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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
  
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2018
OR
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to               
 
Commission File Number:  001-37415
_________________________
 Evolent Health, Inc.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
32-0454912
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
800 N. Glebe Road, Suite 500, Arlington, Virginia
22203
(Address of principal executive offices)
(Zip Code)
  
(571) 389-6000
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
_________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒
 
As of August 6, 2018, there were 77,880,469 shares of the registrant’s Class A common stock outstanding and 765,646 shares of the registrant’s Class B common stock outstanding.



Evolent Health, Inc.
Table of Contents

Item
 
Page
 
 
1.
2.
3.
4.
 
 
1.
1A.
2.
3.
4.
5.
6.
 





Explanatory Note

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, “Evolent,” the “Company,” “we,” “our” and “us” refer to Evolent Health, Inc. and its consolidated subsidiaries. Evolent Health LLC, a subsidiary of Evolent Health, Inc. through which we conduct our operations, has owned all of our operating assets and substantially all of our business since inception. Evolent Health, Inc. is a holding company and its principal asset is all of the Class A common units of Evolent Health LLC.

FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
 
Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”).  A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like:  “believe,” “anticipate,” “expect,” “estimate,” “aim,” “predict,” “potential,” “continue,” “plan,” “project,” “will,” “should,” “shall,” “may,” “might” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance.  In particular, these include statements relating to future actions, trends in our businesses, prospective services, future performance or financial results and the outcome of contingencies, such as legal proceedings.  We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
 
These statements are only predictions based on our current expectations and projections about future events. Forward-looking statements involve risks and uncertainties that may cause actual results, level of activity, performance or achievements to differ materially from the results contained in the forward-looking statements.  Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others: 

the structural change in the market for health care in the United States;
uncertainty in the health care regulatory framework;
uncertainty in the public exchange market;
the uncertain impact of CMS waivers to Medicaid rules;
the uncertain impact the results of the 2018 congressional, state and local elections, as well as subsequent elections, may have on health care laws and regulations;
our ability to effectively manage our growth;
the significant portion of revenue we derive from our largest partners, and the potential loss, termination or renegotiation of customer contracts;
our ability to offer new and innovative products and services;
risks related to completed and future acquisitions, investments and alliances, including the acquisition of assets from New Mexico Health Connections (“NMHC”) and the acquisitions of Valence Health Inc., excluding Cicerone Health Solutions, Inc. (“Valence Health”), and Aldera Holdings, Inc. (“Aldera”), which may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our stockholders;
certain risks and uncertainties associated with the acquisition of assets from NMHC and the acquisition of Valence Health, including future revenues may be less than expected, the timing and extent of new lives expected to come onto the platform may not occur as expected and the expected results of Evolent may not be impacted as anticipated;
the growth and success of our partners, which is difficult to predict and is subject to factors outside of our control, including premium pricing reductions, selection bias in at-risk membership and the ability to control and, if necessary, reduce health care costs, particularly in New Mexico;
our ability to attract new partners;
the increasing number of risk-sharing arrangements we enter into with our partners;
our ability to recover the significant upfront costs in our partner relationships;
our ability to estimate the size of our target market;
our ability to maintain and enhance our reputation and brand recognition;
consolidation in the health care industry;
competition which could limit our ability to maintain or expand market share within our industry;
risks related to governmental payor audits and actions, including whistleblower claims;
our ability to partner with providers due to exclusivity provisions in our contracts;
restrictions and penalties as a result of privacy and data protection laws;
adequate protection of our intellectual property, including trademarks;
any alleged infringement, misappropriation or violation of third-party proprietary rights;
our use of “open source” software;
our ability to protect the confidentiality of our trade secrets, know-how and other proprietary information;
our reliance on third parties and licensed technologies;
our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;
online security risks and breaches or failures of our security measures;

1


our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;
our reliance on third-party vendors to host and maintain our technology platform;
our ability to contain health care costs, implement increases in premium rates on a timely basis, maintain adequate reserves for policy benefits or maintain cost effective provider agreements;
the risk of a significant reduction in the enrollment in our health plan;
our dependency on our key personnel, and our ability to attract, hire, integrate and retain key personnel;
the risk of potential future goodwill impairment on our results of operations;
our indebtedness and our ability to obtain additional financing;
our ability to achieve profitability in the future;
the requirements of being a public company;
our adjusted results may not be representative of our future performance;
the risk of potential future litigation;
our holding company structure and dependence on distributions from Evolent Health LLC;
our obligations to make payments to certain of our pre-IPO investors for certain tax benefits we may claim in the future;
our ability to utilize benefits under the tax receivables agreement described herein;
our ability to realize all or a portion of the tax benefits that we currently expect to result from past and future exchanges of Class B common units of Evolent Health LLC for our Class A common stock, and to utilize certain tax attributes of Evolent Health Holdings and an affiliate of TPG;
distributions that Evolent Health LLC will be required to make to us and to the other members of Evolent Health LLC;
our obligations to make payments under the tax receivables agreement that may be accelerated or may exceed the tax benefits we realize;
different interests among our pre-IPO investors, or between us and our pre-IPO investors;
the terms of agreements between us and certain of our pre-IPO investors;
the potential volatility of our Class A common stock price;
the potential decline of our Class A common stock price if a substantial number of shares are sold or become available for sale or if a large number of Class B common units are exchanged for shares of Class A common stock;
provisions in our second amended and restated certificate of incorporation and second amended and restated by-laws and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;
the ability of certain of our investors to compete with us without restrictions;
provisions in our second amended and restated certificate of incorporation which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;
our intention not to pay cash dividends on our Class A common stock;
our ability to maintain effective internal control over financial reporting;
our expectations regarding the additional management attention and costs that will be required as we have transitioned from an “emerging growth company” to a “large accelerated filer”; and
our lack of public company operating experience.

The risks included here are not exhaustive.  Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), and other documents filed with the SEC include additional factors that could affect our businesses and financial performance.  Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.
 
Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.  In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
EVOLENT HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)

 
 
As of
 
 
As of
 
 
June 30,
December 31,
  
 
2018
 
 
2017
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
197,983

 
 
$
238,433

 
Restricted cash and restricted investments
 
53,660

 
 
62,398

 
Accounts receivable, net (amounts related to affiliates: 2018 - $5,683; 2017 - $3,358)
 
70,846

 
 
48,947

 
Prepaid expenses and other current assets (amounts related to affiliates: 2018 - $50; 2017 - $25)
 
15,757

 
 
8,404

 
Notes receivable
 
12,000

 
 
20,000

 
Contract assets
 
3,008

 
 

 
Total current assets
 
353,254

 
 
378,182

 
Restricted cash and restricted investments
 
3,394

 
 
3,287

 
Investments in and advances to affiliates
 
4,246

 
 
1,531

 
Property and equipment, net
 
64,630

 
 
50,922

 
Prepaid expenses and other non-current assets
 
11,838

 
 
9,328

 
Contract assets
 
1,267

 
 

 
Contract cost assets
 
10,890

 
 

 
Intangible assets, net
 
236,819

 
 
241,261

 
Goodwill
 
635,282

 
 
628,186

 
Total assets
 
$
1,321,620

 
 
$
1,312,697

 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable (amounts related to affiliates: 2018 - $1,954; 2017 - $10,284)
 
$
34,258

 
 
