Earnings Call Transcript - EVLV Q4 2021

Operator, Operator

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.

Brian Norris, Vice President of Investor Relations

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 in our prospectus filed with the SEC on September 3, 2021, and in other documents filed 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 in those statements will be achieved or will occur. Except as may be required by applicable law, we disclaim any obligation to update them to reflect future events or circumstances. Our commentary today will also include non-GAAP financial measures, including adjusted gross profit, adjusted gross margin, and adjusted EBITDA, which we believe provide additional insight for investors in evaluating ongoing operating results and trends. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with generally accepted accounting principles. Reconciliations from GAAP to non-GAAP metrics for our reported results can be found in our press release issued today and in the accompanying investor presentation. Finally, to provide investors with incremental insight and transparency, today we will begin sharing two additional performance metrics typical of SaaS business, ARR and RPO. ARR, or Annual Recurring Revenue, represents our subscription revenue as well as the recurring service revenue related to purchase subscriptions normalized over a one-year period. RPO or Remaining Performance Obligation reflects the difference between contract value and revenue recognized for installed units as of the end of the quarter. TCV and RPO should be interpreted independently and not as a substitute for or forecast of revenue or deferred revenues. Please keep in mind, our definition of these measures may differ from similarly titled metrics presented by other companies. With that, I'll turn the call over to Peter.

