UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-10245
RCM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada
(State or Other Jurisdiction of
Incorporation or Organization)
2500 McClellan Avenue, Suite 350,
Pennsauken, New Jersey
(Address of Principal Executive Offices)
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
95-1480559
(I.R.S. Employer Identification No.)
08109-4613
(Zip Code)
(856) 356-4500
Name of Each Exchange
on Which Registered
Common Stock, par value $0.05 per share
RCMT
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X
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 X 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 X 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).
(Check one):
Large Accelerated Filer ☐
Accelerated Filer ☐
Non-Accelerated Filer X
Smaller Reporting Company X
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $28.9 million based upon the closing price of $4.00 per share of
the registrant’s common stock on July 2, 2021 on The NASDAQ Global Market. For purposes of making this calculation only, the registrant included all directors, executive
officers and beneficial owners of more than 5% of the Common Stock of the Company as affiliates.
The number of shares of registrant’s common stock (par value $0.05 per share) outstanding as of April 1, 2022: 10,096,588.
Portions of the definitive proxy statement for the registrant’s 2022 Annual Meeting of Stockholders (the “2022 Proxy Statement”) are incorporated by reference into
Items 10, 11, 12, 13 and 14 in Part III of this Annual Report on Form 10-K. If the 2022 Proxy Statement is not filed by May 2, 2022 (the first business day following the day that is
120 days after the last day of the registrant’s 2021 fiscal year), an amendment to this annual report on Form 10-K setting forth this information will be duly filed with the Securities
and Exchange Commission.
Documents Incorporated by Reference
RCM TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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PART I
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made by RCM Technologies, Inc. (“RCM” or the “Company”) are forward-looking within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new
technology solutions; the use by businesses of outsourced solutions, such as those offered by the Company, in connection with such adoption; the Company’s strategic and
business initiatives and growth strategies; and the outcome of litigation (at both the trial and appellate levels) and arbitrations, or other business disputes, involving the
Company. Readers are cautioned that such forward-looking statements, as well as others made by the Company, which may be identified by words such as “may,” “will,”
“expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “believe,” and similar expressions, are only predictions and are subject to risks and uncertainties that could
cause the Company’s actual results and financial position to differ materially from such statements. Such risks and uncertainties include, without limitation: (i) unemployment
and general economic conditions affecting the provision of life sciences, information technology and engineering services and solutions and the placement of temporary staffing
personnel; (ii) the effects of the COVID-19 pandemic; (iii) the Company’s ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients;
(iv) the Company’s ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (v) the Company’s
relationships with and reliance upon significant customers, and ability to collect accounts receivable from such customers; (vi) risks associated with foreign currency
fluctuations and changes in exchange rates, particularly with respect to the Canadian dollar; (vii) uncertainties regarding amounts of deferred consideration and earnout
payments to become payable to former shareholders of acquired businesses; (viii) the adverse effect a potential decrease in the trading price of the Company’s common stock
would have upon the Company’s ability to acquire businesses through the issuance of its securities; (ix) the Company’s ability to obtain financing on satisfactory terms; (x) the
reliance of the Company upon the continued service of its executive officers; (xi) the Company’s ability to remain competitive in the markets that it serves; (xii) the Company’s
ability to maintain its unemployment insurance premiums and workers compensation premiums; (xiii) the risk of claims being made against the Company associated with
providing temporary staffing services; (xiv) the Company’s ability to manage significant amounts of information and periodically expand and upgrade its information processing
capabilities; (xv) the risk of cyber attacks on our information technology systems or those of our third party vendors; (xvi) the Company’s ability to remain in compliance with
federal and state wage and hour laws and regulations; (xvii) uncertainties in predictions as to the future need for the Company’s services; (xviii) uncertainties relating to the
allocation of costs and expenses to each of the Company’s operating segments; (ixx) the costs of conducting and the outcome of litigation, arbitrations and other business
disputes involving the Company, and the applicability of insurance coverage with respect to any such litigation; (xx) the results of, and costs relating to, any interactions with
shareholders of the Company who may pursue specific initiatives with respect to the Company’s governance and strategic direction, including without limitation a contested
proxy solicitation initiated by such shareholders, or any similar such interactions; and (xxi) other economic, competitive, health and governmental factors affecting the
Company’s operations, markets, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date
made. Except as required by law, the Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends
or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
1
ITEM 1. BUSINESS
General
RCM Technologies, Inc. is a premier provider of business and technology solutions designed to enhance and maximize the operational performance of its customers. The
Company provides these services through the deployment of advanced engineering, specialty health care, life sciences and information technology services. For over 40 years,
the Company has developed and assembled an attractive, diverse and extensive portfolio of capabilities, service offerings and delivery options. This combination, paired with
RCM’s efficient pricing structure, offers clients a compelling value proposition.
RCM consists of three operating segments: Engineering, Specialty Health Care and Life Sciences and Information Technology Services.
● The Engineering segment provides a comprehensive portfolio of engineering and design services across three verticals: (1) Energy Services, (2) Process & Industrial
and (3) Aerospace. The segment also offers a complementary suite of services to augment its engineering portfolio, including design and supply of high-quality
engineered process solutions and equipment, technical writing and digital documentation across marine, locomotive, transportation and aerospace markets, and
engineering, procurement and construction management (“EPC”), as well as demand side management/energy conservation services.
● The Specialty Health Care segment provides staffing solutions of health care professionals, primarily health information management professionals, nurses,
paraprofessionals, physicians and various therapists. The segment also provides Teletherapy services targeting the education sector with an emphasis on
behavioral health.
● The Life Sciences and Information Technology, or LS&IT, segment provides enterprise business solutions, application services, infrastructure solutions, life
sciences solutions and other vertical-specific offerings.
The Company services some of the largest national and international companies in North America as well as a lengthy roster of Fortune 1000 and mid-sized businesses in such
industries as Aerospace/Defense, Educational Institutions, Energy, Financial Services, Health Care, Life Sciences, Manufacturing & Distribution, the Public Sector and
Technology. RCM sells and delivers its services through a network of approximately 25 offices in selected regions throughout North America and Serbia.
During the fiscal year ended January 1, 2022, approximately 32.5% of RCM’s total revenues were derived from Engineering services, 48.3% from Specialty Health Care services,
and the remaining 19.2% from IT services.
Impact of COVID-19
As discussed in more detail below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K, the
COVID-19 pandemic has had a substantial impact on our business, particularly in our Specialty Health Care segment, where it impacted the schools where many of the
Company’s personnel work.
Industry Overview
Businesses today face intense competition, the challenge of constant technological change and the ongoing need for business process optimization. To address these issues
and to compete more effectively, companies are continually evaluating the need for implementing innovative solutions to upgrade their systems, applications and processes. As
a result, the ability of an organization to integrate and align advanced technologies with new business objectives is critical.
2
ITEM 1. BUSINESS (CONTINUED)
Industry Overview (Continued)
The Company’s Engineering group remains focused on areas of growth, primarily within the electric power, aerospace, marine and transportation, commercial and industrial, oil
and gas, as well as biofuel industries. Given the current composition of its customer base, the Engineering group’s performance is well balanced between its three segments. In
recent years, many electric utilities have prioritized transitioning their power generation assets to cleaner sources of energy. Much of this transformation is being driven by
investments in renewable energy. The Energy Information Administration (“EIA”) estimates that 38% of the United States’ electric generation capacity will be comprised of wind
and solar assets by 2050. This expansion will require extensive investment in the nation’s transmission infrastructure to interconnect these renewable resources to the energy
grid. Projects of this scale will require engineering and design expertise, as well as the utilization of EPC services. As the world’s industrial output rebounds from pandemic-
related weakness in 2020 and 2021, the Company believes its Process and Industrial group is positioned well to take advantage. Companies in the chemical industry are
reprioritizing spending towards decarbonization technologies, with many US chemical companies expecting to place an emphasis on renewable feedstocks and new carbon
recycling technologies. The Company believes its process engineering services can play a vital role across this multibillion-dollar opportunity.
