1.1. Organization and Basis of Presentation

Description of Business

The Providence Service Corporation (“we”, the “Company” or “Providence”) is a holding company, which owns controlling and noncontrolling interests in companies which provide critical healthcare and workforce development services. In 2016, Providence, through its ownership of interests in subsidiaries and other companies operatedthat are primarily engaged in three segments: Non-Emergency Transportation Services (“NET Services”), Workforce Development Services (“WD Services”)the provision of healthcare and Health Assessment Services (“HA Services”). As further discussed below, on October 19, 2016,workforce development services for public and private sector entities seeking to control costs and promote positive outcomes. The subsidiaries and other companies in which the Company completed its CCHN Group Holdings Inc. (together with its subsidiaries, “Matrix” or “HA Services”) stock subscription transaction pursuant to which a third-party subscribed for a 53.2% equity interest in Matrix with Providence retaining a 46.8% equity interest in Matrix. Thus,holds interests comprise the Company now owns a noncontrolling interest in Matrix, and the results of Matrix are presented within discontinued operations.following segments:

NET Services coordinates non-emergency transportation for individuals whose limited mobility and/or financial resources would otherwise hinder them from accessing necessary healthcare and social services. WD Services primarily provides employability and offender rehabilitation services to eligible participants of government sponsored programs. HA Services, which has been presented as a discontinued operation beginning with these financial statements, provides care optimization and delivery solutions, including comprehensive health assessments (“CHAs”) for health plans as well as in-home care management offerings. In addition, the Company completed the sale of the Human Services segment effective November 1, 2015, which also is presented as a discontinued operation.

●

Non-Emergency Transportation Services (“NET Services”) – Nationwide provider of non-emergency medical transportation programs for state governments and managed care organizations.

●

Workforce Development Services (“WD Services”) – Global provider of employment preparation and placement and legal offender rehabilitation services to eligible participants of government sponsored programs.

●

Matrix Investment – Minority interest in nationwide provider of in-home care optimization and management solutions, including comprehensive health assessments, to members of managed care organizations, accounted for as an equity method investment.

Basis of Presentation

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

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

The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses and certain disclosures to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the three and ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.2017. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these unaudited condensed consolidated financial statements were filed, and considered the effect of such events in the preparation of these unaudited condensed consolidated financial statements.

During the quarter ended September 30, 2016, the HA Services segment met the criteria for held for sale classification due to the execution on August 28, 2016 of a stock subscription agreement by the Company pursuant to which a third-party subscribed for an equity interest in Matrix. Therefore, the HA Services segment is presented as a discontinued operation in accordance with GAAP. The assets and liabilities of the HA Services segment are classified as held for sale in the condensed consolidated balance sheets for all periods presented. Additionally, the operating results of this segment, along with certain expenses associated with the Human Services segment sold on November 1, 2015, are reported as discontinued operations, net of tax, in the condensed consolidated statements of income for all periods presented. See Note 15,Discontinued Operations.

The condensed consolidated balance sheet at December 31, 20152016 has been derived from the audited financial statements at that date, but does not include all of the information and disclosuresfootnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

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

Reclassifications

We have reclassified certain amounts relating to our prior period results to conform to our current period presentation. Effective January 1,On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”) with Providence retaining a 46.8% equity interest (the “Matrix Transaction”). Prior to the Company adoptedclosing of the Matrix Transaction, the financial results of Matrix were included in the Company’s Health Assessment Services (“HA Services”) segment.Accounting Standards Update (“ASU”) No. 2015-03,Interest - Imputation Operating results for this segment are reported as discontinued operations, net of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) and reclassified debt issuance costs to a contra-liability accounttax in the condensed consolidated balance sheet asstatements of December 31, 2015. Additionally, the Company recast its condensed consolidated statement of other comprehensive income for the three and ninesix months ended SeptemberJune 30, 2015 to conform with the presentation of other comprehensive income included in the Company’s Form 10-K 2016. See Note 13,Discontinued Operations,for the year ended December 31, 2015.

further information. See Note 2,.Significant Accounting ChangesPolicies and Recent Accounting Pronouncements, for additional information on other reclassifications.