Peter George, CEO

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 everyone 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 an increasing focus on 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 risks 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 and 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. 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. I'm sure about one thing: they're relying on us, on Evolv, and our solutions to help make their venues safer and their visitors happier. This is a moment, a unique moment as venues and companies are making the architectural shift from analog to digital and Evolv is leading the digital transformation of physical security. As you know, Evolv developed the first and only AI-based weapons detection platform that prevents threats from entering places they shouldn't while preserving the visitor experience as people walk right in at the pace of life. Through our SaaS-based subscription model and unprecedented dataset, we can finally democratize security and make it available to anyone who needs it. This is our mission at Evolv and why I feel so strongly about our business today and about our future as the human security company. The results we are reporting today reflect that intersection of our mission and our imperative to meet the moment we now have. Moving to Slide 7. Our fourth quarter results were highlighted by strong new customer acquisition, the introduction of demand-driven product innovations, and acceleration with our channel partners. We reported total revenue of $6.8 million in the fourth quarter, up 236% year-over-year, and full-year revenue of $23.7 million, up 395% over 2020. As Mario will describe in his remarks, we had an adjustment in revenue recognition in the fourth quarter of 2021 as we determined that our SaaS offerings have now taken on a greater portion of our overall value delivered to our customers. This, in turn, requires us to ascribe more value to our subscription revenue. We believe this is a positive transition for a growing SaaS business like ours. Despite this change, we still reported results for the year that were beyond the top end of our guidance range while adding greater visibility into our expected forward revenues. We added 84 new customers in 2021, which was seven times the number of new customers added in 2020. We define subscriptions or deployed units as active revenue generated by Evolv Express under contract. We grew subscriptions from 214 to over 700 in 2021, reflecting growth of 229% year-over-year. We had no subscription churn in the fourth quarter and have not had any renewals up to yet. Finally, Total Contract Value booked, or TCV, was $17.9 million in the fourth quarter, up 201% year-over-year, and was $53.8 million in 2021, up 148% year-over-year. Turning to Slide 8, we were honored to welcome more than two dozen enterprises to our customer base in the fourth quarter. While others in the security screening market cite a number of pilots or RFP activity, we're grateful to have added 84 new customers in 2021 to bring our customer base to over 200 at the end of the year. Our pace of new customer acquisition accelerated throughout the year. In the fourth quarter, we again saw a broad diversification of our customer acquisition activity. As you can see on this slide, some of our newest customers include DHL, Birmingham Race Course Casino, Champagne Schools, Fall River Public Schools, Florida Theater, the Fox Theater in Atlanta, the Jalaz Center, the Monterey Bay Aquarium, the North Shore Hospital, the Van West Performing Arts Center, and the Woodruff Arts Center. Twenty percent of our TCV came from the professional sports vertical as we secured another NFL franchise, our fifth pro football team, as well as another MLB team, our fifth professional baseball franchise. We now have 15% of the NFL and nearly 20% of the MLB as Evolv Express customers. We also landed an important opportunity by winning the Capital One Arena in Washington, D.C. Nearly 15% of our TCV in the fourth quarter came through the K-12 education market where we closed six transactions. We unfortunately saw acceleration in that market immediately following the school shooting in Oxford, Michigan. Ten percent of our TCV in the fourth quarter came from tourist sites, including the Monterey Bay Aquarium and some of the most iconic venues in the United States. We saw important contributions from the healthcare market, which includes hospitals and clinics, and represented about 10% of our fourth quarter TCV. We also saw continued growth in the hotel and casino market which represents about 10% of our fourth quarter TCV. Three other vertical markets each contributed about 10% to TCV in the quarter, including performing arts centers, convention centers, and factory warehouses. Let's turn to Slide 9 to update you on our go-to-market efforts, which consists of a direct quota-carrying sales force as well as a growing network of channel partners that help extend our reach in certain geographies or vertical markets. We've been clear about our intentions to scale the company with and through partners in an approach we refer to as channel-centric. Our goal at the beginning of 2021 was to secure 15% of our TCV with partners. We ended up doubling that to 30%, strong evidence of both customer demand and partner engagement. Forty-five percent of our fourth quarter TCV involved a partner, and we're now starting to see transactions closed with channel partners without any involvement at all from us. We are seeing broad activity across three dozen authorized channel partners and several strategic global partners in Johnson Controls, Stanley Black & Decker, and Motorola Solutions, where incidentally, the number of qualified opportunities in our pipeline more than doubled in the fourth quarter to over 500 prospects. Turning to Slide 10 highlights the growing separation that we're creating between Evolv Technology and the rest of the competitive market. There are several unique elements of the Evolv story, which are highlighted here on the left side of the slide. We are currently commercially screening more than 20,000 people every hour or on average about 500,000 people every day. That volume is important when you consider that we're collecting more than 1.5 million data points for each of these visitors. Said another way, we're collecting about 750 billion security data points every single day across more than 200 venues in more than a dozen vertical markets. Simply put, we've created what we believe to be the single largest data lake in the security screening industry. As a result, our customers turn to us to power their digital thresholds. We're digitally transforming security with critical capabilities in such areas as weapons detection, crowd assessment, mass notification, and people analytics. These capabilities enable us to continually raise the bar of innovation and bring better products to the market. And in time, we believe this will enable us to optimize Average Revenue Per Unit or ARPU and maximize renewal rates as and when customers reach the end of their initial SaaS contracts. By having more data and better products, we believe we're able to deliver a superior value proposition to the market. We're able to build brands based on this unique, large, and rapidly growing data set that makes it possible with our advanced algorithms to improve detection accuracy over time. We believe this enables Evolv to deliver an improved security posture, which makes our customers' venues safer than ever before. In addition, we also deliver a superior visitor experience as our customers can enter the venue without ever slowing down, without ever divesting of their personal items, and without ever forming a single-file, close-contact line. We strive to deliver significant operational efficiencies that drive up to 70% cost savings for venue operators. Finally, we're able to provide venue operators with a higher level of valuable data, which is delivered automatically and available on demand via Evolv Insights, our analytics platform to our customers to make better security decisions before, during, and after events. Before I turn things over to Mario, I want to share some thoughts as to the near-term and longer-term drivers of our business, which we believe position us well to fulfill our mission of democratizing security for all. Several of the near-term drivers of the business include the reopening of facilities, and that's happening right now. Facility operators are looking for a new and safer way of welcoming visitors back, and certainly Evolv Express does just that. We will look to balance this demand with the impact that COVID has had and likely will continue to have on both our supply chain as well as our ability to access customers' premises to install booked units. Other near-term drivers are expected increases in quota-carrying sales executives, the increase in quotas for 2022, and the price book increases we have implemented to gain full value for our subscription offering while also offsetting the impact that increasing inflation has had across nearly every industry. Another driver is our channel-centric strategy, which continues to show growing momentum. We're expecting channel partners to be involved in as much as 40% of all opportunities in 2022, up from 30% in 2021. Switching to some of the long-term drivers of the business. First and foremost, the secular demands for strong public safety are more important than ever. Unfortunately, trends in gun violence are escalating, not abating. Second, we see a significant long-term opportunity with both existing and new channel partners. We are making great progress, and still, there's much more to do. We expect to benefit from ancillary revenue streams with analytics and digital tools, which we expect will drive average ARPU higher over time while also enhancing renewal opportunities. Finally, we anticipate new potential products that can drive deeper penetration of large untapped TAM segments. With that, let me turn this over to Mario, who will take you through our financial results, key trends, and our outlook for 2022.