In the health care services industry, a shortage of nurses and other medical personnel in the United States has led to increases in business activity for health care service
companies, including the Company’s Specialty Health Care group. Due in part to an aging population and improved medical technology, the demand for selected health care
professionals is expected to continue over the next several years, with an emphasis on leveraging technology to expand access to care. The increased adoption of telemedicine,
an area in which the Specialty Health Care group has developed new service offerings, is a primary example. In addition, public educational institutions are outsourcing their
requirements for school nurses, therapists and paraprofessionals to lower their costs and it is expected that this will continue and grow. Each of these dynamics have been
exacerbated by COVID-19. The pandemic has also altered patterns in health care delivery, with newer delivery models gaining traction, namely telemedicine. Given federal and
state regulatory changes as well as private insurer reimbursement methods, utilization of telemedicine services increased significantly. As the COVID-19 pandemic continues,
CDC researchers stated that maintaining the expansion of telehealth remains critical to providing access to care. It is expected the total addressable market opportunity will
continue to expand and grow. Expanding access to behavioral health and mental well-being is also a priority for public health officials. Increasing and maintaining access to
proper care remains a top priority and the market opportunity for these services is expected to continue to grow.
Companies must integrate and manage computing environments consisting of multiple computing platforms, operating systems, databases and networking protocols and off-the-
shelf software applications to support business objectives. Companies also need to keep pace with new technology developments, which often rapidly render existing
equipment and internal skills obsolete. At the same time, varied factors have caused many organizations to focus on core competencies and trim workforces in the IT
management area. Accordingly, these organizations often lack the quantity, quality and variety of IT skills necessary to design and support IT solutions. IT managers are
charged with supporting increasingly complex systems and applications of significant strategic value, while working under budgetary, personnel and expertise constraints within
their own organizations.
The Company believes its target market for IT services is among middle-market companies, which typically lack the time and technical resources to satisfy all of their IT needs
internally. These companies commonly require sophisticated, experienced IT assistance to achieve their business objectives and often rely on IT service providers to help
implement and manage their systems. RCM is structured to provide middle-market companies a single source for their IT needs.
3
ITEM 1. BUSINESS (CONTINUED)
Business Strategy
RCM is dedicated to providing solutions to meet its clients’ business needs by delivering engineering, specialty health care, life sciences and information technology services.
The Company’s objective is to remain a recognized leader of specialized professional staffing, consulting services and solutions in major markets throughout North America.
The Company adapts operating strategies to achieve this objective. The following is a discussion of the key elements of its growth and operating strategies:
Growth Strategy
Promote Full Life Cycle Solution Capability
The Company promotes a full life cycle solution capability to its customers. The goal of the full life cycle solution strategy is to fully address a client’s project implementation
cycle at each stage of its development and deployment. This entails the Company working with its clients from the initial conceptualization of a project through its design and
project execution, and extending into ongoing management and support of the delivered product. RCM’s strategy is to build projects and solutions offerings selectively,
utilizing its extensive resource base.
The Company believes that the effective execution of this strategy will generate improved margins on its existing resources. The completion of this service-offering continuum is
intended to afford the Company the opportunity to strengthen long-term client relationships that will further contribute to a more predictable revenue stream.
In addition to a full life cycle solution offering, the Company continues to focus on transitioning into higher value oriented services in an effort to increase its margins on its
various service lines and generate revenue that is more sustainable. The Company believes this transition is accomplished by pursuing additional vertical market specific
solutions in conjunction or combination with longer-term based solutions, through expansion of its client relationships and by pursuing strategic alliances and partnerships.
Achieve Internal Growth
The Company continues to promote its internal growth strategies which it designed to better serve the Company’s customers, generate higher revenue and achieve greater
operating efficiencies. Every division of the Company continuously focuses on services and client diversification. Business units are collaborating on penetrating and servicing
accounts as sales teams are increasing their activity levels. This enables clients to be supported by specialists in their areas of need while RCM productivity increases.
RCM provides an orientation program in which sales managers and professionals receive relevant information about Company operations.
RCM has adopted an industry-centric approach to sales and marketing. This initiative contemplates that clients within the same industry sectors tend to have common business
challenges. It therefore allows the Company to present and deliver enhanced value to those clients in the vertical markets in which RCM has assembled the greatest work
experience. RCM’s consultants continue to acquire project experience that offers differentiated awareness of the business challenges that clients in that industry are facing. This
alignment also facilitates and creates additional cross-selling opportunities. The Company believes this strategy will lead to greater account penetration and enhanced client
relationships.
Operational strategies contributing to RCM’s internal productivity include the delineation of certain new solutions practice areas in markets where its clients had historically
known the Company as a contract service provider. The formation of these practice areas facilitates the flow of project opportunities and the delivery of project-based solutions.
4
ITEM 1. BUSINESS (CONTINUED)
Growth Strategy (Continued)
Pursue Selective Strategic Acquisitions
The industries in which the Company operates continue to be highly fragmented, and the Company plans to continue to selectively assess opportunities to make strategic
acquisitions as such opportunities are presented to the Company. The Company's acquisition strategy is designed to broaden the scope of services and technical competencies
and grow its full life cycle solution capabilities. In considering acquisition opportunities, the Company focuses principally on companies with (i) technologies or market
segments RCM has targeted for strategic value enhancement, (ii) margins that are accretive to existing margins, (iii) experienced management personnel, (iv) substantial growth
prospects and (v) sellers who desire to join the Company’s management team. To retain and provide incentives for management of its acquired companies, the Company has
generally structured a significant portion of the acquisition price in the form of multi-tiered consideration based on growth of operating profitability of the acquired company over
a two to four year period.
Operating Strategy
Develop and Maintain Strong Customer Relationships
The Company seeks to develop and maintain strong interactive customer relationships by anticipating and focusing on its customers’ needs. The Company emphasizes a
relationship-oriented approach to business, rather than the transaction or assignment-oriented approach that the Company believes is used by many of its competitors. This
industry-centric strategy is designed to allow RCM to expand further its relationships with clients in RCM’s targeted sectors.
To develop close customer relationships, the Company’s practice managers and/or sales people regularly meet with both existing and prospective clients to identify areas of
need and help design solutions and identify the resources needed to execute their strategies. The Company’s managers also maintain close communications with their customers
during each project and on an ongoing basis after its completion. The Company believes that this relationship-oriented approach can result in greater customer satisfaction.
Additionally, the Company believes that by collaborating with its customers in designing business solutions, it can generate new opportunities to cross-sell additional services
that the Company has to offer. The Company focuses on providing customers with qualified individuals or teams of experts compatible with the business needs of its customers
and makes a concerted effort to follow the progress of such relationships to ensure their continued success.
Attract and Retain Highly Qualified Consultants and Technical Resources
The Company believes it has been successful in attracting and retaining highly qualified consultants and contractors by (i) providing stimulating and challenging work
assignments, (ii) offering competitive wages, (iii) effectively communicating with its candidates, (iv) providing selective training to maintain and upgrade skills and (v) aligning
the needs of its customers with appropriately skilled personnel. The Company believes it has been successful in retaining these personnel due in part to its use of practice
managers who are dedicated to maintaining contact with, and monitoring the satisfaction levels of, the Company’s consultants and contractors while they are on assignment.
5
ITEM 1. BUSINESS (CONTINUED)
Engineering
RCM provides a full range of Engineering services including Project Management Engineering & Design, Engineering Analysis, Engineer-Procure-Construct, Configuration
Management, Hardware/Software Validation & Verification, Quality Assurance, Technical Writing & Publications, Manufacturing Process Planning & Improvement and 3D/BIM
Integrated Design. Engineering services are provided at the site of the client or at the Company’s own facilities.
The Company’s Engineering segment consists of three business units – Energy Services, Aerospace Services and Process & Industrial Services.
● Energy Services: Provides solutions to the utility industry, including power generation and transmission and distribution. The group has project experience that
encompasses multi-disciplined engineering and design services as well as providing technical support during design, construction and plant operational phases. The
Company believes that the deregulation of the utilities industry and the aging of nuclear power plants offer the Company an opportunity to capture a greater share of
professional services and project management requirements of the utilities industry. Electric utilities have prioritized transitioning their power generation assets to
cleaner sources of energy. This expansion requires large-scale investment in the nation’s transmission infrastructure to interconnect these renewable resources to the
energy grid.
