BBSI 10-K & 10-Q changes, risk factors and insider trading

Risks RelatingRelated to Workers’ Compensation

OnIn June2020 29,and 2020,2021, the Company entered into a loss portfolio transfer agreement (“LPT 1”)agreements to remove all outstanding workers’ compensation claims obligations for claims incurred under its insured program between February 1, 2014 and December 31, 2017. On June 30, 2021, the Company entered into a loss portfolio transfer agreement (“LPT 2”) to remove all remaining outstanding workers’ compensation claims obligations for client policies issued under its insured program up to June 30, 2018.

Thus, for claims incurred before July 1, 2020, the Company has financial risk for most workers’ compensation claims under $5.0 million on a per occurrence basis, except for claims transferred under the insured program as part of LPTthe 1loss andportfolio LPTtransfer 2.agreements. For claims incurred between July 1, 2020 and June 30, 2021, the Company has financial risk for most workers' compensation claims under $3.0 million on a per occurrence basis. This level of per occurrence retention may result in higher workers’ compensation costs to us with a corresponding negative effect on our operating results and financial condition.

To attract and retain clients and satisfy their expectations, the software, hardware andhardware, networking technologies and artificial intelligence ("AI") tools we use must be frequently and rapidly upgraded, enhanced and improved in response to technological advances, competitive pressures, client expectations, and new and changing laws. Failure to successfully implement technological improvements could result in harm to our reputation, loss of market share, reduced revenue, or client claims against us, any of which could materially harm our business.

The methods and techniques used by cyber threat actors to gain entry into our network and access our computer systems, software and data will become more advanced with the use of artificial intelligence ("AI") and may become increasingly difficult or impossible to detect and prevent. As these threats continue to evolve, we may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any security vulnerabilities. While our technology infrastructure is designed to safeguard and protect personal and business information, we have limited ability to monitor the implementation of similar safeguards by our vendors.

The safe and responsible integration of AI functionality as it rapidly evolves presents emerging ethical and legal challenges, and the use of such technologies may result in diminished brand trust and reputational harm. As with many innovations, AI presents risks and challenges that could significantly disrupt our business model. In addition, the use of AI by bad actors presents increasingly complex and sophisticated security threats to our confidential customer, employee, and Company data, and we must make additional efforts to maintain network security. The regulatory landscape surrounding AI technologies is evolving, and the ways in which these technologies will be regulated by governmental authorities, self-regulatory institutions, or other regulatory authorities remains uncertain and may be inconsistent from jurisdiction to jurisdiction. Certain jurisdictions in which we operate are considering or have proposed or enacted legislation and policies regulating AI and non-personal data, such as thea recent Executive Order onseeking AI.to centralize AI policies and to identify and challenge inconsistent state laws. Such regulations may result in operational costs to modify, maintain, or align our business practices,practices with rapidly evolving, potentially unclear, or conflicting regulatory regimes, or constrain our ability to develop, deploy, or maintain these technologies.

New or highly regulated service offerings, includingsuch as health care benefits, may also introduce additional legislative and regulatory requirements with which we are not familiar, or from which we are currently exempt. Violation of such laws and regulations could subject us to fines, penalties, and damages, damage our reputation, constitute a breach of our client agreements, impair our ability to obtain and renew required licenses, and decrease our profitability or competitiveness. If any of these effects were to occur, our operating results and financial condition could be materially adversely affected.

The Company’s revenue growth can be volatile and is dependent on same customer sales and the addition of new clients. Revenues increased 8.4% in 2025 and 7.0% in 2024 and increased 1.4% in 2023.2024. There can be no assurance that we will continue to maintain current levels of revenues. Efforts to achieve business growth intensifies pressure on retaining current clients and attracting increasing numbers of new clients.

Weak economic conditions, including periods of elevated inflation and interest rates, may have a negative impact on small-and mid-sized businesses, which make up the majority of our clients. In turn, these businesses could cut costs, including trimming employees from their payrolls, or closing locations or ceasing operations altogether. If current economic conditions were to weaken further,weaken, these forces may result in decreased revenues due both to the downsizing of our current clients and increased difficulties in attracting new clients in a poor economic environment. An economic downturn may also result in additional bad debt expense to the extent that existing clients cease operations or are otherwise unable to meet their financial obligations. Additionally, weak economic conditions may result in higher unemployment, which is correlated with increased workers’ compensation claims. The spread of a highly infectious or contagious disease, and the response by federal, state, and local government agencies, including preventative actions taken such as shelter-in-place orders, restrictions on travel, temporary closures of businesses deemed to be high-risk or non-essential, and other government mandates, could create significant economic disruption that results in a material reduction in business operations. Clients who are impacted by government restrictions and economic disruptions may experience liquidity and other financial issues, which may reduce their capacity to pay for our services.

Our PEO and staffing revenue is based on client payroll, and our business growth depends on the availability of a sufficient and stable workforce for our clients. The availability of labor may be affected by various factors, including, among others, economic conditions; demographic trends, including outmigration from states in which we operate; government policies on immigration; and public health crises. The spread of highly infectious diseases canmay reduce workforce participation due to illness, quarantine requirements, or caregiving responsibilities. Economic downturns or shifts in labor market dynamics canmay impact workforce participation rates and overall labor availability. Additionally, changes in government administrations canmay result in shifts in immigration policies, which may affect our clients’ ability to recruit and retain workers. Stricter visa requirements, limitations on work permits, delays in processing, or reductions in visa allocations could lead to labor shortages, particularly in industries that rely on immigrant labor, such as agriculture, construction, and hospitality. Businesses that depend on seasonal labor, including those utilizing temporary work visa programs, may be especially vulnerable to such changes. Any of these factors could adversely impact our business and financial performance.

We believe that the successful operation of our business is dependent upon our retention of the services of key personnel, including our Chief Executive Officer, other executive officers and area managers. We may not be able to retain all our executives, senior managers and key personnel in light of competition for their services. If we lose the services of one of our executive officers or a significant number of our senior managers, our results of operations would likely would be adversely affected.

InWe 2023, BBSI began offeringoffer health insurance benefits as part of our PEO services. Our arrangement with third-party insurers provides health insurance coverage to BBSI’s PEO clients through December 31, 2025,2026, with the possibility of additional annual renewals. If our third-party insurers are unwilling or unable to renew ouran arrangement in the future, we would need to seek coverage from alternative insurers. If replacement coverage were unavailable or available only on significantly less favorable terms, our business and results of operations would be materially adversely affected. Additionally, if maintaining health insurance coverage becomes significantly more costly due to claims experience or other factors, this could also have a material adverse effect on our business and results of operations.

Additionally, we began offeringoffer employee health and welfare benefits to our PEO clients beginning in 2023.clients. We cannot be certain that compliant insurance coverage will remain available to us on reasonable terms, and we could face additional risks arising from future changes to or repeal of the Acts or changed interpretations of our obligations under the Acts. If new healthcare legislation or future changes to the Acts were to increase the cost of providing health care benefits, or to limit our ability to offer health care benefits to our PEO clients, our business, operating results, and financial condition could be materially adversely affected.

As BBSI beganBy offering health benefits to our PEO clients in 2023,clients, we have access to protected health information ("PHI") of our client employees. Compliance with federal and state regulations such as HIPAA and the HITECH Act is required for handling this PHI. HIPAA imposes limitations on the use and disclosure of PHI, and sets requirements for health data privacy, security, and breach notification. Non-compliance with HIPAA can lead to penalties and fines. Failure to appropriately comply with data security regulations could materially adversely impact our business, reputation, operating results, and financial condition.

We face competition from various companies that may provide all or some of the services we offer. Our competitors include companies that are engaged in staffing services such as Robert Half International Inc., Kelly Services, Inc., and ManpowerGroup Inc.; companies that are focused on co-employment, such as Insperity, Inc., and TriNet Group, Inc.; and companieshuman thatcapital primarilymanagement provide payroll processing services,companies, such as Automatic Data Processing, Inc. and Paychex, Inc. We also compete with insurance carriers and other providers of workers’ compensation insurance, and our offerings must be priced competitively with prices provided by these competitors for us to attract and retain our clients. Maintaining competitive pricing in the workers’ compensation market could lead to reduced margins and profitability. Additionally, we face competition from information technology outsourcing firms and broad-based outsourcing and consulting firms that perform individual projects.

