Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-K
 (Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
(State or other jurisdiction of incorporation or organization)
 
700 Canal Street, Third Floor, Stamford, CT
(Address of principal executive offices)
86-0845127
(I.R.S. Employer Identification No.)
 
06902
(Zip code)
Registrant’s telephone number, including area code: (203) 307-2800
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock, $0.001 par value per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒  Yes ☐  No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐  Yes ☒  No
 
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
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting 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 Act). ☐  Yes ☒  No
 
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates based on the closing price for such common equity as reported on The NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2018) was $904.9 million.
 
As of February 22, 2019, there were outstanding 12,833,846 shares (excluding treasury shares of 4,973,552) of the registrant’s Common Stock, $0.001 par value per share.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
All or a portion of Items 10 through 14 in Part III of this Annual Report on Form 10-K are incorporated by reference to our definitive proxy statement on Schedule 14A for our 2019 stockholder meeting; provided that if such proxy statement is not filed on or before April 30, 2019, such information will be included in an amendment to this Annual Report on Form 10-K filed on or before such date.

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TABLE OF CONTENTS 

 
 
 Page No.
PART I
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
Item 5. 
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8. 
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
PART III
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13. 
 
 
 
Item 14.  
 
 
 
PART IV
 
 
 
Item 15. 
 
 
 
Item 16.
Form 10-K Summary.
 
 
 

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Part I
 
In this Annual Report on Form 10-K, the words the “Company”, the “registrant”, “we”, “our”, “us”, “Providence” and similar terms refer to The Providence Service Corporation and, except as otherwise specified herein, to our subsidiaries. When such terms are used in reference to the Company’s common stock, $0.001 par value per share (the “Common Stock”), and the Series A Convertible Preferred Stock, $0.001 par value per share (the “Preferred Stock”), they refer specifically to The Providence Service Corporation.
 
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K contains certain statements that may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements related to the Company’s strategies or expectations about revenues, liabilities, results of operations, cash flows, ability to fund operations, profitability, ability to meet financial covenants, contracts or market opportunities. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission (the “SEC”), in materials delivered to stockholders and in press releases. In addition, the Company’s representatives may from time to time make oral forward-looking statements. In certain cases, you may identify forward looking-statements by words such as “may”, “will”, “should”, “could”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “seek”, “estimate”, “predict”, “potential”, “target”, “forecast”, “likely”, the negative of such terms or comparable terminology. In addition, statements that are not historical statements of fact should also be considered forward-looking statements. These forward-looking statements are based on the Company’s current expectations, assumptions, estimates and projections about its business and industry, and involve risks, uncertainties and other factors that may cause actual events to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks described under Item 1A in Part I of this Annual Report on Form 10-K.
 
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company is under no obligation to (and expressly disclaims any such obligation to) update any of the information in any forward-looking statement if such forward-looking statement later turns out to be inaccurate, whether as a result of new information, future events or otherwise.
 
Item 1.
Business.
 
Overview
 
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. The Company’s NET Services segment, which primarily operates under the brands LogistiCare and Circulation, is the largest manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations (“MCOs”) in the United States. On September 21, 2018, we completed the acquisition of Circulation, Inc. (“Circulation”), which offers a full suite of logistics solutions to manage NET programs across all areas of healthcare, powered by its HIPAA-compliant digital platform. Circulation’s technology expands LogistiCare’s capabilities to manage transportation benefits, integrating all transportation capabilities and emphasizing member convenience and satisfaction.

The Company’s Matrix Investment segment consists of a minority investment in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”), a nationwide provider of home and mobile-based healthcare services for health plans in the United States, including comprehensive health assessments (“CHAs”), quality gap closure visits, “level of service” needs assessments, and post-acute and chronic care management, providing such services through a network of community-based clinicians, and a fleet of mobile health clinics with advanced diagnostics capabilities. On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a controlling equity interest in Matrix, with the Company retaining a non-controlling equity interest (the “Matrix Transaction”). Matrix’s financial results prior to October 19, 2016 are presented as a discontinued operation.
 
The Company’s Corporate and Other segment includes the Company’s executive, accounting, finance, internal audit, tax, legal, public reporting, and corporate development functions, as well as 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 LogistiCare (the “Organizational Consolidation”). LogistiCare will retain its name and continue to be headquartered in Atlanta, GA, and the Company will continue to be named The Providence Service Corporation and be listed on The NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “PRSC”. The Organizational Consolidation process involves transferring all job responsibilities previously performed by employees of the

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holding company to LogistiCare and closing the current corporate offices in Stamford, Connecticut and Tucson, Arizona. The Organizational Consolidation is expected to be complete by the end of the second quarter of 2019.

On December 21, 2018, we completed the sale of substantially all of the operating subsidiaries of our Workforce Development Services (“WD Services”) segment to Advanced Personnel Management Global Pty Ltd of Australia (“APM”) and APM UK Holdings Limited, an affiliate of APM, except for the segment’s employment services operations in Saudi Arabia (the “WD Services Sale”). Our contractual counterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginning January 1, 2019.

On June 11, 2018, the Company entered into a Share Purchase Agreement to sell Ingeus France, which was part of our WD Services segment, for a de minimis amount. The sale was effective on July 17, 2018, after court approval. The financial results of WD Services prior to December 21, 2018 are presented as discontinued operations.
 
The Company is a Delaware corporation formed in 1996 and headquartered in Stamford, Connecticut.
 
Business Strategies

The Company’s mission is to provide effective and quality NET services and logistics and to create shareholder value by pursuing and implementing six key strategies.

Centers of Excellence Operations Alignment

In January 2019, we reorganized the operational structure of our NET Services segment in order to centralize and reduce the layers in core functions that form the most significant elements of our cost base and drive performance for our clients and the members and patients they serve. Our operational structure now includes six Centers of Excellence (“COEs”): Transportation Network, Call Center Operations, Client Services, Technology, Growth and Process Improvement. We implemented this operational strategy to enhance the visibility, flexibility and control we have over our operations. The Transportation Network COE is focused on increases to capacity and improvements to quality and improvements designed to reduce cost and enhance the member experience. Within our Call Center Operations, activities such as contact center workflow standardization, cross skilling, and intensive operations management are aimed at improving employee productivity. We believe the new model for Client Services will bring a closer focus on local operations as well as holistic approaches to our customers and client retention. Our Technology COE will be coordinated and focused on the support of operations and the systematic roll out of the Circulation technology platform. Growth will continue to focus our sales, marketing and business development teams on the generation and delivery of new business. Finally, our Process Improvement COE will continue to support all of our other COE’s in the pursuit of effective and efficient operations. We believe this new structure makes our scale more nimble and provides us with a competitive advantage.

Technology Transformation

On September 21, 2018, we completed the acquisition of Circulation to revolutionize our technology development capability, add to our executive team, extend our business model, and open new market opportunities. We believe that this technology allows us to reduce transportation as a barrier to care and that through the deployment of our new technology we are able to extend the size of the market that we can serve. In order to achieve our target synergies and enhance our operations, we plan to roll out Circulation’s technology as our core workflow platform over the next 36 months. We have 21 operations centers that we expect to convert to the Circulation platform. Our plan is to convert several call centers in 2019, beginning in the second quarter, with a target to convert all sites by the end of 2021. Technology roll outs include a substantial amount of change management and will require careful risk mitigation policies to ensure smooth transitions. Our change management process is a core strength deeply embedded in our organization and will support a major change in the way we operate today, driving significant efficiencies and enhancing the member experience benefits to our clients.

Client and Member Satisfaction

Transportation related to care is one of the most impactful experiences contributing to our clients’ members’ and patients’ satisfaction during their care encounter. At the core of our operational and technology strategies is a focus on driving client and member satisfaction. Our COEs’ operational structure allows us to develop locally tailored network solutions with a higher level of visibility. Greater access to real time information, enabled through our technology, provides us the ability to shorten cycle times to identify and resolve client and member issues. We expect our clients to begin to realize benefits in the near term from our new organizational model and roll out of the Circulation technology platform.


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Organic Growth

Across the healthcare market, we see an increasing understanding of the benefit of removing transportation as a barrier to care and a way to improve other determinants of health, such as access to food, shelter, socialization, and pharmacy. We believe that our scale, deep experience, operational strategy, and technology migration uniquely position us to address customer needs related to transportation of vulnerable populations. We approach sales, marketing and business development in a manner that is focused on driving market share in our core Medicaid market including states and MCOs, Medicare Advantage (“MA”) plans, health systems and providers. Simultaneously, we target business development efforts with partners to enter new transportation markets, including the movement of home health providers, pharmacy delivery and beneficiaries of workers compensation. We expect there will be network effects as we serve more and more healthcare constituencies within a geography.

Inorganic Growth

We closely follow our core NET market and expansion markets mentioned above for tuck-in acquisition opportunities. We believe our experience, relationships in the industry, scale and executive team gives us the strongest position to be a consolidation platform in healthcare transportation. Our acquisition strategy may include an evaluation of new entrants, which may not be able to otherwise compete without the benefits of scale and experience, and closely-held businesses that may seek a new capital structure or sale to achieve liquidity for founders. With our balance sheet, strong team and track record, we believe we are a natural consolidator.

Smart Capital Allocation

The WD Services sale was a significant milestone in our strategy to focus our capital allocation priorities on the opportunities available to our NET Services segment. The NET Services segment has historically generated positive cash flows and our strong balance sheet provides us with optionality with respect to capital allocation and how we can best drive shareholder value. Our immediate focus in 2019 is to invest in our operations, including the roll-out of the Circulation technology to enhance client and member experience and drive operational efficiency. We will also continue to assess the opportunities for capital deployment in order to create value for shareholders, which may include dividends, share repurchases and/or acquisitions.
 
NET Services
 
Services offered. NET Services provides non-emergency transportation solutions to clients, including health systems, in 40 states and the District of Columbia. As of December 31, 2018, approximately 24.5 million individuals were eligible to receive our transportation services, and during 2018, NET Services managed approximately 52.6 million trips. NET Services accounts for all of our consolidated revenue from continuing operations going forward.
 
NET Services primarily contracts with state Medicaid programs and MCOs, including MA plans, (collectively “NET customers”) for the coordination of their members’ (“NET end-users”) non-emergency transportation needs. NET end-users are typically Medicaid or Medicare eligible members, whose limited mobility or financial resources hinders their ability to access necessary healthcare and social services. We believe our transportation services enable access to care that not only improves the quality of life and health of the populations we serve, but also enables many of the individuals we serve to pursue independent living in their homes rather than in more expensive institutional care settings. In addition, studies have shown that missed medical appointments lessens patient compliance with clinical guidelines and leads to complications and expensive medical services. Through provider access to medical transportation, NET Services can save state Medicaid programs and MCOs significant amounts of money when used as part of a care management strategy for individuals with chronic illness. We believe we are uniquely positioned to partner with NET customers to provide these savings while improving the lives of the populations we serve.
 
NET Services program delivery is dependent upon a highly-integrated technology platform and business process as well as the management of a multifaceted network of subcontracted transportation providers. Our technology platform is purpose-built for the unique needs of our industry and is highly scalable, capable of supporting substantial growth in our clients’ current and future membership base. In addition, our technology platform efficiently provides a broad interconnectivity among NET end-users, NET customers, and our network of transportation providers. We believe this technological capability and our industry experience uniquely position us as a future focal point in the evolving healthcare industry to introduce valuable population insights. In 2016 and 2017, we introduced service offerings and new technological features for NET end-users to improve service levels, lower costs and build the foundation for additional data analytics capabilities. In 2018, we acquired Circulation to provide additional technological improvements through their digital transportation platform. Circulation’s technology allows for on-demand ride scheduling, eligibility assessment, benefits management, ride assignment and dispatch, real time ride tracking, network management and analytics.
 

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To fulfill the transportation needs of NET end-users, we apply our proprietary technology platform to an extensive network of approximately 4,500 transportation resources. This includes our in-network roster of fully contracted transportation providers who operate sedans, wheelchair equipped vehicles, multi-passenger vans and ambulances. Our system also utilizes partnerships with on-demand transportation network companies, mass transit entities, mileage reimbursement programs, taxis and county-based emergency medical service providers. To promote safety, quality, and compliance, our in-network transportation providers undergo an in-depth credentialing and education process.

Our transportation management services also include fraud, waste, and abuse prevention and utilization review programs designed to monitor that our transportation services are provided in compliance with Medicaid and Medicare program rules and remediate issues that are identified. Compliance controls include ongoing monitoring, auditing and remediation efforts, such as validating NET end-user eligibility for the requested date of service and employing a series of gatekeeping questions to verify that the treatment type is covered and the appropriate mode of transportation is assigned. We also conduct post-trip confirmations of attendance directly with the healthcare providers for certain repetitive trips and we employ field monitors to inspect transportation provider vehicles and observe some transports in real time. Our claims validation process generally limits payment to trips that are properly documented, have been authorized in advance, and are billed at the pre-trip estimated amount. Our claims process is increasingly digital, which provides more protection to member protected health information and reduces the impact on the environment. Transportation providers are able to submit their bills and supporting documentation through a secured web portal directly to LogistiCare.

Revenue and customers. In 2018, contracts with state Medicaid agencies and MCOs represented 52.9% and 47.1%, respectively, of NET Services’ revenue. NET Services derived 12.6%, 13.8% and 13.1% of its revenue from a single state Medicaid agency for the years ended December 31, 2018, 2017 and 2016, respectively. The next four largest NET Services customers in the aggregate comprised 21.4%, 22.3% and 22.6% of NET Services’ revenue for the years ended December 31, 2018, 2017 and 2016, respectively.
 
Contracts with state Medicaid agencies are typically for three to five years with multiple renewal options. Contracts with MCOs continue until terminated by either party upon reasonable notice (as determined in accordance with the contract), and allow for regular price adjustments based upon utilization and transportation cost. As of December 31, 2018, 13.2% of NET Services revenue was generated under state Medicaid contracts that are subject to renewal within the next 12 months. In 2018, NET Services renewed contracts representing 32.4% of its revenue in such year.
  
79.2% of NET Services’ revenue in 2018 was generated under capitated contracts where we assume the responsibility of meeting the covered healthcare related transportation requirements of a specific population based on per-member per-month fees for the number of members in the customer’s program. Revenue is recognized based on the population served during the period. Under certain capitated contracts, known as reconciliation contracts, partial payment is received as a prepayment during the month service is provided. These partial payments may be due back to the customer, or additional payments may be due to the Company, after each reconciliation period, based on a reconciliation of actual utilization and cost compared to the prepayment made. 20.8% of NET Services’ revenue was generated under other types of fee arrangements, including administrative services only, fee for service and cost plus (collectively “FFS”) and flat fee contracts, under which fees are generated based upon billing rates for specific services or defined membership populations.
 
Seasonality. While revenue is generally fixed, primarily as a result of the capitated nature of the majority of our contracts, service expense varies based on the utilization of our services. The quarterly operating income and cash flows of NET Services normally fluctuate as a result of seasonal variations in the business, principally due to lower transportation demand during the winter season and higher demand during the summer season.
 
Competition. We compete with a variety of national organizations that provide similar healthcare and social services related transportation, such as Medical Transportation Management, Southeastrans, Veyo, and Access2Care, as well as local and regional providers. Most local competitors seek to win contracts for specific counties or small geographic territories whereas we and other larger competitors seek to win contracts for an entire state or large regional area. We compete based upon a number of factors, including our nationwide network, technical expertise, experience, service capability, service quality, and price.

Matrix Investment
 
Our Matrix Investment is comprised of our interest in Matrix. Since the completion of the Matrix Transaction, the Company has had a non-controlling equity interest in Matrix. The Company and an affiliate of Frazier Healthcare Partners (the “Frazier Subscriber”), which holds the controlling equity interest in Matrix, are party to the Second Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”) of Mercury Parent, LLC, the company through which the parties hold their equity interests in Matrix. The Operating Agreement sets forth certain terms and conditions regarding the ownership by the Company

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and Frazier Subscriber of interests in Mercury Parent and their indirect ownership of common stock of Matrix, and provides for, among other things, certain liquidity and governance rights and other obligations and rights, in each case, on the terms and conditions contained therein.

At December 31, 2018, the Company owned a 43.6% non-controlling interest in Matrix. Prior to the closing of the Matrix Transaction, the financial results of Matrix were included in our Health Assessment Services (“HA Services”) segment. The Company’s proportionate share of Matrix’s net assets and financial results for the period following the closing of the Matrix Transaction are presented using the equity method. The assets, liabilities and financial results of Matrix for the period prior to the closing of the Matrix Transaction are presented within discontinued operations. For additional information regarding the Matrix Transaction, see Note 23, Discontinued Operations, to our consolidated financial statements.
 
Services offered. Matrix offers in-home care optimization services for members, including CHAs, through a national network of community-based clinicians and a fleet of mobile health clinics with advanced diagnostics capabilities. As of December 31, 2018, Matrix utilized a national network of approximately 3,500 clinical providers, including 1,800 nurse practitioners (“NPs”), located across 48 states, to provide its services primarily to members of Medicare Advantage (“MA”) health plans.

Matrix expanded its provider network and service offerings through two acquisitions in 2017 and 2018. In December 2017, Matrix grew its clinical provider network through its acquisition of LP Health Services, a provider of quality and wellness visits on behalf of Medicaid/Duals managed care plans across the U.S., for a purchase price of $3.6 million. In February 2018, Matrix completed its acquisition of HealthFair, a leading operator of mobile clinics which offer preventative health assessment and advanced diagnostic testing services, including laboratory, ultrasound, EKG and mammography testing, for a purchase price of $155 million. Although to date the results of HealthFair have been below our expectations, we still believe the combination of the two organizations provides health plan members with more convenient access to important care management and preventative health services.

Matrix primarily generates revenue from CHAs, which obtain a health plan member's information related to health status, social, environmental and medical risks and help the MA plans improve the accuracy of such information. Matrix also operates a care management offering which provides additional data analytics and chronic care management services.
  
Matrix’s services are dependent upon its technology platform which integrates the clinical provider network, operations infrastructure, call centers and clients. Matrix’s platform is designed for the unique needs of its industry, is highly scalable and can support substantial growth. We believe Matrix’s network and platform position Matrix as a future focal point in the evolving healthcare industry in the introduction of both additional population insights and care management services. With data provided by its health plan clients, Matrix utilizes analytics to determine which members it can most effectively lower costs and improve outcomes through face-to-face engagements with clinicians. Each program is customized and is served by a comprehensive team of case managers, nurse practitioners, registered nurses, and trained call center colleagues.
  
Revenue, customers and clients. As of December 31, 2018, Matrix’s customers included 65 health plans, including for-profit multi-state health plans and non-profit health plans that operate in only one state or several counties within one state. For the year ended December 31, 2018, Matrix’s top five customers accounted for 66.3% of its revenue, as its largest customer accounted for 31.5% of its revenue and its second largest customer accounted for 21.2% of its revenue. Matrix enters into annual or multi-annual contracts with its customers under which it is paid on a per assessment basis. However, volumes are not guaranteed under contracts and customers may choose to utilize other third party providers or in-source capabilities.  A significant customer has indicated it intends to in-source certain services, which may result in a decrease in volume for Matrix. 
 
Seasonality. Matrix attempts to perform CHAs evenly throughout the year to efficiently utilize NP capacity, although the timing of performance is driven by client demand.  
 
Competition. We believe that Matrix and Signify Health are the largest independent providers of CHAs to the health plan market. There are many smaller competitors, such as EMSI Healthcare Services, MedXM, which was acquired by Quest Diagnostics on February 1, 2018, and Inovalon. In addition, some health plans in-source CHA services. Matrix’s chronic care management competitors include Landmark Healthcare, PopHealthCare and Optum.
 
Employees
 
As of December 31, 2018, we had approximately 4,000 employees. None of our employees are members of a union. We believe we have good relationships with our employees.
 

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Regulatory Environment
 
Overview
 
Our NET Services and Matrix Investment segments (the “Healthcare Segments”) are subject to numerous U.S. federal, state and local laws, regulations and agency guidance (collectively, “Laws”). These Laws significantly affect the way in which these segments operate various aspects of their businesses. Our Healthcare Segments must also comply with state and local licensing requirements, state and federal requirements for participation in Medicare and Medicaid, requirements for contracting with MA plans, and contractual requirements imposed upon them by the federal, state and local agencies and third-party commercial customers to which they provide services. Failure to follow the rules and requirements of these programs can significantly affect our Healthcare Segments’ ability to be paid for the services they provide and be authorized to provide services on an ongoing basis.
 
The Medicare and Medicaid programs are governed by significant and complex Laws.  Both Medicare and Medicaid are financed, at least in part, with federal funds. Therefore, any direct or indirect recipients of those funds are subject to federal fraud, waste and abuse Laws.  In addition, there are federal privacy and security Laws that govern the healthcare industry. State Laws primarily pertain to the licensure of certain categories of healthcare professionals and providers and the state’s interest in regulating the quality of healthcare in the state, regardless of the source of payment, but may also include state Laws pertaining to fraud, waste and abuse, privacy and security Laws, and the state’s regulation of its Medicaid program. Federal and state regulatory laws that may affect our Healthcare Segments’ businesses, include, but are not limited to the following:

false and other improper claims or false statements Laws pertaining to reimbursement;
the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and its privacy, security, breach notification and enforcement and code set regulations and guidance, along with evolving state Laws protecting patient privacy and requiring notifications of unauthorized access to, or use of, patient medical information;
civil monetary penalties Law;
anti-kickback Laws;
the Stark Law and other self-referral, financial inducement, fee splitting, and patient brokering Laws;
The Centers for Medicare and Medicaid Services (“CMS”) regulations pertaining to Medicare as well as CMS releases applicable to the operation of MA plans, such as reimbursement rates, risk adjustment and data collection methodologies, adjustments to quality management measurements and other relevant factors; and
state licensure laws.
 
A violation of certain of these Laws could result in civil and criminal damages and penalties, the refund of monies paid by government or private payors, our Healthcare Segments’ exclusion from participation in federal healthcare payor programs, or the loss of our segments’ license to conduct business within a particular state’s boundaries.
 