$
42,930

 
Accrued liabilities (amounts related to affiliates: 2018 - $6,683; 2017 - $719)
 
39,477

 
 
29,572

 
Accrued compensation and employee benefits
 
23,168

 
 
35,390

 
Deferred revenue
 
29,818

 
 
24,807

 
Claims reserves
 
9,466

 
 

 
Total current liabilities
 
136,187

 
 
132,699

 
Long-term debt, net of discount
 
121,853

 
 
121,394

 
Other long-term liabilities
 
10,666

 
 
9,861

 
Deferred tax liabilities, net
 
1,533

 
 
2,437

 
Total liabilities
 
270,239

 
 
266,391

 
 
 
 
 
 
 
 
Commitments and Contingencies (See Note 9)
 

 
 

 
 
 
 
 
 
 
 
Shareholders' Equity (Deficit)
 
 
 
 
 
 
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 77,577,615 and 74,723,597
 
 
 
 
 
 
shares issued and outstanding as of June 30, 2018, and December 31, 2017, respectively
 
776

 
 
747

 
Class B common stock - $0.01 par value; 100,000,000 shares authorized; 765,646 and 2,653,544
 
 
 
 
 
 
shares issued and outstanding as of June 30, 2018, and December 31, 2017, respectively
 
8

 
 
27

 
Additional paid-in-capital
 
961,472

 
 
924,153

 
Accumulated other comprehensive income (loss)
 
(148
)
 
 

 
Retained earnings (accumulated deficit)
 
79,125

 
 
85,952

 
Total shareholders' equity (deficit) attributable to Evolent Health, Inc.
 
1,041,233

 
 
1,010,879

 
Non-controlling interests
 
10,148

 
 
35,427

 
Total shareholders' equity (deficit)
 
1,051,381

 
 
1,046,306

 
Total liabilities and shareholders' equity (deficit)
 
$
1,321,620

 
 
$
1,312,697

 

See accompanying Notes to Consolidated Financial Statements
3


EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands, except per share data)

 
For the Three
 
For the Six
 
Months Ended
 
Months Ended
 
June 30,
 
June 30,
 
2018

2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
Transformation services (1)
$
8,215

 
$
5,361

 
$
14,720

 
$
15,596

Platform and operations services (1)
113,346

 
101,710

 
223,164

 
197,714

Premiums
22,737

 

 
46,128

 

Total revenue
144,298

 
107,071

 
284,012

 
213,310

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization
 
 
 
 
 
 
 
expenses presented separately below) (1)
69,003

 
67,994

 
140,978

 
135,523

Claims expenses
18,428

 

 
35,177

 

Selling, general and administrative expenses (1)
57,403

 
51,090

 
112,929

 
104,641

Depreciation and amortization expenses
10,034

 
6,904

 
19,530

 
13,519

Change in fair value of contingent consideration and indemnification asset
(1,604
)
 
200

 
(1,504
)
 
200

Total operating expenses
153,264

 
126,188

 
307,110

 
253,883

Operating income (loss)
(8,966
)
 
(19,117
)
 
(23,098
)
 
(40,573
)
Interest income
878

 
218

 
1,950

 
403

Interest expense
(855
)
 
(947
)
 
(1,708
)
 
(1,901
)
Income (loss) from equity affiliates
(1,275
)
 
(555
)
 
(1,406
)
 
(1,077
)
Other income (expense), net
78

 
3

 
60

 
5

Income (loss) before income taxes and non-controlling interests
(10,140
)
 
(20,398
)
 
(24,202
)
 
(43,143
)
Provision (benefit) for income taxes
(109
)
 
(700
)
 
(106
)
 
(295
)
Net income (loss)
(10,031
)
 
(19,698
)
 
(24,096
)
 
(42,848
)
Net income (loss) attributable to non-controlling interests
(115
)
 
(2,793
)
 
(554
)
 
(7,930
)
Net income (loss) attributable to Evolent Health, Inc.
$
(9,916
)
 
$
(16,905
)
 
$
(23,542
)
 
$
(34,918
)
 
 
 
 
 
 
 
 
Earnings (Loss) Available for Common Shareholders
 
 
 
 
 
 
 
Basic
$
(9,916
)
 
$
(16,905
)
 
$
(23,542
)
 
$
(34,918
)
Diluted
(9,916
)
 
(16,905
)
 
(23,542
)
 
(34,918
)
 
 
 
 
 
 
 
 
Earnings (Loss) per Common Share
 
 
 
 
 
 
 
Basic
$
(0.13
)
 
$
(0.28
)
 
$
(0.31
)
 
$
(0.62
)
Diluted
(0.13
)
 
(0.28
)
 
(0.31
)
 
(0.62
)
 
 
 
 
 
 
 
 
Weighted-Average Common Shares Outstanding
 
 
 
 
 
 
 
Basic
77,209

 
59,478

 
76,297

 
56,057

Diluted
77,209

 
59,478

 
76,297

 
56,057

 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
 
 
 
 
 
 
Net income (loss)
$
(10,031
)
 
$
(19,698
)
 
$
(24,096
)
 
(42,848
)
Other comprehensive income (loss), net of taxes, related to:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(148
)
 

 
(148
)
 

Total comprehensive income (loss)
(10,179
)
 
(19,698
)
 
(24,244
)
 
(42,848
)
Total comprehensive income (loss) attributable to non-controlling interests
(115
)
 
(2,793
)
 
(554
)
 
(7,930
)
Total comprehensive income (loss) attributable to Evolent Health, Inc.
$
(10,064
)
 
$
(16,905
)
 
$
(23,690
)
 
$
(34,918
)

(1) See Note 16 for amounts related to affiliates included in these line items.



See accompanying Notes to Consolidated Financial Statements
4



EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 
For the Six
 
Months Ended
 
June 30,
  
2018
 
2017
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$
(24,096
)
 
$
(42,848
)
Adjustments to reconcile net income (loss) to net cash and restricted cash
 
 
 
provided by (used in) operating activities:
 
 
 
(Income) loss from affiliates
1,406

 
1,077

Change in fair value of contingent consideration and indemnification asset
(1,504
)
 
200

Impact of lease termination

 
(496
)
Depreciation and amortization expenses
19,530

 
13,519

Amortization of deferred financing costs
459

 
456

Stock-based compensation expense
8,513

 
10,464

Deferred tax provision (benefit)
(171
)
 
(280
)
Amortization of contract cost assets
1,166

 

Accretion of bond premium (discount)

 
105

Other
(55
)
 
291

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivables, net
(21,093
)
 
(7,902
)
Prepaid expenses and other current and noncurrent assets
(12,753
)
 
(1,412
)
Contract assets
(193
)
 

Contract cost assets
(762
)
 

Accounts payable
(342
)
 
7,041

Accrued liabilities
6,140

 
(3,621
)
Accrued compensation and employee benefits
(12,846
)
 
(16,630
)
Deferred revenue
8,267

 
6,719

Claims reserves
9,466

 

Other long-term liabilities
864

 
(4,495
)
Net cash and restricted cash provided by (used in) operating activities
(18,004
)
 
(37,812
)
 
 
 
 
Cash Flows from Investing Activities
 
 
 
Cash paid for asset acquisitions or business combinations
(11,676
)
 
(3,241
)
Principal repayment for implementation funding loan
8,000

 

Amount received from escrow in asset acquisition
500

 

