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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             
 
Commission File Number 001-34221
 
 

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

 

Delaware
 
86-0845127
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
       1275 Peachtree Street
Sixth Floor
Atlanta
Georgia
30309
 
 
 
 
 
(Address of principal executive offices)
 
 
 
(Zip Code)
 
(404) 888-5800
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, $0.001 par value per share
PRSC
The NASDAQ Global Select Market






1



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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company ☐
 
 
 
 
Emerging growth company
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

As of August 5, 2019, there were outstanding 12,973,706 shares (excluding treasury shares of 4,975,971) of the registrant’s Common Stock, $0.001 par value per share.



2



TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets – June 30, 2019 (unaudited) and December 31, 2018
 
 
 
 
Unaudited Condensed Consolidated Statements of Operations – Three and six months ended June 30, 2019 and 2018
 
 
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2019 and 2018
 
 
 
 
Unaudited Condensed Consolidated Statements of Stockholders’ Equity – Three and six months ended June 30, 2019 and 2018
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2019 and 2018
 
 
 
 
Notes to the Unaudited Condensed Consolidated Financial Statements – June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 



3



PART I—FINANCIAL INFORMATION
Item 1.   Financial Statements.
The Providence Service Corporation
Condensed Consolidated Balance Sheets
(in thousands except share and per share data)
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,804

 
$
5,678

Accounts receivable, net of allowance of $2,120 in 2019 and $1,854 in 2018
154,864

 
147,756

Other receivables
6,115

 
4,846

Prepaid expenses and other
39,818

 
44,167

Restricted cash
1,832

 
1,482

Current assets of discontinued operations
4,181

 
7,051

Total current assets
236,614

 
210,980

Operating lease right-of-use assets
19,354

 

Property and equipment, net
21,548

 
22,965

Goodwill
135,216

 
135,216

Intangible assets, net
23,028

 
26,146

Equity investment
157,948

 
161,503

Other assets
10,228

 
9,949

Restricted cash, less current portion
1,896

 
2,886

Total assets
$
605,832

 
$
569,645

Liabilities, redeemable convertible preferred stock and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Current portion of operating lease liabilities
$
6,892

 
$

Current portion of long-term obligations
308

 
718

Accounts payable
9,635

 
8,828

Accrued expenses
49,775

 
39,191

Accrued transportation costs
87,825

 
84,889

Deferred revenue
232

 
562

Reinsurance and related liability reserves
4,701

 
5,438

Current liabilities of discontinued operations
1,280

 
3,257

Total current liabilities
160,648

 
142,883

Long-term debt, less current portion
199

 
353

Operating lease liabilities, less current portion
13,810

 

Other long-term liabilities
15,076

 
14,970

Deferred tax liabilities
20,909

 
23,049

Long-term liabilities of discontinued operations
713

 

Total liabilities
211,355

 
181,255

Commitments and contingencies (Note 13)

 

Redeemable convertible preferred stock
 
 
 
Convertible preferred stock, net: Authorized 10,000,000 shares; $0.001 par value; 799,969 and 801,606, respectively, issued and outstanding; 5.5%/8.5% dividend rate
77,234

 
77,392

Stockholders’ equity
 
 
 
Common stock: Authorized 40,000,000 shares; $0.001 par value; 17,947,072 and 17,784,769, respectively, issued and outstanding (including treasury shares)
18

 
18

Additional paid-in capital
344,676

 
334,744

Retained earnings
183,812

 
187,127

Treasury shares, at cost, 4,975,971 and 4,970,093 shares, respectively
(211,263
)
 
(210,891
)
Total stockholders’ equity
317,243

 
310,998

Total liabilities, redeemable convertible preferred stock and stockholders’ equity
$
605,832

 
$
569,645


 See accompanying notes to the unaudited condensed consolidated financial statements

4



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Operations
(in thousands except share and per share data)
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Service revenue, net
$
363,911

 
$
343,736

 
$
731,726

 
$
680,432

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Service expense
345,948

 
317,741

 
686,446

 
620,856

General and administrative expense
16,860

 
18,139

 
36,262

 
36,037

Asset impairment charge

 
678

 

 
678

Depreciation and amortization
4,353

 
3,747

 
8,827

 
7,327

Total operating expenses
367,161

 
340,305

 
731,535

 
664,898

 
 
 
 
 
 
 
 
Operating (loss) income
(3,250
)
 
3,431

 
191

 
15,534

 
 
 
 
 
 
 
 
Other expenses (income):
 
 
 
 
 
 
 
Interest expense, net
301

 
232

 
604

 
558

Other income
(66
)
 

 
(132
)
 

Equity in net loss of investee
1,315

 
174

 
2,971

 
2,519

(Loss) income from continuing operations before income taxes
(4,800
)
 
3,025

 
(3,252
)
 
12,457

(Benefit) provision for income taxes
(1,391
)
 
1,062

 
(1,157
)
 
3,071

(Loss) income from continuing operations, net of tax
(3,409
)
 
1,963

 
(2,095
)
 
9,386

Income (loss) from discontinued operations, net of tax
1,697

 
(13,366
)
 
966

 
(15,063
)
Net loss
(1,712
)
 
(11,403
)
 
(1,129
)
 
(5,677
)
Net income (loss) from discontinued operations attributable to non-controlling interest

 
188

 

 
(108
)
Net loss attributable to Providence
$
(1,712
)
 
$
(11,215
)
 
$
(1,129
)
 
$
(5,785
)
 
 
 
 
 
 
 
 
Net loss available to common stockholders (Note 11)
$
(2,810
)
 
$
(12,321
)
 
$
(3,314
)
 
$
(7,980
)
 
 
 
 
 
 
 
 
Basic (loss) earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.35
)
 
$
0.08

 
$
(0.33
)
 
$
0.54

Discontinued operations
0.13

 
(1.03
)
 
0.07

 
(1.15
)
Basic loss per common share
$
(0.22
)
 
$
(0.95
)
 
$
(0.26
)
 
$
(0.61
)
 
 
 
 
 
 
 
 
Diluted (loss) earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.35
)
 
$
0.08

 
$
(0.33
)
 
$
0.54

Discontinued operations
0.13

 
(1.02
)
 
0.07

 
(1.15
)
Diluted loss per common share
$
(0.22
)
 
$
(0.94
)
 
$
(0.26
)
 
$
(0.61
)
 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
12,973,496

 
13,008,106

 
12,937,054

 
13,056,765

Diluted
12,973,496

 
13,088,182

 
12,937,054

 
13,141,198





See accompanying notes to the unaudited condensed consolidated financial statements

5



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

 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(1,712
)
 
$
(11,403
)
 
$
(1,129
)
 
$
(5,677
)
Net income (loss) attributable to non-controlling interest

 
188

 

 
(108
)
Net loss attributable to Providence
(1,712
)
 
(11,215
)
 
(1,129
)
 
(5,785
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax

 
(3,967
)
 

 
(2,041
)
Other comprehensive loss

 
(3,967
)
 

 
(2,041
)
Comprehensive loss
(1,712
)
 
(15,370
)
 
(1,129
)
 
(7,718
)
Comprehensive income (loss) attributable to non-controlling interest

 
62

 

 
(153
)
Comprehensive loss attributable to Providence
$
(1,712
)
 
$
(15,308
)
 
$
(1,129
)
 
$
(7,871
)
 



































See accompanying notes to the unaudited condensed consolidated financial statements

6



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Stockholders’ Equity 
(in thousands except share data)

 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
 
Retained
 
Treasury Stock
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Amount
 
Total
Balance at December 31, 2018
17,784,769

 
$
18

 
$
334,744

 
$
187,127

 
4,970,093

 
$
(210,891
)
 
$
310,998

Stock-based compensation

 

 
2,103

 