● Aerospace Services: Provides engineering and technical services to the aerospace & defense industry. According to the Congressional Budget Office (“CBO”), the
Department of Defense plans to spend over $1 trillion in procurement-related aviation expenditures over the next three decades. Given RCM’s customer account
relationships with several of the largest defense prime contractors, the Company believes there is ample opportunity for engineering services and technical
publication work, including production and procurement engineering services as well as the need for sustainment and development program publication services.
● Process & Industrial Services: Provides engineering services to the industrial, chemical, commercial and oil and gas industries in the United States, Europe and
Canada. As the world’s industrial output rebounds from pandemic-related weakness in 2020 and 2021, the Company believes it is positioned well to take advantage.
With many companies in the chemical industry reprioritizing spending towards decarbonization technologies, many US chemical companies are expected to place an
emphasis on renewable feedstocks and new carbon recycling technologies. The Company believes its process engineering services can play a vital role across this
multibillion-dollar opportunity.
The Company provides its engineering services through a number of delivery methods. These include managed tasks and resources, complete project services, outsourcing,
both on and off-site, and a full complement of resourcing alternatives.
As of January 1, 2022, the Company assigned approximately 440 engineering and technical personnel to its customers.
6
ITEM 1. BUSINESS (CONTINUED)
Specialty Health Care
The Company’s Specialty Health Care Group specializes in long-term and short-term staffing as well as executive search and placement solutions for many of the largest
healthcare institutions and school districts across the United States. The segment’s portfolio of services includes, but is not limited to, the following fields:
● Allied and Therapy Staffing: Specializes in recruiting outstanding professionals across the health care industry. Our allied health care professionals and therapists
work in schools, health systems, hospitals, nursing homes, and rehabilitation facilities.
● Correctional Healthcare Staffing: Staffing services for local, state and federal correctional facilities and provide screening, onboarding, and employee assessments as
well as employee and inmate vaccination and treatment services.
● Health Information Management: Provide healthcare organizations with experienced medical coding professionals that manage staffing shortages, backlogs, vacation
coverage and long-term coding support.
● Nursing Services: Provides nurse placement and staffing services in healthcare facilities, schools, hospitals and correctional facilities.
● Physicians and Advanced Practice: Our national locum tenens (temporary practitioner) practice specializes in placing physicians, physician assistants and nurse
practitioners.
● School Services: Provides full-time and part-time nurse employment services for school districts across the country. The Company also offers other health care
professionals to perform school evaluations and treat students, including occupational and physical therapists, speech and language pathologists, as well as special
education support services and registered behavioral technicians to support students’ individualized education plan and behavioral health needs.
● Telepractice: RCM’s teletherapy solution is an evidence-based service delivery option for students to receive Special Education services such as Speech-Language
Therapy, Occupational Therapy, Physical Therapy, Behavioral and Mental Health services and other healthcare services through an online platform.
As the COVID-19 pandemic has demonstrated, maintaining the utilization of telemedicine remains critical to providing necessary access to care. Expanding access to behavioral
health and mental wellness services is also a priority for many public health officials. The Company’s School Services and Telepractice offerings are well positioned to provide
solutions in these areas of priority as the market opportunity for these services is expected to continue to grow.
As of January 1, 2022, the Company assigned approximately 2,950 specialty health care services personnel to its customers.
7
ITEM 1. BUSINESS (CONTINUED)
Life Sciences and Information Technology
The Company’s Life Sciences and Information Technology segment is an integrated group of business units providing staff supplementation services and project solutions with
physical locations in the United States, Canada and Puerto Rico primarily supporting Financial, Technical, Manufacturing, Life Sciences and Distribution applications.
Specialization in project solutions include, but are not limited to, the following areas:
● Life Sciences: Specializes in providing innovative options to pharmaceutical, medical device and biotechnology companies in need of guidance, support or
remediation of quality, compliance or business challenges. The group assists in staffing, solution planning and remediation needs in the areas of automation,
compliance, data analytics, technical quality assurance and management, and validation and verification.
● IT Services & Solutions: Global provider of business and technology solutions designed to improve the operational performance of our clients. Specialties include
software development, infrastructure services, and managed IT solutions. The Company has a 40-year history of providing qualified IT candidates to customers in a
timely and cost-effective manner to address their specific business needs. The Company offers scalable solutions that can provide emerging growth companies with a
single qualified resource or an entire project team along with RCM’s project management oversight to Fortune 100 clients.
RCM’s sector knowledge coupled with technical and business process experience enable the Company to provide strategic planning, project execution and management and
support services throughout the entire project life cycle. RCM has successfully completed multimillion-dollar projects in a variety of industry verticals using time-tested
methodologies that manage strict budgets, timelines and quality metrics.
The Company believes that its ability to deliver life sciences and information technology solutions across a wide range of technical platforms provides an important competitive
advantage. RCM ensures that its consultants have the expertise and skills needed to keep pace with rapidly evolving information technologies. The Company’s strategy is to
maintain expertise and acquire knowledge in multiple technologies so it can offer its clients non-biased technology solutions best suited to their business needs.
The Company provides its IT services through a number of flexible delivery methods. These include management consulting engagements, project management of client efforts,
project implementation of client initiatives, outsourcing, both on and off site, and a full complement of resourcing alternatives.
As of January 1, 2022, the Company assigned approximately 240 life sciences and information technology personnel to its customers.
8
ITEM 1. BUSINESS (CONTINUED)
Branch Offices
The Company’s organization consists of 25 branch offices located in the United States, Canada, Puerto Rico and Serbia. The locations and services of each of the branch offices
are set forth in the table below.
NUMBER OF
OFFICES
SERVICES
PROVIDED(1)
2
1
1
1
1
1
1
1
3
4
1
1
1
19
2
1
3
HC
E
HC
HC
HC
IT
IT
HC
E, IT
E, HC, IT
E
E
HC
E
E, IT
E, IT
LOCATION
UNITED STATES
California
Connecticut
Florida
Hawaii
Illinois
Maryland
Massachusetts
Michigan
New Jersey
New York
Pennsylvania
Rhode Island
Tennessee
CANADA
PUERTO RICO
SERBIA
(1) Services provided are abbreviated as follows:
E - Engineering
HC - Specialty Health Care
IT - Life Sciences and Information Technology
The Company is domiciled in the United States and its segments operate in the United States, Canada, Puerto Rico and Serbia.
International Operations
The Company operates its business in Canada and, to a less significant extent, in Puerto Rico and Serbia. For the fiscal year ended January 1, 2022, approximately 8.7% of the
Company’s revenues were generated outside the United States. There are certain risks inherent in conducting business internationally including: the imposition of trade barriers,
foreign exchange restrictions, longer payment cycles, greater difficulties in accounts receivables collection, difficulties in complying with a variety of foreign laws (including
without limitation the U.S. Foreign Corrupt Practices Act), changes in legal or regulatory requirements, difficulties in staffing and managing foreign operations, complex and
uncertain employment environments, political instability and potentially adverse tax consequences. Our operations in Serbia could be adversely affected by the current conflict
between Ukraine and Russia, with which Serbia has substantial ties. Should sanctions against Russia affect Russia in a way that causes adverse economic consequences to
Serbia, or if such sanctions were to be extended to countries that might be considered to be in alignment with Russia, thus could have a negative impact on our employees or
operations both within and outside Serbia. To the extent the Company experiences these risks, the business and results of operations could be adversely affected.
9
ITEM 1. BUSINESS (CONTINUED)
International Operations (Continued)
From its headquarters locations in New Jersey, the Company provides its branch offices with centralized administrative, marketing, finance, MIS, human resources and legal
support. Centralized administrative functions minimize the administrative burdens on branch office managers and allow them to spend more time focusing on sales and marketing
and practice development activities.
Branch offices are primarily located in markets that the Company believes have strong growth prospects for the Company’s services. The Company’s branches are operated in a
decentralized, entrepreneurial manner with most offices operating as independent profit centers.