Maturities and sales of investments

 
20,210

Investments in and advances to affiliates
(4,000
)
 

Purchases of property and equipment
(20,243
)
 
(12,430
)
Purchases and maturities of restricted investments
8,043

 
(3,200
)
Net cash and restricted cash provided by (used in) investing activities
(19,376
)
 
1,339

 
 
 
 
Cash Flows from Financing Activities
 
 
 
Change in restricted cash held on behalf of partners for claims processing
(7,258
)
 
(21,997
)
Proceeds from stock option exercises
4,692

 
3,560

Taxes withheld and paid for vesting of restricted stock units
(1,099
)
 
(1,175
)
Net cash and restricted cash provided by (used in) financing activities
(3,665
)
 
(19,612
)
Effect of exchange rate on cash and cash equivalents and restricted cash
7

 

Net increase (decrease) in cash and cash equivalents and restricted cash
(41,038
)
 
(56,085
)
Cash and cash equivalents and restricted cash as of beginning-of-period
295,363

 
170,029

Cash and cash equivalents and restricted cash as of end-of-period
$
254,325

 
$
113,944


See accompanying Notes to Consolidated Financial Statements
5




EVOLENT HEALTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited, in thousands)

 
 
 
 
 
 
 
 
 
 
 
 
Accum-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ulated
 
 
Retained
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
Earnings
 
 
 
 
 
Class A
 
Class B
 
Additional
 
Comprehensive
 
(Accum-
 
Non-
 
Total
 
Common Stock
 
Common Stock
 
Paid-in
 
 
Income
 
 
ulated
 
Controlling
 
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
 
(Loss)
 
 
Deficit)
 
Interests
 
(Deficit)
Balance as of December 31, 2016
52,587

 
$
506

 
15,347

 
$
153

 
$
555,250

 
 
$

 
 
$
146,617

 
$
209,588

 
$
912,114

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense

 

 

 

 
20,437

 
 

 
 

 

 
20,437

Exercise of stock options
788

 
28

 

 

 
4,054

 
 

 
 

 

 
4,082

Restricted stock units vested, net of shares withheld for taxes
149

 
2

 

 

 
(1,274
)
 
 

 
 

 

 
(1,272
)
Shares released from Valence Health escrow
(310
)
 
(3
)
 

 

 
911

 
 

 
 

 

 
908

Exchange of Class B common stock
12,693

 
126

 
(12,693
)
 
(126
)
 
168,883

 
 

 
 

 
(168,883
)
 

Tax impact of 2017 Securities Offerings

 

 

 

 
12,857

 
 

 
 

 

 
12,857

Issuance of Class A common stock during August 2017 Primary
8,816

 
88

 

 

 
166,859

 
 

 
 

 

 
166,947

Reclassification of non-controlling interests

 

 

 

 
(3,824
)
 
 

 
 

 
3,824

 

Net income (loss)

 

 

 

 

 
 

 
 
(60,665
)
 
(9,102
)
 
(69,767
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2017
74,723

 
747

 
2,654

 
27

 
924,153

 
 

 
 
85,952

 
35,427

 
1,046,306

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative-effect adjustment from adoption of ASC 606

 

 

 

 

 
 

 
 
16,715

 
594

 
17,309

Stock-based compensation expense

 

 

 

 
8,513

 
 

 
 

 

 
8,513

Exercise of stock options
766

 
8

 

 

 
4,684

 
 

 
 

 

 
4,692

Restricted stock units vested, net of shares withheld for taxes
201

 
2

 

 

 
(1,101
)
 
 

 
 

 

 
(1,099
)
Exchange of Class B common stock
1,888

 
19

 
(1,888
)
 
(19
)
 
25,334

 
 

 
 

 
(25,334
)
 

Tax impact of Class B Exchanges

 

 

 

 
908

 
 

 
 

 

 
908

Settlement of indemnification asset

 

 

 

 
(1,004
)
 
 

 
 

 

 
(1,004
)
Foreign Currency Translation Adjustment

 

 

 

 

 
 
(148
)
 
 

 

 
(148
)
Reclassification of non-controlling interests

 

 

 

 
(15
)
 
 

 
 

 
15

 

Net income (loss)

 

 

 

 

 
 

 
 
(23,542
)
 
(554
)
 
(24,096
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2018
77,578

 
$
776

 
766

 
$
8

 
$
961,472

 
 
$
(148
)
 
 
$
79,125

 
$
10,148

 
$
1,051,381


See accompanying Notes to Consolidated Financial Statements
6


EVOLENT HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Organization

Evolent Health, Inc. was incorporated in December 2014 in the state of Delaware, and is a managed services firm that supports leading health systems and physician organizations in their migration toward value-based care and population health management. The Company operates through two segments. The Company’s services segment (“Services”) provides our customers, who we refer to as partners, with a population management platform, integrated data and analytics capabilities, pharmacy benefit management (“PBM”) services and comprehensive health plan administration services. Together these services enable health systems to manage patient health in a more cost-effective manner. The Company’s contracts are structured as a combination of advisory fees, monthly member service fees, percentage of plan premiums and shared medical savings arrangements. The Company’s wholly-owned subsidiary, True Health New Mexico, Inc. (“True Health”) operates as a separate segment and is a commercial health plan we operate in New Mexico that focuses on small and large businesses. The Company’s headquarters is located in Arlington, Virginia.

Our predecessor, Evolent Health Holdings, Inc. (“Evolent Health Holdings”), merged with and into Evolent Health, Inc. in connection with the offering reorganization which occurred on June 4, 2015 (the “Offering Reorganization”), as discussed in our 2017 Form 10-K.

Prior to our initial public offering (“IPO”) in June 2015 and the Offering Reorganization we undertook in connection therewith, Evolent Health Holdings did not control Evolent Health LLC, our operating subsidiary company due to certain participating rights granted to our investor, TPG Global, LLC and certain of its affiliates (“TPG”). However, Evolent Health Holdings was able to exert significant influence on Evolent Health LLC and, accordingly, accounted for its investment in Evolent Health LLC using the equity method of accounting through June 3, 2015. Subsequent to the Offering Reorganization, the financial results of Evolent Health LLC have been consolidated in the financial statements of Evolent Health, Inc. Following the Offering Reorganization, the IPO, various securities offerings and sales (as described in Note 4) and acquisitions (as described in Note 4), as of June 30, 2018, Evolent Health, Inc. owned 99.0% of Evolent Health LLC, holds 100% of the voting rights, is the sole managing member and, therefore, controls its operations.

Since its inception, the Company has incurred losses from operations. As of June 30, 2018, the Company had cash and cash equivalents of $198.0 million. The Company believes it has sufficient liquidity for the next 12 months as of the date the financial statements were available to be issued.

2. Basis of Presentation, Summary of Significant Accounting Policies and Changes in Accounting Principles

Basis of Presentation

In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state our financial position, results of operations, and cash flows. The Consolidated Balance Sheet at December 31, 2017, has been derived from audited financial statements as of that date. The interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain footnote disclosures normally included in financial statements prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) have been omitted pursuant to instructions, rules, and regulations prescribed by the United States Securities and Exchange Commission (“SEC”). The disclosures provided herein should be read in conjunction with the audited financial statements and notes thereto included in our 2017 Form 10-K.

