenue balance.
The following table provides a rollforward of deferred revenue (in thousands):
Balance at December 31, 2023 $ 71,490 
Revenue recognized in relation to the beginning of the year contract liability balance (17,323)
Revenue deferred 17,554 
Balance at March 31, 2024 $ 71,721 
The following table presents the Company’s components of lease revenue (in thousands):
Three Months Ended
March 31,
2024 2023
Interest income on lease receivables 42  53 
Lease income - operating leases 14,503  6,466 
Total lease revenue $ 14,545  $ 6,519 
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 condensed consolidated statements of operations and comprehensive loss. The interest income on lease receivables is classified under interest income in the condensed 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 condensed consolidated statements of operations and comprehensive loss. Revenue related to leases entered into with related parties were $0.3 million and $0.2 million during the three months ended March 31, 2024 and 2023, respectively.

Disaggregated Revenue

The following table presents the Company’s revenue by revenue stream (in thousands). Certain prior period amounts have been reclassified to conform to current period presentation:

Three Months Ended
March 31,
2024 2023
Product revenue $ 603  $ 8,754 
Subscription revenue 14,503  6,466 
Service revenue 5,384  2,786 
License fees 724  — 
Professional services and other revenue 454  575 
Total revenue $ 21,668  $ 18,581 

Commissions
The Company incurs and pays commissions on sales of its products and services. The Company applies the practical expedient for contracts less than one year in duration 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 $11.5 million and $11.4 million as of March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024 and 2023, the Company recognized commission expense of $1.4 million and $1.6 million, respectively.