Mario Ramos, CFO

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. Had 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 one-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, which we believe is not the most useful indicator for performance because it does not consider the growing importance of installation activity. Finally, we disclosed remaining performance obligation, or RPO, which reflects the difference between contract value and revenue that has already been recognized for units that have been deployed as of the end of the quarter. RPO at the end of the fourth quarter of 2021 was $40.2 million, up 200% year-over-year. Investors should expect us to regularly report on ARR and RPO, which are indicative of the progress we continue to make. Flipping to Slide 14. We're sharing the additions, which is subscriptions deployed as well as the ending number of subscriptions deployed. In time, we would expect to add churn and renewal activity. However, we have not experienced any churn given our contracts are four years in length. As you can see here, we added 136 additions in the quarter and ended the year with 703 subscription deployments. In addition, we ended the year with approximately 128 units in installation backlog. These represent valid purchase orders, which have been included in TCV but no subscription and service revenue has yet been recognized since the deployment has not yet been completed. It is important to point out that Omicron-related restrictions either among our customers or among our personnel impacted our ability to install units in the fourth quarter of 2021. As we move to Slide 15, here's a deeper look at the trends in ARR and RPO. As you can see here on the left, ARR was up 220% year-over-year in 2021. This continues to reflect the strong new customer adoption we are seeing as well as the expanding deployments we continue to see across our customer base. On the right, you see which again reflects the difference between contract value and revenue already recognized for installed units as of the end of the quarter. RPO grew 200% year-over-year to $40.2 million. Also highlighted on the chart on the right is the value of the backlog, which is the value of units that are fully under contract but are yet to be deployed. As you can see, we had another $10.6 million of contracted revenue associated with units that had not yet been installed as of December 31, 2021. So in total, about $50.8 million of RPO plus backlog. Turning to Slide 16. I want to briefly discuss our financial highlights. As previously discussed, total revenue was $6.8 million in the fourth quarter, up 236% year-over-year. For the full year, total revenue was $23.7 million, up 395% over 2020. We reported gross margin of 4% in the fourth quarter and 28% for the full year, broken down as follows: product gross margin was negative 45% in the fourth quarter and 10% for the full year. Our fourth quarter product gross margin was impacted by several one-time expenses, a $1.6 million impairment related to legacy inventory of our first-generation product, Edge, a $600,000 purchase price variance for product build as well as some other miscellaneous one-time charges for about $200,000. In addition, supply chain challenges impacted costs as we continue to prioritize the availability of finished products. Excluding these adjustments, product gross margin would have been 8% and 28% for Q4 '21 and fiscal year '21, respectively. Subscription gross margin was 45% in the fourth quarter and compared to 31% in the fourth quarter of last year. For the full year, subscription gross margin was 30%. Total operating expenses were $22.3 million in the fourth quarter, up 128% year-over-year and $60.7 million in 2021, up 115% over 2020. The primary drivers of the increase were headcount additions across the company, most notably in revenue-generating sales as well as technical talent for our engineering team, stock-based compensation expense, transaction costs associated with the offering, and a modest impairment for the write-down of certain assets. We exited the fourth quarter with 176 employees compared to 62 employees at the end of 2020. Our loss from operations was $22 million in the fourth quarter, up 136% year-over-year and was $54 million in 2021, up 101% compared to 2020. Finally, we reported net income of $2.6 million or $0.02 per diluted share compared to a net loss of $9.5 million or $1.06 per share in the fourth quarter of last year. For the year, we reported a net loss of $10.9 million or $0.15 per diluted share compared to $27.4 million or $3.07 per share in 2020. Briefly now on the balance sheet. We ended the quarter with approximately $308 million in cash and cash equivalents, down about $26 million from the third quarter. This use of cash reflects the fourth quarter operating loss of $22 million, the repayment of $5.4 million on our revolving line of credit as well as the continuing investment we're making to build inventory in anticipation of our second half 2022 plan. As we move on to Slide 17, you can see the leverage of our subscription model. As highlighted on this slide, we reported adjusted recurring contribution gross margin of 80%, which is a record high for the company. For context, recurring revenue includes subscription revenue and service revenue for all periods presented. Recurring adjusted gross profit and gross margin excludes one-time items and depreciation and amortization, which we believe