Document


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 September 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 001-34221
 
 

The Providence Service Corporation
(Exact name of registrant as specified in its charter)

 

Delaware
 
86-0845127
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
700 Canal Street, Third Floor
Stamford, Connecticut
 
06902
(Address of principal executive offices)
 
(Zip Code)
 
(203) 307-2800
(Registrant’s telephone number, including area code)

 

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 every Interactive Data File required to be submitted 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 such files). ☒  Yes   ☐   No
 

1



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “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 7(a)(2)(B) of the Securities 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 November 5, 2018, there were outstanding 12,810,967 shares (excluding treasury shares of 4,968,899) of the registrant’s Common Stock, $0.001 par value per share.



2



TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets – September 30, 2018 (unaudited) and December 31, 2017
 
 
 
 
Unaudited Condensed Consolidated Statements of Income – Three and nine months ended September 30, 2018 and 2017
 
 
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2018 and 2017
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2018 and 2017
 
 
 
 
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



3



PART I—FINANCIAL INFORMATION
Item 1.   Financial Statements.
The Providence Service Corporation
Condensed Consolidated Balance Sheets
(in thousands except share and per share data)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
47,492

 
$
95,310

Accounts receivable, net of allowance of $1,461 in 2018 and $5,762 in 2017
181,155

 
158,926

Other receivables
3,525

 
5,759

Prepaid expenses and other
27,292

 
35,243

Restricted cash
1,624

 
1,091

Total current assets
261,088

 
296,329

Property and equipment, net
47,027

 
50,377

Goodwill
160,420

 
121,668

Intangible assets, net
52,668

 
43,939

Equity investments
164,097

 
169,912

Other assets
9,314

 
12,028

Restricted cash, less current portion
3,132

 
5,205

Deferred tax asset
6,213

 
4,632

Total assets
$
703,959

 
$
704,090

Liabilities, redeemable convertible preferred stock and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Current portion of debt
$
37,149

 
$
2,400

Accounts payable
17,994

 
15,404

Accrued expenses
70,071

 
103,838

Accrued transportation costs
114,476

 
83,588

Deferred revenue
17,419

 
17,381

Reinsurance and related liability reserves
6,860

 
4,319

Total current liabilities
263,969

 
226,930

Long-term debt, less current portion
430

 
584

Other long-term liabilities
17,609

 
21,386

Deferred tax liabilities
44,716

 
41,627

Total liabilities
326,724

 
290,527

Commitments and contingencies (Note 15)

 

Redeemable convertible preferred stock
 
 
 
Convertible preferred stock, net: Authorized 10,000,000 shares; $0.001 par value; 801,729 and 803,200, respectively, issued and outstanding; 5.5%/8.5% dividend rate
77,404

 
77,546

Stockholders' equity
 
 
 
Common stock: Authorized 40,000,000 shares; $0.001 par value; 17,779,646 and 17,473,598, respectively, issued and outstanding (including treasury shares)
18

 
17

Additional paid-in capital
331,947

 
313,955

Retained earnings
208,589

 
204,818

Accumulated other comprehensive loss, net of tax
(28,102
)
 
(25,805
)
Treasury shares, at cost, 4,968,899 and 4,126,132 shares
(210,812
)
 
(154,803
)
Total Providence stockholders' equity
301,640

 
338,182

Noncontrolling interest
(1,809
)
 
(2,165
)
Total stockholders' equity
299,831

 
336,017

Total liabilities, redeemable convertible preferred stock and stockholders' equity
$
703,959

 
$
704,090


 
See accompanying notes to the unaudited condensed consolidated financial statements

4



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Income
(in thousands except share and per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Service revenue, net
$
421,319

 
$
409,517

 
$
1,239,159

 
$
1,216,994

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Service expense
391,608

 
378,032

 
1,147,914

 
1,124,478

General and administrative expense
16,203

 
18,629

 
53,894

 
53,705

Asset impairment charge

 

 
9,881

 

Depreciation and amortization
6,641

 
6,547

 
20,317

 
19,716

Total operating expenses
414,452

 
403,208

 
1,232,006

 
1,197,899

 
 
 
 
 
 
 
 
Operating income
6,867

 
6,309

 
7,153

 
19,095

 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
Interest expense, net
347

 
302

 
918

 
983

Other loss
669

 

 
669

 

Equity in net loss of investees
1,558

 
460

 
4,026

 
991

Gain on sale of equity investment

 
(12,606
)
 

 
(12,606
)
Gain on remeasurement of cost method investment
(6,577
)
 

 
(6,577
)
 

Loss (gain) on foreign currency transactions
(178
)
 
200

 
(807
)
 
600

Income from continuing operations before income taxes
11,048

 
17,953

 
8,924

 
29,127

Provision for income taxes
4,259

 
2,989

 
7,755

 
8,391

Income from continuing operations, net of tax
6,789

 
14,964

 
1,169

 
20,736

Discontinued operations, net of tax
542

 
(16
)
 
485

 
(6,000
)
Net income
7,331

 
14,948

 
1,654

 
14,736

Net income attributable to noncontrolling interests
(177
)
 
(95
)
 
(285
)
 
(295
)
Net income attributable to Providence
$
7,154

 
$
14,853

 
$
1,369

 
$
14,441

 
 
 
 
 
 
 
 
Net income (loss) available to common stockholders (Note 13)
$
5,298

 
$
11,962

 
$
(1,939
)
 
$
8,927

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.88

 
$
(0.19
)
 
$
1.10

Discontinued operations
0.04

 

 
0.04

 
(0.44
)
Basic earnings (loss) per common share
$
0.41

 
$
0.88

 
$
(0.15
)
 
$
0.66

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.88

 
$
(0.19
)
 
$
1.09

Discontinued operations
0.04

 

 
0.04

 
(0.44
)
Diluted earnings (loss) per common share
$
0.41

 
$
0.88

 
$
(0.15
)
 
$
0.65

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
12,865,777

 
13,581,662

 
12,992,403

 
13,612,764

Diluted
12,927,122

 
13,655,554

 
12,992,403

 
13,676,468


See accompanying notes to the unaudited condensed consolidated financial statements

5



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
7,331

 
$
14,948

 
$
1,654

 
$
14,736

Net loss (income) attributable to noncontrolling interest
(177
)
 
(95
)
 
(285
)
 
(295
)
Net income (loss) attributable to Providence
7,154

 
14,853

 
1,369

 
14,441

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
(882
)
 
2,165

 
(2,924
)
 
6,591

Reclassification of translation loss realized upon sale of subsidiary and equity investment, respectively
627

 
527

 
627

 
527

Other comprehensive income (loss)
(255
)
 
2,692

 
(2,297
)
 
7,118

Comprehensive income
7,076

 
17,640

 
(643
)
 
21,854

Comprehensive income attributable to noncontrolling interest
(203
)
 
(26
)
 
(356
)
 
(113
)
Comprehensive income (loss) attributable to Providence
$
6,873

 
$
17,614

 
$
(999
)
 
$
21,741

 


































See accompanying notes to the unaudited condensed consolidated financial statements

6



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Nine months ended September 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
1,654

 
$
14,736

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
14,217

 
13,802

Amortization
6,100

 
5,914

Asset impairment charge
9,881

 

Provision for doubtful accounts
1,615

 
1,258

Stock-based compensation
6,209

 
4,586

Deferred income taxes
(602
)
 
(7,062
)
Amortization of deferred financing costs and debt discount
408

 
516

Equity in net loss of investees
4,026

 
991

Gain on sale of equity investment

 
(12,606
)
Gain on remeasurement of cost method investment
(6,577
)
 

Other non-cash charges (credits)
(115
)
 
554

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(31,514
)
 
(10,647
)
Prepaid expenses and other
14,243

 
7,517

Reinsurance and related liability reserve
(548
)
 
(4,924
)
Accounts payable and accrued expenses
(26,251
)
 
(3,407
)
Accrued transportation costs
30,888

 
28,839

Deferred revenue
(1,468
)
 
(4,537
)
Other long-term liabilities
304

 
1,399

Net cash provided by operating activities
22,470

 
36,929

Investing activities
 
 
 
Purchase of property and equipment
(13,194
)
 
(15,293
)
Acquisitions, net of cash acquired
(42,067
)
 

Dispositions, net of cash sold
(5,862
)
 

Cost method investments

 
(3,000
)
Proceeds from sale of equity investment

 
15,823

Proceeds from note receivable
3,130

 

Other investing activities

 
310

Net cash used in investing activities
(57,993
)
 
(2,160
)
Financing activities
 
 
 
Preferred stock dividends
(3,302
)
 
(3,305
)
Repurchase of common stock, for treasury
(56,009
)
 
(18,763
)
Proceeds from common stock issued pursuant to stock option exercise
12,413

 
1,528

Performance restricted stock surrendered for employee tax payment
(429
)
 
(96
)
Proceeds from debt
36,000

 

Capital lease payments and other
(2,529
)
 
(1,711
)
Net cash used in financing activities
(13,856
)
 
(22,347
)
Effect of exchange rate changes on cash
21

 
464

Net change in cash, cash equivalents and restricted cash
(49,358
)
 
12,886

Cash, cash equivalents and restricted cash at beginning of period
101,606

 
86,392

Cash, cash equivalents and restricted cash at end of period
$
52,248

 
$
99,278

 See accompanying notes to the unaudited condensed consolidated financial statements

7



The Providence Service Corporation
Supplemental Cash Flow Information
(in thousands)

 
Nine Months Ended
September 30,
Supplemental cash flow information
2018
 
2017
Cash paid for interest
$
767

 
$
776

Cash paid for income taxes
$
11,477

 
$
14,804

Purchase of equipment through capital lease obligation
$
724

 
$
516

Acquisitions:
 
 
 
Purchase price
$
54,700

 
$

Less:
 
 
 
Cash acquired
(1,302
)
 

Restricted cash acquired
(110
)
 

Value of existing ownership in Circulation
(9,577
)
 

Purchase consideration payable
(1,644
)
 

Acquisitions, net of cash acquired
$
42,067

 
$



































 See accompanying notes to the unaudited condensed consolidated financial statements


8



The Providence Service Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2018
(in thousands except years, share and per share data)
 
1.    Organization and Basis of Presentation

Description of Business

The Providence Service Corporation (“we”, the “Company” or “Providence”) owns subsidiaries and investments primarily engaged in the provision of healthcare services in the United States and workforce development services internationally. The subsidiaries and other investments in which the Company holds interests comprise the following segments:

Non-Emergency Transportation Services (“NET Services”) – Nationwide manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations. On September 21, 2018, LogistiCare Solutions, LLC (“LogistiCare”), a wholly-owned subsidiary of the Company, completed its acquisition of Circulation, Inc. (“Circulation”). Circulation is a company that offers a full suite of logistics solutions to manage non-emergency transportation across all areas of healthcare.
Workforce Development Services (“WD Services”) – Global provider of employment preparation and placement services, legal offender rehabilitation services, youth community service programs and certain health related services to eligible participants of government sponsored programs. On November 6, 2018, the Board of Directors of Providence approved the sale of the WD Services segment. On November 7, 2018, the Company and Ingeus UK Holdings Limited (“Holdings”), its direct wholly-owned subsidiary, entered into a share purchase agreement with Advanced Personnel Management Global Pty Ltd and APM UK Holdings Limited (together the “Purchasers”) and International APM Group Pty Limited, as Purchasers’ Guarantor (the “Guarantor”), pursuant to which the Company agreed to sell substantially all of the operating subsidiaries of its WD Services segment with the exception of its operations in Saudi Arabia, for which it is pursuing alternative strategies which are expected to result in no longer providing services in the country beyond the end of the year. The transaction is subject to approvals from certain of Ingeus’ government customers and the satisfaction of customary closing conditions.
Matrix Investment – Minority interest in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”), accounted for as an equity method investment. Matrix offers a national network of community-based clinicians who deliver in-home services for members, including comprehensive health assessments (“CHAs”), and a fleet of mobile health clinics with advanced diagnostic capabilities. On February 16, 2018, Matrix acquired HealthFair.

In addition to its segments’ operations, the Corporate and Other segment includes the Company’s activities at its corporate office that include executive, accounting, finance, internal audit, tax, legal, public reporting, certain strategic and corporate development functions and the results of the Company’s captive insurance company. On April 11, 2018, the Company announced an organizational consolidation plan to integrate substantially all activities and functions performed at the corporate holding company level into its wholly-owned subsidiary, LogistiCare. See Note 9, Restructuring and Related Reorganization Costs, for further information.

Basis of Presentation

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”), which serves as the single source of authoritative non-SEC accounting and reporting standards to be applied by non-governmental entities. All amounts are presented in United States (“U.S.”) dollars, unless otherwise noted.

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the results of the interim periods have been included.

The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses and certain disclosures to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could

9



differ from those estimates. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these unaudited condensed consolidated financial statements were filed, and considered the effect of such events in the preparation of these unaudited condensed consolidated financial statements.

The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The Company holds investments that are accounted for using the equity method. The Company does not control the decision-making process or business management practices of these affiliates. While the Company has access to certain information and performs certain procedures to review the reasonableness of information, the Company relies on management of these affiliates to provide accurate financial information prepared in accordance with GAAP. The Company receives audit reports relating to such financial information from the affiliates’ independent auditors on an annual basis. The Company is not aware of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on the Company’s condensed consolidated financial statements.

Reclassifications

We have reclassified certain amounts relating to our prior period results to conform to our current period presentation. See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, for additional information on reclassifications.

2.    Significant Accounting Policies and Recent Accounting Pronouncements

The Company adopted the following accounting pronouncements during the nine months ended September 30, 2018:

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 introduced FASB Accounting Standards Codification Topic 606 (“ASC 606”), which replaced historical revenue recognition guidance and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASC 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASC 606 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective transition method for contracts that were not completed as of January 1, 2018.

10




The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Upon adoption of ASU 2014-09, the cumulative effect of the changes made to the Company’s condensed consolidated balance sheet as of January 1, 2018 were as follows:

 
Balance at December 31, 2017
 
Adjustments due to ASU 2014-09
 
Balance at January 1, 2018
Assets
 
 
 
 
 
   Prepaid expenses and other
$
35,243

 
$
11,182

 
$
46,425

 
 
 
 
 
 
Liabilities
 
 
 
 
 
   Accrued expenses
103,838

 
2,330

 
106,168

   Deferred revenue
17,381

 
3,112

 
20,493

   Deferred tax liability
41,627

 
30

 
41,657

 
 
 
 
 
 
Equity
 
 
 
 
 
   Retained earnings, net of tax
204,818

 
5,710

 
210,528

    
The impact of applying the new revenue recognition guidance on the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2018, and balance sheet as of September 30, 2018, was as follows:

 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Statements of Income
As Reported
 
Pro forma as if the previous accounting guidance was in effect
 
As Reported
 
Pro forma as if the previous accounting guidance was in effect
Service revenue, net
$
421,319

 
$
422,942

 
$
1,239,159

 
$
1,254,350

Service expense
391,608

 
393,659

 
1,147,914

 
1,159,943

Operating income
6,867

 
6,439

 
7,153

 
10,315

Income from continuing operations before taxes
11,048

 
10,620

 
8,924

 
12,086

Net income attributable to Providence
7,154

 
7,580

 
1,369

 
4,590

Diluted earnings (loss) per share
$
0.41

 
$
0.44

 
$
(0.15
)
 
$
0.09

 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
Balance Sheet
As Reported
 
Pro forma as if the previous accounting guidance was in effect
 
 
 
 
Prepaid expenses and other
$
27,292

 
$
21,890

 
 
 
 
Accrued expenses
70,071

 
68,550

 
 
 
 
Deferred revenue
17,419

 
16,222

 
 
 
 
Deferred tax liabilities
44,716

 
44,527

 
 
 
 
Retained earnings, net of tax
208,589

 
206,094

 
 
 
 

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See further information in Note 3, Revenue Recognition.


11



In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2016-15 on January 1, 2018. The adoption did not have a significant impact on the Company's consolidated financial statements.
 
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires 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. ASU 2016-18 is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period; however, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. ASU 2016-18 must be adopted retrospectively. The Company adopted ASU 2016-18 on January 1, 2018. As a result of the adoption of ASU 2016-18, the Company recast its condensed consolidated statement of cash flows for the nine months ended September 30, 2017. The recast resulted in an increase in cash used in investing activities of $7,029. See additional information in Note 4, Cash, Cash Equivalents and Restricted Cash.

In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms of a share-based payment award should be accounted for as a modification. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change, and the classification as an equity or liability instrument does not change. This guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated financial statements.

Updates to the recent accounting pronouncements as disclosed in the Company's Form 10-K for the year ended December 31, 2017 are as follows:

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 introduced FASB Accounting Standards Codification Topic 842 (“ASC 842”), which will replace ASC 840, Leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). ASU 2018-11 provides a new transition method and a practical expedient for separating components of a contract.

ASC 842 is effective for publicly held entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees may apply a modified retrospective transition approach for leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, or lessees may initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in which it is the lessee. Under ASC 842, lessees will be required to recognize a lease liability and right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The Company intends to apply the modified retrospective transition method and elect the transition option to use the effective date of January 1, 2019 as the date of initial application. The Company will recognize the cumulative effect of the transition adjustment as of the effective date; and, it does not expect to provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company expects to elect the package of practical expedients and the practical expedient not to separate lease and non-lease components. The Company does not expect to apply the use of hindsight practical expedient. In connection with the adoption of ASU 2016-02, the Company has assembled a cross-functional team supported by external consultants to evaluate the lease portfolio, systems, processes and policy change requirements. A review of the lease population has commenced and the Company has selected a third-party software program to store, track and analyze its leases in accordance with the new guidance. The Company is in process of implementing the software program for its lease population. The Company's assessment of the related financial impact is ongoing and, therefore, the Company has not yet determined whether the impact will be material to its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The amendments in ASU 2016-13 will supersede or clarify much of the existing guidance for reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The amendments in ASU 2016-13 affect loans, debt securities,

12



trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 removes certain disclosures, modifies certain disclosures and added additional disclosures. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact of ASU 2018-13 on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which will align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of ASU 2018-15 on its consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule is effective on November 5, 2018. The Company will adopt this new rule beginning with its financial reporting for the quarter ended March 31, 2019. Upon adoption, the Company will include its Consolidated Statements of Stockholders’ Equity with each filing of a Quarterly Report on Form 10-Q.

There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017.

3.    Revenue Recognition

Under ASC 606, the Company recognizes revenue as it transfers control of promised services to its customers. The Company generates all of its revenue from contracts with customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for these services. The Company satisfies substantially all of its performance obligations and recognizes revenue over time instead of at points in time.

Disaggregation of Revenue
The following table summarizes disaggregated revenue from contracts with customers for the three and nine months ended September 30, 2018 by contract type for NET Services:

 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
State Medicaid agency contracts
$
183,661

 
$
544,409

Managed care organization contracts
160,110

 
479,794

  Total NET Services revenue, net
$
343,771

 
$
1,024,203

 
 
 
 
Capitated contracts
$
297,808

 
$
869,203

Non-capitated contracts
45,963

 
155,000

  Total NET Services revenue, net
$
343,771

 
$
1,024,203


    

13



The following table summarizes disaggregated revenue from contracts with customers for the three and nine months ended September 30, 2018 by revenue category for WD Services:

 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Employment preparation and placement services
$
31,767

 
$
118,161

Legal offender rehabilitation services
17,926

 
58,775

Youth services
23,171

 
24,160

Other
4,684

 
13,860

     Total WD Services revenue, net
$
77,548

 
$
214,956


    
The following table summarizes disaggregated revenue from contracts with customers for the three and nine months ended September 30, 2018 by geographic region:

 
Three months ended September 30, 2018
 
United
States
 
United
Kingdom
 
Other
Foreign
 
Total
NET Services
$
343,771

 
$

 
$

 
$
343,771

WD Services
5,066

 
53,018

 
19,464

 
77,548

   Total
$
348,837

 
$
53,018

 
$
19,464

 
$
421,319

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
United
States
 
United
Kingdom
 
Other
Foreign
 
Total
NET Services
$
1,024,203

 
$

 
$

 
$
1,024,203

WD Services
14,108

 
127,487

 
73,361

 
214,956

   Total
$
1,038,311

 
$
127,487

 
$
73,361

 
$
1,239,159


NET Services Revenue
NET Services provides non-emergency transportation services pursuant to contractual commitments over defined service delivery periods. For most contracts, NET Services arranges for transportation of members through its network of independent transportation providers, whereby it remits payment to the transportation providers. However, for certain contracts, NET Services only provides administrative management services to support the customers’ efforts to serve its clients, and the amount of revenue recognized is based upon the management fee earned.
These contracts typically include single performance obligations under which NET Services stands ready to deliver management, fulfillment and record-keeping related to non-emergency transportation services. Transportation management services include, but are not limited to, fraud, waste, and abuse and utilization review programs as well as compliance controls. NET Services’ performance obligations consist of a series of distinct services that are substantially the same and which are transferred to the customer in the same manner. In most cases, NET Services is the principal in its arrangements because it controls the services before transferring those services to the customer.

NET Services primarily uses the ‘as invoiced’ practical expedient to recognize revenue because it typically has the right to consideration from customers in an amount that corresponds directly with the value of its performance to date. This is consistent with NET Services’ historical revenue recognition policy. NET Services recognizes revenue for some of its contracts that include variable consideration using a time-elapsed measure when the fees earned relate directly to services performed in the period. Because most contracts include termination for convenience clauses with required notice periods of less than one year, most NET Services contracts are deemed to be short-term in nature.
Some of NET Services’ contracts include provisions whereby it must provide certain levels of service or face potential penalties or be required to refund fees paid by the customer. For those contracts, NET Services records a provision to reduce revenue to reflect the amount to which it expects it will ultimately be entitled.

14



The only financial impact for NET Services of adopting ASU 2014-09 was the determination it is the agent under one of its contracts based on the new guidance, whereas it previously considered itself the principal in the arrangement. Consequently, NET Services now recognizes revenue under the specific contract on a net basis, which resulted in reduced revenue and service expense of $3,765 and $11,166 during the three and nine months ended September 30, 2018, respectively.
During the three and nine months ended September 30, 2018, NET Services recognized $1,956 and $5,685, respectively, from performance obligations satisfied in previous periods due to the resolution of contractual adjustments agreed with the customer.
WD Services Revenue
WD Services provides workforce development and offender rehabilitation services, which include employment preparation and placement, as well as apprenticeship and training, youth community service programs and certain health related services to clients on behalf of governmental and private entities pursuant to contractual commitments over defined service delivery periods. While the specific terms vary by contract, WD Services often receives four types of revenue streams under contracts with government entities: referral/attachment fees, job placement/job outcome fees, sustainment fees and incentive fees (collectively, “outcome fees”).
 
Most of WD Services’ contracts include a single promise to stand ready to deliver pre-defined services. WD Services concluded its performance obligations comprise a series of distinct monthly services that are substantially the same and which are transferred to the customer in the same manner. Accordingly, the monthly promise to stand ready is accounted for as a single performance obligation. Substantially all of WD Services’ contracts include variable consideration, whereby it earns revenues if certain contractually-defined outcomes occur in the future. As the related performance obligations are satisfied, WD Services recognizes revenue for those outcomes in proportion to the amount of the related fees it estimates have been earned. The amount of revenue is based upon WD Services’ estimate of the final amount of outcome fees to be earned. WD Services evaluates probability generally using the expected value method because the likelihood it will be entitled to variable fees is binary in nature. These estimates consider i) contractual rates, ii) assumed success rates and iii) assumed participant life in program. Generally, each of these estimates is based upon historical results, although for new contracts, other factors may be considered. At each reporting period, WD Services updates its estimate of variable consideration based on actual results or other relevant information and records an adjustment to revenue based upon services performed to date. For some of WD Services’ contracts, it recognizes revenue as it invoices customers because the amount to which it is entitled to invoice approximates the fair value of the services transferred.
WD Services constrains its estimates of variable consideration by reducing those estimates to amounts it believes with sufficient confidence will not later result in a significant reversal of revenue. When determining if variable consideration should be constrained, management considers whether there are factors outside WD Services’ control that could result in a significant reversal of revenue. In making these assessments, WD Services considers the likelihood and magnitude of a potential reversal of revenue.

For some of WD Services’ contracts, WD Services accrues for potential penalties it could incur as a result of not meeting certain performance targets. These penalties are estimated based on expectations from historical results. During the nine months ended September 30, 2018, our subsidiary, The Reducing Reoffending Partnership Limited (“RRP”), along with other providers of probation services, obtained further clarity on the recommendations resulting from the UK probation services review, including the measurement of frequency and binary recidivism measures and the related income and penalties. As a result of this clarification of the agreement, which was subsequently signed in the third quarter, RRP was able to calculate a reasonable estimate of its liability, recording a reduction of revenue of $1,681 during the nine months ended September 30, 2018. In addition, based upon current performance trends, the Company estimates it will incur additional penalties over the remainder of the contract through 2020, and such amounts will be recorded as an offset to revenue earned over such periods, based upon ASC 606. The Company believes it will have the opportunity to earn additional income based upon the final amendment, but such amounts will be recorded in the future as services are provided.

Under the new standard, for certain contracts in which WD Services receives up-front fees or fixed monthly fees, WD Services may recognize revenue over a different period than under historical guidance, which may include a longer period of time. In addition, WD Services may recognize revenue for outcome fees earlier than under historical guidance, as WD Services previously recognized those revenues only upon final resolution of the outcome, at which point the related invoice was issued. Thus, the new standard results in a greater degree of estimation for outcome-based fees, and to a lesser extent, fixed fees.

During the three and nine months ended September 30, 2018, WD Services recognized $3,283 and $8,357, respectively, from performance obligations satisfied in previous periods, based upon final resolution of amounts with the customer.

15



Related Balance Sheet Accounts
Accounts receivable, net - The Company records accounts receivable amounts at the contractual amount, less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts at an amount it estimates to be sufficient to cover the risk that an account will not be collected. The Company regularly evaluates its accounts receivables, especially receivables that are past due, and reassesses its allowance for doubtful accounts based on identified customer collection issues. In circumstances where the Company is aware of a customer’s inability to meet its financial obligation, the Company records a specific allowance for doubtful accounts to reduce its net recognized receivable to an amount the Company reasonably expects to collect. Under certain contracts of NET Services, final payment is based on a reconciliation of actual utilization and cost, and the final reconciliation may require a considerable period of time. In addition, certain government entities which WD Services serves remit payment substantially beyond the payment terms. The Company monitors these amounts due to the aging of receivables, taking into account discussions with the customer and other considerations, and generally believes the balances are collectible. However, factors within those government entities could change and there can be no assurance that such changes would not result in an inability to collect the receivables.
For example, under WD Services’ employability contract in Saudi Arabia, certain receivable balances are significantly past due. During the three months ended September 30, 2018, the Company reached an agreement with the Saudi Arabian authorities to settle certain outstanding receivables at a discount, recording a write-down of $1,804. Such amounts arose prior to March 2017, when the government implemented an electronic billing system. A reserve was not provided previously, as the amounts were expected to be paid. However, due to delays in payment and the related administrative burden of the reconciliation process, the Company offered a discount in order to settle the receivable.
The following table provides information about accounts receivable, net as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
Accounts receivable
$
138,254

 
$
122,634

NET Services' reconciliation contract receivable
44,362

 
42,054

Allowance for doubtful accounts
(1,461
)
 
(5,762
)
 
$
181,155

 
$
158,926

Contract assets - Primarily reflects estimated revenue expected to be billed, as the Company does not have the unconditional right to invoice these amounts. We receive payments from customers based on the terms established in our contracts. The balance of $4,512 is included in “Prepaid expenses and other” in the condensed consolidated balance sheet at September 30, 2018.
NET Services accrued contract payments - Includes liabilities related to certain contracts of NET Services for which final payment is based on a reconciliation of actual utilization and cost, and the final reconciliation may require a considerable period of time. The balance is included in “Accrued liabilities” in the condensed consolidated balance sheet. The balance at September 30, 2018 and December 31, 2017 totaled $10,713 and $17,487, respectively.
Deferred Revenue - Includes funds received for certain services in advance of services being rendered. The balance at September 30, 2018 and December 31, 2017 totaled $17,419 and $17,381, respectively. The increase in the deferred revenue balance from December 31, 2017 to September 30, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, including the impact of the adoption of the revenue recognition standard, as revenue under the WD Services youth services contract is now fully deferred until the courses are offered in the summer and fall. During the nine months ended September 30, 2018, $11,602 of revenue deferred as of December 31, 2017 was recognized.
Costs to Obtain and Fulfill a Contract

The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract; ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract; and iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to service expense as the Company satisfies its performance obligations. These costs, which are classified in “Prepaid expenses and other” on the condensed consolidated balance sheets, principally relate to costs deferred for work performed by sub-contractors under WD Services’ contracts that will be used in satisfying future performance obligations. These deferred costs totaled $1,937 and $2,543 at September 30, 2018 and December 31, 2017, respectively. The Company recognized $2,438 and $2,562, respectively, of deferred costs as service expense during the three and nine months ended September 30, 2018.

16



Practical Expedients, Exemptions and Other Matters
We do not incur significant sales commissions expenses. Any amounts are expensed as incurred. These costs are recorded within service expense in the condensed consolidated statements of income.
The Company generally expects the period of time from when it transfers a promised service to a customer and when the customer pays for the service to be one year or less, and thus we do not have a significant financing component for our contracts with customers.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed; or (iii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation, and the terms of the variable consideration relate specifically to our efforts to transfer the distinct service or to a specific outcome from transferring the distinct service.
4.    Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:

 
September 30, 2018
 
September 30, 2017
Cash and cash equivalents
$
47,492

 
$
92,178

Restricted cash, current
1,624

 
1,198

Restricted cash, less current portion
3,132

 
5,902

Cash, cash equivalents and restricted cash
$
52,248

 
$
99,278


Restricted cash primarily relates to amounts held in trusts for reinsurance claims losses under the Company’s Captive insurance operation for historical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawal under our self-insured medical and benefits plans.

5.    Equity Investment

Matrix

As of September 30, 2018 and December 31, 2017, the Company owned a 43.6% and 46.6% noncontrolling interest in Matrix, respectively. The Company's ownership decreased as a result of the rollover of certain equity interests in HealthFair, which Matrix acquired on February 16, 2018. Pursuant to a Shareholder’s Agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting and the Company’s share of Matrix’s income or losses are recorded as “Equity in net (gain) loss of investees” in the accompanying condensed consolidated statements of income.

The carrying amount of the assets included in the Company’s condensed consolidated balance sheet and the maximum loss exposure related to the Company’s interest in Matrix as of September 30, 2018 and December 31, 2017 totaled $163,814 and $169,699, respectively.

Summary financial information for Matrix on a standalone basis is as follows:
 
September 30, 2018
 
December 31, 2017
Current assets
$
64,139

 
$
37,563

Long-term assets
732,630

 
597,613

Current liabilities
29,691

 
27,718

Long-term liabilities
375,466

 
240,513


17



 
Three months ended
September 30, 2018
 
Three months ended September 30, 2017
Revenue
$
70,522

 
$
58,639

Operating income
1,492

 
3,159

Net loss
(4,351
)
 
(537
)
 
 
 
 
 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
Revenue
$
216,361

 
$
175,346

Operating income
5,330

 
10,109

Net loss
(13,736
)
 
(775
)

Included in Matrix’s standalone net loss for the three months ended September 30, 2018 are depreciation and amortization of $9,558, interest expense of $6,193, equity compensation of $491, management fees paid to certain of Matrix’s shareholders of $583, merger and acquisition related diligence costs of $95, integration costs of $1,931, and an income tax benefit of $350. Included in Matrix’s standalone net loss for the nine months ended September 30, 2018 are depreciation and amortization of $27,969, interest expense of $22,475, including $6,567 related to the amortization of deferred financing costs primarily resulting from the refinancing of Matrix debt facility, equity compensation of $2,090, management fees paid to certain of Matrix’s shareholders of $4,337, merger and acquisition related diligence costs of $2,341 primarily related to the first quarter acquisition of HealthFair, integration costs of $4,293, and an income tax benefit of $3,409.

Included in Matrix’s standalone net loss for the three months ended September 30, 2017 were equity compensation of $640, depreciation and amortization of $8,469, interest expense of $3,741 and an income tax expense of $45. Included in Matrix’s standalone net loss for the nine months ended September 30, 2017 were transaction bonuses and other transaction related costs of $3,518, equity compensation of $1,902, depreciation and amortization of $24,629, interest expense of $11,005 and an income tax benefit of $121.

 6.    Prepaid Expenses and Other

Prepaid expenses and other were comprised of the following: 
 
September 30,
2018
 
December 31,
2017
Prepaid income taxes
$
2,050

 
$
1,106

Escrow funds

 
10,000

Contract asset
4,512

 

Prepaid insurance
2,070

 
2,121

Prepaid taxes and licenses
2,131

 
906

Note receivable

 
3,224

Prepaid rent
1,014

 
2,268

Deposits held for leased premises and bonds
2,115

 
2,849

Costs to fulfill a contract
1,937

 
2,543

Other
11,463

 
10,226

Total prepaid expenses and other
$
27,292

 
$
35,243


Escrow funds at December 31, 2017 represent amounts related to indemnification claims from the sale of the Human Services segment, which was completed on November 1, 2015. The escrow funds were used during the three months ended September 30, 2018 to satisfy a portion of the Company’s settlement of indemnification claims. See Note 15, Commitments and Contingencies, for further information. “Contract asset” and “Costs to fulfill a contract” in the table above relate to the adoption of ASC 606, as described in Note 3, Revenue Recognition.


18



7. Goodwill and Intangible Assets

Goodwill
 
Changes in goodwill were as follows:
 
 
NET
Services
 
WD
Services
 
Consolidated
Total
Balances at December 31, 2017
 
 
 
 
 
Goodwill
$
191,215

 
$
37,718

 
$
228,933

Accumulated impairment losses
(96,000
)
 
(11,265
)
 
(107,265
)
 
95,215

 
26,453

 
121,668

 
 
 
 
 
 
Acquisition of Circulation
39,554

 

 
39,554

Foreign currency translation adjustment

 
(802
)
 
(802
)
Balances at September 30, 2018
 
 
 
 
 
Goodwill
230,769

 
36,916

 
267,685

Accumulated impairment losses
(96,000
)
 
(11,265
)
 
(107,265
)
 
$
134,769

 
$
25,651

 
$
160,420

 
The total amount of goodwill that was deductible for income tax purposes related to acquisitions as of September 30, 2018 and December 31, 2017 was $4,222.

Intangible Assets
 
Intangible assets are comprised of acquired customer relationships, trademarks and trade names, and developed technology. Intangible assets consisted of the following:
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Estimated
Useful
Life (Yrs.)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Customer relationships
15
 
$
48,084

 
$
(35,421
)
 
$
48,128

 
$
(33,136
)
Customer relationships
10
 
29,522

 
(13,578
)
 
30,583

 
(11,871
)
Customer relationships
3
 
1,400

 

 

 

Trademarks and Trade Names
10
 
14,021

 
(6,076
)
 
14,525

 
(5,205
)
Trademarks and Trade Names
3
 
200

 

 

 

Developed technology of Ingeus and Circulation
5
 
17,216

 
(2,700
)
 
3,228

 
(2,313
)
Total
 
 
$
110,443

 
$
(57,775
)
 
$
96,464

 
$
(52,525
)
 
The weighted-average amortization period at September 30, 2018 for intangibles was 11.3 years. No significant residual value is estimated for these intangible assets. Amortization expense was $1,988 and $6,100 for the three and nine months ended September 30, 2018, respectively. Amortization expense was $1,990 and $5,914 for the three and nine months ended September 30, 2017, respectively. The Company acquired Circulation in September 2018, which resulted in the increase of intangible assets from December 31, 2017 to September 30, 2018. See additional discussion of the Circulation acquisition in Note 17, Acquisitions.


19



The total amortization expense is estimated to be as follows, based on completed acquisitions and the applicable foreign exchange rates as of September 30, 2018:
   
Year
 
Amount
2018 (remaining year)
 
$
2,826

2019
 
10,940

2020
 
10,687

2021
 
10,455

2022
 
9,694

Thereafter
 
8,066

Total
 
$
52,668


8.    Accrued Expenses

Accrued expenses consisted of the following:
 
September 30,
2018
 
December 31, 2017
Accrued compensation
$
15,438

 
$
29,715

NET Services accrued contract payments
10,713

 
17,487

Accrued settlement

 
15,000

Accrued cash settled stock-based compensation
5,137

 
3,938

Income taxes payable
1,087

 
3,723

Other
37,696

 
33,975

Total accrued expenses
$
70,071

 
$
103,838


The accrued settlement represents amounts related to indemnification claims from the sale of the Human Services segment, which was completed on November 1, 2015. The settlement was finalized during the three months ended September 30, 2018, which resulted in the payment of the accrued settlement amount, in which $10,000 was released from an escrow account and $4,475 was paid in cash. See Note 15, Commitments and Contingencies, for further information.

9.    Restructuring and Related Reorganization Costs

Corporate and Other

On April 11, 2018, the Company announced an organizational consolidation plan to integrate substantially all activities and functions performed at the corporate holding company level into its wholly-owned subsidiary, LogistiCare. As part of the organizational consolidation process, the Company’s Stamford, CT headquarters and Tucson, AZ satellite office will be closed. The Company adopted an employee retention plan designed to incentivize current holding company level employees to remain employed with the Company during the transition. The employee retention plan became effective on April 9, 2018 and covers the holding company level employees and provides for certain payments and benefits to be provided to the employees if they remain employed with the Company through a retention date established for each individual, subject to a fully executed retention letter. The organizational consolidation is expected to be completed by the middle of 2019.

As of September 30, 2018, the Company estimates that it will incur aggregate pre-tax restructuring charges of approximately $9,600 through June 30, 2019 in connection with the organizational consolidation discussed above. These charges include approximately $5,600 related to retention and personnel costs, $2,000 related to acceleration of stock-based compensation, $600 related to accelerated depreciation and $1,400 related to other costs, including lease termination and recruiting costs. A total of $2,082 restructuring and related costs has been incurred during the three months ended September 30, 2018 related to the organizational consolidation. These costs include $1,330 of retention and personnel costs, $119 of accelerated stock-based compensation expense, $146 of accelerated depreciation and $487 of other costs, primarily related to recruiting and legal costs. A total of $5,163 restructuring and related costs has been incurred during the nine months ended September 30, 2018 related to the organizational consolidation. These costs include $1,978 of retention and personnel costs, $1,569 of accelerated stock-based compensation expense, $291 of accelerated depreciation and $1,325 of other costs, primarily related to recruiting and legal costs.

20



These costs are recorded as “General and administrative expense” and “Depreciation and amortization” in the accompanying condensed consolidated statements of income.

Summary of Liability for Corporate and Other Restructuring and Related Charges
 
January 1,
2018
 
Costs
Incurred
 
Cash Payments
 
September 30, 2018
 
 
 
 
 
 
 
 
Retention and personnel liability
$

 
$
2,038

 
$
(111
)
 
$
1,927

Other liability

 
1,265

 
(786
)
 
479

Total
$

 
$
3,303

 
$
(897
)
 
$
2,406


The total restructuring liability at September 30, 2018 includes $2,188 classified as “Accrued expenses” and $218 classified as “Accounts payable” in the condensed consolidated balance sheet.

WD Services

WD Services has two active redundancy programs at September 30, 2018. During the year ended December 31, 2017, WD Services had four redundancy programs. Of these four redundancy plans, two redundancy plans were approved in 2015: a plan related to the termination of employees delivering services under an offender rehabilitation program (“Offender Rehabilitation Program”), which has been completed, and a plan related to the termination of employees delivering services under the Company’s employability and skills training programs and certain other employees in the United Kingdom (“UK Restructuring Program”). In addition, a redundancy plan related to the termination of employees as part of a value enhancement project (“Ingeus Futures Program”) to better align costs at Ingeus with revenue and to improve overall operating performance was approved in 2016 and began a second phase during the three months ended March 31, 2018. Further, a redundancy program to align costs with revenue for offender rehabilitation services (“Delivery First Program”) was approved in the fourth quarter of 2017, and a second phase of this program began in the second quarter of 2018. The Company recorded severance and related charges of $2,363 and $1,117 during the nine months ended September 30, 2018 and 2017, respectively, relating to the termination benefits for employee groups and specifically identified employees impacted by these plans. The severance charges incurred are recorded as “Service expense” in the accompanying condensed consolidated statements of income.

The initial estimate of severance and related charges for the plans was based upon the employee groups impacted, average salary and benefits, and redundancy benefits pursuant to the existing policies. Additional charges above the initial estimates, or additional phases of the plan, were incurred for the redundancy plans during the nine months ended September 30, 2018 and 2017 related to the actualization of termination benefits for specifically identified employees impacted under these plans, as well as an increase in the number of individuals impacted by these plans. The final identification of the employees impacted by each program is subject to customary consultation procedures. In addition, additional phases of value enhancement projects may be undertaken in the future, if costs and revenue are not aligned.

Summary of Liability for WD Services Severance and Related Charges
 
January 1,
2018
 
Costs
Incurred
 
Cash Payments
 
Foreign Exchange
Rate Adjustments
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Ingeus Futures Program
$
482

 
$
1,336

 
$
(1,463
)
 
$
(30
)
 
$
325

Delivery First Program
1,287

 
1,027

 
(1,474
)
 
(5
)
 
835

Total
$
1,769

 
$
2,363

 
$
(2,937
)
 
$
(35
)
 
$
1,160


21



 
January 1,
2017
 
Costs
Incurred
 
Cash Payments
 
Foreign Exchange
Rate Adjustments
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Ingeus Futures Program
$
2,486

 
$
1,186

 
$
(3,086
)
 
$
158

 
$
744

Offender Rehabilitation Program
1,380

 
(40
)
 
(1,357
)
 
17

 

UK Restructuring Program
50

 
(29
)
 

 
3

 
24

Total
$
3,916

 
$
1,117

 
$
(4,443
)
 
$
178

 
$
768


The total of accrued severance and related costs of $1,160 is reflected in “Accrued expenses” in the condensed consolidated balance sheet at September 30, 2018. The amount accrued as of September 30, 2018 is expected to be settled principally by the end of 2018. Additionally, in conjunction with the second phase of the Ingeus Futures Program, the Company incurred $351 of expense during the nine months ended September 30, 2018 primarily related to property and equipment costs.

10.    Debt

The Company’s debt was as follows as of the dates referenced below:  
 
 
September 30,
2018
 
December 31,
2017
$200,000 revolving loan, LIBOR plus 2.25% - 3.25% with interest payable at least once every three months through August 2019
$
36,000

 
$

Capital lease obligations
1,579

 
2,984

 
37,579

 
2,984

Less current portion of debt
37,149

 
2,400

Total debt, less current portion
$
430

 
$
584


On June 7, 2018, the Company and certain of its subsidiaries entered into the Fifth Amendment to the Amended and Restated Credit and Guaranty Agreement (the “Amendment”), amending the Amended and Restated Credit and Guaranty Agreement dated as of August 2, 2013 (as amended to date, the “Credit Agreement”), by and among the Company, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America, N.A. as administrative agent.
 
The Amendment extends the maturity date of the Credit Agreement to August 2, 2019. The Amendment also amends certain covenants under the Credit Agreement to provide for greater operational, financial and strategic flexibility, including the implementation of the Company’s organizational consolidation plan.

During the three months ended September 30, 2018, the Company drew on its revolving credit facility, primarily to fund the acquisition of Circulation. See additional discussion of the Circulation acquisition in Note 17, Acquisitions.


22



11.    Stockholders’ Equity

The following table reflects changes in common stock, additional paid-in capital, retained earnings, accumulated other comprehensive loss, treasury stock and noncontrolling interest for the nine months ended September 30, 2018:
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Non-controlling Interest
 
 Total
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
Balance at December 31, 2017
17,473,598

 
$
17

 
$
313,955

 
$
204,818

 
$
(25,805
)
 
4,126,132

 
$
(154,803
)
 
$
(2,165
)
 
$
336,017

Cumulative effect adjustment from change in accounting principle, net of tax

 

 

 
5,710

 

 

 

 

 
5,710

Stock-based compensation

 

 
6,346

 

 

 

 

 

 
6,346

Exercise of employee stock options
266,293

 
1

 
11,669

 

 

 

 

 

 
11,670

Restricted stock issued
29,384

 

 
(320
)
 

 

 
4,048

 
(256
)
 

 
(576
)
Performance restricted stock issued
3,110

 

 
(109
)
 

 

 

 

 

 
(109
)
Shares issued for bonus settlement and director stipend
3,576

 


 
150

 


 

 

 

 

 
150

Stock repurchase plan

 

 

 

 

 
838,719

 
(55,753
)
 

 
(55,753
)
Conversion of convertible preferred stock to common stock
3,685

 

 
148

 
(6
)
 

 

 

 

 
142

Foreign currency translation adjustments, net of tax

 

 

 

 
(2,924
)
 

 

 
71

 
(2,853
)
Reclassification of translation loss realized upon sale of foreign subsidiary

 

 

 

 
627

 

 

 

 
627

Convertible preferred stock dividends

 

 

 
(3,302
)
 

 

 

 

 
(3,302
)
Noncontrolling interests

 

 

 

 

 

 

 
285

 
285

Other

 

 
108

 

 

 

 

 

 
108

Net income attributable to Providence

 

 

 
1,369

 

 

 

 

 
1,369

Balance at September 30, 2018
17,779,646

 
$
18

 
$
331,947

 
$
208,589

 
$
(28,102
)
 
4,968,899

 
$
(210,812
)
 
$
(1,809
)
 
$
299,831


Share Repurchases 

On March 29, 2018, the Board of Directors (“Board”) authorized an increase in the amount available for stock repurchases under the Company’s existing stock repurchase program by $77,794, and extended the existing stock repurchase program through June 30, 2019 (as amended and extended, the “Stock Repurchase Program”). As of September 30, 2018, approximately $81,177 remains for additional repurchases by the Company under the Stock Repurchase Program, excluding commission payments. The share repurchases may be made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, accelerated share repurchase transactions and other derivative transactions. The timing, number and amount of any shares repurchased will be determined by the Company’s officers at their discretion, and as permitted by securities laws, covenants under existing bank agreements and other legal requirements, and will be based on a number of factors, including an evaluation of general market and economic conditions and the trading price of the common stock. The Stock Repurchase Program may be suspended or discontinued at any time without prior notice.

12.    Stock-Based Compensation and Similar Arrangements

The Company provides stock-based compensation to employees and non-employee directors under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). Typical awards issued under this plan include stock option awards, restricted stock awards (“RSAs”) and performance based restricted stock units (“PRSUs”).


23



The following table reflects the amount of stock-based compensation, for share settled awards, recorded in each financial statement line item for the three and nine months ended September 30, 2018 and 2017:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Service expense
$
209

 
$
131

 
$
303

 
$
365

General and administrative expense
1,718

 
1,434

 
5,906

 
4,221

Equity in net loss of investees
(24
)
 
10

 
137

 
50

Total stock-based compensation
$
1,903

 
$
1,575

 
$
6,346

 
$
4,636


At September 30, 2018, the Company had 963,169 stock options outstanding with a weighted-average exercise price of $61.40. In August 2018 the Company granted 294,464 stock options to NET Services employees in relation to their 2018 long-term incentive plan. Additionally, in September 2018 the Company granted 33,210 stock options to employees of Circulation in accordance with the terms of the merger agreement with Circulation. See additional discussion of the Circulation acquisition in Note 17, Acquisitions. The Company also had 51,526 shares of unvested RSAs outstanding at September 30, 2018 with a weighted-average grant date fair value, as modified, of $54.19.

Awards Granted and Modified in Conjunction with the Organizational Consolidation

In connection with the organizational consolidation plan, the Company entered into an agreement with R. Carter Pate for his continued employment as the Company’s Interim CEO through June 30, 2019. The agreement also provided for a grant of unvested options to purchase up to 394,000 shares of the Company's common stock, at a price of $71.67 per share, which was the closing price of the Company’s common stock on the grant date. The options are subject to vesting as follows: (i) 50% of the options will become vested if Mr. Pate remains employed by the Company through June 30, 2019 (the “Time-Vesting Options”), (ii) 25% of the options will become vested on March 31, 2019 if the Company has achieved its budget for its 2018 fiscal year, subject to certain adjustments, and Mr. Pate is then employed, and (iii) 25% of the options will become vested on March 31, 2019 subject to Mr. Pate’s achievement of other performance metrics if Mr. Pate is then employed. In addition, the Time-Vesting Options will become fully vested upon a “change in control” (as defined in the 2006 Plan) or a termination of Mr. Pate’s employment by the Company without “cause” (as defined in the Company’s 2015 Holding Company LTI Program) or for “good reason” (as defined in the Option Agreement). Once vested, the options will remain exercisable until April 8, 2021, unless terminated earlier due to a termination of Mr. Pate’s employment for “cause”. In recognition of certain holding company employees’ essential contributions to the success of the Company, and to encourage further alignment with the Company’s long-term interests through the ownership of equity, Mr. Pate voluntarily set aside 98,500 of the options granted to him, representing 25% of his total award. The value of the awards of $1,273 was fully expensed in the three months ended June 30, 2018. The Compensation Committee of the Board expects to grant at a later date restricted stock awards equivalent in value to the options voluntarily set aside by Mr. Pate, to employees based upon their performance throughout the organizational consolidation process.

Also, in connection with the organizational consolidation plan and his appointment as Interim CFO, on April 9, 2018, William Severance received an option to purchase 13,710 shares of common stock at a price of $71.67 per share, which was the closing price of the Company’s common stock on the grant date. The options will become fully exercisable on May 10, 2019, subject to Mr. Severance’s continued employment with the Company, and if not exercised will expire on December 31, 2020.

In addition, as part of the Company’s retention plan associated with the organizational consolidation plan, the Company provided that unvested share-based awards to employees subject to the retention plan will vest in full upon their termination dates so long as those employees fulfill their service obligation to the Company under the retention plan. As such, the vesting terms of 7,286 restricted stock awards and 11,035 stock options were modified. Additionally, the exercise terms of the respective unvested stock options were modified to allow for exercise through December 31, 2020. As a result of the modifications, the Company revalued the awards as of April 9, 2018, and is expensing the unrecognized stock-based compensation cost, based on the new fair value, through the termination date of each relevant employee. Additional expense incurred during the three and nine months ended September 30, 2018, as a result of the modification, totaled $119 and $296, respectively. See Note 9, Restructuring and Related Reorganization Costs, for additional information.

Cash Settled Awards

The Company also grants stock equivalent unit awards (“SEUs”) and stock option equivalent units that are cash settled awards and are not included as part of the 2006 Plan. During the three and nine months ended September 30, 2018, respectively, the Company recorded a benefit of $2,191 and expense of $1,435 of stock-based compensation expense for cash settled awards.

24



During the three and nine months ended September 30, 2017, respectively, the Company recorded $380 and $1,611 of stock-based compensation expense for cash settled awards. The expense for cash settled awards is included as “General and administrative expense” in the accompanying condensed consolidated statements of income. As the instruments are accounted for as liability awards, the expense recorded for the three and nine months ended September 30, 2018 and 2017 is almost entirely attributable to the Company’s change in stock price from the previous reporting period. The liability for unexercised cash settled share-based payment awards of $5,137 and $3,938 at September 30, 2018 and December 31, 2017, respectively, are reflected in “Accrued expenses” in the condensed consolidated balance sheets. At September 30, 2018, the Company had 5,202 SEUs and 200,000 stock option equivalent units outstanding.

Vertical Long-Term Incentive Plans

The Company also provides cash settled long-term incentive plans for executive management and key employees of its operating segments. For the three and nine months ended September 30, 2018, expenses of $57 and $171, respectively, are included as “Service expense” in the condensed consolidated statements of income related to an ongoing long-term incentive plan for NET Services. For the three and nine months ended September 30, 2017, expense of $274 and $1,157, respectively, are included as “Service expense” in the condensed consolidated statements of income related to an ongoing long-term incentive plan for NET Services. At September 30, 2018 and December 31, 2017, the liability for this plan of $1,054 and $2,657, respectively, is reflected in “Accrued expenses” and “Other long-term liabilities” in the condensed consolidated balance sheet.

The Board approved the LogistiCare 2017 Senior Executive LTI Plan (the “LogistiCare LTIP”) for executive management and key employees of NET Services during the three months ended March 31, 2018. The LogistiCare LTIP pays in cash, however up to 50% of the award may be paid in unrestricted stock if the recipient elects this option prior to the award payment date. The LogistiCare LTIP rewards participants based on certain measures of free cash flow and EBITDA results adjusted as specified in the plan document. The awards have a performance period of January 1, 2017 through December 31, 2019, with a payout date within two and a half months of the performance period end date. Payout is subject to the participant remaining employed by the Company on the payment date. The maximum amount that can be earned through the LogistiCare LTIP is $7,000. As of September 30, 2018, 65.5% of the awards have been issued under the LogistiCare LTIP. No expense has been incurred for this plan during the nine months ended September 30, 2018.


25



13.    Earnings Per Share

The following table details the computation of basic and diluted earnings per share: 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income attributable to Providence
$
7,154

 
$
14,853

 
$
1,369

 
$
14,441

Less dividends on convertible preferred stock
(1,113
)
 
(1,114
)
 
(3,308
)
 
(3,305
)
Less income allocated to participating securities
(743
)
 
(1,777
)
 

 
(2,209
)
Net income (loss) available to common stockholders
$
5,298

 
$
11,962

 
$
(1,939
)
 
$
8,927

 
 
 
 
 
 
 
 
Continuing operations
$
4,756

 
$
11,978

 
$
(2,424
)
 
$
14,927

Discontinued operations
542

 
(16
)
 
485

 
(6,000
)
 
$
5,298

 
$
11,962

 
$
(1,939
)
 
$
8,927

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share -- weighted-average shares
12,865,777

 
13,581,662

 
12,992,403

 
13,612,764

Effect of dilutive securities:
 
 
 
 
 
 
 
Common stock options
61,345

 
68,856

 

 
58,668

Performance-based restricted stock units

 
5,036

 

 
5,036

Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion
12,927,122

 
13,655,554

 
12,992,403

 
13,676,468

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.88

 
$
(0.19
)
 
$
1.10

Discontinued operations
0.04

 

 
0.04

 
(0.44
)
 
$
0.41

 
$
0.88

 
$
(0.15
)
 
$
0.66

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.88

 
$
(0.19
)
 
$
1.09

Discontinued operations
0.04

 

 
0.04

 
(0.44
)
 
$
0.41

 
$
0.88

 
$
(0.15
)
 
$
0.65


Income allocated to participating securities is calculated by allocating a portion of net income attributable to Providence, less dividends on convertible stock, to the convertible preferred stockholders on a pro-rata, as converted basis; however, the convertible preferred stockholders are not allocated losses.

The following weighted average shares were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock options to purchase common stock
358,310

 
33,890

 
333,030

 
56,528

Convertible preferred stock
801,935

 
803,285

 
802,762

 
803,360



26



14.    Income Taxes

The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2018 was 38.6% and 86.9%, respectively. The effective tax rate for the three and nine months ended September 30, 2018 was higher than the U.S. federal statutory rate of 21% primarily due to foreign net operating losses for which the future income tax benefit cannot be currently recognized, state income taxes and certain non-deductible expenses. The impact of these items was partially offset by no income tax provision being recorded on the gain on remeasurement of cost method investment of $6,577. The effective tax rate for the nine months ended September 30, 2018 was additionally impacted by the WD Services impairment charge of $9,202, which contributes to the tax basis in WD Services but does not generate a current tax benefit.

The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2017 was 16.7% and 28.8%, respectively. The effective tax rate for the three and nine months ended September 30, 2017 was lower than the U.S. federal statutory rate of 35% primarily due to no provision for income taxes related to the gain on sale of equity investment of $12,606 due to the substantial difference in tax basis versus book basis in the investment.

On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted which institutes fundamental changes to the taxation of multinational corporations. As a result of the Tax Reform Act, the U.S. corporate income tax rate was reduced to 21% and the Company revalued its ending net deferred tax liabilities as of December 31, 2017. The Company recognized a provisional tax benefit of $19,397 in its consolidated financial statements for the year ended December 31, 2017. The final impact of the Tax Reform Act may differ from these provisional amounts, possibly materially, due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions the Company has made, and actions the Company may take as a result of the Tax Reform Act. There have been no changes to the Company's provisional tax benefit recognized in 2017. The Company expects the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018, after the Company’s 2017 income tax returns are filed.

15.    Commitments and Contingencies

Legal proceedings

In the ordinary course of business, the Company is a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Providence. Litigation is inherently uncertain, and the actual losses incurred in the event that the related legal proceedings were to result in unfavorable outcomes could have a material adverse effect on the Company’s business and financial performance.

Indemnifications

The Company indemnified certain third parties in connection with a rights offering in February 2015 as well as in connection with the Company’s acquisition of CCHN Group Holdings, Inc. (operating under the tradename Matrix, and formerly included in our Health Assessment Services segment) in October 2014 and related financing commitments. In June 2015, a putative stockholder class action derivative complaint related to such rights offering and acquisition was filed in the Court of Chancery of the State of Delaware captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL (“Haverhill Litigation”). In November 2017, the Company received a payment of $5,363 under the settlement agreement entered into by the parties to the Haverhill Litigation. For further information regarding this legal proceeding and the indemnifications please see Note 18, Commitments and Contingencies, in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The Company recorded $21 and $296, respectively, of such indemnified legal expenses related to the Haverhill Litigation during the three and nine months ended September 30, 2017 which is included in “General and administrative expense” in the condensed consolidated statements of income. Of this amount, $23 and $231, respectively, was indemnified legal expenses of related parties for the three and nine months ended September 30, 2017. Other legal expenses of the Company related to the Haverhill Litigation are covered under the Company’s insurance policies, subject to applicable deductibles and customary review of the expenses by the carrier. The Company recognized a related benefit of $17 and $218, respectively, for the three and nine months ended September 30, 2018, and a related benefit of $3 and expense of $8, respectively, for the three and nine months ended September 30, 2017. While the carrier typically remits payment directly to the respective law firm, the Company accrues for the cost and records a corresponding receivable for the amount to be paid by the carrier. The Company has recognized an insurance receivable of $17 and $941 in “Other receivables” in the condensed consolidated balance sheets at September 30, 2018 and December 31, 2017, respectively, with a corresponding liability amount recorded to “Accrued expenses”.


27



The Company provided certain standard indemnifications in connection with the sale of the Human Services segment (the “PHS Sale”) to Molina Healthcare Inc. (“Molina”), which was effective November 1, 2015. Certain representations made by the Company in the Membership Interest Purchase Agreement (the “Purchase Agreement”), including tax representations, survive until the expiration of applicable statutes of limitation, and healthcare representations survive until the third anniversary of the closing date. Molina and the Company entered into a settlement agreement regarding indemnification claims by Molina with respect to Rodriguez v. Providence Community Corrections (the “Rodriguez Litigation”), a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division, against Providence Community Corrections, Inc. (“PCC”), an entity sold under the Purchase Agreement, and other matters. Following the final settlement of the Rodriguez Litigation, during the three months ended September 30, 2018, the Company released $10,000 from an escrow account and made an additional $4,475 payment to Molina in accordance with the Company's settlement agreement with Molina. The Company expects to recover a portion of the settlement through insurance coverage, although this cannot be assured.

The Company provided certain standard indemnifications in connection with its Matrix stock subscription transaction whereby Mercury Fortuna Buyer, LLC (“Subscriber”), Providence and Matrix entered into a stock subscription agreement (the “Subscription Agreement”), dated August 28, 2016. The representations and warranties made by the Company in the Subscription Agreement ended January 19, 2018; however, certain fundamental representations survive through the 36th month following the closing date. The covenants and agreements of the parties to be performed prior to the closing ended January 19, 2018, and all other covenants and agreements survive until the expiration of the applicable statute of limitations in the event of a breach, or for such lesser periods specified therein. The Company is not aware of any indemnification liabilities with respect to Matrix that require accrual at September 30, 2018.

On May 9, 2018, the Company entered into a registration indemnification agreement with Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Blackwell Partners, LLC - Series A and Coliseum Capital Co-Invest, L.P. (collectively, the “Coliseum Stockholders”), who as of September 30, 2018 collectively held approximately 9.6% of the Company’s outstanding common stock and approximately 95.5% of the Company’s outstanding Preferred Stock, pursuant to which the Company has agreed to indemnify the Coliseum Stockholders, and the Coliseum Stockholders have agreed to indemnify the Company, against certain matters relating to the registration of the Selling Stockholders’ securities for resale under the Securities Act of 1933, as amended (the “Securities Act”).
Loss Reserves for Certain Reinsurance Programs
The Company historically reinsured a substantial portion of its automobile, general and professional liability and workers’ compensation costs under reinsurance programs through the Company’s wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCIC continues to resolve claims under the historical policy years.

The Company utilizes a report prepared by an independent actuary to estimate the gross expected losses related to historical automobile, general and professional and workers’ compensation liability reinsurance policies, including the estimated losses in excess of SPCIC’s insurance limits, which would be reimbursed to SPCIC to the extent such losses were incurred.  As of September 30, 2018 and December 31, 2017, the Company had reserves of $4,761 and $6,699, respectively, for the automobile, general and professional liability and workers’ compensation reinsurance policies, net of expected receivables for losses in excess of SPCIC’s historical insurance limits.  The gross reserve as of September 30, 2018 and December 31, 2017 of $10,747 and $12,448, respectively, is classified as “Reinsurance liability reserves” and “Other long-term liabilities” in the condensed consolidated balance sheets.  The estimated amount to be reimbursed to SPCIC as of September 30, 2018 and December 31, 2017 was $5,986 and $5,749, respectively, and is classified as “Other receivables” and “Other assets” in the condensed consolidated balance sheets.

Deferred Compensation Plan

The Company has one deferred compensation plan for highly compensated employees of NET Services as of September 30, 2018. The deferred compensation plan is unfunded, and benefits are paid from the general assets of the Company. The total of participant deferrals, which is reflected in “Other long-term liabilities” in the condensed consolidated balance sheets, was $2,274 and $1,806 at September 30, 2018 and December 31, 2017, respectively.

16.    Transactions with Related Parties

The Company incurred legal expenses under an indemnification agreement with the Coliseum Stockholders as further discussed in Note 15, Commitments and Contingencies. Convertible preferred stock dividends earned by the Coliseum Stockholders

28



during the three and nine months ended September 30, 2018 totaled $1,062 and $3,151, respectively. Convertible preferred stock dividends earned by the Coliseum Stockholders during the three and nine months ended September 30, 2017 totaled $1,062 and $3,151, respectively.

During the three months ended March 31, 2017, the Company made a $566 loan to Mission Providence. The loan was repaid during the three months ended September 30, 2017.

Effective June 15, 2018, the Company registered shares of the Company’s common stock and Preferred Stock held by the Coliseum Stockholders for resale under the Securities Act and on May 9, 2018, in connection with such registration, the Company entered into a registration indemnification agreement with the Coliseum Stockholders as further discussed in Note 15, Commitments and Contingencies.
17. Acquisitions

During 2017, the Company made an equity investment in Circulation, which was accounted for as a cost method investment. On September 21, 2018, the Company's subsidiary, LogistiCare, acquired all of the outstanding equity of Circulation. Circulation is a company that offers a full suite of logistics solutions to manage non-emergency transportation across all areas of healthcare, powered by its HIPAA-compliant digital platform. Circulation enables administration of transportation benefits, proactively monitors for fraud waste and abuse, and integrates all transportation capabilities (e.g. outsourced transportation, owned fleets, and other medical logistics services), while emphasizing patient convenience and satisfaction. Circulation’s proprietary platform simplifies ordering, improves reliability and efficiency, and reduces transportation spend. The Company believes the acquisition advances LogistiCare's central mission of reducing transportation as a barrier to healthcare and will help deliver a differentiated user experience and provide a core technology and analytics platform that better positions LogistiCare for growth.

The purchase price was comprised of cash consideration of $45,123 paid to Circulation’s equity holders (including holders of vested Circulation stock options), other than Providence. Per the terms of the Agreement and Plan of Merger (the “merger agreement”), dated as of September 14, 2018, by and among LogistiCare, the Company, Catapult Merger Sub, a wholly-owned subsidiary of LogistiCare (“Merger Sub”), Circulation and Fortis Advisors LLC, as the representative of Circulation’s equity holders, Providence assumed certain unvested Circulation stock options under similar terms and conditions to the existing option awards previously issued by Circulation. The merger agreement also required $1,000 to be paid three years after the closing date of the transaction to each of the two co-founders of Circulation subject to their continued employment or provision of consulting services to LogistiCare. The value of the options assumed and co-founder hold back is accounted for as compensation, over the relevant vesting period, as such amounts are tied to future service conditions.

The Company's initial investment in Circulation was $3,000 in July 2017 to acquire a minority interest. As a result of the transactions pursuant to the merger agreement, the fair value of this pre-acquisition interest increased to $9,577, and thus the Company recognized a gain of $6,577. This gain is recorded as “Gain on remeasurement of cost method investment” on the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2018. The Company determined the fair value of its pre-acquisition equity interest by multiplying the number of shares it held in Circulation pre-acquisition by the per-share consideration validated by reference to the total merger consideration agreed to with other unrelated equity holders in Circulation.

The Company incurred acquisition and related costs for this acquisition of $1,597 during the three and nine months ended September 30, 2018. These expenses are included in general and administrative expenses of the NET Services segment.

The preliminary purchase price of Circulation is calculated as follows:

Cash purchase of common stock
 
$
45,123

Providence's acquisition date fair value equity interest in Circulation
 
9,577

  Total consideration
 
$
54,700



29



The table below presents Circulation's net assets based upon the preliminary estimate of respective fair values:

Cash
 
$
1,302

Accounts receivable
 
996

Other assets
 
216

Property and equipment
 
49

Intangibles