2. Significant Accounting Policies and Recent Accounting Pronouncements

The Company adopted the following accounting pronouncements during the periods presented in these condensed consolidated financial statements:six months ended June 30, 2017:

In AprilNovember 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company capitalizes debt issuance costs incurred in connection with its credit facilities, line-of-credit, and other borrowings (“deferred financing costs”2015-17”), and amortizes such costs overwhich changes how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the life of the respective debt liability.

Upon adoption of ASU 2015-03 on January 1, 2016, the Company electedcurrent requirement for organizations to present deferred financing costs for both its credit facilitiestax liabilities and line-of credit arrangementassets as a direct deduction from the carrying amount of the respective debt liability. Accordingly, deferred financing costs, net of amortization, totaling $3,774 at December 31, 2015 have been reclassified from “Other assets” to “Long-term obligations, less current portion” in the condensed consolidated balance sheets. Deferred financing costs and debt discounts, net of accumulated amortization, totaling $2,302 and $1,050 at September 30, 2016 are included in “Current portion of long-term obligations” and “Other long-term liabilities”, respectively, in the condensed consolidated balance sheets. See Note 7,Long-Term Obligations, for additional information regarding current classification of this amount. Deferred financing costs and debt discounts, net of accumulated amortization, totaling $4,879 at December 31, 2015 are included in “Long-term obligations, less current portion” in the condensed consolidated balance sheets.

In February 2015, the FASB issued ASU No. 2015-02,Consolidation (Topic 810): Amendments to the Consolidation Analysis(“ASU 2015-02”), which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interestsnoncurrent in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The new guidance excludes money market funds that areclassified balance sheet. Instead, organizations will be required to comply with Rule 2a-7 ofclassify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. For public companies, the Investment Company Act of 1940 and similar entities from the GAAP consolidation requirements. The new consolidation guidance isamendments are effective for public business entitiesfinancial statements issued for annual and interim periods in fiscal years beginning after December 15, 2015. The adoption of ASU 2015-02 on January 1,16, 2016, had no impact on the consolidation of the Company’s existing VIEs.

Updates to the recent accounting pronouncements as disclosed in the Company’s Form 10-K for the year ended December 31, 2015 are as follows:

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers: Topic 606(“ASU 2014-09”). ASU 2014-09 introduced FASB Accounting Standards Codification Topic 606 (“ASC 606”). ASC 606 will supersede ASC 605,Revenue Recognition (“ASC 605”) and most of the industry-specific guidance on recognizing revenue. The FASB has since issued the following updates that clarify or supplement the guidance in ASU 2014-09:

Each of these ASUs are effective for public companies for annual reporting periods (and interim reporting periods within those annual reporting periods) beginning after December 15, 2017 and permit entities to transition using either a full retrospective or modified retrospective methodology.periods. The Company has developed an implementation plan, assembled a cross-functional project team and begun to assessadopted ASU 2015-17 retrospectively on January 1, 2017, which resulted in the impacts of applying ASC 606 by completing an analysisreclassification of the Company’s contracts with its customers. The assessmentDecember 31, 2016 deferred tax assets-current balance of applying ASC 606 is ongoing$6,825 and therefore, the Company has not yet determined whether those impacts will be materialnon-current deferred tax assets of $2,493 to the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842)(“ASU 2016-02”). ASU 2016-02 introduced FASB Accounting Standards Codification Topic 842 (“ASC 842”), which will replace ASC 840,Leases. Under ASC 842, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

ASU 2016-02 is effective for publicly held entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presentedlong-term deferred tax liabilities in the financial statements. The modified retrospective approach does not require transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in which it is the lessee. The Company is in the preliminary stagesamount of assessing the impact of applying ASC 842 to its lease agreements. The assessment of applying ASU 2016-02 is ongoing and, therefore, the Company has not yet determined whether the impacts will be material to the Company’s consolidated financial statements.$9,318.

In March 2016, the FASB issued ASU No. 2016-07,Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting(“ASU 2016-07”). ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 instead specifies that the investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and apply the equity method of accounting as of the date the investment became qualified for equity method accounting. ASU 2016-07 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and should be applied prospectively. The Company adopted ASU 2016-07 on January 1, 2017. The adoption of ASU 2016-07 willhad no impact on the Company’s accounting and disclosures for investments for which it begins applying the equity method after the effective date.financial statements or disclosures.