Summary of Significant Accounting Policies
 
Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are summarized below. See “Part II - Item 8. Financial Statements and Supplementary Data - Note 2” in our 2017 Form 10-K for a complete summary of our significant accounting policies.

Accounting Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. In the accompanying consolidated financial statements, estimates are used for, but not limited to, the valuation of assets, liabilities, consideration related to business combinations and asset acquisitions, revenue

7


recognition including variable consideration, discounts and credits, estimated selling prices for performance obligations in contracts with multiple performance obligations, claims reserves, contingent payments, allowance for doubtful accounts, depreciable lives of assets, impairment of long lived assets (including equity method investments), stock-based compensation, deferred income taxes and valuation allowance, contingent liabilities, valuation of intangible assets (including goodwill), purchase price allocation in taxable stock transactions and the useful lives of intangible assets.

Principles of Consolidation
 
The consolidated financial statements include the accounts of Evolent Health, Inc. and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation.

Operating Segments

Operating segments are defined as components of a business that earn revenue and incur expenses for which discrete financial information is available that is evaluated, on a regular basis, by the chief operating decision maker (“CODM”) to decide how to allocate resources and assess performance. The Company operates through two segments: (1) Services, and (2) True Health. Our Services segment consists of our technology-enabled services platform that supports our various value-based operations, such as delivery network alignment, population health performance, integrated cost and revenue management solutions and financial and administrative management services. Our True Health segment consists of a commercial health plan we operate in New Mexico that focuses on small and large businesses. See Note 17 for a discussion of our operating results by segment.

Revenue Recognition

Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services. See “Changes in Accounting Principles” below for our updated revenue recognition policy as a result of our adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers.

Our True Health segment derives revenue from premiums that are earned over the terms of the related insurance policies. The portion of premiums that will be earned in the future or are received prior to the effectiveness of the policy are deferred and reported as premiums received in advance. These amounts are generally classified as short-term deferred revenue on our Consolidated Balance Sheets.

8


Restricted Cash and Restricted Investments

Restricted cash and restricted investments include cash and investments used to collateralize various contractual obligations (in thousands) as follows:

 
 
As of
 
 
As of
 
 
June 30,
December 31,
 
 
2018
 
 
2017
 
Collateral for letters of credit
 
 
 
 
 
 
for facility leases (1)
 
$
3,711

 
 
$
3,812

 
Collateral with financial institutions (2)
 
21,941

 
 
24,725

 
Pharmacy benefit management
 
 
 
 
 
 
and claims processing services (3)
 
19,028

 
 
26,286

 
Collateral for reinsurance agreement (4)
 
10,000

 
 
10,000

 
Other
 
2,374

 
 
862

 
Total restricted cash
 
 
 
 
 
 
and restricted investments
 
57,054

 
 
65,685

 
 
 
 
 
 
 
 
Current restricted investments
 

 
 
8,150

 
Current restricted cash
 
53,660

 
 
54,248

 
Total current restricted cash
 
 
 
 
 
 
and restricted investments
 
53,660

 
 
62,398

 
 
 
 
 
 
 
 
Non-current restricted investments
 
712

 
 
605

 
Non-current restricted cash
 
2,682

 
 
2,682

 
Total non-current restricted cash
 
 
 
 
 
 
and restricted investments
 
$
3,394

 
 
$
3,287

 

(1) Represents restricted cash related to collateral for letters of credit required in conjunction with lease agreements. See Note 9 for further discussion of our lease commitments.
(2) Represents collateral held with financial institutions for risk-sharing arrangements. As of June 30, 2018, and December 31, 2017, approximately $21.9 million and $16.6 million of the collateral amount was in a trust account and invested in a money market fund. The amounts invested in money market funds are considered restricted cash and are carried at fair value, which approximates cost. See Note 15 for further discussion of our fair value measurement. As of December 31, 2017, approximately $8.2 million of the collateral amount was invested in restricted certificates of deposit with remaining maturities of less than 12 months. The restricted investments are classified as held-to-maturity and stated at amortized cost. Fair value of the certificates of deposit is determined using Level 2 inputs and approximates amortized cost as of December 31, 2017. See Note 9 for further discussion of our risk-sharing arrangements.
(3) Represents cash held by Evolent on behalf of partners to process PBM and other claims. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed.
(4) Represents restricted cash required as part of our capital only reinsurance agreement to provide balance sheet support to NMHC. There is no transfer of underwriting risk to Evolent and we are not at risk for any cash payments on behalf of NMHC as part of the agreement. The reinsurance agreement is further discussed in Note 9. Approximately $2.5 million is in a FDIC participating bank account and approximately $7.5 million is invested in a money market fund. The amount invested in the money market fund is considered restricted cash and is carried at fair value, which approximates cost.


9


The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.

 
As of June 30,
 
2018
 
2017
Cash and cash equivalents
$
197,983

 
$
99,975

Restricted cash and restricted investments
57,054

 
22,119

Restricted investments included in
 
 
 
restricted cash and restricted investments
(712
)
 
(8,150
)
Total cash and cash equivalents and restricted cash
 
 
 
shown in the consolidated statements of cash flows
$
254,325

 
$
113,944


Notes Receivable

Notes receivable are carried at the face amount of each note plus respective accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but contributed $20.0 million in the form of an implementation funding loan (the “Implementation Loan”) under an agreement with a current customer entered during the year ended December 31, 2017. The Implementation Loan is expected to support implementation services to assist the customer in expanding its Medicaid membership. The Implementation Loan carries a fixed interest rate of 2.5% per annum and the terms of the agreement governing the Implementation Loan require it to be repaid in ten equal monthly installments of $2.0 million, plus accrued interest, during 2018. As of June 30, 2018, the outstanding principal balance of the Implementation Loan was $12.0 million, excluding approximately $0.2 million of accrued interest. As of December 31, 2017, the outstanding principal balance of the Implementation Loan was $20.0 million, excluding approximately $0.1 million of accrued interest.

Intangible Assets, Net

Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. The Company acquired additional intangible assets in conjunction with a strategic acquisition made during 2018. Information regarding the determination and allocation of the fair value of the acquired assets and liabilities is further described within Note 4.

The following summarizes the estimated useful lives by asset classification:

Corporate trade name
20 years
Customer relationships
15-25 years
Technology
5 years
Provider network contracts
5 years

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group exceed the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value. See Note 7 for additional discussion regarding our intangible assets.

Goodwill

We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting unit level, which is consistent with the way management evaluates our business. Goodwill is assigned to the reporting unit that benefits from the synergies arising from each business combination.


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Foreign Currency

The Company established an international subsidiary during the first quarter of 2018. The functional currency of our international subsidiary is the Indian Rupee. We translate the financial statements of this subsidiary to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue, costs, and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of shareholders' equity. We recorded an immaterial “Foreign currency translation adjustment” on our Consolidated Statements of Operations for the three and six months ended June 30, 2018, which resulted in an immaterial “Accumulated other comprehensive income (loss)” balance on our Consolidated Balance Sheet as of June 30, 2018.

Changes in Accounting Principles

Adoption of ASU 2014-09, Revenue from Contracts with Customers

As discussed in Note 3, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, effective January 1, 2018. The following is our updated accounting policy with respect to revenue recognition for our Services segment.

Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services. Revenue is recognized when control of the services is transferred to our customers. We use the following 5-Step model, outlined in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), to determine revenue recognition on our contracts with customers:

Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to performance obligations
Recognize revenue when (or as) the entity satisfies a performance obligation

Transformation Services Revenue

Transformation services consist of strategic assessments, or Blueprint contracts, and implementation services whereby we assist the customer in launching its population health or health plan strategy. In certain cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for clients who are exiting a line of business or population. The transformation services are usually completed within 12 months. We generally receive a fixed fee for transformation services and recognize revenue over time using an input method based on hours incurred compared to the total estimated hours required to satisfy our performance obligation.

Platform and Operations Services Revenue

Platform and operations services generally include multi-year arrangements with customers to provide various population health, health plan operations and PBM services on an ongoing basis, as well as transition or run-out services to customers receiving primarily third-party administration (“TPA”) services. Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is customized to meet the specialized needs of our customers. Generally we will apply the series guidance to the performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for these services that typically include a monthly payment that is calculated based on a specified per member per month rate, multiplied by the number of members that our partners are managing under a value-based care arrangement or a percentage of plan premiums. Our arrangements may also include other variable fees related to service level agreements, shared medical savings arrangements and other performance measures. Variable consideration is estimated using the most likely amount based on our historical experience and best judgment at the time. Due to the nature of our arrangements certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue for platform and operations services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.

Contracts with Multiple Performance Obligations

Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both transformation services and platform and operations services as these services are distinct from one another. When a contract has multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into

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consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives when determining the standalone selling price.

Principal vs Agent

We occasionally use third parties to assist in satisfying our performance obligations. In order to determine whether we are the principal or agent in the arrangement, we will review each third party relationship on a contract by contract basis. We are an agent when our role is to arrange for another entity to provide the services to the customer. In these instances, we do not control the service before it is provided and will recognize revenue on a net basis. We are the principal when we control the good or service prior to transferring control to the customer. We recognize revenue on a gross basis when we are the principal in the arrangement.

In accordance with the requirements under ASU 2014-09, the impact of adoption to our consolidated financial statements was as follows. See Note 5 for additional disclosures regarding Evolent's contracts with customers.

Condensed Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2018
 
 
 
 
 
Amounts without
Impact of
 
 
 
 
adoption of
adoption
 
As Reported
 
ASC 606
 
Higher/(Lower)
Revenue
 
 
 
 
 
 
 
 
 
Transformation services
 
$
8,215

 
 
$
9,928

 
 
$
(1,713
)
 
Platform and operations services
 
113,346

 
 
111,569

 
 
1,777

 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization
 
 
 
 
 
 
 
 
 
presented separately below)
 
69,003

 
 
69,097

 
 
(94
)
 
Selling, general and administrative expenses
 
57,403

 
 
58,451

 
 
(1,048
)
 
Income (loss) before income taxes and non-controlling interests
 
(10,140
)
 
 
(11,346
)
 
 
1,206

 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2018
 
 
 
 
 
Amounts without
Impact of
 
 
 
 
adoption of
adoption
 
As Reported
 
ASC 606
 
Higher/(Lower)
Revenue
 
 
 
 
 
 
 
 
 
Transformation services
 
$
14,720

 
 
$
15,715

 
 
$
(995
)
 
Platform and operations services
 
223,164

 
 
221,543

 
 
1,621

 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization
 
 
 
 
 
 
 
 
 
presented separately below)
 
140,978

 
 
141,378

 
 
(400
)
 
Selling, general and administrative expenses
 
112,929

 
 
113,968

 
 
(1,039
)
 
Income (loss) before income taxes and non-controlling interests
 
(24,202
)
 
 
(26,267
)
 
 
2,065

 


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Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
As of June 30, 2018
 
 
 
 
 
Balances without
Impact of
 
 
 
 
adoption of
adoption
 
As Reported
 
ASC 606
 
Higher/(Lower)
Assets
 
 
 
 
 
 
 
 
 
Accounts receivable, net
 
$
70,846

 
 
$
67,626

 
 
$
3,220

 
Contract assets (current)
 
3,008

 
 

 
 
3,008

 
Contract assets (noncurrent)
 
1,267

 
 

 
 
1,267

 
Contract cost assets
 
10,890

 
 

 
 
10,890

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity (Deficit)
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Deferred revenue
 
$
29,818

 
 
$
30,961

 
 
$
(1,143
)
 
Other long-term liabilities
 
10,666

 
 
10,510

 
 
156

 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity (Deficit)
 
 
 
 
 
 
 
 
 
Retained earnings (accumulated deficit)
 
79,125

 
 
60,418

 
 
18,707

 
Non-controlling interests
 
10,148

 
 
9,483

 
 
665

 


Adoption of ASU 2016-18, Statement of Cash Flows: Restricted Cash

The Company adopted ASU 2016-18, Statement of Cash Flows: Restricted Cash, effective December 31, 2017, using the retroactive transition method, which resulted in the recast of our statement of cash flows for each period presented. See “Part II - Item 8. Financial Statements and Supplementary Data - Note 2” in our 2017 Form 10-K for further information about the adoption.

The amendments in the ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

A significant portion of the Company’s restricted cash consists of cash held on behalf of partners to process PBM claims. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed. Under the previous standard, there was no net impact to the statement of cash flows related to these amounts as the change in accounts payable was offset by the change in restricted cash. Upon adoption of ASU 2016-18, the change in restricted cash held on behalf of PBM partners would no longer net to zero, thereby potentially having a significant impact on cash flows from operations period over period. Given the pass-through nature of these PBM claim payments, the change in restricted cash held on behalf of PBM partners is presented within cash flows from financing activities on our statements of changes in cash flows under the updated requirements of ASU 2016-18.


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The following table summarizes the impact of the change in accounting principle to the Company’s Consolidated Statements of Cash Flows for the six months ended June 30, 2017 (in thousands):

 
For the Six Months Ended June 30, 2017
 
 
As Reported
Correction (1)
As Revised
Adjustments (2)
As Adjusted
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable, net
 
 
$
(5,247
)
 
 
$
(2,655
)
 
 
$
(7,902
)
 
 
$

 
 
$
(7,902
)
Accounts payable, net of change in restricted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
cash and restricted investments
 
 
(2,514
)
 
 
9,555

 
 
7,041

 
 

 
 
7,041

Net cash and restricted cash provided by
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(used in) operating activities
 
 
(44,712
)
 
 
6,900

 
 
(37,812
)
 
 

 
 
(37,812
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases and maturities of restricted investments
 
 

 
 

 
 

 
 
(3,200
)
 
 
(3,200
)
Change in restricted cash and restricted investments
 
 
3,200

 
 
(6,900
)
 
 
(3,700
)
 
 
3,700

 
 

Net cash and restricted cash provided by
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(used in) investing activities
 
 
7,739

 
 
(6,900
)
 
 
839

 
 
500

 
 
1,339

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in restricted cash held on behalf of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
partners for claims processing
 
 

 
 

 
 

 
 
(21,997
)
 
 
(21,997
)
Net cash and restricted cash provided by
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(used in) financing activities
 
 
2,385

 
 

 
 
2,385

 
 
(21,997
)
 
 
(19,612
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
equivalents and restricted cash
 
 
(34,588
)
 
 

 
 
(34,588
)
 
 
(21,497
)
 
 
(56,085
)
Cash and cash equivalents and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
restricted cash as of beginning-of-period
 
 
134,563

 
 

 
 
134,563

 
 
35,466

 
 
170,029

Cash and cash equivalents and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
restricted cash as of end-of-period
 
 
$
99,975

 
 
$

 
 
$
99,975

 
 
$
13,969

 
 
$
113,944


(1) 
Subsequent to the filing of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, the Company identified an error related to the classification of restricted cash and restricted investments on its Consolidated Statements of Cash Flows. Accordingly, the Company corrected this error by revising the classification of certain changes in restricted cash and restricted investments within the Consolidated Statements of Cash Flows. The Company assessed the materiality of the misstatement both quantitatively and qualitatively and determined the correction of this error to be immaterial to all prior consolidated financial statements taken as a whole. This column reflects the revisions required to correct the error in the Company’s originally reported Consolidated Statements of Cash Flows for the six months ended June 30, 2017. See “Part II - Item 8. Financial Statements and Supplementary Data - Note 18” in our 2017 Form 10-K for further discussion of the error correction.
(2) 
This column reflects the subsequent adjustments required to present revised amounts within the requirements of ASU 2016-18.