 

 

 
2,103

Exercise of employee stock options
57,022

 

 
2,557

 

 

 

 
2,557

Restricted stock issued
25,357

 

 

 

 
3,459

 
(217
)
 
(217
)
Shares issued for bonus settlement and director stipends
599

 

 

 

 

 

 

 Convertible preferred stock dividends (1)

 

 

 
(1,087
)
 

 

 
(1,087
)
 Net income attributable to Providence

 

 

 
582

 

 

 
582

Balance at March 31, 2019
17,867,747

 
18

 
339,404

 
186,622

 
4,973,552

 
(211,108
)
 
314,936

    Stock-based compensation

 

 
1,289

 

 

 

 
1,289

    Exercise of employee stock options
67,931

 

 
3,826

 

 

 

 
3,826

    Restricted stock issued
7,088

 

 

 

 
2,419

 
(155
)
 
(155
)
 Shares issued for bonus settlement and director stipends
202

 

 

 

 

 

 

       Preferred stock conversion
4,104

 

 
157

 

 

 

 
157

       Convertible preferred stock dividends (1)

 

 

 
(1,098
)
 

 

 
(1,098
)
  Net loss attributable to Providence

 

 

 
(1,712
)
 

 

 
(1,712
)
Balance at June 30, 2019
17,947,072

 
$
18

 
$
344,676

 
$
183,812

 
4,975,971

 
$
(211,263
)
 
$
317,243


(1) Cash dividends on redeemable convertible preferred stock of $1.36 and $1.37 per share were distributed to convertible preferred stockholders for the three months ended March 31, 2019 and June 30, 2019, respectively.



























7



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Stockholders’ Equity - continued
(in thousands except share data)

 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-In
 
Retained
 
Comprehensive
Loss, Net of
 
Treasury Stock
 
Non-
Controlling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Tax
 
Shares
 
Amount
 
Interest
 
Total
Balance at December 31, 2017
17,473,598

 
$
17

 
$
313,955

 
$
204,818

 
$
(25,805
)
 
4,126,132

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

Stock-based compensation

 

 
993

 

 

 

 

 

 
993

Exercise of employee stock options
212,789

 
1

 
8,819

 

 

 

 

 

 
8,820

Restricted stock issued
20,904

 

 

 

 

 
3,778

 
(237
)
 

 
(237
)
Shares issued for bonus settlement and director stipends
2,715

 

 
150

 

 

 

 

 

 
150

Stock repurchase plan

 

 

 

 

 
583,027

 
(36,930
)
 

 
(36,930
)
Convertible preferred stock dividends (2)

 

 

 
(1,089
)
 

 

 

 

 
(1,089
)
Foreign currency translation adjustments, net of tax

 

 

 

 
1,926

 

 

 
(81
)
 
1,845

Non-controlling interest

 

 

 

 

 

 

 
296

 
296

Other

 

 
49

 

 

 

 

 

 
49

Net income attributable to Providence

 

 

 
5,430

 

 

 

 

 
5,430

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

 

 

 
5,710

 

 

 

 

 
5,710

Balance at March 31, 2018
17,710,006

 
18

 
323,966

 
214,869

 
(23,879
)
 
4,712,937

 
(191,970
)
 
(1,950
)
 
321,054

Stock-based compensation

 

 
3,446

 

 

 

 

 

 
3,446

Exercise of employee stock options
53,004

 

 
2,842

 

 

 

 

 

 
2,842

Restricted stock issued
6,085

 

 
(320
)
 

 

 
129

 
(9
)
 

 
(329
)
Performance restricted stock issued
3,110

 

 
(109
)
 

 

 

 

 

 
(109
)
Shares issued for bonus settlement and director stipends
318

 

 

 

 

 

 

 

 

Stock repurchase plan

 

 

 

 

 
255,692

 
(18,823
)
 

 
(18,823
)
Conversion of convertible preferred stock to common stock
2,608

 

 
105

 
(5
)
 

 

 

 

 
100

Convertible preferred stock dividends (2)

 

 

 
(1,101
)
 

 

 

 

 
(1,101
)
Foreign currency translation adjustments, net of tax

 

 

 

 
(3,967
)
 

 

 
126

 
(3,841
)
Other

 

 
79

 

 

 

 

 
(188
)
 
(109
)
Net loss attributable to Providence

 

 

 
(11,215
)
 

 

 

 

 
(11,215
)
Balance at June 30, 2018
17,775,131

 
$
18

 
$
330,009

 
$
202,548

 
$
(27,846
)
 
4,968,758

 
$
(210,802
)
 
$
(2,012
)
 
$
291,915


(2) Cash dividends on redeemable convertible preferred stock of $1.36 and $1.37 per share were distributed to convertible preferred stockholders for the three months ended March 31, 2018 and June 30, 2018, respectively.















See accompanying notes to the unaudited condensed consolidated financial statements

8



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

 
Six months ended June 30,
 
2019
 
2018
Operating activities
 
 
 
Net loss
$
(1,129
)
 
$
(5,677
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation
5,710

 
9,565

Amortization
3,117

 
4,112

Asset impairment charge

 
9,881

Provision for doubtful accounts
281

 
197

Stock-based compensation
3,392

 
4,278

Deferred income taxes
(1,346
)
 
(2,665
)
Amortization of deferred financing costs and debt discount
201

 
308

Equity in net loss of investee
2,971

 
2,468

Other non-cash charges (credits)

 
(605
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(7,389
)
 
(33,993
)
Prepaid expenses and other
(4,473
)
 
(10,967
)
Income tax receivable on sale of business
8,223

 

Reinsurance and related liability reserve
(1,235
)
 
(1,294
)
Accounts payable and accrued expenses
9,775

 
(4,865
)
Accrued transportation costs
2,936

 
10,489

Deferred revenue
(433
)
 
10,780

Operating lease and other long-term liabilities
2,470

 
72

Net cash provided by (used in) operating activities
23,071

 
(7,916
)
Investing activities
 
 
 
Purchase of property and equipment
(4,277
)
 
(8,792
)
Proceeds from note receivable

 
3,130

Net cash used in investing activities
(4,277
)
 
(5,662
)
Financing activities
 
 
 
Preferred stock dividends
(2,185
)
 
(2,190
)
Repurchase of common stock, for treasury
(372
)
 
(56,428
)
Proceeds from common stock issued pursuant to stock option exercise
6,383

 
12,405

Repayment of debt
(12,000
)
 

Proceeds from debt
12,000

 

Capital lease payments and other
(566
)
 
(1,793
)
Net cash provided by (used in) financing activities
3,260

 
(48,006
)
Effect of exchange rate changes on cash

 
(53
)
Net change in cash, cash equivalents and restricted cash
22,054

 
(61,637
)
Cash, cash equivalents and restricted cash at beginning of period
12,367

 
101,606

Cash, cash equivalents and restricted cash at end of period
$
34,421

 
$
39,969


 



See accompanying notes to the unaudited condensed consolidated financial statements

9



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

 
Six Months Ended
June 30,
Supplemental cash flow information
2019
 
2018
Cash paid for interest
$
852

 
$
588

Cash paid for income taxes
$
1,992

 
$
9,462

Purchase of equipment through capital lease obligation
$

 
$
677














































 See accompanying notes to the unaudited condensed consolidated financial statements


10



The Providence Service Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2019
(in thousands except years, share and per share data)
 
1.    Organization and Basis of Presentation

Description of Business

The Providence Service Corporation (“we”, the “Company” or “Providence”) is the largest manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations (“MCOs”) in the United States (“U.S.”). The Company’s NET Services segment operates under the brands LogistiCare and Circulation. Additionally, the Company owns a minority investment in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”). Matrix is a nationwide provider of home and mobile-based healthcare services for health plans in the U.S., 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.

During 2018, the Company announced an organizational consolidation plan ("Organizational Consolidation") to integrate substantially all activities and functions performed at the corporate holding company level into its NET Services segment. As the Organizational Consolidation was substantially complete beginning January 1, 2019, our former Corporate and Other segment was combined with the NET Services segment. See Note 8, Restructuring and Related Reorganization Costs, and Note 16, Segments, for further information.

Basis of Presentation

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

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

The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses and certain disclosures in the preparation of these condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these condensed consolidated financial statements were filed with the SEC and considered the effect of such events in the preparation of these condensed consolidated financial statements.

The condensed consolidated balance sheet at December 31, 2018 has been derived from audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The Company accounts for its investment in Matrix using the equity method, as the Company does not control the decision-making process or business management practices of Matrix. While the Company has access to certain information and performs certain procedures to review the reasonableness of information, the Company relies on the management of Matrix to provide accurate financial information prepared in accordance with GAAP. The Company receives audit reports relating to such financial information from Matrix’s independent auditors on an annual basis. The Company is not aware of any errors in or possible misstatements of the financial information provided by Matrix that would have a material effect on the Company’s consolidated financial statements. See Note 5, Equity Investments, for further information.

11



Reclassifications

In conjunction with the change in the Company’s organizational structure as described in Note 16, Segments, we reclassified certain costs between “General and administrative expense” and “Service expense” on our accompanying condensed consolidated statements of operations as summarized below:
 
Three Months Ended June 30, 2018
 
As Previously Reported (1)
 
Reclassifications
 
As Reported
Service expense
$
324,126

 
$
(6,385
)
 
$
317,741

General and administrative expense
11,754

 
6,385

 
18,139

 
Six Months Ended June 30, 2018
 
As Previously Reported (1)
 
Reclassifications
 
As Reported
Service expense
$
634,827

 
$
(13,971
)
 
$
620,856

General and administrative expense
22,066

 
13,971

 
36,037

(1) Adjusted for discontinued operations, as described in Note 15.

2.    Significant Accounting Policies and Recent Accounting Pronouncements

The Company adopted the following accounting pronouncements during the six months ended June 30, 2019:

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

The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in which it is the lessee. Under ASC 842, lessees are required to recognize a lease liability and right-of-use (ROU) asset for all leases (with the exception of short-term leases) at the lease commencement date. Effective January 1, 2019, the Company adopted this guidance, applied the modified retrospective transition method and elected the transition option to use the effective date as the date of initial application. The Company recognized the cumulative effect of the transition adjustment on the condensed consolidated balance sheet as of the effective date and did not provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company elected the package of transitional-related practical expedients and the practical expedient not to separate lease and non-lease components. At January 1, 2019, the Company recorded $23,165 and $24,491 of additional ROU leased assets and liabilities, respectively, on its condensed consolidated balance sheet. The adoption did not have a material impact on the statement of operations. See Note 9, Leases, for further information.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company adopted this new rule in the quarter ended March 31, 2019 by including the condensed consolidated statements of stockholders’ equity.

Recent accounting pronouncements that the Company has yet to adopt are as follows:

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The amendments in ASU 2016-13 will supersede or clarify much of the existing guidance for reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The amendments in ASU 2016-13 affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for financial statements

12



issued for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

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

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

3.    Revenue Recognition
    
Disaggregation of Revenue
The following table summarizes disaggregated revenue from contracts with customers by contract type for NET Services:
 
Three months ended June 30, 2019
 
Three Months Ended June 30, 2018
State Medicaid agency contracts
$
177,773

 
$
183,459

Managed care organization contracts
186,138

 
160,277

  Total Service revenue, net
$
363,911

 
$
343,736

 
 
 
 
Capitated contracts
$
308,690

 
$
286,994

Non-capitated contracts
55,221

 
56,742

  Total Service revenue, net
$
363,911

 
$
343,736

    
 
Six months ended June 30, 2019
 
Six months ended June 30, 2018
State Medicaid agency contracts
$
354,741

 
$
360,748

Managed care organization contracts
376,985

 
319,684

  Total Service revenue, net
$
731,726

 
$
680,432

 
 
 
 
Capitated contracts
$
613,262

 
$
571,395

Non-capitated contracts
118,464

 
109,037

  Total Service revenue, net
$
731,726

 
$
680,432



During the three months ended June 30, 2019 and 2018, NET Services recognized positive $236 and negative $1,007, respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the customer agreed. During the six months ended June 30, 2019 and 2018, NET Services recognized negative $39 and positive $5,685, respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the customer agreed.
Related Balance Sheet Accounts

The following table provides information about accounts receivable, net:

13



 
June 30, 2019
 
December 31, 2018
Accounts receivable
$
99,656

 
$
101,340

NET Services’ reconciliation contract receivable
57,328

 
48,270

Allowance for doubtful accounts
(2,120
)
 
(1,854
)
 
$
154,864

 
$
147,756


The following table provides information about other accounts included on the accompanying condensed consolidated balance sheets:
 
June 30, 2019
 
December 31, 2018
Accrued contract payments, included in accrued expenses
$
20,896

 
$
9,756

Deferred revenue, current
232

 
562

Deferred revenue, long-term, included in other long-term liabilities
860

 
963


During the six months ended June 30, 2019 and 2018, $386 and $3,019 of deferred revenue as of December 31, 2018 and 2017, respectively, was recognized.

14



4.    Cash, Cash Equivalents and Restricted Cash

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

 
June 30, 2019
 
June 30, 2018
Cash and cash equivalents
$
29,804

 
$
29,700

Restricted cash, current
1,832

 
1,868

Current assets of discontinued operations
889

 
5,141

Restricted cash, less current portion
1,896

 
3,260

Cash, cash equivalents and restricted cash
$
34,421

 
$
39,969



Restricted cash primarily relates to amounts held in trusts for reinsurance claims losses under the Company’s captive insurance operation for historical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawal under our self-insured medical and benefits plans. Current assets of discontinued operations principally reflect the cash position of WD Services operations in Saudi Arabia, which was not sold as part of the WD Services sale. Such cash will be used to fund the shut-down costs of this operation as needed. See Note 15, Discontinued Operations, for further information on the WD Services sale.

5.    Equity Investment

As of both June 30, 2019 and December 31, 2018, the Company owned a 43.6% non-controlling interest in Matrix. Pursuant to a shareholder’s agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting with the Company’s share of Matrix’s income or losses recorded as “Equity in net loss of investee” in the accompanying condensed consolidated statements of operations.

The carrying amount of the assets included in the Company’s condensed consolidated balance sheets and the maximum loss exposure related to the Company’s interest in Matrix as of June 30, 2019 and December 31, 2018 totaled $157,948 and $161,503, respectively.

Summary financial information for Matrix on a standalone basis is as follows:
 
June 30, 2019
 
December 31, 2018
Current assets
$
65,317

 
$
61,565

Long-term assets
703,622

 
719,450

Current liabilities
26,226

 
27,619

Long-term liabilities
369,178

 
373,159

 
Three months ended
June 30, 2019
 
Three months ended June 30, 2018
Revenue
$
72,161

 
$
78,409

Operating income
1,543

 
4,627

Net loss
(3,661
)
 
(869
)

    
 
Six months ended June 30, 2019
 
Six months ended June 30, 2018
Revenue
$
139,144

 
$
145,839

Operating income
2,098

 
3,838

Net loss
(8,148
)
 
(9,387
)




15



6.    Prepaid Expenses and Other

Prepaid expenses and other were comprised of the following: 
 
June 30,
2019
 
December 31,
2018
Prepaid income taxes
$
30,516

 
$
35,207

Prepaid insurance
2,340

 
1,308

Prepaid rent
854

 
828

Other prepaid expen