Sales and Marketing
Sales and marketing efforts are conducted at the local and national level through the Company’s network of branch offices. Sales activities and productivity are tracked and
rankings established and published. Sales between business units are recognized and financially encouraged. The Company emphasizes long-term personal relationships with
customers that are developed through regular assessment of customer requirements and proactive monitoring of service performance. The Company’s sales personnel make
regular visits to existing and prospective customers. New customers are obtained through active sales programs and referrals. The Company encourages its employees to
participate in national and regional trade associations, local chambers of commerce and other civic associations. The Company seeks to develop strategic partnering
relationships with its customers by providing comprehensive solutions for all aspects of a customer’s engineering, life sciences, information technology and other professional
services needs. The Company concentrates on providing carefully screened professionals with the appropriate skills in a timely manner and at competitive prices. The Company
regularly monitors the quality of the services provided by its personnel and obtains feedback from its customers as to their satisfaction with the services provided.
The Company serves Fortune 1000 companies and many middle market clients. The Company’s relationships with these customers are typically formed at the customers’ local or
regional level and from time to time, when appropriate, at the corporate level for national accounts.
Key Customers
The Company has established long-term relationships with many of its customers across each of its business segments. RCM’s emphasis on client retention has resulted in
repeat business from many of its largest strategic accounts. During the fiscal year ended January 1, 2022, no client accounted for 10% or more of total revenues. The Company’s
five, ten and twenty largest customers accounted for approximately 35.8%, 52.5% and 65.1%, respectively, of the Company’s revenues for the fiscal year ended January 1, 2022.
10
ITEM 1. BUSINESS (CONTINUED)
Other Information
Safeguards - Business, Disaster and Contingency Planning
RCM has implemented a number of safeguards to protect the Company from various system-related risks including Redundant Telecommunications and server systems
architecture, multi-tiered server and desktop backup infrastructure, and data center physical and environmental controls. In addition, RCM has developed disaster recovery /
business continuity procedures for all offices.
Given the significant amount of data generated in the Company’s key processes including recruiting, sales, payroll and customer invoicing, RCM has established redundant
procedures, functioning on a daily basis, within the Company’s primary data center, which is a third-party Internet Data Center (“IDC”). This redundancy should mitigate the
risks related to hardware, application and data loss by utilizing the concept of live differential backups of servers and desktops to Storage Area Network (SAN) devices on its
backup LAN, culminating in offsite tape storage at an independent facility. Controls within the data center environment ensure that all systems are proactively monitored and
data is properly archived.
Additionally, RCM has contracted and brokered strategic relationships with third-party vendors to meet its recovery objectives in the event of a system disruption. For example,
comprehensive service level agreements for RCM’s data circuits and network devices guarantee minimal outages as well as network redundancy and scalability.
The Company’s ability to protect its data assets against damage from fire, power loss, telecommunications failures, and facility violations is critical. To address potential cyber
security threats, the Company uses a third-party mail management service to filter all emails destined for the RCMT domain before being delivered to the corporate mail servers.
The service has also been deployed to safeguard the enterprise from malicious internet content. The deployment of virus, spam, and patch management controls extends from the
perimeter network to all desktops and is centrally monitored and managed. In addition to the virus and malware controls, an Intrusion Protection System (IPS) monitors and alerts
on changes in network traffic patterns as well as known hostile signatures.
The Company maintains a disaster recovery plan that outlines the recovery time / point objectives (RTO / RPO), organization structure, roles and procedures, including site
addendum disaster plans for all of its key operating offices. Corporate IT personnel regulate the maintenance and integrity of backed-up data throughout the Company.
The IDC provides RCM with a robust data center environment with redundant HVAC, commercial power feeds, ten 2000kW diesel generator sets with five 10,000-gallon, above-
ground fuel oil storage tanks to provide standby power and dry pipe fire suppression. In addition, the IDC provides 24x7 security staffing, closed-circuit monitors, secure-card
key access, biometrics scanners, man traps, and alarmed doors.
11
ITEM 1. BUSINESS (CONTINUED)
Competition
The market for engineering and IT services is highly competitive and is subject to rapid change. As the market demand has shifted, many software companies have adopted
tactics to pursue services and consulting offerings making them direct competitors when in the past they may have been alliance partners. Primary competitors include
participants from a variety of market segments, including publicly and privately held firms, systems consulting and implementation firms, application software firms, service
groups of computer equipment companies, facilities management companies, general management consulting firms and staffing companies. In addition, the Company competes
with its clients’ internal resources, particularly where these resources represent a fixed cost to the client. Such competition may impose additional pricing pressures on the
Company.
The Company believes its principal competitive advantages in the engineering and IT services market include: strong relationships with existing clients, a long-term track record
with over 1,000 clients, a broad range of services, technical expertise, knowledge and experience in multiple industry sectors, quality and flexibility of service, responsiveness to
client needs and speed in delivering IT solutions.
Additionally, the Company competes for suitable acquisition candidates based on its differentiated acquisition model, its entrepreneurial and decentralized operating philosophy,
and its strong corporate-level support and resources.
Seasonality
The Company’s operating results can be affected by the seasonal fluctuations in client expenditures. Expenditures in the Engineering, Life Sciences and Information Technology
segments can be negatively impacted during the first quarter of the year when clients are finalizing their budgets. Quarterly results generally fluctuate depending on, among
other things, the number of billing days in a quarter and the seasonality of clients’ businesses. The business is also affected by the timing of holidays and seasonal vacation
patterns, generally resulting in lower revenues and gross profit in the fourth quarter of each year, not considering any non-seasonal impact. Extreme weather conditions may also
affect demand in the first and fourth quarters of the year as certain clients’ facilities are located in geographic areas subject to closure or reduced hours due to inclement weather.
The Company generally experiences an increase in its cost of sales and a corresponding decrease in gross profit and gross margin percentage in the first and second fiscal
quarters of each year as a result of resetting certain state and federal employment tax rates and related salary limitations. Also, the Company’s Specialty Health Care segment
typically experiences a significant decline in revenues due to the substantial closure of one of its largest customers, the New York City Department of Education, and other
educational institution clients during the third quarter due to their summer recess.
Government Regulations
The Company is a consulting firm and employment service provider and is generally subject to one or more of the following types of government regulation: (1) regulation of the
employer/employee relationship between a firm and its employees, including tax withholding or reporting, social security or retirement, benefits, workplace compliance, wage and
hour, anti-discrimination, immigration and workers’ compensation, (2) registration, licensing, record keeping and reporting requirements, and (3) federal contractor compliance.
The Company believes it is in material compliance with all employee related statutes.
12
ITEM 1. BUSINESS (CONTINUED)
Intellectual Property
Management believes the RCM Technologies, Inc. name is extremely valuable and important to its business. The Company endeavors to protect its intellectual property rights
and maintain certain trademarks, trade names, service marks and other intellectual property rights, including The Source of Smart Solutions®. The Company is not currently
aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect the Company’s use of its proprietary rights.
Workforce
As of January 1, 2022, the Company employed an administrative, sales, recruiting and management staff of approximately 250 people, including licensed engineers and certified IT
specialists who, from time to time, participate in engineering design and IT projects undertaken by the Company. As of January 1, 2022, there were approximately 440 engineering
and technical personnel, 2,950 specialty health care services personnel and 240 life sciences and information technology personnel assigned by the Company to work on client
projects or assignments for various periods. None of the Company’s employees are party to a collective bargaining agreement.
Access to Company Information
The Company is a Nevada corporation organized in 1971. The address of its principal executive office is 2500 McClellan Avenue, Suite 350, Pennsauken, NJ 08109-4613.
RCM electronically files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and
Exchange Commission (“SEC”). The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxies, information statements, and other information regarding
issuers that file electronically.
RCM makes available on its website or by responding free of charge to requests addressed to the Company’s Corporate Secretary, its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed by the Company with the SEC pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The
Company’s website is http://www.rcmt.com. The information contained on the Company’s website, or on other websites linked to the Company’s website, is not part of this
document. Reference herein to the Company’s website is an inactive text reference only.
RCM has adopted a Code of Conduct applicable to all of its directors, officers and employees. In addition, the Company has adopted a Code of Ethics, within the meaning of
applicable SEC rules, applicable to its Chief Executive Officer, Chief Financial Officer and Controller. Both the Code of Conduct and Code of Ethics are available, free of charge, by
sending a written request to the Company’s Corporate Secretary. If the Company makes any amendments to either of these Codes (other than technical, administrative, or other
non-substantive amendments), or waives (explicitly or implicitly) any provision of the Code of Ethics to the benefit of its Chief Executive Officer, Chief Financial Officer or
Controller, it intends to disclose the nature of the amendment or waiver, its effective date and to whom it applies in the investor relations portion of the website, or in a report on
Form 8-K filed with the SEC.
13
ITEM 1A. RISK FACTORS
The Company’s business involves a number of risks, some of which are beyond its control. The risk and uncertainties described below are not the only ones the Company
faces. Set forth below is a discussion of the risks and uncertainties that management believes to be material to the Company.
Economic Trends
Adverse global economic conditions, when they occur, may create conditions such as a general tightening in the credit markets, lower levels of liquidity, increases in the rates of
default and bankruptcy, and volatility in credit, equity and fixed income markets. Any or all of these developments can negatively affect the Company’s business, operating
results or financial condition in a number of ways. For example, current or potential customers may be unable to fund capital spending programs, new product launches of other
similar endeavors whereby they might procure services from the Company, and therefore delay, decrease or cancel purchases of services or not pay or delay paying for
previously purchased services. In addition, these conditions may cause the Company to incur increased expenses or make it more difficult either to utilize existing debt capacity
or otherwise obtain financing for operations, investing activities (including the financing of any future acquisitions), or financing activities, all of which could adversely affect
the Company’s business, financial condition and results of operations.
Global Epidemics
The ongoing COVID-19 pandemic, and associated initiatives to reduce its spread, have adversely affected the Company’s business and financial position, and may continue to
do so. The impacts described in this risk factor as relating to COVID-19 could arise in the future with respect to any other global pandemics that may occur.
Our business has been, and may continue to be, adversely impacted by the effects of the COVID-19 pandemic. As COVID-19 continues to present various health, business and
other challenges globally, including significant impacts in the United States, we are taking a variety of measures to protect the health and safety of our employees and, especially
in the healthcare segment, deploying our resources, including the talents of our employees, to help the communities we serve meet and overcome the current challenges.
However, public and private sector policies and initiatives to reduce the transmission of COVID-19, such as closures of schools, businesses and manufacturing facilities, the
promotion of social distancing, the adoption of working from home by companies and institutions, and travel restrictions could continue to adversely affect demand for our
services and to present challenges to us in delivering these services. The extent to which COVID-19 impacts operations will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the pandemic and the
actions to contain COVID-19 or treat its impact, among others. These impacts on our business could have an adverse effect on our liquidity position and access to capital,
including our ability to access our line of credit. The Company can give no assurance that the line of credit will be available in the future.
These factors, in addition to delays in payment (from clients and/or clients in bankruptcy), have resulted in, and could continue to result in, significant additional bad debts in the
near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs, materials, supplies and
equipment used in performing services (including the impact of potential tariffs and COVID-19) could not be passed on to our clients.
In addition, we believe that to maintain or improve our financial performance we must continue to obtain service agreements with new clients, retain and provide new services to
existing clients, achieve modest price increases on current service agreements with existing clients and/or maintain internal cost reduction strategies at our various operational
levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the
successful execution of our projected growth strategies. Certainly, the ongoing COVID-19 pandemic makes these objective more difficult to attain.
14
ITEM 1A. RISK FACTORS (CONTINUED)
Government Regulations
Staffing firms and employment service providers are generally subject to one or more of the following types of government regulation: (1) regulation of the employer/employee
relationship between a firm and its employees, including tax withholding or reporting, social security or retirement, benefits, workplace compliance, wage and hour, anti-
discrimination, immigration and workers’ compensation; (2) registration, licensing, record keeping and reporting requirements; and (3) federal contractor compliance. Failure to
comply with these regulations could result in the Company incurring penalties and other liabilities, monetary and otherwise.
Highly Competitive Business
The staffing services and outsourcing markets are highly competitive and have limited barriers to entry. RCM competes in global, national, regional, and local markets with
numerous temporary staffing and permanent placement companies. Price competition in the staffing industry is significant and pricing pressures from competitors and customers
are increasing. In addition, there is increasing pressure on companies to outsource certain areas of their business to low cost offshore outsourcing firms. RCM expects that the
level of competition will remain high in the future, which could limit RCM’s ability to maintain or increase its market share or profitability. Our inability to compete successfully
with our competitors could adversely affect the Company’s business, financial condition and results of operations.
Seasonality of Business
As described in “Item 1. Business,” our operating results are subject to seasonal fluctuations, with reduced demand often occurring during the first quarter of the year when
clients are finalizing their engineering and IT budgets, and also during periods in which there are a substantial amount of holidays and season vacations. In particular, one of the
largest customers in our Specialty Health Care group, the New York City Department of Education, significantly reduces activity during the third quarter, when schools are closed
for summer recess. Our operating results for any given period may fluctuate as a result of the timing of holidays, vacations and other events, and if we were to experience
unfavorable performance during periods in which we would otherwise expect to have high seasonal demand, we may have limited ability to make up for such performance during
periods of seasonally lower demand.
Events Affecting Significant Customers
As disclosed in “Item 1. Business,” the Company’s five, ten and twenty largest customers accounted for approximately 35.8%, 52.5% and 65.1%, respectively, of revenues for the
fiscal year ended January 1, 2022. During the fiscal year ended January 1, 2022, no client accounted for 10% or more of total revenues. The Company’s customers may be
affected by the current state of the economy or developments in the credit markets or may engage in mergers or similar transactions. In addition, customers may choose to
reduce the business they do with RCM for other reasons or no reason. The Company could also be materially impacted by actions of prime contractors whereby the Company
derives revenues through a subcontractor relationship. Should any significant customers experience a downturn in their business that weakens their financial condition or merge
with another company or otherwise cease independent operation, or limit their relationship with us, it is possible that the business that the customer does with the Company
would be reduced or eliminated, which could adversely affect the Company’s business, financial condition and results of operations.
15
ITEM 1A. RISK FACTORS (CONTINUED)
Safety Concerns Regarding Nuclear Power Plants; Limitations on Insurance
New and existing concerns are being expressed in public forums about the safety of nuclear generating units and nuclear fuel. Among other things, these concerns have led to,
and are expected to continue to lead to, various proposals to regulators and governing bodies in some localities where nuclear facilities are located for legislative and regulatory
changes that could lead to the shut-down of nuclear units, denial of license renewal applications, municipalization of nuclear units, restrictions on nuclear units or other adverse
effects on owning and operating nuclear generating units. Should these concerns or proposals lead to a diminishment of or reduced growth in the nuclear power industry, the
Company’s Engineering segment, which has a focus on the nuclear power industry, could be harmed, and the Company’s business, financial condition and results of operations
could be materially adversely affected.
In addition, our liability insurance does not cover accidents occurring at nuclear power facilities. Should we be found to be responsible for such an event, we may not be able to
cover relating damages, and our business would be adversely affected.
Subcontractors, Transit Accounts Receivable and Transit Accounts Payables Related to Construction Management Contracts
The Company’s Engineering segment has entered into arrangements to provide construction management and engineering services to customers under which arrangements the
Company then engages subcontractors to provide the construction services. Ultimately, as a primary contractor, the Company is responsible for the nonperformance or
negligence of its subcontractors, whom the Company requires to be adequately insured and to issue performance bonds for their assignment. Should a subcontractor not
perform or act negligently and should there be inadequate insurance or performance bonds in place, the Company might not be able to mitigate its primary liability to the
customer, and the Company’s business, financial condition and results of operations could be materially adversely affected. In addition, while payments to subcontractors
typically are due from the Company only after the Company receives payment from the ultimate customer, the Company faces the risk that, should a customer not pay the
Company, or should a subcontractor demand payment from the Company prior to the Company’s receipt of payment from its customer, the Company’s business, financial
condition and results of operations could be materially adversely affected.
Dependence Upon Personnel
The Company’s operations depend on the continued efforts of its officers and other executive management. The loss of key officers and members of executive management may
cause a significant disruption to the Company’s business.
RCM also depends on the performance and productivity of its local managers and field personnel. The Company’s ability to attract and retain new business is significantly
affected by local relationships and the quality of service rendered. The loss of key managers and field personnel may also jeopardize existing client relationships with businesses
that continue to use the Company’s services based upon past relationships with local managers and field personnel. In order to fulfill the requirements of the Company’s
customers, the Company must be able to recruit and retain appropriate personnel for client assignments.
16
ITEM 1A. RISK FACTORS (CONTINUED)
Revolving Credit Facility and Liquidity
If the Company were unable to borrow under its Revolving Credit Facility (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources – Financing Activities”), it may adversely affect liquidity, results of operations and financial condition. The Company’s liquidity
depends on its ability to generate sufficient cash flows from operations and, from time to time, borrowings under the Revolving Credit Facility with the Company’s agent lender
Citizens Bank of Pennsylvania. The Company believes that Citizens Bank is liquid and is not aware of any current risk that they will become illiquid. At January 1, 2022, the
Company had $14.2 million in borrowings under the Revolving Credit Facility outstanding and $1.9 million outstanding under letters of credit, with availability for additional
borrowings under the Revolving Credit Facility of $28.9 million.
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i)
LIBOR (London Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter
durations. At the option of Citizens Bank, LIBOR can be replaced with SOFR (Secured Overnight Financing Rate). The LIBOR alternative is being phased out in 2022. Citizens
Bank has not indicated when this switch will occur, but in any event, the Company does not believe there will be any material impact on its borrowing rate.
The Revolving Credit Facility contains various financial and non-financial covenants. At January 1, 2022, the Company was in compliance with the covenants and other
provisions of the Credit Facility. Any failure to be in compliance could have a material adverse effect on liquidity, results of operations and financial condition.
Foreign Currency Fluctuations and Changes in Exchange Rates
The Company is exposed to risks associated with foreign currency fluctuations and changes in exchange rates. RCM’s exposure to foreign currency fluctuations relates to
operations in Canada and Serbia, principally conducted through its Canadian and Serbian subsidiaries. Exchange rate fluctuations affect the United States dollar value of
reported earnings derived from the Canadian operations as well as the carrying value of the Company’s investment in the net assets related to these operations. The Company
does not engage in hedging activities with respect to foreign operations.
Changes in Tax Laws
At any time, United States federal tax laws or the administrative interpretations of those laws may be changed. As a result, changes in United States federal tax laws could
negatively impact our operating results, financial condition and business operations, and adversely impact the Company’s shareholders. At any time, tax laws in the Company’s
other jurisdictions, Canada, Puerto Rico and Serbia, may also change. These tax law changes may have a material impact on the Company’s income tax expense.
Workers’ Compensation and Employee Medical Insurance
The Company self-insures a portion of the exposure for losses related to workers’ compensation and employees’ medical insurance. The Company has established reserves for
workers’ compensation and employee medical insurance claims based on historical loss statistics and periodic independent actuarial valuations. Significant differences in actual
experience or significant changes in assumptions may materially affect the Company’s future financial results.
17
ITEM 1A. RISK FACTORS (CONTINUED)
Improper Activities of Temporary Professionals Could Result in Damage to Business Reputation, Discontinuation of Client Relationships and Exposure to Liability
The Company may be subject to claims by clients related to errors and omissions, misuse of proprietary information, discrimination and harassment, theft and other criminal
activity, malpractice, and other claims stemming from the improper activities or alleged activities of temporary professionals. There can be no assurance that current liability
insurance coverage will be adequate or will continue to be available in sufficient amounts to cover damages or other costs associated with such claims.
Claims raised by clients stemming from the improper actions of temporary professionals, even if without merit, could cause the Company to incur significant expense associated
with rework costs or other damages related to such claims. Furthermore, such claims by clients could damage the Company’s business reputation and result in the
discontinuation of client relationships.
Acquisitions May Not Succeed
The Company reviews prospective acquisitions as an element of its growth strategy. The failure of any acquisition to meet the Company’s expectations, whether due to a failure
to successfully integrate any future acquisition or otherwise, may result in damage to the Company’s financial performance and/or divert management’s attention from its core
operations or could negatively affect the Company’s ability to meet the needs of its customers promptly.
International Operations
The Company operates its business in Canada and, to a less significant extent, in Puerto Rico and Serbia. For the fiscal year ended January 1, 2022, approximately 8.7% of the
Company’s revenues were generated outside the United States. There are certain risks inherent in conducting business internationally including: the imposition of trade barriers,
foreign exchange restrictions, longer payment cycles, greater difficulties in accounts receivables collection, difficulties in complying with a variety of foreign laws (including
without limitation the U.S. Foreign Corrupt Practices Act), changes in legal or regulatory requirements, difficulties in staffing and managing foreign operations, complex and
uncertain employment environments, political instability and potentially adverse tax consequences. Our operations in Serbia could be adversely affected by the current conflict
between Ukraine and Russia, with which Serbia has substantial ties. Should sanctions against Russia affect Russia in a way that causes adverse economic consequences to
Serbia, or if such sanctions were to be extended to countries that might be considered to be in alignment with Russia, this could have a negative impact on our employees or
operations both within and outside Serbia. To the extent the Company experiences these risks, the business and results of operations could be adversely affected.
Trademarks
Management believes the RCM Technologies, Inc. name is extremely valuable and important to its business. The Company endeavors to protect its intellectual property rights
and maintain certain trademarks, trade names, service marks and other intellectual property rights, including The Source of Smart Solutions®. The Company is not currently
aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect the Company’s use of its proprietary rights. The Company’s
success depends on its ability to successfully obtain and maintain, and prevent misappropriation or infringement of, its intellectual property, maintain trade secret protection, and
conduct operations without violating or infringing on the intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming, and it is
often difficult, if not impossible, to predict the outcome of such litigation. If the Company is involved in an intellectual property litigation, its business, financial condition and
results of operations could be materially adversely affected.
18
ITEM 1A. RISK FACTORS (CONTINUED)
Data Center Capacity and Telecommunication Links
Uninterruptible Power Supply (UPS), card key access, fire suppression, and environmental control systems protect RCM’s datacenter. All systems are monitored on a 24/7 basis
with alerting capabilities via voice or email. The telecommunications architecture at RCM utilizes managed private circuits from AT&T, which encompasses provisioning
redundancy and diversity.
The Company’s ability to protect its data center against damage from fire, power loss, telecommunications failure and other disasters is critical to business operations. In order
to provide many of its services, RCM must be able to store, retrieve, process and manage large databases and periodically expand and upgrade its capabilities. Any damage to
the Company’s data centers or any failure of the Company’s telecommunication links that interrupts its operations or results in an inadvertent loss of data could adversely affect
the Company’s ability to meet its customers’ needs and their confidence in utilizing the Company for future services.
RCM’s ability to protect its data, provide services and safeguard its installations, as it relates to the IT infrastructure, is in part dependent on several outside vendors with whom
the Company maintains service level agreements.
Cyber Security
We are highly dependent on information technology systems to operate our business. A breakdown, invasion, corruption, destruction or interruption of critical information
technology systems by employees, others with authorized access to our systems or unauthorized persons could negatively impact operations. In the ordinary course of
business, we collect, store and transmit confidential information and it is critical that we do so in a secure manner to maintain the confidentiality and integrity of such
information. Additionally, we outsource certain elements of our information technology systems to third parties. As a result of this outsourcing, our third party vendors may or
could have access to our confidential information making such systems vulnerable. Data breaches of our information technology systems, or those of our third party vendors,
may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we believe that we have taken appropriate security measures to protect our
data and information technology systems, and have been informed by our third party vendors that they have as well, there can be no assurance that our efforts will prevent
breakdowns or breaches in our systems, or those of our third party vendors, that could adversely affect our business.
Data Privacy
We control, process, or have access to personal information regarding our own employees or employment candidates, as well as that of many of our customers or other third
parties. Information concerning these individuals may also reside in systems controlled by third party vendors with whom we do business. The legal and regulatory environment
concerning data privacy is becoming more complex and challenging, and the potential consequences of non-compliance have become more severe. The European Union’s
General Data Protection Regulation, the California Consumer Privacy Act, the Health Insurance Portability and Accountability Act of 1996 and similar laws impose additional
compliance requirements related to the collection, use, processing, transfer, disclosure, and retention of personal information, which can increase operating costs and resources
to accomplish. Any failure to abide by these regulations or to protect such personal information from inappropriate access or disclosure, whether through social engineering or
by accident or other cause, could have severe consequences including fines, litigation, regulatory sanctions, reputational damage, and loss of customers or employees. There
can be no assurance that the steps we take to abide by applicable requirements and protect information will meet all current and future regulatory requirements, anticipate all
potential methods of unauthorized access, or prevent all inappropriate disclosures. Any failures to do so could result in governmental enforcement actions, fines, and other
penalties, or other liabilities, that could adversely affect our business.
19
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The Company provides specialty professional consulting services, principally performed at various client locations, through 25 administrative and sales offices located in the
United States, Puerto Rico, Canada and Serbia. The majority of the Company’s offices typically consist of 1,000 to 13,000 square feet and are typically leased by the Company for
terms of one to five years. Offices in larger or smaller markets may vary in size from the typical office. The Company does not expect that it will be difficult to maintain or find
suitable lease space at reasonable rates in its markets or in areas where the Company contemplates expansion.
The Company’s executive office is located at 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613. These premises consist of approximately 3,500 square feet
and are leased at a rate of approximately $15.00 per square foot per annum for a term ending on November 30, 2025.
The Company’s operational office is located at 20 Waterview Boulevard, 4th Floor, Parsippany, NJ 07054-1271. These premises consist of approximately 9,200 square feet and are
leased at a rate of approximately $24.95 per square foot per annum for a term ending on January 31, 2024.
20
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the ordinary business course. These matters may relate to professional liability, tax,
compensation, contract, competitor disputes, and employee-related matters and include individual and class action lawsuits, as well as inquiries and investigations by
governmental agencies regarding the Company’s employment and compensation practices. Additionally, some of the Company’s clients may also become subject to claims,
governmental inquiries and investigations, and legal actions relating to the Company’s professional services. Depending upon the particular facts and circumstances, the
Company may also be subject to indemnification obligations under its contracts with such clients relating to these matters.
As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of losses and possible recoveries. The Company
may not be covered by insurance as it pertains to some or all of these matters. A determination of the amount of the provision required for these commitments and
contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The Company records a liability when management believes an adverse
outcome from a loss contingency is both probable and the amount, or a range, can be reasonably estimated. From time to time, the Company must estimate the potential loss even
though the party adverse to the Company has not asserted any specific amounts. Significant judgment is required to determine both probability of loss and the estimated
amount. The Company reviews its loss contingencies at least quarterly and adjusts its accruals and/or disclosures to reflect the impact of negotiations, settlements, rulings,
advice of legal counsel, or other new information, as deemed necessary. Once established, a provision may change in the future due to new developments or changes in
circumstances and could increase or decrease the Company’s earnings in the period that the changes are made.
The Company is exposed to various asserted claims as of January 1, 2022, where the Company believes it has a probability of loss. Additionally, the Company is exposed to other
asserted claims whereby an amount of loss has not been declared, and the Company cannot determine the potential loss. Any of these various claims could result in an
unfavorable outcome or settlement that exceeds the accrued amounts. However, the Company believes that such matters will not, either individually or in the aggregate, have a
material adverse effect on its business, consolidated financial position, results of operations, or cash flows. As of January 1, 2022, the Company has accrued $2.9 million for
asserted claims. Included in the January 1, 2022 accrual of $2.9 million, the Company has reserved $1.6 million for the settlement of a class-action suit in California that alleges the
Company did not properly pay its travel nurses overtime wages. While the Company believes it did not violate any overtime wage laws, it decided to settle this class action
lawsuit in December 2020. The Company paid the $1.6 million settlement in early January 2022.
The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by
insurance.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
21
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of the Company’s common stock are traded on The NASDAQ Global Market under the Symbol “RCMT.”
Holders
PART II
As of February 11, 2022, the approximate number of holders of record of the Company’s Common Stock was 280 and the number of beneficial owners of its Common Stock was
approximately 5,110.
Dividends
No dividends were declared in fiscal 2020 or fiscal 2021. All restricted share awards contain a dividend equivalent provision entitling holders to dividends paid between the
restricted stock unit grant date and ultimate share distribution date. As of January 1, 2022, there were no accrued dividends.
While the Company, at this time, has no plans to issue any future dividends, any future payment of dividends will depend upon, among other things, the Company’s earnings,
financial condition, capital requirements, level of indebtedness, contractual restrictions, and other factors that the Board of Directors deems relevant. The Revolving Credit
Facility (as discussed in Item 7 hereof) prohibits the payment of any dividends or distributions on account of the Company’s capital stock without the prior consent of the
majority of the Company’s lenders.
Stock Repurchase by Issuer
On January 13, 2021, the Company’s Board of Directors authorized a program to repurchase shares of the Company’s common stock constituting, in the aggregate, up to an
amount not to exceed $7.5 million. On November 12, 2021, the Company’s Board of Directors further increased the total amount available to repurchase shares up to an amount
not to exceed $19.1 million (including the initial $7.5 million authorized), consistent with the maximum limitation set forth by the Company’s revolving line of credit. The program is
designed to provide the Company with enhanced flexibility over the long term to optimize its capital structure. Shares of the common stock may be repurchased in the open
market or through negotiated transactions. All of the repurchases were conducted under the safe harbor from liability under certain market manipulation rules provided by Rule
10b-18 under the Securities Exchange Act of 1934, as amended. The program may be terminated or suspended at any time at the discretion of the Company.
The following table provides information relating to the shares we purchased during the fourth quarter of the fiscal year ended January 1, 2022:
Period
October 3, 2021 –
October 31, 2021
November 1, 2021 –
November 30, 2021
December 1, 2021 –
January 1, 2022
Total
Total Number
of Shares
Purchased
Weighted Average
Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Program
260,577 $
273,005 $
239,610 $
773,192 $
22
5.89
6.54
6.57
6.33
260,577 $
13,465,000
533,582 $
11,679,000
773,192 $
773,192 $
10,104,000
10,104,000
ITEM 6.
RESERVED
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COVID-19 Considerations
The Company’s priorities during the COVID-19 pandemic are protecting the health and safety of our employees and, especially in the healthcare segment, deploying our
resources, including the talents of our employees, to help the communities we serve meet and overcome the current challenges. In the future, the pandemic may cause reduced
demand for our services if, for example, the pandemic results in a prolonged recessionary economic environment affecting industries in which we serve; however, since certain
services that we offer are essential to the daily lives of our customers, we believe that over the long term, there will continue to be demand for our services.
Our ability to continue to operate without any significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees
and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees, with particular measures
in place for those working in our customer facilities. While our revenue, gross profit and operating income were negatively impacted in fiscal 2020 on a consolidated basis and in
fiscal 2021 for certain business lines, we have maintained the consistency of our operations, to a substantial degree, from the onset of the COVID-19 pandemic. We intend to
continue to adhere to our employee safety measures as we seek to ensure that any disruptions to our operations remain as limited as possible during the pandemic. However, the
uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example, an inability of a key supplier or transportation
supplier to source and transport materials) that could negatively impact our operations. Any material changes to labor rates for the Company’s workforce may have a material
negative impact to revenue, gross profit and operating income.
For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-K.
For additional information on how COVID-19 has impacted operations and our financial position, please refer to the Segment Discussion and Liquidity and Capital Resources
sections in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23
ITEM 7.