In March 2016, the FASB issued ASU No. 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting(“ASU 2016-09”). ASU 2016-09 is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences, classification of awards as either equity or liabilities and classification onin the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on January 1, 2017, and elected to recognize forfeitures as they occur. As a result, the Company recorded a cumulative effect adjustment of $850 to retained earnings as of January 1, 2017. Upon adoption, all excess tax benefits and tax deficiencies related to employee share-based payments are recognized through income tax expense prospectively. For the three months ended June 30, 2017, the Company recorded excess tax deficiencies of $97 as an increase to the provision for income taxes. For the six months ended June 30, 2017, the Company recorded excess tax benefits of $113 as a reduction to the provision for income taxes. The Company excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis resulting in a decrease in diluted weighted average shares outstanding of 16,196 and 8,787 shares, respectively, for the three and six months ended June 30, 2017.

The Company elected to apply the change in classification of cash flows resulting from excess tax benefits or deficiencies on a retrospective basis. This resulted in an increase in cash flows provided by operating activities of $258 and an increase of $258 in cash flows used in financing activities in the condensed consolidated statement of cash flows for the six months ended June 30, 2016. Additionally, ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows, which is how the Company has historically classified these amounts.

In January 2017, the FASB issued ASU No. 2017-01,Business Combinations (Topic 805):Clarifying the Definition of a Business(“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted ASU 2017-01 on April 1, 2017. The adoption of ASU 2017-01 had no impact on the Company’s financial statements or disclosures.

In January 2017, the FASB issued ASU No. 2017-04,Intangibles-Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment(“ASU 2017-04”).ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for any organization in any interim or annual period.goodwill impairment tests performed after January 1, 2017. The Company currently is evaluating the impact of theadopted ASU 2017-04 on April 1, 2017. The adoption of ASU 2016-092017-04 had no impact on the Company's consolidatedCompany’s financial statements and has determined it will not early adopt ASU 2016-09.or disclosures.

Updates to the recent accounting pronouncements as disclosed in the Company’s Form 10-K for the year ended December 31, 2016 are as follows:

In May 2016,2014, the FASB issued ASU No. 2016-11,2014-09,Revenue Recognitionfrom Contracts with Customers (Topic 605) and Derivatives and Hedging (Topic 815); Rescission of SEC Guidance Because of606)(“ASU 2014-09”).ASU 2014-09 introduced FASB Accounting Standards UpdatesCodification Topic 606 (“ASC 606”), which will replace most currently applicable existing revenue recognition guidance and is intended to improve and converge with internationalstandards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity shouldrecognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09also requires additional disclosures about the nature, timing and 2014-16 Pursuantuncertainty of revenue and cash flows arising from customer contracts, including significantjudgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to Staff Announcementseach prior reporting period presented or on amodified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the March 3, 2016 EITF Meeting (“ASU 2016-11”),date of initial application, which rescinded certain SEC Staff Observer comments that are codified in Topic 605,Revenue Recognition, and Topic 932,Extractive Activities-Oil and Gas, effective upon adoption of Topic 606. will beeffective for the Company beginning January 1, 2018.

The Company has developed an adoption plan, assembled a cross-functional project team and is in the process of assessing the impacts of applying ASC 606 to the Company’s financial statements, information systems and internal controls. The Company has performed detailed reviews of a significant number of its existing contracts with customers. These reviews have focused on several key considerations which could impact the Company's accounting and reporting under the new standard:

Management’s assessment is ongoing; therefore, the Company has not yet determined with certainty the impact of applying ASC 606. However, management does not expectbelieve the adoption of this section of ASU 2016-11 to have an impact on its consolidated financial statements.Additionally, ASU 2016-11 removed fromstatements will be significant based on the Codificationprocedures performed to date.

