Providence Service Corp.
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission 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 ClassCommon Stock, $0.001 par value per shareName of each exchange on which registeredThe NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate 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 12months (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 ofthis 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 thebest 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 “largeaccelerated 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 financialaccounting 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 onThe 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 our2019 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 onForm 10-K filed on or before such date.1TABLE OF CONTENTS Page No.PART I Item 1.Business.3 Item 1A.Risk Factors.14 Item 1B.Unresolved Staff Comments.29 Item 2.Properties.29 Item 3.Legal Proceedings.29 Item 4.Mine Safety Disclosures.29 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 30 Item 6.Selected Financial Data. 32 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.35 Item 7A.Quantitative and Qualitative Disclosures About Market Risk. 56 Item 8. Financial Statements and Supplementary Data. 57 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 110 Item 9A.Controls and Procedures.110 Item 9B.Other Information.110 PART III Item 10.Directors, Executive Officers and Corporate Governance.111 Item 11.Executive Compensation. 111 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 111 Item 13. Certain Relationships and Related Transactions, and Director Independence. 111 Item 14. Principal Accounting Fees and Services.111 PART IV Item 15. Exhibits, Financial Statement Schedules. 112 Item 16.Form 10-K Summary.117 SIGNATURES1182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 TheProvidence Service Corporation and, except as otherwise specified herein, to our subsidiaries. When such terms are used in reference to the Company’scommon stock, $0.001 par value per share (the “Common Stock”), and the Series A Convertible Preferred Stock, $0.001 par value per share (the “PreferredStock”), 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 27Aof 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 fundoperations, profitability, ability to meet financial covenants, contracts or market opportunities. The Company may also make forward-looking statements inother reports filed with the Securities and Exchange Commission (the “SEC”), in materials delivered to stockholders and in press releases. In addition, theCompany’s representatives may from time to time make oral forward-looking statements. In certain cases, you may identify forward looking-statements bywords 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 shouldalso be considered forward-looking statements. These forward-looking statements are based on the Company’s current expectations, assumptions, estimatesand projections about its business and industry, and involve risks, uncertainties and other factors that may cause actual events to be materially different fromthose expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks described under Item1A 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. TheCompany is under no obligation to (and expressly disclaims any such obligation to) update any of the information in any forward-looking statement if suchforward-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 provisionof healthcare services in the United States. The Company’s NET Services segment, which primarily operates under the brands LogistiCare and Circulation, isthe largest manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations (“MCOs”) in theUnited States. On September 21, 2018, we completed the acquisition of Circulation, Inc. (“Circulation”), which offers a full suite of logistics solutions tomanage NET programs across all areas of healthcare, powered by its HIPAA-compliant digital platform. Circulation’s technology expands LogistiCare’scapabilities 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”), anationwide 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 anetwork of community-based clinicians, and a fleet of mobile health clinics with advanced diagnostics capabilities. On October 19, 2016, affiliates of FrazierHealthcare Partners purchased a controlling equity interest in Matrix, with the Company retaining a non-controlling equity interest (the “MatrixTransaction”). 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 anorganizational 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 benamed The Providence Service Corporation and be listed on The NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “PRSC”. TheOrganizational Consolidation process involves transferring all job responsibilities previously performed by employees of the3holding company to LogistiCare and closing the current corporate offices in Stamford, Connecticut and Tucson, Arizona. The Organizational Consolidationis 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 (“WDServices”) segment to Advanced Personnel Management Global Pty Ltd of Australia (“APM”) and APM UK Holdings Limited, an affiliate of APM, except forthe segment’s employment services operations in Saudi Arabia (the “WD Services Sale”). Our contractual counterparties in Saudi Arabia, including an entityowned 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 deminimis amount. The sale was effective on July 17, 2018, after court approval. The financial results of WD Services prior to December 21, 2018 are presentedas discontinued operations. The Company is a Delaware corporation formed in 1996 and headquartered in Stamford, Connecticut. Business StrategiesThe Company’s mission is to provide effective and quality NET services and logistics and to create shareholder value by pursuing andimplementing six key strategies.Centers of Excellence Operations AlignmentIn January 2019, we reorganized the operational structure of our NET Services segment in order to centralize and reduce the layers in core functionsthat form the most significant elements of our cost base and drive performance for our clients and the members and patients they serve. Our operationalstructure now includes six Centers of Excellence (“COEs”): Transportation Network, Call Center Operations, Client Services, Technology, Growth andProcess Improvement. We implemented this operational strategy to enhance the visibility, flexibility and control we have over our operations. TheTransportation Network COE is focused on increases to capacity and improvements to quality and improvements designed to reduce cost and enhance themember experience. Within our Call Center Operations, activities such as contact center workflow standardization, cross skilling, and intensive operationsmanagement are aimed at improving employee productivity. We believe the new model for Client Services will bring a closer focus on local operations aswell as holistic approaches to our customers and client retention. Our Technology COE will be coordinated and focused on the support of operations and thesystematic roll out of the Circulation technology platform. Growth will continue to focus our sales, marketing and business development teams on thegeneration 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 andefficient operations. We believe this new structure makes our scale more nimble and provides us with a competitive advantage.Technology TransformationOn September 21, 2018, we completed the acquisition of Circulation to revolutionize our technology development capability, add to our executiveteam, extend our business model, and open new market opportunities. We believe that this technology allows us to reduce transportation as a barrier to careand 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 synergiesand enhance our operations, we plan to roll out Circulation’s technology as our core workflow platform over the next 36 months. We have 21 operationscenters 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 targetto convert all sites by the end of 2021. Technology roll outs include a substantial amount of change management and will require careful risk mitigationpolicies to ensure smooth transitions. Our change management process is a core strength deeply embedded in our organization and will support a majorchange in the way we operate today, driving significant efficiencies and enhancing the member experience benefits to our clients.Client and Member SatisfactionTransportation related to care is one of the most impactful experiences contributing to our clients’ members’ and patients’ satisfaction during theircare encounter. At the core of our operational and technology strategies is a focus on driving client and member satisfaction. Our COEs’ operational structureallows us to develop locally tailored network solutions with a higher level of visibility. Greater access to real time information, enabled through ourtechnology, provides us the ability to shorten cycle times to identify and resolve client and member issues. We expect our clients to begin to realize benefitsin the near term from our new organizational model and roll out of the Circulation technology platform.4Organic GrowthAcross the healthcare market, we see an increasing understanding of the benefit of removing transportation as a barrier to care and a way to improveother 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, marketingand 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 aswe serve more and more healthcare constituencies within a geography.Inorganic GrowthWe 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. Ouracquisition 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 trackrecord, we believe we are a natural consolidator.Smart Capital AllocationThe WD Services sale was a significant milestone in our strategy to focus our capital allocation priorities on the opportunities available to our NETServices segment. The NET Services segment has historically generated positive cash flows and our strong balance sheet provides us with optionality withrespect 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-outof the Circulation technology to enhance client and member experience and drive operational efficiency. We will also continue to assess the opportunitiesfor 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 ofColumbia. As of December 31, 2018, approximately 24.5 million individuals were eligible to receive our transportation services, and during 2018, NETServices 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 thecoordination 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 servicesenable 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 topursue independent living in their homes rather than in more expensive institutional care settings. In addition, studies have shown that missed medicalappointments lessens patient compliance with clinical guidelines and leads to complications and expensive medical services. Through provider access tomedical transportation, NET Services can save state Medicaid programs and MCOs significant amounts of money when used as part of a care managementstrategy for individuals with chronic illness. We believe we are uniquely positioned to partner with NET customers to provide these savings while improvingthe 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 amultifaceted network of subcontracted transportation providers. Our technology platform is purpose-built for the unique needs of our industry and is highlyscalable, capable of supporting substantial growth in our clients’ current and future membership base. In addition, our technology platform efficientlyprovides a broad interconnectivity among NET end-users, NET customers, and our network of transportation providers. We believe this technologicalcapability and our industry experience uniquely position us as a future focal point in the evolving healthcare industry to introduce valuable populationinsights. In 2016 and 2017, we introduced service offerings and new technological features for NET end-users to improve service levels, lower costs and buildthe foundation for additional data analytics capabilities. In 2018, we acquired Circulation to provide additional technological improvements through theirdigital transportation platform. Circulation’s technology allows for on-demand ride scheduling, eligibility assessment, benefits management, ride assignmentand dispatch, real time ride tracking, network management and analytics. 5To fulfill the transportation needs of NET end-users, we apply our proprietary technology platform to an extensive network of approximately 4,500transportation 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, mileagereimbursement programs, taxis and county-based emergency medical service providers. To promote safety, quality, and compliance, our in-networktransportation 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 thatour transportation services are provided in compliance with Medicaid and Medicare program rules and remediate issues that are identified. Compliancecontrols include ongoing monitoring, auditing and remediation efforts, such as validating NET end-user eligibility for the requested date of service andemploying a series of gatekeeping questions to verify that the treatment type is covered and the appropriate mode of transportation is assigned. We alsoconduct post-trip confirmations of attendance directly with the healthcare providers for certain repetitive trips and we employ field monitors to inspecttransportation provider vehicles and observe some transports in real time. Our claims validation process generally limits payment to trips that are properlydocumented, have been authorized in advance, and are billed at the pre-trip estimated amount. Our claims process is increasingly digital, which providesmore protection to member protected health information and reduces the impact on the environment. Transportation providers are able to submit their billsand 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 and2016, 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 yearsended 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 untilterminated by either party upon reasonable notice (as determined in accordance with the contract), and allow for regular price adjustments based uponutilization and transportation cost. As of December 31, 2018, 13.2% of NET Services revenue was generated under state Medicaid contracts that are subject torenewal 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 coveredhealthcare related transportation requirements of a specific population based on per-member per-month fees for the number of members in the customer’sprogram. 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 additionalpayments may be due to the Company, after each reconciliation period, based on a reconciliation of actual utilization and cost compared to the prepaymentmade. 20.8% of NET Services’ revenue was generated under other types of fee arrangements, including administrative services only, fee for service and costplus (collectively “FFS”) and flat fee contracts, under which fees are generated based upon billing rates for specific services or defined membershippopulations. Seasonality. While revenue is generally fixed, primarily as a result of the capitated nature of the majority of our contracts, service expense variesbased on the utilization of our services. The quarterly operating income and cash flows of NET Services normally fluctuate as a result of seasonal variationsin 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 asMedical Transportation Management, Southeastrans, Veyo, and Access2Care, as well as local and regional providers. Most local competitors seek to wincontracts for specific counties or small geographic territories whereas we and other larger competitors seek to win contracts for an entire state or large regionalarea. We compete based upon a number of factors, including our nationwide network, technical expertise, experience, service capability, service quality, andprice.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 controllingequity interest in Matrix, are party to the Second Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”) of MercuryParent, LLC, the company through which the parties hold their equity interests in Matrix. The Operating Agreement sets forth certain terms and conditionsregarding the ownership by the Company6and Frazier Subscriber of interests in Mercury Parent and their indirect ownership of common stock of Matrix, and provides for, among other things, certainliquidity 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 financialresults of Matrix were included in our Health Assessment Services (“HA Services”) segment. The Company’s proportionate share of Matrix’s net assets andfinancial results for the period following the closing of the Matrix Transaction are presented using the equity method. The assets, liabilities and financialresults of Matrix for the period prior to the closing of the Matrix Transaction are presented within discontinued operations. For additional informationregarding 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-basedclinicians and a fleet of mobile health clinics with advanced diagnostics capabilities. As of December 31, 2018, Matrix utilized a national network ofapproximately 3,500 clinical providers, including 1,800 nurse practitioners (“NPs”), located across 48 states, to provide its services primarily to members ofMedicare 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 clinicalprovider network through its acquisition of LP Health Services, a provider of quality and wellness visits on behalf of Medicaid/Duals managed care plansacross 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 clinicswhich offer preventative health assessment and advanced diagnostic testing services, including laboratory, ultrasound, EKG and mammography testing, for apurchase price of $155 million. Although to date the results of HealthFair have been below our expectations, we still believe the combination of the twoorganizations 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 andmedical risks and help the MA plans improve the accuracy of such information. Matrix also operates a care management offering which provides additionaldata analytics and chronic care management services. Matrix’s services are dependent upon its technology platform which integrates the clinical provider network, operations infrastructure, call centersand clients. Matrix’s platform is designed for the unique needs of its industry, is highly scalable and can support substantial growth. We believe Matrix’snetwork and platform position Matrix as a future focal point in the evolving healthcare industry in the introduction of both additional population insightsand care management services. With data provided by its health plan clients, Matrix utilizes analytics to determine which members it can most effectivelylower costs and improve outcomes through face-to-face engagements with clinicians. Each program is customized and is served by a comprehensive team ofcase 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 plansand 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 fivecustomers 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 arenot guaranteed under contracts and customers may choose to utilize other third party providers or in-source capabilities. A significant customer has indicatedit 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 isdriven 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 manysmaller 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 goodrelationships with our employees. 7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 theirbusinesses. Our Healthcare Segments must also comply with state and local licensing requirements, state and federal requirements for participation inMedicare and Medicaid, requirements for contracting with MA plans, and contractual requirements imposed upon them by the federal, state and localagencies and third-party commercial customers to which they provide services. Failure to follow the rules and requirements of these programs cansignificantly 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 federalprivacy and security Laws that govern the healthcare industry. State Laws primarily pertain to the licensure of certain categories of healthcare professionalsand 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 Lawspertaining to fraud, waste and abuse, privacy and security Laws, and the state’s regulation of its Medicaid program. Federal and state regulatory laws that mayaffect 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 andcode set regulations and guidance, along with evolving state Laws protecting patient privacy and requiring notifications of unauthorizedaccess 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 theoperation of MA plans, such as reimbursement rates, risk adjustment and data collection methodologies, adjustments to quality managementmeasurements 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 privatepayors, our Healthcare Segments’ exclusion from participation in federal healthcare payor programs, or the loss of our segments’ license to conduct businesswithin 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 provideinformation to such segments’ customers that results in reimbursement by a federal healthcare payor program to such segments or to them. The principalfederal Laws that affect our Healthcare Segments’ businesses include those that prohibit the filing of false or improper claims or other data with federalhealthcare 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 HealthcareSegments 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 falserecord 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 madedirectly 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 willreimburse the contractor or grantee. Liability can be incurred for submitting (or causing another to submit) false claims with actual knowledge or forsubmitting false claims with reckless disregard or deliberate ignorance. Liability can also be incurred for knowingly making or using a false record orstatement to receive payment from the federal government or for knowingly and improperly avoiding or decreasing an obligation to pay or transmit money orproperty to the government. Consequently, a provider need not take an affirmative action to conceal or avoid an obligation to the government, but the mereretention of an overpayment from the government could lead to potential liability under the False Claims Act. 8Many states also have similar false claims statutes. In addition, healthcare fraud is a priority of the U.S. Department of Justice (“DOJ”), theDepartment of Health and Human Services (“DHHS”), its program integrity contractors and its Office of Inspector General, the Federal Bureau of Investigationand 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 thegovernment (including damages and penalties in addition to the return of reimbursements previously collected) and could be excluded from participating infederal healthcare programs or providing services to entities which contract with those programs. Although our Healthcare Segments monitor their billingpractices 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 mannerconsistent with a court or an agency’s interpretation. While the criminal statutes generally are reserved for instances evidencing fraudulent intent, the civiland administrative penalty statutes are being applied by the federal government in an increasingly broad range of circumstances. Examples of the types ofactivities 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, thefederal government takes the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant should haveknown that the services were unnecessary. The federal government also takes the position that claiming reimbursement for services that are substandard is aviolation of these statutes if the claimant should have known that the care was substandard. Criminal penalties also are available even in the case of claimsfiled with private insurers if the federal government shows that the claims constitute mail fraud or wire fraud or violate any of the federal criminal healthcarefraud statutes. State Medicaid agencies and state Attorneys General also have authority to seek criminal or civil sanctions for fraud and abuse violations. Inaddition, private insurers may bring actions under state false claim laws. In certain circumstances, federal and state laws authorize private whistleblowers tobring false claim or “qui tam” suits on behalf of the government against providers and reward the whistleblower with a portion of any final recovery. Inaddition, the federal government has engaged a number of private audit organizations to assist it in tracking and recovering claims for healthcare servicesthat may have been improperly submitted. Governmental investigations and whistleblower “qui tam” suits against healthcare companies have increased significantly in recent years, and haveresulted in substantial penalties and fines and exclusions of persons and entities from participating in government healthcare programs. For more informationon the risks related to a failure to comply with applicable government coding and billing rules, see “Risk Factors—Regulatory Risks—Our HealthcareSegments could be subject to actions for false claims or recoupment of funds pursuant to certain audits if they do not comply with government coding andbilling 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 transactionssuch 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 standardsand 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 enforcementprovisions currently applicable to the healthcare privacy regulations to other HIPAA standards, including security, transactions and the appropriate use ofservice code sets. The Health Information Technology for Economic and Clinical Health Act (“HITECH”), enacted as part of the American Recovery andReinvestment Act of 2009, extends certain of HIPAA’s obligations to parties providing services to healthcare entities covered by HIPAA known as “businessassociates,” imposes new notice of privacy breach reporting obligations, extends enforcement powers to state Attorneys General and amends the HIPAAprivacy and security laws to strengthen the civil and criminal enforcement of HIPAA. HITECH establishes four categories of violations that reflect increasinglevels of culpability, four corresponding tiers of penalty amounts that significantly increase the minimum penalty amount for each violation, and a maximumpenalty amount of $1.5 million for all violations of an identical provision. With the additional HIPAA enforcement power under HITECH, the Office for CivilRights of the DHHS and states are increasing their investigations and enforcement of HIPAA compliance. Our Healthcare Segments have taken steps to ensurecompliance with HIPAA and we are monitoring compliance on an ongoing basis. 9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 bedeemed to be “business associates” for HIPAA rule purposes of such covered entities. Our Healthcare Segments monitor their compliance obligations underHIPAA as modified by HITECH, and implement operational and systems changes, associate training and education, conduct risk assessments and allocateresources as needed. Any noncompliance with HIPAA requirements could expose such segments to the criminal and increased civil penalties provided underHITECH 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 ofvalue (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 bemade by Medicare, Medicaid or certain other federal healthcare programs; or the ordering, purchasing, leasing, or arranging for, or recommending thepurchase, 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 thatthe 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 fideinvestment interests in a healthcare provider may be questioned under the Anti-Kickback Statute if the government concludes that the opportunity to investwas 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 againstAnti-Kickback Statute allegations. Failure of an arrangement to satisfy all of the requirements of a particular safe harbor does not mean that the arrangementis 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 reachreimbursement 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 theirclients would be subject to civil and criminal penalties, and these segments’ arrangements would not be legally enforceable, which could materially andadversely 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 applicablebribery, 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 tohealthcare 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 inwhich 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 requestby 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. Suchsegments cannot provide assurance that future regulatory changes will not result in other services they provide becoming subject to the Stark Law’sownership, 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 thatare intended to induce referrals of clients. Moreover, many states where such segments operate10have laws similar to the Stark Law prohibiting physician self-referrals. While our Healthcare Segments believe that they are operating in compliance with theStark 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 AffordableCare 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-reachingand 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 oversightprovisions. 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 fewmonths following approval to ten years. Due to the complexity of the ACA, it is likely that additional legislation will be considered and enacted. The ACArequires the promulgation of regulations that will likely have significant effects on the healthcare industry and third-party payors. Thus, the healthcareindustry and our operations may be subjected to significant new statutory and regulatory requirements and contractual terms and conditions, andconsequently 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-KickbackStatute trigger false claims liability. In addition, the ACA lessened the intent requirements under the Anti-Kickback Statute to provide that a person mayviolate the statute without knowledge or specific intent. The ACA also provided new funding and expanded powers to investigate fraud, including throughexpansion of the Medicare Recovery Audit Contractor (“RAC”) program to Medicare Parts C and D and Medicaid and authorizing the suspension ofMedicare and Medicaid payments to a provider of services pending an investigation of a credible allegation of fraud. Finally, the legislation createdenhanced 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 thegovernment’s implementation of the ACA minimizes the burden on impacted parties (such as individuals and states). The underlying intent of the executiveorder was to take the first steps to repeal and replace the ACA. The executive order specifically instructed agencies to “waive, defer, grant exemptions from, ordelay implementation of provisions” that place a “fiscal burden on any State” or that impose a “cost, fee, tax, penalty, or regulatory burden” on stakeholdersincluding patients, providers, and insurers. The order stated that any changes should be made only to the extent “permitted by law” and should comply withthe law governing administrative rule-making. The executive order did not, however, provide specifics on next steps or provisions that would be reexaminednor was it clear how the executive branch would be reconciled with Republican congressional efforts to repeal and replace the ACA or what portions of theACA may continue in any replacement legislation. There are multiple pending legislative proposals to amend the ACA which, among other effects, couldrepeal all or parts of the ACA without replacing its extension of coverage to expansion populations. In addition, there are pending legislative proposals tomaterially restructure Medicaid and other government health care programs and there is litigation challenging, amongst other claims, the constitutionality ofthe 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 asunconstitutional. The judge ruled in favor of the plaintiffs by determining that the ACA’s individual mandate is no longer a tax and is therefore anunconstitutional 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 Columbiaintervened as defendants in Texas v. United States to proffer a defense of the constitutionality of the ACA. The DOJ declined to defend the ACA onconstitutional grounds. The intervenor defendant states have announced they will appeal the District Court’s decision to the Fifth Circuit Court ofAppeals. 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 eliminatecertain non-emergency medical transportation services provided by NET Services as a required Medicaid benefit. A similar proposal was made in 2018 by thePresident of the United States in a federal budget proposal. If additional privatization initiatives are not proposed or enacted, or if previously enactedprivatization initiatives are challenged, repealed or invalidated, there could be a material adverse impact on our segments’ operating results. 11Surveys and Audits Our Healthcare Segments’ programs are subject to periodic surveys by government authorities or their contractors to ensure compliance with variousrequirements. Regulators conducting periodic surveys often provide reports containing statements of deficiencies for alleged failures to comply with variousregulatory requirements. In most cases, if a deficiency finding is made by a reviewing agency, our segments will work with the reviewing agency to agreeupon the steps to be taken to bring our program into compliance with applicable regulatory requirements. In some cases, however, an agency may take anumber 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 requirementsand state licensure requirements, failure to comply with these requirements could have a material adverse impact on such segments’ businesses and theirability 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 ourHealthcare Segments’ claims or other audits in conjunction with their obligations to comply with the requirements of Medicare or Medicaid. In order toconduct these reviews, payors request documentation from our Healthcare Segments and then review that documentation to determine compliance withapplicable rules and regulations, including the eligibility of clients to receive benefits, the appropriateness of the care provided to those clients, and thedocumentation of that care. Any determination that such segments have not complied with applicable rules and regulations could result in adjustment ofpayments 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,” whichdefinition 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 theiroperations 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 ourHealthcare Segments’ businesses violate these laws, it may seek to have such segments discontinue or restructure those portions of their operations or subjectthem to increased costs, penalties, fines, certain license requirements or other measures. Any determination that such segments have acted improperly in thisregard 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 theirprofessions. For example, our mid-level practitioners (e.g., NPs) are subject to state laws requiring physician supervision and state laws governing mid-levelscope 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 restrictedby the enactment of new state laws governing mid-level scope of practice and by state agency interpretations and enforcement of such existing laws. Inaddition, services rendered by mid-level practitioners may not be reimbursed by payors at the same rates as payors may reimburse physicians for the sameservices. Lastly, professionals who are eligible to participate in Medicare and Medicaid as individual providers must not have been excluded fromparticipation in government programs at any time. Our Healthcare Segments’ ability to provide services depends upon the ability of their personnel to meetindividual licensure and other requirements and maintain such licensure in good standing.12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 theExchange Act, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the SEC. Copies are alsoavailable, 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 Form10-K or any other report we file with or furnish to the SEC. 13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 AnnualReport on Form 10-K, including our consolidated financial statements and related notes. The risks described below are not the only ones facing us. Theoccurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial couldmaterially 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 onsatisfactory terms, if at all. Disruptions to, the early expiration of or the failure to renew our contracts could have a material adverse impact on ourfinancial 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 NETServices revenue for the year ended December 31, 2018, have terms ranging from three to five years and are typically subject to a competitive biddingprocess 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 cannotanticipate 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 contractsrepresented 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 withoutpenalty to the payor, either immediately or upon the expiration of a short notice period in the event that, among other reasons, government appropriationssupporting 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 acontract with us. If we are unable to retain or renew our contracts, or replace lost contracts, on satisfactory terms our financial conditions and results ofoperations could be materially adversely affected. While we pursue new contract awards and also undertake efficiency measures, there can be no assurancethat 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 thisprocess 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 entailsresponding to a government request for proposals (“RFP”). To propose effectively, we must accurately estimate our cost structure for servicing a proposedcontract, the time required to establish operations and submit the most attractive proposal with respect to both technical and price specifications. We mustalso assemble and submit a large volume of information within rigid and often short timetables. Our ability to respond successfully to RFPs will greatly affectour business. If we misinterpret bid requirements as to performance criteria or do not accurately estimate performance costs in a binding bid for an RFP, wewill 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 maybe 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 performanceand 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 maintaincurrent contracts or obtain new contracts. The termination of a contract for cause could, for instance, subject us to liabilities for excess costs incurred by apayor in obtaining similar services from another source. In addition, our contracts require us to indemnify payors for our failure to meet standards of care, andsome 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 the14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 ouractual use is less than the minimum commitment for a specified period, we may be subject to significant expense, without the benefit of correspondingrevenue.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 materialadverse impact on our operating results. Our growth strategy involves the evaluation of potential entry into complementary markets and service lines through acquisition, particularly withopportunities that may leverage the advantages inherent in our large-scale technology-enabled operations and networks. We have made acquisitions andanticipate that we will continue to consider and pursue strategic acquisition opportunities the success of which depends in part on our ability to integrate anacquired company into our business operations. For example, we completed the acquisition of Circulation in September 2018 and will utilize Circulation’stechnology 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 thetechnology evaluation, we decided to terminate the development of our legacy LCAD NextGen technology (“NextGen”), resulting in an impairment chargein the fourth quarter of 2018 of $13.5 million. While preliminary implementation is on track, the work to deploy the Circulation technology platform isongoing, and subject to the scalability of Circulation’s technology platform to process similar levels of transactions as LogistiCare. In addition, thedigitization of claims processing on the Circulation platform may have unintended financial impacts related to claim costs and working capital. To theextent we are unable to successfully integrate the Circulation acquisition, our results of operations may be adversely affected and anticipated synergies maynot be realized. Integration of any acquired companies will place significant demands on our management, systems, internal controls and financial andphysical resources. This could require us to incur significant expense for, among other things, hiring additional qualified personnel, retaining professionals toassist in developing the appropriate control systems and expanding our information technology infrastructure. The nature of our business is such thatqualified management personnel can be difficult to find. Our inability to manage growth effectively could have a material adverse effect on our financialresults. There can be no assurance that the companies acquired will generate income or incur expenses at the historical or projected levels on which webased our acquisition decisions, that we will be able to maintain or renew the acquired companies’ contracts, that we will be able to realize operating andeconomic efficiencies upon integration of acquired companies or that the acquisitions will not adversely affect our results of operations or financialcondition. We expect to continually review opportunities to acquire other businesses that would complement our current services, expand our markets orotherwise offer prospects for growth. In connection with our acquisition strategy, we could issue stock that would dilute existing stockholders’ percentageownership, or we could incur or assume substantial debt or contingent liabilities. Acquisitions involve numerous risks, including, but not limited to, thefollowing:•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 ourinability to do so could disrupt our operations and adversely affect our business. Our failure to address these risks or other problems encountered inconnection with past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incurunanticipated 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 ourOrganizational Consolidation, which is expected to be completed in the middle of 2019. While we expect the15Organizational Consolidation to generate annual savings upon completion, implementation of the process will negatively impact earnings. There can be noassurance 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 savingsrequire the deployment of technology and substantial changes to existing business processes. There can be no assurance as to whether any other strategicinitiatives will be adopted, and the outcome of any current or future strategic initiatives is uncertain, including the roll out of the Circulation technologyplatform 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 relianceon our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potentiallosses 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 todirect the activities that most significantly impact such business’ economic performance. Our future growth may depend, in part, on future similararrangements, any of which could be material to our financial condition and results of operations. These arrangements involve risks not present with respectto our wholly-owned subsidiaries, which may negatively impact our financial condition and results of operations or make the arrangements less successfulthan 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 thatrequire us to cede or share decision-making authority over major decisions affecting the ownership or operation of the joint venture andany property owned by the joint venture, such as the sale or financing of the business or the making of additional capital contributions forthe 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 venturepartners;•our joint venture partners may become bankrupt or fail to fund their share of required capital contributions, which could adversely impactthe 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 theownership, 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 anddirectors, 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 thefunding, financial viability or our relationships with these payors could have a material adverse impact on our financial condition and results ofoperations. We generate a significant amount of our revenue from a few payors under a small number of contracts. For example, for the years ended December31, 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 yearsended 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 theyears ended December 31, 2018, 2017 and 2016, respectively. The loss of, reduction in amounts generated by, or changes in methods or regulationsgoverning payments for our services under these contracts could have a material adverse impact on our revenue and results of operations. In addition, anyconsolidation 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 theremainder generated through FFS and flat fee contracts. Under most of NET Services’ capitated contracts, we assume the responsibility of managing the needsof 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 experiencein the state or with similar services, the medically covered programs outlined in the contract, identified populations to be serviced, estimated volume,16estimated transportation provider rates and availability of mass transit. The amount of the fixed per-member, monthly fee is determined in the biddingprocess, 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, thecontract may be less profitable than anticipated, or may not be profitable at all. Under our FFS contracts, we receive fees based on our interactions withgovernment-sponsored clients. To earn a profit on these contracts, we must accurately estimate costs incurred in providing services. Our risk relating to thesecontracts 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 costbasis and therefore, if we fail to estimate our costs accurately, we may experience reduced margins or losses on these contracts. Revenue under certaincontracts may be adjusted prospectively if client volumes are below expectations. If we are unable to adjust our costs accordingly, our profitability may benegatively affected. In addition, certain contracts with state Medicaid agencies are renewable or extended at the state’s option without an adjustment topricing terms. If such renewed contracts require us to incur higher costs, including inflation or regulatory changes, than originally anticipated, our results ofoperations 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 includeleasing office space, purchasing office equipment, instituting information technology systems, development of supply chains and hiring personnel. As aresult, in certain contracts where the payor does not fund program start-up costs, we may be required to make significant investments before receiving anyrelated 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 thepayor correctly or to collect our fee in a timely manner. Such amounts may exceed our available cash, and any resulting liquidity shortages may requireadditional financing, which may not be available on satisfactory terms, or at all. This could have a material adverse impact on our ongoing operations andour 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 ouroperations and cash flows, and could adversely affect our ability to continue to purchase appropriate liability insurance. We can be subject to claims fornegligence or intentional misconduct (in addition to professional liability type claims) by an employee or a third party we engage to assist with the provisionof services, including but not limited to claims arising out of accidents involving vehicle collisions, CHAs performed by Matrix, and various claims thatcould result from employees or contracted third parties driving to or from interactions with clients or while providing direct client services. We can be subjectto employee-related claims such as wrongful discharge, discrimination or a violation of equal employment laws and permitting issues. While we attempt toinsure against these types of claims, damages exceeding our insurance limits or outside our insurance coverage, such as a claim for fraud, certain wage andhour 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 experiencedprofessionals who possess the skills and experience necessary to deliver high-quality services to our clients, with the continued contributions of our seniormanagement being especially critical to our success. Our objective of providing the highest quality of service to our clients is a significant considerationwhen we evaluate the education, experience and qualifications of potential candidates for employment as direct care and administrative staff. A portion ofour staff is professionals with requisite educational backgrounds and professional certifications. These employees are in great demand and are likely toremain 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, ourability to offer competitive wages, benefits and professional growth opportunities. While we have established programs to attract new employees and provideincentives to retain existing employees, particularly our senior management, we cannot assure you that we will be able to attract new employees or retain theservices of our senior management or any other key employees in the future. Some of the companies with which we compete for experienced personnel mayhave greater financial, technical, political and marketing resources, name recognition and a larger number of clients and payors than we do, which may provemore attractive to employment candidates. The inability to attract and retain experienced personnel could have a material adverse effect on our business. 