3. Recently Issued Accounting Standards

Adoption of New Accounting Standards

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. The update expands the scope of ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU specifies that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments in the update also clarify that ASC 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606. We adopted the requirements of this standard effective July 1, 2018, and there was no impact to

14


our financial condition and results of operations for the three and six months ended June 30, 2018. Going forward, we do not expect the adoption to have a material impact on our financial condition or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, in order to clarify the principles of recognizing revenue. This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB defines a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligations. By completing all five steps of the process, the core principles of revenue recognition will be achieved. The new revenue standard (including updates) is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The guidance permits two methods of adoption: i) the full retrospective method applying the standard to each prior reporting period presented, or ii) the modified retrospective method with a cumulative effect of initially applying the guidance recognized at the date of initial application. The standard also allows entities to apply certain practical expedients at their discretion. The Company adopted the standard effective January 1, 2018, using the modified retrospective method for only contracts that were not completed at the date of initial application. Results for reporting periods beginning after January 1, 2018 are presented under Accounting Standards Codification ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition (“ASC 605”). The adoption of this standard resulted in changes related to revenue recognition for contracts that contain certain features, such as variable consideration. These changes generally accelerate revenue recognition. In addition, certain customer setup costs, which have historically been expensed as incurred, will now be capitalized. Evolent recognized the cumulative effect of applying the new revenue standard as a $17.3 million adjustment to the opening balance of retained earnings, including non-controlling interests, in the first quarter of 2018, primarily as a result of capitalization of expenses related to contract acquisition and fulfillment costs and acceleration of revenue due to variable consideration estimation. See Note 5 for additional disclosures regarding Evolent's contracts with customers. See Note 2 for updated revenue recognition accounting policy and the impact of adopting the new revenue recognition standard on Evolent’s financial statements.

Future Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. With respect to assets measured at amortized cost, such as held-to-maturity assets, the update requires presentation of the amortized cost net of a credit loss allowance. The update eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses as opposed to the previous standard, when an entity only considered past events and current conditions. With respect to available for sale debt securities, the update requires that credit losses be presented as an allowance rather than as a write-down. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We intend to adopt the requirements of this standard effective January 1, 2020, and are currently evaluating the impact of the adoption on our financial condition and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight‑line basis over the term of the lease, respectively. A lessee is also required to record a right‑of‑use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 (ASC Topic 842) supersedes the previous leases standard, ASC 840, Leases. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.

The Company has formulated an implementation team that is currently engaged in the evaluation process. We intend to adopt the requirements of this standard effective January 1, 2019, using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, which is intended to make targeted improvements to ASU 2016-02. The amendments in ASU 2018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The requirements of ASU 2018-11 are effective on the same date as the requirements of ASU 2016-02. Pursuant to ASU 2018-11, the Company will apply the new standard at its adoption date rather than at the earliest comparative period presented in the financial statements and recognize a cumulative-effect adjustment to the opening balance of retaining earnings. We anticipate that this standard will have a material impact on our consolidated balance sheets.


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4. Transactions

Business Combinations

New Mexico Health Connections

On January 2, 2018, the Company, through its wholly-owned subsidiary, True Health, completed its previously announced acquisition of assets related to NMHC’s commercial, small and large group business. The assets include a health plan management services organization with a leadership team and employee base with experience working locally with providers to run NMHC’s suite of preventive, disease and care management programs. The consideration paid by the Company in connection with the acquisition consisted of $10.3 million in cash (subject to certain adjustments), of which $0.3 million was deposited in an escrow account. This acquisition is expected to allow the Company to leverage its platform to support a value-based, provider-centric model of care in New Mexico.

The Company commenced operations of the commercial health plan and began reporting the results of True Health as a new reportable segment during the first quarter of 2018. See Note 17 for further information about the Company’s segment reporting. At the time of the acquisition, the Company also entered into a managed services agreement (“MSA”) with NMHC to support its ongoing business. During the fourth quarter of 2017, the Company also entered into a reinsurance arrangement with NMHC to provide balance sheet support. See Note 9 for further discussion of the reinsurance arrangement. The MSA and reinsurance arrangement were considered separate transactions and accounted for outside of the business combination. Therefore, there is no allocation of purchase price to these arrangements at fair value.

The Company incurred approximately $1.2 million in transaction costs related to the NHMC transaction, materially all of which were recorded within “Selling, general and administrative expenses” on our Consolidated Statements of Operations for the year ended December 31, 2017. The transaction will be accounted for as a business combination using purchase accounting.

The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of January 2, 2018, as follows (in thousands):

Purchase consideration
 
Cash paid to NMHC
$
10,000

Cash paid to escrow agent
252

Total consideration
$
10,252

 
 
Identifiable intangible assets acquired and liabilities assumed
 
Customer relationships
$
2,700

Provider network contracts
2,300

Above market lease
(100
)
Accrued compensation and employee benefits
(474
)
 
 
Goodwill
5,826

Net assets acquired
$
10,252


Identifiable intangible assets associated with customer relationships and provider network contracts will be amortized on a straight-line basis over their estimated useful lives of 15 and 5 years, respectively. The customer relationships represent existing contracts in place to provide health plan services to a number of large and small group customers throughout the state of New Mexico. The provider network contracts represent a network of hospitals and physicians to service the health plan customers. The fair value of the customer relationship intangible asset was primarily determined using the income approach. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The fair value of the provider network intangible asset was primarily determined using the cost approach. The cost approach estimates the fair value for an asset based on the amount it would cost to replace the asset. Goodwill is calculated as the difference between the acquisition date fair value of the total consideration and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Goodwill associated with the acquisition of True Health is allocated entirely to the True Health segment, as all of the assets and liabilities of the acquired business are assigned to the True Health segment. The goodwill is attributable primarily to the acquired workforce and expected cost synergies, none of which qualify for recognition as a separate intangible asset. Goodwill is considered an indefinite-lived asset. The transaction is an asset acquisition for tax purposes, and as such

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the tax-basis in the acquired assets is equal to the book-basis fair value calculated and is recorded at the True Health legal entity. Therefore, no opening balance sheet deferred tax liability was recorded.

The amounts above reflect management’s preliminary estimate of the fair value of the tangible and intangible assets acquired and liabilities assumed based on a valuation performed using currently available information. Any remaining adjustments are expected to be finalized within one year of the acquisition date.

True Health is a separate segment, and its results of operations are provided in Note 17 - Segment Reporting.

Pro Forma Financial Information (Unaudited)

The unaudited pro forma Consolidated Statements of Operations presented below gives effect to (1) the NMHC transaction as if it took place on January 1, 2017. The following pro forma information includes adjustments to:

reclassify transaction costs related to the NMHC transaction to the period beginning January 1, 2017;
record revenue and expenses related to the MSA beginning January 1, 2017; and
record amortization expenses related to intangible assets beginning January 1, 2017, for intangible assets acquired as part of the NMHC transaction.

This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the transactions described above occurred in the specified prior periods. The pro forma adjustments are based on available information and assumptions that the Company believes are reasonable to reflect the impact of these transactions on the Company’s historical financial information on a pro forma basis (in thousands, except per share data).
 
For the Three
 
For the Six
 
Months Ended
 
Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
144,298

 
$
121,356

 
$
284,012

 
$
248,981

Net income (loss)
(10,031
)
 
(29,951
)
 
(24,096
)
 
(58,119
)
Net income (loss) attributable to non-controlling interests
(115
)
 
(3,815
)
 
(554
)
 
(10,250
)
Net income (loss) attributable to Evolent Health, Inc.
(9,916
)
 
(26,136
)
 
(23,542
)
 
(47,869
)
 
 
 
 
 
 
 
 
Net income (loss) per Common Share available to common shareholders
 
 
 
 
 
 
 
Basic
$
(0.13
)
 
$
(0.44
)
 
$
(0.31
)
 
$
(0.85
)
Diluted
(0.13
)
 
(0.44
)
 
(0.31
)
 
(0.85
)

Securities Offerings and Sales

Under an exchange agreement we entered into at the time of our IPO, we granted certain affiliates of TPG (“TPG”), The Advisory Board Company (“The Advisory Board”) and Ptolemy Capital, LLC (“Ptolemy Capital”) (together, the “Investor Stockholders”) an exchange right that allows receipt of newly-issued shares of the Company’s Class A common stock in exchange (a “Class B Exchange”) for an equal number of shares of the Company’s Class B common stock (which are subsequently canceled) and an equal number of Evolent Health LLC’s Class B common units (“Class B units”). Class B units received by the Company from relevant Investor Stockholders are simultaneously exchanged for an equivalent number of Class A units of Evolent Health LLC, and Evolent Health LLC cancels the Class B units it receives in the Class B Exchange. The cancellation of the Class B units results in an increase in the Company’s economic interest in Evolent Health LLC.

March 2018 Private Sale

In March 2018, The Advisory Board sold 3.0 million shares of the Company’s Class A common Stock in a private sale (the “March 2018 Private Sale”). The shares sold in the March 2018 Private Sale consisted of 1.2 million existing shares of the Company’s Class A common stock owned by The Advisory Board and 1.8 million newly-issued shares of the Company’s Class A common stock received by The Advisory Board pursuant to a Class B Exchange for all of its outstanding shares of the Company’s Class B common stock and Class B units. The Company did not receive any proceeds from the March 2018 Private Sale.

As a result of this Class B Exchange and Evolent Health LLC’s cancellation of the Class B units during the March 2018 Private Sale, the Company’s economic interest in Evolent Health LLC increased from 96.6% to 98.9% immediately following the March 2018

17


Private Sale, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.

August 2017 Primary Offering

In August 2017, the Company completed a primary offering of 8.8 million shares of its Class A common stock at a price to the public of $19.85 per share and a corresponding price to the underwriters of $19.01 per share (the “August 2017 Primary”). This offering resulted in net cash proceeds to the Company of approximately $166.9 million (gross proceeds of $175.0 million, net of $8.1 million in underwriting discounts and stock issuance costs). For each share of Class A common stock issued by Evolent Health, Inc., the Company received a corresponding Class A common unit from Evolent Health LLC in exchange for contributing the issuance proceeds to Evolent Health LLC. As a result of the Class A common stock and Class A common units issued during the August 2017 Primary, the Company’s economic interest in Evolent Health LLC increased from 96.1% to 96.6% immediately following the August 2017 Primary, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.

Secondary Offerings

The Investor Stockholders initiated several Class B Exchanges as part of various secondary offerings during 2017, thus increasing the Company’s economic interest in Evolent Health LLC, as discussed below. The Company did not receive any proceeds from the secondary offerings described below.

June 2017 Secondary Offering

In June 2017, the Company completed a secondary offering of 4.5 million shares of its Class A common stock at a price to the underwriters of $25.87 per share (the “June 2017 Secondary”).

The shares sold in the June 2017 Secondary consisted of 0.7 million existing shares of the Company’s Class A common stock owned and held by certain Investor Stockholders and 3.8 million newly-issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges.

As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of the Class B units during the June 2017 Secondary, the Company’s economic interest in Evolent Health LLC increased from 90.5% to 96.1% immediately following the June 2017 Secondary, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.

May 2017 Secondary Offering

In May 2017, the Company completed a secondary offering of 7.0 million shares of its Class A common stock at a price to the underwriters of $24.30 per share (the “May 2017 Secondary”). The shares were sold by the Investor Stockholders and certain management selling stockholders (together with the Investor Stockholders, the “Selling Stockholders”).

The shares sold in the May 2017 Secondary consisted of 3.1 million existing shares of the Company’s Class A common stock owned and held by the Selling Stockholders, 3.8 million newly-issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges and 0.1 million shares issued upon the exercise of options by certain management selling stockholders.

As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of the Class B units during the May 2017 Secondary, the Company’s economic interest in Evolent Health LLC increased from 84.9% to 90.5% immediately following the May 2017 Secondary, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.

March 2017 Secondary Offering

In March 2017, the Company completed a secondary offering of 7.5 million shares of its Class A common stock at a price to the underwriters of $19.53 per share (the “March 2017 Secondary”).

The shares sold in the March 2017 Secondary consisted of 3.1 million existing shares of the Company’s Class A common stock owned and held by the Investor Stockholders and 4.4 million newly-issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges.


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As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of the Class B units during the March 2017 Secondary, the Company’s economic interest in Evolent Health LLC increased from 77.4% to 83.9% immediately following the March 2017 Secondary, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.

In connection with the March 2017 Secondary, the underwriters exercised, in full, their option to purchase an additional 1.1 million shares of Class A common stock (the “March 2017 Option to Purchase Additional Shares”) from the Investor Stockholders at a price of $19.53 per share. The March 2017 Option to Purchase Additional Shares closed in May 2017.

The shares sold in the March 2017 Option to Purchase Additional Shares consisted of 0.5 million existing shares of the Company’s Class A common stock owned and held by certain Investor Stockholders. It also included 0.6 million newly-issued shares of the Company’s Class A common stock received by certain Investor Stockholders pursuant to Class B Exchanges.

As a result of the Class B Exchanges and Evolent Health LLC’s cancellation of the Class B units during the March 2017 Option to Purchase Additional Shares, the Company’s economic interest in Evolent Health LLC increased from 83.9% to 84.9% immediately following the March 2017 Option to Purchase Additional Shares, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc.

The June 2017 Secondary, May 2017 Secondary, March 2017 Secondary and March 2017 Option to Purchase Additional Shares are collectively referred to as the “2017 Secondary Offerings.”

