Class Action Lawsuit Against Evolv Alleges Misconduct in Sales to Channel Partner

Evolv Technologies Holdings is facing numerous class-action lawsuits alleging the AI-based security screening company inaccurately reported revenues and that some of its sales personnel with "engaged in misconduct" in a transaction with one of its largest partners.

Levi & Korsinsky, Bragar Eagel & Squire, Bleichmar Fonti & Auld, and Girard Sharp filed the class-action lawsuits on behalf of Evolv Technologies’ investors. The lawsuits all focus on the same alleged activity.

Bragar Eagel & Squire’s complaint alleges that on Oct. 25, Evolv Technologies announced that its financial statements issued between the second quarter of 2022 and the second quarter of 2024 should not be relied upon due to material misstatements impacting revenue recognition and other previously reported metrics related to revenue. The company revealed that “certain sales, including sales to one of its largest channel partners, were subject to extra-contractual terms and conditions” not shared with the company's accounting personnel, and that “certain company personnel engaged in misconduct in connection with those transactions.”

Evolv Technologies also announced that it “expects to report one or more additional material weaknesses in internal control over financial reporting,” was delaying filing its upcoming quarterly report for the third quarter of 2024, and that it has “self-reported these issues” to the U.S. Securities and Exchange Commission’s division of enforcement. On this news, the company’s stock price dropped roughly 40%, from $4.10 per share on Oct. 24 to $2.47 per share, on Oct. 25, according to the complaint.

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Channel Futures couldn’t reach Massachusetts-based Evolv Technologies for comment on the class-action lawsuits.

Ad Hoc Committee Investigates Evolv Technologies

Evolv Technologies appointed an ad hoc committee to conduct an internal investigation and on Nov. 21 confirmed the inaccurate accounting.

“The ad hoc committee’s previously disclosed estimate that, on a net basis … the sales transactions at issue have resulted in premature or incorrect revenue recognition of $4 million to $6 million through June 30, 2024, has not changed, and it is still the case that the vast majority of such revenue was prematurely rather than incorrectly recognized and is expected to be recognized in future periods,” it said.

Evolv Technologies’ board determined that new leadership is needed to moving the company forward. The board terminated Peter George, president and CEO, without cause, effective immediately. In addition, Mark Donohue, the company’s chief financial officer, resigned.

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Four other employees, including personnel from the company’s sales, accounting and finance departments, were terminated or resigned.

The board has appointed John Kedzierski, previously with Motorola Solutions, as the company’s new CEO, president and board member.

FTC Settlement

Also last month, the Federal Trade Commission (FTC) announced it was taking action against Evolv Technologies over allegations the company made false claims about the extent to which its AI-powered security screening system can detect weapons and ignore harmless personal items, including in school settings.

In the proposed FTC settlement order, Evolv Technologies would be banned from making unsupported claims about its products’ ability to detect weapons by using AI, and would also have to give certain K-12 school customers the option to cancel their contracts. These contracts usually lock customers into multi-year deals, the FTC said.

The FTC’s complaint alleged Evolv Technologies “deceptively” advertised that its Evolv Express scanners would detect all weapons and made “misleading” claims that its use of AI makes its screening systems more accurate, efficient and cost-effective than traditional metal detectors.

The FTC alleged Evolv’s Express scanners multiple times flagged non-weapon personal items like water bottles and laptops, and missed weapons. For example, Evolv’s Express scanners reportedly failed to detect a seven-inch knife brought into a school in October 2022 that was used to stab a student. When school officials increased the system’s sensitivity settings, false alarms occured at a 50% rate, according to the FTC.

Evolv Technologies in 2023 introduced a more sensitive setting for Express in order to detect more knives reduce false positives. However, the company noted that the setting might require additional staff to run the machines, and that some knives would be missed and more false alarms will occur, and additional staffing may be required to run the machines. Evolv also advised schools to add conveyor belts and other measures to divert harmless items by hand, which makes the system more like “traditional lower-cost metal detectors,” according to the FTC complaint.