17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 acrossLogistiCare’s existing operations, and competition for skilled information technology professionals can be intense. Our success depends on our ability torecruit, 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 andsmooth transitions involving senior management, including the appointment of a permanent chief executive officer for the Company and the transition ofseveral key management positions, resulting from the Organizational Consolidation, our ability to execute short and long-term strategic, financial andoperating 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 acontrolling 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, includingavailability of alternative opportunities to deploy capital or otherwise maximize shareholder value as well as other strategic considerations. A divestiture orbusiness termination could result in difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention, thedisruption of our business and the potential loss of key employees and customers. A divestiture or business termination may be subject to the satisfaction ofpre-closing conditions as well as to obtaining necessary regulatory approvals, which, if not satisfied or obtained, may prevent us from completing thedisposition or business termination, whether or not the disposition or business termination has been publicly announced. A divestiture or businesstermination 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 assetscould 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 theyrelate to creation, ownership and rights in intellectual property and compliance with laws and contractual requirements. However, the liability of the formerowners is limited under the relevant acquisition agreements, and certain sellers may be unable to meet their indemnification responsibilities. Similarly, thepurchasers of our divested operations may from time to time agree to indemnify us for operations of such businesses after the closing. We cannot be assuredthat any of these indemnification provisions will fully protect us, and as a result we may face unexpected liabilities that adversely affect our consolidatedresults 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 theHuman Services Sale in 2015. To the extent we choose to divest other operations of our businesses in the future, we expect to provide certainindemnifications in connection with these divestitures. We may face liabilities in connection with these current or future indemnification obligations thatmay 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 withus, including local not-for-profit organizations and community-based organizations, larger companies, organizations that currently provide or may begin toprovide similar NET management services (including transportation network companies such as Uber and Lyft) and CHA providers. Some of these companiesmay have greater financial, technical, political, marketing, name recognition and other resources and a larger number of clients or payors than we do. Inaddition, 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 ourcustomers change and evolve regularly. Accordingly, our success depends on our ability to develop services that address these changing needs and toprovide technology needed to deliver these services on a cost-effective basis. Our competitors may better utilize technology to change the way services inour industry are designed and delivered and they may be able to provide our customers with different or greater capabilities than we can provide, includingbetter contract terms, technical18qualifications, price and availability of qualified professional personnel. In addition, new or disruptive technologies and methodologies by our competitorsmay make our services uncompetitive.In conjunction with our ongoing efforts to improve cost-efficiency and the customer experience, in September 2018, we completed our acquisitionof Circulation. We incurred costs associated with such acquisition and will also incur costs to implement the Circulation technology across LogistiCare’sexisting 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. Increasedcompetition 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 amaterial adverse effect on our operating results. Our business may also be adversely affected by the consolidation of competitors, which may result inincreased pricing pressure or negotiating leverage with payors, or by the provision of our services by payors or clients directly, including through theacquisition 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 sufficientinfrastructure and systems to support growth and business processes. We provide services to individuals, including services that require us to maintainsensitive and personal client information, including information relating to their health, identification numbers and other identifying data. Therefore, ourinformation technology systems store client information protected by numerous federal, state and foreign regulations. We also rely on our informationtechnology 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-partystakeholders, often connected via the Internet. In addition, certain of our services or information related to our services are carried out or hosted within ourcustomers’ IT systems, and any failure or weaknesses in their IT systems may negatively impact our ability to deliver the services, for which we may notreceive relief from contractual performance obligations or compensation for services provided. As a result of the data we maintain and third-party access, weare 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, ourbusiness or financial results could be negatively impacted. Furthermore, computer hackers and data thieves are increasingly sophisticated and operate largescale and complex automated attacks and our information technology systems may be vulnerable to material security breaches (including the access to oracquisition of customer, employee or other confidential data), cyber-based attacks or other material system failures. Because the techniques used to obtainunauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to implement adequatepreventative measures sufficient to prevent a breach of our systems and protect sensitive data. Any breach of our data security could result in an unauthorizedrelease 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, detectand respond in a timely manner to a major breach of our data security or to other cybersecurity threats could result in system disruption, business continuityissues or compromised data integrity. These events or any other failure to safeguard personal data could give rise to unwanted media attention, damage ourreputation, damage our customer relationships and result in lost sales, fines or lawsuits. We may also be required to expend significant capital and otherresources to protect against or respond to or alleviate problems caused by a security breach. If we are unable to prevent material failures, our operations maybe impacted, and we may suffer other negative consequences such as reputational damage, litigation, remediation costs, a requirement not to operate ourbusiness 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 materialadverse 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, phonenumbers, email addresses, identification numbers and payment account information. Malicious cyber- attacks to gain access to personal information affectmany companies across various industries, including ours. Pursuant to federal and state laws, various government agencies have established rules protectingthe privacy and security of personal information. In addition, most states have enacted laws, which vary significantly from jurisdiction to jurisdiction, tosafeguard the privacy and security of personal information. An increasing number of states require that customers be notified if a security breach results in theinappropriate disclosure of personally identifiable customer information. Any compromise of the security of our systems that results in the disclosure ofpersonally identifiable customer or employee information or inadvertent disclosure of any clients’ personal information could damage our reputation, deterpeople from using our services, expose us to litigation, increase regulatory19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 otherthings, attempt to gain unauthorized access to our customers’ accounts, which could have a material adverse effect on our reputation, business and results ofoperations or financial condition.Failure to maintain or to develop further reliable, efficient and secure information technology systems would be disruptive to our operations and diminishour 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 undergoperiodic modifications and improvements without interruptions or untimely delays in service. Additionally, our ability to integrate our systems with those ofour clients is critical to our success. Our information systems rely on the commitment of significant financial and managerial resources to maintain andenhance existing systems as well as develop and create new systems to keep pace with continuing changes in information processing technology or evolvingindustry and regulatory requirements. However, we still rely on manual processes and procedures, including accounting, reporting and consolidationprocesses 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 operationsand could place us at a competitive disadvantage. If we are unable to implement appropriate systems, procedures and controls, we may not be able tosuccessfully offer our services and grow our business and account for transactions in an appropriate and timely manner, which could have an adverse effect onour 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 thesummer 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-livedassets to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets may be impaired. Factors that maynecessitate an impairment assessment include, among others, significant adverse changes in the extent or manner in which an asset is used, significantadverse 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 anasset. Where the presence or occurrence of those events indicates that an asset may be impaired, we assess its recoverability by determining whether thecarrying value of the asset exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assetsover 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 assetusing appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. If the fair value of those assets is less thancarrying value, we record an impairment loss equal to the excess of the carrying value over the estimated fair value. The use of different estimates orassumptions 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 theperiod in which an impairment is recognized, could result in a materially different impairment charge. For example, we recorded an asset impairment chargeof $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 respectivereporting unit. As a result of our growth, in part through acquisitions, goodwill and other intangible assets represent a significant portion of our assets. Forexample, goodwill generated in relation to the acquisition of Circulation was $40.0 million. We perform an analysis on our goodwill balances to test forimpairment on an annual basis. Interim impairment tests may also be required in advance of our annual impairment test if events occur or circumstanceschange 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 carryingvalue. Such circumstances could include but are not limited to: (1) loss of significant contracts, (2) a significant adverse change in legal factors or in theclimate 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 $23.0million, respectively. We continue to monitor the carrying value of these long-lived assets. If future20conditions are different from management’s estimates at the time of an acquisition or market conditions change subsequently, we may incur future charges forimpairment 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 negativelyimpact our business. We reinsured a substantial portion of our automobile, general liability, professional liability and workers’ compensation insurance policies throughMay 15, 2017. Upon renewal of the policies, we made the decision to no longer reinsure these risks, although we continue to resolve claims under thehistorical policy years. Through February 15, 2011, one of our subsidiaries also insured certain general liability, automobile liability, and automobilephysical damage coverage for independent third-party transportation providers. In the event that actual reinsured losses increase unexpectedly andsubstantially exceed actuarially determined estimated reinsured losses under the program, the aggregate of such losses could materially increase our liabilityand 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 actuallosses within our deductible limits increase unexpectedly and substantially exceed our expected losses, the aggregate of such losses could materially increaseour 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 ofinsurance coverage we include in our reinsurance and self-insurance programs, as well as the deductible limits within our traditional insurance programs. Anyincrease to these reinsurance and self-insurance programs or increases in deductible limits increases our risk exposure and therefore increases the risk of apossible 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 orprocure 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 orviolations 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 regulatoryor judicial interpretation of those laws. The Patient Protection and Affordable Care Act, as well as the anticipated attempts to repeal all or portions of thoselaws by the President and Congress, has also introduced some degree of regulatory uncertainty as the industry does not know how the changes it introducedor changes to it will affect many aspects of the industry. Medicare and Medicaid anti-fraud and abuse laws prohibit certain business practices andrelationships related to items and services reimbursable under Medicare, Medicaid and other governmental healthcare programs, including the payment orreceipt of remuneration to induce or arrange for referral of patients or recommendation for the provision of items or services covered by Medicare or Medicaidor any other federal or state healthcare program. Federal and state Laws prohibit the submission of false or fraudulent claims, including claims to obtainreimbursement under Medicare and Medicaid. Our Healthcare Segments have implemented compliance policies to help assure their compliance with theseregulations as they become effective; however, different interpretations or enforcement of these laws and regulations in the future could subject our practicesto allegations21of impropriety or illegality or could require such segments to make changes in their facilities, equipment, personnel, services or the manner in which theyconduct our business.Changes in budgetary priorities of the government entities that fund the services our Healthcare Segments provide could result in our segments’ loss ofcontracts 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 ofthese contracts are subject to legislative appropriations and state or national budget approval, as well as changes to potential eligibility for services. Theavailability of funding under NET Services’ contracts with state governments is dependent in part upon federal funding to states. Changes in Medicaidmethodology may further reduce the availability of federal funds to states in which our Healthcare Segments provide services. The President of the UnitedStates and Congress have proposed various changes to the Medicaid program, including considering converting the Medicaid program to a block grantformat or capping the federal contribution to state Medicaid programs to a fixed amount per beneficiary. CMS has invited states to submit requests forwaivers to CMS that would allow states to reduce or eliminate the NET benefit for some populations. In response, several states have asked for and receivedtemporary waivers of NET requirements for the Medicaid expansion or non-disabled adult population. In addition, in late 2018, DHHS published in theUnified Agenda its intention to revise the current regulations under which states are required to provide NET services for all Medicaid beneficiaries. Thestated goal of this proposed rule is to provide states with greater flexibility as part of the administration’s reform initiatives. It is possible that revisedregulations could be issued in 2019 or 2020 making it optional for the states to provide NET services to certain populations. Such changes, individually or inthe 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 Medicaidfederal matching funds. Provider assessment plans generate additional federal matching funds to the states for Medicaid reimbursement purposes, andimplementation of a provider assessment plan requires approval by CMS in order to qualify for federal matching funds. These plans usually take the form of abed tax or a quality assessment fee, which were historically required to be imposed uniformly across classes of providers within the state, except that suchtaxes 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 thefederal government’s support for those programs can affect the amount of funds available in the programs our Healthcare Segments support. Because fundingunder our Healthcare Segments’ contracts is dependent in part upon federal funding, such funding changes could have a significant effect upon suchsegments’ businesses. Currently, many of the U.S. states in which our segments operate are facing budgetary shortfalls or changes in budgetary priorities. While many ofthese states are dealing with budgetary concerns by shifting costs from institutional care to home and community based care such as we provide, there is noassurance 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 ofservices that we provide, or change in government contracting or funding policies could cause payors to terminate their contracts with our segments or reducetheir 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 withprivacy 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 regulationsissued 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 healthinformation 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 resourceswhich could negatively impact our segments’ results of operations. Further, the HIPAA regulations and state privacy laws expose our segments to increasedregulatory risk, as the penalties associated with a failure to comply or with information security breaches, even if unintentional, could have a material adverseeffect on our segments’ results of operations. 22Our Healthcare Segments could be subject to actions for false claims or recoupment of funds pursuant to certain audits if they do not comply withgovernment 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 criminalor 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 theserules could result in potential criminal or civil liability under the federal False Claims Act, under which extensive financial penalties can be imposed or undervarious state statutes which prohibit the submission of false claims for services covered. Compliance failure could further result in criminal liability undervarious federal and state criminal or civil statutes. Our segments may be subject to audits conducted by our clients or their proxies that may result inrecoupment 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, inturn, implicate our segments’ services. Our segments’ businesses could be adversely affected in the event such an audit results in negative findings andrecoupment 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 natureof the payment mechanism. Government entities may take the position that if a transport cannot be matched to a healthcare event, or is conductedinconsistently 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 andconfusing and they cannot assure that governmental investigators, private insurers or private whistleblowers will not challenge their practices. Such achallenge 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 andother 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 ofremuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or servicespayable by a federally funded healthcare program. Any of our Healthcare Segments’ financial relationships with healthcare providers will be potentiallyimplicated by this statute to the extent Medicare or Medicaid referrals are implicated. Violations of the Anti-Kickback Statute could result in substantial civilor criminal penalties, including criminal fines of up to $100,000 per violation, imprisonment of up to ten years, civil penalties under the Civil MonetaryPenalties 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 foreach claim submitted, plus three times the amounts paid for such claims and exclusion from participation in the Medicaid and Medicare programs. Any suchpenalties could have a significant negative effect on our Healthcare Segments’ operations. Furthermore, the exclusion, if applied to such segments, couldresult in significant reductions in our revenues, which could materially and adversely affect such segments’ businesses, financial condition and results oftheir 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-emergencytransportation services. The market for certain of our Healthcare Segments’ services depends largely on government sponsored programs. These programs can be modified oramended at any time. Moreover, part of our growth strategy includes aggressively pursuing opportunities created by government initiatives to privatize thedelivery of non-emergency transportation services. In 2017, legislation was proposed in the U.S. Congress, but not passed, which would reduce or eliminatecertain non-emergency medical transportation services provided by NET Services as a required Medicaid benefit. If additional privatization initiatives arenot proposed or enacted, or if previously enacted privatization initiatives are challenged, repealed or invalidated, there could be a material adverse impact onour 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 ofthe MA Program established by CMS. From time to time, CMS considers changes to regulatory guidelines23with respect to prospective CHAs or the risk adjusted payment system applicable to Matrix’s Medicare Advantage plan customers. CMS could adopt newrequirements 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 lawsgoverning the scope of practice of mid-level practitioners, or more restrictive interpretations of such laws, may restrict Matrix’s ability to provide servicesusing nurse practitioners. Any such implementation of additional regulations on the CHA industry by CMS or other regulatory bodies or further regulation ofmid-level practitioners could have a material adverse impact on Matrix’s revenues and margins, which could have a material adverse impact on ourconsolidated 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 significantloss of reimbursement revenue. Our Healthcare Segments may be subject to federal and state statutes and regulations banning payments for referrals of patients and referrals byphysicians to healthcare providers with whom the physicians have a financial relationship and billing for services provided pursuant to such referrals if anyoccur. Violation of these federal and state laws and regulations, to the extent applicable to our Healthcare Segments’ operations, may result in prohibition ofpayment for services rendered, loss of licenses, fines, criminal penalties and exclusion from Medicaid and Medicare programs. To the extent such segmentsdo maintain such financial relationships with physicians, they rely on certain exceptions to self-referral laws that they believe will be applicable to sucharrangements. 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 lawsuitsand other legal actions and liabilities that are not as frequently experienced by companies that do not provide government sponsored services. Companiesproviding government sponsored services can also become involved in public inquiries which can lead to negative media speculation or potentialcancellation or termination of contracts. Further, government contract awards are frequently challenged by the losing bidders leading to delays in contractstart 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 andaudits. 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 locallicensing requirements govern the services our segments provide, the credentials of staff, record keeping, treatment planning, client monitoring andsupervision 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 couldprevent them from providing services to clients in a given jurisdiction. Our Healthcare Segments’ contracts are subject to surveys or audit by their payors ortheir clients. Our segments are also subject to regulations that restrict their ability to contract directly with a government agency in certain situations. Suchrestrictions could affect our segments’ ability to contract with certain payors and clients, and could have a material adverse impact on our segments’ results ofoperations.Our Healthcare Segments’ contracts are subject to audit and modification by the payors with whom our Healthcare Segments contract, at their solediscretion. Our Healthcare Segments’ businesses depend on their ability to successfully perform under various government funded contracts. Under the terms ofthese contracts, payors, government agencies or their proxy contractors can review our segments’ compliance or performance, as well as our segments’ recordsand 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 ofprocurement 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 ofour 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.24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 foreigncountries, including specific states or provinces where we operate. Our total income tax provision is a function of applicable local tax rates and thegeographic mix of our income from continuing and discontinued operations before taxes, which is itself impacted by currency movements. Consequently, theisolated 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 andestimation is required in determining our annual income tax expense and in evaluating our tax positions and related matters. In the ordinary course of ourbusiness, there are many transactions and calculations for which the ultimate tax determinations are uncertain or otherwise subject to interpretation. Inaddition, we make judgments regarding the applicability of tax treaties and the appropriate application of transfer pricing regulations. In the event one taxingjurisdiction disagrees with another taxing jurisdiction with respect to the amount or applicability of a particular type of tax, or the amount or availability of aparticular type of tax refund or credit, we could experience temporary or permanent double taxation and increased professional fees to resolve such taxationmatters.Our determination of our income tax liability is always subject to review by applicable tax authorities, and we have been audited by variousjurisdictions in prior years. Although we believe our income tax estimates and related determinations are reasonable and appropriate, relevant taxingauthorities may disagree. The ultimate outcome of any such audits and reviews could be materially different from the estimates and determinations reflectedin our historical income tax provisions and accruals. Any adverse outcome of any such audit or review could have an adverse effect on our financialcondition 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 businessor to pursue our business strategies. The terms contained in the agreements that govern certain of our indebtedness, including our Amended and Restated Credit and GuarantyAgreement (as amended, supplemented, or modified, the “Credit Agreement”), and the agreements that govern any future indebtedness of ours, may include anumber of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to take actions that webelieve 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 maypreclude us from drawing from our senior secured credit facility (the “Credit Facility”) or allow the creditors to accelerate the related debt and may result inthe 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 therepayment 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 ofoperations.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 togenerate 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 offunds, including refinancing all or a portion of our existing or future debt,25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 beobtained on acceptable terms. If we are unable to obtain additional financing, we may (i) be unable to satisfy our obligations under our outstandingindebtedness, (ii) be unable to pursue future business opportunities or fund acquisitions, (iii) find it more difficult to fund future operating costs, taxpayments or general corporate expenditures and (iv) become vulnerable to adverse general economic, capital markets and industry conditions. Any of thesecircumstances 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, cashdividends and business expansion. Any existing and future indebtedness increases the risk that we may be unable to generate cash sufficient to pay amountsdue 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 ourbusiness 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 thefunds 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 regulationand 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 inhigher 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. Tosome extent, this is subject to prevailing economic and competitive conditions and to certain financial, business and other factors, many of which are beyondour control. Our business may not generate sufficient cash flow from operations to permit us to pay principal, premium, if any, or interest on our debtobligations. 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 forcedto reduce or delay capital expenditures, sell or curtail assets or operations, seek additional capital, or seek to restructure or refinance our indebtedness. If wemust 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 ofwhich 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 andcontinue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigationfollowing periods of market volatility. If we become involved in securities litigation, we could incur substantial costs, and our resources and the attention ofmanagement 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 paydividends or to meet any debt service obligations is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends orintercompany loans. We do not currently expect to declare or pay dividends on our Common Stock for the foreseeable future; however, to the extent that wedetermine 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 ofdividends. Further, the agreement governing our Credit Agreement significantly restricts the ability of our subsidiaries to pay dividends, make loans orotherwise transfer assets to us. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our CommonStock.If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and tradingvolume 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 ourbusiness. 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 couldcause 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 priceof our Common Stock to decline. As of February 22, 2019, we had 12,833,846 outstanding shares of Common Stock which are freely transferable withoutrestriction or further registration under the Securities Act, unless held by or purchased by our “affiliates” as that term is defined in Rule 144 under theSecurities Act. Shares of our Common Stock held by or purchased by our affiliates are restricted securities within the meaning of Rule 144 under theSecurities Act, but will be eligible for resale subject to applicable volume, means of sale, holding period and other limitations of Rule 144 under theSecurities 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 aregistration statement under the Securities Act relating to (i) 3,574,300 shares of Common Stock, consisting of 1,653,755 shares of Common Stock and1,920,545 shares of Common Stock issuable upon the conversion of shares of Preferred Stock and (ii) 765,916 shares of Preferred Stock, for the sale byColiseum 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 ourequity compensation plans and, as a result, all shares of Common Stock acquired upon exercise of stock options granted under our plans will also be freelytradable under the Securities Act, unless purchased by our affiliates. As of December 31, 2018, there were stock options outstanding to purchase a total of908,588 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 ofour 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 maintaincompliance with the obligations under our outstanding Preferred Stock which could have a material adverse effect on our future results of operations andour 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 PreferredStock 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 satisfyand manage our obligations under our outstanding Preferred Stock depends, in part, on our ability to generate cash flow and on overall financial marketconditions. Additionally, the terms of our Preferred Stock contain operating and financial covenants that limit management’s discretion with respect tocertain business matters. Among other things, these covenants, subject to certain limitations and exceptions, restrict our ability to incur additional debt, sellor otherwise dispose of our assets, make acquisitions, and merge or consolidate with other entities. As a result of these covenants and restrictions, we may belimited 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 governedby an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities thatwe 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 ourCommon Stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equitysecurities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing ornature 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 Stockand 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-OxleyAct of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect on ourfuture 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 apublicly listed company requires a significant commitment of additional resources and management oversight resulting in increased operating costs. Theserequirements also place additional demands on our finance and accounting staff and on our financial accounting and information systems. Other expensesassociated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increaseddirectors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a publiccompany, we are required, among other things, to define and expand the roles and the duties of our Board of Directors (“Board”) and its committees andinstitute 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 beadversely affected. Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependentupon individual data input or review and require significant management judgment. One or more of these elements may result in errors that may not bedetected and could result in a material misstatement of our consolidated financial statements. If a material misstatement occurs in the future, we may fail tomeet 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 ofwhich 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 maybe adversely affected.Our financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimatesand 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 waseffective for the Company beginning January 1, 2018, required a significant level of judgment and estimation. These estimates and judgments affect thereported amounts of our assets, liabilities, revenue and expenses, the amounts of charges accrued by us, and related disclosure of contingent assets andliabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and atthe 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 ofassets 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 pricecould decline. Anti-takeover provisions in our second amended and restated certificate of incorporation and amended and restated by-laws could discourage, delay orprevent 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 deemedto have anti-takeover effects, including provisions governing when and by whom special meetings of our stockholders may be called, and provisions thatmay discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. In addition, in the event of certainchange of control transactions, holders of Preferred Stock may be entitled under the governing certificate of designations to be paid both (i) the liquidationpreference per share then in effect plus certain unpaid dividends and (ii) a pro rata portion of the transaction consideration on an as-converted28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 Stockoffered 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 Stockif the provisions are viewed as discouraging takeover attempts in the future. Our second amended and restated certificate of incorporation and amended andrestated by-laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchmentthat 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 onappreciation 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 futureearnings, if any, to fund our growth, to develop our business, for working capital needs and for general corporate purposes. Therefore, you are not likely toreceive any dividends on your Common Stock for the foreseeable future and the success of an investment in shares of our Common Stock will depend uponany 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 whichstockholders 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. Thelease 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 wecan 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 certaintythe potential for or outcome of any future litigation. Regardless of the outcome of any particular litigation and the merits of any particular claim, litigationcan have a material adverse impact on our company due to, among other reasons, any injunctive relief granted which could inhibit our ability to operate ourbusiness, 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”) bythe relators Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging violations of the federal False Claims Act by presenting claimsfor payment to government healthcare programs knowing that the prerequisites for such claims to be paid had not been met. The Relators seek to recoverdamages, fees and costs under the federal False Claims Act including treble damages, civil penalties and attorneys’ fees. In addition, the Relators seekreinstatement to their jobs with the Mobile Care entities. None of the Relators was employed by LogistiCare. Prior to January 21, 2019, LogistiCare had noknowledge of the complaint. The federal government has declined to intervene against LogistiCare. The Company intends to defend the litigationvigorously 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 thattime 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 2000Index assuming an investment of $100 in each on December 31, 2013.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, ourability to pay dividends on our Common Stock is limited by the terms of our Credit Agreement and our Preferred Stock. The payment of future cashdividends, 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 bypresent or future debt or equity instruments, and changes in federal tax policies, if any.Issuer Purchases of Equity Securities Period Total Numberof Shares ofCommon StockPurchased (1) Average PricePaid perShare Total Number ofShares of CommonStock Purchased asPart of PubliclyAnnounced Program (2) Maximum DollarValue of Shares ofCommon Stock thatMay Yet Be PurchasedUnder Program (2)(in thousands)Fourth quarter: October 1, 2018 to October 31, 2018 — $— — $81,177November 1, 2018 to November 30, 2018 226 $67.66 — $81,177December 1, 2018 to December 31, 2018 968 $65.70 — $81,177Total 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 arisingfrom 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 aggregatevalue of the Company’s Common Stock during the twelve-month period following October 26, 2016. Through October 26, 2017, a total of 770,808shares 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 arepurchase program to repurchase up to $69.6 million (the amount remaining from the $100.0 million repurchase amount authorized in 2016) inaggregate value of our Common Stock through December 31, 2018. Subsequently, on March 29, 2018, the Board authorized an increase in the amountavailable for stock repurchases under the Company’s existing stock repurchase program by $77.8 million, and extended the existing stock repurchaseprogram through June 30, 2019. Purchases under the repurchase program may be made from time-to-time through a combination of open marketrepurchases (including Rule 10b5-1 plans), privately negotiated transactions, and accelerated share repurchase transactions, at the discretion of theCompany’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 commissionpayments. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidityand 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 belowis 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 AnnualReport on Form 10-K.Significant transactions which occurred during the periods presented include the acquisition of Ingeus effective May 30, 2014, which primarilycomprised our WD Services segment; the investment in Mission Providence, a joint venture in Australia, which commenced operations in 2014 but was soldon September 29, 2017; our equity interest in Matrix effective October 19, 2016, which was originally acquired on October 23, 2014, comprised our HAServices segment through October 19, 2016; and the acquisition of Circulation effective September 21, 2018, which is included in our NET Servicessegment. The operations of HA Services, Human Services, which was sold effective November 1, 2015, and WD Services, which was sold effective December21, 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 $884,117 Operating expenses: Service expense1,284,603 1,223,627 1,131,963 987,352 803,681 General and administrative expense46,098 43,491 39,527 40,598 45,566 Asset impairment charge14,175 — 1,415 — — Depreciation and amortization15,813 13,618 12,780 10,221 8,808Total operating expenses1,360,689 1,280,736 1,185,685 1,038,171 858,055Operating income24,276 37,484 48,157 44,780 26,062Non-operating expense: Interest expense, net1,783 1,204 1,515 2,312 10,472 Other income— (5,363) — — — Equity in net loss (gain) of investees6,158 (13,445) 1,789 — — Gain on measurement of cost method investment(6,577) — — — —Income from continuing operations, before incometaxes22,912 55,088 44,853 42,468 15,590Provision for income taxes4,684 4,003 17,972 15,718 8,053Income from continuing operations, net of tax18,228 51,085 26,881 26,750 7,537(Loss) income from discontinued operations, net of tax(37,053) 2,735 62,965 56,444 12,738Net (loss) income(18,825) 53,820 89,846 83,194 20,275Net (gain) loss from discontinued operationsattributable to noncontrolling interests(156) (451) 2,082 502 —Net (loss) income attributable to Providence$(18,981) $53,369 $91,928 $83,696 $20,275Diluted (loss) earnings per common share: Continuing operations$0.92 $2.97 $1.34 $1.22 $0.50Discontinued operations(2.86) 0.15 3.87 3.18 0.85Total$(1.94) $3.12 $5.21 $4.40 $1.35Weighted-average number of common shares outstanding: Diluted13,033 13,673 14,779 16,116 15,01932 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 $121,538Total assets572,246 704,090 685,279 1,050,202 1,168,934Long-term obligations, including currentportion1,071 2,984 3,611 300,071 574,613Other liabilities182,785 287,543 306,428 382,423 372,907Convertible preferred stock77,392 77,546 77,565 77,576 —Total stockholders’ equity310,998 336,017 297,675 290,132 221,414(1) General and administrative expense for the year ended December 31, 2018 includes $1.7 million in acquisition costs related to the acquisition ofCirculation 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, wedetermined we would not continue the development of our NextGen technology. We also determined we would not place any of the developed NextGentechnology into service, and recorded an asset impairment charge of $13.5 million related to our NET Services segment during the fourth quarter of2018. In addition, we had previously recorded an impairment charge of $0.7 million during the second quarter of 2018 in relation to the decision toabandon specific development work intended to synchronize data across applications of the proprietary NextGen systems, based on the determination ofan 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 $45.1million paid to Circulation’s equity holders (including holders of vested Circulation stock options), other than Providence. Our initial investment inCirculation 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 werecognized 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 isa 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 losson 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 ofIngeus France to its estimated fair value when it was initially recorded as held for sale during 2018, which is included in (loss) income from discontinuedoperations, 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 informationon 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 $12.4million related to the sale of the Company’s equity interest in Mission Providence. The investment in Mission Providence was part of the WD Servicessegment.(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) duringthe 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 ofMatrix, due to Matrix’s re-measurement of its deferred tax liabilities. In addition, the tax provision was adversely impacted by tax expense of $3.6million related to the Company’s 2015 Holding Company LTI Program (the “HoldCo LTIP”), for which expense was incurred for financial33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 thetransaction, net of tax, totaling $109.4 million. In conjunction with the completion of this transaction, we fully repaid the amounts outstanding on ourterm 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, for2015 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 $1.8million 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 yearended 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. corporatetax 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 isreflected as a component of “Provision for income taxes” in the table above. The investment in Matrix at December 31, 2018 of $161.5 million isincluded 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 tobridge 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. “SelectedFinancial Data” and our consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data” of thisreport. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and other factors that may cause actual results todiffer materially from those projected in any forward-looking statements, as discussed in “Disclosure Regarding Forward-Looking Statements”. These risksand 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 theUnited States. On September 21, 2018, we completed the acquisition of Circulation, which offers a full suite of logistics solutions to manage NET programsacross all areas of healthcare, powered by its HIPAA-compliant digital platform. Circulation’s technology expands LogistiCare’s capabilities to managetransportation benefits, integrating all transportation capabilities while proactively monitoring for fraud waste and abuse and emphasizing memberconvenience and satisfaction.Our Matrix Investment segment consists of a minority investment in Matrix, a nationwide provider of home and mobile-based healthcare services forhealth plans in the United States, including CHAs, quality gap closure visits, “level of service” needs assessments, and post-acute and chronic caremanagement, providing such services through a network of community-based clinicians and a fleet of mobile health clinics with advanced diagnosticscapabilities.Our Corporate and Other segment includes the Company’s executive, accounting, finance, internal audit, tax, legal, public reporting, and corporatedevelopment functions, as well as the results of the Company’s captive insurance company. On April 11, 2018, the Company announced the OrganizationalConsolidation. LogistiCare will retain its name and continue to be headquartered in Atlanta, GA, and the Company will continue to be named TheProvidence Service Corporation and be listed on NASDAQ under the ticker symbol “PRSC”. The Organizational Consolidation is expected to be completeby 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 exposedto various trends such as healthcare industry and demographic dynamics. Over the long term, we believe there are numerous factors that could affect growthwithin 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 privatecorporations to provide necessary and innovative services;•increasing demand for in-home care provision, driven by cost pressures on traditional reimbursement models and technological advances enablingremote engagement;•technological advancements, which may be utilized by us to improve service and lower costs, but also by others which may increase industrycompetitiveness; and•proposals by the President of the United States and Congress to change the Medicaid program, including considering converting the Medicaidprogram to a block grant format or capping the federal contribution to state Medicaid programs to a fixed amount per beneficiary, and CMS’ grant ofwaivers to states relative to the parameters of their Medicaid programs. Enactment of adverse legislation, regulation or agency guidance, or litigationchallenges to ACA, state Medicaid programs, or other governmental programs may reduce the eligibility or demand for our services, our ability toconduct 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. Inaddition to the purchase consideration, the35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 millionin 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 havebeen 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 overthe 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 isavailable, 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 oftransportation benefits, proactively monitors for fraud waste and abuse, and integrates all transportation capabilities, while emphasizing patient convenienceand satisfaction. Circulation’s proprietary platform simplifies ordering, improves reliability and efficiency, and reduces transportation spend. We believe theacquisition advances our central mission of reducing transportation as a barrier to healthcare, and will help deliver a differentiated user experience andprovide a core technology and analytics platform that better positions us for growth. Following the acquisition and an analysis of the technology capabilitiesand scalability of the Circulation platform, we determined we will utilize the Circulation platform to service our legacy and new contracts, which resulted inan impairment charge of $13.5 million to NextGen. See further information on the impairment in Note 7, Property and Equipment, in the accompanyingconsolidated 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 ServicesEBITDA; less the assumption of former Corporate and Other segment costs; less cumulative CAPEX (“MIP Financial Performance”) for the performanceperiod 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 iswithin 30 days following the finalization of the Company’s audited financial statements for the fiscal year ending December 31, 2021. Payout is subject tothe participant remaining employed by the Company through December 31, 2021. The amount that can be earned through the MIP ranges from $12.5 millionto $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 Companyhas accrued $1.4 million, reflected in “Other long-term liabilities” in the consolidated balance sheet, towards its estimate of the expected payout under theMIP.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 waseffective 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, anda loss, primarily related to the release of the effects of historic cumulative translation adjustments, of $0.7 million was recorded during the year endedDecember 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 transportationneeds. 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 fortransportation of members through our network of independent transportation providers, whereby we negotiate rates and remit payment to the transportationproviders. However, for certain contracts, we assume no risk for the transportation network, credentialing and/or payments to these providers. For thesecontracts, 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 theexception of certain costs which are classified as “General and administrative expense”. Service expense also excludes asset impairment charges anddepreciation and amortization expenses. In the discussion below, we present the breakdown of service expense by the following major categories: purchasedservices, payroll and related costs, other operating expenses and stock-based compensation. Purchased services include the amounts we pay to third-partyservice providers and are typically dependent upon service volume. Payroll and related costs include all personnel costs of our segments. Other operatingexpenses include general overhead costs, excluding facilities and related charges, of our segments. Stock-based compensation represents the stock-basedcompensation 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 andamortization, 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 becausethey require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes inaccordance with GAAP. Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financialstatements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and otherassumptions 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. Weconsider 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 thetime 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 resultsof operations. For more information on each of these policies, see Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, to ourconsolidated 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 bytransportation providers, as we generally only pay transportation providers for completed trips based upon documentation submitted after services have beenprovided. The transportation accrual requires significant judgment, as the accrual is based upon contractual rates and mileage estimates, as well as anestimated rate for unknown cancellations, as members may have requested transportation but not notified us of cancellation. Based upon historicalexperience and contract terms, we estimate the amount of expense incurred for invoices which have not yet been submitted as of period end. Actual expensecould 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 andliabilities 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 andintangible assets acquired is allocated to goodwill. When determining the fair values of assets acquired and liabilities assumed, management makessignificant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are notlimited to future expected cash flows from customer relationships, developed technology and trade names, and discount rates. Management’s estimates of fairvalue are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. As a result, actual results may differsignificantly 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 eventsand circumstances indicate that an asset may be impaired. Such circumstances could include, but are not limited to: (1) the loss or modification of significantcontracts, (2) a significant adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by aregulator, 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 unitis 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 itscarrying 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 ofthe goodwill impairment test. Instead, if we deem it necessary to perform the quantitative goodwill impairment test in an annual or interim period, werecognize 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 ofgoodwill 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-livedassets or groups of assets to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets may beimpaired. Factors that may necessitate an impairment assessment include, among others, significant adverse changes in the extent or manner in which an assetor 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 orsignificant 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 groupof 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 orgroup of assets exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over theremaining 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 notrecoverable, we estimate the fair value of the asset or group of assets using appropriate valuation methodologies, which would typically include an estimateof 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 thecarrying 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 forthose assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairmentcharge. Income Taxes We record income taxes under the liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences oftemporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on thedifferences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset orliability 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 byjurisdiction, 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 inherentcomplexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual andanticipated 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 thannot 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 notit 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 thetaxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these taxpositions 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 corporateincome tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The TaxReform 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 ReformAct 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 aregistrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accountingfor certain income tax effects of the Tax Reform Act. We recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for therevaluation of deferred tax assets and liabilities, and included these amounts in our consolidated financial statements for the year ended December 31, 2017.The financial38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 underreinsurance programs through our wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurancecompany 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 policydeductibles. In addition, we maintain self-funded health insurance programs for employees with a stop-loss umbrella policy with a third-party insurer to limitthe maximum potential liability for individual claims and for a maximum potential claim liability based on member enrollment. We utilize independentactuarial reports to determine the expected losses and in order to record the appropriate entries associated with our historical reinsurance programs, ourretained exposure for the deductibles under our current policies, and self-funded health insurance programs. We regularly analyze our reserves for incurredbut not reported claims, and for reported but not paid claims related to our reinsurance and self-funded insurance programs. We believe our reserves areadequate. However, significant judgment is involved in assessing these reserves such as evaluating historical paid claims, average lag times between theclaims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amountsand 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 mostcontracts, NET Services arranges for transportation of members through its network of independent transportation providers, whereby it remits payment to thetransportation providers. However, for certain contracts, NET Services only provides administrative management services to support the customers’ efforts toserve 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 andrecord-keeping related to non-emergency transportation services. Transportation management services include, but are not limited to, fraud, waste, and abuseand utilization review programs as well as compliance controls. NET Services’ performance obligations consist of a series of distinct services that aresubstantially the same and which are transferred to the customer in the same manner. In most cases, NET Services is the principal in its arrangements becauseit 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 fromcustomers in an amount that corresponds directly with the value of its performance to date. This is consistent with NET Services’ historical revenuerecognition policy. NET Services recognizes revenue for some of its contracts that include variable consideration using a time-elapsed measure when the feesearned relate directly to services performed in the period. Because most contracts include termination for convenience clauses with required notice periods ofless 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 torefund 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 willultimately 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 balancesheets 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 vestbased upon performance conditions. We measure the value of stock option awards on the date of grant at fair value using the appropriate valuationtechniques, including the Black-Scholes and Monte Carlo option-pricing models. We recognize the fair value as stock-based compensation expense on astraight-line basis over the requisite service period, which is typically the vesting period. The pricing models require various highly judgmental assumptionsincluding volatility and expected option term. If any of the assumptions used in the models change significantly, stock-based compensation expense maydiffer materially in the future from that recorded in the current period. We do not record stock-based compensation expense net of39estimated forfeitures and the tax effects of awards are treated as discrete items in the period in which tax windfalls or shortfalls occur. See additionaldiscussion 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 ourincome tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value ofthe 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 reasonablyestimable. The amounts used in determining severance accruals are based on an estimate of the salaries and related benefit costs payable and are included inaccrued 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 businesssegment, NET Services. Our investment in Matrix is also a reportable segment referred to as the “Matrix Investment”. Segment results are based on how ourchief operating decision maker manages our business, makes operating decisions and evaluates operating performance. The operating results of our principalbusiness segment include revenue and expenses incurred by the segment, as well as an allocation of direct expenses incurred by our corporate division onbehalf of the segment, which primarily relate to insurance and stock-based compensation allocations. Indirect expenses, including unallocated corporatefunctions and expenses, such as executive, accounting, finance, internal audit, tax, legal, public reporting, certain strategic and corporate developmentfunctions and the results of the Company’s captive insurance company and elimination entries recorded in consolidation are reflected in “Corporate andOther”. Discontinued operations. During the periods presented, the Company completed the following transactions, which resulted in the presentation of theoperations 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, theCompany 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% equityinterest at the time of the transaction. Prior to the closing of the Matrix Transaction, the financial results of Matrix were included in the Company’sHA 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 andAPM UK Holdings Limited, an affiliate of APM, except for the segment’s employment services operations in Saudi Arabia. The Company’scontractual counterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginningJanuary 1, 2019. Additionally, on June 11, 2018, the Company entered into a Share Purchase Agreement to sell Ingeus France for a de minimisamount. 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 consolidatedstatements of operations for 2018 and 2017 (in thousands): Year ended December 31, 2018 2017 $ Percentageof Revenue $ Percentageof RevenueService revenue, net1,384,965 100.0 % 1,318,220 100.0 % Operating expenses: Service expense1,284,603 92.8 % 1,223,627 92.8 %General and administrative expense46,098 3.3 % 43,491 3.3 %Asset impairment charge14,175 1.0 % — — %Depreciation and amortization15,813 1.1 % 13,618 1.0 %Total operating expenses1,360,689 98.2 % 1,280,736 97.2 % Operating income24,276 1.8 % 37,484 2.8 % Non-operating expense: Interest expense, net1,783 0.1 % 1,204 0.1 %Other income— — % (5,363) (0.4)%Equity in net loss (gain) of investees6,158 0.4 % (13,445) (1.0)%Gain on remeasurement of cost method investment(6,577) (0.5)% — — %Income from continuing operations before income taxes22,912 1.7 % 55,088 4.2 %Provision for income taxes4,684 0.3 % 4,003 0.3 %Income from continuing operations18,228 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 tononcontrolling 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 revenueof NET Services. Total operating expenses. Consolidated operating expenses for 2018 increased $80.0 million, or 6.2%, compared to 2017. Operating expenses for2018 compared to 2017 included an increase in expenses attributable to NET Services of $76.0 million and Corporate and Other of $4.0 million. NETServices’ 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 forCorporate 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 $9.3million. Interest expense, net. Consolidated interest expense, net for 2018 increased $0.6 million, or 48.1%, compared to 2017, and remained consistent as apercentage of revenue. The increase was attributable to borrowings on the revolving line of credit during the second half of 2018 used to fund the Circulationacquisition, 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.41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. Ourequity 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 investmenteffective 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 orgain of investees. Included in Matrix’s 2018 full standalone net loss of $20.0 million (which is not consolidated with Providence’s) are depreciation andamortization of $43.1 million, interest expense of $25.9 million, integration related costs of $6.5 million, equity compensation of $2.7 million, managementfees 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 2017primarily 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 purchaseprice was comprised of cash consideration of $45.1 million paid to Circulation’s equity holders (including holders of vested Circulation stock options), otherthan Providence. Our initial investment in Circulation was $3.0 million. As a result of the transaction, the fair value of this pre-acquisition interest increasedto $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 consistentwith 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 Actduring 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 wasrecorded 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 theaward not being satisfied. This tax expense was the result of the adoption of Accounting Standards Update No. 2016-09, Compensation - StockCompensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which subjects our tax rate to quarterlyvolatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result ina 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 formerWD Services segment and our former Human Services segment. For 2018, the loss from discontinued operations, net of tax, for our former WD Servicessegment 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 millionrelated 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 WDServices 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 ofthe accrued settlement amount for indemnified legal matters, based on the final settlement agreement, offset by the related income tax impact. For 2017, theloss from discontinued operations, net of tax for our Human Services segment was $6.0 million, which primarily related to the accrual of a contingent liabilityof $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 operationsattributable to noncontrolling interests primarily relates to a minority interest held by a third-party operating partner in our company servicing the offenderrehabilitation contract in our historical WD Services segment. Segment Results. The following analysis includes discussion of each of our segments. 42NET Services NET Services financial results are as follows for 2018 and 2017 (in thousands): Year Ended December 31, 2018 2017 $ Percentage ofRevenue $ Percentage ofRevenueService revenue, net1,384,965 100.0% 1,318,220 100.0% Service expense1,285,029 92.8% 1,227,426 93.1%General and administrative expense14,247 1.0% 11,779 0.9%Asset impairment charge14,175 1.0% — —%Depreciation and amortization15,026 1.1% 13,275 1.0%Operating income56,488 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 primarilyrelated to the impact of new contracts, including managed care organization (“MCO”) contracts in Illinois, Indiana, Oregon and New York and new statecontracts in Texas and West Virginia, which contributed $112.8 million of revenue for 2018, as well as net increased revenue from existing contracts of $39.2million, due to the net impact of membership and rate changes, including the impact of increased rates agreed after 2017 on certain contracts related toincreased costs to serve the contracts, which was partially offset by the impact of a retroactive rate adjustment recorded in 2017 related to increasedutilization activity under a significant contract. Revenue additionally increased $2.2 million due to revenue generated from Circulation in the fourth quarterof 2018. These increases were partially offset by the impact of contracts we no longer serve, including state contracts in New York and Connecticut, certainMCO contracts in Florida and Louisiana, and decreased membership in Virginia, which resulted in a decrease in revenue of $72.0 million. In addition, theadoption 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 onecontract 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 ofRevenue $ Percentage ofRevenuePurchased services1,055,278 76.2% 1,009,518 76.6%Payroll and related costs179,175 12.9% 165,666 12.6%Other operating expenses49,626 3.6% 51,720 3.9%Stock-based compensation950 0.1% 522 —%Total service expense1,285,029 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 higherpurchased services and payroll and related costs. Purchased services expense increased primarily as a result of new contracts, which was partially offset by theimpact 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 tolower 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 transportationprovider partners with local market conditions and the fees paid to us by our customers. Transportation costs on a per trip basis fluctuate from period toperiod.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, temporarylabor and increased health insurance expenses, as well as the impact from the acquisition of Circulation. Other operating expenses decreased for 2018 ascompared 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. Thisdecrease 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, primarilydue to $1.7 million of transaction expenses related to the acquisition of Circulation in 2018, as well as increased facility costs resulting from the overallgrowth of our operations. Asset impairment charge. Following the acquisition of Circulation and an analysis of the technology capabilities and scalability of the Circulationplatform, we determined we would not continue the development of NextGen. We also determined we would not place any of the developed NextGen intoservice and recorded an asset impairment charge of $13.5 million related to our NET Services segment during the fourth quarter of 2018. We had previouslyrecorded an impairment charge of $0.7 million during the second quarter of 2018 in relation to the decision to abandon specific development work intendedto 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 theaddition of long-lived assets relating to information technology projects, as well as amortization expense related to the intangible assets acquired with theCirculation 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 insurancecompany, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for 2018 and 2017 (inthousands): Year Ended December 31, 2018 2017 $ $Service expense(426) (3,799)General and administrative expense31,851 31,712Depreciation and amortization787 343Operating 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 andadministrative expense” for 2018 are $8.4 million of expenses relating to the Organizational Consolidation, including retention, recruitment and acceleratedstock-based compensation expenses. Additionally, included in “Depreciation and amortization” is $0.4 million of accelerated depreciation expense incurredin relation to the Organizational Consolidation. General and administrative expenses for 2018 also include an increase in legal and consulting costs over2017. Included in both 2018 and 2017 is a reduction in insurance loss reserves in “Service expense” due to favorable claims history of our captivereinsurance 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 and2017, 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 millionand $7.1 million, respectively, of share settled stock-based compensation, excluding accelerated stock-based compensation expense related to theOrganizational Consolidation, for 2018 and 2017. Share settled stock-based compensation expense for 2017 included stock-based compensation for theHoldCo 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 arerecorded 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 consolidatedstatements of operations for 2017 and 2016 (in thousands): Year ended December 31, 2017 2016 $ Percentageof Revenue $ Percentageof RevenueService revenue, net1,318,220 100.0 % 1,233,842 100.0% Operating expenses: Service expense1,223,627 92.8 % 1,131,963 91.7%General and administrative expense43,491 3.3 % 39,527 3.2%Asset impairment charge— — % 1,415 0.1%Depreciation and amortization13,618 1.0 % 12,780 1.0%Total operating expenses1,280,736 97.2 % 1,185,685 96.1% Operating income37,484 2.8 % 48,157 3.9% Non-operating expense: Interest expense, net1,204 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 taxes55,088 4.2 % 44,853 3.6%Provision for income taxes4,003 0.3 % 17,972 1.5%Income from continuing operations51,085 3.9 % 26,881 2.2%Income from discontinued operations, net of tax2,735 0.2 % 62,965 5.1%Net income53,820 4.1 % 89,846 7.3%Net (income) loss from discontinued operations attributable tononcontrolling interest(451) — % 2,082 0.2%Net income attributable to Providence53,369 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 revenueof NET Services. Total operating expenses. Consolidated operating expenses for 2017 increased $95.1 million, or 8.0%, compared to 2016. Operating expenses for2017 compared to 2016 included an increase in expenses attributable to NET Services of $95.8 million, which was partially offset by a decrease at Corporateand 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 ofNET 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 $0.6million 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% ofrevenue.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. Ourequity in net loss of investees for 2016 includes equity in net loss for Matrix of $1.8 million. We45began reporting Matrix as an equity investment effective October 19, 2016, upon the completion of the Matrix Transaction, and we record our ownershippercentage 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 notconsolidated with Providence’s) are depreciation and amortization of $33.5 million, interest expense of $14.8 million, transaction bonuses and othertransaction related costs of $3.5 million, equity compensation of $2.6 million, management fees paid to Matrix’s shareholders of $2.3 million, merger andacquisition diligence related costs of $0.7 million and income tax benefit of $29.6 million. Matrix’s significant income tax benefit in 2017 primarily relatedto 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 fullstandalone net loss of $4.2 million (which is not consolidated with Providence’s) are depreciation and amortization of $6.4 million, interest expense of $2.9million, transaction bonuses and other transaction related costs of $6.4 million, equity compensation of $0.4 million, management fees paid to Matrix’sshareholders 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 theenactment 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 taxliabilities 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 ofMatrix 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 HoldCoLTIP, 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 tothe 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 toquarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awardswhich 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 Servicessegment, Human Services segment and our former HA Services segment, composed entirely of our 100% ownership in Matrix until the completion of theMatrix 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 ourequity interest in Mission Providence of $12.4 million. For 2016, the loss from discontinued operations, net of tax for our WD Services segment was $45.8million, 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 acontingent liability of $9.0 million related to the settlement of indemnification claims and associated legal costs of $0.7 million, partially offset by a relatedtax 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 $6.0million with respect to potential indemnification claims, legal costs of $1.1 million related to these potential claims and transaction related expenses of $0.8million, 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, netof tax, of $109.4 million. Net (income) loss from discontinued operations attributable to noncontrolling interests. Net (income) loss from discontinued operationsattributable to noncontrolling interests primarily relates to a minority interest held by a third-party operating partner in our company servicing the offenderrehabilitation 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 ofRevenue $ Percentage ofRevenueService revenue, net1,318,220 100.0% 1,233,720 100.0% Service expense1,227,426 93.1% 1,132,857 91.8%General and administrative expense11,779 0.9% 11,406 0.9%Depreciation and amortization13,275 1.0% 12,375 1.0%Operating income65,740 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 tonet increased revenue from existing contracts, including successfully renewed contracts, of $82.5 million, due to the net impact of membership and ratechanges. Included within net rate changes are the positive impacts of final agreements on rate adjustments related to existing contracts that experiencedincreased utilization in 2017 as well as the release of previously accrued revenue hold-backs based on certain contract performance requirements on asignificant contract. Additionally, the impact of new contracts, including new MCO contracts in Florida and New York, contributed $93.8 million of revenuefor 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 ofNew York. Service expense. Service expense is comprised of the following for 2017 and 2016 (in thousands): Year Ended December 31, 2017 2016 $ Percentage ofRevenue $ Percentage ofRevenuePurchased services1,009,518 76.6% 927,321 75.2%Payroll and related costs165,666 12.6% 162,000 13.1%Other operating expenses51,720 3.9% 42,478 3.4%Stock-based compensation522 —% 1,058 0.1%Total service expense1,227,426 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 theimpact 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% in2017 primarily attributable to an increase in utilization across multiple contracts. The higher utilization was in part driven by increased Medicaidreimbursement in New Jersey for certain medical services, increasing the demand for transportation services, and increased utilization across multiple MCOsin California. Additionally, due to milder winter weather conditions during the first quarter of 2017, we experienced above expected utilization; however, weexperienced 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 apercentage of revenue caused by increased utilization was partially offset by the successful implementation of initiatives aimed at lowering transportationcosts 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 multipleprocess improvement initiatives, including those aimed at lowering payroll expense across our reservation and operation center networks, as well as adecrease in chief executive officer compensation expense due to the transition of the chief executive officer position during 2017. Other operating expensesincreased for 2017 as compared to 2016 primarily attributable to an incremental $4.1 million of value enhancement and related costs incurred for externalresources used in the design and47implementation of NET Services member experience and value enhancement initiatives in 2017, as well as increased software and hardware maintenancecosts 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 toincreased facility costs resulting from the overall growth of our operations. As a percentage of revenue, general and administrative expense remained constantat 0.9%. Depreciation and amortization expense. Depreciation and amortization expense increased $0.9 million primarily due to the addition of long-livedassets 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 insurancecompany, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for 2017 and 2016 (inthousands): Year Ended December 31, 2017 2016 $ $Service revenue, net— 122 Service expense(3,799) (894)General and administrative expense31,712 28,121Asset impairment charge— 1,415Depreciation and amortization343 405Operating 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 ininsurance 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 asdecreased costs of the captive operations due to no longer writing new policies as of May 2017, which is included in “Service expense”, decreasedaccounting, legal and professional fees included in “General and administrative expense”, and decreased asset impairment charges, as $1.4 million wasrecorded in 2016 in relation to the sale of a building. These decreases were partially offset by an increase in cash settled stock-based compensation expenseof $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 sharesdue to any employees, expense for stock options issued to a former chief executive officer upon separation from the Company, and a benefit recorded in 2016for 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 periodended on December 31, 2017 was less than $56.79. As such, as of December 31, 2017, we accelerated all remaining unrecognized compensation expense forthe 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 andadministrative 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 $0.9million, 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 thetiming of new contracts, which impact the amount of revenues earned and expenses incurred. NET Services48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 marginsduring 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 ourOrganizational Consolidation and other strategic initiatives. We expect to meet our cash requirements through available cash on hand, cash generated fromNET 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 WDServices 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 incash 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 and2017, 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 obligationsand activities of our captive insurance subsidiary. Given expiring policies under our captive insurance subsidiary were not renewed upon expiration in May2017, 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 ofthe adoption of Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, as of January 1, 2018. At bothDecember 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 alsoraise debt financing to fund future repurchases of our Common Stock. The timing, term, size, and pricing of any such financing will depend on investorinterest 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, weextended 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 onour 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 ofcapacity and extend the expiration date of the program from December 31, 2018 to June 30, 2019. As of December 31, 2018, the Company hadapproximately $81.2 million of share repurchase availability. During the year ended December 31, 2018, the Company repurchased 838,719 shares for $55.8million.The accompanying consolidated cash flow statement for all periods presented includes both continuing and discontinued operations. Discontinuedoperations 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 endedDecember 31, 2017 and 2016, respectively. For 2018, the loss from discontinued operations primarily related to the operating loss of our historical WDServices 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 fromdiscontinued operations during the year ended December 31, 2016 related to the gain on sale of our HA Services segment. Significant non-cash items of ourdiscontinued operations included the following: 2018 2017 2016Depreciation$6,711 $7,825 $11,799Amortization5,153 5,026 23,145Asset impairment charge9,203 — 19,588Deferred income taxes345 (3,940) 45,7002018 cash flows compared to 2017Operating activities. Cash provided by operating activities was $7.9 million for 2018, a decrease of $47.1 million compared with 2017. 2018 and2017 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 ofWD 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 Servicessegment 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 translationadjustment;•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 in2017.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 cashoutflow of $36.7 million was primarily attributable to NET Services due to the timing of collections from a limited number of payers, which waspartially 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 wasaccrued for during 2017, which was partially offset by an increase in cash inflow from discontinued operations of $7.8 million and the impact ofchanges 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 in2017. 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 wasprimarily attributable to the purchase of Circulation resulting in cash used for acquisition, net of cash acquired, of $43.7 million, which was partially offsetby $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 equityinvestment in Mission Providence. During 2018, we also collected a note receivable for $3.1 million. Additionally in 2017, we made a cost methodinvestment 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 includedpurchases 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, werepurchased $26.7 million more of our Common Stock than in 2017. In addition, there was an increase in proceeds from Common Stock issued pursuant tostock option exercises of $10.5 million.2017 cash flows compared to 2016Operating activities. Cash provided by operating activities was $55.0 million for 2017, an increase of $13.3 million compared with 2016. 2017 and2016 cash flows from operations were driven by net income of $53.8 million and $89.8 million, respectively, non-cash adjustments to reconcile net incometo net cash provided by operating activities of negative $11.1 million and negative $32.9 million, respectively, and changes in working capital of $12.3million 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 ascompared 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 in2016.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 cashinflow 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 HAServices in 2016. These changes were partially offset by cash outflows in 2017 related to an increase in WD Services’ receivables in Germany, SaudiArabia, 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 incash inflow of $19.5 million was primarily attributable to a decrease in other receivables related to amounts receivable from insurance carriers inrespect to certain claims paid by the Company, but reimbursable from the respective insurance carrier, decreased receivables related to our captiveinsurance company insurance policy rewrite, decreased prepaid value added taxes in the UK, decreased prepayments in WD Services in relation tocertain 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 asthe disposition of HA Services, which generated a cash inflow of $10.6 million in 2016. Partially offsetting these impacts is the impact of theincrease in the accrued settlement related to our former Human Services segment of $9.0 million during 2017 as compared to an increase of $6.0million 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 in2016. The increase in cash inflow of $2.6 million is due primarily to the timing of payments to NET Services transportation providers and increasedvolume.•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 $318.0million in 2016. The change was primarily attributable to $371.6 million of proceeds on the Matrix Transaction recorded in 2016, which was partially offsetby 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 costmethod 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 anda 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 issuedpursuant 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”), withBank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. The Credit Agreementprovides 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 ofDecember 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 creditunder 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 facilityfrom 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 additionalcommitments from lenders under the Credit Agreement at such time or new commitments from financial institutions acceptable to the administrative agentin its reasonable discretion, so long51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 optionas 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 adverseeffect 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 toreimbursement of the lenders’ breakage and redeployment costs in connection with prepayments of London Interbank Offered Rate, or LIBOR, loans. Theunutilized 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 orthe 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 thebase 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 CreditFacility and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. Thecommitment 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 theoutstanding loans in an aggregate amount equal to 100% of the net cash proceeds received from certain asset dispositions, debt issuances, insurance andcasualty awards and other extraordinary receipts.Our obligations under the Credit Facility are guaranteed by all of our present and future domestic subsidiaries, excluding certain domesticsubsidiaries, which includes our insurance captive. Our obligations under, and each guarantor’s obligations under its guaranty of, the Credit Facility aresecured 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 theissued 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 onour ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, repurchase shares, sellassets, 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 interestcoverage 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 creditissuer, SunTrust Bank, as syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint leadarrangers and joint book managers and other lenders party thereto. The Credit Agreement provided us with a senior secured credit facility, in aggregateprincipal amount of $225.0 million, comprised of a $60.0 million term loan facility and a $165.0 million revolving credit facility. The Credit Facilityincludes 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, weborrowed the entire amount available under the term loan facility and $16.0 million under our revolving credit facility and used the proceeds thereof torefinance 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, amongother 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 theconsummation 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 tranchein aggregate principal amount of up to $250.0 million to partly finance the acquisition of Matrix and make certain other modifications in connection withthe 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 segment52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 withthe Fourth Amendment, which provided for the lenders’ consent to the Matrix Transaction, a portion of the net cash proceeds received by the Company inconnection with the Matrix Transaction was applied to the prepayment of outstanding term loans and revolving loans. Additionally, effective following therepayment of the outstanding term loans in full on October 20, 2016, the Fourth Amendment further (i) reduced the aggregate revolving commitments underthe Credit Agreement to $200.0 million, (ii) amended the consolidated net leverage ratio covenant such that the Company’s consolidated net leverage ratiomay 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 acovenant 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 ofthe Credit Agreement to August 2, 2019 and (ii) amended certain covenants under the Credit Agreement to provide for greater operational, financial andstrategic 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 marketconditions and our financial condition.Rights OfferingWe completed a rights offering on February 5, 2015, allowing all of the Company’s existing common stockholders the non-transferrable right topurchase 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 wasconvertible 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 onOctober 22, 2014. Stockholders exercised subscription rights to purchase 130,884 shares of the Company’s Preferred Stock. Pursuant to the terms and conditions of theStandby Purchase Agreement between the Coliseum Stockholders and the Company, the remaining 524,116 shares of the Company’s Preferred Stock werepurchased by the Coliseum Stockholders at the $100.00 per share subscription price. The Coliseum Stockholders beneficially owned approximately 94% ofour outstanding Preferred Stock after giving effect to the Rights Offering and the Standby Purchase Agreement. The Company received $65.5 million inaggregate gross proceeds from the consummation of the Rights Offering and Standby Purchase Agreement, which it used to repay the related party unsecuredsubordinated 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’sconvertible 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 of5.5% per annum on the liquidation preference then in effect. On or before the third business day immediately preceding each fiscal quarter, we determine ourintention 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 soonas 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 preferencein 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 ofdetermination. 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 thefirst day of the applicable dividend period. Payment in kind (“PIK”) dividends, if applicable, will accrue and be cumulative on the same schedule as set forthabove for cash dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. PIK dividends are paidupon the occurrence of a liquidation event, conversion or redemption in accordance with the terms of the Preferred Stock. Cash dividends were declared eachquarter 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 eventof a certain change of control transactions, see “Risk Factors–Risks Related to Our Capital Stock–Anti-takeover provisions in our second amended andrestated certificate of incorporation and amended and restated by-laws could discourage, delay or prevent a change of control of our company and may affectthe 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 underreinsurance programs primarily through our wholly-owned captive insurance subsidiary, Social Services Providers Captive Insurance Company, or SPCIC. Asof 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 liabilityand workers’ compensation reinsurance programs was $0.3 million, $0.8 million and $2.8 million, respectively. Based on an independent actuarial report, ourexpected losses related to workers’ compensation, automobile and general and professional liability in excess of our liability under our associated historicalreinsurance 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 primarilyrestricted to secure the reinsured claims losses under the historical automobile, general and professional liability and workers’ compensation reinsuranceprograms.