The Company’s economic interest in Evolent Health LLC will increase if further Class B Exchanges occur.

Asset Acquisitions

Accordion Health, Inc.

On June 8, 2017, the Company entered into an agreement to acquire Accordion Health, Inc. (“Accordion”) for $3.2 million (the “Accordion Purchase Agreement”). Accordion provides technology that the Company believes enhances its risk-adjustment factor (“RAF”) services to its partners. In addition to technology assets, the software development team from Accordion joined Evolent as full-time employees. Under the terms of the Accordion Purchase Agreement, members of the software development team will be eligible for an additional $0.8 million earn-out, contingent upon the completion of specified software development targets.

We accounted for the transaction as an asset acquisition as substantially all of the fair value of the gross assets acquired was concentrated in a single identified asset, thus satisfying the requirements of the screen test introduced in ASU 2017-01. The assets acquired in the transaction were measured based on the amount of cash paid to Accordion, including transaction costs, as the fair value of the assets given was more readily determinable than the fair value of the assets received. We classified and designated the identifiable assets acquired as a $3.3 million technology intangible asset, inclusive of approximately $0.1 million of capitalized transaction costs. We also assessed and determined the useful life of the acquired intangible assets to be five years, subject to amortization. The Company will account for the contingent earn-out as a post-acquisition expense as the specified software development targets are achieved. The transaction was a taxable stock acquisition and the Company recognized deferred tax liability of $2.0 million related to the book-tax basis difference in the acquired asset, which resulted in a $2.0 million increase in the value of the intangible asset. The additional deferred tax liability represents a future source of taxable income that enables the Company to release some of its previously established valuation allowance, the reduction of which is accounted for outside of acquisition accounting, resulting in income tax benefit.


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5. Revenue Recognition

As discussed in Note 3, we adopted ASU 2014-09, effective January 1, 2018, which introduces ASC 606. See Note 2 for the updated revenue recognition policy and the impact of adopting the new revenue recognition standard on the Company’s financial statements. The following are other relevant disclosures as required by the adoption of ASU 2014-09. Provisions within ASC 606 are only applicable to revenues derived from our Services segment.

Disaggregation of Revenue

The following table represents Evolent’s Services segment revenue disaggregated by revenue type for the three and six months ended June 30, 2018 (in thousands), excluding revenues from our True Health segment and from our downside risk sharing arrangements through our insurance subsidiary, which are accounted for under ASC 944, Financial Services-Insurance.

  
For the Three
For the Six
 
Months Ended
Months Ended
  
June 30,
June 30,
 
 
2018
 
 
2018
 
Services Revenue
 
 
 
 
 
 
Transformation services
 
$
8,215

 
 
$
14,720

 
Platform and operations services
 
110,836

 
 
219,284

 

Transaction Price Allocated to the Remaining Performance Obligations

For contracts with a term that is greater than one year, we have allocated approximately $139.5 million of transaction price to performance obligations that are unsatisfied or partially unsatisfied as of June 30, 2018. We do not include variable consideration that is allocated entirely to a wholly unsatisfied performance obligation accounted for under the series guidance in the calculation. As a result, the balance represents the value of the fixed consideration in our long-term contracts that will be recognized as revenue in a future period and excludes the majority of our platform and operations revenue, which is primarily derived based on variable consideration as discussed in Note 2. We expect to recognize revenue on approximately 65% of these remaining performance obligations by December 31, 2019, with the remaining balance to be recognized thereafter. However, because our existing contracts may be canceled or renegotiated including for reasons outside our control, the amount of this revenue that we actually receive may be less than this estimate.

Contract Balances

Contract balances consist of accounts receivable, contract assets and deferred revenue. Contract assets are recorded when the right to consideration for services is conditional on something other than the passage of time. Contract assets relating to unbilled receivables are transferred to accounts receivable when the right to consideration becomes unconditional. We classify contract assets as current or noncurrent based on the timing of our rights to the unconditional payments. Our contract assets are generally classified as current and recorded within “Contract assets” on our consolidated balance sheets.

Deferred revenue includes advance customer payments and billings in excess of revenue recognized. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. Our current deferred revenue is recorded within “Deferred revenue” on our consolidated balance sheets, and noncurrent deferred revenue is recorded within “Other long-term liabilities” on our consolidated balance sheets.


20


The following table provides information about receivables, contract assets and deferred revenue from contracts with customers (in thousands):

 
 
As of
 
 
As of
 
 
June 30,
January 1,
 
 
2018
 
2018
Receivables (1)
 
$
69,064

 
 
$
47,131

 
Short-term contract assets
 
3,008

 
 
3,710

 
Long-term contract assets
 
1,267

 
 
1,791

 
Short-term deferred revenue
 
29,818

 
 
26,147

 
Long-term deferred revenue
 
1,405

 
 
493

 
(1) Excludes pharmacy claims receivable and premiums receivable

During the six months ended June 30, 2018, our contract asset balance decreased by $1.2 million, primarily as a result of transfers to receivables from contract assets recognized at the beginning of the period. During the six months ended June 30, 2018, our deferred revenue increased by $4.6 million, primarily as a result of new contracts and increased pre-billing for services.

The amount of revenue recognized during the three and six months ended June 30, 2018, from amounts included in deferred revenue at the beginning of the period was $4.4 million and $13.3 million, respectively. The amount of revenue recognized during the three and six months ended June 30, 2018 from performance obligations satisfied (or partially satisfied) in previous periods, due to net gain share, service-level agreement true-ups and changes in estimates, was $2.5 million and $2.1 million, respectively.

Contract Costs

Certain bonuses and commissions earned by our sales team are considered incremental costs of obtaining a contract with a customer that we expect to be recoverable. The capitalized contract acquisition costs are classified as noncurrent assets and recorded within “Contract cost assets” on our consolidated balance sheets. Amortization expense is recorded within “Selling, general and administrative expenses” on the accompanying consolidated statements of operations. As of June 30, 2018, the Company had $1.9 million of contract acquisition cost assets, net of accumulated amortization, and amortization expense of less than $0.1 million for the three and six months ended June 30, 2018.

In our platforms and operations arrangements, we incur certain costs related to the implementation of our platform before we begin to satisfy our performance obligation to the customer. The costs, which we expect to recover, are considered costs to fulfill a contract. Our contract fulfillment costs primarily include our employee labor costs and third party vendor costs. The capitalized contract fulfillment costs are classified as noncurrent and recorded within “Contract cost assets” on our consolidated balance sheets. Amortization expense is recorded within “Cost of revenue” on the accompanying consolidated statements of operations. As of June 30, 2018, the Company had $9.0 million of contract fulfillment cost assets, net of accumulated amortization, and amortization expense of $0.5 million and $1.0 million for the three and six months ended June 30, 2018, respectively.

The majority of the contract cost balance was recorded as part of the transition adjustment that was recorded upon implementation of ASC 606. These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. The period of benefit was based on our technology, the nature of our customer arrangements and other factors.


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6. Property and Equipment, Net

The following summarizes our property and equipment (in thousands):
 
 
 
As of
 
 
As of
 
  
June 30,
December 31,
  
 
2018
 
 
2017
 
Computer hardware
 
$
7,256

 
 
$
5,667

 
Furniture and equipment
 
3,011

 
 
2,448

 
Internal-use software development costs
 
66,650

 
 
48,557