provides a more meaningful representation of contribution margin. Moving on. Over the next few slides, I want to share with investors the highlights of our 2022 business outlook and the rationale and assumptions behind it. I'll remind investors that these forward-looking statements represent our views only as of today. Starting here on Slide 18. Our current expectations are for full-year revenue of between $29 million to $31 million, which would reflect growth of about 25% year-over-year. That growth would have been 58% pro forma for the change in SSP in 2021. We expect ending ARR at December 31 to more than double in 2022 to between $27 million to $28 million. We expect operating expenses to increase to $94 million to $96 million in 2022. We expect to continue investing across the business, mostly in revenue-generating and revenue-supporting headcount as well as engineering resources to continue to extend our leadership position. We expect our operating loss to range between $82 million to $84 million in 2022. Finally, we expect adjusted EBITDA to range between negative $65 million and $67 million in 2022. Moving on to Slide 19. I want to provide some context to our investment priorities in 2022. Starting with R&D, we're focusing on next-generation Evolv Express to deliver significant cost reductions and drive gross margins higher. We're also investing in ancillary products designed to drive ARPU for existing clients higher while also enhancing renewal opportunities. In the area of sales and marketing, we're adding to the number of quota-carrying sales executives, which will position us well for growth in 2023 and beyond. We're balancing this investment with our channel strategy to put us in the best position to accelerate sales. Turning to G&A, we continue to build the company's infrastructure to manage our reporting and controls environment as well as to support current and future growth. For example, we are in the final stages of our NetSuite implementation, which is set to go live in the second quarter of 2022. Finally, we're making the necessary investments in public company initiatives typical of a company of our size. Turning to Slide 20. We want to share some additional insights into our projected use of cash in 2022. We expect an elevated cash burn into 2023 as we ramp up investments and emerge from supply chain constraints. We expect elevated operating losses in 2022 as we continue to build our public company infrastructure and to make the necessary investments in sales and marketing. We expect to meaningfully leverage both investment areas in 2023 and beyond, as we further scale the business. We have not been immune to COVID-related supply chain challenges that have persisted over the last 12 to 18 months, which have driven our hardware costs higher. While we've been able to take advantage of our balance sheet to in certain cases, prebuy certain hard-to-find parts, we have not yet been able to scale sufficiently to recognize significant purchasing benefits. However, we are working and investing in redesign efforts with the goal of reducing hardware costs by 40% to 50%. We are continuing our efforts to proactively build inventory to support our growing pipeline and to meet expected demand in the second half of the year and into 2023. To that end, we expect to end 2022 with more than 250 Express units in inventory compared to approximately 75 units in inventory at the end of 2021. Another important use of cash is, of course, the support of our pure subscription customers. When customers choose our pure subscription model over our purchase subscription model, we are fully funding the equipment costs and retaining the title to the Evolv Express platform. We then recover that equipment cost with a higher subscription value over the term of the non-cancelable subscription contracts. We are currently evaluating third-party financing sources which would significantly reduce our cash consumption needs. Without that program in place, we expect to use as much as $15 million to $20 million in 2022 to support equipment costs of our pure subscription offering. In light of all these iterations, we currently expect to end 2022 with approximately $220 million to $230 million in cash. Turning to Slide 21. I wanted to share with you a few additional modeling considerations as you think about 2022. We continue to see an impact on installations here in the first quarter of 2022 due to Omicron, and since installations are the most important element of revenue recognition, we expect that will impact the linearity of both product and subscription revenue in the first quarter. We expect both ARR and revenues to further accelerate in the second half of 2022 as we continue to add additional customers and subscriptions. We expect the mix of installed units to be 70% pure subscription and 30% purchase subscription. Finally, we're modeling an ending base of subscriptions of between 1,400 and 1,500, approximately doubling our 2021 ending subscription count. Again, due to some of the Omicron impacted challenges of installation in Q1, we expect that the rate of installations will accelerate in the second half of the year. With that, I'll turn that back over to Brian.

Brian Norris, Vice President of Investor Relations

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

Operator, Operator

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

Shaul Eyal, Analyst

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?

Mario Ramos, CFO

Yes, '22, we didn't talk about an adjusted number in '22, what we said is if all of '21 had been using the same SSP assumption that we used in the fourth quarter for the entirety of 2021, our guidance would have been 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.

Shaul Eyal, Analyst

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?

Peter George, CEO

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 as we exit 2022.

Operator, Operator

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

Mike Latimore, Analyst

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

Peter George, CEO

Yes. The last time we spoke, we mentioned that our sales cycle was contracting to approximately 90 days, and that remains the case. In Q4 and the beginning of Q1, two things changed for us. In Q4, Omicron emerged in mid-December, leading us to shift from having most employees in the office to being fully remote again, and unfortunately, our customers did the same. This caused a slight slowdown in total contract value, particularly in our ability to deploy systems. While the sales cycle didn't change, reaching our customers became more difficult as they worked from home, and with facility shutdowns, we were unable to install systems. We deployed 136 systems in Q4 but had around 100 systems left in backlog as we exited the year. Although we secured robust bookings, installation was challenging. Additionally, we made a significant investment in the channel in Q4, which became a notable part of our business. This investment slowed down our sales cycle by about 30 days because we lack direct control over the channel as we do with direct sales. Moving forward, we plan to adjust our pipeline strategy; instead of aiming for three times the pipeline to meet our goals, we will target four times, allowing for an extra month of planning due to channel engagement. As for the diversification you mentioned, we had a strong quarter in K-12, healthcare, and municipalities—markets where we traditionally had less presence. The channel played a crucial role in helping us enter these areas, making our Q4 investment a strategic one that we expect will yield significant returns in 2022.

Mike Latimore, Analyst

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?

Peter George, CEO

You bet. And so as you know, a $20 billion TAM, $18 billion is greenfield and all of these markets are places there traditionally isn't a 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.

Mike Latimore, Analyst

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?

Peter George, CEO

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

Mario Ramos, CFO

And Mike, to clarify, we are following GAAP, and this is not about changing rules. We are adhering to generally accepted accounting principles in the United States. What we find is that a larger portion of our revenue comes from our SaaS offering, which is a positive development for a growing business like ours. That's what you're observing, and this is beneficial for the long term.

Operator, Operator

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

Brian Ruttenbur, Analyst

I would like to clarify the guidance and how you'll report in the future. Do you still expect total revenue to be between $29 million and $31 million, with $27 million to $28 million that is recurring? Will you continue to have product subscription and services revenue, or will it all be subscription with other categories?

Mario Ramos, CFO

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.

Brian Ruttenbur, Analyst

I appreciate you highlighting that point. Regarding the second part of your question about financials, you mentioned that the first half is weaker than the second half. Can we discuss seasonality? I believe you had a very strong third quarter. Do you view the third quarter as the peak, with a potential decline in the fourth quarter?

Mario Ramos, CFO

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.

Brian Ruttenbur, Analyst

Okay. In terms of the one-time charge related to the write-off of the first generation Evolv system, is it roughly $6 million?

Mario Ramos, CFO

Not that big. It was $1.6 million.

Brian Ruttenbur, Analyst

It's $1.6 million.

Mario Ramos, CFO

It's essentially the older generation units, mostly located in the U.S., which we proactively replaced for our clients. One reason for this change is that the new units provide clients with enhanced functionality on our software platform. Additionally, we were able to extend contracts, benefiting the company, but in the short term, we needed to write off those units.

Brian Ruttenbur, Analyst

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

Mario Ramos, CFO

This is cleaned out.

Peter George, CEO

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 one at a time. Once we introduced Express, it was our second generation, and 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.

Mario Ramos, CFO

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.

Operator, Operator

And our last question is from Rob Galvin.

Brian Norris, Vice President of Investor Relations

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

Rob Galvin, Analyst

Can you guys hear me?

Brian Norris, Vice President of Investor Relations

Yes, yes.

Rob Galvin, Analyst

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 current model?

Mario Ramos, CFO

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.

Brian Norris, Vice President of Investor Relations

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

Rob Galvin, Analyst

No, that was it.

Brian Norris, Vice President of Investor Relations

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

Peter George, CEO

All right. 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.

Mario Ramos, CFO

Bye-bye.

Operator, Operator

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.