As the administrative employer in our co-employer relationships with our clients, we are subject to a complex and evolving set of federal, state and local payroll tax laws and regulations, including requirements related to withholding, reporting and remitting payroll taxes on behalf of our clients. Compliance with these laws requires significant resources, and failure to comply with payroll tax laws in any jurisdiction in which we operate could subject us to financial penalties, interest charges and other liabilities. Additionally,As ournew clientstax may be eligible for various legislativelaws and regulatoryregulations programs,are adopted— including thoserecently establishedenacted under the CARES Act and the American Rescue Plan Act,legislation such as the EmployeeOne RetentionBig TaxBeautiful CreditBill (“ERC”),Act—we whichmust useupdate payrolland taxmodify creditsour systems and processes to address these changes. These updates require substantial time, investment, and operational resources, and expose us to an increased risk of errors or deferralsnoncompliance asduring the mechanism to provide benefits to small businesses and employees. When clients and former clients wish to utilize these programs, the associated tax forms must be filed through the PEO, which creates additional administrative effort for the PEO. Additionally, determining eligibility for these programs is complex and is based on company-specific data that PEOs do not possess for their clients. If the IRS determines that clients who received payroll tax credits through BBSI are ineligible, and if the tax authorities or our clients attempt to hold BBSI liable for these amounts, this could have a materially adverse effect on our business, reputation, results of operation, and financial condition.implementation.

We are the administrative employer sponsoring single-employer plans in our co-employment relationships under the various laws and regulations of the IRS and the U.S. Department of Labor. If we are determined not to be the administrative employer under such laws and regulations and are therefore unable to assume our clients’ obligations for employment and other taxes, our clients may be held jointly and severally liable for payment of such taxes. Some clients or prospective clients may view such potential liability as an unacceptable risk, discouraging current clients from continuing a relationship with us or prospective clients from entering into a new relationship with us. Any determination that we are not the administrative employer sponsoring single-employer plans for purposes of ERISA could also adversely affect our ability to offer health care benefits to our PEO clients by subjecting us to additional state and federal laws and regulations, and could materially adversely affect our business, financial condition, and results of operations.

We are subject to national data protection, privacy and security laws, and regulations that relate to our various business units and data processing activities, which may include sensitive, confidential, and personal information. These laws, regulations and codes may be inconsistent across jurisdictions and are subject to evolving and differing (sometimes conflicting) interpretations. Government officials and regulators, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data.data, including through the use of AI technologies. This scrutiny can result in new and shifting interpretations of existing laws, thereby further impacting our business. State laws on privacy, data and related technologies create additional privacy and security compliance obligations and expand the scope of potential liability. As privacy, data‑protection and technology‑related laws—including those governing the use of AI—continue to expand and diverge across federal and state jurisdictions, the regulatory environment is becoming increasingly complex. We expect the costs of monitoring and complying with these evolving requirements to rise, and the risk of compliance challenges or failures to increase accordingly.

With our PEO clients, we enter into a co-employment arrangement in which we become the administrative employer while the client maintains physical care, custody and control of their workforce. Our PEO services are billed as a percentage of client payroll; the gross amount invoiced includes direct payroll costs and employee benefits coverage (if provided), plus an additional percentage amount to cover employer payroll-related taxes, workers’ compensation coverage (if provided), other service-related costs and a margin. However, actual costs can be higher or lower than anticipated. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Revenues for PEO services exclude direct payroll billings because we are not the primary obligor for those payments.

We generate staffing services revenues primarily from short-term staffing, contract staffing, on-site management and direct placement services. For staffing services other than direct placement, invoiced amounts include direct payroll, an amount intended to cover employer payroll-related taxes, workers’ compensation coverage, other service-related costs and a margin. Staffing customers are typically invoiced weekly and typicallygenerally have payment terms of 30 days. Direct placement services are billed at agreed fees at the time of a successful placement.

Our business is concentrated in California, and we expect to continue to derive a majority of our revenues from this market in the future. Revenues generated in our California operations accounted for 72% of our total revenues in 2024,each 72%of in2025, 20232024 and 73% in 2022.2023. Consequently, weakness in economic conditions, changes in the regulatory or insurance environment, or natural disasters or other major disruptive events in California could have a material adverse effect on our financial results.

Our cost of revenues for PEO services includes employer payroll-related taxes, workers’ compensation costs and employee benefits costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, and workers’ compensation costs. Direct payroll costs represent the gross payroll earned by staffing services employees based on salary or hourly wages. Payroll taxes and benefits consist of the employer’s portion of Social Security and Medicare taxes, federal and state unemployment taxes, and employee benefit costs, which primarily comprisescomprise health insurance premiums paid to third-party insurers and underwriting and benefit consultant payroll. Workers’ compensation costs consist primarily of premiums paid to third-party insurers, claims reserves, third-party broker commissions, risk manager payroll, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, and risk manager payroll, as well as costs associated with operating our two wholly owned insurance companies, Associated Insurance Company for Excess (“AICE”) and Ecole Insurance Company (“Ecole”).

Depreciation and amortization represent depreciation of property and equipment, leasehold improvements, softwareimprovements and internally developed software costs. Property, equipment, softwareequipment and internally developed software costs are depreciated using the straight-line method over their estimated useful lives, which range from 3 to 39 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life.

For all claims incurred underUnder the Company’s workers’ compensation programs, we record an estimate forultimate the total amount of workers’ compensation costs,losses, which representsrepresent the amount necessary to pay claims and related expenses,expenses including premiums to third-party insurers,associated with respect to workplace injuries that have occurred under our various workers’ compensation insurancethe programs.

Our estimates are based on actuarial analyses and informed judgment, derived from individual experiencesexperience and expertise applied to multiple sets of data and analyses. We consider significant facts and circumstances known both at the time that loss reserves are initially established and as new facts and circumstances become known. Due to the inherent uncertainty underlying loss estimates, the ultimate expense incurred will likely vary from the related loss estimate at the reporting date. Therefore, as specific claims are paid out in the future, actual paid losses may be materially different from our current loss estimates.

Statements in this ItemAnnual orReport inon ItemsForm 1, 1A, 3 and 9A of this report10-K include forward-looking statements, which are not historical in nature and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, discussion of economic conditions in our market areas, especially in California, and their effect on revenue levels; the competitiveness of our service offerings; the availability of certain fully insured medical and other health and welfare benefits to qualifying worksite employees; our ability to attract and retain clients and to achieve revenue growth; the effect of changes in our mix of services on gross margin; labor market conditionsconditions, including the impact of AI and automation on workplace displacement; the adequacy of our workers' compensation reserves; the effect of changes in estimates of our future claims liabilities on our workers’ compensation reserves, including the effect of changes in our reserving practices and claims management process on our actuarial estimates; expected levels of required surety deposits and letters of credit; the outcome of audits; the effect of our formation and operation of two wholly owned licensed insurance subsidiaries; the risks of operation and cost of our insured program; the financial viability of our excess insurance carriers; the effectiveness of our management information systems; our relationship with our primary bank lender and the availability of financing and working capital to meet our funding requirements; litigation costs; the effect of inflationary pressures or changes in the interest rate environment on the value of our investment securities; the adequacy of our allowance for expected credit losses; and the potential for and effect of acquisitions.

All our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include: our ability to retain current clients and attract new clients; technology disruption, including the displacement of employees through the adoption of AI and automation by our clients; difficulties associated with integrating clients into our operations; economic trends in our service areas and the potential effects of changing governmental policiespolicies, including those related to immigration, tariffs, other trade policies, or climate regulation; risks to our business and the business of our clients arising from current or future tariffs or other trade restrictions, supply chain issues, changes in labor force, or geopolitical instability, including the war in Ukraine, conflicts in the Middle East, and the potential for future conflicts or disruptions in other parts of the world; natural disasters; the potential for material deviations from expected future workers’ compensation claims experience; changes in the workers’ compensation regulatory environment in our primary markets; PEO client benefit costs, particularly with regard to health insurance benefits; security breaches or failures in the Company’s information technology systems; collectability of accounts receivable; changes in executive management; changes in effective payroll tax rates and federal and state income tax rates; the carrying values of deferred income tax assets and goodwill (which may be affected by our future operating results); the effects of inflation on our operating expenses and those of our clients; the impact of and potential changes to the Patient Protection and Affordable Care Act, escalating medical costs, and other health care legislative initiatives on our business; the effect of changing monetary policy, interest rates and conditions in the global capital markets on our investment portfolio; and the availability of capital, borrowing capacity on our revolving credit facility, or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining our status as a qualified self-insured employer for workers' compensation coverage or our insured program. Additional risk factors affecting our business are discussed in Item 1A of Part I of this report. We disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

The increase in PEO services revenues was primarily attributable to a 4.2%6.7% increase in average number of WSEs as well as a 3.4%2.4% increase in average billing per WSE.WSE per day.

Workers’ compensation expense for 20242025 totaled $204.1 million or 16.5% of revenue compared to $201.7 million or 17.6% of revenue compared to $206.0 million or 19.2% of revenue for 2023.2024. The decrease in workers’ compensation expense as a percentage of revenue was primarily due to lower workers' compensation costs in the current year, which included favorable prior year asliability welland aspremium adjustments of $18.7 million in 2025, compared to favorable prior year liability and premium adjustments of $18.5 million in 2024, compared to prior year liability and premium adjustments of $14.9 million in 2023.2024.

Selling, general and administrative (“SG&A”) expenses for 20242025 totaled $190.5 million or 15.4% of revenue compared to $185.9 million or 16.2% of revenue compared to $174.8 million or 16.3% of revenue for 2023.2024. The increase of $11.1$4.6 million in SG&A expense was primarily attributable to increased employee-related costs, including increased variable employee compensation and incentive pay related to stronger financial results compared to 2023.costs.

Other income, net for 20242025 totaled $11.0$9.2 million compared to other income of $8.3$11.0 million for 2023.2024. The increasedecrease was primarily attributable to ana increasedecrease in investment income in 2024.2025.

A discussion of our financial condition and results of operations for 20232024 compared to 20222023 can be found in Part II, Item 7. Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2023,2024, filed with the SEC on MarchFebruary 1,28, 2024.2025.

The Company's cash balance of $82.6$126.3 million,million at December 31, 2025, which includes cash, cash equivalents, and restricted cash, increased $7.7$43.7 million for the twelve months ended December 31, 2024,2025, compared to athe decreasecash balance of $32.5$82.6 million forat theDecember comparable31, period2024, with an increase of 2023.$7.7 million compared to 2024. The increase in cash at December 31, 20242025 as compared to December 31, 20232024 was primarily due to proceeds from the salefactors anddiscussed maturities of investments and restricted investments, increased accrued payroll and related benefits, and net income, partially offset by increased trade accounts receivable, decreased workers' compensation claim liabilities, purchases of investments and restricted investments, and repurchases of common stock.below.

Net cash provided by operating activities in 20242025 amounted to $10.1$66.0 million, compared to net cash provided by operating activities of $67.2$10.1 million for the comparable period of 2023.2024. In 2024,2025, net cash provided by operating activities was primarily due to net income of $54.4 million, increased accrued payroll and related benefits of $55.2$22.6 million, increased payroll taxes payable of $12.8 million, share-based compensation of $10.4 million, increased other accrued liabilities of $8.8 million and netdepreciation incomeand amortization of $53.0$8.3 million, largelypartially offset by increased trade accounts receivable of $63.1 million and decreased workers’ compensation claims liabilities of $39.4$23.6 million, decreased premium payable of $16.0 million and increased trade accounts receivable of $14.1 million.

Net cash provided by investing activities totaled $38.8$30.8 million in 2024,2025, compared to net cash usedprovided by investing activities of $55.2$38.8 million for the comparable period of 2023.2024. In 2024,2025, net cash provided by investing activities consisted primarily of proceeds from the sale and maturity of investments and restricted investments of $90.8$93.6 million, partially offset by the purchases of investments and restricted investments of $37.9$44.0 million and the purchase of property, equipment and software of $14.2$18.8 million.

Net cash used in financing activities in 20242025 was $41.1$53.0 million compared to net cash used in financing activities of $44.6$41.1 million for the comparable period of 2023.2024. In 2024,2025, net cash used in financing activities primarily consisted of repurchases of common stock of $29.1$42.0 million and dividend payments of $8.1$8.2 million.

See “Note 5 - Revolving Credit Facility and Long-Term Debt” to the consolidated financial statements included in Item 8 of Part II of this report for information regarding the Company’s credit agreement with Wells Fargo Bank, N.A.

(1) As of December 31, 2024,2025, the Company hashad no additional operating leases that have not yet commenced of $7.1 million and remaining balances on short-term operating leases of $0.06$0.2 million, included in the table above. In January 2022, theThe Company paidhas offno alllong-term debt obligations as of itsDecember long-term31, debt.2025.

The following table sets forth the percentages of total revenues represented by selected items in the Company’s condensed consolidated statements of operations for the three and six months ended MarchJune 31,30, 2026 and 2025 ($ in thousands):

During the first quarter of 2026, the Company recorded tax-effected charges of $11.6 million related to the disallowance of certain wage-based tax credits claimed in prior years. This charge was recorded within provision for (benefit from) income taxes on our condensed consolidated statements of operations. We have excluded this charge from our non-GAAP measures as it relates to prior periods and is not indicative of our current or future operational performance. See “Note 5 – Income Taxes” to the condensed consolidated financial statements included in Item 1 of Part I of this report for additional information.

The reconciliation of net loss and diluted loss per share to non-GAAP net lossincome and non-GAAP diluted lossincome per share for the threesix months ended MarchJune 31,30, 2026 is shown in the table below (in thousands, except per share amounts):

We report PEO revenues net of direct payroll costs because we are not the primary obligor for wage payments to our clients’ employees. However, management believes that gross billings and wages are useful in understanding the volume of our business activity and serve as an important performance metric in managing our operations, including the preparation of internal operating forecasts and establishing executive compensation performance goals. We therefore present for purposes of analysis gross billings and wage information for the three and six months ended MarchJune 31,30, 2026 and 2025.

Three Months Ended MarchJune 31,30, 2026 and 2025

Net lossincome for the firstsecond quarter of 2026 amounted to $14.8$12.9 million compared to net lossincome of $1.0$18.5 million for the firstsecond quarter of 2025. Diluted net lossincome per share for the firstsecond quarter of 2026 was $0.59$0.52 compared to diluted net lossincome per share of $0.04$0.70 for the firstsecond quarter of 2025.

Revenue for the firstsecond quarter of 2026 totaled $307.0$319.3 million, an increase of $14.4$11.6 million or 4.9%3.8% over the firstsecond quarter of 2025, which reflects an increase in the Company’s PEO services revenue of $18.1$14.8 million or 6.6%5.1% and a decrease in staffing services revenue of $3.6$3.2 million or 20.6%.18.2%.

Gross margin for the firstsecond quarter of 2026 totaled $43.2$64.9 million or 14.1%20.3% of revenue compared to $42.6$73.3 million or 14.6%23.8% of revenue for the firstsecond quarter of 2025. The decrease in gross margin as a percentage of revenues is primarily a result of the factors discussed within the separate components of gross margin below.

Direct payroll costs for the firstsecond quarter of 2026 totaled $10.5$10.6 million or 3.4%3.3% of revenue compared to $13.3$13.2 million or 4.5%4.3% of revenue for the firstsecond quarter of 2025. The decrease in direct payroll costs as a percentage of revenues was primarily due to a decrease in staffing services within the mix of our customer base compared to the firstsecond quarter of 2025.

Payroll taxes for the firstsecond quarter of 2026 totaled $174.1$158.2 million or 56.7%49.5% of revenue compared to $169.4$155.0 million or 57.9%50.4% of revenue for the firstsecond quarter of 2025. The decrease in payroll taxes as a percentage of revenuerevenues in the firstsecond quarter of 2026 was primarily due to a higher mix of revenue attributable to PEO client benefits coverage, which is not subject to payroll taxes.

Benefit costs for the firstsecond quarter of 2026 totaled $27.4$28.9 million or 8.9%9.1% of revenue compared to $17.6$18.3 million or 6.0%5.9% of revenue for the firstsecond quarter of 2025. The increase in benefit costs as a percentage of revenuerevenues was primarily due to expanded adoption of our PEO client benefit programs, as well as an increase in health insurance premium rates.

Workers’ compensation expense for the firstsecond quarter of 2026 totaled $51.8$56.7 million or 16.9%17.8% of revenue compared to $49.6$48.0 million or 17.0%15.6% of revenue for the firstsecond quarter of 2025. The slight decreaseincrease in workers’ compensation expense as a percentage of revenuerevenues was primarily attributable to lowerhigher workers’ compensation costs in the firstsecond quarter of 2026, which included favorable prior year liability and premium adjustments of $1.1$2.0 million, compared to favorable prior year liability and premium adjustments of $3.8$8.8 million in the firstsecond quarter of 2025.

Selling, general and administrative (“SG&A”) expenses for the firstsecond quarter of 2026 totaled $47.5$47.2 million or 15.5%14.8% of revenue compared to $44.8$48.2 million or 15.3%15.7% of revenue for the firstsecond quarter of 2025. The increasedecrease of $2.7$1.0 million in SG&A expense was primarily attributable to increaseddecreased employee-related costs compared to the firstsecond quarter of 2025.

Other income, net for the firstsecond quarter of 2026 totaled $2.0$1.9 million compared to other income, net of $2.6$2.3 million for the firstsecond quarter of 2025. The decrease was primarily attributable to a decrease in investment income in the firstsecond quarter of 2026.

Provision for income taxes for the first quartersix months of 2026 was $10.4$14.8 million compared to benefitprovision fromfor income taxes of $0.5$6.4 million for the first quartersix months of 2025. The increase was primarily due to additional tax expense and interest recorded during the first quarter of 2026 related to the disallowance of certain wage-based tax credits claimed in prior years. See “Note 5 – Income Taxes” to the condensed consolidated financial statements included in Item 1 of Part I of this report for additional information.

The Company’s cash balance of $84.6$30.9 million, which includes cash, cash equivalents, and restricted cash, decreased $41.8$95.5 million for the threesix months ended MarchJune 31,30, 2026, compared to a decrease of $39.6$45.4 million for the comparable period of 2025. The decrease in cash at MarchJune 31,30, 2026 as compared to December 31, 2025 was primarily due to the factors discussed below.

Net cash used in operating activities for the threesix months ended MarchJune 31,30, 2026 amounted to $22.1$78.0 million, compared to cash providedused of $5.2$48.6 million for the comparable period of 2025. For the threesix months ended MarchJune 31,30, 2026, net cash used in operating activities was primarily due to increased trade accounts receivable of $45.0$52.9 million, netdecreased losspremium payable of $14.8$42.7 million, increaseddecreased prepaidpayroll expensestaxes payable of $10.8$14.0 million, decreased other accrued liabilities of $9.2$9.5 million and decreased workers’ compensation claims liabilities of $5.3$9.1 million, partially offset by increased accrued payroll and related benefits of $25.1$34.6 million,million increased premium payable of $17.0 million,and increased income taxes payable of $10.3 million and increased payroll taxes payable of $6.8$13.5 million.

Net cash provided by investing activities for the threesix months ended MarchJune 31,30, 2026 totaled $3.3$22.7 million, compared to cash usedprovided of $32.0$26.1 million for the comparable period of 2025. For the threesix months ended MarchJune 31,30, 2026, net cash provided by investing activities consisted of proceeds from sales and maturities of investments and restricted investments of $10.4$35.8 million, partially offset by purchases of property, equipment and software of $5.7$11.2 million.

Net cash used in financing activities for the threesix months ended MarchJune 31,30, 2026 was $23.0$40.2 million, compared to cash used of $12.8$22.9 million for the comparable period of 2025. For the threesix months ended MarchJune 31,30, 2026, net cash used in financing activities primarily consisted of repurchases of common stock of $20.3$35.5 million and dividend payments of $2.0$3.9 million.

The Company is required to maintain minimum collateral levels for certain policies issued under the insured program, which is held in a trust account (the “trust account”). The balance in the trust account was $189.5$135.0 million and $175.3 million at MarchJune 31,30, 2026 and December 31, 2025, respectively. The trust account balance is included as a component of the current and long-term restricted cash and investments in the Company’s condensed consolidated balance sheets.

Statements in this report include forward-looking statements, which are not historical in nature and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, discussion of economic conditions in our market areas, especially in California, and their effect on revenue levels; the competitiveness of our service offerings; the availability of certain fully insured medical and other health and welfare benefits to qualifying worksite employees; our ability to attract and retain clients and to achieve revenue growth; the effect of changes in our mix of services on gross margin; labor market conditions, including the impact of AI and automation on workplace displacement; the adequacy of our workers’ compensation reserves; the effect of changes in estimates of our future claims liabilities on our workers’ compensation reserves, including the effect of changes in our reserving practices and claims management process on our actuarial estimates; expected levels of required surety deposits and letters of credit; the outcome of audits and other determinations by the IRS; the effect of our formation and operation of two wholly owned licensed insurance subsidiaries; the risks of operation and cost of our insured program; the financial viability of our excess insurance carriers; the effectiveness of our management information systems; our relationship with our primary bank lender and the availability of financing and working capital to meet our funding requirements; litigation costs; the effect of inflationary pressures or changes in the interest rate environment on the value of our investment securities; the adequacy of our allowance for expected credit losses; and the potential for and effect of acquisitions.

All our forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include: our ability to retain current clients and attract new clients; technology disruption, including the displacement of employees through the adoption of AI and automation by our clients; difficulties associated with integrating clients into our operations; economic trends in our service areas and the potential effects of changing governmental policies, including those related to immigration, tariffs, other trade policies, or climate regulation; risks to our business and the business of our clients arising from current or future tariffs or other trade restrictions, supply chain issues, changes in labor force, or geopolitical instability, including the warwars in Ukraine,Ukraine and Iran, other conflicts in the Middle East, and the potential for future conflicts or disruptions in other parts of the world; natural disasters; the potential for material deviations from expected future workers’ compensation claims experience; changes in the workers’ compensation regulatory environment in our primary markets; PEO client benefit costs, particularly with regard to health insurance benefits; security breaches or failures in the Company’s information technology systems; collectability of accounts receivable; changes in executive management; changes in effective payroll tax rates and federal and state income tax rates; the carrying values of deferred income tax assets and goodwill (which may be affected by our future operating results); the effects of inflation on our operating expenses and those of our clients; the impact of and potential changes to the Patient Protection and Affordable Care Act, escalating medical costs, and other health care legislative initiatives on our business; the impact of the One Big Beautiful Bill Act and other recently enacted legislation on our business; the effect of changing monetary policy, interest rates and conditions in the global capital markets on our investment portfolio; and the availability of capital, borrowing capacity on our revolving credit facility, or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining our status as a qualified self-insured employer for workers’ compensation coverage or our insured program. Additional risk factors affecting our business are discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the SEC on February 26, 2026.2026 and in Item 1A of Part II in this report. We disclaim any obligation to publicly announce any revisions to any of the forward-looking statements contained herein to reflect future events or developments.