In January 2017, the SEC Staff Announcement, “Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share Under Topic 815,” which is codified in FASB ASC Topic 815,Derivatives and Hedging,andis effective on adoption ofissued ASU No. 2014-16,2017-03,DerivativesAccounting Changes and HedgingError Corrections (Topic 815)250) and Investments - Equity Method and Joint Ventures (Topic323)(“ASU 2014-16”2017-03”). The Company adopted ASU 2014-16 effective January 1, 2015. The2017-03 expands required qualitative disclosures when registrants cannot reasonably estimate the impact that adoption of an ASU will have on the financial statements. Such qualitative disclosures would include a comparison of the registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. Other than enhancements to the qualitative disclosures regarding future adoption of new ASUs, adoption of the provisions of this section of ASU 2016-11 didstandard is not expected to have anany impact on the Company’s consolidated financial statements.

In June 2016,May 2017, the FASB issued ASU No. 2016-13,2017-09,Financial Instruments – Credit LossesCompensation–Stock Compensation (Topic 326)718): (“Scope of Modification Accounting(“ASU 2016-13”2017-09”). The amendments in ASU 2016-13 will supersede or clarify much2017-09 provides guidance about which changes to the terms of a share-based payment award should be accounted for as a modification. A change to an award should be accounted for as a modification unless the fair value of the existingmodified award is the same as the original award, the vesting conditions do not change, and the classification as an equity or liability instrument does not change. This guidance for reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. The amendments in ASU 2016-13 affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early2017. Early adoption permitted for fiscal years beginning after December 15, 2018.The Company has not evaluated the impactis permitted. The adoption of ASU 2016-132017-09 is not expected to have a material impact on itsthe Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(“ASU 2016-15”). ASU 2016-15 provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company currently is evaluating the impact the adoption of this ASU will have on the presentation of the Company's statements of cash flows.

There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for the year ended December 31, 2015.2016.

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 Services segment. Subsequent to the closing of the Matrix Transaction, the Company owns a 46.8% noncontrolling interest in Matrix. Pursuant to a Shareholder’s Agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting and the Company’s share of Matrix’s income or losses are recorded as “Equity in net (gain) loss of investees” in the accompanying condensed consolidated statements of income.

The carrying amount of the assets included in the Company’s condensed consolidated balance sheet and the maximum loss exposure related to the Company’s interest in Matrix as of June 30, 2017 and December 31, 2016 totaled $157,124 and $157,202, respectively.

Summary financial information for Matrix on a standalone basis is as follows:

		June 30, 2017				December 31, 2016
Current assets		$	43,479			$	28,589
Long-term assets			604,598				614,841
Current liabilities			35,236				25,791
Long-term liabilities			274,426				281,348

		Three months ended June 30, 2017
Revenue		$	60,852
Operating income			5,942
Net income			1,619

		Six months ended June 30, 2017
Revenue		$	116,707
Operating income			6,950
Net loss			(238	)

See Note 13,Discontinued Operations, for Matrix’s 2016 results of operations.

3Mission Providence. Equity Investment

The Company entered into a joint venture agreement in November 2014 to form Mission Providence Pty Ltd (“Mission Providence”). Mission Providence delivers employment preparation and placement services in Australia. The Company has a 60% ownership interest in Mission Providence, and has rights to 75% of Mission Providence’s distributions of cash or profit surplus twice per calendar year. The Company provided to Mission Providence $6,381 in capital contributions during the nine months ended September 30, 2016, and may continue to provide further contributions in exchange for its equity interests.

The Company determined it has a variable interest in Mission Providence. However, it does not have unilateral power to direct the activities that most significantly impact Mission Providence’s economic performance, which include budget approval, business planning, the appointment of key officers and liquidation and distribution of share capital. As a result, the Company is not the primary beneficiary of Mission Providence. The Company accounts for this investment under the equity method of accounting and the Company’s share of Mission Providence’s income or losses areis recorded as “Equity in net (gain) loss of investees” in the accompanying condensed consolidated statements of income. Cash contributions made to Mission Providence in exchange for its equity interests are included in the condensed consolidated statements of cash flows as “Equity investments”.investments.”

The following table summarizes the carrying amounts of the assets and liabilities included in the Company’s condensed consolidated balance sheetssheet and the maximum loss exposure related to the Company’s interest in Mission Providence as of SeptemberJune 30, 20162017 and December 31, 2015:2016: