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-

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From           to          

Commission File Number 0-21886

 

BARRETT BUSINESS SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

52-0812977

(State or other jurisdiction of
Incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

8100 NE Parkway Drive, Suite 200

 

 

Vancouver, Washington

 

98662

(Address of principal executive offices)

 

(Zip Code)

(360) 828-0700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01 Per Share

BBSI

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes       No  

As of April 21, 2021, 7,565,315 shares of the registrant’s common stock ($0.01 par value) were outstanding.

 


 

 

BARRETT BUSINESS SERVICES, INC.

INDEX TO FORM 10-Q

 

Part I - Financial Information (Unaudited)

 

 

 

 

 

 

Page

Item 1.

 

Unaudited Interim Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - March 31, 2021 and December 31, 2020

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2021 and 2020

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss - Three Months Ended March 31, 2021 and 2020

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March 31, 2021 and 2020

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2021 and 2020

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

26

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

27

 

 

 

 

 

Item 1A.

 

Risk Factors

 

27

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

 

Item 6.

 

Exhibits

 

29

 

 

 

 

 

Signature

 

30

 

 

 

 

 

 

2


 

 

PART I – FINANCIAL INFORMATION

Item 1.

Unaudited Interim Condensed Consolidated Financial Statements

Barrett Business Services, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In Thousands, Except Par Value)

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,545

 

 

$

68,688

 

Investments

 

 

114,142

 

 

 

101,244

 

Trade accounts receivable, net

 

 

207,430

 

 

 

118,506

 

Income taxes receivable

 

 

8,209

 

 

 

6,485

 

Prepaid expenses and other

 

 

14,613

 

 

 

15,961

 

Restricted cash and investments

 

 

99,183

 

 

 

96,991

 

Total current assets

 

 

472,122

 

 

 

407,875

 

Property, equipment and software, net

 

 

35,400

 

 

 

34,916

 

Operating lease right-of-use assets

 

 

23,475

 

 

 

23,025

 

Restricted cash and investments

 

 

261,020

 

 

 

258,153

 

Goodwill

 

 

47,820

 

 

 

47,820

 

Other assets

 

 

2,818

 

 

 

3,161

 

 

 

$

842,655

 

 

$

774,950

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

221

 

 

$

221

 

Accounts payable

 

 

5,611

 

 

 

4,746

 

Accrued payroll, payroll taxes and related benefits

 

 

233,132

 

 

 

149,989

 

Current operating lease liabilities

 

 

8,006

 

 

 

7,539

 

Other accrued liabilities

 

 

8,292

 

 

 

7,275

 

Workers' compensation claims liabilities

 

 

103,290

 

 

 

102,040

 

Safety incentives liability

 

 

11,254

 

 

 

18,827

 

Total current liabilities

 

 

369,806

 

 

 

290,637

 

Long-term workers' compensation claims liabilities

 

 

259,373

 

 

 

255,706

 

Long-term debt

 

 

3,455

 

 

 

3,510

 

Deferred income taxes

 

 

2,511

 

 

 

4,518

 

Long-term operating lease liabilities

 

 

16,387

 

 

 

16,419

 

Customer deposits and other long-term liabilities

 

 

6,638

 

 

 

5,925

 

Total liabilities

 

 

658,170

 

 

 

576,715

 

Commitments and contingencies (Notes 4 and 6)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $.01 par value; 20,500 shares authorized, 7,554

   and 7,566 shares issued and outstanding

 

 

76

 

 

 

76

 

Additional paid-in capital

 

 

26,483

 

 

 

24,885

 

Accumulated other comprehensive income

 

 

2,314

 

 

 

7,564

 

Retained earnings

 

 

155,612

 

 

 

165,710

 

Total stockholders' equity

 

 

184,485

 

 

 

198,235

 

 

 

$

842,655

 

 

$

774,950

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In Thousands, Except Per Share Amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

 

Professional employer service fees

 

$

193,819

 

 

$

193,592

 

Staffing services

 

 

24,626

 

 

 

25,512

 

Total revenues

 

 

218,445

 

 

 

219,104

 

Cost of revenues:

 

 

 

 

 

 

 

 

Direct payroll costs

 

 

18,450

 

 

 

19,077

 

Payroll taxes and benefits

 

 

122,783

 

 

 

119,462

 

Workers' compensation

 

 

46,347

 

 

 

54,514

 

Total cost of revenues

 

 

187,580

 

 

 

193,053

 

Gross margin

 

 

30,865

 

 

 

26,051

 

Selling, general and administrative expenses

 

 

37,107

 

 

 

32,115

 

Depreciation and amortization

 

 

1,297

 

 

 

1,000

 

Loss from operations

 

 

(7,539

)

 

 

(7,064

)

Other income (expense):

 

 

 

 

 

 

 

 

Investment income, net

 

 

1,769

 

 

 

2,967

 

Interest expense

 

 

(308

)

 

 

(235

)

Other, net

 

 

9

 

 

 

1

 

Other income, net

 

 

1,470

 

 

 

2,733

 

Loss before income taxes

 

 

(6,069

)

 

 

(4,331

)

Benefit from income taxes

 

 

(1,515

)

 

 

(924

)

Net loss

 

$

(4,554

)

 

$

(3,407

)

Basic loss per common share

 

$

(0.60

)

 

$

(0.45

)

Weighted average number of basic common shares

     outstanding

 

 

7,576

 

 

 

7,521

 

Diluted loss per common share

 

$

(0.60

)

 

$

(0.45

)

Weighted average number of diluted common

     shares outstanding

 

 

7,576

 

 

 

7,521

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(4,554

)

 

$

(3,407

)

Unrealized losses on investments, net of tax of ($2,007) and ($1,046) in 2021

   and 2020, respectively

 

 

(5,250

)

 

 

(2,735

)

Comprehensive loss

 

$

(9,804

)

 

$

(6,142

)

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


 

 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2021 and 2020

(Unaudited)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Income

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss)

 

 

Earnings

 

 

Total

 

Balance, December 31, 2020

 

7,566

 

 

$

76

 

 

$

24,885

 

 

$

7,564

 

 

$

165,710

 

 

$

198,235

 

Common stock issued on exercise of options,

   purchase of ESPP shares and vesting of

   restricted stock units and performance awards

 

38

 

 

 

 

 

 

815

 

 

 

 

 

 

 

 

 

815

 

Common stock repurchased on vesting of

   restricted stock units and performance

   awards

 

(1

)

 

 

 

 

 

(107

)

 

 

 

 

 

 

 

 

(107

)

Share-based compensation expense

 

 

 

 

 

 

 

1,060

 

 

 

 

 

 

 

 

 

1,060

 

Company repurchase of common stock

 

(49

)

 

 

 

 

 

(170

)

 

 

 

 

 

(3,266

)

 

 

(3,436

)

Cash dividends on common stock ($0.30 per

   share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,278

)

 

 

(2,278

)

Unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

(5,250

)

 

 

 

 

 

(5,250

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,554

)

 

 

(4,554

)

Balance, March 31, 2021

 

7,554

 

 

$

76

 

 

$

26,483

 

 

$

2,314

 

 

$

155,612

 

 

$

184,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Income

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss)

 

 

Earnings

 

 

Total

 

Balance, December 31, 2019

 

7,514

 

 

$

75

 

 

$

20,227

 

 

$

2,819

 

 

$

148,678

 

 

$

171,799

 

Common stock issued on exercise of options,

   purchase of ESPP shares and vesting of

   restricted stock units and performance awards

 

56

 

 

 

1

 

 

 

903

 

 

 

 

 

 

 

 

 

904

 

Common stock repurchased on vesting of

   restricted stock units and performance

   awards

 

(6

)

 

 

 

 

 

(378

)

 

 

 

 

 

 

 

 

(378

)

Share-based compensation expense

 

 

 

 

 

 

 

342

 

 

 

 

 

 

 

 

 

342

 

Company repurchase of common stock

 

(59

)

 

 

(1

)

 

 

(169

)

 

 

 

 

 

 

(2,817

)

 

 

(2,987

)

Cash dividends on common stock ($0.30 per

   share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,262

)

 

 

(2,262

)

Unrealized loss on investments, net of tax

 

 

 

 

 

 

 

 

 

 

(2,735

)

 

 

 

 

 

(2,735

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,407

)

 

 

(3,407

)

Balance, March 31, 2020

 

7,505

 

 

$

75

 

 

$

20,925

 

 

$

84

 

 

$

140,192

 

 

$

161,276

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

6


 

 

Barrett Business Services, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,554

)

 

$

(3,407

)

Reconciliations of net loss to net cash (used in) provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,297

 

 

 

1,000

 

Non-cash lease expense

 

 

1,872

 

 

 

1,724

 

Investment amortization and losses recognized

 

 

203

 

 

 

81

 

Deferred Income taxes

 

 

 

 

 

508

 

Share-based compensation

 

 

1,060

 

 

 

342

 

Changes in certain operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

(88,924

)

 

 

(2,229

)

Income taxes

 

 

(1,724

)

 

 

(1,102

)

Prepaid expenses and other

 

 

1,348

 

 

 

(1,592

)

Accounts payable

 

 

865

 

 

 

(1,660

)

Accrued payroll, payroll taxes and related benefits

 

 

83,926

 

 

 

6,406

 

Other accrued liabilities

 

 

964

 

 

 

(2,095

)

Workers' compensation claims liabilities

 

 

5,273

 

 

 

6,452

 

Safety incentives liability

 

 

(7,573

)

 

 

(1,620

)

Operating lease liabilities

 

 

(1,887

)

 

 

(1,672

)

Other assets and liabilities, net

 

 

(30

)

 

 

(95

)

Net cash (used in) provided by operating activities

 

 

(7,884

)

 

 

1,041

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, equipment and software

 

 

(1,781

)

 

 

(3,439

)

Purchase of investments

 

 

(23,444

)

 

 

(23,722

)

Proceeds from sales and maturities of investments

 

 

9,381

 

 

 

21,758

 

Purchase of restricted investments

 

 

(132,788

)

 

 

(1,828

)

Proceeds from sales and maturities of restricted investments

 

 

24,286

 

 

 

14,449

 

Net cash (used in) provided by investing activities

 

 

(124,346

)

 

 

7,218

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments on long-term debt

 

 

(55

)

 

 

(55

)

Repurchase of common stock

 

 

(3,436

)

 

 

(2,987

)

Common stock repurchased on vesting of stock awards

 

 

(107

)

 

 

(378

)

Dividends paid

 

 

(2,278

)

 

 

(2,262

)

Proceeds from exercise of stock options

 

 

815

 

 

 

904

 

Net cash used in financing activities

 

 

(5,061

)

 

 

(4,778

)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(137,291

)

 

 

3,481

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

233,837

 

 

 

273,341

 

Cash, cash equivalents and restricted cash, end of period

 

$

96,546

 

 

$

276,822

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7


 

 

Barrett Business Services, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 - Basis of Presentation of Interim Period Statements

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Barrett Business Services, Inc. (“BBSI”, the “Company”, “our” or “we”), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures typically included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The accompanying condensed financial statements are prepared on a consolidated basis. All intercompany account balances and transactions have been eliminated in consolidation. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from such estimates and assumptions. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form 10-K at pages 34 – 61. The results of operations for an interim period are not necessarily indicative of the results of operations for a full year.

Revenue recognition

Professional employer (“PEO”) services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site. Staffing revenues relate primarily to short-term staffing, contract staffing and on-site management services. The Company’s performance obligations for PEO and staffing services are satisfied, and the related revenue is recognized, as services are rendered by our workforce.

Our PEO client service agreements have a minimum term of one year, are renewable on an annual basis, and typically require 30 days’ written notice to cancel or terminate the contract by either party. In addition, our client service agreements provide for immediate termination upon any default of the client regardless of when notice is given. PEO customers are invoiced following the end of each payroll processing cycle, with payment generally due on the invoice date. Staffing customers are invoiced weekly based on agreed rates per employee and actual hours worked, typically with payment terms of 30 days. The amount of earned but unbilled revenue is classified as a receivable on the condensed consolidated balance sheets.

We report PEO revenues net of direct payroll costs because we are not the primary obligor for these payments to our clients’ employees. Direct payroll costs include salaries, wages, health insurance, and employee out-of-pocket expenses incurred incidental to employment. We also present revenue net of safety incentives because these incentives represent consideration payable to customers.

8


 

Cost of revenues

Our cost of revenues for PEO services includes employer payroll-related taxes and workers’ compensation costs. Our cost of revenues for staffing services includes direct payroll costs, employer payroll-related taxes, employee benefits, 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 employee benefits consist of the employer’s portion of Social Security and Medicare taxes, federal and state unemployment taxes, and staffing services employee reimbursements for materials, supplies and other expenses, which are paid by our customer. Workers’ compensation costs consist primarily of claims reserves, claims administration fees, legal fees, medical cost containment (“MCC”) expense, state administrative agency fees, third-party broker commissions, risk manager payroll, premiums for excess insurance, and the fronted insurance program, as well as costs associated with operating our two wholly owned insurance companies, Associated Insurance Company for Excess (“AICE”) and Ecole Insurance Company (“Ecole”).

Cash and cash equivalents

We consider non-restricted short-term investments that are highly liquid, readily convertible into cash, and have maturities at acquisition of less than three months, to be cash equivalents for purposes of the condensed consolidated statements of cash flows and condensed consolidated balance sheets. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. The Company has not experienced any losses related to its cash concentration.

Investments

The Company classifies investments as available-for-sale. The Company’s investments are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Investments are recorded as current on the condensed consolidated balance sheets as the invested funds are available for current operations. Management considers available evidence in evaluating potential impairment of investments, including the extent to which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance would be recognized to the extent that the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses on sales of investments are included in investment income in our condensed consolidated statements of operations.

Restricted cash and investments

The Company holds restricted cash and investments primarily for the future payment of workers’ compensation claims. These investments are categorized as available-for-sale. They are reported at fair value with unrealized gains and losses, net of taxes, shown as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Restricted cash and investments are classified as current and noncurrent on the condensed consolidated balance sheets based on the nature of the restriction. Management considers available evidence in evaluating potential impairment of restricted investments, including the extent to which fair value is less than cost and adverse conditions related to the security. In the event of a credit loss, an allowance would be recognized to the extent that the fair value of the security is less than the present value of the expected future cash flows. Realized gains and losses on sales of restricted investments are included in investment income in our condensed consolidated statements of operations.

Restricted cash and investments also includes investments held as part of the Company’s deferred compensation plan. These investments are classified as trading securities and are recorded at fair value with unrealized gains and losses reported as a component of income (loss) from operations.

9


 

Allowance for doubtful accounts

The Company had an allowance for doubtful accounts of $1,092,000 and $757,000 at March 31, 2021 and December 31, 2020, respectively. We make estimates of the collectability of our accounts receivable for services provided to our customers based on future expected credit losses. Management analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customers’ payment trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.

Workers’ compensation claims liabilities

Our workers’ compensation claims liabilities do not represent an exact calculation of liability but rather management’s best estimate, utilizing actuarial expertise and projection techniques, at a given reporting date. The estimated liability for open workers’ compensation claims is based on an evaluation of information provided by our third-party administrator for workers’ compensation claims, coupled with an actuarial estimate of future loss development with respect to reported claims and incurred but not reported claims (together, “IBNR”). Workers’ compensation claims liabilities include case reserve estimates for reported losses, plus additional amounts for estimated IBNR claims, MCC and legal costs, unallocated loss adjustment expenses and estimated future recoveries. The estimate of incurred costs expected to be paid within one year is included in current liabilities, while the estimate of incurred costs expected to be paid beyond one year is included in long-term liabilities on our condensed consolidated balance sheets. These estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known.

The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including changes in claims handling practices, changes in reserve estimation procedures, inflation, trends in the litigation and settlement of pending claims, and legislative changes.

Our estimates are based on informed judgment, derived from individual experience 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 reserve estimates, the expenses incurred through final resolution of our liability for our workers’ compensation claims will likely vary from the related loss reserves 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 reserves.

A basic premise in most actuarial analyses is that historical data and past patterns demonstrated in the incurred and paid historical data form a reasonable basis upon which to project future outcomes, absent a material change. Significant structural changes to the available data can materially impact the reserve estimation process. To the extent a material change affecting the ultimate claim liability becomes known, such change is quantified to the extent possible through an analysis of internal Company data and, if available and when appropriate, external data. Nonetheless, actuaries exercise a considerable degree of judgment in the evaluation of these factors and the need for such actuarial judgment is more pronounced when faced with material uncertainties.

10


 

Safety incentives

We accrue for and present expected safety incentives as a reduction of revenue. Safety incentives represent cash incentives paid to certain PEO client companies for maintaining safe-work practices and minimizing workplace injuries. The incentive is based on a percentage of annual payroll and is paid annually to customers who meet predetermined workers’ compensation claims cost objectives. Safety incentive payments are made only after closure of all workers’ compensation claims incurred during the customer’s contract period. The safety incentive liability is estimated and accrued each month based upon contract year-to-date payroll and the then current amount of the customer’s estimated workers’ compensation claims reserves as established by us and our third-party administrator. The Company provided $11.3 million and $18.8 million at March 31, 2021 and December 31, 2020, respectively, as an estimate of the liability for unpaid safety incentives.

Customer deposits

We require deposits from certain PEO customers to cover a portion of our accounts receivable due from such customers in the event of default of payment.

Comprehensive income (loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders.

Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. generally accepted accounting principles (“GAAP”) are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity. Our other comprehensive income (loss) comprises unrealized holding gains and losses on our available-for-sale investments.

Statements of cash flows

Interest paid during the three months ended March 31, 2021 and 2020 did not materially differ from interest expense. Income taxes paid during the three months ended March 31, 2021 totaled $0.2 million. No income taxes were paid during the three months ended March 31, 2020.

Bank deposits and other cash equivalents that are restricted for use are classified as restricted cash. The table below reconciles the cash, cash equivalents and restricted cash balances from our condensed consolidated balance sheets to the amounts reported on the condensed consolidated statements of cash flows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

28,545

 

 

$

68,688

 

 

$

14,272

 

 

$

44,570

 

Restricted cash, included in restricted cash and

   investments

 

 

68,001

 

 

 

165,149

 

 

 

262,550

 

 

 

228,771

 

Total cash, cash equivalents and restricted cash

   shown in the statement of cash flows

 

$

96,546

 

 

$

233,837

 

 

$

276,822

 

 

$

273,341

 

 

11


 

 

Basic and diluted earnings per share

Basic earnings per share are computed based on the weighted average number of common shares outstanding for each year using the treasury method. Diluted earnings per share reflect the potential effects of the exercise of outstanding stock options, the issuance of stock associated with outstanding restricted stock units, performance share units and the Company’s employee stock purchase plan. Basic and diluted shares outstanding are summarized as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Weighted average number of basic shares outstanding

 

 

7,576

 

 

 

7,521

 

Effect of dilutive securities

 

 

 

 

 

 

Weighted average number of diluted shares outstanding

 

 

7,576

 

 

 

7,521

 

 

As a result of the net loss for the three months ended March 31, 2021 and 2020, 95,899 and 187,745 potential common shares have been excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

 

Accounting estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are used for fair value measurement of investments, allowance for doubtful accounts, deferred income taxes, carrying values for goodwill and property, equipment and software, accrued workers’ compensation liabilities and safety incentive liabilities. Actual results may or may not differ from such estimates.

 

 

 

 

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Note 2 - Fair Value Measurement

The following table summarizes the Company’s investments at March 31, 2021 and December 31, 2020 measured at fair value on a recurring basis (in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020