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 claimsgenerally 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, inorder 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 yetreported to the plan administrator, and therefore, have not been paid. The incurred but not reported reserve is based on an established cap and currentpayment 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 ofeach 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 coverliabilities based on our past experience. Any significant increase in the number of claims or costs associated with claims made under this program above whatwe 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 than1-33-5After 5Contractual cash obligations (000’s)Total1 YearYearsYearsYearsCapital leases$1,071$718 $353 $— $—Interest (1)445445 — — —Purchased services commitment (2)35,23113,805 21,419 7 —Guarantees (3)42,05642,056 — — —Letters of credit (3)12,33812,338 — — —Operating leases (4)27,0398,825 11,046 5,568 1,600Total$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 obligationwe have under this agreement. If the Company does not utilize the minimum level of services specified in the agreement, a penalty provision willapply. However, the minimum obligation is less than our projected use for these periods and payments may be more than the minimum obligationbased on actual use.(3)Guarantees and letters of credit (“LOCs”) are commitments that represent funding responsibilities that may require our performance in the event ofthird-party demands or contingent events. Guarantees include surety bonds we provide to certain customers to protect against potential non-deliveryof our non-emergency transportation services. Of the outstanding balance of our stand-by LOCs, $12.3 million directly reduces the amount availableto 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 containperiodic 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 ourCommon Stock during the twelve-month period following November 4, 2015. This plan terminated on November 3, 2016. A total of 1,360,249 shares werepurchased 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 ourCommon Stock during the twelve-month period following October 26, 2016. As of October 26, 2017, we spent $30.4 million, excluding commissionpayments, 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 engagein a repurchase program to repurchase up to $69.6 million (the amount remaining from the $100.0 million repurchase amount authorized in 2016) inaggregate value of our Common Stock through December 31, 2018. Subsequently, on March 29, 2018, the Board authorized an increase in the amountavailable for stock repurchases under the Company’s existing stock repurchase program by $77.8 million, and extended the existing stock repurchaseprogram through June 30, 2019. As of December 31, 2018, 1,018,989 shares were purchased under this plan for $66.3 million, excluding commissionpayments, 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 10b5-1plans), 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 referredto as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or othercontractually 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 AccountingPronouncements, 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 nothave 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 Management’s Report on Internal Control Over Financial Reporting58 Reports of Independent Registered Public Accounting Firm59 Consolidated Balance Sheets at December 31, 2018 and 201762 For the years ended December 31, 2018, 2017 and 2016: Consolidated Statements of Operations63 Consolidated Statements of Comprehensive Income64 Consolidated Statements of Stockholders’ Equity65 Consolidated Statements of Cash Flows66 Notes to Consolidated Financial Statements6857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, assuch term is defined in Rule 13a-15(f) of the Exchange Act. We designed our internal control over financial reporting to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting 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 thattransactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts 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 couldhave 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 financialstatement preparation and presentation. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controlsmust be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occurand not be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company conducts periodic evaluations of itsinternal 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 controlover financial reporting as of December 31, 2018, Circulation’s internal control over financial reporting associated with total assets of $6.1 million (whichexcludes acquired goodwill and intangible assets) and total revenues of $2.2 million included in the consolidated financial statements of the Company as ofand 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 areanalyzing, evaluating and, where necessary, making changes in controls and procedures related to this acquisition, which we expect to be completed in fiscalyear 2019. We have excluded this acquisition from our assessment of internal control over financial reporting as of December 31, 2018, as permitted by theguidance provided by the staff of the SEC. Other than the changes described above, there were no changes in our internal control over financial reportingduring the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting.The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financialofficer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, based on the criteriaset forth in the Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based onsuch 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 thisAnnual 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 inPart 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 DirectorsThe Providence Service Corporation:Opinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of The Providence Service Corporation and subsidiaries (the “Company”) as ofDecember 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of theyears in the three-year period ended December 31, 2018, and the related notes and financial statement schedule II (collectively, the “consolidated financialstatements”). In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements present fairly, in all materialrespects, 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 inthe 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’sinternal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2019 expressed an unqualified opinion on theeffectiveness 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 $6.2million for the year ended December 31, 2018. The financial statements of Mercury Parent, LLC were audited by other auditors whose report has beenfurnished 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 PrincipleAs discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenues and related costs in 2018due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission 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 reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures thatrespond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financialstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating theoverall presentation of the consolidated financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for ouropinion./s/ KPMG LLPWe have served as the Company’s auditor since 2008.Stamford, ConnecticutMarch 1, 201959Report of Independent Registered Public Accounting Firm To the Stockholders and Board of DirectorsThe Providence Service Corporation:Opinion on Internal Control Over Financial ReportingWe 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 TreadwayCommission. 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 TreadwayCommission.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance 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 financialstatements.The Company acquired Circulation, Inc. (“Circulation”) during 2018, and management excluded from its assessment of the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2018, Circulation’s internal control over financial reporting associated with total assets of $6.1million (which excludes acquired goodwill and intangible assets) and total revenues of $2.2 million included in the consolidated financial statements of theCompany as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluationof the internal control over financial reporting of Circulation.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable 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 reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures aswe 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 ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ KPMG LLPStamford, ConnecticutMarch 1, 201961The Providence Service CorporationConsolidated Balance Sheets(in thousands except share and per share data) December 31, 2018 2017Assets Current assets: Cash and cash equivalents$5,678 $52,798Accounts receivable, net of allowance of $1,854 in 2018 and $5,262 in 2017147,756 110,208Other receivables4,846 5,749Prepaid expenses and other44,167 22,459Restricted cash1,482 1,091Current assets of discontinued operations7,051 104,024Total current assets210,980 296,329Property and equipment, net22,965 37,672Goodwill135,216 95,215Intangible assets, net26,146 14,165Equity investments161,503 169,699Other assets9,949 11,977Restricted cash, less current portion2,886 5,205Deferred tax asset2,601 —Noncurrent assets of discontinued operations— 73,828Total assets$572,246 $704,090Liabilities, redeemable convertible preferred stock and stockholders’ equity Current liabilities: Current portion of long-term obligations$718 $2,400Accounts payable8,828 318Accrued expenses39,191 71,643Accrued transportation costs84,889 83,588Deferred revenue562 3,019Reinsurance and related liability reserves5,438 4,319Current liabilities of discontinued operations3,257 61,643Total current liabilities142,883 226,930Long-term obligations, less current portion353 584Other long-term liabilities14,970 16,216Deferred tax liabilities25,650 39,232Noncurrent liabilities of discontinued operations— 7,565Total liabilities183,856 290,527Commitments and contingencies (Note 20) Redeemable convertible preferred stock Convertible preferred stock, net: Authorized 10,000,000 shares; $0.001 par value; 801,606 and 803,200 issued and outstanding;5.5%/8.5% dividend rate77,392 77,546Stockholders’ equity Common stock: Authorized 40,000,000 shares; $0.001 par value; 17,784,769 and 17,473,598 issued and outstanding (includingtreasury shares)18 17Additional paid-in capital334,744 313,955Retained earnings187,127 204,818Accumulated other comprehensive loss, net of tax— (25,805)Treasury shares, at cost, 4,970,093 and 4,126,132 shares(210,891) (154,803)Total Providence stockholders’ equity310,998 338,182Noncontrolling interest— (2,165)Total stockholders’ equity310,998 336,017Total liabilities, redeemable convertible preferred stock and stockholders’ equity$572,246 $704,090See accompanying notes to the consolidated financial statements62The Providence Service CorporationConsolidated Statements of Operations(in thousands except share and per share data) Year ended December 31, 2018 2017 2016 Service revenue, net$1,384,965 $1,318,220 $1,233,842 Operating expenses: Service expense1,284,603 1,223,627 1,131,963General and administrative expense46,098 43,491 39,527Asset impairment charge14,175 — 1,415Depreciation and amortization15,813 13,618 12,780Total operating expenses1,360,689 1,280,736 1,185,685Operating income24,276 37,484 48,157 Other expenses: Interest expense, net1,783 1,204 1,515Other income— (5,363) —Equity in net loss (gain) of investees6,158 (13,445) 1,789Gain on remeasurement of cost method investment(6,577) — —Income from continuing operations before income taxes22,912 55,088 44,853Provision for income taxes4,684 4,003 17,972Income from continuing operations, net of tax18,228 51,085 26,881(Loss) income from discontinued operations, net of tax(37,053) 2,735 62,965Net (loss) income(18,825) 53,820 89,846Net (income) loss from discontinued operations attributable to noncontrolling interest(156) (451) 2,082Net (loss) income attributable to Providence$(18,981) $53,369 $91,928 Net (loss) income available to common stockholders (Note 16)$(25,257) $42,636 $76,940 Basic (loss) earnings per common share: Continuing operations$0.92 $2.99 $1.35Discontinued operations(2.87) 0.15 3.90Basic (loss) earnings per common share$(1.95) $3.14 $5.25 Diluted (loss) earnings per common share: Continuing operations$0.92 $2.97 $1.34Discontinued operations(2.86) 0.15 3.87Diluted (loss) earnings per common share$(1.94) $3.12 $5.21 Weighted-average number of common shares outstanding: Basic12,960,837 13,602,140 14,666,896Diluted13,033,247 13,673,314 14,779,398 See accompanying notes to the consolidated financial statements63The Providence Service CorporationConsolidated Statements of Comprehensive Income(in thousands) Year ended December 31, 2018 2017 2016Net (loss) income$(18,825) $53,820 $89,846Net (income) loss from discontinued operations attributable to noncontrolling interest(156) (451) 2,082Net (loss) income attributable to Providence(18,981) 53,369 91,928Other comprehensive income (loss): Foreign currency translation adjustments, net of tax(4,168) 7,117 (16,618)Reclassification of translation loss realized upon sale of subsidiaries in 2018 and equityinvestment in 201729,973 527 —Other comprehensive income (loss)25,805 7,644 (16,618)Comprehensive income6,980 61,464 73,228Comprehensive (income) loss from discontinued operations attributable tononcontrolling interest(2,165) (255) 1,968Comprehensive income attributable to Providence$4,815 $61,209 $75,196 See accompanying notes to the consolidated financial statements64The Providence Service CorporationConsolidated Statements of Stockholders’ Equity (in thousands except share data) AccumulatedOther Common Stock AdditionalPaid-In Retained ComprehensiveLoss, Net of Treasury Stock Non-Controlling Shares Amount Capital Earnings Tax Shares Amount Interest TotalBalance at December 31, 201517,186,780 $17 $293,012 $69,209 $(16,831) 1,895,998 $(54,823) $(452) $290,132Stock-based compensation— — 5,154 — — — — — 5,154Exercise of employee stock options,including net tax benefit of $276105,788 — 3,832 — — — — — 3,832Restricted stock issued22,793 — — — — 2,736 (130) — (130)Stock repurchase plan— — — — — 1,579,942 (70,248) — (70,248)Conversion of convertible preferred stockto common stock300 — 12 — — — — — 12Convertible preferred stock dividends— — — (4,419) — — — — (4,419)Foreign currency translation adjustments,net of tax— — — — (16,618) — — 114 (16,504)Noncontrolling interest— — — — — — — (2,082) (2,082)Net income attributable to Providence— — — 91,928 — — — — 91,928Balance at December 31, 201617,315,661 17 302,010 156,718 (33,449) 3,478,676 (125,201) (2,420) 297,675Stock-based compensation— — 7,619 — — — — — 7,619Exercise of employee stock options91,400 — 2,423 — — 5,665 (238) — 2,185Restricted stock issued36,623 — — — — 19,556 (878) — (878)Performance restricted stock issued3,773 — (96) — — — — — (96)Shares issued for bonus settlement anddirector stipends25,646 — 1,107 — — — — — 1,107Stock repurchase plan— — — — — 622,235 (28,486) — (28,486)Conversion of convertible preferred stockto common stock495 — 20 (1) — — — — 19Convertible preferred stock dividends— — — (4,418) — — — — (4,418)Foreign currency translation adjustments,net of tax— — — — 7,117 — — (196) 6,921Reclassification of translation lossrealized upon sale of equity investments— — — — 527 — — — 527Noncontrolling interest— — — — — — — 451 451Other— — 22 — — — — — 22Net income attributable to Providence— — — 53,369 — — — — 53,369Cumulative effect adjustment from changein accounting principle, net of tax— — 850 (850) — — — — —Balance at December 31, 201717,473,598 17 313,955 204,818 (25,805) 4,126,132 (154,803) (2,165) 336,017Cumulative effect adjustment from changein accounting principle, net of tax— — — 5,710 — — — — 5,710Stock-based compensation— — 9,130 — — — — — 9,130Exercise of employee stock options266,293 1 11,669 — — — — — 11,670Restricted stock issued33,582 — (320) — — 5,242 (335) — (655)Performance restricted stock issued3,110 — (109) — — — — — (109)Shares issued for bonus settlement anddirector stipends4,193 — 150 — — — — — 150Stock repurchase plan— — — — — 838,719 (55,753) — (55,753)Conversion of convertible preferred stockto common stock3,993 — 161 (7) — — — — 154Foreign currency translation adjustments,net of tax— — — — (4,168) — — 1,839 (2,329)Reclassification of translation lossrealized upon sale of foreign subsidiary— — — — 29,973 — — — 29,973Convertible preferred stock dividends— — — (4,413) — — — — (4,413)Noncontrolling interest— — — — — — — 326 326Other— — 108 — — — — — 108Net loss attributable to Providence— — — (18,981) — — — — (18,981)Balance at December 31, 201817,784,769 $18 $334,744 $187,127 $— 4,970,093 $(210,891) $— $310,998 See accompanying notes to the consolidated financial statements65The Providence Service Corporation Consolidated Statements of Cash Flows(in thousands) Year ended December 31, 2018 2017 2016Operating activities Net (loss) income$(18,825) $53,820 $89,846Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation18,769 18,542 21,699Amortization8,908 7,927 26,026Provision for doubtful accounts6,062 1,372 3,759Stock-based compensation8,993 7,543 5,136Deferred income taxes(545) (22,996) (14,130)Amortization of deferred financing costs and debt discount512 682 1,754Write-off of deferred financing charges— — 2,302Asset impairment charge23,378 — 21,003Equity in net (gain) loss of investees6,072 (12,054) 10,287Gain on sale of equity investment— (12,377) —Loss (gain) on sale of business53,692 — (167,895)Gain on remeasurement of cost method investment(6,577) — —Deferred income taxes and income taxes payable (receivable) on sale of business(51,861) — 58,492Other non-cash charges (credits)(353) 296 (1,323)Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable(30,997) 5,715 (19,332)Prepaid expenses and other14,253 15,457 (4,058)Reinsurance and related liability reserve(2,743) (5,731) (4,110)Accounts payable and accrued expenses(21,799) (9,064) 33,365Income taxes payable on gain from sale of business— — (30,153)Accrued transportation costs1,301 11,232 8,654Deferred revenue(1,975) (4,691) (4,019)Other long-term liabilities1,634 (629) 4,462Net cash provided by operating activities7,899 55,044 41,765Investing activities Purchase of property and equipment(17,521) (19,923) (41,216)Proceeds from sale of property— — 1,039Proceeds from sale of equity investment— 15,593 —Acquisitions, net of cash acquired(43,711) — —Dispositions or sale of business, net of cash sold12,780 — 371,580Purchase of equity investment— — (13,663)Cost method investments— (3,000) —Proceeds from note receivable3,130 — —Other investing activities— 310 239Net cash (used in) provided by investing activities(45,322) (7,020) 317,979Financing activities Preferred stock dividends(4,413) (4,418) (4,419)Repurchase of common stock, for treasury(56,088) (29,364) (70,378)Proceeds from common stock issued pursuant to stock option exercise12,413 1,921 4,108Proceeds from debt42,000 — 52,500Repayment of debt(42,000) — (357,450)Other financing activities(3,467) (1,927) (1,182)Net cash used in financing activities(51,555) (33,788) (376,821)Effect of exchange rate changes on cash(261) 978 (1,357)Net change in cash, cash equivalents and restricted cash(89,239) 15,214 (18,434)Cash, cash equivalents and restricted cash at beginning of period101,606 86,392 104,826Cash, cash equivalents and restricted cash at end of period$12,367 $101,606 $86,392See accompanying notes to the consolidated financial statements66The Providence Service CorporationSupplemental Cash Flow Information(in thousands) Year ended December 31,Supplemental cash flow information2018 2017 2016 Cash included in current assets of discontinued operations held for sale$2,321 $42,512 $22,666Cash paid for interest$1,162 $987 $9,768Cash paid for income taxes$12,054 $18,128 $55,827Proceeds receivable from option exercise$— $562 $—Purchases of equipment in accounts payable and accrued liabilities$— $1,362 $983Note receivable issued for sale of property$— $— $3,130Purchase of equipment through capital lease obligation$724 $1,474 $4,547Acquisitions: Purchase price$54,700 $— $—Less: Cash acquired(1,302) — —Restricted cash acquired(110) — —Value of existing ownership in Circulation(9,577) — —Acquisitions, net of cash acquired$43,711 $— $— See accompanying notes to the consolidated financial statements67The Providence Service CorporationNotes to Consolidated Financial StatementsDecember 31, 2018(in thousands except share and per share data) 1. Organization and Basis of Presentation Description of BusinessThe Providence Service Corporation (“we”, the “Company” or “Providence”), owns subsidiaries and investments primarily engaged in the provisionof healthcare services in the United States. The Company’s NET Services segment, which primarily operates under the brands LogistiCare and Circulation,since its acquisition in September 2018, is the largest manager of non-emergency medical transportation (“NET”) programs for state governments andmanaged care organizations (“MCOs”) in the United States (“U.S.”). 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 digitalplatform. Circulation’s technology expands LogistiCare’s capabilities to manage transportation benefits, integrating all transportation capabilities whileproactively monitoring for fraud, waste and abuse 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”), anationwide 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 ofcommunity-based clinicians and a fleet of mobile health clinics with advanced diagnostics capabilities.The Company’s Corporate and Other segment includes the Company’s executive, accounting, finance, internal audit, tax, legal, public reporting,and corporate development functions. On April 11, 2018, the Company announced an organizational consolidation plan to integrate substantially allactivities and functions performed at the corporate holding company level into LogistiCare (the “Organizational Consolidation”). LogistiCare will retain itsname and continue to be headquartered in Atlanta, GA, and the Company will continue to be named The Providence Service Corporation and be listed onNASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “PRSC”. The Organizational Consolidation is expected to be complete by the secondquarter of 2019. See Note 10, Restructuring and Related Reorganization Costs, for further information.Discontinued OperationsDuring the periods presented, the Company completed the following transactions, which resulted in the presentation of the operations asDiscontinued Operations.•On December 21, 2018, the Company completed the sale of substantially all of the operating subsidiaries of its WD Services segment to AdvancedPersonnel Management Global Pty Ltd of Australia (“APM”) and APM UK Holdings Limited, an affiliate of APM, with the exception of thesegment’s employment services operations in Saudi Arabia (the “WD Services Sale”). 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, aftercourt approval.•On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in Matrix with Providence retaining a 46.8% equityinterest (the “Matrix Transaction”) at the time of the transaction. Prior to the closing of the Matrix Transaction, the financial results of Matrix wereincluded in the Company’s Health Assessment Services (“HA Services”) segment.•On November 1, 2015, the Company completed the sale of its Human Services segment. In addition to the results through the sale date, theCompany has recorded additional expenses related to legal proceedings as described in Note 20, Commitment and Contingencies, related to anindemnified legal matter. Basis of Presentation The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accountingprinciples generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities68and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAPissued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”), which serves as a single source of authoritative non-SECaccounting and reporting standards to be applied by non-governmental entities. All amounts are presented in U.S. dollars, unless otherwise noted.The Company holds an investment in Matrix which is accounted for using the equity method. The Company does not control the decision-makingprocess or business management practices of Matrix. While the Company has access to certain information and performs certain procedures to review thereasonableness of information, the Company relies on 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 awareof any errors in or possible misstatements of the financial information provided by Matrix that would have a material effect on the Company’s consolidatedfinancial statements. Reclassifications The Company has reclassified certain amounts relating to its prior period results to conform to its current period presentation. See Note 2, SignificantAccounting Policies and Recent Accounting Pronouncements, for additional information on reclassifications. 2. Significant Accounting Policies and Recent Accounting Pronouncements Principles of Consolidation The accompanying consolidated financial statements include The Providence Service Corporation, its wholly-owned subsidiaries, and entities itcontrols, or in which it has a variable interest and is the primary beneficiary of expected cash profits or losses. The Company records its investments inentities that it does not control, but over which it has the ability to exercise significant influence, using the equity method. The Company has eliminatedsignificant intercompany transactions and accounts. Accounting Estimates The Company uses estimates and assumptions in the preparation of the consolidated financial statements in accordance with GAAP. Those estimatesand assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Company’sconsolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. The Company’sactual financial results could differ significantly from these estimates. The significant estimates underlying the Company’s consolidated financial statementsinclude revenue recognition; allowance for doubtful accounts; accrued transportation costs; accrued restructuring; income taxes; recoverability of currentand long-lived assets, including equity method investments; intangible assets and goodwill; loss contingencies; accounting for business combinations,including amounts assigned to definite and indefinite lived intangibles and contingent consideration; loss reserves for reinsurance and self-funded insuranceprograms; and stock-based compensation. Cash and Cash Equivalents Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. Investments incash equivalents are carried at cost, which approximates fair value. The Company places its temporary cash investments with high credit quality financialinstitutions. At times, such investments may be in excess of the federally insured limits. Accounts Receivable and Allowance for Doubtful AccountsThe Company records accounts receivable amounts at the contractual amount, less an allowance for doubtful accounts. The Company maintains anallowance for doubtful accounts at an amount it estimates to be sufficient to cover the risk that an account will not be collected. The Company regularlyevaluates its accounts receivables, especially receivables that are past due, and reassesses its allowance for doubtful accounts based on identified customercollection issues. In circumstances where the Company is aware of a customer’s inability to meet its financial obligation, the Company records a specificallowance for doubtful accounts to reduce its net recognized receivable to an amount the Company reasonably expects to collect. Under certain contracts ofNET Services, final payment is based on a reconciliation of actual utilization and cost, and the final reconciliation may require a considerable period of time.69The Company’s provision for doubtful accounts expense from continuing operations for the years ended December 31, 2018, 2017 and 2016 was$338, $1,347 and $2,892, respectively. Property and Equipment Property and equipment are stated at historical cost, net of accumulated depreciation, or at fair value if the assets were initially recorded as the resultof a business combination or if the asset was remeasured due to an impairment. Depreciation is calculated using the straight-line method over the estimateduseful life of the asset. Maintenance and repairs are expensed as incurred. Gains and losses resulting from the disposition of an asset are reflected in operatingexpense.Recoverability of Goodwill In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews goodwill for impairment annually, or more frequently, if eventsand circumstances indicate that an asset may be impaired. Such circumstances could include, but are not limited to: (1) the loss or modification of significantcontracts, (2) a significant adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by aregulator, 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 unitis 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 itscarrying value amount, then we perform a quantitative assessment and compare the fair value of the reporting unit to its carrying value.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 ofthe goodwill impairment test. Instead, if we deem it necessary to perform the quantitative goodwill impairment test in an annual or interim period, werecognize 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 ofgoodwill allocated to the reporting unit. The Company estimates the fair value of the Company’s reporting units using either an income approach, a market valuation approach, a transactionvaluation approach or a blended approach. The income approach produces an estimated fair value of a reporting unit based on the present value of the cashflows the Company expects the reporting unit to generate in the future. Estimates included in the discounted cash flow model include the discount rate,which the Company determines based on adjusting an industry-wide weighted-average cost of capital for size, geography, and company specific risk factors,long-term rates of growth and profitability of the Company’s business, working capital effects and planned capital expenditures. The market approachproduces an estimated fair value of a reporting unit based on a comparison of the reporting unit to comparable publicly traded entities in similar lines ofbusiness. The transaction valuation approach produces an estimated fair value of a reporting unit based on a comparison of the reporting unit to publiclyavailable transactional data involving both publicly traded and private entities in similar lines of business. The Company’s significant estimates in both themarket and transaction approach include the selected similar companies with comparable business factors such as size, growth, profitability, risk and returnon investment and the multiples the Company applies to revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) to estimatethe fair value of the reporting unit. Recoverability of Intangible Assets Subject to Amortization and Other Long-Lived Assets Intangible assets subject to amortization and other long-lived assets are carried at cost and are amortized or depreciated on a straight-line basis overtheir estimated useful lives of 3 to 15 years. In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews 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 beimpaired. Factors that may necessitate an impairment assessment include, among others, significant adverse changes in the extent or manner in which an assetor 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 orsignificant 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 groupof assets may be impaired. In those cases, the Company assesses the recoverability of an asset or group of assets by determining whether the carrying value ofthe 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 assetsover 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 ofassets is not recoverable, the Company estimates the fair value of the asset or group of assets using appropriate valuation methodologies,70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, theCompany records an impairment loss equal to the excess of the carrying value over the estimated fair value.Accrued Transportation Costs Eligible members of our customers schedule transportation through the Company’s central reservation system. NET Services generally contractswith third-party providers to provide transportation. The cost of transportation is recorded in the month the services are rendered, based upon contractualrates and mileage estimates. Transportation providers provide invoices once the trip is completed. Any trips that have not been invoiced require an accrual,based upon the expected cost as well as an estimate for cancellations, as the Company is generally only obligated to pay the transportation provider forcompleted trips. These estimates are based upon the historical trend associated with each contract’s population and the transportation provider networkservicing the program. There may be differences between actual invoiced amounts and estimated costs, and any resulting adjustments are included inexpense. Accrued transportation costs were $84,889 and $83,588 at December 31, 2018 and 2017, respectively. Deferred Financing Costs and Debt Discounts The Company capitalizes direct expenses incurred in connection with its credit facilities and other borrowings, and amortizes such expenses overthe life of the respective credit facility or other borrowings. Fees charged by lenders on the revolving facility and all fees charged by third parties are recordedas deferred financing costs and fees charged by lenders on term loans are recorded as a debt discount. Deferred financing costs, net of amortization, totaling$268 and $388 as of December 31, 2018 and 2017, respectively, are included in “Prepaid expenses and other” on the consolidated balance sheets. Revenue Recognition The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, effective January 1, 2018 using the modified retrospectivetransition method for contracts that were not completed as of January 1, 2018. See Recent Accounting Pronouncements below for further information on theadoption.The Company recognizes revenue as it transfers control of promised services to its customers. The Company generates all of its revenue fromcontracts with customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for theseservices. The Company satisfies substantially all of its performance obligations and recognizes revenue over time instead of at points in time. See furtherinformation in Note 3, Revenue Recognition.Stock-Based Compensation The Company follows the fair value recognition provisions of ASC Topic 718 – Compensation – Stock Compensation (“ASC 718”), which requirescompanies to measure and recognize compensation expense for all share-based payments at fair value.•The Company calculates the fair value of stock options using the Black-Scholes option-pricing formula. The fair value of non-vestedrestricted stock grants is determined based on the closing market price of the Company’s Common Stock on the date of grant. Stock-basedcompensation expense charged against income for stock options and stock grants is based on the grant-date fair value. Forfeitures arerecorded as they occur. The expense for stock-based compensation awards is amortized on a straight-line basis over the requisite serviceperiod, which is typically the vesting period.•The Company records restricted stock units (“RSUs”) that may be settled by the holder in cash, rather than shares, as a liability andremeasures these liabilities at fair value at the end of each reporting period. Upon settlement of these awards, the total compensationexpense recorded over the vesting period of the awards will equal the settlement amount, which is based on the Company’s stock price onthe settlement date.•Performance-based RSUs vest upon achievement of certain company specific performance conditions. On the date of grant, the Companydetermines the fair value of the performance-based award using the fair value of the Company’s Common Stock at that time and assesseswhether it is probable that the performance targets will be achieved. If assessed as probable, the Company records compensation expense forthese awards over the requisite service period. At each reporting period, the Company reassesses the probability of achieving theperformance targets and the performance period required to meet those targets. The estimation of whether the performance targets will beachieved and of the performance period required to achieve the targets requires judgment, and to the extent actual results or updatedestimates differ from the Company’s current estimates, the cumulative effect71on current and prior periods of those changes will be recorded in the period estimates are revised, or the change in estimate will be appliedprospectively depending on whether the change affects the estimate of total compensation cost to be recognized or merely affects theperiod over which compensation cost is to be recognized. The ultimate number of shares issued and the related compensation expenserecognized will be based on a comparison of the final performance metrics to the specified targets.•The Company calculates the fair value of market-based stock awards using the Monte-Carlo simulation valuation model. Forfeitures arerecorded as they occur. Compensation expense for market-based awards is recognized over the requisite service period regardless of whetherthe market conditions are expected to be achieved. Income Taxes Deferred income taxes are determined by the liability method in accordance with ASC Topic 740 - Income Taxes. Under this method, deferred taxassets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes and are measured using the enacted tax rates and laws that are expected to be in effect when the differences areexpected to reverse. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent earningsexperience by jurisdiction, expectations of future taxable income, and the carryforward periods available for tax reporting purposes, as well as other relevantfactors. The Company establishes a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. Due to inherentcomplexities arising from the nature of the Company’s businesses, future changes in income tax law or variances between the Company’s actual andanticipated operating results, the Company makes certain judgments and estimates. Therefore, actual income taxes could materially vary from theseestimates. The Company has recorded a valuation allowance which includes amounts for certain carryforwards and deferred tax assets, as more fully describedin Note 19, Income Taxes, for which the Company has concluded that it is more likely than not that these carryforwards and deferred tax assets will not berealized in the ordinary course of operations. The Company recognizes interest and penalties related to income taxes as a component of income tax expense.The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first stepassesses whether the tax position is more likely than not to be sustained upon examination by the tax authority, including resolution of any appeals orlitigation, based on the technical merits of the position. If the tax position meets the more likely than not criteria, the portion of the tax benefit greater than50% likely to be realized upon settlement with the tax authority is recognized in the consolidated financial statements.On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted as more fully described inNote 19, Income Taxes. Loss Reserves for Certain Reinsurance and Self-Funded Insurance Programs The Company historically reinsured a substantial portion of its automobile, general and professional liability and workers’ compensation costsunder reinsurance programs primarily through the Company’s wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), alicensed captive insurance company domiciled in the State of Arizona. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCICwill continue to resolve claims under the historical policy years.The Company utilizes a report prepared by an independent actuary to estimate the gross expected losses related to historical automobile, generaland professional and workers’ compensation liability reinsurance policies, including the estimated losses in excess of SPCIC’s insurance limits, which wouldbe reimbursed to SPCIC to the extent such losses were incurred. As of December 31, 2018 and 2017, the Company had reserves of $3,900 and $6,699,respectively, for the automobile, general and professional liability and workers’ compensation reinsurance policies, net of expected receivables for losses inexcess of SPCIC’s historical insurance limits. The gross reserve as of December 31, 2018 and 2017 of $10,489 and $12,448, respectively, is classified as“Reinsurance liability reserves” and “Other long-term liabilities” in the consolidated balance sheets. The estimated amount to be reimbursed to SPCIC as ofDecember 31, 2018 and 2017 was $6,589 and $5,749, respectively, and is classified as “Other receivables” and “Other assets” in the consolidated balancesheets. The Company also maintains a self-funded health insurance program with a stop-loss umbrella policy with a third-party insurer to limit themaximum potential liability for individual claims generally to $300 per person, subject to an aggregating stop-loss limit of $400. In addition, the programhas a total stop-loss limit for total claims, in order to limit the Company’s exposure to72catastrophic claims. With respect to this program, the Company considers historical and projected medical utilization data when estimating its healthinsurance program liability and related expense. As of December 31, 2018 and 2017, the Company had $2,201 and $2,229, respectively, in reserve for its self-funded health insurance programs. The reserves are classified as “Reinsurance and related liability reserves” in the consolidated balance sheets. The Company utilizes analysis prepared by third-party administrators and independent actuaries based on historical claims information with respectto the general and professional liability coverage, workers’ compensation coverage, automobile liability, automobile physical damage, and health insurancecoverage to determine the amount of required reserves. The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance andself-funded insurance programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing these reserves, suchas assessing historical paid claims, average lag times between the claims’ incurred date, reported dates and paid dates, and the frequency and severity ofclaims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once aprobable amount is known. Restructuring and Related Reorganization Costs On April 11, 2018, the Company announced the Organizational Consolidation. The Company accrued for severance and other employee separationcosts under this plan when it was probable that benefits would be paid and the amount was reasonably estimable. The amounts used in determining severanceaccruals 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.See further information in Note 10, Restructuring and Related Reorganization Costs. Discontinued Operations In determining whether a group of assets disposed (or to be disposed) of should be presented as a discontinued operation, the Company makes adetermination of whether the criteria for held-for-sale classification is met and whether the disposition represents a strategic shift that has (or will have) amajor effect on the entity’s operations and financial results. If these determinations can be made affirmatively, the results of operations of the group of assetsbeing disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from continuing operating results ofthe Company in the consolidated financial statements. See Note 23, Discontinued Operations, for a summary of discontinued operations.Earnings Per Share The Company computes basic earnings per share by taking net income attributable to the Company available to common stockholders divided by theweighted average number of common shares outstanding during the period, including restricted stock and stock held in escrow if such shares areparticipating securities. Diluted earnings per share includes the potential dilution that may occur from stock-based awards and other stock-basedcommitments using the treasury stock or the as-if converted methods, as applicable. For additional information on how the Company computes earnings pershare, see Note 16, Earnings Per Share.Recent Accounting Pronouncements The Company adopted the following accounting pronouncements during the year ended December 31, 2018: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 introducedFASB Accounting Standards Codification Topic 606 (“ASC 606”), which replaced historical revenue recognition guidance and is intended to improve andconverge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASC 606 is thatan entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods orservices. ASC 606 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts,including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reportingperiod presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initialapplication. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective transition method for contracts that were notcompleted as of January 1, 2018.The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retainedearnings. These impacts related to our WD Services segment, which has since met the criteria for classification as discontinued operations. Upon adoption ofASU 2014-09, the cumulative effect of the changes made to the Company’s consolidated balance sheet as of January 1, 2018 were as follows:73 Balance at December 31,2017 Adjustments due to ASU2014-09 Balance at January 1,2018Assets Current assets of discontinued operations$104,024 $11,182 $115,206 Liabilities Current liabilities of discontinued operations61,643 5,442 67,085Noncurrent liabilities of discontinued operations7,565 30 7,595 Equity Retained earnings, net of tax204,818 5,710 210,528 The impact of applying the new revenue recognition guidance on the Company’s consolidated statement of operations for the year ended December31, 2018 was as follows: Year ended December 31, 2018 As Reported Pro forma as if theprevious accountingguidance was in effectService revenue, net$1,384,965 $1,400,453Service expense1,284,603 1,300,091Operating income24,276 24,276There was no impact of applying the new revenue recognition guidance on the Company’s consolidated balance sheet at December 31, 2018, as anyassets and liabilities impacted by the guidance were sold in the WD Services Sale. The comparative information has not been restated and continues to bereported under the accounting standards in effect for those periods. See further information in Note 3, Revenue Recognition.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and CashPayments (“ASU 2016-15”). ASU 2016-15 provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified inthe statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2016-15 on January 1, 2018. The adoption did not have asignificant impact on the Company’s consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described asrestricted cash or restricted cash equivalents. ASU 2016-18 is effective for public entities for fiscal years beginning after December 15, 2017, and interimperiods within those fiscal years. Early adoption is permitted, including adoption in an interim period; however, any adjustments must be reflected as of thebeginning of the fiscal year that includes that interim period. ASU 2016-18 must be adopted retrospectively. The Company adopted ASU 2016-18 on January1, 2018. As a result of the adoption of ASU 2016-18, the Company recast its consolidated statement of cash flows for the years ended December 31, 2017 and2016. The recast resulted in an increase in cash used in investing activities of $7,834 for the year ended December 31, 2017. The recast resulted in a decreasein cash provided by investing activities of $5,926 for the year ended December 31, 2016. See additional information in Note 4, Cash, Cash Equivalents andRestricted Cash.In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms of a share-based payment award should be accounted for as a modification. A changeto an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions donot change, and the classification as an equity or liability instrument does not change. This guidance is effective for fiscal years beginning after December15, 2017. Early74adoption is permitted. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on theCompany’s consolidated financial statements.Recent accounting pronouncements that were not yet adopted by the Company through December 31, 2018 are as follows: In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 introduced FASB Accounting StandardsCodification Topic 842 (“ASC 842”), which will replace ASC 840, Leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements toTopic 842 (Leases) (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, inJuly 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). ASU 2018-11 provides a new transition methodand a practical expedient for separating components of a contract.ASC 842 is effective for publicly held entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscalyears. Early adoption is permitted. Lessees may apply a modified retrospective transition approach for leases existing at, or entered after, the beginning of theearliest comparative period presented in the financial statements, or lessees may initially apply the new lease standard at the adoption date and recognize acumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in whichit is the lessee. Under ASC 842, lessees will be required to recognize a lease liability and right-of-use asset for all leases (with the exception of short-termleases) at the commencement date. The Company will apply the modified retrospective transition method and elect the transition option to use the effectivedate of January 1, 2019 as the date of initial application. The Company will recognize the cumulative effect of the transition adjustment as of the effectivedate and will not provide any new lease disclosures for periods before the effective date. With respect to the practical expedients, the Company will elect thepackage of practical expedients and the practical expedient not to separate lease and non-lease components. The Company will not apply the use ofhindsight practical expedient. Based on the Company’s current portfolio of leases, the Company expects $24,000 to $28,000 of additional leased assets andliabilities will be recognized on its consolidated balance sheet. The Company does not expect a material impact on the statement of operations.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The amendments in ASU2016-13 will supersede or clarify much of the existing guidance for reporting credit losses for assets held at amortized cost basis and available for sale debtsecurities. 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 effectivefor financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15,2018. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the DisclosureRequirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 removes certain disclosures, modifies certain disclosures and added additionaldisclosures. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoptionpermitted. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. The Company is currentlyevaluating 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 forImplementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which will align the requirements forcapitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costsincurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, with early adoptionpermitted. The Company is currently evaluating the impact of ASU 2018-15 on its consolidated financial statements.In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certaindisclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosurerequirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption ofstockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of thebeginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule is effective onNovember 5, 2018. The Company will adopt this new rule beginning with its financial reporting for the quarter ending March 31, 2019. Upon adoption,75the Company will include its Consolidated Statements of Stockholders’ Equity with each filing of a Quarterly Report on Form 10-Q. 3. Revenue RecognitionUnder ASC 606, the Company recognizes revenue as it transfers control of promised services to its customers. The Company generates all of itsrevenue from contracts with customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled inexchange for these services. The Company satisfies substantially all of its performance obligations and recognizes revenue over time instead of at points intime.Disaggregation of RevenueThe following table summarizes disaggregated revenue from contracts with customers for the year ended December 31, 2018 by contract type forNET Services:State Medicaid agency contracts $732,261Managed care organization contracts 652,704 Total NET Services revenue, net $1,384,965 Capitated contracts $1,096,822Non-capitated contracts 288,143 Total NET Services revenue, net $1,384,965 NET Services provides non-emergency transportation services pursuant to contractual commitments over defined service delivery periods. For mostcontracts, NET Services arranges for transportation of members through its network of independent transportation providers, whereby it remits payment to thetransportation providers. However, for certain contracts, NET Services only provides administrative management services to support the customers’ efforts toserve 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 andrecord-keeping related to non-emergency transportation services. Transportation management services include, but are not limited to, fraud, waste, and abuseand utilization review programs as well as compliance controls. NET Services’ performance obligations consist of a series of distinct services that aresubstantially the same and which are transferred to the customer in the same manner. In most cases, NET Services is the principal in its arrangements becauseit 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 fromcustomers in an amount that corresponds directly with the value of its performance to date. This is consistent with NET Services’ historical revenuerecognition policy. NET Services recognizes revenue for some of its contracts that include variable consideration using a time-elapsed measure when the feesearned relate directly to services performed in the period. Because most contracts include termination for convenience clauses with required notice periods ofless 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 torefund 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 willultimately be entitled.The only financial impact for NET Services of adopting ASU 2014-09 was the determination it is the agent under one of its contracts based on thenew guidance, whereas it previously considered itself the principal in the arrangement. Consequently, NET Services now recognizes revenue under thespecific contract on a net basis, which resulted in reduced revenue and service expense of $15,488 during the year ended December 31, 2018.During the year ended December 31, 2018, NET Services recognized $5,685 from performance obligations satisfied in previous periods due to theresolution of contractual adjustments agreed with the customer.76Related Balance Sheet AccountsAccounts receivable, net - The following table provides information about accounts receivable, net as of December 31, 2018 and 2017: December 31, 2018 December 31, 2017Accounts receivable$101,340 $73,416NET Services’ reconciliation contract receivable48,270 42,054Allowance for doubtful accounts(1,854) (5,262) $147,756 $110,208NET Services accrued contract payments - Includes liabilities related to certain contracts of NET Services for which final payment is based on areconciliation of actual utilization and cost, and the final reconciliation may require a considerable period of time. The balance is included in “Accruedexpenses” in the consolidated balance sheets. The balance at December 31, 2018 and 2017 totaled $9,756 and $17,487, respectively.Deferred revenue - Includes funds received for certain services in advance of services being rendered. The balance of current deferred revenue atDecember 31, 2018 and December 31, 2017 totaled $562 and $3,019, respectively. The balance of noncurrent deferred revenue was $963 at December 31,2018, and is included in “Other long-term liabilities” on the consolidated balance sheet. The decrease in the total deferred revenue balance fromDecember 31, 2017 to December 31, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations. Duringthe year ended December 31, 2018, $3,019 of revenue deferred as of December 31, 2017 was recognized.Practical Expedients, Exemptions and Other MattersWe do not incur significant sales commission expenses. Any amounts are expensed as incurred. These costs are recorded within service expense inthe consolidated statements of operations.The Company generally expects the period of time from when it transfers a promised service to a customer and when the customer pays for theservice to be one year or less, and thus we do not have a significant financing component for our contracts with customers.We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; (ii)contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed; or (iii) contracts for which the variableconsideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service thatforms part of a single performance obligation, and the terms of the variable consideration relate specifically to our efforts to transfer the distinct service or to aspecific outcome from transferring the distinct service.4. Cash, Cash Equivalents and Restricted CashThe following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to theamounts shown in the consolidated statements of cash flows: December 31, 2018 2017Cash and cash equivalents$5,678 $52,798Restricted cash, current1,482 1,091Current assets of discontinued operations2,321 42,512Restricted cash, less current portion2,886 5,205Cash, cash equivalents and restricted cash$12,367 $101,606Restricted cash primarily relates to amounts held in trusts for reinsurance claims losses under the Company’s captive insurance operation forhistorical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawalunder our self-insured medical and benefits plans. Current assets of discontinued77operations principally reflects the cash position of WD Services operations in Saudi Arabia, which was not sold as part of the WD Services Sale. Such cashwill be used to fund the shut-down costs of this operation as needed.5. Equity Investment Matrix Prior to the closing of the Matrix Transaction on October 19, 2016, the financial results of Matrix were included in the Company’s HA Servicessegment. Subsequent to the closing of the Matrix Transaction, the Company owned a 46.8% noncontrolling interest in Matrix. As of December 31, 2018, theCompany owned a 43.6% noncontrolling interest in Matrix. Pursuant to a Shareholder’s Agreement, affiliates of Frazier Healthcare Partners hold rightsnecessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting andthe Company’s share of Matrix’s income or losses are recorded as “Equity in net loss (gain) of investees” in the accompanying consolidated statements ofoperations.The carrying amount of the assets included in the Company’s consolidated balance sheets and the maximum loss exposure related to the Company’sinterest in Matrix as of December 31, 2018 and 2017 totaled $161,503 and $169,699, respectively.Summary financial information for Matrix on a standalone basis is as follows: December 31, 2018 2017Current assets$61,565 $37,563Long-term assets719,450 597,613Current liabilities27,619 27,718Long-term liabilities373,159 240,513 Year endedDecember 31, 2018 Year endedDecember 31, 2017 October 19, 2016through December31, 2016Revenue$282,067 $227,872 $41,635Operating (loss) income(1,186) 11,870 (4,079)Net (loss) income(19,962) 26,665 (4,200) Included in Matrix’s standalone net loss of $19,962 for the year ended December 31, 2018 are depreciation and amortization of $43,119, integrationcosts of $6,524, equity compensation of $2,698, management fees paid to Matrix’s shareholders of $4,887, merger and acquisition due diligence related costsof $2,341, transaction related costs of $1,010, interest expense of $25,942, including debt transaction costs and the write-off of deferred financing fees of$3,748, and an income tax benefit of $7,166.Included in Matrix’s standalone net income of $26,665 for the year ended December 31, 2017 are depreciation and amortization of $33,512,transaction related expenses of $3,537, which includes $2,679 of transaction incentive compensation, equity compensation of $2,639, management fees paidto Matrix’s shareholders of $2,331, acquisition related costs of $412, interest expense of $14,818 and an income tax benefit of $29,613. The income taxbenefit 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 standalone net loss of $4,200 for the year ended December 31, 2016 are depreciation and amortization of $6,356, transactionrelated expenses of $6,367, which includes $4,033 of transaction incentive compensation, equity compensation of $407, management fees paid to Matrix’sshareholders of $396, interest expense of $2,949 and an income tax benefit of $2,828.See Note 23, Discontinued Operations, for Matrix’s January 1, 2016 through October 19, 2016 results of operations.786. Prepaid Expenses and Other Prepaid expenses and other were comprised of the following: December 31, 2018 2017Prepaid income taxes$35,207 $254Escrow funds— 10,000Prepaid insurance1,308 1,765Note receivable— 3,224Prepaid rent828 722Other6,824 6,494Total prepaid expenses and other$44,167 $22,459 Escrow funds at December 31, 2017 represented amounts related to indemnification claims from the sale of the Human Services segment. The escrowfunds were used during the year ended December 31, 2018 to satisfy a portion of the Company’s settlement of indemnification claims. See Note 20,Commitments and Contingencies, for further information.7. Property and Equipment Property and equipment consisted of the following: EstimatedUseful December 31, Life (years) 2018 2017Computer and telecom equipment3 — 5 $29,883 $27,742Software3 — 5 24,318 22,256Leasehold improvementsShorter of 7 years orlease term 8,078 7,599Furniture and fixtures5 — 10 1,942 2,351Automobiles 5 3,666 3,209Construction and development in progress N/A 299 12,579 68,186 75,736Less accumulated depreciation 45,221 38,064Total property and equipment, net $22,965 $37,672 Depreciation expense from continuing operations was $12,058, $10,717 and $9,900 for the years ended December 31, 2018, 2017 and 2016,respectively. Following the acquisition of Circulation and an analysis of the technology capabilities and scalability of the Circulation platform, the Companydetermined it would not continue the development of the LCAD NextGen technology (“NextGen”). The Company also determined it would not place any ofthe developed NextGen technology into service, and recorded an asset impairment charge of $13,496 related to its NET Services segment during the fourthquarter of 2018. In addition, the Company had previously recorded an impairment of $679 during the second quarter of 2018 in relation to the decision toabandon specific development work intended to synchronize data across applications of the proprietary NextGen systems, based on the determination of analternative method to accomplish this task. The total impairment charge of $14,175 is reflected in “Asset impairment charge” in the consolidated statement ofoperations for the year ended December 31, 2018. As of December 31, 2017, construction in progress was primarily comprised of the software developmentcosts for NextGen.798. Goodwill and Intangibles Impairment The Company did not record any goodwill or intangible asset impairment charges for continuing operations for the years ended December 31, 2018,2017 and 2016. Goodwill There were no changes in goodwill from December 31, 2016 to December 31, 2017. Changes in goodwill were as follows for the period fromDecember 31, 2017 to December 31, 2018: NETServicesBalances at December 31, 2017 Goodwill $191,215Accumulated impairment losses (96,000) 95,215 Acquisition of Circulation 40,001Balances at December 31, 2018 Goodwill 231,216Accumulated impairment losses (96,000) $135,216 The total amount of goodwill from continuing operations that was deductible for income tax purposes related to acquisitions as of December 31,2018 and 2017 was $29 for each year.Intangible Assets Intangible assets are comprised of acquired customer relationships, trademarks and trade names, and developed technology. Intangible assetsconsisted of the following: December 31, 2018 2017 EstimatedUsefulLife (Yrs) GrossCarryingAmount AccumulatedAmortization GrossCarryingAmount AccumulatedAmortizationCustomer relationships15 $43,800 $(32,515) $43,800 $(29,635)Developed technology of Circulation5 14,100 (705) — —Customer relationships of Circulation3 1,400 (117) — —Trademarks and trade names of Circulation3 200 (17) — —Total $59,500 $(33,354) $43,800 $(29,635) The weighted-average amortization period at December 31, 2018 for intangibles was 12.3 years. No significant residual value is estimated for theseintangible assets. Amortization expense from continuing operations was $3,755, $2,901 and $2,881 for the years ended December 31, 2018, 2017 and 2016,respectively.The Company acquired Circulation in September 2018, which resulted in the increase of intangible assets from December 31, 2017 to December 31,2018. See additional discussion of the Circulation acquisition in Note 22, Acquisitions.80The total amortization expense is estimated to be as follows for the next five years as of December 31, 2018: Year Amount2019 $6,2342020 6,2342021 6,1012022 5,4612023 2,116Total $26,146 9. Accrued Expenses Accrued expenses consisted of the following: December 31, 2018 2017Accrued compensation and related$11,050 $18,816NET Services accrued contract payments9,756 17,487Accrued settlement— 15,000Accrued cash settled stock-based compensation3,719 3,938Income taxes payable— 1,959Other14,666 14,443Total accrued expenses$39,191 $71,643The accrued settlement at December 31, 2017 represented amounts related to indemnification claims from the sale of the Human Services segment,which was completed on November 1, 2015. The settlement was finalized during the year ended December 31, 2018, which resulted in the payment of theaccrued settlement amount, in which $10,000 was released from an escrow account and $4,475 was paid in cash. See Note 20, Commitments andContingencies, for further information.10. Restructuring and Related Reorganization Costs Corporate and OtherOn April 11, 2018, the Company announced the Organizational Consolidation, which involves transferring all job responsibilities previouslyperformed by employees of the holding company to LogistiCare, and closing the current corporate offices in Stamford, Connecticut and Tucson, Arizona.The Company adopted an employee retention plan designed to incentivize current holding company level employees to remain employed with the Companyduring the transition. The employee retention plan became effective on April 9, 2018 and covers the holding company level employees and provides forcertain payments and benefits to be provided to the employees if they remain employed with the Company through a retention date established for eachindividual, subject to a fully executed retention letter. The Organizational Consolidation is expected to be completed by the end of the second quarter of2019.As of December 31, 2018, the Company estimates that it will incur aggregate pre-tax restructuring charges of approximately $12,200 through June30, 2019 in connection with the Organizational Consolidation discussed above. These charges include approximately $7,100 related to retention andpersonnel costs, $2,000 related to acceleration of stock-based compensation, $600 related to accelerated depreciation and $2,500 related to other costs,including lease termination and recruiting costs. A total of $8,797 restructuring and related costs has been incurred during the year ended December 31, 2018related to the Organizational Consolidation. These costs include $5,098 of retention and personnel costs, $1,731 of accelerated stock-based compensationexpense, $436 of accelerated depreciation and $1,532 of other costs, primarily related to recruiting and legal costs. These costs are recorded as “General andadministrative expense” and “Depreciation and amortization” in the accompanying consolidated statements of operations. The Company’s estimate issubject to change, as it is based upon assumptions for the sublease of office space in Stamford, Connecticut and Tucson, Arizona, as well as other factors.81Summary of Liability for Corporate and Other Restructuring and Related Charges January 1,2018 CostsIncurred Cash Payments December 31,2018Retention and personnel liability$— $5,098 $(3,142) $1,956Other liability— 1,532 (1,134) 398Total$— $6,630 $(4,276) $2,354The total restructuring liability at December 31, 2018 includes $2,124 classified as “Accrued expenses” and $230 classified as “Accounts payable”in the consolidated balance sheet.11. Debt The Company’s debt was as follows: December 31, 2018 December 31, 2017 $200,000 revolving loan, LIBOR plus 2.25% - 3.25% with interest payable at least once every three monthsthrough August 2019$— $—Capital lease obligations1,071 2,984 1,071 2,984Less current portion of debt718 2,400Total debt, less current portion$353 $584 Annual maturities of revolving loan and capital lease obligations as of December 31, 2018 are as follows: Year Amount2019 $7182020 3082021 45Total $1,071 Credit Facility The Company is a party to the amended and restated credit and guaranty agreement, dated as of August 2, 2013 (as amended, the “CreditAgreement”), with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. The CreditAgreement provides the Company with a $200,000 revolving credit facility (the “Credit Facility”), including a sub-facility of $25,000 for letters of credit. OnJune 7, 2018, the Company and certain of its subsidiaries entered into the Fifth Amendment to the Amended and Restated Credit and Guaranty Agreement(the “Amendment”), amending the Amended and Restated Credit and Guaranty Agreement dated as of August 2, 2013 (as amended to date, the “CreditAgreement”), by and among the Company, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America,N.A. as administrative agent. The Amendment (i) extended the maturity date of the Credit Agreement to August 2, 2019 and (ii) amended certain covenantsunder the Credit Agreement to provide for greater operational, financial and strategic flexibility, including the implementation of the Company’sOrganizational Consolidation.As of December 31, 2018, the Company had borrowings of $0 and ten letters of credit outstanding in the amount of $12,338 under the revolvingcredit facility. At December 31, 2018, the Company’s available credit under the revolving credit facility was $187,662. Under the Credit Agreement, theCompany has an option to request an increase in the amount of the revolving credit facility from time to time (on substantially the same terms as apply to theexisting facilities) in an aggregate amount of up to $75,000 with either additional commitments from lenders under the Credit Agreement at such time or newcommitments from82financial institutions acceptable to the administrative agent in its reasonable discretion, so long as no default or event of default exists at the time of any suchincrease. The Company may not be able to access additional funds under this increase option as no lender is obligated to participate in any such increaseunder the Credit Facility. The Credit Agreement has a maturity date of August 2, 2019.Interest on the outstanding principal amount of loans accrues, at the Company’s election, at a per annum rate equal to LIBOR, plus an applicablemargin, or the base rate as defined in the agreement plus an applicable margin. The applicable margin ranges from 2.25% to 3.25% in the case of LIBORloans and 1.25% to 2.25% in the case of the base rate loans, in each case, based on the Company’s consolidated leverage ratio as defined in the CreditAgreement. Interest on the loans is payable quarterly in arrears. In addition, the Company is obligated to pay a quarterly commitment fee based on apercentage of the unused portion of each lender’s commitment under the Credit Facility and quarterly letter of credit fees based on a percentage of themaximum 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% and2.25% to 3.25%, respectively, in each case, based on the Company’s consolidated leverage ratio.The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s present and future domestic subsidiaries, excludingcertain domestic subsidiaries which include the Company’s insurance captive and the Company’s investment in Matrix. The Company’s 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 the Company’s respectiveassets, including a pledge of 100% of the issued and outstanding stock of the Company’s domestic subsidiaries, excluding the Company’s insurance captive.The Credit Agreement contains customary affirmative and negative covenants and events of default. The negative covenants include restrictions onthe Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets, andmerge and consolidate. The Company is subject to financial covenants, including consolidated net leverage and consolidated interest coverage covenants. Capital Leases We have capital leases for information technology hardware and software with termination dates ranging from January 2018 through October 2020.The terms of the leases are between 12 and 36 months, with interest recorded at an incremental borrowing rate of 3.28%. At December 31, 2018, $1,894represents the hardware and software under capital leases and $673 represents the related accumulated depreciation. 12. Convertible Preferred Stock, Net The Company completed a rights offering on February 5, 2015 (the “Rights Offering”) providing all of the Company’s existing commonstockholders the non-transferrable right to purchase their pro rata share of $65,500 of convertible preferred stock at a price equal to $100.00 per share(“Preferred Stock”). The Preferred Stock is convertible into shares of Providence’s common stock, $0.001 par value per share (“Common Stock”) at aconversion price equal to $39.88 per share, which was the closing price of the Company’s 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 theStandby Purchase Agreement (the “Standby Purchase Agreement”) between Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., BlackwellPartners, LLC - Series A and Coliseum Capital Co-Invest, L.P. (collectively, the “Coliseum Stockholders”) and the Company, the remaining 524,116 shares ofthe Company’s Preferred Stock were purchased by the Coliseum Stockholders at the $100.00 per share subscription price. The Company received $65,500 inaggregate gross proceeds from the consummation of the Rights Offering and Standby Purchase Agreement. Additionally, on March 12, 2015, the ColiseumStockholders exercised their right to purchase an additional 150,000 shares of the Company’s Preferred Stock, at a purchase price of $105.00 per share or atotal purchase price of $15,750, of the same series and having the same conversion price as the Preferred Stock sold in the Rights Offering. The Company may pay a noncumulative cash dividend on each share of Preferred Stock, if and when declared by a committee of its Board ofDirectors (“Board”), at the rate of five and one-half percent (5.5%) per annum on the liquidation preference then in effect. On or before the third business dayimmediately preceding each fiscal quarter, the Company must determine its intention whether or not to pay a cash dividend with respect to that ensuingquarter and will give notice of its intention to each holder of Preferred Stock as soon as practicable thereafter. In the event the Company does not declare and pay a cash dividend, the Company will declare a payment-in-kind (“PIK”) dividend by increasingthe liquidation preference of the convertible Preferred Stock to an amount equal to the liquidation preference in effect at the start of the applicable dividendperiod, plus an amount equal to the liquidation preference then in effect multiplied83by eight and one-half percent (8.5%) per annum, computed on the basis of a 365-day year and the actual number of days elapsed from the start of theapplicable dividend period to the applicable date of determination. All holders of the Company’s Preferred Stock are able to convert their Preferred Stock into shares of Common Stock at a rate of approximately 2.51shares of Common Stock for each share of Preferred Stock. As of December 31, 2018, a total of 3,394 shares of Preferred Stock have been converted to 8,503shares of Common Stock.Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, and commenced on April 1, 2015, and, ifdeclared, begin to accrue on the first day of the applicable dividend period. PIK dividends, if applicable, accrue cumulatively on the same schedule as setforth above for cash dividends and are also compounded at the applicable annual rate on each applicable subsequent dividend date. Cash dividends onredeemable convertible preferred stock totaling $4,413, or $5.50 per share, $4,418, or $5.50 per share, and $4,419, or $5.50 per share, were distributed toconvertible preferred stockholders for the years ended December 31, 2018, 2017 and 2016, respectively. The Preferred Stock is accounted for outside of stockholders’ equity as it may be redeemed upon certain change in control events that are not solelyin the control of the Company. Dividends are recorded in stockholders’ equity and consist of the 5.5%/8.5% dividend. Certain other provisions apply incertain change in control events. The following table summarizes the Preferred Stock activity for the years ended December 31, 2018 and 2017: Dollar Value Share CountBalance at December 31, 2016$77,565 803,398Conversion to common stock(20) (198)Allocation of issuance costs1 —Balance at December 31, 2017$77,546 803,200Conversion to common stock(161) (1,594)Allocation of issuance costs7 —Balance at December 31, 2018$77,392 801,606 As of December 31, 2018 and 2017, the outstanding shares of Preferred Stock were convertible into 2,010,045 and 2,014,042 shares of CommonStock, respectively. 13. Stockholders’ Equity At December 31, 2018 and 2017 there were 17,784,769 and 17,473,598 shares of the Company’s Common Stock issued, respectively, including4,970,093 and 4,126,132 treasury shares at December 31, 2018 and 2017, respectively. Subject to the rights specifically granted to holders of any then outstanding shares of the Company’s Preferred Stock, the Company’s commonstockholders are entitled to vote together as a class on all matters submitted to a vote of the Company’s common stockholders, and are entitled to anydividends that may be declared by the Board. The Company’s common stockholders do not have cumulative voting rights. Upon the Company’s dissolution,liquidation or winding up, holders of the Company’s Common Stock are entitled to share ratably in the Company’s net assets after payment or provision forall liabilities and any preferential liquidation rights of the Company’s Preferred Stock then outstanding. The Company’s common stockholders do not havepreemptive rights to purchase shares of the Company’s stock. The issued and outstanding shares of the Company’s Common Stock are not subject to anyredemption provisions and are not convertible into any other shares of the Company’s capital stock. The rights, preferences and privileges of holders of theCompany’s Common Stock will be subject to those of the holders of any shares of the Company’s Preferred Stock the Company may issue in the future. 84The following table reflects the total number of shares of the Company’s Common Stock reserved for future issuance as of December 31, 2018: Shares of common stock reserved for: Exercise of stock options and restricted stock awards960,719Conversion of preferred stock to common stock2,010,045Total shares of common stock reserved for future issuance2,970,764 Share Repurchases On November 4, 2015, the Board authorized the Company to engage in a repurchase program to repurchase up to $70,000 in aggregate value of theCompany’s Common Stock during the twelve-month period following November 4, 2015. This plan terminated on November 3, 2016. A total of 1,360,249shares were purchased through this plan for $62,981, excluding commission payments.On October 26, 2016, the Board authorized a new repurchase program, under which the Company may repurchase up to $100,000 in aggregate valueof the Company’s Common Stock during the twelve-month period following October 26, 2016. Through October 26, 2017, a total of 770,808 shares werepurchased through this plan for $30,360, excluding commission payments.On November 2, 2017, the Board approved the extension of the Company’s October 26, 2016 stock repurchase program, authorizing the Companyto engage in a repurchase program to repurchase up to $69,640 (the amount remaining from the $100,000 repurchase amount authorized in 2016) inaggregate value of our Common Stock through December 31, 2018. Subsequently, on March 29, 2018, the Board authorized an increase in the amountavailable for stock repurchases under the Company’s existing stock repurchase program by $77,800, and extended the existing stock repurchase programthrough June 30, 2019. As of December 31, 2018, 1,018,989 shares were purchased under this plan after it was extended on November 2, 2017 for $66,256,excluding commission payments. During the years ended December 31, 2018, 2017 and 2016, the Company withheld 5,242, 19,556 and 2,736 shares, respectively, from employees tocover the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock awards. In addition, during the yearsended December 31, 2018 and 2017, the Company withheld 12,676 and 5,665 shares, respectively, from employees to cover the settlement of income tax andrelated benefit withholding obligations and the exercise price upon the exercise of stock options.14. Stock-Based Compensation and Similar Arrangements The Company provides stock-based compensation to employees, non-employee directors, consultants and advisors under the Company’s 2006Long-Term Incentive Plan (“2006 Plan”). The 2006 Plan allows the flexibility to grant or award stock options, stock appreciation rights, restricted stock,unrestricted stock, stock units including restricted stock units and performance awards to eligible persons.The following table summarizes the activity under the 2006 Plan as of December 31, 2018: Number of sharesof the Company’sCommon Stockauthorized for Number of sharesof the Company’sCommon Stockremaining for Number of shares of the Company’s CommonStock subject to issuance future grants Stock Options Stock Grants2006 Plan5,400,000 1,356,820 908,588 52,131 85The following table reflects the amount of stock-based compensation, for share settled awards issued to employees and non-employee directors,recorded in each financial statement line item for the years ended December 31, 2018, 2017 and 2016: Year Ended December 31, 201820172016Service expense$950 $434 $841General and administrative expense8,037 7,052 4,324Equity in net loss (gain) of investees137 76 18(Loss) income from discontinued operations, net of tax6 57 (29)Total stock-based compensation$9,130 $7,619 $5,154 Stock-based compensation included in service expense is related to the NET Services segment, whereas the amount included in equity in net loss(gain) of investees is related to the Matrix Investment segment, as a member of Matrix management continues to hold Providence equity awards.The amounts above exclude tax benefits of $1,888, $2,885 and $2,072 for the years ended December 31, 2018, 2017 and 2016, respectively.Stock Options During the year ended December 31, 2016, the Company did not grant any stock options. The fair value of each stock option awarded to employeesis estimated on the date of grant using the Black-Scholes option-pricing formula based on the following assumptions for the years ended December 31, 2018and 2017: Year Ended December 31, 2018 2017Expected dividend yield0.0% 0.0%Expected stock price volatility26.47%—39.83% 19.5%—42.95%Risk-free interest rate2.26%—2.91% 1.0%—2.23%Expected life of options (years)1.29—6.50 0.03—6.50The risk-free interest rate was based on the U.S. Treasury security rate in effect as of the date of grant which corresponds to the expected life of theaward. The expected stock price volatility was based on the Company’s historical data. The expected lives of options were based on the Company’s historicaldata, a simplified method for plain vanilla options, or the Company’s best estimate where appropriate. The simplified method was used for plain vanillaoptions for which the Company did not have sufficient historical data to use in determining the expected life.In connection with the Organizational Consolidation, on April 9, 2018, the Company entered into an agreement with R. Carter Pate for hiscontinued employment as the Company’s Interim CEO through June 30, 2019. The agreement also provided for a grant of unvested options to purchase up to394,000 shares of the Company’s common stock, at a price of $71.67 per share, which was the closing price of the Company’s common stock on the grantdate. The options are subject to vesting as follows: (i) 50% of the options will become vested if Mr. Pate remains employed by the Company through June 30,2019 (the “Time-Vesting Options”), (ii) 25% of the options will become vested on March 31, 2019 if the Company has achieved its budget for its 2018 fiscalyear, subject to certain adjustments, and Mr. Pate is then employed, and (iii) 25% of the options will become vested on March 31, 2019 subject to Mr. Pate’sachievement of other performance metrics if Mr. Pate is then employed. In recognition of certain holding company employees’ essential contributions to thesuccess of the Company, and to encourage further alignment with the Company’s long-term interests through the ownership of equity, Mr. Pate voluntarilyset aside 98,500 of the options granted to him, representing 25% of his total award. The value of the awards of $1,273 was fully expensed in the three monthsended June 30, 2018. The Compensation Committee of the Board granted cash bonuses to employees based upon their performance throughout theOrganizational Consolidation process in December 2018 in relation to the options voluntarily set aside by Mr. Pate.In accordance with the terms of the agreement and actual performance to budget, only half of the options related to the budget performance criteria in (ii)above will vest.86In addition, the Time-Vesting Options will become fully vested upon a “change in control” (as defined in the 2006 Plan) or a termination of Mr.Pate’s employment by the Company without “cause” (as defined in the Company’s 2015 Holding Company LTI Program) or for “good reason” (as defined inthe Option Agreement). Once vested, the options will remain exercisable until April 8, 2021, unless terminated earlier due to a termination of Mr. Pate’semployment for “cause”.Also, in connection with the Organizational Consolidation and his appointment as Interim CFO, on April 9, 2018, William Severance received anoption to purchase 13,710 shares of common stock at a price of $71.67 per share, which was the closing price of the Company’s common stock on the grantdate. The options will become fully exercisable on May 10, 2019, subject to Mr. Severance’s continued employment with the Company, and if not exercisedwill expire on December 31, 2020.During the fourth quarter of 2017, James Lindstrom resigned from the Company as Chief Executive Officer (“CEO”) and board member of theCompany. As a result of Mr. Lindstrom’s resignation as CEO, a separation agreement was entered into between the Company and Mr. Lindstrom. As a resultof this separation agreement, Mr. Lindstrom was granted 125,000 stock options with an exercise price of $61.33 per share that were immediately vested.75,000 of these options were exercised during the year ended December 31, 2018, the remaining options expired on December 31, 2018. During the year ended December 31, 2018, the Company issued 266,293 shares of its Common Stock in connection with the exercise of employeestock options under the Company’s 2006 Plan. The following table summarizes the stock option activity for the year ended December 31, 2018: Year ended December 31, 2018 Numberof SharesUnderOption Weighted-averageExercisePrice Weighted-averageRemainingContractualTerm AggregateIntrinsicValueBalance at beginning of period, January 1606,695 $48.70 Granted750,993 66.73 Exercised(278,969) 44.82 Forfeited/Canceled(120,131) 68.81 Expired(50,000) 61.33 Outstanding at end of period, December 31908,588 $61.44 2.40 $4,348Vested or expected to vest at end of period, December 31871,651 $61.01 2.49 $4,348Exercisable at end of period, December 31263,897 $50.28 1.98 $2,570 The weighted-average grant date fair value for options granted, total intrinsic value and cash received by the Company related to options exercisedduring the years ended December 31, 2018, 2017 and 2016 were as follows: Year ended December 31, 2018 2017 2016Weighted-average grant date fair value per share$15.08 $9.05 $—Options exercised: Total intrinsic value$6,805 $2,010 $979Cash received$12,413 $1,921 $4,108 Stock Option Modifications As part of the Company’s retention plan associated with the Organizational Consolidation, the Company provided that unvested stock-based awardsto employees subject to the retention plan will vest in full upon their termination dates so long as those employees fulfill their service obligation to theCompany under the retention plan. As such, the vesting terms of 11,035 stock options were modified. Additionally, the exercise terms of the respectiveunvested stock options were modified to allow for exercise through December 31, 2020. As a result of the modifications, the Company revalued the awards asof April 9, 2018,87and is expensing the unrecognized stock-based compensation cost, based on the new fair value, through the termination date of each relevant employee.Additional expense incurred during the year ended December 31, 2018, as a result of the modification, totaled $168. See Note 10, Restructuring and RelatedReorganization Costs, for additional information.During the fourth quarter of 2017, as a result of the separation agreement between the Company and Mr. Lindstrom, Mr. Lindstrom’s outstandingstock options from his grants of 11,319 on August 6, 2015 and 9,798 on March 15, 2017 were modified to accelerate the vesting date of both awards toNovember 15, 2017 and allow exercise of the stock options until December 31, 2018. As a result of the modification to the terms of the original stock optionsgranted to Mr. Lindstrom, the Company recognized an accelerated expense of $83 on the award for the year ended December 31, 2017. Restricted Stock Awards During the year ended December 31, 2018, the Company granted 20,242 shares of restricted stock (“RSAs”) to non-employee directors of its Board,executive officers and certain key employees. The awards primarily vest in three equal installments on the first, second and third anniversaries of the date ofgrant.During the year ended December 31, 2018, the Company issued 27,894 shares of its Common Stock to non-employee directors, executive officersand key employees upon the vesting of certain RSAs granted in 2017, 2016 and 2015 under the Company’s 2006 Plan. The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company’s unvested restricted CommonStock during the year ended December 31, 2018: Shares Weighted-averagegrant datefair value Non-vested at beginning of period, January 164,779 $44.82Granted20,242 $66.07Vested(27,894) $46.39Forfeited or cancelled(9,799) $46.83Non-vested at end of period, December 3147,328 $52.56 As of December 31, 2018, there was $7,604 of unrecognized compensation cost related to unvested share settled stock options and RSAs grantedunder the 2006 Plan. The cost is expected to be recognized over a weighted-average period of 1.2 years. The total fair value of stock options and RSAs vestedwas $4,428, $3,550 and $1,383 for the years ended December 31, 2018, 2017 and 2016, respectively.Restricted Stock Award ModificationsAs part of the Company’s retention plan associated with the Organizational Consolidation, the Company provided that unvested stock-based awardsto employees subject to the retention plan will vest in full upon their termination dates so long as those employees fulfill their service obligation to theCompany under the retention plan. As such, the vesting terms of 7,286 restricted stock awards were modified. As a result of the modifications, the Companyrevalued the awards as of April 9, 2018, and is expensing the unrecognized stock-based compensation cost, based on the new fair value, through thetermination date of each relevant employee. Additional expense incurred during the year ended December 31, 2018, as a result of the modification, totaled$290. See Note 10, Restructuring and Related Reorganization Costs, for additional information. Restricted Stock Units During the year ended December 31, 2016, the Company granted 5,930 restricted stock units to a key employee, related to the terms of a separationagreement, that vested on January 3, 2017. The units were settled through a cash payment of $304 during the year ended December 31, 2017. The award wasclassified as a liability, and the expense recorded was based upon the Company’s closing stock price at the end of each reporting period and the completedrequisite service period.88Deferred Share Units During the year ended December 31, 2018, the Company granted 4,803 deferred share units to a director that vested on June 8, 2018, but will not bereleased until March 3, 2019. The units were fully expensed during the year ended December 31, 2018 and had a grant date fair value of $75.51 per share.Cash Settled Awards During the years ended December 31, 2018, 2017 and 2016, respectively, the Company issued 2,017, 3,097 and 3,360 stock equivalent units(“SEUs”), which settle in cash upon vesting, to Coliseum Capital Partners, L.P., in lieu of a grant to Christopher Shackelton, Chairman of the Board, for hisservice on the Board, which vest one-third upon each anniversary of the vesting date. The fair value of the SEUs is based on the closing stock price on the lastday of the period and the completed requisite service period. The Company recorded $209, $235 and $287 of expense for SEUs during the years endedDecember 31, 2018, 2017 and 2016, respectively. During the year ended December 31, 2014, the Company issued 200,000 stock option equivalent units (“SOEUs”), with an exercise price of $43.81per share, which settle in cash, to Coliseum Capital Partners, L.P in lieu of a grant to Christopher Shackelton, for other services rendered. All 200,000 SOEUswere outstanding and exercisable at December 31, 2018. This award vested one-third upon grant, one-third on June 30, 2015 and one-third on June 30, 2016.No additional SOEUs were granted during the years ended December 31, 2018, 2017 and 2016. The Company recorded benefits of $191 and $1,517 forSOEUs during the years ended December 31, 2018 and 2016, respectively, and expense of $2,146 during the year ended December 31, 2017. The benefitsand expense are included in “General and administrative expense” in the consolidated statements of operations. The fair value of the SOEUs was estimated asof December 31, 2018, 2017 and 2016 using the Black-Scholes option-pricing formula and amortized over the option’s graded vesting periods with thefollowing assumptions: Year ended December 31, 2018 2017 2016Expected dividend yield0.0% 0.0% 0.0%Expected stock price volatility27.82%—30.59% 23.36%—32.09% 35.71%—41.8%Risk-free interest rate2.50%—2.61% 1.75%—1.95% 1.11%—1.64%Expected life of options (in years)0.75—1.75 0.75—2.75 1.00—3.00 As of December 31, 2018 and 2017, the Company had a short-term liability of $3,719 and $3,938, respectively, in “Accrued expenses” in theconsolidated balance sheets related to unexercised vested and unvested cash settled share-based payment awards. The cash settled share-based compensationexpense in total excluded a tax benefit of $908 for the year ended December 31, 2017. The cash settled share-based compensation benefit in total excluded atax expense of $4 and $492 for the years ended December 31, 2018 and 2016. The unrecognized compensation cost for SEUs is expected to be recognizedover a weighted average period of 0.7 years; however, the total expense for both SEUs and SOEUs will continue to be adjusted until the awards are settled. Holdco Long-Term Incentive Plan On August 6, 2015 (the “Award Date”), the Compensation Committee of the Board adopted the 2015 Holding Company LTI Program (“HoldCoLTIP”) under the 2006 Plan. Under the program, executives would receive shares of Providence common stock based on the shareholder value created inexcess of an 8.0% compounded annual return between the Award Date and December 31, 2017 (the “Extraordinary Shareholder Value”). The Award Datevalue was calculated on the basis of the Providence stock price equal to the volume weighted average of the common share price over the 90-day tradingperiod ending on the Award Date. The Extraordinary Shareholder Value was calculated on the basis of the Providence stock price equal to the volumeweighted average of the common share price over the 90-day trading period ending on December 31, 2017. A pool for use in the allocation of awards wascreated equal to 8.0% of the Extraordinary Shareholder Value.It was determined that no shares would be distributed under the Holdco LTIP as the calculation of the pool amount was zero. $4,738 and $3,319 ofexpense are included in “General and administrative expense” in the consolidated statements of operations for the years ended December 31, 2017 and 2016,respectively.89These awards were classified as equity and the fair value of the awards was calculated using a Monte-Carlo simulation valuation model. The fairvalue of the awards granted in 2016 were estimated using the following assumptions: Year ended December 31, 2016Forward interest rate0.24%—2.71%Expected Volatility40.0%Dividend Yield—%Fair Value of Total Pool$12,870 15. Long-Term Incentive Plans The Company established Long-Term Incentive Plans (“LTIPs”) for the Company’s operating segments during the fourth quarter of 2015. Theawards pay in cash, however up to 50% of the award may be paid in unrestricted stock if the recipient elects this option when the LTIP offer letter is received.In addition, at the discretion of the Company, the recipients may be able to elect unrestricted stock in lieu of cash compensation at a later date. The LTIPsreward participants based on certain measures of free cash flow and EBITDA results adjusted as specified in the plan document. The awards vest in threeinstallments: 60% of the award will pay out immediately following December 31, 2017, 25% one year following the performance period (i.e. December 31,2018) and 15% two years following the performance period (i.e. December 31, 2019). Payout is subject to the participant remaining employed by theCompany.During 2017, the Company revised the structure of the NET Services long-term incentive plan. As a result, the Company finalized the amountpayable under the plan at $2,956. The total value will be paid to the awarded participants per the terms of the original agreement and thus the remainingunamortized expense relating to this plan continues to be recognized over the remaining service period. For the years ended December 31, 2018, 2017, and2016, a benefit of $253, expense of $816 and expense of $1,513, respectively, is included in “Service expense” in the consolidated statements of operationsrelated to this plan. At December 31, 2018 and 2017, the liability for long-term incentive plans of the Company’s operating segments of $630 and $2,657,respectively, is reflected in “Accrued expenses” and “Other long-term liabilities” in the consolidated balance sheets.The Board approved the LogistiCare 2017 Senior Executive LTI Plan (the “LogistiCare LTIP”) for executive management and key employees ofNET Services during the three months ending March 31, 2018. The LogistiCare LTIP pays in cash, however up to 50% of the award may be paid inunrestricted stock if the recipient elects this option prior to the award payment date. The LogistiCare LTIP rewards participants based on certain measures offree cash flow and EBITDA results adjusted as specified in the plan document. The awards have a performance period of January 1, 2017 through December31, 2019, with a payout date within two and a half months of the performance period end date. Payout is subject to the participant remaining employed bythe Company on the payment date. The maximum amount that can be earned through the LogistiCare LTIP is $7,000. As of December 31, 2018, 65.5% of theawards have been issued under the LogistiCare LTIP. No expense has been incurred for this plan during the year ended December 31, 2018, as we currentlybelieve that it is not probable the defined measures will be met.In connection with the acquisition of Circulation, the Company established a management incentive plan (“MIP”) that is intended to motivate keyemployees of Circulation whereby they may be entitled to cash payments if certain financial measures are met based upon cumulative NET ServicesEBITDA; less the assumption of former Corporate and Other segment costs; less cumulative CAPEX (“MIP Financial Performance”) for the performanceperiod 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 iswithin 30 days following the finalization of the Company’s audited financial statements for the fiscal year ending December 31, 2021. Payout is subject tothe participant remaining employed by the Company through December 31, 2021. The amount that can be earned through the MIP ranges from $12,500 to$237,500 based on a range of value of the MIP Financial Performance of $272,500 to $395,500. As of December 31, 2018, the Company has accrued $1,441,reflected in “Other long-term liabilities” in the consolidated balance sheet, towards its estimate of the expected payout under the MIP.9016. Earnings Per Share The following table details the computation of basic and diluted earnings per share: Year ended December 31, 2018 2017 2016Numerator: Net (loss) income attributable to Providence$(18,981) $53,369 $91,928Less dividends on convertible preferred stock(4,420) (4,419) (4,419)Less income allocated to participating securities(1,856) (6,314) (10,569)Net (loss) income available to common stockholders$(25,257) $42,636 $76,940 Continuing operations$11,953 $40,647 $19,749Discontinued operations(37,210) 1,989 57,191 $(25,257) $42,636 $76,940 Denominator: Denominator for basic earnings per share -- weighted-average shares12,960,837 13,602,140 14,666,896Effect of dilutive securities: Common stock options72,410 66,314 105,837Performance-based restricted stock units— 4,860 6,665Denominator for diluted earnings per share -- adjusted weighted-average shares assumedconversion13,033,247 13,673,314 14,779,398 Basic earnings (loss) per share: Continuing operations$0.92 $2.99 $1.35Discontinued operations(2.87) 0.15 3.90 $(1.95) $3.14 $5.25Diluted earnings (loss) per share: Continuing operations$0.92 $2.97 $1.34Discontinued operations(2.86) 0.15 3.87 $(1.94) $3.12 $5.21 Income allocated to participating securities is calculated by allocating a portion of net income attributable to Providence, less dividends onconvertible stock, to the convertible preferred stockholders on a pro-rata as converted basis; however, the convertible preferred stockholders are not allocatedlosses.The following weighted-average shares were not included in the computation of diluted earnings per share as the effect of their inclusion wouldhave been anti-dilutive: Year ended December 31, 2018 2017 2016Stock options to purchase common stock560,547 362,392 22,638Convertible preferred stock802,489 803,323 803,442 9117. Operating Leases and Service Commitment Operating LeasesThe Company has non-cancelable contractual obligations in the form of operating leases for office space, related office equipment and otherfacilities. The leases expire in various years and generally provide for renewal options. In the normal course of business, it is expected that these leases will berenewed or replaced by leases on other properties. Certain operating leases provide for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index,subject to certain minimum increases. Several of these lease agreements contain provisions for periods in which rent payments are reduced. The total amountof rental payments due over the lease term is being charged to rent expense on a straight-line basis over the term of the lease. The cumulative differencebetween rent expense recorded and the amount paid, for continuing operations, as of December 31, 2018 and 2017 was $2,115 and $2,209, respectively, andis included in “Accrued expenses” and “Other long-term liabilities” in the consolidated balance sheets. Future minimum payments under non-cancelable operating leases for equipment and property with initial terms of one year or more consisted of thefollowing at December 31, 2018: Operating Leases2019$8,82520206,45220214,59420223,80120231,767Thereafter1,600Total future minimum lease payments$27,039 Rent expense for continuing operations related to operating leases was $10,960, $10,250 and $9,624, for the years ended December 31, 2018, 2017and 2016, respectively. Also, the lease agreements generally require the Company to pay executory costs such as real estate taxes, insurance, and repairs,which are recorded to expense as incurred.Service Commitment The Company has entered into a commitment related to transportation services. The commitment amount represents the minimum obligation theCompany has 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 the Company’s projected use for these periods and payments may be more than the minimum obligation basedon actual use.Future minimum payments under this service commitment consisted of the following at December 31, 2018: Service Commitment2019$9,509202019,208Total future minimum payments$28,717 18. Retirement Plan The Company maintains a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, for allemployees of its NET Services’ operating segment and corporate personnel. The Company, at its discretion, may make a matching contribution to the plan.Any matching contributions vest over 5 years. Unvested matching contributions are forfeitable upon employee termination. Employee contributions are fullyvested and non-forfeitable. The Company’s92contributions to the plan for continuing operations were $340, $304 and $232, for the years ended December 31, 2018, 2017 and 2016, respectively. The Company also maintains a Deferred Compensation Rabbi Trust Plan for highly compensated employees of NET Services. This plan was put inplace to compensate for the inability of highly compensated employees to take full advantage of the Company’s 401(k) plan. Additional information isincluded in Note 20, Commitments and Contingencies. 19. Income Taxes The federal and state tax provision is summarized as follows: Year Ended December 31, 2018 2017 2016Federal income tax expense (benefit): Current$3,462 $19,011 $20,963Deferred(1,157) (19,762) (6,545) Total Federal income tax expense (benefit)2,305 (751) 14,418 State income tax expense (benefit): Current2,113 4,048 4,501Deferred266 706 (947) Total State income tax expense (benefit)2,379 4,754 3,554Total provision for income taxes$4,684 $4,003 $17,972A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income fromcontinuing operations before income taxes is as follows: Year Ended December 31, 2018 2017 2016Federal statutory rates21% 35% 35%Federal income tax at statutory rates$4,812 $19,281 $15,699Revaluation of net deferred tax liabilities due to U.S. tax reform(286) (19,304) —U.S. tax reform impact on equity income of investees— (1,646) —Change in valuation allowance36 177 296Change in uncertain tax positions108 7 73State income taxes, net of federal benefit1,843 3,157 2,399Compensation expense235 — —Stock compensation76 3,400 —Meals and entertainment74 99 94Transaction costs263 159 —Cost method investment re-measurement gain(1,381) — —Tax credits(1,208) (354) (947)Legal expense— (805) 522Other112 (168) (164)Provision for income taxes$4,684 $4,003 $17,972Effective income tax rate20% 7% 40% 93Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities of continuing operationsare as follows: December 31, 2018 2017Deferred tax assets: Net operating loss carryforwards$19,485 $—Capital loss carryforward1,072 —Tax credit carryforwards840 486Accounts receivable allowance227 1,134Accrued items and reserves6,817 8,297Stock compensation1,480 1,480Deferred rent543 572Deferred revenue272 —Other773 172 31,509 12,141Deferred tax liabilities: Deferred financing costs12 38Prepaids900 1,439Property and equipment depreciation3,492 3,329Goodwill and intangibles amortization6,944 3,678Equity investment40,577 42,113Other— 303 51,925 50,900Net deferred tax liabilities(20,416) (38,759)Less valuation allowance(2,633) (473)Net deferred tax liabilities$(23,049) $(39,232)Net noncurrent deferred tax assets, net of valuation allowance of $0 for 2018 and 2017$2,601 $—Net noncurrent deferred tax liabilities, net of valuation allowance of $2,633 and $473 for 2018 and 2017,respectively(25,650) (39,232) $(23,049) $(39,232) At December 31, 2018, the Company had approximately $86,865 of federal net operating loss carryforwards, including $3,055 which will expireprimarily in 2037 and $83,810 which can be carried forward indefinitely. In addition, at December 31, 2018, the Company had approximately $26,936 ofstate net operating loss carryforwards which expire as follows:2023$2,021Thereafter24,915Total state net operating loss carryforwards$26,936Approximately $8,600 of the U.S. and state net operating loss carryforwards relate to Circulation, Inc. pre-acquisition tax periods and are subject tochange of ownership limitations on their use. These limitations are not expected to restrict the ultimate use of these loss carryforwards. Realization of the Company’s net operating loss carryforwards is dependent on generating sufficient taxable income. Although realization is notassured, management believes it is more likely than not that all of the deferred tax assets will be realized, to the extent they are not covered by a valuationallowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income duringthe carryforward period are reduced.94 The net change in the total valuation allowance for the year ended December 31, 2018 was $2,160, of which $36 related to current operations,$1,492 related to discontinued operations and $632 related to the balance from the Circulation acquisition. The valuation allowance of $2,633 includes$2,166 for state net operating loss, capital loss and tax credit carryforwards and $467 for stock compensation and accrued liability deferred tax assets forwhich the Company has concluded that it is more likely than not that these carryforwards and deferred tax assets will not be realized in the ordinary course ofoperations. The Company will continue to assess the valuation allowance, and to the extent it is determined that the valuation allowance should be changed,an appropriate adjustment will be recorded.U.S. Tax ReformOn December 22, 2017, the Tax Reform Act was enacted which institutes fundamental changes to the taxation of multinational corporations. TheTax Reform Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferralrules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Reform Act also includes a permanent reduction in thecorporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interestexpense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributedearnings and profits (“E&P”) of foreign affiliates. Although the Tax Reform Act is generally effective January 1, 2018, GAAP requires recognition of the taxeffects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017.As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities as of December 31,2017 and recognized a provisional tax benefit of $20,950. The Company projected net accumulated deficits in foreign E&P; therefore, no provisional taxexpense for deemed repatriation was recognized. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when aregistrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accountingfor certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, the Company has recognized the provisional tax impactsrelated to the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017.The financial reporting impact of the Tax Reform Act was completed in the fourth quarter of 2018 and an additional benefit of $286 was recorded.Unrecognized Tax Benefits The Company expects no material amount of the unrecognized tax benefits to be recognized during the next twelve months. The Companyrecognizes interest and penalties as a component of income tax expense. During the years ended December 31, 2018, 2017 and 2016, the Companyrecognized approximately $47, $65 and $19, respectively, in interest and penalties from continuing operations. The Company had approximately $109 and$83 for the payment of penalties and interest of continuing operations accrued as of December 31, 2018 and 2017, respectively.A reconciliation of the liability for unrecognized income tax benefits for continuing operations is as follows: December 31, 2018 2017 2016Unrecognized tax benefits, beginning of year$1,115 $1,108 $271Balance upon acquisition/disposition— — 764Increase related to prior year positions104 22 37Increase related to current year tax positions160 101 139Statute of limitations expiration(157) (116) (103)Unrecognized tax benefits, end of year$1,222 $1,115 $1,108 The Company is subject to taxation in the U.S. and various state jurisdictions. The statute of limitations is generally three years for the U.S. andbetween three and four years for the various states in which the Company operates. The tax years that remain open for examination by the U.S. and statesprincipally include the years 2014 to 2017.9520. Commitments and Contingencies Legal proceedings In the ordinary course of business, the Company is a party to various lawsuits. Management does not expect these lawsuits to have a material impacton the liquidity, results of operations, or financial condition of the Company.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”) bythe relators Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging violations of the federal False Claims Act by presenting claimsfor payment to government healthcare programs knowing that the prerequisites for such claims to be paid had not been met. The Relators seek to recoverdamages, fees and costs under the federal False Claims Act including treble damages, civil penalties and attorneys’ fees. In addition, the Relators seekreinstatement to their jobs with the Mobile Care entities. None of the Relators was employed by LogistiCare. Prior to January 21, 2019, LogistiCare had noknowledge of the complaint. The federal government has declined to intervene against LogistiCare. The Company intends to defend the litigationvigorously and believes that the case will not have a material adverse effect on its business, financial condition or results of operations.Indemnifications related to Haverhill Litigation The Company indemnified the Coliseum Stockholders from and against any and all losses, claims, damages, expenses and liabilities relating to orarising out of (i) any breach of any representation, warranty, covenant or undertaking made by or on behalf of the Company in the Standby PurchaseAgreement and (ii) the transactions contemplated by the Standby Purchase Agreement and the 14.0% Unsecured Subordinated Note in aggregate principalamount of $65,500, except to the extent that any such losses, claims, damages, expenses and liabilities are attributable to the gross negligence, willfulmisconduct or fraud of such Coliseum Stockholder. The Company has also indemnified other third parties from and against any and all losses, claims, damages, expenses and liabilities arising out of orin connection with the Company’s acquisition of CCHN Group Holdings, Inc. (operating under the tradename Matrix, and formerly included in our HAServices segment) in October 2014 and related financing commitments, except to the extent that any such losses, claims, damages, expenses and liabilitiesare found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconductof such third parties, or a material breach of such third parties’ obligations under the related agreements.In June 2015, a putative stockholder class action derivative complaint related to such rights offering and acquisition was filed in the Court ofChancery of the State of Delaware captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL (the “Haverhill Litigation”). In November2017, the Company received a payment of $5,363 under the settlement agreement entered into by the parties to the Haverhill Litigation. The Company recorded $318 and $1,282 of such indemnified legal expenses related to the Haverhill Litigation during the years ended December 31,2017 and 2016, respectively, which is included in “General and administrative expenses” in the consolidated statements of operations. Of these amounts,$245 and $757 for the years ended December 31, 2017 and 2016, respectively, were indemnified legal expenses of related parties. Other legal expenses of theCompany related to the Haverhill Litigation are covered under the Company’s insurance policies, subject to applicable deductibles and customary review ofthe expenses by the carrier. The Company recognized a benefit of $226 for the year ended December 31, 2018, and expense of $8 and $210 for the yearsended December 31, 2017 and 2016, respectively. While the carrier typically remits payment directly to the respective law firm, the Company accrues for thecost and records a corresponding receivable for the amount to be paid by the carrier. The Company recognized an insurance receivable of $941 in “Otherreceivables” in the consolidated balance sheet at December 31, 2017, with a corresponding liability amount recorded to “Accrued expenses”.Other Indemnifications The Company provided certain standard indemnifications in connection with the sale of the Human Services segment to Molina Healthcare Inc.(“Molina”) effective November 1, 2015. Certain representations made by the Company in the related Membership Interest Purchase Agreement (the“Purchase Agreement”) including tax representations, survive until the expiration of applicable statutes of limitation. Molina and the Company entered intoa settlement agreement regarding indemnification claims by Molina with respect to Rodriguez v. Providence Community Corrections (the “RodriguezLitigation”), a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division, against Providence Community Corrections, Inc.(“PCC”),96an entity sold under the Purchase Agreement. The Company expects to recover a portion of the settlement through insurance coverage, although this cannotbe assured. The Company has provided certain standard indemnifications in connection with its Matrix stock subscription transaction whereby Mercury FortunaBuyer, LLC (“Subscriber”), Providence and Matrix entered into a stock subscription agreement (the “Subscription Agreement”), dated August 28, 2016. Therepresentations and warranties made by the Company in the Subscription Agreement ended January 19, 2018; however, certain fundamental representationssurvive through the 36th month following the closing date. The covenants and agreements of the parties to be performed prior to the closing ended January19, 2018, and all other covenants and agreements survive until the expiration of the applicable statute of limitations in the event of a breach, or for suchlesser periods specified therein. The Company is not aware of any indemnification liabilities with respect to Matrix that require accrual at December 31,2018.The Company has provided certain standard indemnifications in connection with the sale of substantially all of its WD Services segment to APM,which closed on December 21, 2018. The non-title warranties made by the Company in the related Share Purchase Agreement survive for 18 monthsfollowing the closing date, and the title-related warranties and tax warranties survive five years from the closing date. The Company is not aware of anyindemnification liabilities with respect to the former WD Services segment that require accrual at December 31, 2018.On May 9, 2018, the Company entered into a registration indemnification agreement with the Coliseum Stockholders, who as of December 31, 2018,collectively held approximately 9.6% of the Company’s outstanding common stock and approximately 95.6% of the Company’s outstanding PreferredStock, pursuant to which the Company has agreed to indemnify the Coliseum Stockholders, and the Coliseum Stockholders have agreed to indemnify theCompany, against certain matters relating to the registration of the Coliseum Stockholders’ securities for resale under the Securities Act.Deferred Compensation Plan The Company has one deferred compensation plan for management and highly compensated employees of NET Services as of December 31, 2018.The deferred compensation plan is unfunded, and benefits are paid from the general assets of the Company. The total of participant deferrals, which isreflected in “Other long-term liabilities” in the consolidated balance sheets, was $1,982 and $1,806 at December 31, 2018 and 2017, respectively. 21. Transactions with Related Parties The Company incurred legal expenses under an indemnification agreement with the Coliseum Stockholders as further discussed in Note 20,Commitments and Contingencies. Preferred stock dividends earned by the Coliseum Stockholders during the years ended December 31, 2018 and 2017totaled $4,213 each year. Effective June 15, 2018, the Company registered shares of the Company’s common stock and Preferred Stock held by the Coliseum Stockholders forresale under the Securities Act and on May 9, 2018, in connection with such registration, the Company entered into a registration indemnification agreementwith the Coliseum Stockholders as further discussed in Note 20, Commitments and Contingencies.During the year ended December 31, 2017, the Company made a $566 loan to Mission Providence. The loan was also repaid during the year endedDecember 31, 2017.22. AcquisitionsDuring 2017, the Company made an equity investment in Circulation, which was accounted for as a cost method investment. On September 21,2018, the Company’s subsidiary, LogistiCare, acquired all of the outstanding equity of Circulation, which offers a full suite of logistics solutions to managenon-emergency transportation across all areas of healthcare, powered by its HIPAA-compliant digital platform. Circulation enables administration oftransportation benefits, proactively monitors for fraud, waste and abuse, and integrates all transportation capabilities (e.g. outsourced transportation, ownedfleets, and other medical logistics services), while emphasizing patient convenience and satisfaction. Circulation’s proprietary platform simplifies ordering,improves reliability and efficiency, and reduces transportation spend. The Company believes the acquisition advances LogistiCare’s central mission ofreducing transportation as a barrier to healthcare and will help deliver a differentiated user experience and provide a core technology and analytics platformthat better positions LogistiCare for growth.97The purchase price was comprised of cash consideration of $45,123 paid to Circulation’s equity holders (including holders of vested Circulationstock options), other than Providence. Per the terms of the Agreement and Plan of Merger (the “merger agreement”), dated as of September 14, 2018, by andamong LogistiCare, the Company, Catapult Merger Sub, a wholly-owned subsidiary of LogistiCare (“Merger Sub”), Circulation and Fortis Advisors LLC, asthe representative of Circulation’s equity holders, Providence assumed certain unvested Circulation stock options under similar terms and conditions to theexisting option awards previously issued by Circulation. The merger agreement also required $1,000 to be paid three years after the closing date of thetransaction to each of the two co-founders of Circulation subject to their continued employment or provision of consulting services to LogistiCare. The valueof the options assumed and co-founder hold back is accounted for as compensation, over the relevant vesting period, as such amounts are tied to futureservice conditions.The Company’s initial investment in Circulation was $3,000 in July 2017 to acquire a minority interest. As a result of the transactions pursuant tothe merger agreement, the fair value of this pre-acquisition interest increased to $9,577, and thus the Company recognized a gain of $6,577. This gain isrecorded as “Gain on remeasurement of cost method investment” on the Company’s consolidated statement of operations for the year ended December 31,2018. The Company determined the fair value of its pre-acquisition equity interest by multiplying the number of shares it held in Circulation pre-acquisitionby the per-share consideration validated by reference to the total merger consideration agreed to with other unrelated equity holders in Circulation.The Company incurred acquisition and related costs for this acquisition of $1,729 during the year ended December 31, 2018. These expenses areprimarily included in general and administrative expenses of the NET Services segment in the consolidated statements of operations.The purchase price of Circulation is calculated as follows:Cash purchase of common stock $45,123Providence’s acquisition date fair value equity interest in Circulation 9,577 Total consideration $54,700The table below presents Circulation’s net assets at the date of acquisition based upon the final estimate of respective fair values:Cash $1,302Accounts receivable 996Other assets 216Property and equipment 49Intangibles 15,700Goodwill 40,001Deferred taxes, net (2,199)Accounts payable and accrued liabilities (1,244)Deferred revenue (69)Other non-current liabilities (52) Total of assets acquired and liabilities assumed $54,700The goodwill is allocated to the NET Services segment. None of the acquired goodwill is expected to be deductible for tax purposes.98The fair value of intangible assets is as follows: Type Life ValueCustomer relationshipsAmortizable 3 years $1,400Trademarks and trade namesAmortizable 3 years 200Developed technologyAmortizable 5 years 14,100 $15,700The amounts of Circulation’s revenue and net income included in the Company’s consolidated statement of operations for the year ended December31, 2018, and the unaudited pro forma revenue and net (loss) income attributable to Providence of the combined entity had the acquisition date been January1, 2017, are: Year Ended December31, 2018 Actual Circulation: Revenue $2,205 Net loss (2,108) Year Ended December 31, 2018 2017Pro forma: Revenue $1,388,203 $1,319,195Net (loss) income attributable to Providence (21,541) 49,097Diluted (loss) earnings per share $(2.11) $2.85The pro forma information above for the year ended December 31, 2018 includes the elimination of acquisition related costs. Adjustments for allperiods include expensing the incentive for two co-founders to be paid upon continuing employment, amortization expense based on the estimated fair valueand useful lives of intangible assets and related tax effects. The pro forma financial information is not necessarily indicative of the results of operations thatwould have occurred had the transaction been affected on January 1, 2017.23. Discontinued Operations WD Services SegmentOn December 21, 2018, the Company completed the sale of substantially all of the operating subsidiaries of its WD Services segment to APM andAPM UK Holdings Limited, an affiliate of APM, except for the segment’s employment services operations in Saudi Arabia. The Company’s contractualcounterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginning January 1, 2019.The total cash consideration of the sale was $46,450, with the buyer retaining existing WD Services cash of $20,993. In addition to the purchaseconsideration, as a result of closing the transaction before the year end, the Company expects to realize cash tax benefits of approximately $51,861 from thetransaction, including approximately $34,275 in tax refunds by the fourth quarter of 2019 in relation to its 2018 tax returns and loss carrybacks, which isinclusive of $646 of tax that would have been otherwise due in the fourth quarter of 2018. The remaining cash tax benefit of $17,586 is expected to berealized as an offset to tax payments over the following three years, based upon the Company’s current estimate of taxable income. In addition, $1,072 ofbenefits related to capital loss carryforwards is available, which amount was reserved as of December 31, 2018.On June 11, 2018, the Company entered into a Share Purchase Agreement to sell the shares of Ingeus France, its WD Services operation in France, fora de minimis amount. The sale was effective on July 17, 2018, after court approval.99On September 29, 2017, the Company and Mission Australia completed the sale of 100% of the stock of Mission Providence, a joint venture in theWD Services segment, pursuant to a share sale agreement. Upon the sale of Mission Providence, the Company received AUD 20,184, or $15,823 of proceeds,for its equity interest, net of transaction fees. Subsequently, a working capital adjustment was finalized in December 2017 resulting in the return of $229 ofthe proceeds. The related gain on sale of Mission Providence totaling $12,377 is recorded as “(Loss) income from discontinued operations, net of tax” in theaccompanying consolidated statements of operations for the year ended December 31, 2017. Summary financial information for Mission Providence on astandalone basis for the nine months ended September 30, 2017 and the year ended December 31, 2016 is as follows: Nine months endedSeptember 30, 2017 Year ended December31, 2016Revenue$30,125 $36,546Operating loss(1,765) (9,664)Net loss(1,934) (8,843)In accordance with ASC 205-20, Presentation of Financial Statements-Discontinued Operations, (“ASC 205-20”) a component of an entity isreported in discontinued operations after meeting the criteria for held for sale classification if the disposition represents a strategic shift that has (or will have)a major effect on the entity’s operations and financial results. The Company analyzed the quantitative and qualitative factors relevant to the disposition ofthe WD Services segment and determined that those held for sale conditions for discontinued operations presentation were met during the fourth quarter of2018. As such, the historical financial results of the Company’s historical WD Services segment, and the related income tax effects have been presented asdiscontinued operations for all periods presented in the accompanying consolidated financial statements.HA Services SegmentEffective October 19, 2016, the Company completed the Matrix Transaction. At the closing, (i) cash consideration of $180,614 was paid by theSubscriber to Matrix based upon an enterprise value of $537,500 and (ii) Matrix borrowed approximately $198,000 pursuant to a credit and guarantyagreement providing for term loans in an aggregate principal amount of $198,000 and revolving loan commitments in an aggregate principal amount not toexceed $10,000, which was not drawn at the closing. At the closing, Matrix distributed $381,163 to Providence, in full satisfaction of a promissory note andaccumulated interest between Matrix and Providence. At the closing, Providence made a $5,663 capital contribution to Matrix, as described in theSubscription Agreement, as amended, based upon its pro-rata ownership of Matrix, to fund the near-term cash needs of Matrix. On the day that was fifteendays following the closing date, Providence was, to the extent payable pursuant to the terms of the Subscription Agreement, as amended, entitled to receivefrom Matrix, or required to pay to Matrix, subsequent working capital adjustment payments. Providence received an initial payment of $5,172 from Matrix inNovember 2016 which is net of the capital contribution of $5,663 described above, based upon the initial working capital calculation as described in theSubscription Agreement. Additionally, in February 2017, the Company received a $75 payment from Matrix representing the final working capitaladjustment payment. In accordance with ASC 205-20, the Company analyzed the quantitative and qualitative factors relevant to the Matrix stock subscription transactionresulting in the Company no longer owning a controlling interest in Matrix, and determined that those held for sale conditions for discontinued operationspresentation were met during the third quarter of 2016. As such, the historical financial results of Matrix, the Company’s historical HA Services segment, andthe related income tax effects have been presented as discontinued operations for all periods presented in the accompanying consolidated financialstatements through October 19, 2016. The Company has continuing involvement with Matrix through its ownership of 43.6% of the equity interests in Matrix as of December 31, 2018, aswell as through a management consulting agreement, not to exceed ten years. Prior to the Matrix Transaction, the Company owned 100% of the equityinterest in Matrix. Subsequent to the Matrix Transaction, the Company accounts for its investment in Matrix under the equity method of accounting. TheCompany’s share of Matrix’s gains and losses subsequent to the Matrix Transaction, which totaled a loss of $6,158, a gain of $13,445 and a loss of $1,789, isrecorded as “Equity in net (gain) loss of investees” in its consolidated statement of operations for the years ended December 31, 2018, 2017 and 2016,respectively. Matrix’s pretax loss for the year ended December 31, 2018 totaled $27,128. Matrix’s pretax loss for the year ended December 31, 2017 totaled$2,948 and included $3,537 of transaction related expenses. Matrix’s pretax loss for the period of100October 19, 2016 through December 31, 2016 totaled $7,027 and included $6,367 of transaction related expenses. There have been no cash inflows oroutflows from or to Matrix subsequent to the closing of the Matrix Transaction, other than the working capital adjustments discussed above and managementand advisory fees associated with its ongoing relationship with Matrix, of which $2,271 and $1,103 were received during the years ended December 31, 2018and 2017, respectively. $259 and $247 are included in “Other receivables” in the consolidated balance sheets at December 31, 2018 and 2017, respectively,related to management fees receivable. Human Services SegmentOn September 3, 2015, the Company entered into a Purchase Agreement, pursuant to which the Company agreed to sell all of the membershipinterests in Providence Human Services, LLC and Providence Community Services, LLC, comprising the Company’s Human Services segment. During theyears ended December 31, 2018, 2017 and 2016, the Company recorded additional expenses and benefits related to the Human Services segment, principallyrelated to legal proceedings as described in Note 20, Commitment and Contingences, related to an indemnified legal matter.Results of Operations The following table summarizes the results of operations classified as (loss) income from discontinued operations, net of tax, for the years endedDecember 31, 2018, 2017 and 2016. The HA Services segment column in the table below for the year ended December 31, 2016 reflects the financial resultsfor HA Services from January 1, 2016 through October 19, 2016. Year ended December 31, 2018 Human ServicesSegment WD ServicesSegment Total DiscontinuedOperationsService revenue, net$— $264,553 $264,553 Operating expenses: Service expense— 248,824 248,824General and administrative expense(495) 26,895 26,400Asset impairment charge— 9,203 9,203Depreciation and amortization— 11,864 11,864Total operating expenses (benefits)(495) 296,786 296,291Operating income (loss)495 (32,233) (31,738) Other expenses: Interest expense, net— 35 35Gain on foreign currency transactions— (388) (388)Other gain— (87) (87)Income (loss) from discontinued operations before gain on disposition andincome taxes495 (31,793) (31,298)Loss on disposition— (53,692) (53,692)(Provision) benefit for income taxes(545) 48,482 47,937(Loss) income from discontinued operations, net of tax$(50) $(37,003) $(37,053)The loss on disposition in the table above includes the reclassification of translation loss realized upon sale of subsidiaries of $29,973. The benefitfor income taxes in the table above for the WD Services segment includes tax benefits on the WD Services Sale of $51,861 and income tax expense on WDServices operations of $3,379.101 Year ended December 31, 2017 Human ServicesSegment WD ServicesSegment Total DiscontinuedOperationsService revenue, net$— $305,662 $305,662 Operating expenses: Service expense— 265,417 265,417General and administrative expense9,674 28,845 38,519Depreciation and amortization— 12,851 12,851Total operating expenses9,674 307,113 316,787Operating loss(9,674) (1,451) (11,125) Other expenses: Interest expense, net— 74 74Equity in net loss of investees— 1,391 1,391Gain on sale of equity investment— (12,377) (12,377)Loss on foreign currency transactions— 345 345(Loss) income from discontinued operations before gain on disposition andincome taxes(9,674) 9,116 (558)Benefit for income taxes3,691 (398) 3,293(Loss) income from discontinued operations, net of tax$(5,983) $8,718 $2,735 Year ended December 31, 2016 Human ServicesSegment HA ServicesSegment WD ServicesSegment Total DiscontinuedOperationsService revenue, net$— $166,090 $344,403 $510,493 Operating expenses: Service expense— 120,906 320,147 441,053General and administrative expense7,966 2,148 30,384 40,498Asset impairment charge— — 19,588 19,588Depreciation and amortization— 21,121 13,823 34,944Total operating expenses7,966 144,175 383,942 536,083Operating (loss) income(7,966) 21,915 (39,539) (25,590) Other expenses: Interest expense, net— 9,929 68 9,997Equity in net loss of investees— — 8,498 8,498Write-off of deferred financing fees— 2,302 — 2,302Gain on foreign currency transactions— — (1,374) (1,374)(Loss) income from discontinued operations before gain ondisposition and income taxes(7,966) 9,684 (46,731) (45,013)Gain on disposition— 167,895 — 167,895Benefit (provision) for income taxes2,401 (63,254) 936 (59,917)(Loss) income from discontinued operations, net of tax$(5,565) $114,325 $(45,795) $62,965 102Asset impairment chargesIn connection with classifying the assets and liabilities of Ingeus France as held for sale during the three months ended June 30, 2018, the carryingvalue of the assets and liabilities was reduced to its estimated fair value less selling costs. As a result, an impairment charge of $9,203 was recorded during theyear ended December 31, 2018 and is included in “Asset impairment charge” in the table above.During the fourth quarter of 2016, the Company reviewed WD Services for impairment, primarily due to lower than expected volumes andunfavorable service mix shifts under a large contract in the United Kingdom (“UK”) impacting future projections; additional clarity into the anticipated sizeand structure of the Work and Health Programme in the UK; the absence of additional details regarding the restructuring of the offender rehabilitationcontract in the UK; and a change in senior management at WD Services during the fourth quarter. As a result, the Company performed a quantitative testcomparing the fair value of the asset groupings comprising WD Services with the carrying amounts and recorded an asset impairment charge of $4,381 todefinite-lived customer relationship intangible assets and an asset impairment charge of $9,983 to property and equipment, which are recorded in “Assetimpairment charge” in the table above. In addition, the Company reviewed the carrying value of goodwill of WD Services, noting the carrying valueexceeded the fair value. Therefore, the Company performed the second step of the impairment test, in which the fair value of the reporting unit is allocated toall of the assets and liabilities, on a fair value basis, with any excess representing the implied value of goodwill of the reporting unit. The fair value wasdetermined using an income approach, which estimates the present value of future cash flows based on management’s forecast of revenue growth rates andoperating margins, working capital requirements and capital expenditures. Based on this analysis, the carrying value of goodwill of the WD Servicesreporting unit exceeded the implied fair value and the Company recorded an asset impairment charge of $5,224, which is included in “Asset impairmentcharge” on the Company’s consolidated statement of operations.Interest expense, net The Company allocated interest expense, including amortization of deferred financing fees, to discontinued operations based on the portion of thedebt that was required to be paid with the proceeds from the sale of the Matrix Transaction. The total allocated interest expense is included in “Interestexpense, net” in the tables above. The total allocated interest expense for the year ended December 31, 2016 for the HA Services segment was $9,939.Loss on disposition, net of taxThe total loss on disposition, net of tax, related to the sale of WD Services subsidiaries during the year ended December 31, 2018 is calculated asfollows:Total cash received, net of transaction costs and cash sold$12,780Total WD Services net asset value as of transaction date, net of cash sold(36,499)Income tax benefit51,861Gain on sale before reclassification of currency translation, net of tax28,142Adjustment for reclassification of currency translation(29,973)Loss on disposition, net of tax$(1,831)103Assets and liabilitiesThe following table summarizes the carrying amounts of the major classes of assets and liabilities of discontinued operations in the consolidatedbalance sheets as of December 31, 2018 and 2017. Amounts as of December 31, 2018 represent the accounts of WD Services operations in Saudi Arabia,which were not sold as part of the WD Services Sale. December 31, 2018 2017Cash and cash equivalents$2,321 $42,512Accounts receivable, net of allowance of $3,460 and $500 in 2018 and 2017, respectively4,316 48,718Other receivables— 10Prepaid expenses and other414 12,784Current assets of discontinued operations$7,051 $104,024 Property and equipment, net$— $12,705Goodwill— 26,453Intangible assets, net— 29,774Equity investments— 213Other assets— 51Deferred tax asset— 4,632Noncurrent assets of discontinued operations$— $73,828 Accounts payable$486 $15,086Accrued expenses2,771 32,195Deferred revenue— 14,362Current liabilities of discontinued operations$3,257 $61,643 Other long-term liabilities$— $5,170Deferred tax liabilities— 2,395Noncurrent liabilities of discontinued operations$— $7,565Cash Flow Information The following table presents depreciation, amortization, capital expenditures and significant operating noncash items of the discontinuedoperations for the years ended December 31, 2018, 2017 and 2016: For the year ended December 31, 2018 Human ServicesSegment WD ServicesSegment TotalDiscontinuedOperations Cash flows from discontinued operating activities: Depreciation$— $6,711 $6,711Amortization— 5,153 5,153Asset impairment charge— 9,203 9,203Stock-based compensation— 6 6Deferred income taxes419 (74) 345 Cash flows from discontinued investing activities: Purchase of property and equipment$— $6,725 $6,725 104 For the year ended December 31, 2017 Human ServicesSegment WD ServicesSegment TotalDiscontinuedOperations Cash flows from discontinued operating activities: Depreciation$— $7,825 $7,825Amortization— 5,026 5,026Stock-based compensation— 57 57Deferred income taxes(3,433) (507) (3,940) Cash flows from discontinued investing activities: Purchase of property and equipment$— $4,527 $4,527 For the year ended December 31, 2016 HAServicesSegment WD ServicesSegment TotalDiscontinuedOperations Cash flows from discontinued operating activities: Depreciation$3,661 $8,138 $11,799Amortization17,460 5,685 23,145Asset impairment charge— 19,588 19,588Stock-based compensation(18) (11) (29)Deferred income taxes52,338 (6,638) 45,700 Cash flows from discontinued investing activities: Purchase of property and equipment$9,174 $19,810 $28,984 24. Segments The Company owns subsidiaries and investments primarily engaged in the provision of healthcare services in the United States. The Company’sNET Services segment, which primarily operates under the brands LogistiCare and Circulation, since its acquisition in September 2018, is the largest managerof NET programs for state governments and MCOs in the U.S. On September 21, 2018, we completed the acquisition of Circulation, which offers a full suiteof logistics solutions to manage NET programs across all areas of healthcare, powered by its HIPAA-compliant digital platform. Circulation’s technologyexpands LogistiCare’s existing capabilities to manage transportation benefits, integrating all transportation capabilities while proactively monitoring forfraud, waste and abuse and emphasizing member convenience and satisfaction.The Company’s Matrix Investment segment consists of a minority investment in Matrix, a nationwide provider of home and mobile-based healthcareservices for health plans in the U.S., including CHAs, quality gap closure visits, “level of service” needs assessments, and post-acute and chronic caremanagement, providing such services through a network of community-based clinicians, and a fleet of mobile health clinics with advanced diagnosticscapabilities. On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a controlling equity interest in Matrix, with the Company retaining anon-controlling equity interest. 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 reportingand corporate development functions, as well as the results of the Company's captive insurance company. On April 11, 2018, the Company announced anOrganizational Consolidation. See Note 10, Restructuring and Related Reorganization Costs, for further information. Our segments are determined based on how the Company’s chief operating decision maker (“CODM”) manages the Company’s business, makesoperating decisions and evaluates operating performance. The operating results of the segments105include revenue and expenses incurred by the segment, as well as an allocation of direct expenses incurred by Corporate on behalf of the segment. Indirectexpenses, including unallocated corporate functions and expenses, such as executive, accounting, finance, internal audit, tax, legal, public reporting, certainstrategic and corporate development functions and the results of the Company’s captive insurance company as well as elimination entries recorded inconsolidation are reflected in Corporate and Other.The following table sets forth certain financial information from continuing operations attributable to the Company’s business segments for theyears ended December 31, 2018, 2017 and 2016. Year Ended December 31, 2018 NET Services MatrixInvestment Corporate andOther TotalService revenue, net$1,384,965 $— $— $1,384,965 Service expense1,285,029 — (426) 1,284,603General and administrative expense14,247 — 31,851 46,098Asset impairment charge14,175 — — 14,175Depreciation and amortization15,026 — 787 15,813Operating income (loss)$56,488 $— $(32,212) $24,276 Equity in net (gain) loss of investees$— $6,158 $— $6,158Investment in equity method investee$— $161,503 $— $161,503Total assets$349,567 $161,503 $54,125 $565,195Long-lived asset expenditures$10,796 $— $— $10,796 Year Ended December 31, 2017 NET Services MatrixInvestment Corporate andOther TotalService revenue, net$1,318,220 $— $— $1,318,220 Service expense1,227,426 — (3,799) 1,223,627General and administrative expense11,779 — 31,712 43,491Asset impairment charge— — — —Depreciation and amortization13,275 — 343 13,618Operating income (loss)$65,740 $— $(28,256) $37,484 Equity in net (gain) loss of investees$— $(13,445) $— $(13,445)Investment in equity method investee $169,699 $169,699Total assets$294,127 $169,699 $62,412 $526,238Long-lived asset expenditures$15,319 $— $77 $15,396106 Year Ended December 31, 2016 NET Services Matrix Investment Corporate andOther TotalService revenue, net$1,233,720 $— $122 $1,233,842 Service expense1,132,857 — (894) 1,131,963General and administrative expense11,406 — 28,121 39,527Asset impairment charge— — 1,415 1,415Depreciation and amortization12,375 — 405 12,780Operating income (loss)$77,082 $— $(28,925) $48,157 Equity in net (gain) loss of investees$— $1,789 $— $1,789Long-lived asset expenditures$10,845 $— $1,387 $12,232 Customer Information 12.6%, 13.8% and 13.1% of the Company’s consolidated revenue was derived from one U.S. state Medicaid program for the years endedDecember 31, 2018, 2017 and 2016, respectively. In addition, substantially all of the Company’s revenues are generated from domestic governmentalagencies or entities that contract with governmental agencies.25. Quarterly Results (Unaudited) The quarterly consolidated financial statements presented below reflect WD Services and Human Services as discontinued operations for all periodspresented. Additionally, certain costs incurred by the Corporate and Other segment which directly related to the WD Services Sale are also included asdiscontinued operations. Quarter ended March 31,2018 June 30, 2018 (1) (2) September 30,2018 (3) December 31,2018 (4) Service revenue, net$336,696 $343,736 $343,771 $360,762Operating income12,103 3,431 9,435 (693)Income from continuing operations, net of tax7,423 1,964 10,295 (1,454)(Loss) income from discontinued operations, net of tax(1,697) (13,366) (2,964) (19,026)Net income (loss) attributable to Providence5,430 (11,215) 7,154 (20,350)Earnings (loss) per common share (10): Basic$0.27 $(0.96) $0.37 $(1.67)Diluted$0.26 $(0.95) $0.37 $(1.67) 107 Quarter ended March 31,2017 (5) June 30,2017 September 30,2017 (6) December 31,2017(6)(7)(8)(9) Service revenue, net$324,033 $338,805 $324,824 $330,558Operating income4,707 11,333 7,271 14,173Income from continuing operations, net of tax2,046 7,658 3,374 38,008(Loss) income from discontinued operations, net of tax(5,997) (3,917) 11,575 1,074Net (loss) income attributable to Providence(4,325) 3,915 14,853 38,926(Loss) earnings per common share (10): Basic$(0.40) $0.15 $0.88 $2.44Diluted$(0.40) $0.14 $0.88 $2.42(1)Operating income in the quarter ending June 30, 2018 was negatively impacted by higher transportation costs on a per trip basis as NETServices saw a shift in service mix to higher cost modes of transportation and higher average mileage per trip.(2)Due to the disposition of Ingeus France in July 2018, the carrying value of its assets and liabilities were reduced to their estimated fair value lessselling costs during the quarter ending June 30, 2018. As a result, an impairment charge of $9,203 was recorded during the quarter ending June30, 2018, which is included in (loss) income from discontinued operations, net of tax.(3)During the quarter ending September 30, 2018, the Company acquired all of the outstanding equity of Circulation. The Company’s initialinvestment in Circulation was $3,000. As a result of the transaction, the fair value of this pre-acquisition interest increased to $9,577, and thusthe Company recognized a gain of $6,577.(4)(Loss) income from discontinued operations, net of tax in the quarter ending December 31, 2018, includes a loss on the disposition ofsubstantially all of the WD Services segment of $1,056, net of tax. This sale was completed on December 21, 2018.(5)The Company recorded expenses, net of tax, of $5,866 in (loss) income from discontinued operations, net of tax, in the quarter ending March31, 2017 related to the Company’s former Human Services segment, which are principally related to a settled legal matter. (6)The Company recorded a gain on sale of equity investment of $12,606, net of tax, related to the sale of its equity interest in Mission Providenceduring the quarter ended September 30, 2017, which is reflected in (loss) income from discontinued operations, net of tax. During the quarterended December 31, 2017, the Company recorded a reduction to the gain on sale of $229, related to the finalization of the working capitaladjustment per the sale agreement.(7)Operating income for the quarter ended December 31, 2017 increased as compared to the prior quarters in 2017 as a result of a decrease inservice expense as a percentage of revenue for NET Services. This was primarily a result of lower operating costs as well as certain NET Servicescontractual adjustments recorded in the fourth quarter of 2017.(8)The quarter ended December 31, 2017 includes the receipt of the Haverhill Litigation settlement of $5,363.(9)The quarter ended December 31, 2017 includes a net tax benefit of $15,925 related to the enactment of the Tax Reform Act during the fourthquarter 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 tax benefit of $19,304, partially offset by $3,379 of increased tax expense resulting from additional equity in net gain ofMatrix, due to Matrix’ re-measurement of its deferred tax liabilities. The equity in net gain from Matrix for the quarter ended December 31, 2017includes a tax benefit of $13,610 related to Matrix’s re-measurement of deferred tax liabilities as a result of the Tax Reform Act.108(10)Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of quarterly earnings per share may notequal the total computed for the year.109Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A.Controls and Procedures. Evaluation of Disclosure Controls and Procedures The Company, under the supervision and with the participation of its management (including its principal executive officer and principal financialofficer), evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of theExchange Act as of the end of the period covered by this Annual Report on Form 10-K (December 31, 2018). Based upon this evaluation, the Company’sprincipal executive and financial officers have concluded that such disclosure controls and procedures were effective to provide reasonable assurance that (i)information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it filesor submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and financialofficers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control Over Financial Reporting Management’s report on internal control over financial reporting is presented in Part II, Item 8, of this Annual Report and is hereby incorporated byreference.We acquired Circulation on September 21, 2018, as discussed in Note 22, Acquisitions, to the Consolidated Financial Statements. As permitted bythe SEC staff’s Frequently Asked Question 3 on Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure inExchange Act Periodic Reports (revised September 24, 2007), our management excluded from our assessment of internal control over financial reportingeffectiveness as of December 31, 2018, Circulation’s internal control over financial reporting associated with consolidated total assets of approximately1.1%, and consolidated total revenues of approximately 0.2%, included in our Consolidated Financial Statements as of and for the year ended December 31,2018. We will include Circulation in our assessment of the effectiveness of internal control over financial reporting starting in the third quarter of 2019.Report of Independent Registered Public Accounting Firm The attestation report of the registered public accounting firm on the Company’s internal control over financial reporting is presented in Part II, Item8, of this Annual Report and is hereby incorporated by reference. Changes in Internal Control Over Financial Reporting The principal executive and financial officers also conducted an evaluation of whether any changes in the Company’s internal control over financialreporting occurred during the quarter ended December 31, 2018 that have materially affected or which are reasonably likely to materially affect such control.Such officers have concluded that no such changes have occurred. Item 9B.Other Information. None.110PART III Item 10.Directors, Executive Officers and Corporate Governance. This Item is incorporated by reference from our definitive proxy statement on Schedule 14A to be filed with the SEC and delivered to stockholdersin connection with our 2019 annual meeting of stockholders; provided that if such proxy statement is not filed on or before April 30, 2019, such informationwill be included in an amendment to this Annual Report on Form 10-K filed on or before such date. Code of Ethics We have adopted a code of ethics that applies to our senior management, including our chief executive officer, chief financial officer, controller andpersons performing similar functions, as well as our directors, officers and employees. This code of ethics is part of our broader Compliance and Ethics Planand Code of Conduct, which is available free of charge in the Investor Relations section of our website at www.prscholdings.com. We intend to disclose anyamendment to, or waiver from, a provision of the code of ethics that applies to our principal executive officer, principal financial officer or principalaccounting officer on our website. The information contained on our website is not part of, and is not incorporated in, this Annual Report on Form 10-K orany other report we file with or furnish to the SEC. Item 11.Executive Compensation. This Item is incorporated by reference from our definitive proxy statement on Schedule 14A to be filed with the SEC and delivered to stockholdersin connection with our 2019 annual meeting of stockholders; provided that if such proxy statement is not filed on or before April 30, 2019, such informationwill be included in an amendment to this Annual Report on Form 10-K filed on or before such date. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. This Item is incorporated by reference from our definitive proxy statement on Schedule 14A to be filed with the SEC and delivered to stockholdersin connection with our 2019 annual meeting of stockholders; provided that if such proxy statement is not filed on or before April 30, 2019, such informationwill be included in an amendment to this Annual Report on Form 10-K filed on or before such date. Item 13.Certain Relationships and Related Transactions, and Director Independence. This Item is incorporated by reference from our definitive proxy statement on Schedule 14A to be filed with the SEC and delivered to stockholdersin connection with our 2019 annual meeting of stockholders; provided that if such proxy statement is not filed on or before April 30, 2019, such informationwill be included in an amendment to this Annual Report on Form 10-K filed on or before such date. Item 14.Principal Accounting Fees and Services. This Item is incorporated by reference from our definitive proxy statement on Schedule 14A to be filed with the SEC and delivered to stockholdersin connection with our 2019 annual meeting of stockholders; provided that if such proxy statement is not filed on or before April 30, 2019, such informationwill be included in an amendment to this Annual Report on Form 10-K filed on or before such date. 111PART IV Item 15.Exhibits, Financial Statement Schedules. (a)(1) Financial Statements The following consolidated financial statements including footnotes are included in Item 8. •Consolidated Balance Sheets at December 31, 2018 and 2017; •Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016;•Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016;•Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016; and•Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016.(2) Financial Statement Schedules Schedule II Valuation and Qualifying Accounts Additions Balance atbeginning ofperiodCharged tocosts andexpensesCharged tootheraccountsDeductionsBalance atend ofperiodYear Ended December 31, 2018: Allowance for doubtful accounts$5,262$338$(523)(1)$3,223(2)$1,854Year Ended December 31, 2017: Allowance for doubtful accounts$5,164$765$(537)(1)$130(2)$5,262Year Ended December 31, 2016: Allowance for doubtful accounts$3,879$2,903$1,172(1)$2,790(2)$5,164Notes: Schedule above has been recast from prior year to exclude activity related to discontinued operations. (1)Amounts primarily include the allowance for contractual adjustments related to our non-emergency transportation services operating segment thatare recorded as adjustments to non-emergency transportation services revenue.(2)Write-offs, net of recoveries.All other schedules are omitted because they are not applicable or the required information is shown in our financial statements or the related notesthereto. 112 (3) ExhibitsExhibitNumber Description2.1 Share Sale Agreement, dated as of March 31, 2014, by and among The Providence Service Corporation, Pinnacle Australia HoldcoPty Ltd, Thérèse Virginia Rein, Gregory Kenneth Ashmead and GK Ashmead Holdings Pty Limited (as trustee of the GK AshmeadNominees Trust) (Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC onApril 1, 2014). 2.2 Australian Share Sale Agreement Side Deed, dated as of March 31, 2014, by and among The Providence Service Corporation,Pinnacle Australia Holdco Pty Ltd, Thérèse Virginia Rein, Gregory Kenneth Ashmead, GK Ashmead Holdings Pty Limited (astrustee of the GK Ashmead Nominees Trust) and Deloitte LLP (Incorporated by reference from an exhibit to the registrant’s currentreport on Form 8-K filed with the SEC on April 1, 2014). 2.3 Stock Subscription Agreement, dated as of August 28, 2016, by and among The Providence Service Corporation, CCHN GroupHoldings, Inc. and Mercury Fortuna Buyer, LLC (Incorporated by reference from an exhibit to the registrant’s current report onForm 8-K filed with the SEC on August 31, 2016). 2.4 Amendment No. 1, dated as of October 19, 2016, to the Stock Subscription Agreement, dated August 28, 2016, by and among TheProvidence Service Corporation, CCHN Group Holdings, Inc. and Mercury Fortuna Buyer, LLC (Incorporated by reference from anexhibit to the registrant’s current report on Form 8-K filed with the SEC on October 25, 2016). 2.5 Agreement and Plan of Merger, dated as of September 14, 2018, among The Providence Service Corporation, LogistiCareSolutions, LLC, Catapult Merger Sub, Circulation, Inc. and Fortis Advisors LLC (Incorporated by reference from an exhibit to theregistrant’s current report on Form 8-K filed with the SEC on September 17, 2018). 2.6 Share Purchase Agreement, dated November 7, 2018, among The Providence Service Corporation, Ingeus UK Holdings Limited,Advanced Personnel Management Group Pty Ltd, APM UK Holdings Limited and International APM Group Pty Limited(Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended September 30,2018 filed with the SEC on November 8, 2018). 3.1 Second Amended and Restated Certificate of Incorporation of The Providence Service Corporation, including Certificate ofDesignation of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Delaware on December 9, 2011(Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended December 31, 2011filed with the SEC on March 15, 2012). 3.2 Certificate of Amendment of the Certificate of Incorporation of The Providence Service Corporation, dated as of May 6, 2015(Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC on May 7, 2015). 3.3 Amended and Restated Bylaws of The Providence Service Corporation, effective March 10, 2010 (Incorporated by reference froman exhibit to the registrant’s annual report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 12,2010). 4.1 Certificate of Designations of Series A Convertible Preferred Stock of The Providence Service Corporation, dated as of February 6,2015 (Incorporated by reference from an exhibit to Amendment No. 1 to the registrant’s annual report on Form 10-K/A for the yearended December 31, 2014 filed with the SEC on April 30, 2015). 10.1 Amended and Restated Credit and Guaranty Agreement, dated as of August 2, 2013, by and among The Providence ServiceCorporation and certain of its subsidiaries party thereto, Bank of America, N.A., SunTrust Bank, BMO Harris Bank, Merrill Lynch,Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc. and the lenders party thereto (Incorporated byreference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC on August 5, 2013). 10.2 Amended and Restated Pledge Agreement, dated as of August 2, 2013, by and among The Providence Service Corporation, certainof its subsidiaries party thereto, and Bank of America, N.A., as administrative agent (Incorporated by reference from an exhibit tothe registrant’s current report on Form 8-K filed with the SEC on August 5, 2013). 10.3 Amended and Restated Security Agreement, dated as of August 2, 2013, by and among The Providence Service Corporation,certain of its subsidiaries party thereto, and Bank of America, N.A., as administrative agent (Incorporated by reference from anexhibit to the registrant’s current report on Form 8-K filed with the SEC on August 5, 2013). 11310.4 First Amendment to Amended and Restated Credit and Guaranty Agreement and Consent, dated as of May 28, 2014, by and amongThe Providence Service Corporation, the Guarantors named therein, the New Subsidiaries named therein, the Lenders and NewLender named therein and Bank of America, N.A., as administrative agent (Incorporated by reference from an exhibit to theregistrant’s current report on Form 8-K filed with the SEC on June 3, 2014). 10.5 Second Amendment to the Amended and Restated Credit and Guaranty Agreement and Consent, dated as of October 23, 2014, byand among The Providence Service Corporation, certain of its subsidiaries party thereto, Bank of America, N.A., SunTrust Bank,Royal Bank of Canada, BMO Harris Bank, N.A., HSBC Bank USA, National Association, the other Lenders party thereto, MerrillLynch, Pierce, Fenner & Smith Incorporated, SunTrust Robinson Humphrey, Inc., and RBC Capital Markets (Incorporated byreference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC on October 24, 2014). 10.6 Third Amendment and Consent to the Amended and Restated Credit and Guaranty Agreement, dated as of September 3, 2015, byand among The Providence Service Corporation, certain of its subsidiaries party thereto, Bank of America, N.A., Sun Trust Bank,Royal Bank of Canada, BMO Harris Bank, N.A., HSBC Bank USA, National Association, the other lenders party thereto, MerrillLynch Pierce, Fenner & Smith Incorporated, Sun Trust Robinson Humphrey, Inc. and RBC Capital Markets (Incorporated byreference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC on September 8, 2015). 10.7 Fourth Amendment and Consent to the Amended and Restated Credit and Guaranty Agreement, dated as of August 28, 2016, byand among The Providence Service Corporation, the guarantors party thereto, the lenders party thereto and Bank of America, N.A.,as Administrative Agent (Incorporated by reference to an exhibit to the registrant’s current report on Form 8-K filed with the SECon August 31, 2016). 10.8 Employment Agreement, dated January 14, 2015, by and between The Providence Service Corporation and James Lindstrom(Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC on January 21, 2015). 10.9+ Employment Agreement, dated as of September 28, 2015, by and between The Providence Service Corporation and DavidShackelton (Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC onNovember 20, 2015). 10.10+ Amended & Restated Employment Agreement, dated January 9, 2018, by and between The Providence Service Corporation andDavid Shackelton (Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC onJanuary 16, 2018). 10.11+ Employment Agreement, dated April 4, 2016, between The Providence Service Corporation and Sophia Tawil (Incorporated byreference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2016 filed with the SECon May 6, 2016). 10.12+ Amended & Restated Employment Agreement, dated January 9, 2018, by and between The Providence Service Corporation andSophia Tawil (Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC onJanuary 16, 2018). 10.13+ Employment Agreement, dated November 15, 2017, between The Providence Service Corporation and R. Carter Pate (Incorporatedby reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC on November 15, 2017). 10.14+ Letter Agreement, dated January 10, 2018, by and between The Providence Service Corporation and William Severance(Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC on January 16, 2018). 10.15+ The Providence Service Corporation Non-Qualified Stock Option Agreement, dated April 9, 2018, between The Providence ServiceCorporation and R. Carter Pate (Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed withthe SEC on April 11, 2018). 10.16+ Amendment No. 1 to The Providence Service Corporation Non-Qualified Stock Option Agreement, dated May 1, 2018, betweenThe Providence Service Corporation and R. Carter Pate (Incorporated by reference from an exhibit to the registrant's RegistrationStatement on Form S-1 filed with the SEC on May 9, 2018). 10.17+ Employment Agreement, dated August 18, 2018, by and among The Providence Service Corporation, LogistiCare Solutions, LLCand Kevin M. Dotts (Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the SEC onAugust 22, 2018). 10.18+ The Providence Service Corporation 2006 Long-Term Incentive Plan, as amended and restated effective July 27, 2016(Incorporated by reference from an appendix to the registrant’s definitive proxy statement on Schedule 14A filed with the SEC onJune 14, 2016). 11410.19+ Form of Restricted Stock Agreements (Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Qfor the quarter ended March 31, 2011 filed with the SEC on May 6, 2011). 10.20+ Form of Stock Option Agreements (Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q forthe quarter ended March 31, 2011 filed with the SEC on May 6, 2011). 10.21+ Form of Special Incentive Stock Option Award Agreement (Incorporated by reference from an exhibit to the registrant’s currentreport on Form 8-K filed with the SEC on August 11, 2015). 10.22+ Form of Matching Incentive Stock Option Award Agreement (Incorporated by reference from an exhibit to the registrant’s currentreport on Form 8-K filed with the SEC on August 11, 2015). 10.23 Amended and Restated Limited Liability Company Agreement of Mercury Parent, LLC, by and between Prometheus Holdco,LLC and Mercury Fortuna Buyer, LLC, dated as of October 19, 2016 (Incorporated by reference from an exhibit to the registrant’scurrent report on Form 8-K filed with the SEC on October 25, 2016). 10.24 Second Amended and Restated Limited Liability Company Agreement of Mercury Parent, LLC, by and between PrometheusHoldco, LLC and Mercury Fortuna Buyer, LLC, dated February 16, 2018 (Incorporated by reference from an exhibit to theregistrant’s annual report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 9, 2018). 10.25+ Form of Matching Stock Option Agreement (Incorporated by reference from an exhibit to the registrant’s quarterly report on Form10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017). 10.26+ Form of Stock Option Agreement (Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for theyear ended December 31, 2017 filed with the SEC on March 9, 2018). 10.27+ Letter agreement, dated September 21, 2015, between The Providence Service Corporation and Matthew Umscheid (Incorporatedby reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended December 31, 2017 filed with theSEC on March 9, 2018). 10.28+ The Providence Service Corporation Employee Retention Plan (Incorporated by reference from an exhibit to the registrant’s currentreport on Form 8-K filed with the SEC on April 11, 2018). 10.29 Registration Indemnification Agreement, dated May 9, 2018, between The Providence Service Corporation, Coliseum CapitalPartners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC - Series A(Incorporated by reference from an exhibit to the registrant’s Registration Statement on Form S-1 filed with the SEC on May 9,2018). 10.30+ Form of Deferred Share Unit Agreement (Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Qfor the quarter ended June 30, 2018 filed with the SEC on August 8, 2018). 10.31+ Form of Amendment to Retention Letter under The Providence Service Corporation Employee Retention Plan (Incorporated byreference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2018 filed with theSEC on November 8, 2018). 21.1* Subsidiaries of the Registrant. 23.1* Consent of KPMG LLP. 23.2* Consent of Deloitte & Touche LLP (Mercury Parent, LLC financial statements). 23.3* Consent of KPMG LLP (Mercury Parent, LLC financial statements). 31.1* Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer. 31.2* Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer. 32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of theChief Executive Officer. 32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of theChief Financial Officer. 99.1* Financial Statements of Mercury Parent, LLC. 101. INS* XBRL Instance Document 101.SCH* XBRL Schema Document115 101.CAL* XBRL Calculation Linkbase Document 101.LAB* XBRL Label Linkbase Document 101.PRE* XBRL Presentation Linkbase Document 101.DEF* XBRL Definition Linkbase Document +Management contract or compensatory plan or arrangement. *Filed herewith.116Item 16. Form 10-K Summary.None.117SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. THE PROVIDENCE SERVICE CORPORATION By:/s/ R. Carter Pate R. Carter PateInterim Chief Executive Officer Dated: March 1, 2019 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date/S/ R. CARTER PATE Interim Chief Executive Officer March 1, 2019R. Carter Pate (Principal Executive Officer) /S/ KEVIN DOTTS Chief Financial Officer March 1, 2019Kevin Dotts (Principal Financial Officer) /S/ LAURENCE ORTON Senior Vice President, Finance March 1, 2019Laurence Orton (Principal Accounting Officer) /S/ CHRISTOPHER S. SHACKELTON Chairman of the Board March 1, 2019Christopher S. Shackelton /S/ TODD J. CARTER Director March 1, 2019Todd J. Carter /S/ DAVID A. COULTER Director March 1, 2019David A. Coulter /S/ RICHARD A. KERLEY Director March 1, 2019Richard A. Kerley /S/ LESLIE V. NORWALK Director March 1, 2019Leslie V. Norwalk /S/ FRANK J. WRIGHT Director March 1, 2019Frank J. Wright 118Exhibit 21.1 Name of SubsidiaryState/Country of Incorporation Social Services Providers Captive Insurance Co. Arizona Ingeus Australasia Pty Ltd Australia Providence IT Procurement, LLC Connecticut Circulation, Inc. Delaware Health Trans, Inc. Delaware Ingeus America, LLC Delaware LogistiCare Solutions, LLC Delaware Pinnacle Acquisitions LLC Delaware Prometheus Holdco, LLC Delaware Ride Plus LLC Delaware Provado Technologies, LLC Florida Red Top Transportation, Inc. Florida LogistiCare Solutions Independent Practice Association, LLC New York Ingeus LLC (Saudi Arabia) Saudi Arabia Ingeus Investments Limited United Kingdom Ingeus UK Holdings Limited United Kingdom Exhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of DirectorsThe Providence Service Corporation: We consent to the incorporation by reference in the registration statement (Nos. 333-212888, 333-183339, 333-166978, 333-151079, 333-135126 and 333-145843) on Form S-8 and in the registration statement (No. 333-224798) on Form S-1 of The Providence Service Corporation and subsidiaries (the“Company”) of our reports dated March 1, 2019, with respect to the consolidated balance sheets of the Company as of December 31, 2018 and 2017, therelated consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year periodended December 31, 2018, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”), and theeffectiveness of internal control over financial reporting as of December 31, 2018, which reports appear in the December 31, 2018 annual report on Form10‑K of the Company.Our report on the consolidated financial statements refers to a change in the method of accounting for revenues and related costs in 2018 due to the adoptionof Accounting Standard Codification Topic 606, Revenue from Contracts with Customers.Our report on the effectiveness of internal control over financial reporting as of December 31, 2018, contains an explanatory paragraph which states that theCompany acquired Circulation, Inc. (“Circulation”) during 2018, and management excluded from its assessment of the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2018, Circulation’s internal control over financial reporting associated with total assets of $6.1million (which excludes acquired goodwill and intangible assets) and total revenues of $2.2 million included in the consolidated financial statements of theCompany as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluationof the internal control over financial reporting of Circulation. /s/ KPMG LLP Stamford, ConnecticutMarch 1, 2019 Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (Numbers 333- 212888, 333-183339, 333-166978, 333-151079, 333-135126,and 333-145843) on Form S-8 and the Registration Statement (Number 333-224798) on Form S-1 of our report dated March 1, 2019, relating to theconsolidated financial statements of Mercury Parent, LLC and its subsidiaries as of and for the years ended December 31, 2018 and 2017 included as Exhibit99.1 to the Annual Report on Form 10-K of The Providence Service Corporation for the year ended December 31, 2018. /s/ Deloitte & Touche LLP Phoenix, ArizonaMarch 1, 2019 Exhibit 23.3 Consent of Independent Auditors The Board of DirectorsMercury Parent, LLC:We consent to the incorporation by reference in the registration statements (Nos. 333-212888, 333-183339, 333-166978, 333-151079, 333-135126, and 333-145843) on Form S-8 and in the registration statement (No. 333-224798) on Form S-1 of The Providence Service Corporation and subsidiaries of our reportdated March 10, 2017, with respect to the consolidated balance sheet of Mercury Parent, LLC as of December 31, 2016, and the related consolidatedstatements of operations, members’ equity and cash flows for the period from October 19, 2016 to December 31, 2016, which report appears in the annualreport on Form 10-K of The Providence Service Corporation dated March 1, 2019./s/ KPMG LLPPhoenix, ArizonaMarch 1, 2019Exhibit 31.1 CERTIFICATIONS I, R. Carter Pate, certify that: 1. I have reviewed this annual report on Form 10-K of The Providence Service Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 1, 2019 By: /s/ R. Carter Pate R. Carter Pate Interim Chief Executive Officer (Principal Executive Officer)Exhibit 31.2CERTIFICATIONS I, Kevin Dotts, certify that: 1. I have reviewed this annual report on Form 10-K of The Providence Service Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 1, 2019 By: /s/ Kevin Dotts Kevin Dotts Chief Financial Officer (Principal Financial Officer )Exhibit 32.1 THE PROVIDENCE SERVICE CORPORATIONCERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,the undersigned officer of The Providence Service Corporation (the “Company”), does hereby certify with respect to the Annual Report of the Company onForm 10-K for the year ended December 31, 2018 (the “Report”) that, to the best of such officer’s knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 1, 2019 /s/ R. Carter PateR. Carter PateInterim Chief Executive Officer(Principal Executive Officer ) Exhibit 32.2 THE PROVIDENCE SERVICE CORPORATIONCERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, the undersigned officer of The Providence Service Corporation (the “Company”), does hereby certify with respect to the Annual Report of theCompany on Form 10-K for the year ended December 31, 2018 (the “Report”) that, to the best of such officer’s knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 1, 2019 /s/ Kevin DottsKevin DottsChief Financial Officer(Principal Financial Officer)Mercury Parent, LLC Consolidated Financial Statements as of December 31, 2018 and 2017, and for the Years Ended December 31, 2018 and 2017, and the Period from October 19, 2016, to December 31, 2016, Report of Independent Registered Public Accounting Firm, and Independent Auditors’ Report MERCURY PARENT, LLC TABLE OF CONTENTS Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1 INDEPENDENT AUDITORS’ REPORT 2–3 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 2018 and 2017 4 Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017, and the Period from October 19, 2016, to December 31, 2016 5 Consolidated Statements of Changes in Members’ Equity for the Years Ended December 31, 2018 and 2017, and the Period from October 19, 2016, to December 31, 2016 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017, and the Period from October 19, 2016, to December 31, 2016 7 Notes to Consolidated Financial Statements 8–34 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Members and the Board of Directors of Mercury Parent, LLC Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Mercury Parent, LLC and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in members’ equity, and cash flows, for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the 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 two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance withthe 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 and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Phoenix, Arizona March 1, 2019 We have served as the Company’s auditor since 2017. INDEPENDENT AUDITORS’ REPORT The Board of Directors Mercury Parent, LLC: We have audited the accompanying consolidated financial statements of Mercury Parent, LLC (the Company) and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, members’ equity, and cash flows for the period from October 19, 2016 to December 31, 2016, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury Parent, LLC and itssubsidiaries as of December 31, 2016, and the results of their operations and their cash flows in accordance with U.S. generally accepted accounting principles. Emphasis of Matter As discussed in note 2 to the consolidated financial statements, effective October 19, 2016, Frazier Healthcare Partners acquired 53.2% of the equity interest in CCHN Group Holdings, Inc. and subsidiaries (predecessor entity) in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition. /s/ KPMG LLP Phoenix, Arizona March 10, 2017 - 3 - MERCURY PARENT, LLC CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2018 AND 2017 (Amounts in thousands, except unit and per unit amounts) 2018 2017 ASSETS CURRENT ASSETS: Cash and cash equivalents$ 23,925 $ 15,020 Clinical assessment and other accounts receivable—net of allowance of $2,310 and $737, respectively 32,051 17,813 Inc ome taxes rec eivable 1,533 1,619 Prepaid expenses and other current assets 4,056 3,111 Total current assets 61,565 37,563 PROPERTY AND EQUIPMENT—Net 21,282 16,869 GOODWILL 448,516 353,864 INTANGIBLE ASSETS—Net 248,429 226,762 OTHER LONG-TERM ASSETS 1,223 118 TOTAL ASSETS $ 781,015 $ 635,176 LIABILITIES AND MEMBERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 6,334 $ 3,652 Accrued liabilities—including related party of $594 and $529, respectively 18,059 14,624 Other short-term liabilities 1,367 1,065 Current portion of long-term debt 1,859 8,377 Total c urrent liabilities 27,619 27,718 DEFERRED TAX LIABILITY—Net 52,391 60,580 OTHER LONG-TERM LIABILITIES 2,886 1,039 LONG-TERM DEBT—Net of current portion 317,882 178,894 Total liabilities 400,778 268,231 COMMITMENTS AND CONTINGENCIES (Note 11) MEMBERS’ EQUITY: Common A units—352,950,000 and 352,950,000 units authorized, issued, and outstanding, liquidity preference of $1 per unit 349,628 366,945 Common B units—24,158,682 and 0 units authorized, issued, and outstanding, liquidity preference of $1.267 per unit 30,609 - Series A units—39,066,667 units authorized, 14,239,870 and 7,816,520 units issued and outstanding, participate in dividends and distributions in excess of $1 per common unit - - Series B units—18,170,543 units authorized, 6,643,152 and 3,635,591 units issued and outstanding, participate in dividends and distributions in excess of $1 per common unit - - Series C units—14,777,249 units authorized, 5,402,563 and 2,956,655 units issued and outstanding, participate in dividends and distributions in excess of $1 per common unit - - Series D units—15,885,542 units authorized, 5,723,950 and 3,178,404 units issued and outstanding, participate in dividends and distributions in excess of $1 per common unit - - Total members’ equity 380,237 366,945 TOTAL LIABILITIES AND MEMBERS’ EQUITY$ 781,015 $ 635,176 See accompanying notes to consolidated financial statements. - 4 - MERCURY PARENT, LLC CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017, AND THE PERIOD FROM OCTOBER 19, 2016, TO DECEMBER 31, 2016 (Amounts in thousands) Period from Year Ended Year Ended October 19, 2016, December 31, December 31, to December 31, 2018 2017 2016 NET REVENUES$ 282,067 $ 227,872 $ 41,635 OPERATING EXPENSES: Service expense 228,326 176,582 36,489 General and administrative 6,807 2,742 530 Depreciation and amortization 43,119 33,512 6,356 (Gain) loss on disposition of assets (34) 23 5 Management fees 5,035 3,143 2,334 Total operating expenses 283,253 216,002 45,714 (LOSS) INCOME FROM OPERATIONS (1,186) 11,870 (4,079) INTEREST EXPENSE—Net and other expense: Interest expense—Net and other expense (23,417) (14,818) (2,949) Finance restructuring (2,525) - - Total interest expense—Net and other expense (25,942) (14,818) (2,949) LOSS BEFORE TAXES (27,128) (2,948) (7,028) INCOME TAX BENEFIT 7,166 29,613 2,828 NET (LOSS) INCOME FROM OPERATIONS$ (19,962) $ 26,665 $ (4,200) See accompanying notes to consolidated financial statements. - 5 - MERCURY PARENT, LLC CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017, AND THE PERIOD FROM OCTOBER 19, 2016, TO DECEMBER 31, 2016 (Amounts in thousands) Total Common A Common B Members’ Units Units Series A Series B Series C Series D Equity Recapitalization and issuance of members’ equity$ 340,084 $ - $ - $ - $ - $ - $ 340,084 Net loss from October 19, 2016 to December 31, 2016 (4,200) - - - - - (4,200) Equity-based compensation 407 - - - - - 407 BALANCE—December 31, 2016 336,291 - - - - - 336,291 Capital contributions 1,350 - - - - - 1,350 Net income 26,665 - - - - - 26,665 Equity-based compensation 2,639 - - - - - 2,639 BALANCE—December 31, 2017 366,945 - - - - - 366,945 Ac quisition rollover capital c ontribution - 30,609 - - - - 30,609 Units repurchased (53) - - - - - (53) Net loss (19,962) - - - - - (19,962) Equity-based compensation 2,698 - - - - - 2,698 BALANCE—December 31, 2018$ 349,628 $ 30,609 $ - $ - $ - $ - $ 380,237 See accompanying notes to consolidated financial statements. - 6 - MERCURY PARENT, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017, AND THE PERIOD FROM OCTOBER 19, 2016, TO DECEMBER 31, 2016 (Amounts in thousands) Period from Year Ended Year Ended October 19, 2016, December 31, December 31, to December 31, 2018 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (19,962) $ 26,665 $ (4,200) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 43,119 33,512 6,356 Amortization of debt issuance costs 1,471 1,535 330 Restructuring Finance Fees 1,131 - - Change in deferred income taxes (8,189) (34,512) (2,843) Equity-based compensation 2,698 2,639 407 Provision for bad debts 1,097 (407) 218 (Gain) loss on disposal of property and equipment (34) 23 5 Changes in operating assets and liabilities: Clinical assessment and other accounts receivable (8,235) (419) 7,327 Prepaid expenses and other current assets 766 3,672 (2,251) Other long-term assets (990) 81 3,559 Accounts payable and accrued liabilities 3,836 (4,702) (4,573) Other liabilities 301 606 - Income taxes receivable 87 (809) (810) Net cash provided by operating activities 17,096 27,884 3,525 CASH FLOWS FROMINVESTING ACTIVITIES: Business acquisition—net of cash acquired (156,799) (3,455) - Proceeds from sale of assets 54 - - Purchases of property and equipment (10,375) (11,042) (3,364) Net cash used in investing activities (167,120) (14,497) (3,364) CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions 30,609 1,350 - Payment of financing fees (6,825) - (2,633) Payment of contingent transaction expenses - - (1,414) Proceeds from term loan 330,000 - 193,024 Payments on term loan (194,700) (4,950) (380,000) Payments on capital leases (102) - - Proceeds from issuance of members’ equity - - 180,924 Re purc ha s e o f me mbe rs ' unit s ( 53) - - Return of capital to Providence - (75) (5,172) Net cash provided by (used in) financing activities 158,929 (3,675) (15,271) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,905 9,712 (15,110) CASH AND CASH EQUIVALENTS—Beginning of the period 15,020 5,308 20,418 CASH AND CASH EQUIVALENTS—End of the period$ 23,925 $ 15,020 $ 5,308 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest$ 21,784 $ 13,147 $ 3,737 Cash paid for income taxes$ 3,688 $ 5,520 $ 147 NONCASH INVESTING AND FINANCING TRANSACTIONS: Additions to property and equipment financed through capital leases, accounts payable, andaccrued expenses $ 1,671 $ 828 $ - See accompanying notes to consolidated financial statements. - 7 - MERCURY PARENT, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017, AND THE PERIOD FROM OCTOBER 19, 2016, TO DECEMBER 31, 2016 1. ORGANIZATION AND NATURE OF OPERATIONS Nature of Operations—Mercury Parent, LLC (“Mercury Parent” and collectively with its subsidiaries and affiliates, the “Company”) is a Delaware limited liability company formed on October 19, 2016, as a holding company for CCHN Group Holdings, Inc. (the “Group”), CCHN Holdings, LLC (“Holdings”), and Community Care Health Network, LLC and its subsidiaries (CCHN) (collectively, “Matrix”). All financial activity is recorded at the operating company, CCHN consolidated level. Matrix is a national provider of in-home care optimization and care management solutions, including comprehensive health assessments (CHAs), to members of managed care organizations. Through a national network of more than 3,500 clinical practitioners and 33 mobile clinics, Matrix primarily generates revenue from CHAs, which gather health plan members’ information related to health status, social, environmental, and medication risks to help health plans improve the accuracy of such data and optimize care for the health plan member. Description of Transaction—Prior to October 19, 2016, CCHNwas wholly owned by The Providence Service Corporation (“Providence”), a Delaware corporation. On October 19, 2016, affiliates of Frazier Healthcare Partners (“Buyer”) purchased a 53.2% equity interest in CCHN with Providence retaining a 46.8% equity interest. As a result of the transaction, Buyer gained control of CCHN. Concurrent with the transaction, Buyer and Providence exchanged their equity interests in CCHN for similar ownership in Mercury Parent, with CCHN becoming a wholly owned subsidiary of Mercury Parent. Basis of Presentation—As a result of the above transactions, Buyer applied the provisions of purchase accounting for business combinations. The years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, consolidated financial statements represent those of the acquired entity. The consolidated financial statements included herein represent those of the acquired entity. As such, the Company has elected to adopt pushdown accounting and reflect the use of the acquirer’s basis in the preparation of its consolidated financial statements beginning with the date of the change of control. References to “Successor” and “Successor Period” refer to the Company on or after October 19, 2016, the period from October 19, 2016, to December 31, 2016, and the yearsended December 31, 2017 and 2018, respectively. See Note 2 for further description of the transaction and the application of pushdown accounting. 2. CHANGE OF CONTROL TRANSACTION As indicated in Note 1, on October 19, 2016 (the “Close Date”), Buyer obtained control of the Company, and the Company has applied pushdown accounting effective as of the Close Date. - 8 - The following transactions occurred contemporaneously with closing: Inflows: • Buyer funded $187.1 million of cash for its equity interest, including $180.6 million for its acquisition of a 53.2% interest of CCHN and $6.5 million for its pro rata share of the additional capital contribution made at closing. • The Company received net debt proceeds of $193 million under a new lending arrangement. Outflows: • The Company repaid its existing debt plus interest of $381.2 million owed to Providence. • The Company paid $13.3 million, consisting of $0.6 million of Providence-related expenses, $1.5 million of expenses which were contingent on the close of the transaction and thus not reflected as an expense in the Successor period, $2.7 million of prepaid expenses for management fees, $6.2 million of equity issuance costs, and $2.3 million of debt transaction costs. Fair Value of Consideration Transferred—The fair value of the consideration transferred was $180.9 million of proceeds (net of equity issuance costs) received for the units issued to Buyer, representing a 53.2% equity interest in the Company. The enterprise value of the Company as of the date of the transaction was $340.1 million, and the fair value of the equity interest retained by Providence (46.8%) was determined to be $159.2 million. Allocation of Consideration Transferred—The transaction hasbeen accounted for by Buyer using the acquisition method of accounting as of the date of change of control. Acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be measured at their acquisition-date fair values. The excess of the enterprise value over the net fair value of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is not amortized, but is tested for impairment at least annually. The Company elected to push down the effects of the acquisition method as of the Close Date. - 9 - The Company allocated the enterprise value of $340.2 million to the estimated fair value of acquired assets (assumed liabilities) as follows (in millions): Cash and cash equivalents$ 6.0 Accounts receivable 23.3 Prepaid expenses and other current assets 5.1 Property and equipment 8.7 Intangible assets 257.6 Goodwill 353.2 Other long-term assets 3.8 Accounts payable (0.3) Accrued liabilities (25.7) Other short-term liabilities (0.7) Deferred tax liability (97.9) Other long-term liabilities (2.2) Long-term debt—net (190.7) $ 340.2 Included in the allocation are measurement period adjustments of $1.4 million to establish a reserve for state tax credits, $0.1 million to true-up income tax refunds due to seller, and $0.1 million final net working capital adjustment. Intangible assets in the table above consist of customer relationships of $180 million and developed technology of $46.2 million that will be amortized over their estimated useful lives of 10 and five years, respectively. Indefinite-lived intangible assets consist of trade names and trademarks of $31.4 million, which are not subject to amortization. The estimates of the fair value of the assets or rights acquired and liabilities assumed at the date of the change of control were subject to adjustment during the measurement period (up to one year from the date of the change of control). The primary areas of the accounting for the change ofcontrol that were not yet finalized relate to the fair value of certain tangible and intangible assets acquired, residual goodwill, and any related tax impact. The fair values of these net assets acquired were based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. During the measurement period, the Company reduced the fair value of deferred tax assets by $1.4 million of deferred tax assets for which it is not more likely than not that such assets will be realized. A final net working capital settlement of $0.1 million was paid during the measurement period. The effect of this measurement period adjustment to the estimated fair value was reflected as if the adjustment had been completed on the date of the change of control. Goodwill recorded in connection with the change of control was attributable to the value of assembled workforce and future synergies expected to be achieved. Currently, the Company has only one reporting unit referred to as the core reporting unit. - 10 - 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation—The consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of Mercury Parent, its consolidated and wholly owned subsidiaries, and its affiliates. Affiliated entities operate in states that have statutory requirements regarding legal ownership of operating entities by a licensed medical practitioner. Accordingly, each affiliate entity has a contractual relationship with the Company whereby the Company provides management and other services for these affiliates. The Company has entered into license, service, and redemption agreements with the affiliates and the members of the affiliates. The Company may terminate the license, service, or employment agreement with or without cause upon written notice to the affiliated entity and/or member subject to certain time requirements, generally less than 90 days. Upon termination, the member shall surrender the stock and the status of the physician as a member shall be deemed to have terminated and shall have no further ownership in the Company. The surrender of the stock by the member will be exchanged for a nominal amount as specified in the redemptionagreement. As such and in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810-10-05, Consolidation of Entities Controlled by Contract, the affiliated entities are being presented on a consolidated basis as the Company meets the requirements to consolidate, specifically the controlling financial interest provisions. All intercompany accounts and transactions, including those between the Company and its subsidiaries and the affiliated entities, are eliminated in consolidation. Revenue Recognition—On January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. The adoption did not result in any change to revenue recognition for any of its revenue streams. To conform to Topic 606, the Company modified its revenue recognition policy as described below. The Company’s revenue is generated primarily from the conduct of CHAs (see Note 1) and, to a lesser extent, other services related to gathering, monitoring, and assessing information related to health plan members’ health and health care activities. All revenue activities other than the conduct of CHAs are deemed to be immaterial. CHAs are performed subject to customer contracts and areconducted either at a health plan members’ home, a skilled nursing facility, or at a mobile clinic. These three delivery mechanisms are subject to different economic factors (e.g., the efficiency associated with conducting CHAs for multiple health plan members) and different average revenues and fulfillment costs. - 11 - Revenues are disaggregated as follows (in millions): Year Ended December 31, 2018 Visit revenue (home assessments, mobile assessments, home quality visits, and mobile quality visits)$ 277 Care management revenue 1 Other revenue 4 $ 282 The performance obligation identified in the CHA-related customer contracts is the performance of a completed assessment as part of a series. The Company recognizes revenues for the conduct of CHAs over time using cost-based input methods, in which significant judgment is required to evaluate assumptions including the amount of net contract revenues and the total estimated costs to determine the Company’s progress toward contract completion and to calculate the corresponding amount of revenue to recognize. The Company believes that this method provides a realistic depiction of the transfer of services to the customer. Payment is typically due from the customer upon delivery of the CHA results. As billing occurs after performance obligations have been satisfied, there are no contract liability balances, and contract asset balances arise from accounts receivable and revenue recognized in advance of billing. Such amounts are reflected as clinical assessment and other accounts receivable—net in the accompanying consolidated balance sheet.The increase in this balance at December 31, 2018, as compared to December 31, 2017, was primarily attributable to the acquisition of HealthFair. Some customer contracts provide for variable service-level agreement bonuses and/or rebates that are tied to certain performance criteria and are settled at the end of the contract period. Because such amounts are immaterial and are not estimable, such amounts are constrained at the onset of the contract until such time that payment becomes probable. Probability of payment is based on, among other factors, the Company’s historical experience. The aggregate amount of the transaction price allocated to performance obligations that are partially unsatisfied at December 31, 2018, relates to CHAs that are in process at year- end. The aggregate amount of revenue yet to be billed for in-process CHAs was immaterial at December 31, 2018, and is expected to be billed within one to two months after year- end. Costs to obtain a contract consist of commissions and are recognized as the related revenues are recognized over the term of the related contract. Such amounts are immaterial. Prior to the adoption of ASU No. 2014-09, revenue was recognized using the proportional performance method in the period in which the services are rendered. All costs associated with the acquisition of new customersor contracts were expensed as incurred. - 12 - Concentration of Credit Risk—For the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, two health plans made up approximately 53%, 58%, and 42% of net revenues, respectively. Accounts receivable from these two health plans at December 31, 2018 and 2017, were approximately 13% and 21%, respectively, of total accounts receivable. Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual events and results could materially differ from those assumptions and estimates. The most significant assumptions and estimates underlying these consolidated financial statements and the accompanying notes involve the recognition of revenues and receivables, allowances for contractual discounts and uncollectible accounts, long-lived assets, accounting for income taxes, insurance reserves, fair value estimates, and share-based payments. Cash and Cash Equivalents—TheCompany considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions, and at times, balances may exceed federally insured limits. At December 31, 2018 and 2017, the Company has $23.2 million and $14.7 million, respectively, of interest-bearing and non-interest-bearing cash balances with three financial institutions that exceed federally insured limits. Accounts Receivable and Sales Allowance—The Company records accounts receivable amounts at the contractual amount, less an allowance for unbillable assessments. The Company maintains an allowance at an amount it estimates to be sufficient to cover the risk that an assessment will not be able to be billed and collected. The Company regularly evaluates its accounts receivable and reassesses its sales allowance based on updated information. Sales allowance consists of the following (in millions): Balance at October 19, 2016$ 929 Provisions 92 Direct write-offs (68) Balance at December 31, 2016$ 953 Balance at January 1, 2017$ 953 Provisions 173 Direct write-offs (389) Balance at December 31, 2017$ 737 Balance at January 1, 2018$ 737 Provisions 2,017 Direct write-offs (444) Balance at December 31, 2018$2,310 - 13 - Property and Equipment—Property and equipment are recorded at cost, less accumulated depreciation, and are depreciated using the straight-line method over the following estimated useful lives of the related assets: Computer applications 3 years Computer equipment 3 years Office equipment 5 years Furniture and fixtures 5 years Leasehold improvements Shorter of lease term or 5 years Vehicles and accessories Shorter of lease term or 6 years Medical equipment 5 years Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized. For items that are disposed, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the consolidated statements of operations. In accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets, the Company evaluates the carrying amount of its property and equipment whenever changes in circumstances or events indicate that the value of such assets may not be fully recoverable. An impairment loss is recorded when the sum of the undiscounted future cash flows is less than the carrying amount of the asset and is measured as the amount by which thecarrying amount of the asset exceeds its fair value. Software Development Costs—The Company capitalizes certain development costs incurred in connection with its internal-use software in accordance with ASC 350-40, Internal-Use Software. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. Internal-use software is included as a component of property and equipment, and amortization begins when the computer software is ready for its intended use. Internal-use software is amortized on a straight-line basis over the estimated useful lives of the related software applications, which are generally three to five years. For the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, $9 million, $11 million, and $1.9 million, respectively, were capitalized as internally developed software, which is a component of computer software included in property and equipment. Goodwill—Goodwill represents the excess of the purchase price over the fair value of tangible net assets of acquired businessesafter amounts are allocated to other intangible assets. In accordance with ASC 350-20, Intangibles—Goodwill and Other, the Company evaluates goodwill for impairment on an annual basis as of the first day of the fourth quarter of each calendar year-end and on an interim basis should events and circumstances warrant. To test for impairment, the Company first performs a qualitative assessment of relevant circumstances and events to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If this qualitative - 14 - assessment indicates it is more likely than not the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, the Company performs a quantitative goodwill impairment test to determine if goodwill is impaired. The quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets associated with that unit, goodwill is not considered impaired. If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and will be determined as the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Determining the fair value of the Company’s reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount, and long-term growth rates. The Company determines the fair value of its reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industrytrends. The Company considers historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. The Company considers other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value. Changes in these estimates based on evolving economic conditions or business strategies could result in material impairment charges in future periods. The Company bases its fair value estimates on assumptions it believes to be reasonable. Actual results may differ from those estimates. Other Intangible Assets—Other intangible assets consist of customer relationships, trade names and trademarks, and developed technologies acquired in business combination transactions. Intangible assets (excluding indefinite-lived assets) are amortized over their estimated useful lives using the straight-line method. In accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets, the Company evaluates the carrying amount of its intangible long-lived assets whenever changes in circumstances or events indicate that the value of such assets may not be fully recoverable. An impairment loss is recorded when the sum of the undiscounted future cash flows isless than the carrying amount of the asset and is measured as the amount by which the carrying amount of the asset exceeds its fair value. Fair Value Measurements—The Company applies fair value accounting for assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the consolidated financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers as follows: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market, or other inputs that areobservable or can be corroborated by observable - 15 - market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data. The fair values of cash, accounts receivable, trade accounts payable, capital expenditures payable, and certain other current assets and accrued expenses approximate carrying values because of their short-term nature. Our assets and liabilities recorded at fair value on a recurring basis include cash equivalent money market funds. The carrying value of long-term debt (see Note 8) includes an amount recorded as debt discount that reduces the unpaid principal balance of the debt to an amount that approximated fair value at December 31, 2018 and 2017. As interest on such debt is based on variable rates, which approximate borrowing rates currently available to the Successor for long-term borrowings with similar terms and variable interest rates. This estimate may not be indicative of the amounts that the Company could realize in a current market exchange. Cash equivalent money market funds (Level 1) were $6.1 million and $10 million as of December 31, 2018 and 2017, respectively. Operating Leases—The Company has certain operating leases for its vehicle fleet and its administrative facilities and office equipment in California, Arizona, Massachusetts, and Florida.Leases that do not transfer substantially all benefits and risks of ownership to the Company or meet any of the other criteria for capitalization are classified as operating leases. These lease payments are recognized as an expense on a straight-line basis over the lease term. Debt Issuance Costs—Debt issuance costs are deferred and amortized to interest expense using the effective interest method over the term of the related debt. For the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, the Company recognized interest expense of $1.5 million, $1.5 million, and $0.3 million, respectively, from the amortization of debt issuance costs. Unamortized debt issuance costs are a reduction of current and long-term debt. Defined Contribution Plans—The Company maintains defined contribution plans (the “Plans”) for the benefit of eligible employees under the provision of Section 401(k) of the U.S. Internal Revenue Code (IRC). The Company provides matching contributions that vest over three years. Unvested matching contributions are forfeitable upon employee termination. Employee contributions are fully vested and nonforfeitable. The assets of the Plans are held separately from those of the Company and are independently managed and administered. The Company’scontributions to the Plans were $1.2 million, $1.1 million, and $0.3 million for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. Income Taxes—The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its consolidated financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax law or rates. While Mercury Parent is a pass-through entity, affiliates and subsidiaries in these consolidated financial statements are taxable entities, giving rise to the tax provisions contained in these consolidated financial statements. - 16 - The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where it is required to file for uncertain tax positions. The Company recognizes a liability for each uncertain tax position at the amount estimated to be required to settle the issue. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company recognized expense of $0.2 million, $0.3 million, and $0 during the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively, related to uncertain tax provisions. Equity-Based Compensation—The Company accounts for equity-based compensation in accordance with ASC 718, Compensation-Stock Compensation. In accordance with ASC 718, equity-based compensation cost is measured at the grant date based on the fair value of the award and accounts for forfeitures as they occur. The Company uses an option-pricing model to determine the fair value of stock-based awards. The assumptions for expected terms were determined using the simplified method outlined in Staff Accounting Bulletin No. 110, as the Company does not have sufficient historical evidence for determining expected terms. The risk-free interest rateis based on the U.S. Treasury rates at the grant date with maturity dates approximately equal to the expected term at the grant date. The historical volatility of a representative group of peer companies’ stock is used as the basis for the volatility assumption. Related-Party Transactions Management Fees—In connection with the change of control transaction described in Note 2, the Company entered into a management services agreement with an affiliate of its majority member. As part of the agreement, the Company is also obligated to pay to its members an ongoing management fee that equals a combined 4% of consolidated EBITDA, as such term is defined in the agreement, to be distributed based upon each member’s relative share of ownership. The Company recognized management fee expense of $4.9 million, $3.1 million, and $2.3 million for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. Included in the management fee expense are transaction fees of $2.4 million paid to related parties for the HealthFair acquisition. Leases—The Company leases one of its properties from the former owner of HealthFair. For the year ended December 31, 2018, the Company paid $0.3 million in rent and taxes related to this property. Deposits—The Company repaid $1 million toformer owner of HealthFair for a bus deposit that the former owner funded prior to the acquisition of HealthFair. Recent Accounting Pronouncements—In May 2014, the FASB issued ASU No. 2014-09. The core principle of ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of ASU No. 2014-09 by one year. In 2016 and 2017, the FASB issued ASUs that amended several aspects of ASU No. 2014-09. ASU No. 2014-09, as amended, is effective for the Company beginning January 1, 2019, and allows for full retrospective or modified - 17 - retrospective methods of adoption. The Company has elected to adopt ASU No. 2014-09 early as of January 1, 2018, under the modified retrospective method. This adoption did not result in any change to revenue recognition for any of its revenue streams. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016- 02 will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU No. 2016-02, a lessee will be required to recognize assets and liabilities for leases with terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. ASU No. 2016-02 will be effective for the Company beginning January 1, 2020 (with early adoption permitted). ASU No. 2016-02 requires either a modified retrospective transition approach with application in all comparative periods presented or an alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements. In March2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions. ASU No. 2016-09 requires excess tax benefits and deficiencies from share-based payment awards to be recorded in income tax expense in the statement of operations. Currently, excess tax benefits and deficiencies are recognized in paid-in capital in the balance sheet. This change is required to be applied prospectively. In addition, ASU No. 2016-09 changes the accounting for statutory tax withholding requirements classification in the statement of cash flows and provides an option to continue to estimate forfeitures or account for forfeitures as they occur. The Company early adopted ASU No. 2016-09 for the year ended December 31, 2017, and elected to account for forfeitures as they occur. The Company’s adoption of ASU No. 2016-09 results in increased volatility to its income tax expense in its consolidated statements of operations in 2017 and future periods, the magnitude of which will depend on, among other things, the timing and volume of equity-based compensation awards and the timing and volume of forfeitures. In August 2016, the FASB issuedASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU No. 2016-15 will be effective for the Company beginning January 1, 2019 (with early adoption permitted). The Company adopted ASU No. 2016-15 on January 1, 2019, and does not anticipate this amendment will have a material impact on its consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU No. 2016-18 requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. ASU No. 2016-18 will be effective for the Company beginning January 1, 2019 (with early adoption permitted), and will be applied using a retrospective transition method to each periodpresented. The Company adopted ASU No. 2016-18 on January 1, 2019, and does not anticipate this amendment will have a material impact on its consolidated financial statements. - 18 - In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU No. 2017-04 simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. The amendment is effective for calendar year- end 2021, and early adoption is permitted. The Company early adopted ASU No. 2017- 04 during 2018. The adoption of this standard did not affect the Company’s consolidated financial statements. 4. ACQUISITIONS HealthFair—On February 16, 2018, the Company acquired 100% of the equity interests of DPN USA, LLC (“HealthFair” or the “HF Membership Interests”). HealthFair is a health and wellness company whose primary service offering consists of utilizing mobile clinics to conduct CHAs. Pursuant to the HF Membership Interest purchase agreement governing the transaction, the Company acquired all the assets and liabilities of HealthFair for an aggregate purchase price of $155.3 million, consisting of cash consideration of $124.7 million(inclusive of working capital adjustments) and the issuance of 24.2 million of the Company’s Series B units with a fair value of $30.6 million. The Company has accounted for this transaction as a purchase under ASC 805, Business Combinations. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their respective preliminary fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. The Company may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if it obtains more information regarding asset valuations and liabilities assumed. The goodwill of $95.2 million resulting from this transaction is attributable to the synergies gained with the Company’s existing business. Goodwill also includes an identified assembled workforce with an associated value of $3.3 million, which does not qualify for separate acquired asset recognition in a business combination. The goodwill recognized is expected to be deductible for tax purposes. The Company has determined that it will maintain one core reporting unit. - 19 - The following table summarizes the final allocation of the total purchase consideration at the date of the acquisition based on current estimates of the fair value of assets acquired and liabilities assumed: Cash and cash equivalents$ 0.9 Accounts receivable 7.1 Prepaid expenses and other current assets 1.7 Property and equipment 2.0 Intangible assets 55.0 Goodwill 95.2 Accrued liabilities (2.0) Other short-term liabilities (1.9) Deferred tax liability (2.7) $ 155.3 Intangible assets in the table above include customer relationships of $53.5 million, developed technology of $1.4 million, and trademarks and trade names of $0.1 million that will be amortized over their useful lives of 10 years, 1.5 years, and 1 year, respectively. LP Health—On November 30, 2017, the Company acquired 100% of the equity interests of LP Health Services, LLC and LP Health Network LLC (collectively, “LP Health” or the “LP Membership Interests”). Immediately prior to the transaction, the assets and liabilities related to the LP Membership Interests were owned by Munich Atlanta Financial Corporation and were contributed into the LP Membership Interests for the purpose of carving out the specific assets and liabilities to be sold. LP Health is a leading provider of quality and wellness visits on behalf of primarily Medicaid/Duals managed care plans via a national network of providers.Pursuant to the LP Membership Interest purchase agreement governing the transaction, the Company acquired all the assets and liabilities of LP Health for an aggregate purchase price of $3.6 million of cash consideration after working capital adjustments and transaction expenses. The Company has accounted for this transaction as a purchase under ASC 805. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their respective preliminary fair values at the date of the acquisition due to the proximity of the acquisition to the end of the year. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. The Company may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if it obtains more information regarding asset valuations and liabilities assumed. The goodwill of $0.3 million resulting from this transaction is attributable to the synergies gained with the Company’s existing business. Goodwill also includes an identified assembled workforce with an associated value of $0.3 million, which does not qualify for separate acquired asset recognition in a business combination. Adjustments to goodwill in 2018 of $0.6 million are the result of an intangible asset valuationadjustment and net working capital adjustments. The goodwill recognized is expected to be deductible for tax purposes. The Company has determined that it will maintain one core reporting unit. - 20 - The following table summarizes the allocation of the total purchase consideration at the date of the acquisition based on current estimates of the fair value of assets acquired and liabilities assumed: Cash and cash equivalents$ 0.3 Accounts receivable 1.2 Prepaid expenses and other current assets 0.2 Intangible assets 2.2 Goodwill 0.3 Accrued liabilities (0.5) Other short-term liabilities (0.1) $ 3.6 Intangible assets in the table above consist of customer relationships of $1.6 million, developed technology of $0.6 million, and trademarks and trade names of $20 thousand that will be amortized over their useful lives of 10 years, 1 year, and 1 year, respectively. As part of a measurement period adjustment, the useful life for customer relationships changed from 8 to 10 years. 5. PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2018 and 2017, consist of the following (in millions): December 31, December 31, 2018 2017 Computer equipment$ 5.8 $ 3.5 Computer software 25.6 16.0 Furniture and fixtures 0.9 0.8 Leasehold improvements 0.6 0.6 Medical equipment 0.7 - Vehicles 1.9 - Work in process 1.6 2.5 37.1 23.4 Accumulated depreciation (15.8) (6.5) Property and equipment—net$ 21.3 $ 16.9 Depreciation expense on property and equipment was $9.6 million, $6.2 million, and $0.8 million for the years ended December31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. - 21 - 6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill of $448.5 million consists of $353 million attributable to the change of control transaction that occurred on October 19, 2016, $0.3 million attributable to the acquisition of LP Health that occurred on November 30, 2017, and $95.2 million associated with acquisition of HealthFair that occurred on February 16, 2018 (each of which are inclusive of measurement period adjustments). See Notes 2 and 4. There were no goodwill impairment charges recognized for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016. Goodwill consists of the following (in millions): Balance at December 31, 2016$ 351.4 Measurement period adjustments 1.6 Acquisition 0.9 Balance at December 31, 2017 353.9 Measurement period adjustments (0.6) Acquisition 95.2 Balance at December 31, 2018$ 448.5 Other intangible assets—net consist of the following (in millions): As of December 31, 2018 Gross Carrying Accumulated Net Carrying AmountAmortization Value Customer relationships$ 235.1 $ (44.5) $ 190.6 Developed technologies 48.2 (21.8) 26.4 Trade names and trademarks 31.4 - 31.4 $ 314.7 $ (66.3) $ 248.4 As of December 31, 2017 Gross Carrying Accumulated Net Carrying AmountAmortization Value Customer relationships$ 181.4$ (21.6) $ 159.8 Developed technologies 46.8 (11.2) 35.6 Trade names and trademarks 31.4 - 31.4 $ 259.6 $ (32.8) $ 226.8 - 22 - At December 31, 2018, the remaining net book value of customer relationships and developed technologies is expected to be amortized over a weighted-average period of 8.1 years and 2.8 years, respectively. Trade names and trademarks are indefinite-lived intangible assets and are not subject to amortization, except for trade names and trademarks acquired through the HealthFair and LP Health acquisitions, which are amortized over a useful life of one year. Other intangible assets are amortized using the straight-line method over the following useful lives: Useful Life Customer relationships 10 years Developed technologies 1 to 5 years The Company recognized amortization expense related to other intangible assets of $33.5 million, $27.3 million, and $5.5 million for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. Estimated future amortization expense of the other intangible assets with finite lives is as follows for each of the fiscal years ending December 31 (in millions): 2019 $ 33.3 2020 32.7 2021 30.9 2022 23.5 2023 23.5 Thereafter 73.1 Total $ 217.0 7. ACCRUED LIABILITIES Accrued liabilities consist of the following (in millions): December 31, December 31, 2018 2017 Salaries, payroll taxes, and benefits$ 5.8 $ 4.6 Accrued bonuses 2.5 2.1 Otheraccruals 9.8 7.9 Total accrued liabilities$ 18.1 $ 14.6 - 23 - 8. LONG-TERM DEBT Long-term debt consists of the following (in millions): December 31, December 31, 2018 2017 Term loan$ 328.4 $ 193.1 Unamortized debt issuance costs (8.6) (5.8) Total term loan 319.8 187.3 Less current portion of long-term debt 1.9 8.4 Long-term debt—net of current portion$ 317.9 $ 178.9 In 2018, the Company conducted a refinancing of its existing term and line of credit facilities, with its existing lenders. The revised credit facility agreement is with two national banks and provides for an initial term loan facility in the amount of $330 million and a revolving credit line of $20 million. The term loan bears interest at a rate of London InterBank Offered Rate (LIBOR) plus 4.75% (7.09% at December 31, 2018). Principal and interest payments are due and payable quarterly through the maturity date of February 16, 2025. The Company incurred debt issuance costs of $5.4 million, which have been recorded as a direct reduction to the carrying value of the loan and will be amortized over the life of the loan. The Company analyzed the terms of this refinancing and determined that it constitutes a modification under the guidance of ASC 470, Debt. Under this guidance, the existing unamortized debt issuance costs of $4.5 million associated with the continuing lender are being amortized over the life of the new credit facilities and $1.1 million associated with thelender that was replaced were expensed. As a result of the modification, the Company recorded $2.5 million in finance restructuring charges of which $1.4 million related to debt issuance costs paid to third parties and $1.1 million related to write-offs of existing term facilities’ debt issuance costs. Total amortization of debt issuance costs was $1.5 million, $1.5 million, and $0.3 million for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. As of December 31, 2018 and 2017, unamortized debt issuance costs were $8.6 million and $5.8 million, respectively. The revolving credit line has a variable interest rate that adjusts to the Company’s secured net leverage ratio. The interest rate of the revolving credit line is LIBOR plus 4.75%. The unused portion of the revolving credit line is subject to a commitment fee rate up to 0.5%. Commitment fees incurred on the revolving credit line were $88 thousand, $37 thousand, and $7 thousand for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. The Company was in compliance with debt covenants as of December 31, 2018 and 2017. - 24 - Annual maturities of long-term debt are as follows for the years ending December 31 (in millions): 2019 $ 3.3 2020 3.3 2021 3.3 2022 3.3 2023 3.3 Thereafter 311.9 Total $ 328.4 9. INCOME TAXES The components of the Company’s income tax provision are as follows (in millions): Period from Year Ended Year Ended October 19, 2016, December 31, December 31, to December 31, 2018 2017 2016 Current: Federal$ 2.6 $ 4.2 $ - State—net of state tax credits 1.1 0.7 - Total current 3.7 4.9 - Deferred: Federal (7.2) (29.0) (2.5) State (3.7) (5.5) (0.3) Total deferred (10.9) (34.5) (2.8) Total income tax benefit$ (7.2) $ (29.6) $ (2.8) - 25 - A reconciliation of the provision for income taxes with the expected provision for income taxes computed by applying the federal statutory income tax rate of 21% to the net loss before provision for income taxes is as follows (in millions): Period from Year Ended Year Ended October 19, 2016, December 31, December 31, to December 31, 2018 2017 2016 Federal income tax at statutory rate $ (5.7) $ (0.9) $ (2.4) State income tax benefit—net of federal income tax effect (1.4) - (0.3) Change in blended rate (1.3) (29.2) - Research and development tax credits (1.1) (1.1) - Transaction costs 0.1 0.1 - Change in uncertain tax positions 0.2 0.3 - Change in valuation allowance 0.7 0.6 0.1 Mercury Parent, LLC Equity Compensati 0.5 0.8 - Other—net 0.8 (0.2) (0.2) Total income tax benefit$ (7.2) $ (29.6) $ (2.8) - 26 - Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income taxes are as follows (in millions): December 31, December 31, 2018 2017 Deferred tax assets: Accrued incentive compensation$ 0.6 $ 0.7 Accrued PTO 0.4 0.4 Sales allowance 0.5 0.3 Deferred rent 0.4 0.3 Loss carryforwards 1.0 1.0 Credit carryforwards 3.1 2.5 Other accrued expenses 0.2 0.6 Interest limitation 4.4 - Related party transactions 0.1 - Total deferred tax assets 10.7 5.8 Deferred tax liabilities: Fixed assets - (0.5) Goodwill—tax amortization (0.7) - Intangible assets (53.3) (59.7) Internally developed software (4.4) (3.1) Deferred financing costs (0.6) - Total deferred tax liabilities (59.0) (63.3) Valuation allowance (4.1) (3.1) Net deferred tax liabilities$ (52.4) $ (60.6) The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a onetime transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and many other significant changes to the U.S. tax code. At December 31, 2017, the Company has completed and applied its accounting for the tax effects enactmentof the Act. At December 31, 2018, the Company has Arizona and California state research and development tax credits of $5.1 million available to offset future income taxes, if any, for those jurisdictions. The Arizona research and development tax credits will begin to expire in 2026. The California research and development tax credits may be carried forward indefinitely. The valuation allowance of $4.1 million at December 31, 2018, relates to separate legal entities that operate at breakeven for tax purposes, state research and development tax - 27 - credits, and state net operating losses. The Company believes that it is not more likely than not that it will be able to realize the tax benefit related to its net operating losses and credits. The deferred tax assets for the state research and development tax credits and federal and state net operating losses have been offset by a valuation allowance to reflect this expectation. The Company has gross federal and state net operating loss carryforwards of $3.3 million and $5.7 million, respectively, at December 31, 2018. Federal net operating loss carryforwards will begin to expire in 2026 while the state net operating losses will begin to expire in 2022. The Company has a gross interest limitation carryforward of $16.8 million under Section 163(j) for federal tax purposes at December 31, 2018. The Section 163(j) interest may be carried forward indefinitely. Under IRC Section 382 (“Section 382”), the annual utilization of the Company's federal net operating loss carryforwards, state research and developmental credits, and federal IRC Section 163(j) interest expense carryforward may be limited. The Company has determined that the annual limitation did not affect net operating loss, research and development, or interest expense utilization in 2018. However, due to significant complexities associated with Section 382 regulations, the Company is currently analyzing theimpact on the attribute carryforwards. The Company is currently under no active examinations by its major taxing authorities. With exceptions due to the generation and utilization of net operating losses or credits, as of December 31, 2018, the CCHN Group Holdings, Inc. and subsidiaries and the affiliated entities are no longer subject to federal or state examinations by taxing authorities for tax years before 2015 and 2014, respectively. The Company expects no material amount of the unrecognized tax benefits to be recognized during the next 12 months. The Company's policy is to recognize interest and penalties accrued on unrecognized tax benefits as a component of income tax expense. The Company has accrued interest and penalties of $45 thousand. A reconciliation of the liability for unrecognized income tax benefits is as follows: December 31, December 31, 2018 2017 Unrecognized tax benefits—beginning of year$ 1.1 $ 0.8 Increase related to prior-year tax positions 0.1 - Increase related to current-year tax positions 0.3 0.3 Unrecognized tax benefits—end of year$ 1.5 $ 1.1 - 28 - 10. MEMBERS’ EQUITY Capital Structure—As part of the change of control transaction described in Note 2, CCHN became a wholly owned subsidiary of Mercury Parent, a limited liability company. At December 31, 2018, Mercury Parent had an authorized capital structure consisting of the following units: • Common A units—353 million units authorized and outstanding, voting rights, liquidation preference of $1 per unit • Common B units— 24.2 million units authorized and outstanding, voting rights, liquidation preference of $1.267 per unit • Series A units—39.1 million units authorized, no voting rights, participation in distributions in excess of $1 per common unit • Series B units—18.2 million units authorized, no voting rights, participation in distributions in excess of $2 per common unit • Series C units—14.8 million units authorized, no voting rights, participation in distributions in excess of $3 per common unit • Series D units—15.9 million units authorized, no voting rights, participation in distributions in excess of $4 per common unit For the year ended December 31, 2018, the Company issued an aggregate of 24.2 million of the Company’s Common B units with a fair value of $30.6 million as partial consideration for the acquisition of HealthFair. See Note 4 for further description of the transaction. For the year ended December 31, 2017, the Company issued an aggregate of 1.4 millioncommon units to its members in exchange for proceeds of $1.4 million. Equity-Based Compensation—On October 19, 2016, the Company’s board of directors adopted a Value Unit Plan (the “Plan”) for certain executives within the Company. The Plan provides for awarding of up to 39.1 million Series A units, 18.2 million Series B units, 14.8 million Series C units, and 15.9 million Series D units, with each series of units being nonvoting and vesting at a rate of 25% after the first-year anniversary of the date of grant and 1/36 of the remaining to be vested in each successive month following the first-year anniversary. Each of the units shall participate in distributions provided that minimum value thresholds are met as defined in the Plan. At December 31, 2018, there were 12 million of Series A units, 5.5 million of Series B units, 4.4 million of Series C units, and 4.8 million of Series D units available for issuance under the Plan. The fair value of each Plan unit was established at the date of award based on an option- pricing model using the following assumptions: Years Ended December 31, 2018 2017 Risk-free interest rate 2.86 % 1.73 % Expected term 2.5 years 3.0 years Volatility 60.00 % 57.00 % - 29 - The risk-free interest rate was based on the U.S. Federal Reserve rate in effect as of the date of grant, which corresponds to the expected term of the award. The expected term was based on management’s estimated time to a transaction event, such as a sale, initial public offering, and recapitalization. The volatility was based on historical data for a group of peer companies for the expected term of the award. The following is the activity for the awards for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016: Fair Fair Fair Fair Series A Value Series B Value Series C Value Series D Value Units per Unit Units per Unit Units per Unit Units Per Unit Awards outstanding at October 19, 2016 - $ - - $ - - $ - - $ - Awards granted 28,845,525 0.27 13,416,522 0.13 10,911,028 0.07 11,729,354 0.04 Awards outstanding at December 31, 2016 28,845,525 0.27 13,416,522 0.13 10,911,028 0.07 11,729,354 0.04 Awards granted 1,074,333 0.27 499,690 0.13 406,374 0.07 436,852 0.04 Awards forfeited (2,295,167) 0.27 (1,067,519) 0.13 (868,163) 0.07 (933,275) 0.04 Awards outstanding at December 31, 2017 27,624,691 0.27 12,848,693 0.13 10,449,239 0.07 11,232,931 0.04 Awards vested and expected to vest at December 31, 2017 27,624,691 0.27 12,848,693 0.13 10,449,239 0.0711,232,931 0.04 Awards vested at December 31, 2017 7,725,417 0.27 3,593,217 0.13 2,992,195 0.07 3,141,359 0.04 Awards granted 462,434 0.27 363,411 0.13 295,545 0.07 317,711 0.04 Awards forfeited (935,972) 0.27 (435,336) 0.13 (354,038) 0.07 (380,591) 0.04 Awards repurchased (138,361) 0.27 (64,354) 0.13 (52,336) 0.07 (56,261) 0.04 Awards outstanding at December 31, 2018 27,012,792 0.27 12,712,414 0.13 10,338,410 0.07 11,113,790 0.04 Awards vested and expected to vest at December 31, 2018 27,012,792 0.27 12,712,414 0.13 10,338,410 0.07 11,113,789 0.04 Awards vested at December 31, 2018 14,239,870 0.27 6,643,152 0.13 5,402,563 0.07 5,723,950 0.04 The Company issues the respective equity units upon reaching the vesting date. The grant- date fair value of all unit awards granted under the Plan during the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, was $0.2 million, $0.2 million, and $9.5 million, respectively. During the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, the Company recognized $2.5 million, $2.5 million, and $0.4 million, respectively, of compensation expense for these awards. All compensation expense isincluded in service expense in the consolidated statements of operations. Unrecognized compensation expense related to the Plan as of December 31, 2018, was $4.8 million, which is expected to be recognized over a weighted-average period of one year. All awards are classified as equity. 11. COMMITMENTS AND CONTINGENCIES Operating Leases—The Company leases office space in Arizona, California, Massachusetts, and Florida under operating leases that expire through 2027. These leases contain rent escalation clauses that have been factored into determining rent expense on a straight-line basis over the respective lease term. Rent expense under these leases totaled $3.1 million, $2.5 million, and $0.5 million for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. The Company has subleased its office space in California, for which it received income of $0.2 million, $0.1 million, and $0 for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. Under this sublease, the Company expects to receive $32 thousand in 2019. - 30 - In September 2012, the Company entered into a master lease agreement with a vehicle fleet service company. This agreement has a base term of one year and will continue indefinitely thereafter until canceled or terminated by either party. The minimum lease term for each vehicle is 367 days, beginning on the Company’s acceptance of the vehicle. Thereafter, the lease term may be renewed monthly for the lesser of the maximum lease term (up to 96 months) or the amortization term set in the respective vehicle order. Lease expense for the fleet lease was $4.1 million, $3.7 million, and $0.9 million for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. At December 31, 2018, the approximate future minimum rental payments under the noncancelable operating leases for the years ending December 31 are as follows (in millions, net of expected subleases): 2019 $ 6.8 2020 6.1 2021 5.8 2022 5.0 2023 1.8 Thereafter 1.6 Total $ 27.1 Capital Leases—The Company has capital leases for equipment and mobile clinics that expire through 2024. These leases are depreciated on a straight-line basis over the respective lease term. Depreciation expense under these leases totaled $118 thousand for the year ended December 31, 2018. There were no capitalleases in prior years. At December 31, 2018, the gross amounts of assets recorded under equipment and mobile clinic capital leases were $0.3 million and $1.6 million, respectively. At December 31, 2018, the accumulated depreciation of assets recorded under equipment and mobile clinic capital leases was $94 thousand and $24 thousand, respectively. At December 31, 2018, the current-term and long-term liabilities related to capital leases were $0.3 million and $1.5 million, respectively, which are included in other short-term liabilities and other long- term liabilities, respectively. - 31 - At December 31, 2018, the approximate future minimum lease payments under the capital leases for the years ending December 31 are as follows (in millions): 2019 $ 0.5 2020 0.4 2021 0.3 2022 0.3 2023 0.3 Thereafter 0.3 Total 2.1 Management fees (0.1) Imputed interest (0.2) Capital lease obligation$ 1.8 Severance Agreements—The Company has entered into employment and termination agreements with key personnel that obligate the Company for salary continuation upon termination without cause. The Company incurred $0.8 million, $0.5 million, and $0.1 million of severance costs for the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. At December 31, 2018 and 2017, the Company had $0.2 million and $0 in accrued severance costs, respectively. Bonus Incentive Plan—In connection with the change of control transaction described in Note 2, the Company implemented a new bonus plan. Under the new plan, an aggregate of $8.8 million was paid to certain employees, with 50% paid on the 60-day anniversary of the change of control transaction and the other 50% paid on the six-month anniversary of the transaction. Such amounts were subject to continued employment. The Company recognized $0 and $2.7 million of bonusexpense related to this plan for the years ended December 31, 2018 and 2017, respectively. For the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, $0, $4.4 million, and $4.4 million, respectively, were paid under the plan. As of December 31, 2018 and 2017, the Company had $0 accrued related to this plan. Management Incentive Plan—The Company has a bonus incentive plan available for certain managers and executives of the Company. The bonus incentive plan is based on the financial results of the Company, which include certain benchmark thresholds that are determined annually to establish a baseline pool of the amounts to be distributed to the eligible participants. If the Company does not meet the requirements as defined annually by the board of directors, the baseline pool is established for distribution based on a sliding scale. Further, the distribution of the bonus amounts is based at least in part on the individual performance of the eligible participants. For the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, the Company incurred $2 million, $1.5 million, and $0.8 million, respectively, of management incentive costs. At December 31, 2018 and 2017, the Company had $2.2 million and $1.8million, respectively, in accrued management incentive costs. Cash Bonus Plan—In connection with Providence’s acquisition of CCHN on October 23, 2014, a seller-funded $5 million bonus pool was established for the benefit of certain Company employees. Plan amounts are held in escrow with escrow releases each time amounts are paid under the plan. Original awards under the plan are to be paid 25%, - 32 - 25%, and 50% on the first, second, and third anniversaries of the acquisition. Amounts under the plan were reallocated upon forfeiture with reallocation awards paid on or before December 31, 2017. For the years ended December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, the Company incurred $0, $1.6 million, and $0.5 million, respectively, of bonus expense. At December 31, 2017, all such amounts have been paid. Laws and Regulations—The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, Medicare and Medicaid fraud and abuse, false claims, and disguised payments in exchange for the referral of patients. Government activity has continued with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by health care service providers. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations can be subject to future government review and interpretations. The HealthInsurance Portability and Accountability Act (HIPAA) was enacted on August 21, 1996, to ensure health insurance portability, reduce health care fraud and abuse, guarantee security and privacy of health information, and enforce standards for health information. Effective August 2009, the Health Information Technology for Economic and Clinical Health Act was introduced imposing notification requirements in the event of certain security breaches relating to protected health information. Organizations are required to be in compliance with HIPAA provisions and are subject to significant fines and penalties if found not to be compliant with the provisions outlined in the regulations. Legal—The Company is a party to certain legal actions arising in the ordinary course of business. The Company believes that potential liability, if any, under these claims will not have a material adverse effect on the consolidated financial position, results of operations, or cash flows. As of December 31, 2018, the Company is defending 3 medical malpractice lawsuits that arose from operations involving a business that was discontinued in 2012. The Company believes it is reasonably possible that a loss has occurred in connection with 1 of those actions; however, the Company is not able to reliably estimate the amount of loss. The Company does not believe theaggregate amount of liability that could be reasonably possible with respect to those lawsuits would have a material adverse affect on its financial results. Insurance—The Company has established and maintained a fully funded, no deductible workers’ compensation plan (in all states, except Ohio and Washington as stated previously). The Company also maintains a self-insured medical plan. Other health care benefits, such as vision and dental, remained fully insured. - 33 - Determining reserves for losses in these self-insured programs involves significant judgments based upon the Company’s experience and expectations of future events, including projected settlements for pending claims, known incidents that may result in claims, estimate of incurred but not yet reported claims, estimated litigation costs, and other factors. Since these reserves are based on estimates, actual expenses may differ from the amount reserved. The Company had $78 thousand, $11 thousand, and $0.2 million of estimated workers’ compensation plan expenses and $0.7 million, $0.8 million, and $0.4 million of estimated medical plan expenses included in accrued liabilities at December 31, 2018 and 2017, and the period from October 19, 2016, to December 31, 2016, respectively. 12. SUBSEQUENT EVENTS The Company has evaluated all subsequent events that occurred after the consolidated balance sheet date through March 1, 2019, which represents the date the consolidated financial statements were available to be issued. The Company is not aware of any significant events that have not been disclosed herein that will have an impact of these consolidated financial statements. ****** - 34 - 

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