Federal Law
 
Federal healthcare Laws apply in any case in which our Healthcare Segments are providing an item or service that is reimbursable or provide information to such segments’ customers that results in reimbursement by a federal healthcare payor program to such segments or to them. The principal federal Laws that affect our Healthcare Segments’ businesses include those that prohibit the filing of false or improper claims or other data with federal healthcare payor programs and those that prohibit unlawful inducements for the referral of business reimbursable under federal healthcare payor programs.

False and Other Improper Claims
 
Under the federal False Claims Act (31 U.S.C. §§ 3729-3733) and similar state Laws, the government may impose civil liability on our Healthcare Segments if they knowingly submit a false claim to the government or cause another to submit a false claim to the government, or knowingly make a false record or statement intended to get a false claim paid by the government. The False Claims Act defines a claim as a demand for money or property made directly to the government or to a contractor, grantee, or other recipient if the money is to be spent on the government’s behalf or if the government will reimburse the contractor or grantee. Liability can be incurred for submitting (or causing another to submit) false claims with actual knowledge or for submitting false claims with reckless disregard or deliberate ignorance. Liability can also be incurred for knowingly making or using a false record or statement to receive payment from the federal government or for knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property to the government. Consequently, a provider need not take an affirmative action to conceal or avoid an obligation to the government, but the mere retention of an overpayment from the government could lead to potential liability under the False Claims Act.
  

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Many states also have similar false claims statutes. In addition, healthcare fraud is a priority of the U.S. Department of Justice (“DOJ”), the Department of Health and Human Services (“DHHS”), its program integrity contractors and its Office of Inspector General, the Federal Bureau of Investigation and state Attorneys General. These agencies have devoted a significant amount of resources to investigating healthcare fraud.
  
If our Healthcare Segments are ever found to have violated the False Claims Act, they could be required to make significant payments to the government (including damages and penalties in addition to the return of reimbursements previously collected) and could be excluded from participating in federal healthcare programs or providing services to entities which contract with those programs. Although our Healthcare Segments monitor their billing practices for compliance with applicable laws, such laws are very complex, and they might not be able to detect all errors or interpret such laws in a manner consistent with a court or an agency’s interpretation. While the criminal statutes generally are reserved for instances evidencing fraudulent intent, the civil and administrative penalty statutes are being applied by the federal government in an increasingly broad range of circumstances. Examples of the types of activities giving rise to liability for filing false claims include billing for services not rendered, misrepresenting services rendered (i.e., miscoding), applications for duplicate reimbursement and providing false information that results in reimbursement or impacts reimbursement amounts. Additionally, the federal government takes the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant should have known that the services were unnecessary. The federal government also takes the position that claiming reimbursement for services that are substandard is a violation of these statutes if the claimant should have known that the care was substandard. Criminal penalties also are available even in the case of claims filed with private insurers if the federal government shows that the claims constitute mail fraud or wire fraud or violate any of the federal criminal healthcare fraud statutes.
 
State Medicaid agencies and state Attorneys General also have authority to seek criminal or civil sanctions for fraud and abuse violations. In addition, private insurers may bring actions under state false claim laws. In certain circumstances, federal and state laws authorize private whistleblowers to bring false claim or “qui tam” suits on behalf of the government against providers and reward the whistleblower with a portion of any final recovery. In addition, the federal government has engaged a number of private audit organizations to assist it in tracking and recovering claims for healthcare services that may have been improperly submitted.
 
Governmental investigations and whistleblower “qui tam” suits against healthcare companies have increased significantly in recent years, and have resulted in substantial penalties and fines and exclusions of persons and entities from participating in government healthcare programs. For more information on the risks related to a failure to comply with applicable government coding and billing rules, see “Risk Factors—Regulatory Risks—Our Healthcare Segments could be subject to actions for false claims or recoupment of funds pursuant to certain audits if they do not comply with government coding and billing rules, which could have a material adverse impact on our segments’ operating results.”
 
Health Information Practices
 
Under HIPAA, DHHS issued rules to define and implement standards for the electronic transactions and code sets for the submission of transactions such as claims, and privacy and security of individually identifiable health information in whatever manner it is maintained.
 
The Final Rule on Enforcement of the HIPAA Administrative Simplification provisions, including the transaction standards, the security standards and the privacy rule, published by DHHS addresses, among other issues, DHHS’s policies for determining violations and calculating civil monetary penalties, how DHHS will address the statutory limitations on the imposition of civil monetary penalties, and various procedural issues. The rule extends enforcement provisions currently applicable to the healthcare privacy regulations to other HIPAA standards, including security, transactions and the appropriate use of service code sets.
 
The Health Information Technology for Economic and Clinical Health Act (“HITECH”), enacted as part of the American Recovery and Reinvestment Act of 2009, extends certain of HIPAA’s obligations to parties providing services to healthcare entities covered by HIPAA known as “business associates,” imposes new notice of privacy breach reporting obligations, extends enforcement powers to state Attorneys General and amends the HIPAA privacy and security laws to strengthen the civil and criminal enforcement of HIPAA. HITECH establishes four categories of violations that reflect increasing levels of culpability, four corresponding tiers of penalty amounts that significantly increase the minimum penalty amount for each violation, and a maximum penalty amount of $1.5 million for all violations of an identical provision. With the additional HIPAA enforcement power under HITECH, the Office for Civil Rights of the DHHS and states are increasing their investigations and enforcement of HIPAA compliance. Our Healthcare Segments have taken steps to ensure compliance with HIPAA and we are monitoring compliance on an ongoing basis.
 

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Additionally, the HITECH Final Rule imposes various requirements on covered entities and business associates, and expands the definition of “business associates” to cover contractors of business associates. Even when our Healthcare Segments are not operating as covered entities, they may be deemed to be “business associates” for HIPAA rule purposes of such covered entities. Our Healthcare Segments monitor their compliance obligations under HIPAA as modified by HITECH, and implement operational and systems changes, associate training and education, conduct risk assessments and allocate resources as needed. Any noncompliance with HIPAA requirements could expose such segments to the criminal and increased civil penalties provided under HITECH and require them to incur significant costs in order to seek to comply with its requirements or to remediate potential issues that may arise.
 
Federal and State Anti-Kickback Laws
 
Federal law commonly known as the “Anti-Kickback Statute” prohibits the knowing and willful offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) which is intended to induce: the referral of an individual for a service for which payment may be made by Medicare, Medicaid or certain other federal healthcare programs; or the ordering, purchasing, leasing, or arranging for, or recommending the purchase, lease or order of, any service or item for which payment may be made by Medicare, Medicaid or certain other federal healthcare programs.
 
Interpretations of the Anti-Kickback Statute have been very broad and under current Law, courts and federal regulatory authorities have stated that the Anti-Kickback Statute is violated if even one purpose (as opposed to the sole or primary purpose) of the arrangement is to induce referrals. Even bona fide investment interests in a healthcare provider may be questioned under the Anti-Kickback Statute if the government concludes that the opportunity to invest was offered as an inducement for referrals.
 
This act is subject to numerous statutory and regulatory “safe harbors.” Compliance with the requirements of a safe harbor offers defenses against Anti-Kickback Statute allegations. Failure of an arrangement to satisfy all of the requirements of a particular safe harbor does not mean that the arrangement is unlawful. However, it may mean that such an arrangement will be subject to scrutiny by the regulatory authorities.
 
Many states, including some where our Healthcare Segments do business, have adopted anti-kickback laws that are similar to the federal Anti-Kickback Statute. Some of these state laws are very closely patterned on the federal Anti-Kickback Statute; others, however, are broader and reach reimbursement by private payors. If our Healthcare Segments’ activities were deemed to be inconsistent with state anti-kickback or illegal remuneration laws, they could face civil and criminal penalties or be barred from such activities, any of which could harm such segments’ businesses.

If our Healthcare Segments’ arrangements are found to violate the Anti-Kickback Statute or applicable state laws, these segments, along with their clients would be subject to civil and criminal penalties, and these segments’ arrangements would not be legally enforceable, which could materially and adversely affect their business. For more information on the risks related to failure to comply with applicable anti-bribery and anti-corruption regulations, see “Risk Factors—Regulatory Risks—Our segments’ business could be subject to civil penalties and loss of business if we fail to comply with applicable bribery, corruption and other regulations governing business with governments.”
 
Federal and State Self-Referral Prohibitions
 
Our Healthcare Segments may be subject to federal and state statutes banning payments for referrals of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship. Section 1877 of the Social Security Act, also known as the “Stark Law”, prohibits physicians from making a “referral” for “designated health services” for Medicare (and in many cases Medicaid) patients from entities or facilities in which such physicians directly or indirectly hold a “financial relationship”.
 
A financial relationship can take the form of a direct or indirect ownership, investment or compensation arrangement. A referral includes the request by a physician for, or ordering of, or the certifying or recertifying the need for, any designated health services.
 
Certain services that our Healthcare Segments provide may be identified as “designated health services” for purposes of the Stark Law. Such segments cannot provide assurance that future regulatory changes will not result in other services they provide becoming subject to the Stark Law’s ownership, investment or compensation prohibitions in the future.
 
Many states, including some states where our Healthcare Segments do business, have adopted similar or broader prohibitions against payments that are intended to induce referrals of clients. Moreover, many states where such segments operate

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have laws similar to the Stark Law prohibiting physician self-referrals. While our Healthcare Segments believe that they are operating in compliance with the Stark Law, there can be no guarantee that violations will not occur. 
 
Healthcare Reform
 
On March 23, 2010, the President of the United States signed into law comprehensive health reform through the Patient Protection and Affordable Care Act (Pub. L. 11-148) (“PPACA”). On March 30, 2010, the President signed a reconciliation budget bill that included amendments to the PPACA (Pub. L. 11-152). These laws in combination form the “ACA” referred to herein. The changes to various aspects of the healthcare system in the ACA were far-reaching and included, among many others, substantial adjustments to Medicare reimbursement, establishment of individual mandates for healthcare coverage, extension of coverage to certain populations, expansion of Medicaid, restrictions on physician-owned hospitals, and increased efficiency and oversight provisions.
 
Some of the provisions of the ACA took effect immediately, while others will take effect later or will be phased in over time, ranging from a few months following approval to ten years. Due to the complexity of the ACA, it is likely that additional legislation will be considered and enacted. The ACA requires the promulgation of regulations that will likely have significant effects on the healthcare industry and third-party payors. Thus, the healthcare industry and our operations may be subjected to significant new statutory and regulatory requirements and contractual terms and conditions, and consequently to structural and operational changes and challenges.
 
The ACA also implemented significant changes to healthcare fraud and abuse laws that intensify the risks and consequences of enforcement actions. These included expansion of the False Claims Act by: (a) narrowing the public disclosure bar; and (b) explicitly stating that violations of the Anti-Kickback Statute trigger false claims liability. In addition, the ACA lessened the intent requirements under the Anti-Kickback Statute to provide that a person may violate the statute without knowledge or specific intent. The ACA also provided new funding and expanded powers to investigate fraud, including through expansion of the Medicare Recovery Audit Contractor (“RAC”) program to Medicare Parts C and D and Medicaid and authorizing the suspension of Medicare and Medicaid payments to a provider of services pending an investigation of a credible allegation of fraud. Finally, the legislation created enhanced penalties for noncompliance, including increased criminal penalties and expansion of administrative penalties under Medicare and Medicaid. Collectively, such changes could have a material adverse impact on our Healthcare Segments’ operations.
 
On January 20, 2017, the President of the United States issued an executive order that directed federal agencies to take steps to ensure the government’s implementation of the ACA minimizes the burden on impacted parties (such as individuals and states). The underlying intent of the executive order was to take the first steps to repeal and replace the ACA. The executive order specifically instructed agencies to “waive, defer, grant exemptions from, or delay implementation of provisions” that place a “fiscal burden on any State” or that impose a “cost, fee, tax, penalty, or regulatory burden” on stakeholders including patients, providers, and insurers. The order stated that any changes should be made only to the extent “permitted by law” and should comply with the law governing administrative rule-making. The executive order did not, however, provide specifics on next steps or provisions that would be reexamined nor was it clear how the executive branch would be reconciled with Republican congressional efforts to repeal and replace the ACA or what portions of the ACA may continue in any replacement legislation. There are multiple pending legislative proposals to amend the ACA which, among other effects, could repeal all or parts of the ACA without replacing its extension of coverage to expansion populations. In addition, there are pending legislative proposals to materially restructure Medicaid and other government health care programs and there is litigation challenging, amongst other claims, the constitutionality of the ACA. Most recently, on December 14, 2018, a federal district court judge in Texas issued a widely anticipated opinion that struck down the entire ACA as unconstitutional. The judge ruled in favor of the plaintiffs by determining that the ACA’s individual mandate is no longer a tax and is therefore an unconstitutional exercise of congressional authority. The judge also found that the individual mandate could not be severed from the rest of the ACA, rendering the entire ACA, not just the guaranteed issue and community rating provisions, unconstitutional. Sixteen states and the District of Columbia intervened as defendants in Texas v. United States to proffer a defense of the constitutionality of the ACA.  The DOJ declined to defend the ACA on constitutional grounds. The intervenor defendant states have announced they will appeal the District Court’s decision to the Fifth Circuit Court of Appeals. We are not able to predict the outcome of this matter nor are we able to predict the impact of a full or partial invalidation of the ACA.

In 2017, legislation was proposed in the U.S. Congress, but did not advance out of committee and was not passed, which would reduce or eliminate certain non-emergency medical transportation services provided by NET Services as a required Medicaid benefit. A similar proposal was made in 2018 by the President of the United States in a federal budget proposal. If additional privatization initiatives are not proposed or enacted, or if previously enacted privatization initiatives are challenged, repealed or invalidated, there could be a material adverse impact on our segments’ operating results.
 

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Surveys and Audits
 
Our Healthcare Segments’ programs are subject to periodic surveys by government authorities or their contractors to ensure compliance with various requirements. Regulators conducting periodic surveys often provide reports containing statements of deficiencies for alleged failures to comply with various regulatory requirements. In most cases, if a deficiency finding is made by a reviewing agency, our segments will work with the reviewing agency to agree upon the steps to be taken to bring our program into compliance with applicable regulatory requirements. In some cases, however, an agency may take a number of adverse actions against a program, including:

the imposition of fines or penalties or the recoupment of amounts paid;
temporary suspension of admission of new clients to our program’s service;
in extreme circumstances, exclusion from participation in Medicaid, Medicare or other programs;
revocation of our license; or
contract termination.
 
While our Healthcare Segments believe that our programs are in compliance with Medicare, Medicaid and other program certification requirements and state licensure requirements, failure to comply with these requirements could have a material adverse impact on such segments’ businesses and their ability to enter into contracts with other agencies to provide services.
 
Billing/claims Reviews and Audits
 
Agencies and other third-party commercial payors periodically conduct pre-payment or post-payment medical reviews or other audits of our Healthcare Segments’ claims or other audits in conjunction with their obligations to comply with the requirements of Medicare or Medicaid. In order to conduct these reviews, payors request documentation from our Healthcare Segments and then review that documentation to determine compliance with applicable rules and regulations, including the eligibility of clients to receive benefits, the appropriateness of the care provided to those clients, and the documentation of that care. Any determination that such segments have not complied with applicable rules and regulations could result in adjustment of payments or the incurrence of fines and penalties, or in situations of significant compliance failures review or non-renewal of related contracts.
 
Corporate Practice of Medicine and Fee Splitting
 
Some states in which our Healthcare Segments operate prohibit general business entities, such as these segments, from “practicing medicine,” which definition varies from state to state and can include employing physicians, as well as engaging in fee-splitting arrangements with these healthcare providers. Among other things, our Healthcare Segments currently contract with and employ NPs to perform CHAs. We believe that such segments have structured their operations appropriately; however, they could be alleged or found to be in violation of some or all of these laws. If a state determines that some portion of our Healthcare Segments’ businesses violate these laws, it may seek to have such segments discontinue or restructure those portions of their operations or subject them to increased costs, penalties, fines, certain license requirements or other measures. Any determination that such segments have acted improperly in this regard may result in liability to them. In addition, agreements between the corporation and the professional may be considered void and unenforceable.
 
Professional Licensure and Other Requirements
 
Many of our Healthcare Segments’ employees are subject to federal and state laws and regulations governing the ethics and practice of their professions. For example, our mid-level practitioners (e.g., NPs) are subject to state laws requiring physician supervision and state laws governing mid-level scope of practice. As physicians’ use of mid-level practitioners increases, state governing boards are implementing more robust regulations governing mid-levels and their scope of practice under physician supervision. Our Healthcare Segments’ ability to provide mid-level practitioner services may be restricted by the enactment of new state laws governing mid-level scope of practice and by state agency interpretations and enforcement of such existing laws. In addition, services rendered by mid-level practitioners may not be reimbursed by payors at the same rates as payors may reimburse physicians for the same services. Lastly, professionals who are eligible to participate in Medicare and Medicaid as individual providers must not have been excluded from participation in government programs at any time. Our Healthcare Segments’ ability to provide services depends upon the ability of their personnel to meet individual licensure and other requirements and maintain such licensure in good standing.


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Additional Information
 
The Company’s website at www.prscholdings.com provides access to its periodic reports, certain corporate governance documents, press releases, interim shareholder reports and links to its subsidiaries’ websites. The Company makes available to the public on its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the SEC. Copies are also available, without charge, upon request to The Providence Service Corporation, 700 Canal Street, Third Floor, Stamford, CT 06902, (203) 307-2800, Attention: Corporate Secretary. The information contained on our website is not part of, and is not incorporated by reference in, this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.
 

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Item 1A.
Risk Factors.

You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition and results of operations. This Annual Report on Form 10-K also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in any forward-looking statements as a result of specific factors, including the risks and uncertainties described below.
 
Risks Related to Our Business
 
There can be no assurance that our contracts will survive until the end of their stated terms, or that upon their expiration will be renewed or extended on satisfactory terms, if at all. Disruptions to, the early expiration of or the failure to renew our contracts could have a material adverse impact on our financial condition and results of operations.
  
Our NET Services contracts are subject to frequent renewal. For example, many of our state Medicaid contracts, which represented 52.9% of NET Services revenue for the year ended December 31, 2018, have terms ranging from three to five years and are typically subject to a competitive bidding process near the end of the term. NET Services also contracts with MCOs, which represented 47.1% of NET Services revenue for the year ended December 31, 2018. MCO contracts typically continue until terminated by either party upon reasonable notice (as determined in accordance with the contract). We cannot anticipate if, when or to what extent we will be successful in renewing our state Medicaid contracts or retaining our MCO contracts. As of December 31, 2018, 13.2% of NET Services revenue was generated under state Medicaid contracts that are subject to renewal within the next 12 months. Renewed contracts represented 32.4% of our NET Services revenue for the year ended December 31, 2018.

In addition, with respect to many of our state contracts, the payor may terminate the contract without cause, or for convenience, at will and without penalty to the payor, either immediately or upon the expiration of a short notice period in the event that, among other reasons, government appropriations supporting the programs serviced by the contract are reduced or eliminated.
  
We cannot anticipate if, when or to what extent a payor might terminate its contract with us prior to its expiration, or fail to renew or extend a contract with us. If we are unable to retain or renew our contracts, or replace lost contracts, on satisfactory terms our financial conditions and results of operations could be materially adversely affected. While we pursue new contract awards and also undertake efficiency measures, there can be no assurance that such measures will fully offset the impact of contracts that are not renewed or are canceled on our operating income and results of operations.
 
We obtain a significant portion of our business through responses to government requests for proposals and we may not be awarded contracts through this process in the future, or contracts we are awarded may not be profitable.
 
We obtain, and will continue to seek to obtain, a significant portion of our business from state government entities, which generally entails responding to a government request for proposals (“RFP”). To propose effectively, we must accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations and submit the most attractive proposal with respect to both technical and price specifications. We must also assemble and submit a large volume of information within rigid and often short timetables. Our ability to respond successfully to RFPs will greatly affect our business. If we misinterpret bid requirements as to performance criteria or do not accurately estimate performance costs in a binding bid for an RFP, we will seek to correct such mistakes in the final contract. However, there can be no assurance that we will be able to modify the proposed contract and we may be required to perform under a contract that is not profitable.
 
If we fail to satisfy our contractual obligations, we could be liable for damages and financial penalties, which may place existing pledged performance and payment bonds at risk as well as harm our ability to keep our existing contracts or obtain new contracts and future bonds.
 
Our failure to comply with our contractual obligations could, in addition to providing grounds for immediate termination of the contract for cause, negatively impact our financial performance and damage our reputation, which, in turn, could have a material adverse effect on our ability to maintain current contracts or obtain new contracts. The termination of a contract for cause could, for instance, subject us to liabilities for excess costs incurred by a payor in obtaining similar services from another source. In addition, our contracts require us to indemnify payors for our failure to meet standards of care, and some of them contain liquidated damages provisions and financial penalties that we must pay if we breach these contracts, which amounts could be material. For example, the service commitment under one of our contracts could subject us to penalties if we do not utilize the

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minimum level of services specified in such agreement. The total future minimum commitment was $28.7 million as of December 31, 2018. To the extent our actual use is less than the minimum commitment for a specified period, we may be subject to significant expense, without the benefit of corresponding revenue.

Our failure to meet contractual obligations could also result in substantial actual and consequential financial damages.

Any acquisition or integration that we undertake could disrupt our business, not generate anticipated results, dilute stockholder value or have a material adverse impact on our operating results.
 
Our growth strategy involves the evaluation of potential entry into complementary markets and service lines through acquisition, particularly with opportunities that may leverage the advantages inherent in our large-scale technology-enabled operations and networks. We have made acquisitions and anticipate that we will continue to consider and pursue strategic acquisition opportunities the success of which depends in part on our ability to integrate an acquired company into our business operations. For example, we completed the acquisition of Circulation in September 2018 and will utilize Circulation’s technology platform to service our legacy or new customers, which will result in a decrease in the usage of our existing technology. As a result of the technology evaluation, we decided to terminate the development of our legacy LCAD NextGen technology (“NextGen”), resulting in an impairment charge in the fourth quarter of 2018 of $13.5 million. While preliminary implementation is on track, the work to deploy the Circulation technology platform is ongoing, and subject to the scalability of Circulation’s technology platform to process similar levels of transactions as LogistiCare. In addition, the digitization of claims processing on the Circulation platform may have unintended financial impacts related to claim costs and working capital.  To the extent we are unable to successfully integrate the Circulation acquisition, our results of operations may be adversely affected and anticipated synergies may not be realized. Integration of any acquired companies will place significant demands on our management, systems, internal controls and financial and physical resources. This could require us to incur significant expense for, among other things, hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding our information technology infrastructure. The nature of our business is such that qualified management personnel can be difficult to find. Our inability to manage growth effectively could have a material adverse effect on our financial results.
 
There can be no assurance that the companies acquired will generate income or incur expenses at the historical or projected levels on which we based our acquisition decisions, that we will be able to maintain or renew the acquired companies’ contracts, that we will be able to realize operating and economic efficiencies upon integration of acquired companies or that the acquisitions will not adversely affect our results of operations or financial condition. 
 
We expect to continually review opportunities to acquire other businesses that would complement our current services, expand our markets or otherwise offer prospects for growth. In connection with our acquisition strategy, we could issue stock that would dilute existing stockholders’ percentage ownership, or we could incur or assume substantial debt or contingent liabilities. Acquisitions involve numerous risks, including, but not limited to, the following:

challenges and unanticipated costs assimilating the acquired operations;
known and unknown legal or financial liabilities associated with an acquisition;
diversion of management’s attention from our core businesses;
adverse effects on existing business relationships with customers;
entering markets in which we have limited or no experience;
potential loss of key employees of purchased organizations;
incurrence of excessive leverage in financing an acquisition;
failure to maintain and renew contracts and other revenue streams of the acquired business;
costs associated with litigation or other claims arising in connection with the acquired company;
unanticipated operating, accounting or management difficulties in connection with an acquisition; and
dilution to our earnings per share.
 
There can be no assurance that we will be successful in overcoming problems encountered in connection with any acquisition or integration and our inability to do so could disrupt our operations and adversely affect our business. Our failure to address these risks or other problems encountered in connection with past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally.
 
We may be unable to realize the benefits of any strategic initiatives that are adopted by the Company.

From time to time we may launch strategic initiatives to enhance shareholder value. For example, on April 11, 2018, we announced our Organizational Consolidation, which is expected to be completed in the middle of 2019. While we expect the

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Organizational Consolidation to generate annual savings upon completion, implementation of the process will negatively impact earnings. There can be no assurance that the Organizational Consolidation will be completed in a timely fashion or at all, or that it will generate the expected cost savings. In addition, part of the rationale for the acquisition of Circulation was the ability to utilize its technology platform to generate substantial cost savings. Such cost savings require the deployment of technology and substantial changes to existing business processes. There can be no assurance as to whether any other strategic initiatives will be adopted, and the outcome of any current or future strategic initiatives is uncertain, including the roll out of the Circulation technology platform across our LogistiCare business.
 
Our investments in any joint ventures and unconsolidated entities could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners.
 
We currently hold a non-controlling interest in Matrix, which constitutes 28.2% of our consolidated assets. We do not have unilateral power to direct the activities that most significantly impact such business’ economic performance. Our future growth may depend, in part, on future similar arrangements, any of which could be material to our financial condition and results of operations. These arrangements involve risks not present with respect to our wholly-owned subsidiaries, which may negatively impact our financial condition and results of operations or make the arrangements less successful than anticipated, including the following:

we may be unable to take actions that we believe are appropriate but are opposed by our joint venture partners under arrangements that require us to cede or share decision-making authority over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture, such as the sale or financing of the business or the making of additional capital contributions for the benefit of the business;
our joint venture partners may take actions that we oppose;
we may be unable to sell or transfer our interest in a joint venture to a third party if we fail to obtain the prior consent of our joint venture partners;
our joint venture partners may become bankrupt or fail to fund their share of required capital contributions, which could adversely impact the joint venture or increase our financial commitment to the joint venture;
our joint venture partners may have business interests or goals with respect to a business that conflict with our business interests and goals, including with respect to the timing, terms and strategies for investment, which could increase the likelihood of disputes regarding the ownership, management or disposition of the business;
disagreements with our joint venture partners could result in litigation or arbitration that increases our expenses, distracts our officers and directors, and disrupts the day-to-day operations of the business, including the delay of important decisions until the dispute is resolved; and
we may suffer losses as a result of actions taken by our joint venture partners with respect to our joint venture investments.
  
We derive a significant amount of our revenues from a few payors, which puts our financial condition and results of operations at risk. Any changes in the funding, financial viability or our relationships with these payors could have a material adverse impact on our financial condition and results of operations.
 
We generate a significant amount of our revenue from a few payors under a small number of contracts. For example, for the years ended December 31, 2018, 2017 and 2016, we generated 51.4%, 52.4% and 51.7%, respectively, of our consolidated revenue from continuing operations from ten payors. Additionally, the top five payors represented, in the aggregate, 34.0%, 36.1% and 35.6%, respectively, of revenue from continuing operations for the years ended December 31, 2018, 2017 and 2016. Additionally, a single payor related to Matrix represented 31.5%, 30.9% and 27.8% of Matrix revenue for the years ended December 31, 2018, 2017 and 2016, respectively. The loss of, reduction in amounts generated by, or changes in methods or regulations governing payments for our services under these contracts could have a material adverse impact on our revenue and results of operations. In addition, any consolidation of any of our private payors could increase the impact that any such risks would have on our revenue and results of operations.
  
If we fail to estimate accurately the cost of performing certain contracts, we may experience reduced or negative margins.
 
During 2018, 2017 and 2016, 79.2%, 77.9% and 78.3% of our NET Services revenue, respectively, was generated under capitated contracts with the remainder generated through FFS and flat fee contracts. Under most of NET Services’ capitated contracts, we assume the responsibility of managing the needs of a specific geographic population by contracting out transportation services to local transportation companies on a per ride or per mile basis. We use “pricing models” to determine applicable contract rates, which take into account factors such as estimated utilization, state specific data, previous experience in the state or with similar services, the medically covered programs outlined in the contract, identified populations to be serviced, estimated volume,

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estimated transportation provider rates and availability of mass transit. The amount of the fixed per-member, monthly fee is determined in the bidding process, but is predicated on actual historical transportation data for the subject geographic region as provided by the payor, actuarial work performed in-house as well as by third party actuarial firms and actuarial analysis provided by the payor. If the utilization of our services is more than we estimated, the contract may be less profitable than anticipated, or may not be profitable at all. Under our FFS contracts, we receive fees based on our interactions with government-sponsored clients. To earn a profit on these contracts, we must accurately estimate costs incurred in providing services. Our risk relating to these contracts is that our client population is not large enough to cover our fixed costs, such as rent and overhead. Our FFS contracts are not reimbursed on a cost basis and therefore, if we fail to estimate our costs accurately, we may experience reduced margins or losses on these contracts. Revenue under certain contracts may be adjusted prospectively if client volumes are below expectations. If we are unable to adjust our costs accordingly, our profitability may be negatively affected. In addition, certain contracts with state Medicaid agencies are renewable or extended at the state’s option without an adjustment to pricing terms. If such renewed contracts require us to incur higher costs, including inflation or regulatory changes, than originally anticipated, our results of operations and financial condition may be adversely affected.
 
We may incur costs before receiving related revenues, which affect our liquidity.
 
When we are awarded a contract to provide services, we may incur expenses before we receive any contract payments. These expenses include leasing office space, purchasing office equipment, instituting information technology systems, development of supply chains and hiring personnel. As a result, in certain contracts where the payor does not fund program start-up costs, we may be required to make significant investments before receiving any related contract payments or payments sufficient to cover start-up costs. In addition, payments due to us from payors may be delayed due to billing cycles, which may adversely affect our liquidity. Moreover, any resulting mismatch in expenses and revenue could be exacerbated if we fail either to invoice the payor correctly or to collect our fee in a timely manner. Such amounts may exceed our available cash, and any resulting liquidity shortages may require additional financing, which may not be available on satisfactory terms, or at all. This could have a material adverse impact on our ongoing operations and our financial position.
 
Our business is subject to risks of litigation.
 
The services we provide are subject to lawsuits and claims. A substantial award payable by us could have a material adverse impact on our operations and cash flows, and could adversely affect our ability to continue to purchase appropriate liability insurance. We can be subject to claims for negligence or intentional misconduct (in addition to professional liability type claims) by an employee or a third party we engage to assist with the provision of services, including but not limited to claims arising out of accidents involving vehicle collisions, CHAs performed by Matrix, and various claims that could result from employees or contracted third parties driving to or from interactions with clients or while providing direct client services. We can be subject to employee-related claims such as wrongful discharge, discrimination or a violation of equal employment laws and permitting issues. While we attempt to insure against these types of claims, damages exceeding our insurance limits or outside our insurance coverage, such as a claim for fraud, certain wage and hour violations or punitive damages, could adversely affect our cash flow and financial condition.
 
We face risks related to attracting and retaining qualified employees and labor relations.
 
Our success depends, to a significant degree, on our ability to identify, attract, develop, motivate and retain highly qualified and experienced professionals who possess the skills and experience necessary to deliver high-quality services to our clients, with the continued contributions of our senior management being especially critical to our success. Our objective of providing the highest quality of service to our clients is a significant consideration when we evaluate the education, experience and qualifications of potential candidates for employment as direct care and administrative staff. A portion of our staff is professionals with requisite educational backgrounds and professional certifications. These employees are in great demand and are likely to remain a limited resource for the foreseeable future.
 
Our ability to attract and retain employees with the requisite experience and skills depends on several factors including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. While we have established programs to attract new employees and provide incentives to retain existing employees, particularly our senior management, we cannot assure you that we will be able to attract new employees or retain the services of our senior management or any other key employees in the future. Some of the companies with which we compete for experienced personnel may have greater financial, technical, political and marketing resources, name recognition and a larger number of clients and payors than we do, which may prove more attractive to employment candidates. The inability to attract and retain experienced personnel could have a material adverse effect on our business.
 

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The performance of our business also depends on the talents and efforts of our highly skilled information technology professionals. For example, realization of the synergies related to our recent acquisition of Circulation relies heavily on our ability to deploy Circulation’s technology platform across LogistiCare’s existing operations, and competition for skilled information technology professionals can be intense. Our success depends on our ability to recruit, retain and motivate these individuals.
 
Effective succession planning is also important to our future success. If we fail to ensure the effective transfer of senior management knowledge and smooth transitions involving senior management, including the appointment of a permanent chief executive officer for the Company and the transition of several key management positions, resulting from the Organizational Consolidation, our ability to execute short and long-term strategic, financial and operating goals, as well as our business, financial condition and results of operations generally, could be adversely affected.

We may have difficulty successfully completing divestitures or exiting businesses.
 
As demonstrated most recently with the WD Services sale in 2018 and various other transactions involving WD Services, as well as the sale of a controlling interest in Matrix in 2016, we may dispose of all or a portion of our investments or exit businesses based on a variety of factors, including availability of alternative opportunities to deploy capital or otherwise maximize shareholder value as well as other strategic considerations. A divestiture or business termination could result in difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention, the disruption of our business and the potential loss of key employees and customers. A divestiture or business termination may be subject to the satisfaction of pre-closing conditions as well as to obtaining necessary regulatory approvals, which, if not satisfied or obtained, may prevent us from completing the disposition or business termination, whether or not the disposition or business termination has been publicly announced. A divestiture or business termination may also involve continued financial involvement in the divested assets and businesses, such as indemnities or other financial obligations, including continuing obligations to employees, in which the performance of the divested assets or businesses could impact our results of operations. Further, such divestitures may result in proceeds to us in an amount less than we expect or less than our assessment of the value of those assets. Any sale of our assets could result in a loss on divestiture. Any of the foregoing could adversely affect our financial condition and results of operations.
 
The indemnification provisions of acquisition and disposition agreements by which we have acquired or sold companies may result in liabilities.
 
We rely heavily on the representations and warranties and related indemnities provided to us by the sellers of acquired companies, including as they relate to creation, ownership and rights in intellectual property and compliance with laws and contractual requirements. However, the liability of the former owners is limited under the relevant acquisition agreements, and certain sellers may be unable to meet their indemnification responsibilities. Similarly, the purchasers of our divested operations may from time to time agree to indemnify us for operations of such businesses after the closing. We cannot be assured that any of these indemnification provisions will fully protect us, and as a result we may face unexpected liabilities that adversely affect our consolidated results of operations, financial condition and cash flows.
 
In addition, we have provided certain indemnifications in connection with the WD Services sale in 2018, the Matrix Transaction in 2016 and the Human Services Sale in 2015. To the extent we choose to divest other operations of our businesses in the future, we expect to provide certain indemnifications in connection with these divestitures. We may face liabilities in connection with these current or future indemnification obligations that may adversely affect our consolidated results of operations, financial condition and cash flows.
 
Our success depends on our ability to compete effectively in the marketplace.
 
We compete for clients and for contracts with a variety of organizations that offer similar services. Many organizations of varying sizes compete with us, including local not-for-profit organizations and community-based organizations, larger companies, organizations that currently provide or may begin to provide similar NET management services (including transportation network companies such as Uber and Lyft) and CHA providers. Some of these companies may have greater financial, technical, political, marketing, name recognition and other resources and a larger number of clients or payors than we do. In addition, some of these companies offer more services than we do. To remain competitive, we must provide superior services and performance on a cost-effective basis to our customers.

The market in which we operate is influenced by technological developments that affect cost-efficiency and quality of services, and the needs of our customers change and evolve regularly. Accordingly, our success depends on our ability to develop services that address these changing needs and to provide technology needed to deliver these services on a cost-effective basis. Our competitors may better utilize technology to change the way services in our industry are designed and delivered and they may be able to provide our customers with different or greater capabilities than we can provide, including better contract terms, technical

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qualifications, price and availability of qualified professional personnel. In addition, new or disruptive technologies and methodologies by our competitors may make our services uncompetitive.

In conjunction with our ongoing efforts to improve cost-efficiency and the customer experience, in September 2018, we completed our acquisition of Circulation. We incurred costs associated with such acquisition and will also incur costs to implement the Circulation technology across LogistiCare’s existing operations, but there is no guarantee that this will ultimately serve our business purposes or result in lower costs.
  
We have experienced, and expect to continue to experience, competition from new entrants into the markets in which we operate. Increased competition may result in pricing pressures, loss of or failure to gain market share or loss of or failure to gain clients or payors, any of which could have a material adverse effect on our operating results. Our business may also be adversely affected by the consolidation of competitors, which may result in increased pricing pressure or negotiating leverage with payors, or by the provision of our services by payors or clients directly, including through the acquisition of competitors.
 
We may be adversely affected by inadequacies in, or security breaches of, our information technology systems.
 
Our information technology systems are critically important to our operations and we must implement and maintain appropriate and sufficient infrastructure and systems to support growth and business processes. We provide services to individuals, including services that require us to maintain sensitive and personal client information, including information relating to their health, identification numbers and other identifying data. Therefore, our information technology systems store client information protected by numerous federal, state and foreign regulations. We also rely on our information technology systems (some of which are outsourced to third parties) to manage the data, communications and business processes for all other functions, including our marketing, sales, logistics, customer service, accounting and administrative functions. Further, our systems include interfaces to third-party stakeholders, often connected via the Internet. In addition, certain of our services or information related to our services are carried out or hosted within our customers’ IT systems, and any failure or weaknesses in their IT systems may negatively impact our ability to deliver the services, for which we may not receive relief from contractual performance obligations or compensation for services provided. As a result of the data we maintain and third-party access, we are subject to increasing cybersecurity risks. The nature of our business, where services are often performed outside a secured location, adds additional risk.
 
If we do not allocate and effectively manage the resources necessary to build, sustain and protect an appropriate technology infrastructure, our business or financial results could be negatively impacted. Furthermore, computer hackers and data thieves are increasingly sophisticated and operate large scale and complex automated attacks and our information technology systems may be vulnerable to material security breaches (including the access to or acquisition of customer, employee or other confidential data), cyber-based attacks or other material system failures. Because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to implement adequate preventative measures sufficient to prevent a breach of our systems and protect sensitive data. Any breach of our data security could result in an unauthorized release or transfer of customer or employee information, or the loss of valuable business data or cause a disruption in our business. A failure to prevent, detect and respond in a timely manner to a major breach of our data security or to other cybersecurity threats could result in system disruption, business continuity issues or compromised data integrity. These events or any other failure to safeguard personal data could give rise to unwanted media attention, damage our reputation, damage our customer relationships and result in lost sales, fines or lawsuits. We may also be required to expend significant capital and other resources to protect against or respond to or alleviate problems caused by a security breach. If we are unable to prevent material failures, our operations may be impacted, and we may suffer other negative consequences such as reputational damage, litigation, remediation costs, a requirement not to operate our business until defects are remedied or penalties under various data privacy laws and regulations, any of which could detrimentally affect our business, financial condition and results of operations.
 
Failure to protect our client’s privacy and confidential information could lead to legal liability, adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.

We retain confidential information in our computer systems, including personal information about our customers, such as names, addresses, phone numbers, email addresses, identification numbers and payment account information. Malicious cyber- attacks to gain access to personal information affect many companies across various industries, including ours. Pursuant to federal and state laws, various government agencies have established rules protecting the privacy and security of personal information. In addition, most states have enacted laws, which vary significantly from jurisdiction to jurisdiction, to safeguard the privacy and security of personal information. An increasing number of states require that customers be notified if a security breach results in the inappropriate disclosure of personally identifiable customer information. Any compromise of the security of our systems that results in the disclosure of personally identifiable customer or employee information or inadvertent disclosure of any clients’ personal information could damage our reputation, deter people from using our services, expose us to litigation, increase regulatory

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scrutiny and require us to incur significant technical, legal and other expenses. In addition, data breaches impacting other companies, such as our vendors, may allow cybercriminals to obtain personally identifiable information about our customers. Cybercriminals may then use this information to, among other things, attempt to gain unauthorized access to our customers’ accounts, which could have a material adverse effect on our reputation, business and results of operations or financial condition.

Failure to maintain or to develop further reliable, efficient and secure information technology systems would be disruptive to our operations and diminish our ability to compete and grow our business successfully.

We are highly dependent on efficient and uninterrupted performance of our information technology and business systems. These systems quote, process and service our business, and perform financial functions necessary for pricing and service delivery. These systems must also be able to undergo periodic modifications and improvements without interruptions or untimely delays in service. Additionally, our ability to integrate our systems with those of our clients is critical to our success. Our information systems rely on the commitment of significant financial and managerial resources to maintain and enhance existing systems as well as develop and create new systems to keep pace with continuing changes in information processing technology or evolving industry and regulatory requirements. However, we still rely on manual processes and procedures, including accounting, reporting and consolidation processes that may result in errors and may not scale proportionately with our business growth.

A failure or delay to achieve improvements in our information technology platforms could interrupt certain processes or degrade business operations and could place us at a competitive disadvantage. If we are unable to implement appropriate systems, procedures and controls, we may not be able to successfully offer our services and grow our business and account for transactions in an appropriate and timely manner, which could have an adverse effect on our business, financial condition and results of operations.
 
Our results of operations will continue to fluctuate due to seasonality.
 
Our operating results and operating cash flows normally fluctuate as a result of seasonal variations in our business. Due to higher demand in the summer months and lower demand in the winter months, coupled with a primarily fixed revenue stream based on a per-member, per-month payment structure, we normally experience lower operating margins in the summer and higher operating margins in the winter.

Our reported financial results could suffer if there is an impairment of long-lived assets.
 
We are required under generally accepted accounting principles in the United States of America (“GAAP”) to review the carrying value of long-lived assets to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets may be impaired. Factors that may necessitate an impairment assessment include, among others, significant adverse changes in the extent or manner in which an asset is used, significant adverse changes in legal factors or the business climate that could affect the value of an asset or significant declines in the observable market value of an asset. Where the presence or occurrence of those events indicates that an asset may be impaired, we assess its recoverability by determining whether the carrying value of the asset exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the asset. If such testing indicates the carrying value of the asset is not recoverable, we estimate the fair value of the asset using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. If the fair value of those assets is less than carrying value, we record an impairment loss equal to the excess of the carrying value over the estimated fair value. The use of different estimates or assumptions in determining the fair value of our intangible assets may result in different values for those assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge. For example, we recorded an asset impairment charge of $14.2 million in 2018 related to NextGen.

In addition, goodwill may be impaired if the estimated fair value of one or more of our reporting units is less than the carrying value of the respective reporting unit. As a result of our growth, in part through acquisitions, goodwill and other intangible assets represent a significant portion of our assets. For example, goodwill generated in relation to the acquisition of Circulation was $40.0 million. We perform an analysis on our goodwill balances to test for impairment on an annual basis. Interim impairment tests may also be required in advance of our annual impairment test if events occur or circumstances change that would more likely than not reduce the fair value, including goodwill, of one or more of our reporting units below the reporting unit’s carrying value. Such circumstances could include but are not limited to: (1) loss of significant contracts, (2) a significant adverse change in legal factors or in the climate of our business, (3) unanticipated competition, (4) an adverse action or assessment by a regulator or (5) a significant decline in our stock price.

As of December 31, 2018, the carrying value of goodwill, intangibles and property and equipment, net was $135.2 million, $26.1 million and $23.0 million, respectively. We continue to monitor the carrying value of these long-lived assets. If future

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conditions are different from management’s estimates at the time of an acquisition or market conditions change subsequently, we may incur future charges for impairment of our goodwill or intangible assets, which could have a material adverse impact on our results of operations and financial position.
 
Our use of a reinsurance program and insurance programs to cover certain claims for losses suffered and costs or expenses incurred could negatively impact our business.
 
We reinsured a substantial portion of our automobile, general liability, professional liability and workers’ compensation insurance policies through May 15, 2017. Upon renewal of the policies, we made the decision to no longer reinsure these risks, although we continue to resolve claims under the historical policy years. Through February 15, 2011, one of our subsidiaries also insured certain general liability, automobile liability, and automobile physical damage coverage for independent third-party transportation providers. In the event that actual reinsured losses increase unexpectedly and substantially exceed actuarially determined estimated reinsured losses under the program, the aggregate of such losses could materially increase our liability and adversely affect our financial condition, liquidity, cash flows and results of operations.

In addition, under our current insurance policies, we are subject to deductibles, and thus retain exposure within these limits. In the event that actual losses within our deductible limits increase unexpectedly and substantially exceed our expected losses, the aggregate of such losses could materially increase our liability and adversely affect our financial condition, liquidity, cash flows and results of operations.

As the availability to us of certain traditional insurance coverage diminishes or increases in cost, we will continue to evaluate the levels and types of insurance coverage we include in our reinsurance and self-insurance programs, as well as the deductible limits within our traditional insurance programs. Any increase to these reinsurance and self-insurance programs or increases in deductible limits increases our risk exposure and therefore increases the risk of a possible material adverse effect on our financial condition, liquidity, cash flows and results of operations.
 
Inaccurate, misleading or negative media coverage could damage our reputation and harm our ability to maintain or procure contracts.
 
There is sometimes media coverage regarding services that we or our competitors provide or contracts that we or our competitors are a party to. Inaccurate, misleading or negative media coverage about us could harm our reputation and, accordingly, our ability to maintain our existing contracts or procure new contracts.
 
Regulatory Risks
 
Our Healthcare Segments conduct business in a heavily regulated healthcare industry. Compliance with existing Laws is costly, and changes in Laws or violations of Laws may result in increased costs or sanctions that could reduce our segments’ revenue and profitability.
 
The U.S. healthcare industry is subject to extensive federal and state Laws relating to, among other things:

professional licensure;
conduct of operations;
addition of facilities, equipment and services, including certificates of need;
coding and billing related to our services; and
payment for services.
  
Both federal and state government agencies have increased coordinated civil and criminal enforcement efforts related to the healthcare industry. Regulations related to the healthcare industry are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of those laws. The Patient Protection and Affordable Care Act, as well as the anticipated attempts to repeal all or portions of those laws by the President and Congress, has also introduced some degree of regulatory uncertainty as the industry does not know how the changes it introduced or changes to it will affect many aspects of the industry. Medicare and Medicaid anti-fraud and abuse laws prohibit certain business practices and relationships related to items and services reimbursable under Medicare, Medicaid and other governmental healthcare programs, including the payment or receipt of remuneration to induce or arrange for referral of patients or recommendation for the provision of items or services covered by Medicare or Medicaid or any other federal or state healthcare program. Federal and state Laws prohibit the submission of false or fraudulent claims, including claims to obtain reimbursement under Medicare and Medicaid. Our Healthcare Segments have implemented compliance policies to help assure their compliance with these regulations as they become effective; however, different interpretations or enforcement of these laws and regulations in the future could subject our practices to allegations

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of impropriety or illegality or could require such segments to make changes in their facilities, equipment, personnel, services or the manner in which they conduct our business.

Changes in budgetary priorities of the government entities that fund the services our Healthcare Segments provide could result in our segments’ loss of contracts or a decrease in amounts payable to them under their contracts.
 
Our Healthcare Segments’ revenue is largely derived from contracts that are directly or indirectly paid or funded by government agencies. All of these contracts are subject to legislative appropriations and state or national budget approval, as well as changes to potential eligibility for services. The availability of funding under NET Services’ contracts with state governments is dependent in part upon federal funding to states. Changes in Medicaid methodology may further reduce the availability of federal funds to states in which our Healthcare Segments provide services. The President of the United States and Congress have proposed various changes to the Medicaid program, including considering converting the Medicaid program to a block grant format or capping the federal contribution to state Medicaid programs to a fixed amount per beneficiary. CMS has invited states to submit requests for waivers to CMS that would allow states to reduce or eliminate the NET benefit for some populations. In response, several states have asked for and received temporary waivers of NET requirements for the Medicaid expansion or non-disabled adult population. In addition, in late 2018, DHHS published in the Unified Agenda its intention to revise the current regulations under which states are required to provide NET services for all Medicaid beneficiaries. The stated goal of this proposed rule is to provide states with greater flexibility as part of the administration’s reform initiatives. It is possible that revised regulations could be issued in 2019 or 2020 making it optional for the states to provide NET services to certain populations. Such changes, individually or in the aggregate, could have a material adverse effect on our Healthcare Segments operations.
 
Among the alternative Medicaid funding approaches that states have explored are provider assessments as tools for leveraging increased Medicaid federal matching funds. Provider assessment plans generate additional federal matching funds to the states for Medicaid reimbursement purposes, and implementation of a provider assessment plan requires approval by CMS in order to qualify for federal matching funds. These plans usually take the form of a bed tax or a quality assessment fee, which were historically required to be imposed uniformly across classes of providers within the state, except that such taxes only applied to Medicaid health plans.
 
Changes to provider assessment opportunities, the Medicaid programs in states in which our Healthcare Segments operate or in the structure of the federal government’s support for those programs can affect the amount of funds available in the programs our Healthcare Segments support. Because funding under our Healthcare Segments’ contracts is dependent in part upon federal funding, such funding changes could have a significant effect upon such segments’ businesses.
 
Currently, many of the U.S. states in which our segments operate are facing budgetary shortfalls or changes in budgetary priorities. While many of these states are dealing with budgetary concerns by shifting costs from institutional care to home and community based care such as we provide, there is no assurance that this trend will continue.
 
Consequently, a significant decline in government expenditures, shift of expenditures or funding away from programs that call for the types of services that we provide, or change in government contracting or funding policies could cause payors to terminate their contracts with our segments or reduce their expenditures under those contracts, either of which could have a negative impact on our segments’ operating results. 
 
Our Healthcare Segments are subject to regulations relating to privacy and security of patient and service user information. Failure to comply with privacy and security regulations could result in a material adverse impact on our segments’ operating results.
 
There are numerous federal and state regulations addressing patient information privacy and security concerns. In particular, the federal regulations issued under HIPAA contain provisions that:

protect individual privacy by limiting the uses and disclosures of patient information;
require the implementation of security safeguards to ensure the confidentiality, integrity and availability of individually identifiable health information in electronic form; and
prescribe specific transaction formats and data code sets for certain electronic healthcare transactions.
 
Compliance with state and federal laws and regulations is costly and requires our segment management to expend substantial time and resources which could negatively impact our segments’ results of operations. Further, the HIPAA regulations and state privacy laws expose our segments to increased regulatory risk, as the penalties associated with a failure to comply or with information security breaches, even if unintentional, could have a material adverse effect on our segments’ results of operations.
 

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Our Healthcare Segments could be subject to actions for false claims or recoupment of funds pursuant to certain audits if they do not comply with government coding and billing rules, which could have a material adverse impact on our segments’ operating results. 

If our Healthcare Segments fail to comply with federal and state documentation, coding and billing rules, our segments could be subject to criminal or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, which could have a material adverse impact on our segments’ operating results. In billing for our segments’ services to third-party payors, our segments must follow complex documentation, coding and billing rules. These rules are based on federal and state laws, rules and regulations, various government pronouncements, and industry practice. Failure to follow these rules could result in potential criminal or civil liability under the federal False Claims Act, under which extensive financial penalties can be imposed or under various state statutes which prohibit the submission of false claims for services covered. Compliance failure could further result in criminal liability under various federal and state criminal or civil statutes. Our segments may be subject to audits conducted by our clients or their proxies that may result in recoupment of funds. In addition, our segments’ clients may be subject to certain audits that may result in recoupment of funds from our clients that may, in turn, implicate our segments’ services. Our segments’ businesses could be adversely affected in the event such an audit results in negative findings and recoupment from or penalties to their customers.
 
Our Healthcare Segments’ contracts are subject to stringent claims and invoice processing regimes which vary depending on the customer and nature of the payment mechanism. Government entities may take the position that if a transport cannot be matched to a healthcare event, or is conducted inconsistently with contractual, regulatory or even policy requirements, payment for such transport may be recouped by such customer.
 
While our Healthcare Segments carefully and regularly review their documentation, coding and billing practices, the rules are frequently vague and confusing and they cannot assure that governmental investigators, private insurers or private whistleblowers will not challenge their practices. Such a challenge could result in a material adverse effect on our Healthcare Segments’ financial position and results of operations.

Our Healthcare Segments’ business could be subject to civil penalties and loss of business if we fail to comply with applicable bribery, corruption and other regulations governing business with governments.
 
Our Healthcare Segments are subject to the federal Anti-Kickback Statute, which prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by a federally funded healthcare program. Any of our Healthcare Segments’ financial relationships with healthcare providers will be potentially implicated by this statute to the extent Medicare or Medicaid referrals are implicated. Violations of the Anti-Kickback Statute could result in substantial civil or criminal penalties, including criminal fines of up to $100,000 per violation, imprisonment of up to ten years, civil penalties under the Civil Monetary Penalties Law of up to $100,000 per violation, plus three times the remuneration involved, civil penalties under the False Claims Act of up to $22,363 for each claim submitted, plus three times the amounts paid for such claims and exclusion from participation in the Medicaid and Medicare programs. Any such penalties could have a significant negative effect on our Healthcare Segments’ operations. Furthermore, the exclusion, if applied to such segments, could result in significant reductions in our revenues, which could materially and adversely affect such segments’ businesses, financial condition and results of their operations. In addition, many states have adopted laws similar to the federal Anti-Kickback Statute with similar penalties.

Our Healthcare Segments’ businesses could be adversely affected by future legislative changes that hinder or reverse the privatization of non-emergency transportation services.
 
The market for certain of our Healthcare Segments’ services depends largely on government sponsored programs. These programs can be modified or amended at any time. Moreover, part of our growth strategy includes aggressively pursuing opportunities created by government initiatives to privatize the delivery of non-emergency transportation services. In 2017, legislation was proposed in the U.S. Congress, but not passed, which would reduce or eliminate certain non-emergency medical transportation services provided by NET Services as a required Medicaid benefit. If additional privatization initiatives are not proposed or enacted, or if previously enacted privatization initiatives are challenged, repealed or invalidated, there could be a material adverse impact on our Healthcare Segments’ operating results.

Changes to the regulatory landscape applicable to Matrix could have a material adverse effect on our results of operations and financial condition.
 
The CHA services industry is primarily regulated by federal and state healthcare Laws and the requirements of participation and reimbursement of the MA Program established by CMS. From time to time, CMS considers changes to regulatory guidelines

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with respect to prospective CHAs or the risk adjusted payment system applicable to Matrix’s Medicare Advantage plan customers. CMS could adopt new requirements or guidelines that may, for example, increase the costs associated with CHAs, limit the opportunities and settings available to administer CHAs, or otherwise change the risk adjusted payment system in a way that would adversely impact our business. Further, changes in or adoption of new state laws governing the scope of practice of mid-level practitioners, or more restrictive interpretations of such laws, may restrict Matrix’s ability to provide services using nurse practitioners. Any such implementation of additional regulations on the CHA industry by CMS or other regulatory bodies or further regulation of mid-level practitioners could have a material adverse impact on Matrix’s revenues and margins, which could have a material adverse impact on our consolidated results of operations.

If our Healthcare Segments fail to comply with physician self-referral laws, to the extent applicable to our operations, they could experience a significant loss of reimbursement revenue.
 
Our Healthcare Segments may be subject to federal and state statutes and regulations banning payments for referrals of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship and billing for services provided pursuant to such referrals if any occur. Violation of these federal and state laws and regulations, to the extent applicable to our Healthcare Segments’ operations, may result in prohibition of payment for services rendered, loss of licenses, fines, criminal penalties and exclusion from Medicaid and Medicare programs. To the extent such segments do maintain such financial relationships with physicians, they rely on certain exceptions to self-referral laws that they believe will be applicable to such arrangements. Any failure to comply with such exceptions could result in the penalties discussed above.
 
As government contractors, our segments are subject to an increased risk of litigation and other legal actions and liabilities.
 
As government contractors, our segments are subject to an increased risk of investigation, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities that are not as frequently experienced by companies that do not provide government sponsored services. Companies providing government sponsored services can also become involved in public inquiries which can lead to negative media speculation or potential cancellation or termination of contracts. Further, government contract awards are frequently challenged by the losing bidders leading to delays in contract start dates, rebids, or even loss of a previously awarded contract.
 
Our Healthcare Segments’ businesses are subject to licensing regulations and other regulatory provisions, including provisions governing surveys and audits. Changes to, or violations of, these regulations could negatively impact our Healthcare Segments’ revenues.
 
In many of the locations where our segments operate, they are required by local laws to obtain and maintain licenses. The applicable state and local licensing requirements govern the services our segments provide, the credentials of staff, record keeping, treatment planning, client monitoring and supervision of staff. The failure to maintain these licenses or the loss of a license could have a material adverse impact on our segments’ businesses and could prevent them from providing services to clients in a given jurisdiction. Our Healthcare Segments’ contracts are subject to surveys or audit by their payors or their clients. Our segments are also subject to regulations that restrict their ability to contract directly with a government agency in certain situations. Such restrictions could affect our segments’ ability to contract with certain payors and clients, and could have a material adverse impact on our segments’ results of operations.

Our Healthcare Segments’ contracts are subject to audit and modification by the payors with whom our Healthcare Segments contract, at their sole discretion.
 
Our Healthcare Segments’ businesses depend on their ability to successfully perform under various government funded contracts. Under the terms of these contracts, payors, government agencies or their proxy contractors can review our segments’ compliance or performance, as well as our segments’ records and general business practices at any time, and may, in their discretion:

suspend or prevent our segments from receiving new contracts or extending existing contracts because of violations or suspected violations of procurement laws or regulations;
terminate or modify our segments’ existing contracts;
reduce the amount our segments are paid under our existing contracts; or
audit and object to our segments’ contract related fees.
   
Any increase in the number or scope of audits could increase our segments’ expenses, and the audit process may disrupt the day-to-day operations of our segments’ businesses and distract their management. If payors have significant audit findings, or if they make material modifications to our segments’ contracts, it could have a material adverse impact on our segments’ results of operations.

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Our estimated income taxes could be materially different from income taxes that we ultimately pay.
 
We are subject to income taxation in both the U.S. and, due to our ownership of international entities prior to the WD Services sale, 10 foreign countries, including specific states or provinces where we operate. Our total income tax provision is a function of applicable local tax rates and the geographic mix of our income from continuing and discontinued operations before taxes, which is itself impacted by currency movements. Consequently, the isolated or combined effects of unfavorable movements in tax rates, geographic mix, or foreign exchange rates could reduce our after-tax income.

Our total income tax provision is based on our income and the tax laws in the various jurisdictions in which we operate. Significant judgment and estimation is required in determining our annual income tax expense and in evaluating our tax positions and related matters. In the ordinary course of our business, there are many transactions and calculations for which the ultimate tax determinations are uncertain or otherwise subject to interpretation. In addition, we make judgments regarding the applicability of tax treaties and the appropriate application of transfer pricing regulations. In the event one taxing jurisdiction disagrees with another taxing jurisdiction with respect to the amount or applicability of a particular type of tax, or the amount or availability of a particular type of tax refund or credit, we could experience temporary or permanent double taxation and increased professional fees to resolve such taxation matters.

Our determination of our income tax liability is always subject to review by applicable tax authorities, and we have been audited by various jurisdictions in prior years. Although we believe our income tax estimates and related determinations are reasonable and appropriate, relevant taxing authorities may disagree. The ultimate outcome of any such audits and reviews could be materially different from the estimates and determinations reflected in our historical income tax provisions and accruals. Any adverse outcome of any such audit or review could have an adverse effect on our financial condition and the results of our operations.

Risks Related to Our Indebtedness
 
Restrictive covenants in our Credit Agreement may limit our current and future operations, particularly our ability to respond to changes in our business or to pursue our business strategies.
 
The terms contained in the agreements that govern certain of our indebtedness, including our Amended and Restated Credit and Guaranty Agreement (as amended, supplemented, or modified, the “Credit Agreement”), and the agreements that govern any future indebtedness of ours, may include a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to take actions that we believe may be in our best interest. These agreements, among other things, limit our ability to:

incur additional debt;
provide guarantees in respect of obligations of other persons;
issue redeemable stock and preferred stock;
pay dividends or distributions or redeem or repurchase capital stock;
make loans, investments and capital expenditures;
enter into transactions with affiliates;
create or incur liens;
make distributions from our subsidiaries;
sell assets and capital stock of our subsidiaries;
make acquisitions; and
consolidate or merge with or into, or sell substantially all of our assets to, another person.
   
A breach of the covenants or restrictions could result in a default under the applicable agreements that govern our indebtedness. Such default may preclude us from drawing from our senior secured credit facility (the “Credit Facility”) or allow the creditors to accelerate the related debt and may result in the acceleration of any other debt that we may incur to which a cross acceleration or cross-default provision applies. In the event our lenders accelerate the repayment of our borrowings, we cannot assure that we and our subsidiaries would have sufficient assets to repay such indebtedness.
 
Loss of available financing or an inability to renew, repay or refinance our debt could have an adverse effect on our financial condition and results of operations.

At December 31, 2018, our available credit under the Credit Facility was $187.7 million. If our cash on hand is insufficient, or we are unable to generate sufficient cash flows in the future, to cover our cash flow and liquidity needs and service our debt, we may be required to seek additional sources of funds, including refinancing all or a portion of our existing or future debt,

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incurring additional debt to maintain sufficient cash flow to fund our ongoing operating needs, pay interest and fund anticipated expenditures. In addition, the Credit Facility matures on August 2, 2019. There can be no assurance that any refinancing will be possible or that any additional financing could be obtained on acceptable terms. If we are unable to obtain additional financing, we may (i) be unable to satisfy our obligations under our outstanding indebtedness, (ii) be unable to pursue future business opportunities or fund acquisitions, (iii) find it more difficult to fund future operating costs, tax payments or general corporate expenditures and (iv) become vulnerable to adverse general economic, capital markets and industry conditions. Any of these circumstances could have a material adverse effect on our financial position, liquidity and results of operations.

We may incur substantial additional indebtedness in the future, which could impair our financial condition.
 
We may incur substantial additional indebtedness in the future to fund activities including but not limited to share repurchases, acquisitions, cash dividends and business expansion. Any existing and future indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of such indebtedness. Future substantial indebtedness could have other important consequences on our business. For example, it could:

make it more difficult for us to satisfy our obligations;
make it more difficult to renew or enter into new contracts with existing and potential future clients;
limit our ability to borrow additional amounts to fund working capital, capital expenditures, debt service requirements, execution of our business strategy or acquisitions and other purposes;
require us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce the funds available to us for other purposes;
restrict our ability to dispose of assets and use the proceeds from any such dispositions;
restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due;
make us more vulnerable to adverse changes in general economic, industry and competitive conditions, as well as in government regulation and to our business;
expose us to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates; and
make it more difficult to satisfy our financial obligations.
  
Our ability to satisfy and manage our debt obligations depends on our ability to generate cash flow and on overall financial market conditions. To some extent, this is subject to prevailing economic and competitive conditions and to certain financial, business and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow from operations to permit us to pay principal, premium, if any, or interest on our debt obligations. If we are unable to generate sufficient cash flow from operations to service our debt obligations and meet our other cash needs, we may be forced to reduce or delay capital expenditures, sell or curtail assets or operations, seek additional capital, or seek to restructure or refinance our indebtedness. If we must sell or curtail our assets or operations, it may negatively affect our ability to generate revenue.
  
Risks Related to Our Capital Stock
 
Our annual operating results and stock price may be volatile or may decline significantly regardless of our operating performance.
 
Our annual operating results and the market price for our Common Stock may fluctuate significantly in response to a number of factors, many of which we cannot control, including: 

changes in rates or coverage for services by payors;
changes in Medicaid, Medicare or other U.S. federal or state rules, regulations or policies;
market conditions or trends in our industry or the economy as a whole;
increased competition in any of our segments, including through insourcing of services by our clients and new entrants to the market;
other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events;
changes in tax law; and
changes in accounting principles.
  
In addition, the stock markets, and in particular, NASDAQ, have experienced considerable price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we become involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could be diverted from our business.

26



 
The Company depends on its subsidiaries for cash to fund all of its operations and expenses, including to make future dividend payments, if any.

Our operations are conducted entirely through our subsidiaries and our ability to generate cash to fund all of our operations and expenses, to pay dividends or to meet any debt service obligations is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans. We do not currently expect to declare or pay dividends on our Common Stock for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our Common Stock, none of our subsidiaries will be obligated to make funds available to us for the payment of dividends. Further, the agreement governing our Credit Agreement significantly restricts the ability of our subsidiaries to pay dividends, make loans or otherwise transfer assets to us. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our Common Stock.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our Common Stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more analysts downgrade our stock or publish misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.
 
Future sales of shares by existing stockholders could cause our stock price to decline.
 
Sales of substantial amounts of our Common Stock in the public market, or the perception that these sales could occur, could cause the market price of our Common Stock to decline. As of February 22, 2019, we had 12,833,846 outstanding shares of Common Stock which are freely transferable without restriction or further registration under the Securities Act, unless held by or purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Shares of our Common Stock held by or purchased by our affiliates are restricted securities within the meaning of Rule 144 under the Securities Act, but will be eligible for resale subject to applicable volume, means of sale, holding period and other limitations of Rule 144 under the Securities Act.
 
As of December 31, 2018, shares of our Preferred Stock were convertible into 2,010,045 shares of Common Stock. On May 5, 2018, we filed a registration statement under the Securities Act relating to (i) 3,574,300 shares of Common Stock, consisting of 1,653,755 shares of Common Stock and 1,920,545 shares of Common Stock issuable upon the conversion of shares of Preferred Stock and (ii) 765,916 shares of Preferred Stock, for the sale by Coliseum Capital Co-Invest, L.P., Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P. and Blackwell Partners, LLC - Series A (collectively, the “Coliseum Stockholders”) of such securities, which was declared effective on June 15, 2018.
  
In August 2016, we filed a registration statement under the Securities Act to register additional shares of Common Stock to be issued under our equity compensation plans and, as a result, all shares of Common Stock acquired upon exercise of stock options granted under our plans will also be freely tradable under the Securities Act, unless purchased by our affiliates. As of December 31, 2018, there were stock options outstanding to purchase a total of 908,588 shares of our Common Stock and there were 52,131 shares of our Common Stock subject to restricted stock awards. In addition, 1,356,820 shares of our Common Stock are reserved for future issuances under the plan.

The terms of our Preferred Stock contain restrictive covenants that may impair our ability to conduct business and we may not be able to maintain compliance with the obligations under our outstanding Preferred Stock which could have a material adverse effect on our future results of operations and our stock price.

On February 11, 2015 and March 12, 2015, we issued $65.5 million and $15.8 million, respectively, of Preferred Stock. The terms of the Preferred Stock require us to pay mandatory quarterly dividends, either in cash or through an increase in the stated principal value of such stock. Our ability to satisfy and manage our obligations under our outstanding Preferred Stock depends, in part, on our ability to generate cash flow and on overall financial market conditions. Additionally, the terms of our Preferred Stock contain operating and financial covenants that limit management’s discretion with respect to certain business matters. Among other things, these covenants, subject to certain limitations and exceptions, restrict our ability to incur additional debt, sell or otherwise dispose of our assets, make acquisitions, and merge or consolidate with other entities. As a result of these covenants and restrictions, we may be limited in how we conduct our business, which could have a material adverse effect on our future results of operations and our stock price.

27



 
Future offerings of debt or equity securities that would rank senior to our Common Stock, may adversely affect the market price of our Common Stock.
 
If, in the future, we decide to issue debt or equity securities that rank senior to our Common Stock, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our Common Stock and may result in dilution to owners of our Common Stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our Common Stock will bear the risk of our future offerings reducing the market price of our Common Stock and diluting the value of their stock holdings in us.
  
Fulfilling our obligations incident to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on our future results of operations and our stock price.
 
We are subject to the reporting and corporate governance requirements, under the listing standards of NASDAQ and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), that apply to issuers of listed equity, which impose certain significant compliance costs and obligations upon us. Being a publicly listed company requires a significant commitment of additional resources and management oversight resulting in increased operating costs. These requirements also place additional demands on our finance and accounting staff and on our financial accounting and information systems. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we are required, among other things, to define and expand the roles and the duties of our Board of Directors (“Board”) and its committees and institute more comprehensive compliance and investor relations functions.

If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected. Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant management judgment. One or more of these elements may result in errors that may not be detected and could result in a material misstatement of our consolidated financial statements. If a material misstatement occurs in the future, we may fail to meet our future reporting obligations. For example, we may fail to file periodic reports in a timely manner or may need to restate our financial results, either of which may cause the price of our Common Stock to decline.

If the accounting estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may be adversely affected.

Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments about, among other things, taxes, revenue recognition, contingent obligations, NET Services transportation expense, recoverability of long-lived assets and doubtful accounts. In addition, the implementation of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was effective for the Company beginning January 1, 2018, required a significant level of judgment and estimation. These estimates and judgments affect the reported amounts of our assets, liabilities, revenue and expenses, the amounts of charges accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and at the time they are made. If our estimates or the assumptions underlying them are not correct, we may need to accrue additional charges or reduce the value of assets that could adversely affect our results of operations, leading to a loss in investor confidence in our ability to manage our business and our stock price could decline.
 
Anti-takeover provisions in our second amended and restated certificate of incorporation and amended and restated by-laws could discourage, delay or prevent a change of control of our company and may affect the trading price of our Common Stock.
 
Our second amended and restated certificate of incorporation and amended and restated bylaws include a number of provisions that may be deemed to have anti-takeover effects, including provisions governing when and by whom special meetings of our stockholders may be called, and provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. In addition, in the event of certain change of control transactions, holders of Preferred Stock may be entitled under the governing certificate of designations to be paid both (i) the liquidation preference per share then in effect plus certain unpaid dividends and (ii) a pro rata portion of the transaction consideration on an as-converted

28



basis. As a result of these provisions, holders of our Common Stock may not receive the full benefit of any premium to the market price of our Common Stock offered by a bidder in a takeover context.

Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Common Stock if the provisions are viewed as discouraging takeover attempts in the future. Our second amended and restated certificate of incorporation and amended and restated by-laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of our stockholders.
 
We do not expect to pay dividends on our Common Stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our Common Stock.  
 
We currently do not expect to declare and pay dividends on our Common Stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, to develop our business, for working capital needs and for general corporate purposes. Therefore, you are not likely to receive any dividends on your Common Stock for the foreseeable future and the success of an investment in shares of our Common Stock will depend upon any future appreciation in their value. There is no guarantee that shares of our Common Stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
 
Item 1B.
Unresolved Staff Comments.
 
None.
 
Item 2.
Properties.
 
Our principal executive office is located in Stamford, Connecticut. As of February 22, 2019, we leased space in approximately 40 locations. The lease terms vary and we believe are generally at market rates. We believe that our properties are adequate for our current business needs, and believe that we can obtain adequate space, if needed, to meet our foreseeable business needs.

Item 3.
Legal Proceedings.
 
From time-to-time, we may become involved in legal proceedings arising in the ordinary course of our business. We cannot predict with certainty the potential for or outcome of any future litigation. Regardless of the outcome of any particular litigation and the merits of any particular claim, litigation can have a material adverse impact on our company due to, among other reasons, any injunctive relief granted which could inhibit our ability to operate our business, amounts paid as damages or in settlement of any such matter, diversion of management resources and defense costs.  

On January 21, 2019, the United States District Court for the Southern District of Ohio unsealed a qui tam complaint, filed in December 2015, against Mobile Care Group, Inc., Mobile Care Group of Ohio, LLC, Mobile Care EMS & Transport, Inc. and LogistiCare Solutions, LLC (“LogistiCare”) by the relators Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging violations of the federal False Claims Act by presenting claims for payment to government healthcare programs knowing that the prerequisites for such claims to be paid had not been met. The Relators seek to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and attorneys’ fees. In addition, the Relators seek reinstatement to their jobs with the Mobile Care entities. None of the Relators was employed by LogistiCare. Prior to January 21, 2019, LogistiCare had no knowledge of the complaint. The federal government has declined to intervene against LogistiCare. The Company intends to defend the litigation vigorously and believes that the case will not have a material adverse effect on its business, financial condition or results of operations.

Item 4.
Mine Safety Disclosures.
 
Not applicable.


29



PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market for our Common Stock
 
Our Common Stock, our only class of common equity, has been quoted on NASDAQ under the symbol “PRSC” since August 19, 2003. Prior to that time there was no public market for our Common Stock. As of February 22, 2019, there were 26 holders of record of our Common Stock.

Stock Performance Graph
 
The following graph shows a comparison of the cumulative total return for our Common Stock, NASDAQ Health Services Index and Russell 2000 Index assuming an investment of $100 in each on December 31, 2013.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12749269&doc=53

Dividends
 
We have not paid any cash dividends on our Common Stock and currently do not expect to pay dividends on our Common Stock.  In addition, our ability to pay dividends on our Common Stock is limited by the terms of our Credit Agreement and our Preferred Stock.  The payment of future cash dividends, if any, will be reviewed periodically by the Board and will depend upon,

30



among other things, our financial condition, funds from operations, the level of our capital and development expenditures, any restrictions imposed by present or future debt or equity instruments, and changes in federal tax policies, if any.


Issuer Purchases of Equity Securities
 
Period
 
Total Number
of Shares of
Common Stock
Purchased (1)
 
Average Price
Paid per
Share
 
Total Number of
Shares of Common
Stock Purchased as
Part of Publicly
Announced Program (2)
 
Maximum Dollar
Value of Shares of
Common Stock that
May Yet Be Purchased
Under Program (2)
(in thousands)
Fourth quarter:
 
 
 
 
 
 
 
 
October 1, 2018 to October 31, 2018
 

 
$

 

 
$
81,177

November 1, 2018 to November 30, 2018
 
226

 
$
67.66

 

 
$
81,177

December 1, 2018 to December 31, 2018
 
968

 
$
65.70

 

 
$
81,177

Total
 
1,194

 
$
66.07

 

 
 
   
(1)
Includes shares that were acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting in restricted stock awards.
(2)
On October 26, 2016, our Board authorized a new repurchase program, under which the Company may repurchase up to $100.0 million in aggregate value of the Company’s Common Stock during the twelve-month period following October 26, 2016. Through October 26, 2017, a total of 770,808 shares were purchased through this plan for $30.4 million, excluding commission payments.

On November 2, 2017, our Board approved the extension of the Company’s prior stock repurchase program, authorizing the Company to engage in a repurchase program to repurchase up to $69.6 million (the amount remaining from the $100.0 million repurchase amount authorized in 2016) in aggregate value of our Common Stock through December 31, 2018. Subsequently, on March 29, 2018, the Board authorized an increase in the amount available for stock repurchases under the Company’s existing stock repurchase program by $77.8 million, and extended the existing stock repurchase program through June 30, 2019. Purchases under the repurchase program may be made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, and accelerated share repurchase transactions, at the discretion of the Company’s officers, and as permitted by securities laws, covenants under existing bank agreements, and other legal requirements. As of December 31, 2018, a total of 1,018,989 shares were purchased through the extended plan approved on November 2, 2017, for $66.3 million, excluding commission payments. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.



31



Item 6.
Selected Financial Data. 
 
We have derived the following selected financial data from the consolidated financial statements and related notes. The information set forth below is not necessarily indicative of future results. This information should be read in conjunction with our consolidated financial statements and the related notes, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, all of which are included elsewhere in this Annual Report on Form 10-K.

Significant transactions which occurred during the periods presented include the acquisition of Ingeus effective May 30, 2014, which primarily comprised our WD Services segment; the investment in Mission Providence, a joint venture in Australia, which commenced operations in 2014 but was sold on September 29, 2017; our equity interest in Matrix effective October 19, 2016, which was originally acquired on October 23, 2014, comprised our HA Services segment through October 19, 2016; and the acquisition of Circulation effective September 21, 2018, which is included in our NET Services segment. The operations of HA Services, Human Services, which was sold effective November 1, 2015, and WD Services, which was sold effective December 21, 2018, have been presented as discontinued operations for all periods presented.
 
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(1)(2)(3)(4)(11)
 
(5)(6)(7)(8)(11)
 
(7)(9)(11)
 
(10)
 
(12)
 
(dollars and shares in thousands, except per share data)
Statement of operations data:
 
 
 
 
 
 
 
 
 
Service revenue, net
$
1,384,965

 
$
1,318,220

 
$
1,233,842

 
$
1,082,951

 
$
884,117

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
   Service expense
1,284,603

 
1,223,627

 
1,131,963

 
987,352

 
803,681

   General and administrative expense
46,098

 
43,491

 
39,527

 
40,598

 
45,566

   Asset impairment charge
14,175

 

 
1,415

 

 

   Depreciation and amortization
15,813

 
13,618

 
12,780

 
10,221

 
8,808

Total operating expenses
1,360,689

 
1,280,736

 
1,185,685

 
1,038,171

 
858,055

Operating income
24,276

 
37,484

 
48,157

 
44,780

 
26,062

Non-operating expense:
 
 
 
 
 
 
 
 
 
   Interest expense, net
1,783

 
1,204

 
1,515

 
2,312

 
10,472

   Other income

 
(5,363
)
 

 

 

   Equity in net loss (gain) of investees
6,158

 
(13,445
)
 
1,789

 

 

   Gain on measurement of cost method investment
(6,577
)
 

 

 

 

Income from continuing operations, before income taxes
22,912

 
55,088

 
44,853

 
42,468

 
15,590

Provision for income taxes
4,684

 
4,003

 
17,972

 
15,718

 
8,053

Income from continuing operations, net of tax
18,228

 
51,085

 
26,881

 
26,750

 
7,537

(Loss) income from discontinued operations, net of tax
(37,053
)
 
2,735

 
62,965

 
56,444

 
12,738

Net (loss) income
(18,825
)
 
53,820

 
89,846

 
83,194

 
20,275

Net (gain) loss from discontinued operations attributable to noncontrolling interests
(156
)
 
(451
)
 
2,082

 
502

 

Net (loss) income attributable to Providence
$
(18,981
)
 
$
53,369

 
$
91,928

 
$
83,696

 
$
20,275

Diluted (loss) earnings per common share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.92

 
$
2.97

 
$
1.34

 
$
1.22

 
$
0.50

Discontinued operations
(2.86
)
 
0.15

 
3.87

 
3.18

 
0.85

Total
$
(1.94
)
 
$
3.12

 
$
5.21

 
$
4.40

 
$
1.35

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
 
Diluted
13,033

 
13,673

 
14,779

 
16,116

 
15,019


32



  
 
As of December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(2)(3)(11)
 
 
 
(9)
 
 
 
 
 
(dollars in thousands)
Balance sheet data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,678

 
$
52,798

 
$
72,262

 
$
79,756

 
$
121,538

Total assets
572,246

 
704,090

 
685,279

 
1,050,202

 
1,168,934

Long-term obligations, including current
portion
1,071

 
2,984

 
3,611

 
300,071

 
574,613

Other liabilities
182,785

 
287,543

 
306,428

 
382,423

 
372,907

Convertible preferred stock
77,392

 
77,546

 
77,565

 
77,576

 

Total stockholders’ equity
310,998

 
336,017

 
297,675

 
290,132

 
221,414



(1) General and administrative expense for the year ended December 31, 2018 includes $1.7 million in acquisition costs related to the acquisition of Circulation and $8.4 million in restructuring and related costs related to the Organizational Consolidation.

(2) In conjunction with the acquisition of Circulation and an analysis of the technology capabilities and scalability of the Circulation platform, we determined we would not continue the development of our NextGen technology. We also determined we would not place any of the developed NextGen technology into service, and recorded an asset impairment charge of $13.5 million related to our NET Services segment during the fourth quarter of 2018. In addition, we had previously recorded an impairment charge of $0.7 million during the second quarter of 2018 in relation to the decision to abandon specific development work intended to synchronize data across applications of the proprietary NextGen systems, based on the determination of an alternative method to accomplish this task.

(3) On September 21, 2018, we acquired all of the outstanding equity of Circulation. The purchase price was comprised of cash consideration of $45.1 million paid to Circulation’s equity holders (including holders of vested Circulation stock options), other than Providence. Our initial investment in Circulation was $3.0 million. As a result of the transaction, the fair value of this pre-acquisition interest increased to $9.6 million, and thus we recognized a gain of $6.6 million.

(4) On December 21, 2018, we completed the sale of our WD Services segment. Included in (loss) income from discontinued operations, net of tax, for 2018 is a loss, net of tax, on the WD Services sale of $1.1 million. We additionally sold our Ingeus France operations, effective July 17, 2018 and recorded a loss on the sale of $0.7 million. We also incurred an impairment charge of $9.2 million for the adjustment of the carrying value of the assets and liabilities of Ingeus France to its estimated fair value when it was initially recorded as held for sale during 2018, which is included in (loss) income from discontinued operations, net of tax.

(5)
Other income for the year ended December 31, 2017 includes the receipt of the Haverhill Litigation settlement of $5.4 million. See further information on the Haverhill Litigation in Note 20, Commitments and Contingencies, in the accompanying consolidated financial statements.

(6)
(Loss) income from discontinued operations, net of tax, for the year ended December 31, 2017 includes a gain on sale of equity investment of $12.4 million related to the sale of the Company’s equity interest in Mission Providence. The investment in Mission Providence was part of the WD Services segment.

(7)
(Loss) income from discontinued operations, net of tax, for the years ended December 31, 2017 and 2016 include losses of $6.0 million and $5.6 million, respectively, related to potential indemnification claims for our historical Human Services segment.

(8)
The year ended December 31, 2017 includes a net tax benefit of $15.9 million related to the enactment of the Tax Reform Act (as defined below) during the fourth quarter of 2017 due to the re-measurement of deferred tax liabilities by Providence as a result of the reduction in the U.S. corporate tax rate. Providence realized a benefit of $19.3 million, partially offset by $3.4 million of increased tax expense resulting from additional equity in net gain of Matrix, due to Matrix’s re-measurement of its deferred tax liabilities. In addition, the tax provision was adversely impacted by tax expense of $3.6 million related to the Company’s 2015 Holding Company LTI Program (the “HoldCo LTIP”), for which expense was incurred for financial

33



reporting purposes, but no shares were issued due to the market condition of the award not being satisfied and thus no tax deduction was realized.

(9)
On October 19, 2016, we completed the Matrix Transaction. Included in (loss) income from discontinued operations, net of tax, for 2016 is a gain on the transaction, net of tax, totaling $109.4 million. In conjunction with the completion of this transaction, we fully repaid the amounts outstanding on our term loans and Credit Facility in 2016.

(10)
On November 1, 2015, we completed the sale of our Human Services segment. Included in (loss) income from discontinued operations, net of tax, for 2015 is a gain on the sale of the Human Services segment, net of tax, totaling $100.3 million.

(11)
Equity in net (gain) loss of investees relates to Matrix, which became an equity investment upon the completion of the Matrix Transaction. We recorded $6.2 million in equity in net loss of investees and $13.4 million in equity in net gain of investees in 2018 and 2017, respectively. We recorded $1.8 million in equity in net loss of investees for the period of October 19, 2016 through December 31, 2016. The equity in net gain from Matrix for the year ended December 31, 2017 includes a benefit of $13.6 million related to the re-measurement of deferred tax liabilities arising from a lower U.S. corporate tax rate as a result of the Tax Reform Act. As a result of the increased equity income, Providence incurred higher tax expense of $3.4 million, which is reflected as a component of “Provision for income taxes” in the table above. The investment in Matrix at December 31, 2018 of $161.5 million is included in “Equity investments” in our consolidated balance sheet.

(12)
2014 includes $4.5 million of financing fees that were deferred and fully expensed within interest expense in the fourth quarter of 2014 in relation to bridge financing commitments and $3.0 million of third-party financing fees that are included in general and administrative expense.





34



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6. “Selected Financial Data” and our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data” of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and other factors that may cause actual results to differ materially from those projected in any forward-looking statements, as discussed in “Disclosure Regarding Forward-Looking Statements”. These risks and uncertainties include but are not limited to those set forth in Item 1A. “Risk Factors”.
 
Overview of Our Business
 
Please refer to Item 1. “Business” of this Annual Report on Form 10-K for a discussion of our services and corporate strategy.

We own subsidiaries and investments primarily engaged in the provision of healthcare services in the United States. Our NET Services segment, which primarily operates under the brands LogistiCare and Circulation, is the largest manager of NET programs for state governments and MCOs in the United States. On September 21, 2018, we completed the acquisition of Circulation, which offers a full suite of logistics solutions to manage NET programs across all areas of healthcare, powered by its HIPAA-compliant digital platform. Circulation’s technology expands LogistiCare’s capabilities to manage transportation benefits, integrating all transportation capabilities while proactively monitoring for fraud waste and abuse and emphasizing member convenience and satisfaction.

Our Matrix Investment segment consists of a minority investment in Matrix, a nationwide provider of home and mobile-based healthcare services for health plans in the United States, including CHAs, quality gap closure visits, “level of service” needs assessments, and post-acute and chronic care management, providing such services through a network of community-based clinicians and a fleet of mobile health clinics with advanced diagnostics capabilities.

Our Corporate and Other segment includes the Company’s executive, accounting, finance, internal audit, tax, legal, public reporting, and corporate development functions, as well as the results of the Company’s captive insurance company. On April 11, 2018, the Company announced the Organizational Consolidation. LogistiCare will retain its name and continue to be headquartered in Atlanta, GA, and the Company will continue to be named The Providence Service Corporation and be listed on NASDAQ under the ticker symbol “PRSC”. The Organizational Consolidation is expected to be complete by the second quarter of 2019.
 
Business Outlook and Trends
 
Our performance is affected by a number of trends that drive the demand for our services. In particular, the markets in which we operate are exposed to various trends such as healthcare industry and demographic dynamics. Over the long term, we believe there are numerous factors that could affect growth within the industries in which we operate, including:
an aging population, which will increase demand for healthcare services and transportation;
a movement towards value-based versus fee for service care and budget pressure on governments, both of which may increase the use of private corporations to provide necessary and innovative services;
increasing demand for in-home care provision, driven by cost pressures on traditional reimbursement models and technological advances enabling remote engagement;
technological advancements, which may be utilized by us to improve service and lower costs, but also by others which may increase industry competitiveness; and
proposals by the President of the United States and Congress to change the Medicaid program, including considering converting the Medicaid program to a block grant format or capping the federal contribution to state Medicaid programs to a fixed amount per beneficiary, and CMS’ grant of waivers to states relative to the parameters of their Medicaid programs. Enactment of adverse legislation, regulation or agency guidance, or litigation challenges to ACA, state Medicaid programs, or other governmental programs may reduce the eligibility or demand for our services, our ability to conduct some or all of our business and/or reimbursement rates for services performed within our segments.

On December 21, 2018, the Company completed the WD Services Sale, except for the segment’s employment services operations in Saudi Arabia. Our contractual counterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginning January 1, 2019. The total cash consideration from the sale was approximately $46.5 million, with the buyer retaining existing WD Services cash of $21.0 million. In addition to the purchase consideration, the

35



Company expects to be able to realize cash tax benefits of approximately $51.9 million as a result of the transaction, including approximately $34.3 million in tax refunds by the fourth quarter of 2019 in relation to its 2018 tax returns and loss carrybacks, which is inclusive of $0.6 million of tax that would have been otherwise due in the fourth quarter of 2018. The remaining cash tax benefit of $17.6 million is expected to be realized as an offset to tax payments over the following three years, based upon the Company’s current estimate of taxable income. In addition, $1.1 million of benefits related to future capital loss is available, which amount was reserved as of December 31, 2018.

On September 21, 2018, the Company completed the acquisition of Circulation, which 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, while emphasizing patient convenience and satisfaction. Circulation’s proprietary platform simplifies ordering, improves reliability and efficiency, and reduces transportation spend. We believe the acquisition advances our 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 us for growth. Following the acquisition and an analysis of the technology capabilities and scalability of the Circulation platform, we determined we will utilize the Circulation platform to service our legacy and new contracts, which resulted in an impairment charge of $13.5 million to NextGen. See further information on the impairment in Note 7, Property and Equipment, in the accompanying consolidated financial statements. Also, in connection with the acquisition of Circulation, the Company established a management incentive plan (“MIP”), whereby certain key employees of Circulation may be entitled to cash payments if certain financial measures are met based upon cumulative NET Services EBITDA; less the assumption of former Corporate and Other segment costs; less cumulative CAPEX (“MIP Financial Performance”) for the performance period January 1, 2019 to December 31, 2021 as compared to the baseline, as determined by the Board. To the extent amounts are earned, the payout date is within 30 days following the finalization of the Company’s audited financial statements for the fiscal year ending December 31, 2021. Payout is subject to the participant remaining employed by the Company through December 31, 2021. The amount that can be earned through the MIP ranges from $12.5 million to $237.5 million, based on a range of value of the MIP Financial Performance of $272.5 million to $395.5 million. As of December 31, 2018, the Company has accrued $1.4 million, reflected in “Other long-term liabilities” in the consolidated balance sheet, towards its estimate of the expected payout under the MIP.

On June 11, 2018, the Company entered into a Share Purchase Agreement to sell the shares of Ingeus France for a de minimis amount. The sale was effective on July 17, 2018, after court approval. As a result, an impairment charge of $9.2 million was recorded during the year ended December 31, 2018, and a loss, primarily related to the release of the effects of historic cumulative translation adjustments, of $0.7 million was recorded during the year ended December 31, 2018.     

Revenues and Expenses
 
NET Services
 
NET Services primarily contracts with state Medicaid agencies and MCOs for the coordination of their members’ non-emergency transportation needs. Most contracts are capitated, which means we are paid on a per-member, per-month basis for each eligible member. For most contracts, we arrange for transportation of members through our network of independent transportation providers, whereby we negotiate rates and remit payment to the transportation providers. However, for certain contracts, we assume no risk for the transportation network, credentialing and/or payments to these providers. For these contracts, we only provide administrative management services to support the customers’ efforts to serve its clients.
 
Classification of Operating Expenses
 
Our “Service expense” line item includes the majority of the operating expenses of NET Services as well as our captive insurance company, with the exception of certain costs which are classified as “General and administrative expense”. Service expense also excludes asset impairment charges and depreciation and amortization expenses. In the discussion below, we present the breakdown of service expense by the following major categories: purchased services, payroll and related costs, other operating expenses and stock-based compensation. Purchased services include the amounts we pay to third-party service providers and are typically dependent upon service volume. Payroll and related costs include all personnel costs of our segments. Other operating expenses include general overhead costs, excluding facilities and related charges, of our segments. Stock-based compensation represents the stock-based compensation expense associated with stock grants to employees of our segments.

Our “General and administrative expense” primarily includes the operating expenses of our corporate office, excluding depreciation and amortization, as well as acquisition related charges and facility related charges of NET Services.
 

36



Critical Accounting Policies and Estimates
 
Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with GAAP. Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
 
There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

it requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time the estimate is made; and
changes in the estimate or different estimates that could have been selected may have had a material impact on our financial condition or results of operations.
 
For more information on each of these policies, see Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, to our consolidated financial statements. We discuss information about the nature and rationale for our critical accounting estimates below.
 
Accrued Transportation Costs
 
We accrue the cost of transportation expense within NET Services based on request for services and the amount we expect to be billed by transportation providers, as we generally only pay transportation providers for completed trips based upon documentation submitted after services have been provided. The transportation accrual requires significant judgment, as the accrual is based upon contractual rates and mileage estimates, as well as an estimated rate for unknown cancellations, as members may have requested transportation but not notified us of cancellation. Based upon historical experience and contract terms, we estimate the amount of expense incurred for invoices which have not yet been submitted as of period end. Actual expense could be greater or less than the amounts estimated due to changes in member or transportation provider behavior.
 
Business Combinations
 
We assign the value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. Any excess purchase price paid over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships, developed technology and trade names, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differ significantly from estimates.
 
Recoverability of Goodwill and Definite-Lived Intangible Assets
 
Goodwill. In accordance with ASC 350, Intangibles-Goodwill and Other, we review goodwill for impairment annually, or more frequently, if events and circumstances indicate that an asset may be impaired. Such circumstances could include, but are not limited to: (1) the loss or modification of significant contracts, (2) a significant adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in the Company’s stock price. We perform the annual goodwill impairment test for all reporting units as of October 1.

First, we perform qualitative assessments for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying value amount, we then perform a quantitative assessment and compare the fair value of the reporting unit to its carrying value.


37



We adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) effective April 1, 2017. ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. Instead, if we deem it necessary to perform the quantitative goodwill impairment test in an annual or interim period, we recognize an impairment charge equal to the excess, if any, of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
 
Long-Lived Assets Including Intangibles. In accordance with ASC 360, Property, Plant, and Equipment, we review the carrying value of long-lived assets or groups of assets to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets may be impaired. Factors that may necessitate an impairment assessment include, among others, significant adverse changes in the extent or manner in which an asset or group of assets is used, significant adverse changes in legal factors or the business climate that could affect the value of an asset or group of assets or significant declines in the observable market value of an asset or group of assets. The presence or occurrence of those events indicates that an asset or group of assets may be impaired. In those cases, we assess the recoverability of an asset or group of assets by determining whether the carrying value of the asset or group of assets exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the asset or the primary asset in the group of assets. If such testing indicates the carrying value of the asset or group of assets is not recoverable, we estimate the fair value of the asset or group of assets using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. If the fair value of those assets or groups of assets is less than carrying value, we record an impairment loss equal to the excess of the carrying value over the estimated fair value.
 
The use of different estimates or assumptions in determining the fair value of our goodwill and intangible assets may result in different values for those assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge.
 
Income Taxes
 
We record income taxes under the liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.
 
We record liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.

On December 22, 2017, the Tax Reform Act was enacted, which significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Tax Reform Act also provides for a one-time deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities, and included these amounts in our consolidated financial statements for the year ended December 31, 2017. The financial

38



reporting impact of the Tax Reform Act was completed in the fourth quarter of 2018 and an additional benefit of $0.3 million was recorded.
 
Reinsurance and Self-Insurance Liabilities
 
We historically reinsured a substantial portion of our automobile, general and professional liability and workers’ compensation costs under reinsurance programs through our wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona. In conjunction with the policy renewals on May 16, 2017, SPCIC did not renew the expiring policies. However, SPCIC continues to resolve claims under the historical policy years. In addition, under the current policies, the Company retains liability up to the policy deductibles. In addition, we maintain self-funded health insurance programs for employees with a stop-loss umbrella policy with a third-party insurer to limit the maximum potential liability for individual claims and for a maximum potential claim liability based on member enrollment. We utilize independent actuarial reports to determine the expected losses and in order to record the appropriate entries associated with our historical reinsurance programs, our retained exposure for the deductibles under our current policies, and self-funded health insurance programs. We regularly analyze our reserves for incurred but not reported claims, and for reported but not paid claims related to our reinsurance and self-funded insurance programs. We believe our reserves are adequate. However, significant judgment is involved in assessing these reserves such as evaluating historical paid claims, average lag times between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are recorded once a probable amount is known.
 
Revenue Recognition
 
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.
Deferred Revenue
 
At times we may receive funding for certain services in advance of services being rendered. These amounts are reflected in the consolidated balance sheets as “Deferred revenue” until the services are rendered.
 
Stock-Based Compensation
 
Our primary forms of employee stock-based compensation are stock option awards and restricted stock awards, including certain awards which vest based upon performance conditions. We measure the value of stock option awards on the date of grant at fair value using the appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models. We recognize the fair value as stock-based compensation expense on a straight-line basis over the requisite service period, which is typically the vesting period. The pricing models require various highly judgmental assumptions including volatility and expected option term. If any of the assumptions used in the models change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. We do not record stock-based compensation expense net of

39



estimated forfeitures and the tax effects of awards are treated as discrete items in the period in which tax windfalls or shortfalls occur. See additional discussion included in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, to our consolidated financial statements.

Our tax rate is subject to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value of the award at the grant date.
 
Restructuring, Redundancy and Related Reorganization Costs
 
We accrue for severance and other employee separation costs when it is probable that benefits would be paid and the amounts are reasonably estimable. The amounts used in determining severance accruals are based on an estimate of the salaries and related benefit costs payable and are included in accrued expenses to the extent they have not been paid.

Results of Operations
 
Segment reporting. Our operations are organized and reviewed by management along our segment lines. We operate in one principal business segment, NET Services. Our investment in Matrix is also a reportable segment referred to as the “Matrix Investment”. Segment results are based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. The operating results of our principal business segment include revenue and expenses incurred by the segment, as well as an allocation of direct expenses incurred by our corporate division on behalf of the segment, which primarily relate to insurance and stock-based compensation allocations. Indirect expenses, including unallocated corporate functions and expenses, such as 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 and elimination entries recorded in consolidation are reflected in “Corporate and Other”.
 
Discontinued operations. During the periods presented, the Company completed the following transactions, which resulted in the presentation of the operations as Discontinued Operations.

On November 1, 2015, the Company completed the sale of its Human Services segment. In addition to the results through the sale date, the Company has recorded additional expenses related to legal proceedings related to an indemnified legal matter.

On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in Matrix with Providence retaining a 46.8% equity interest at the time of the transaction. Prior to the closing of the Matrix Transaction, the financial results of Matrix were included in the Company’s HA Services segment.

On December 21, 2018, the Company completed the sale of substantially all of the operating subsidiaries of its WD Services segment to APM and APM UK Holdings Limited, an affiliate of APM, except for the segment’s employment services operations in Saudi Arabia. The Company’s contractual counterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginning January 1, 2019. Additionally, on June 11, 2018, the Company entered into a Share Purchase Agreement to sell Ingeus France for a de minimis amount. The sale was effective on July 17, 2018, after court approval.

 



40



Year ended December 31, 2018 compared to year ended December 31, 2017
 
The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our consolidated statements of operations for 2018 and 2017 (in thousands):
 
 
Year ended December 31,
 
2018
 
2017
 
$
 
Percentage
of Revenue
 
$
 
Percentage
of Revenue
Service revenue, net
1,384,965

 
100.0
 %
 
1,318,220

 
100.0
 %
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Service expense
1,284,603

 
92.8
 %
 
1,223,627

 
92.8
 %
General and administrative expense
46,098

 
3.3
 %
 
43,491

 
3.3
 %
Asset impairment charge
14,175

 
1.0
 %
 

 
 %
Depreciation and amortization
15,813

 
1.1
 %
 
13,618

 
1.0
 %
Total operating expenses
1,360,689

 
98.2
 %
 
1,280,736

 
97.2
 %
 
 
 
 
 
 
 
 
Operating income
24,276

 
1.8
 %
 
37,484

 
2.8
 %
 
 
 
 
 
 
 
 
Non-operating expense:
 
 
 
 
 
 
 
Interest expense, net
1,783

 
0.1
 %
 
1,204

 
0.1
 %
Other income

 
 %
 
(5,363
)
 
(0.4
)%
Equity in net loss (gain) of investees
6,158

 
0.4
 %
 
(13,445
)
 
(1.0
)%
Gain on remeasurement of cost method investment
(6,577
)
 
(0.5
)%
 

 
 %
Income from continuing operations before income taxes
22,912

 
1.7
 %
 
55,088

 
4.2
 %
Provision for income taxes
4,684

 
0.3
 %
 
4,003

 
0.3
 %
Income from continuing operations
18,228

 
1.3
 %
 
51,085

 
3.9
 %
(Loss) income from discontinued operations, net of tax
(37,053
)
 
(2.7
)%
 
2,735

 
0.2
 %
Net (loss) income
(18,825
)
 
(1.4
)%
 
53,820

 
4.1
 %
Net (income) loss from discontinued operations attributable to noncontrolling interest
(156
)
 
 %
 
(451
)
 
 %
Net (loss) income attributable to Providence
(18,981
)
 
(1.4
)%
 
53,369

 
4.0
 %
 
Service revenue, net. Consolidated service revenue, net for 2018 increased $66.7 million, or 5.1%, compared to 2017 due to an increase in revenue of NET Services.
 
Total operating expenses. Consolidated operating expenses for 2018 increased $80.0 million, or 6.2%, compared to 2017. Operating expenses for 2018 compared to 2017 included an increase in expenses attributable to NET Services of $76.0 million and Corporate and Other of $4.0 million. NET Services’ operating expenses include asset impairment charges of $14.2 million for 2018.
 
Operating income. Consolidated operating income for 2018 decreased $13.2 million compared to 2017 due to an increase in the operating loss for Corporate and Other of $4.0 million in 2018 as compared to 2017, and a decrease in operating income of NET Services in 2018 as compared to 2017 of $9.3 million.
  
Interest expense, net. Consolidated interest expense, net for 2018 increased $0.6 million, or 48.1%, compared to 2017, and remained consistent as a percentage of revenue. The increase was attributable to borrowings on the revolving line of credit during the second half of 2018 used to fund the Circulation acquisition, which were repaid as of December 31, 2018.

Other income. Other income in 2017 of $5.4 million represents the settlement received from the Haverhill Litigation.


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Equity in net (gain) loss of investees. Our equity in net (gain) loss of investees for 2018 of $6.2 million represents equity in net loss for Matrix. Our equity in net gain of investees for 2017 of $13.4 million represents equity in net gain for Matrix. We began reporting Matrix as an equity investment effective October 19, 2016, upon the completion of the Matrix Transaction, and we record our ownership percentage of Matrix’s profit or loss in net loss or gain of investees. Included in Matrix’s 2018 full standalone net loss of $20.0 million (which is not consolidated with Providence’s) are depreciation and amortization of $43.1 million, interest expense of $25.9 million, integration related costs of $6.5 million, equity compensation of $2.7 million, management fees paid to Matrix’s shareholders of $4.9 million, merger and acquisition diligence related costs of $2.3 million and income tax benefit of $7.2 million. Included in Matrix’s 2017 full standalone net income of $26.7 million (which is not consolidated with Providence’s) are depreciation and amortization of $33.5 million, interest expense of $14.8 million, transaction bonuses and other transaction related costs of $3.5 million, equity compensation of $2.6 million, management fees paid to Matrix’s shareholders of $2.3 million and income tax benefit of $29.6 million. Matrix’s significant income tax benefit in 2017 primarily related to the re-measurement of deferred tax liabilities arising from a lower U.S. corporate tax rate as a result of the Tax Reform Act.

Gain on remeasurement of cost method investment. On September 21, 2018, we acquired all of the outstanding equity of Circulation. The purchase price was comprised of cash consideration of $45.1 million paid to Circulation’s equity holders (including holders of vested Circulation stock options), other than Providence. Our initial investment in Circulation was $3.0 million. As a result of the transaction, the fair value of this pre-acquisition interest increased to $9.6 million, and thus we recognized a gain of $6.6 million.
 
Provision for income taxes. Our effective tax rate from continuing operations for 2018 was 20.4%. The effective tax rate was relatively consistent with the U.S. federal statutory rate of 21%, reflecting the benefit of stock option exercises and tax credits, partially offset by the impact of state income tax.

Our effective tax rate from continuing operations for 2017 was 7.3%. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the impact of the Tax Reform Act. The tax provision includes a benefit of $15.9 million related to the enactment of the Tax Reform Act during the fourth quarter of 2017, consisting of a net tax benefit of $19.3 million from the re-measurement of deferred tax liabilities from the lower U.S. corporate tax rate, partially offset by additional tax expense of $3.4 million due to an increase in our equity in net gain of Matrix as a result of Matrix’s re-measurement of deferred tax liabilities. In addition, the Company incurred tax expense of $3.6 million related to the HoldCo LTIP, for which expense was recorded for financial reporting purposes based upon fair value of the award at the grant date, but no shares were issued due to the market condition of the award not being satisfied. This tax expense was the result of the adoption of Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which subjects our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes.
 
(Loss) income from discontinued operations, net of tax. (Loss) income from discontinued operations, net of tax, includes the activity of our former WD Services segment and our former Human Services segment. For 2018, the loss from discontinued operations, net of tax, for our former WD Services segment was of $37.0 million. Included in the loss was a loss on disposition, net of tax, of $1.8 million as well as an asset impairment charge of $9.2 million related to the sale of WD Services operations in France in the second quarter of 2018. For 2017, income from discontinued operations, net of tax for our WD Services segment was $8.7 million, which included a gain on sale of our equity interest in Mission Providence of $12.4 million.

For 2018, the loss from discontinued operations, net of tax for our Human Services segment was $0.1 million, which primarily reflects a reduction of the accrued settlement amount for indemnified legal matters, based on the final settlement agreement, offset by the related income tax impact. For 2017, the loss from discontinued operations, net of tax for our Human Services segment was $6.0 million, which primarily related to the accrual of a contingent liability of $9.0 million related to the settlement of indemnification claims and associated legal costs of $0.7 million, partially offset by a related tax benefit.
  
Net (income) loss from discontinued operations attributable to noncontrolling interests. Net (income) loss from discontinued operations attributable to noncontrolling interests primarily relates to a minority interest held by a third-party operating partner in our company servicing the offender rehabilitation contract in our historical WD Services segment.
 
Segment Results. The following analysis includes discussion of each of our segments.
 

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NET Services
 
NET Services financial results are as follows for 2018 and 2017 (in thousands):
 
 
Year Ended December 31,
 
2018
 
2017
 
$
 
Percentage of
Revenue
 
$
 
Percentage of
Revenue
Service revenue, net
1,384,965

 
100.0
%
 
1,318,220

 
100.0
%
 
 
 
 
 
 
 
 
Service expense
1,285,029

 
92.8
%
 
1,227,426

 
93.1
%
General and administrative expense
14,247

 
1.0
%
 
11,779

 
0.9
%
Asset impairment charge
14,175

 
1.0
%
 

 
%
Depreciation and amortization
15,026

 
1.1
%
 
13,275

 
1.0
%
Operating income
56,488

 
4.1
%
 
65,740

 
5.0
%
  
Service revenue, net. Service revenue, net for NET Services in 2018 increased $66.7 million, or 5.1%, compared to 2017. The increase was primarily related to the impact of new contracts, including managed care organization (“MCO”) contracts in Illinois, Indiana, Oregon and New York and new state contracts in Texas and West Virginia, which contributed $112.8 million of revenue for 2018, as well as net increased revenue from existing contracts of $39.2 million, due to the net impact of membership and rate changes, including the impact of increased rates agreed after 2017 on certain contracts related to increased costs to serve the contracts, which was partially offset by the impact of a retroactive rate adjustment recorded in 2017 related to increased utilization activity under a significant contract. Revenue additionally increased $2.2 million due to revenue generated from Circulation in the fourth quarter of 2018. These increases were partially offset by the impact of contracts we no longer serve, including state contracts in New York and Connecticut, certain MCO contracts in Florida and Louisiana, and decreased membership in Virginia, which resulted in a decrease in revenue of $72.0 million. In addition, the adoption of ASC 606 resulted in a decrease in revenue of $15.5 million in 2018 as compared to revenue under the previous accounting standard, as one contract is now accounted for on a net basis. 

Service expense. Service expense is comprised of the following for 2018 and 2017 (in thousands):

 
Year Ended December 31,
 
2018
 
2017
 
$
 
Percentage of
Revenue
 
$
 
Percentage of
Revenue
Purchased services
1,055,278

 
76.2
%
 
1,009,518

 
76.6
%
Payroll and related costs
179,175

 
12.9
%
 
165,666

 
12.6
%
Other operating expenses
49,626

 
3.6
%
 
51,720

 
3.9
%
Stock-based compensation
950

 
0.1
%
 
522

 
%
Total service expense
1,285,029

 
92.8
%
 
1,227,426

 
93.1
%
 
Service expense for 2018 increased $57.6 million, or 4.7%, compared to 2017. The increase in service expense was primarily due to higher purchased services and payroll and related costs. Purchased services expense increased primarily as a result of new contracts, which was partially offset by the impact of terminated contracts. Purchased services as a percentage of revenue decreased from 76.6% in 2017 to 76.2% in 2018. This was due primarily to lower transportation costs on a per trip basis in certain geographies as a result of ongoing initiatives to better align the rates we pay to our transportation provider partners with local market conditions and the fees paid to us by our customers. Transportation costs on a per trip basis fluctuate from period to period.

Payroll and related costs as a percentage of revenue increased from 12.6% in 2017 to 12.9% in 2018 due to increased corporate staffing, temporary labor and increased health insurance expenses, as well as the impact from the acquisition of Circulation. Other operating expenses decreased for 2018 as compared to 2017 primarily attributable to a decrease in costs targeted at operational improvement from $6.3 million in 2017 to $2.8 million in 2018. This decrease was partially offset by increased software and hardware maintenance costs associated with new technology initiatives.

43



 
General and administrative expense. General and administrative expenses in 2018 increased $2.5 million, or 21.0%, as compared to 2017, primarily due to $1.7 million of transaction expenses related to the acquisition of Circulation in 2018, as well as increased facility costs resulting from the overall growth of our operations.
 
Asset impairment charge. Following the acquisition of Circulation and an analysis of the technology capabilities and scalability of the Circulation platform, we determined we would not continue the development of NextGen. We also determined we would not place any of the developed NextGen into service and recorded an asset impairment charge of $13.5 million related to our NET Services segment during the fourth quarter of 2018. We had previously recorded an impairment charge of $0.7 million during the second quarter of 2018 in relation to the decision to abandon specific development work intended to synchronize data across applications of the proprietary NextGen system, based on the determination of an alternative method to accomplish this task.

Depreciation and amortization expense. Depreciation and amortization expenses increased $1.8 million compared to 2017, primarily due to the addition of long-lived assets relating to information technology projects, as well as amortization expense related to the intangible assets acquired with the Circulation acquisition. As a percentage of revenue, depreciation and amortization increased to 1.1% for 2018 from 1.0% for 2017.
 
Corporate and Other
 
Corporate and Other includes the headcount and professional service costs incurred at the Providence corporate level, our captive insurance company, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for 2018 and 2017 (in thousands): 
 
 
Year Ended December 31,
 
2018
 
2017
 
$
 
$
Service expense
(426
)
 
(3,799
)
General and administrative expense
31,851

 
31,712

Depreciation and amortization
787

 
343

Operating loss
(32,212
)
 
(28,256
)
 
Operating loss. Corporate and Other operating loss in 2018 increased by $4.0 million, or 14.0%, as compared to 2017. Included in “General and administrative expense” for 2018 are $8.4 million of expenses relating to the Organizational Consolidation, including retention, recruitment and accelerated stock-based compensation expenses. Additionally, included in “Depreciation and amortization” is $0.4 million of accelerated depreciation expense incurred in relation to the Organizational Consolidation. General and administrative expenses for 2018 also include an increase in legal and consulting costs over 2017. Included in both 2018 and 2017 is a reduction in insurance loss reserves in “Service expense” due to favorable claims history of our captive reinsurance program.

The operating loss included expense of less than $0.1 million and $2.4 million, respectively, of cash settled stock-based compensation for 2018 and 2017, primarily as a result of an increase in the Company’s stock price in 2017 as compared to a decrease in 2018. The operating loss included $6.3 million and $7.1 million, respectively, of share settled stock-based compensation, excluding accelerated stock-based compensation expense related to the Organizational Consolidation, for 2018 and 2017. Share settled stock-based compensation expense for 2017 included stock-based compensation for the HoldCo LTIP of $4.7 million.

Costs associated with the resignation of James Lindstrom, a former Chief Executive Officer of the Company, during the year ended December 31, 2017 include cash compensation related items of $0.9 million, stock-based compensation of $0.7 million, and other costs of $0.2 million. These costs are recorded as part of “General and administrative expense”.


44



Year ended December 31, 2017 compared to year ended December 31, 2016
 
The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our consolidated statements of operations for 2017 and 2016 (in thousands):
 
 
Year ended December 31,
 
2017
 
2016
 
$
 
Percentage
of Revenue
 
$
 
Percentage
of Revenue
Service revenue, net
1,318,220

 
100.0
 %
 
1,233,842

 
100.0
%
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Service expense
1,223,627

 
92.8
 %
 
1,131,963

 
91.7
%
General and administrative expense
43,491

 
3.3
 %
 
39,527

 
3.2
%
Asset impairment charge

 
 %
 
1,415

 
0.1
%
Depreciation and amortization
13,618

 
1.0
 %
 
12,780

 
1.0
%
Total operating expenses
1,280,736

 
97.2
 %
 
1,185,685

 
96.1
%
 
 
 
 
 
 
 
 
Operating income
37,484

 
2.8
 %
 
48,157

 
3.9
%
 
 
 
 
 
 
 
 
Non-operating expense:
 
 
 
 
 
 
 
Interest expense, net
1,204

 
0.1
 %
 
1,515

 
0.1
%
Other income
(5,363
)
 
(0.4
)%
 

 
%
Equity in net (gain) loss of investees
(13,445
)
 
(1.0
)%
 
1,789

 
0.1
%
Income from continuing operations before income taxes
55,088

 
4.2
 %
 
44,853

 
3.6
%
Provision for income taxes
4,003

 
0.3
 %
 
17,972

 
1.5
%
Income from continuing operations
51,085

 
3.9
 %
 
26,881

 
2.2
%
Income from discontinued operations, net of tax
2,735

 
0.2
 %
 
62,965

 
5.1
%
Net income
53,820

 
4.1
 %
 
89,846

 
7.3
%
Net (income) loss from discontinued operations attributable to noncontrolling interest
(451
)
 
 %
 
2,082

 
0.2
%
Net income attributable to Providence
53,369

 
4.0
 %
 
91,928

 
7.5
%
 
Service revenue, net. Consolidated service revenue, net for 2017 increased $84.4 million, or 6.8%, compared to 2016 due to an increase in revenue of NET Services.
 
Total operating expenses. Consolidated operating expenses for 2017 increased $95.1 million, or 8.0%, compared to 2016. Operating expenses for 2017 compared to 2016 included an increase in expenses attributable to NET Services of $95.8 million, which was partially offset by a decrease at Corporate and Other of $0.7 million. 2016 operating expenses include an asset impairment charge of $1.4 million at Corporate and Other.
 
Operating income. Consolidated operating income for 2017 decreased $10.7 million compared to 2016 due to a decrease in operating income of NET Services in 2017 as compared to 2016 of $11.3 million, which was partially offset by a decrease in the operating loss for Corporate and Other of $0.6 million in 2017 as compared to 2016.
  
Interest expense, net. Consolidated interest expense, net for 2017 decreased $0.3 million compared to 2016, and remained constant as a 0.1% of revenue.

Other income. Other income in 2017 of $5.4 million represents the settlement received from the Haverhill Litigation.

Equity in net (gain) loss of investees. Our equity in net (gain) loss of investees for 2017 includes equity in net gain for Matrix of $13.4 million. Our equity in net loss of investees for 2016 includes equity in net loss for Matrix of $1.8 million. We

45



began reporting Matrix as an equity investment effective October 19, 2016, upon the completion of the Matrix Transaction, and we record our ownership percentage of Matrix’s profit or loss in net loss or gain of investees. Included in Matrix’s 2017 full standalone net income of $26.7 million (which is not consolidated with Providence’s) are depreciation and amortization of $33.5 million, interest expense of $14.8 million, transaction bonuses and other transaction related costs of $3.5 million, equity compensation of $2.6 million, management fees paid to Matrix’s shareholders of $2.3 million, merger and acquisition diligence related costs of $0.7 million and income tax benefit of $29.6 million. Matrix’s significant income tax benefit in 2017 primarily related to the re-measurement of deferred tax liabilities arising from a lower U.S. corporate tax rate as a result of the Tax Reform Act. Included in Matrix’s 2016 full standalone net loss of $4.2 million (which is not consolidated with Providence’s) are depreciation and amortization of $6.4 million, interest expense of $2.9 million, transaction bonuses and other transaction related costs of $6.4 million, equity compensation of $0.4 million, management fees paid to Matrix’s shareholders of $0.4 million and income tax benefit of $2.8 million.
 
Provision for income taxes. Our effective tax rate from continuing operations for 2017 was 7.3%. The effective tax rate was lower than the U.S. federal statutory rate of 35% primarily due to the impact of the Tax Reform Act. The tax provision includes a benefit of $15.9 million related to the enactment of the Tax Reform Act during the fourth quarter of 2017, consisting of a net tax benefit of $19.3 million from the re-measurement of deferred tax liabilities from the lower U.S. corporate tax rate, partially offset by additional tax expense of $3.4 million due to an increase in our equity in net gain of Matrix as a result of Matrix’s re-measurement of deferred tax liabilities. In addition, the Company incurred tax expense of $3.6 million related to the HoldCo LTIP, for which expense was recorded for financial reporting purposes based upon fair value of the award at the grant date, but no shares were issued due to the market condition of the award not being satisfied. This tax expense was the result of the adoption of ASU 2016-09, which subjects our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes.

Our effective tax rate from continuing operations for 2016 was 40.1%. The effective tax rate was higher than the U.S. federal statutory rate of 35% primarily due to the impact of state taxes.
 
Income from discontinued operations, net of tax. Income from discontinued operations, net of tax, includes the activity of our former WD Services segment, Human Services segment and our former HA Services segment, composed entirely of our 100% ownership in Matrix until the completion of the Matrix Transaction on October 19, 2016. See Note 23, Discontinued Operations, to our consolidated financial statements for additional information.

For 2017, income from discontinued operations, net of tax for our WD Services segment was $8.7 million, which included a gain on sale of our equity interest in Mission Providence of $12.4 million. For 2016, the loss from discontinued operations, net of tax for our WD Services segment was $45.8 million, which included an asset impairment charge of $19.6 million.

For 2017, loss from discontinued operations, net of tax for our Human Services segment was $6.0 million, which primarily related to the accrual of a contingent liability of $9.0 million related to the settlement of indemnification claims and associated legal costs of $0.7 million, partially offset by a related tax benefit. For 2016, the loss from discontinued operations, net of tax for our Human Services segment was $5.6 million, which included an accrual of $6.0 million with respect to potential indemnification claims, legal costs of $1.1 million related to these potential claims and transaction related expenses of $0.8 million, partially offset by a related tax benefit.

Income from discontinued operations, net of tax for our HA Services segment was $114.3 million for 2016, which included a gain on disposition, net of tax, of $109.4 million.
  
Net (income) loss from discontinued operations attributable to noncontrolling interests. Net (income) loss from discontinued operations attributable to noncontrolling interests primarily relates to a minority interest held by a third-party operating partner in our company servicing the offender rehabilitation contract in our historical WD Services segment.
 
Segment Results. The following analysis includes discussion of each of our segments.
 

46



NET Services
 
NET Services financial results are as follows for 2017 and 2016 (in thousands):
 
 
Year Ended December 31,
 
2017
 
2016
 
$
 
Percentage of
Revenue
 
$
 
Percentage of
Revenue
Service revenue, net
1,318,220

 
100.0
%
 
1,233,720

 
100.0
%
 
 
 
 
 
 
 
 
Service expense
1,227,426

 
93.1
%
 
1,132,857

 
91.8
%
General and administrative expense
11,779

 
0.9
%
 
11,406

 
0.9
%
Depreciation and amortization
13,275

 
1.0
%
 
12,375

 
1.0
%
Operating income
65,740

 
5.0
%
 
77,082

 
6.2
%
  
Service revenue, net. Service revenue, net for NET Services in 2017 increased $84.5 million, or 6.8%, compared to 2016. The increase was related to net increased revenue from existing contracts, including successfully renewed contracts, of $82.5 million, due to the net impact of membership and rate changes. Included within net rate changes are the positive impacts of final agreements on rate adjustments related to existing contracts that experienced increased utilization in 2017 as well as the release of previously accrued revenue hold-backs based on certain contract performance requirements on a significant contract. Additionally, the impact of new contracts, including new MCO contracts in Florida and New York, contributed $93.8 million of revenue for 2017. These increases were partially offset by the $91.8 million impact on revenue of contracts we no longer serve, including a contract with the state of New York. 

Service expense. Service expense is comprised of the following for 2017 and 2016 (in thousands):

 
Year Ended December 31,
 
2017
 
2016
 
$
 
Percentage of
Revenue
 
$
 
Percentage of
Revenue
Purchased services
1,009,518

 
76.6
%
 
927,321

 
75.2
%
Payroll and related costs
165,666

 
12.6
%
 
162,000

 
13.1
%
Other operating expenses
51,720

 
3.9
%
 
42,478

 
3.4
%
Stock-based compensation
522

 
%
 
1,058

 
0.1
%
Total service expense
1,227,426

 
93.1
%
 
1,132,857

 
91.8
%
 
Service expense for 2017 increased $94.6 million, or 8.3%, compared to 2016. The increase in service expense was primarily attributable to the impact of new MCO contracts in California, Florida and New York. Purchased services as a percentage of revenue increased from 75.2% in 2016 to 76.6% in 2017 primarily attributable to an increase in utilization across multiple contracts. The higher utilization was in part driven by increased Medicaid reimbursement in New Jersey for certain medical services, increasing the demand for transportation services, and increased utilization across multiple MCOs in California. Additionally, due to milder winter weather conditions during the first quarter of 2017, we experienced above expected utilization; however, we experienced lower utilization for contracts in the third quarter of 2017 due in part to the impact of Hurricane Irma. The increase in purchased services as a percentage of revenue caused by increased utilization was partially offset by the successful implementation of initiatives aimed at lowering transportation costs on a per trip and per mile basis as well as the release of a reserve based upon the finalization of a contract amendment with a state customer.

Payroll and related costs as a percentage of revenue decreased from 13.1% in 2016 to 12.6% in 2017 due to efficiencies gained from multiple process improvement initiatives, including those aimed at lowering payroll expense across our reservation and operation center networks, as well as a decrease in chief executive officer compensation expense due to the transition of the chief executive officer position during 2017. Other operating expenses increased for 2017 as compared to 2016 primarily attributable to an incremental $4.1 million of value enhancement and related costs incurred for external resources used in the design and

47



implementation of NET Services member experience and value enhancement initiatives in 2017, as well as increased software and hardware maintenance costs associated with increased use of information technology.
 
General and administrative expense. General and administrative expense in 2017 increased $0.4 million, or 3.3%, as compared to 2016, due to increased facility costs resulting from the overall growth of our operations. As a percentage of revenue, general and administrative expense remained constant at 0.9%.
 
Depreciation and amortization expense. Depreciation and amortization expense increased $0.9 million primarily due to the addition of long-lived assets relating to information technology projects. As a percentage of revenue, depreciation and amortization remained constant at 1.0%.
 
Corporate and Other
 
Corporate and Other includes the headcount and professional service costs incurred at the holding company level, at our captive insurance company, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for 2017 and 2016 (in thousands): 
 
 
Year Ended December 31,
 
2017
 
2016
 
$
 
$
Service revenue, net

 
122

 
 
 
 
Service expense
(3,799
)
 
(894
)
General and administrative expense
31,712

 
28,121

Asset impairment charge

 
1,415

Depreciation and amortization
343

 
405

Operating loss
(28,256
)
 
(28,925
)
 
Operating loss. Corporate and Other operating loss in 2017 decreased by $0.6 million, or 2.3%, as compared to 2016 primarily due a reduction in insurance loss reserves of $3.5 million in 2017, versus $2.5 million in 2016, due to favorable claims history of our captive reinsurance programs, as well as decreased costs of the captive operations due to no longer writing new policies as of May 2017, which is included in “Service expense”, decreased accounting, legal and professional fees included in “General and administrative expense”, and decreased asset impairment charges, as $1.4 million was recorded in 2016 in relation to the sale of a building. These decreases were partially offset by an increase in cash settled stock-based compensation expense of $3.6 million, primarily as a result of an increase in the Company’s stock price in 2017 as compared to a decrease in 2016, an increase in share settled stock-based compensation expense of $2.7 million, primarily related to an increase in expense for the HoldCo LTIP despite this program expiring with no shares due to any employees, expense for stock options issued to a former chief executive officer upon separation from the Company, and a benefit recorded in 2016 for performance based units, with no corresponding benefit in 2017.

General and administrative expense includes stock-based compensation for the HoldCo LTIP of $4.7 million and $3.3 million for 2017 and 2016, respectively. No shares were distributed under the HoldCo LTIP as the volume weighted average of Providence’s stock price over the 90-day trading period ended on December 31, 2017 was less than $56.79. As such, as of December 31, 2017, we accelerated all remaining unrecognized compensation expense for the Holdco LTIP as there was no further requisite service period associated with the award resulting in an acceleration of expense of $1.1 million. General and administrative expense also includes $0.4 million and $1.6 million for 2017 and 2016, respectively, related to a shareholder lawsuit.

Costs associated with the resignation of James Lindstrom during the year ended December 31, 2017 include cash compensation related items of $0.9 million, stock-based compensation of $0.7 million, and other costs of $0.2 million. These costs are recorded as part of “General and administrative expense”.

Seasonality
 
Our quarterly operating results and operating cash flows normally fluctuate due in part to seasonal factors, uneven demand for services and the timing of new contracts, which impact the amount of revenues earned and expenses incurred. NET Services

48



experiences fluctuations in demand during the summer and winter. Due to higher demand in the summer months, lower demand during the winter months, and a primarily fixed revenue stream based on a per-member, per-month payment structure, NET Services normally experiences lower operating margins during the summer season and higher operating margins during the winter.

Liquidity and Capital Resources
 
Short-term capital requirements consist primarily of recurring operating expenses, new contract start-up costs and costs associated with our Organizational Consolidation and other strategic initiatives. We expect to meet our cash requirements through available cash on hand, cash generated from NET Services, and borrowing capacity under our Credit Facility (as defined below).

Cash flow from operating activities was $7.9 million in 2018. Additionally, 2018 included $12.8 million in proceeds from the sale of our WD Services segment and cash outflows of $43.7 million related to the acquisition of Circulation, which are included in cash used in investing activities, and $12.4 million of proceeds from stock option exercises and cash outflows of $56.1 million for repurchases of common stock for treasury, which are included in cash used in financing activities. Our balance of cash, cash equivalents and restricted cash was $12.4 million and $101.6 million at December 31, 2018 and 2017, respectively, which includes cash of discontinued operations.

We had restricted cash of $4.4 million and $6.3 million at December 31, 2018 and 2017, respectively, primarily related to contractual obligations and activities of our captive insurance subsidiary. Given expiring policies under our captive insurance subsidiary were not renewed upon expiration in May 2017, we expect our restricted cash balances to decline over time. These restricted cash amounts are not included in our balance of cash and cash equivalents, although they are included in the cash, cash equivalents and restricted cash balance on the accompanying consolidated statements of cash flows, as a result of the adoption of Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, as of January 1, 2018. At both December 31, 2018 and 2017, we had no amounts outstanding under our Credit Facility.

We may, from time to time, access capital markets to raise equity or debt financing for various business reasons, including acquisitions. We may also raise debt financing to fund future repurchases of our Common Stock. The timing, term, size, and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing. During the second quarter of 2018, we extended the term of our Credit Facility to expire in August 2019, as further discussed below. At the end of the third quarter of 2018, we borrowed funds on our revolving credit facility to acquire Circulation. As of December 31, 2018, these amounts were fully repaid.

On March 29, 2018, the Company’s Board of Directors amended our ongoing stock repurchase program to add an additional $77.8 million of capacity and extend the expiration date of the program from December 31, 2018 to June 30, 2019. As of December 31, 2018, the Company had approximately $81.2 million of share repurchase availability. During the year ended December 31, 2018, the Company repurchased 838,719 shares for $55.8 million.

The accompanying consolidated cash flow statement for all periods presented includes both continuing and discontinued operations. Discontinued operations include the activity of our historical WD Services, Human Services and HA Services segments. The loss from discontinued operations totaled $37.1 million for the year ended December 31, 2018, while income from discontinued operations totaled $2.7 million and $63.0 million for the years ended December 31, 2017 and 2016, respectively. For 2018, the loss from discontinued operations primarily related to the operating loss of our historical WD Services segment, as well as the loss, net of tax, of $1.8 million incurred on the disposition of subsidiaries within this segment. The significant income from discontinued operations during the year ended December 31, 2016 related to the gain on sale of our HA Services segment. Significant non-cash items of our discontinued operations included the following:

 
2018
 
2017
 
2016
Depreciation
$
6,711

 
$
7,825

 
$
11,799

Amortization
5,153

 
5,026

 
23,145

Asset impairment charge
9,203

 

 
19,588

Deferred income taxes
345

 
(3,940
)
 
45,700



2018 cash flows compared to 2017

Operating activities. Cash provided by operating activities was $7.9 million for 2018, a decrease of $47.1 million compared with 2017. 2018 and 2017 cash flows from operations were driven by net loss of $18.8 million and net income $53.8 million,

49



respectively, non-cash adjustments to reconcile net income to net cash provided by operating activities of $67.1 million and negative $11.1 million, respectively, and changes in working capital of negative $40.3 million and positive $12.3 million, respectively.

The change in non-cash adjustments to reconcile net income to net cash provided by operating activities was due primarily to the impact of:


the asset impairment charge incurred in 2018 of $23.4 million, of which $9.2 million is included in discontinued operations related to the sale of WD Services operations in France;
the impact on deferred taxes and income taxes receivable as a result of the sale of substantially all of the operating subsidiaries in the WD Services segment in 2018 and as a result of the Tax Reform Act passed in 2017;
the pre-tax loss on sale of subsidiaries of $53.7 million in 2018, which includes a non-cash reclass of $30.0 million from currency translation adjustment;
the gain on remeasurement of our cost method investment in Circulation of $6.6 million in 2018;
the gain on sale of Mission Providence of $12.4 million in 2017; and
the impact of the change in equity in net (gain) loss of investees, which was a loss of $6.1 million in 2018 as compared to a gain of $12.1 million in 2017.

The change in working capital was primarily driven by the following:
Accounts receivable generated a cash outflow in 2018 of $31.0 million as compared to an inflow of $5.7 million in 2017. The increase in cash outflow of $36.7 million was primarily attributable to NET Services due to the timing of collections from a limited number of payers, which was partially offset by $13.1 million of additional cash inflow from discontinued operations.
Accounts payable and accrued expenses generated a cash outflow of $21.8 million in 2018, as compared to a cash outflow of $9.1 million in 2017. The increase in cash outflow of $12.7 million is primarily the result of the settlement of indemnified legal claims in 2018, of which $9.0 million was accrued for during 2017, which was partially offset by an increase in cash inflow from discontinued operations of $7.8 million and the impact of changes in the NET Services accrued contract payable balance.
Accrued transportation costs of NET Services generated a cash inflow of $1.3 million in 2018, as compared to a cash inflow of $11.2 million in 2017. The decrease in cash inflow of $9.9 million is due primarily to the timing of payments to NET Services transportation providers.

Investing activities. Net cash used in investing activities of $45.3 million in 2018 increased by $38.3 million as compared to 2017. The increase was primarily attributable to the purchase of Circulation resulting in cash used for acquisition, net of cash acquired, of $43.7 million, which was partially offset by $12.8 million of proceeds on the sale of WD Services. Additionally, 2017 includes the impact of $15.6 million in proceeds from the sale of our equity investment in Mission Providence. During 2018, we also collected a note receivable for $3.1 million. Additionally in 2017, we made a cost method investment in Circulation for $3.0 million. There was also a decrease in the purchase of property and equipment of $2.4 million. 2018 and 2017 included purchases of property and equipment of $6.7 million and $4.5 million, respectively, by our discontinued operations.

Financing activities. Net cash used in financing activities of $51.6 million in 2018 increased $17.8 million as compared to 2017. During 2018, we repurchased $26.7 million more of our Common Stock than in 2017. In addition, there was an increase in proceeds from Common Stock issued pursuant to stock option exercises of $10.5 million.

2017 cash flows compared to 2016

Operating activities. Cash provided by operating activities was $55.0 million for 2017, an increase of $13.3 million compared with 2016. 2017 and 2016 cash flows from operations were driven by net income of $53.8 million and $89.8 million, respectively, non-cash adjustments to reconcile net income to net cash provided by operating activities of negative $11.1 million and negative $32.9 million, respectively, and changes in working capital of $12.3 million and negative $15.2 million, respectively.

The change in non-cash adjustments to reconcile net income to net cash provided by operating activities was due primarily to the impact of:

the disposition of HA Services in 2016, resulting in decreased gain on sale of business, depreciation, amortization and deferred taxes in 2017 as compared to 2016;
the asset impairment charge incurred in 2016 of $21.0 million, which is included in discontinued operations;

50



the impact on deferred taxes as a result of the Tax Reform Act passed in 2017;
the gain on sale of Mission Providence of $12.4 million in 2017, which is included in discontinued operations; and
the impact of the change in equity in net (gain) loss of investees, which was a gain of $12.1 million in 2017 as compared to a loss of $10.3 million in 2016.

The change in working capital was primarily driven by the following:
Accounts receivable generated a cash inflow in 2017 of $5.7 million as compared to an outflow of $19.3 million in 2016. The increase in cash inflow of $25.0 million was primarily attributable to NET Services due to the timing of collections as well as an outflow of $3.1 million of HA Services in 2016. These changes were partially offset by cash outflows in 2017 related to an increase in WD Services’ receivables in Germany, Saudi Arabia, South Korea and the UK.
Prepaid expenses and other generated a cash inflow of $15.5 million in 2017, as compared to a cash outflow of $4.1 million in 2016. The increase in cash inflow of $19.5 million was primarily attributable to a decrease in other receivables related to amounts receivable from insurance carriers in respect to certain claims paid by the Company, but reimbursable from the respective insurance carrier, decreased receivables related to our captive insurance company insurance policy rewrite, decreased prepaid value added taxes in the UK, decreased prepayments in WD Services in relation to certain contracts and changes in income tax payments.
Accounts payable and accrued expenses generated a cash outflow of $9.1 million in 2017, as compared to a cash inflow of $33.4 million in 2016. The decrease in cash inflow of $42.4 million is due primarily to the impact of NET Services accrued contract payments of $21.5 million, as well as the disposition of HA Services, which generated a cash inflow of $10.6 million in 2016. Partially offsetting these impacts is the impact of the increase in the accrued settlement related to our former Human Services segment of $9.0 million during 2017 as compared to an increase of $6.0 million in 2016.
Accrued transportation costs of NET Services generated a cash inflow of $11.2 million in 2017, as compared to a cash inflow of $8.7 million in 2016. The increase in cash inflow of $2.6 million is due primarily to the timing of payments to NET Services transportation providers and increased volume.
Income taxes payable on sale of business for 2016 includes a cash outflow of $30.2 million related to the sale of our Human Services segment.

Investing activities. Net cash used in investing activities totaled $7.0 million in 2017, compared to cash provided by investing activities of $318.0 million in 2016. The change was primarily attributable to $371.6 million of proceeds on the Matrix Transaction recorded in 2016, which was partially offset by the impact of $15.6 million in proceeds from the sale of our equity investment in Mission Providence in 2017. Additionally in 2017, we made a cost method investment in Circulation for $3.0 million. There was also a decrease in funding of our equity investment in Mission Providence of $13.7 million and a decrease in the purchase of property and equipment of $21.3 million. 2017 and 2016 included purchases of property and equipment of $4.5 million and $29.0 million, respectively, by our discontinued operations.

Financing activities. Net cash used in financing activities of $33.8 million in 2017 decreased $343.0 million as compared to 2016. During 2016, there was a net repayment of debt of $305.0 million, primarily related to the repayment of debt upon the completion of the Matrix Transaction. Additionally, during 2017, we repurchased $41.0 million less of our Common Stock than in 2016. In addition, there was a decrease in proceeds from Common Stock issued pursuant to stock option exercises of $2.2 million.

 Obligations and commitments
 
Current Credit Facility
 
We are party to the amended and restated credit and guaranty agreement, dated as of August 2, 2013 (as amended, the “Credit Agreement”), with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. The Credit Agreement provides us with a $200.0 million revolving credit facility (the “Credit Facility”), including a sub-facility of $25.0 million for letters of credit. As of December 31, 2018, we had no borrowings and ten letters of credit in the amount of $12.3 million outstanding. At December 31, 2018, our available credit under the revolving credit facility was $187.7 million.

Under the Credit Agreement, the Company has an option to request an increase in the amount of the revolving credit facility or in a term loan facility from time to time (on substantially the same terms as apply to the existing facility) in an aggregate amount of up to $75.0 million with either additional commitments from lenders under the Credit Agreement at such time or new commitments from financial institutions acceptable to the administrative agent in its reasonable discretion, so long

51



as no default or event of default exists at the time of any such increase. The Company may not be able to access additional funds under this increase option as no lender is obligated to participate in any such increase under the Credit Facility. The Credit Agreement has a maturity date of August 2, 2019. See also “Risk Factors-Risks Related to our Indebtedness-Loss of available financing or an inability to renew, repay or refinance our debt could have an adverse effect on our financial condition and results of operations.”
 
We may prepay any outstanding principal under the Credit Facility in whole or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in connection with prepayments of London Interbank Offered Rate, or LIBOR, loans. The unutilized portion of the commitments under the Credit Facility may be irrevocably reduced or terminated by us at any time without penalty.
 
Interest on the outstanding principal amount of any loans accrues, at our election, at a per annum rate equal to LIBOR, plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranges from 2.25% to 3.25% in the case of LIBOR loans and 1.25% to 2.25% in the case of the base rate loans, in each case, based on our consolidated leverage ratio as defined in the Credit Agreement. Interest on any loans is payable quarterly in arrears. In addition, we are obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each lender’s commitment under the Credit Facility and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee range from 0.25% to 0.50% and 2.25% to 3.25%, respectively, in each case, based on our consolidated leverage ratio.
 
The Credit Facility also requires us (subject to certain exceptions as set forth in the Amended and Restated Credit Agreement) to prepay the outstanding loans in an aggregate amount equal to 100% of the net cash proceeds received from certain asset dispositions, debt issuances, insurance and casualty awards and other extraordinary receipts.

Our obligations under the Credit Facility are guaranteed by all of our present and future domestic subsidiaries, excluding certain domestic subsidiaries, which includes our insurance captive. Our obligations under, and each guarantor’s obligations under its guaranty of, the Credit Facility are secured by a first priority lien on substantially all of our respective assets, other than our equity investment in Matrix, including a pledge of 100% of the issued and outstanding stock of our domestic subsidiaries, excluding our insurance captive.
 
The Credit Agreement contains customary affirmative and negative covenants and events of default. The negative covenants include restrictions on our ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, repurchase shares, sell assets, and merge and consolidate. We are subject to financial covenants, including consolidated net leverage and consolidated interest coverage covenants. The Company’s consolidated net leverage ratio may not be greater than 3.00:1.00 as of the end of any fiscal quarter and the Company’s consolidated interest coverage ratio may not be less than 3.00:1.00 as of the end of any fiscal quarter. We were in compliance with all covenants as of December 31, 2018.

Credit Facility Background
 
On August 2, 2013, we entered into the Credit Agreement with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint book managers and other lenders party thereto. The Credit Agreement provided us with a senior secured credit facility, in aggregate principal amount of $225.0 million, comprised of a $60.0 million term loan facility and a $165.0 million revolving credit facility. The Credit Facility includes sublimits for swingline loans and letters of credit in amounts of up to $10.0 million and $25.0 million, respectively. On August 2, 2013, we borrowed the entire amount available under the term loan facility and $16.0 million under our revolving credit facility and used the proceeds thereof to refinance certain of our existing indebtedness.
  
On May 28, 2014, we entered into the first amendment to the Credit Agreement (the “First Amendment”). The First Amendment provided for, among other things, an increase in the aggregate amount of the Credit Facility from $165.0 million to $240.0 million and other modifications in connection with the consummation of the acquisition of Ingeus.
  
On October 23, 2014, we entered into the Second Amendment to the Credit Agreement (the “Second Amendment”) to (i) add a new term loan tranche in aggregate principal amount of up to $250.0 million to partly finance the acquisition of Matrix and make certain other modifications in connection with the consummation of the acquisition of Matrix and (ii) add an excess cash flow mandatory prepayment provision.
 
On September 3, 2015, we entered into the Third Amendment to the Credit Agreement (the “Third Amendment”). Pursuant to the Third Amendment, the lenders under the Credit Agreement consented to Providence’s sale of the Human Services segment

52



and certain other amendments to the terms of the Credit Agreement to reflect such consents.

On August 28, 2016, we entered into the Fourth Amendment and Consent (the “Fourth Amendment”) to the Credit Agreement. In accordance with the Fourth Amendment, which provided for the lenders’ consent to the Matrix Transaction, a portion of the net cash proceeds received by the Company in connection with the Matrix Transaction was applied to the prepayment of outstanding term loans and revolving loans. Additionally, effective following the repayment of the outstanding term loans in full on October 20, 2016, the Fourth Amendment further (i) reduced the aggregate revolving commitments under the Credit Agreement to $200.0 million, (ii) amended the consolidated net leverage ratio covenant such that the Company’s consolidated net leverage ratio may not be greater than 3.00:1.00 as of the end of any fiscal quarter and (iii) replaced the existing consolidated fixed charge coverage ratio covenant with a covenant that the Company’s consolidated interest coverage ratio may not be less than 3.00:1.00 as of the end of any fiscal quarter.
 
On June 7, 2018, we entered into the Fifth Amendment to the Credit Agreement (the “Fifth Amendment”) which (i) extended the maturity date of the Credit Agreement to August 2, 2019 and (ii) amended certain covenants under the Credit Agreement to provide for greater operational, financial and strategic flexibility, including the implementation of the Organizational Consolidation.

We may from time to time incur additional indebtedness, obtain additional financing or refinance existing indebtedness, subject to market conditions and our financial condition.

Rights Offering

We completed a rights offering on February 5, 2015, allowing all of the Company’s existing common stockholders the non-transferrable right to purchase their pro rata share of $65.5 million of Preferred Stock at a price equal to $100.00 per share (the “Rights Offering”). The Preferred Stock was convertible into shares of our Common Stock at a conversion price equal to $39.88, which was the closing price of our Common Stock on NASDAQ on October 22, 2014.
 
Stockholders exercised subscription rights to purchase 130,884 shares of the Company’s Preferred Stock. Pursuant to the terms and conditions of the Standby Purchase Agreement between the Coliseum Stockholders and the Company, the remaining 524,116 shares of the Company’s Preferred Stock were purchased by the Coliseum Stockholders at the $100.00 per share subscription price. The Coliseum Stockholders beneficially owned approximately 94% of our outstanding Preferred Stock after giving effect to the Rights Offering and the Standby Purchase Agreement. The Company received $65.5 million in aggregate gross proceeds from the consummation of the Rights Offering and Standby Purchase Agreement, which it used to repay the related party unsecured subordinated bridge note that was outstanding as of December 31, 2014.
 
Additionally, on March 12, 2015, the Coliseum Stockholders exercised their right to purchase an additional 150,000 shares of the Company’s convertible preferred stock at a $105 per share subscription price.
 
We may pay a noncumulative cash dividend on each share of Preferred Stock, when, as and if declared by a committee of our Board, at the rate of 5.5% per annum on the liquidation preference then in effect. On or before the third business day immediately preceding each fiscal quarter, we determine our intention whether or not to pay a cash dividend with respect to that ensuing quarter and give notice of our intention to each holder of Preferred Stock as soon as practicable thereafter.
 
In the event we do not declare and pay a cash dividend, the liquidation preference will be increased to an amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to such then applicable liquidation preference multiplied by 8.5% per annum, computed on the basis of a 365-day year and the actual number of days elapsed from the start of the applicable dividend period to the applicable date of determination.
 
Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, and, if declared, will begin to accrue on the first day of the applicable dividend period. Payment in kind (“PIK”) dividends, if applicable, will accrue and be cumulative on the same schedule as set forth above for cash dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. PIK dividends are paid upon the occurrence of a liquidation event, conversion or redemption in accordance with the terms of the Preferred Stock. Cash dividends were declared each quarter for the years ended December 31, 2018 and 2017 and totaled $4.4 million each year. For information on the treatment of Preferred Stock in the event of a certain change of control transactions, see “Risk Factors–Risks Related to Our Capital Stock–Anti-takeover provisions in our second amended and restated certificate of incorporation and amended and restated by-laws could discourage, delay or prevent a change of control of our company and may affect the trading price of our Common Stock.”
 

53



Reinsurance and Self-Funded Insurance Programs
 
Reinsurance
 
We historically reinsured a substantial portion of our automobile, general and professional liability and workers’ compensation costs under reinsurance programs primarily through our wholly-owned captive insurance subsidiary, Social Services Providers Captive Insurance Company, or SPCIC. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCIC will continue to resolve claims under the historical policy years.
 
At December 31, 2018, the cumulative reserve for expected losses since inception of these historical automobile, general and professional liability and workers’ compensation reinsurance programs was $0.3 million, $0.8 million and $2.8 million, respectively. Based on an independent actuarial report, our expected losses related to workers’ compensation, automobile and general and professional liability in excess of our liability under our associated historical reinsurance programs at December 31, 2018 was $6.6 million. We recorded a corresponding receivable from third-party insurers and liability at December 31, 2018 for these expected losses, which would be paid by third-party insurers to the extent losses are incurred.
 
Further, we had restricted cash of $4.4 million and $6.3 million at December 31, 2018 and December 31, 2017, respectively, which was primarily restricted to secure the reinsured claims losses under the historical automobile, general and professional liability and workers’ compensation reinsurance programs.

Health Insurance
 
We offer our NET Services, U.S. based WD Services, and corporate employees an option to participate in self-funded health insurance programs. Additionally, we historically offered this option to our HA Services and Human Services segments’ employees. During the year ended December 31, 2018, health claims were self-funded with a stop-loss umbrella policy with a third-party insurer to limit the maximum potential liability for individual claims generally to $300,000 per person, subject to an aggregating stop-loss limit of $400,000. In addition, the program has a total stop-loss limit for total claims, in order to limit our exposure to catastrophic claims.

Health insurance claims are paid as they are submitted to the plan administrator. We maintain accruals for claims that have been incurred but not yet reported to the plan administrator, and therefore, have not been paid. The incurred but not reported reserve is based on an established cap and current payment trends of health insurance claims. The liability for the self-funded health plan of $2.2 million as of December 31, 2018 and 2017, was recorded in “Reinsurance liability and related reserve” in our consolidated balance sheets.

We charge our employees a portion of the costs of our self-funded group health insurance programs. We determine this charge at the beginning of each plan year based upon historical and projected medical utilization data. Any difference between our projections and our actual experience is borne by us, up to the stop-loss limit. We estimate potential obligations for liabilities under this program to reserve what we believe to be a sufficient amount to cover liabilities based on our past experience. Any significant increase in the number of claims or costs associated with claims made under this program above what we reserve could have a material adverse effect on our financial results.
 

54



Contractual cash Obligations
 
The following is a summary of our future contractual cash obligations as of December 31, 2018:
 
 
 

At December 31, 2018
 

 

Less than

1-3

3-5

After 5
Contractual cash obligations (000’s)

Total

1 Year

Years

Years

Years
Capital leases

$
1,071


$
718

 
$
353

 
$

 
$

Interest (1)

445


445

 

 

 

Purchased services commitment (2)

35,231


13,805

 
21,419

 
7

 

Guarantees (3)

42,056


42,056

 

 

 

Letters of credit (3)

12,338


12,338

 

 

 

Operating leases (4)

27,039


8,825

 
11,046

 
5,568

 
1,600

Total

$
118,180


$
78,187


$
32,818


$
5,575


$
1,600

 
(1)
Future interest payments have been calculated at the current rates as of December 31, 2018.
(2)
The purchased service commitment includes a commitment for transportation services. Our commitment amount represents the minimum obligation we have under this agreement. If the Company does not utilize the minimum level of services specified in the agreement, a penalty provision will apply. However, the minimum obligation is less than our projected use for these periods and payments may be more than the minimum obligation based on actual use.
(3)
Guarantees and letters of credit (“LOCs”) are commitments that represent funding responsibilities that may require our performance in the event of third-party demands or contingent events. Guarantees include surety bonds we provide to certain customers to protect against potential non-delivery of our non-emergency transportation services. Of the outstanding balance of our stand-by LOCs, $12.3 million directly reduces the amount available to us from our Credit Facility. The surety bonds and LOC amounts in the above table represent the amount of commitment expiration per period.
(4)
The operating leases are for office space and related office equipment. We account for these leases on a monthly basis. Certain leases contain periodic rent escalation adjustments and renewal options.

Other than the items described above, we do not have any off-balance sheet arrangements as of December 31, 2018.

Stock repurchase programs
 
On November 4, 2015, our Board authorized us to engage in a repurchase program to repurchase up to $70.0 million in aggregate value of our Common Stock during the twelve-month period following November 4, 2015. This plan terminated on November 3, 2016. A total of 1,360,249 shares were purchased through this plan for $63.0 million, excluding commission payments.
 
On October 26, 2016, our Board authorized us to engage in a repurchase program to repurchase up to $100.0 million in aggregate value of our Common Stock during the twelve-month period following October 26, 2016. As of October 26, 2017, we spent $30.4 million, excluding commission payments, to purchase 770,808 shares of our Common Stock under this plan.

On November 2, 2017, the Board approved the extension of the Company’s existing stock repurchase program, authorizing the Company to engage in a repurchase program to repurchase up to $69.6 million (the amount remaining from the $100.0 million repurchase amount authorized in 2016) in aggregate value of our Common Stock through December 31, 2018. Subsequently, on March 29, 2018, the Board authorized an increase in the amount available for stock repurchases under the Company’s existing stock repurchase program by $77.8 million, and extended the existing stock repurchase program through June 30, 2019. As of December 31, 2018, 1,018,989 shares were purchased under this plan for $66.3 million, excluding commission payments, after it was extended on November 2, 2017.

Purchases under the repurchase program may be made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, and accelerated share repurchase transactions, at the discretion of our officers, and as permitted by securities laws, covenants under existing bank agreements, and other legal requirements.


55



Off-balance sheet arrangements
 
As of December 31, 2018 and 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
New Accounting Pronouncements
 
The new accounting pronouncements that impact our business are included in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, to our consolidated financial statements and are incorporated herein by reference.
  
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk. 

Interest rate risk
 
We have exposure to interest rate risk mainly related to our revolving credit facility, which has variable interest rates that may increase. We did not have any amounts outstanding on our revolving credit facility at December 31, 2018.



56



Item 8.
Financial Statements and Supplementary Data.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  
 
 
 
 
 
 
 
For the years ended December 31, 2018, 2017 and 2016:
 
 
 
 
 
 
 
 
 
 
 


57



Management’s Report on Internal Control Over Financial Reporting
  
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the registrant, as such term is defined in Rule 13a-15(f) of the Exchange Act. We designed our internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.

We acquired Circulation, Inc. (“Circulation”) on September 21, 2018, and we excluded from the assessment of effectiveness of our internal control over financial reporting as of December 31, 2018, Circulation’s internal control over financial reporting associated with total assets of $6.1 million (which excludes acquired goodwill and intangible assets) and total revenues of $2.2 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018.

We are currently integrating this acquisition into our internal control over financial reporting processes. In executing this integration, we are analyzing, evaluating and, where necessary, making changes in controls and procedures related to this acquisition, which we expect to be completed in fiscal year 2019. We have excluded this acquisition from our assessment of internal control over financial reporting as of December 31, 2018, as permitted by the guidance provided by the staff of the SEC. Other than the changes described above, there were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, based on the criteria set forth in the Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, the Company concluded that its internal control over financial reporting was effective as of December 31, 2018.
 
KPMG LLP, an independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting which is presented in Part II, Item 8 of this Annual Report on Form 10-K.



58



Report of Independent Registered Public Accounting Firm
 


To the Stockholders and Board of Directors
The Providence Service Corporation:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Providence Service Corporation and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”). In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
We did not audit the financial statements of Mercury Parent, LLC (43.6 percent owned investee company) as of and for the period ended December 31, 2018. The Company’s investment in Mercury Parent, LLC as of December 31, 2018 was $161.5 million, and its equity in net loss of Mercury Parent, LLC was $6.2 million for the year ended December 31, 2018. The financial statements of Mercury Parent, LLC were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Mercury Parent, LLC, is based solely on the report of the other auditors.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenues and related costs in 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2008.
Stamford, Connecticut
March 1, 2019


59





Report of Independent Registered Public Accounting Firm


 
To the Stockholders and Board of Directors
The Providence Service Corporation:

Opinion on Internal Control Over Financial Reporting
We have audited The Providence Service Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”), and our report dated March 1, 2019 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired Circulation, Inc. (“Circulation”) during 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, Circulation’s internal control over financial reporting associated with total assets of $6.1 million (which excludes acquired goodwill and intangible assets) and total revenues of $2.2 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Circulation.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

60



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP


Stamford, Connecticut
March 1, 2019




61



The Providence Service Corporation
Consolidated Balance Sheets
(in thousands except share and per share data) 
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,678

 
$
52,798

Accounts receivable, net of allowance of $1,854 in 2018 and $5,262 in 2017
147,756

 
110,208

Other receivables
4,846

 
5,749

Prepaid expenses and other
44,167

 
22,459

Restricted cash
1,482

 
1,091

Current assets of discontinued operations
7,051

 
104,024

Total current assets
210,980

 
296,329

Property and equipment, net
22,965