Overview
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on revenue and operations can be
substantial, resulting in significant volatility in the Company’s financial performance.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to present various health, business and
other challenges throughout the United States. As a result, we have temporarily closed or reduced most of our office locations, with much of our workforce working from home,
and have seen a reduction in customer demand to certain business lines. The duration and ultimate magnitude of the disruption remains uncertain. Therefore, we experienced a
negative impact on a consolidated basis during fiscal 2020 and to certain business lines during fiscal 2021, and this matter may continue to negatively impact our business,
results of operations, and financial position throughout fiscal 2022 and possibly beyond, and the related financial impact cannot be reasonably estimated at this time. Please see
more detailed disclosure by segment in our Segment Discussion and the impact to our consolidated financial position under Financial Activities under Liquidity and Capital
Resources, all in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Company believes it has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility and built an efficient
pricing structure. The Company is committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical
focus offering an integrated suite of services through a global delivery platform.
The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today’s business climate. However, the
process of designing, developing and implementing business and technology solutions is becoming increasingly complex. The Company believes that many businesses today
are focused on return on investment analysis in prioritizing their initiatives. This has had an adverse impact on spending by current and prospective clients for many emerging
new solutions.
Nonetheless, the Company continues to believe that businesses must implement more advanced life sciences, information technology and engineering solutions to upgrade their
systems, applications and processes so that they can maximize their productivity and optimize their performance in order to maintain a competitive advantage. Although working
under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications and processes of significant strategic value.
This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business
critical systems, applications and processes.
The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The
billing rates and profit margins for project management and solutions services are generally higher than those for professional consulting services. The Company generally
endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes revenue from client engagements that range from the
placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the
client at hourly rates that are established for each of the Company’s consultants based upon their skill level, experience and the type of work performed.
24
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Overview (Continued)
The majority of the Company’s services are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for
longer terms or where precise documentation on the nature and scope of the assignment is necessary. Although contracts normally relate to longer-term and more complex
engagements, they do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days’ notice. The Company,
from time to time, enters into contracts requiring the completion of specific deliverables. Typically these contracts are for less than one year. The Company recognizes revenue
on these deliverables at the time the client accepts and approves the deliverables.
Costs of services consist primarily of salaries and compensation-related expenses for billable consultants and employees, including payroll taxes, employee benefits and
insurance. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating
activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities,
including the Company’s corporate marketing, administrative and financial reporting responsibilities and acquisition program. The Company records these expenses when
incurred. Corporate overhead expenses are allocated to the segments based on revenue for the purpose of segment financial reporting.
Critical Accounting Policies and Use of Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP
requires us 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
financial statements and the reported amount of revenue and expenses during the reporting period. In our consolidated financial statements, estimates are used for, but not
limited to, accounts receivable and allowance for doubtful accounts, goodwill, long-lived intangible assets, accounting for stock options and restricted stock awards, insurance
liabilities, accounting for income taxes and accrued bonuses.
Revenue Recognition
The Company records revenue under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Revenue is recognized when we satisfy a
performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those
services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance
obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as)
each performance obligation is satisfied.
The Company derives its revenue from several sources. The Company’s Engineering Services, Life Sciences and Information Technology segments perform consulting and
project solution services. The Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care facilities
amongst others. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s
revenue is invoiced on a time and materials basis.
25
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue Recognition (Continued)
The following table presents our revenues disaggregated by revenue source for the fifty-two week period ended January 1, 2022 and fifty-three week period ended January 2,
2021:
Engineering:
Time and Material
Fixed Fee
Permanent Placement Services
Total Engineering
Specialty Health Care:
Time and Material
Permanent Placement Services
Total Specialty Health Care
Life Sciences and Information Technology:
Time and Material
Permanent Placement Services
Total Life Sciences and Information Technology
January 1,
2022
January 2,
2021
$
$
$
$
$
$
$
45,035 $
21,070
67
66,172 $
97,363 $
1,132
98,495 $
38,571 $
637
39,208 $
203,875 $
43,359
14,145
211
57,715
59,692
789
60,481
31,723
490
32,213
150,409
Time and Material
The Company’s IT and Healthcare segments predominantly recognize revenue through time and material work while its Engineering segment recognizes revenue through both
time and material and fixed fee work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore
revenue associated with these time and materials contracts are recognized based on hours worked at contracted rates.
Fixed Fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has
master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered
under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span several years,
the Company’s fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-price basis, revenue
is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract.
Revenue under these arrangements are recognized as the costs on these contracts are incurred. From time-to-time, amounts paid in excess of revenue earned and recognized are
recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying consolidated balance sheets. Additionally, some contracts contain
“Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenue and billings to
specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable and the
work is not complete and the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is
recognized.
26
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue Recognition (Continued)
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. These fees are typically based on a percentage of the compensation paid to the
person placed with the Company’s client.
There was $3.4 million of deferred revenue as of January 1, 2022. Deferred revenue was $0.4 million as of January 2, 2021. Revenue is recognized when the service has been
performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet. In each of the fifty-two week period ended
January 1, 2022 and the fifty-three week period ended January 2, 2021, the Company recognized revenue of $0.4 million, that was included in deferred revenue at the beginning of
the reporting period.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is
not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts.
Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length
of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such
receivables previously written off are credited to bad debt expense.
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with ASC Topic 350 “Intangibles - Goodwill and Other - Testing Indefinite-Lived
Intangible Assets for Impairment” (“ASC Topic 350”). The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each
year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount. The Company has three reporting
units. The Company uses a market-based approach to determine the fair value of the reporting units. This approach uses earnings/revenue multiples of similar companies
recently completing acquisitions and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units. The Company adopted Accounting
Standards Update (“ASU”) 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” effective December 29, 2018 which has
eliminated Step 2 from the goodwill impairment test. Under this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount.
There was no goodwill impairment in fiscal 2021 or 2020. During all periods presented, the Company determined that the existing qualitative factors did not suggest that an
impairment of goodwill exists. There can be no assurance that future indicators of impairment and tests of goodwill impairment will not result in impairment charges for both its
Engineering and Specialty Healthcare segments.
Long-Lived and Intangible Assets
The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying
amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell.
27
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Accounting for Restricted Stock Awards
The Company uses restricted stock awards to attract, retain and reward employees for long-term service. The Company follows Financial Accounting Standards Board (FASB),
Accounting Standards Codification (ASC) Topic 718 “Compensation – Stock Compensation” which requires that the compensation cost relating to stock-based payment
transactions be recognized in the financial statements. This compensation cost is measured based on the fair value of the equity or liability instruments issued. The Company
measures stock-based compensation cost using the Black-Scholes option pricing model for stock options and the fair value of the underlying common stock at the date of grant
for restricted stock awards.
Insurance Liabilities
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The Company establishes loss provisions based on historical
experience and in the case of expected losses from workers compensation, considers input from third parties. The amounts included in the Company’s costs related to this risk
participation are estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance programs.
Accounting for Income Taxes
In establishing the provision for income taxes and deferred income tax assets and liabilities and valuation allowances against deferred tax assets, the Company makes judgments
and interpretations based on enacted tax laws, published tax guidance and estimates of future earnings. As of January 1, 2022, the Company had both domestic and foreign net
deferred tax assets of $0.4 million. The domestic long term net deferred tax assets of $0.5 million includes $3.4 million in deferred assets offset by $2.9 million in deferred tax
liabilities. The domestic deferred tax assets consist of a net operating loss carryforward of $1.2 million, lease liabilities of $0.8 million and various deferred expense accruals and
reserves of $0.8 million. The deferred tax liabilities consist of acquisition amortization of $1.4 million, prepaid expenses of $0.6 million and advance depreciation deductions of $0.4
million. The realization of deferred tax assets is dependent upon the likelihood that future taxable income will be sufficient to realize these benefits over time, and the
effectiveness of tax planning strategies in the relevant tax jurisdictions. If actual results differ from these estimates and assessments, valuation allowances may be required. The
Company also had $0.1 million in foreign net deferred tax liabilities as of January 1, 2022.
The Company conducts its operations in multiple tax jurisdictions in the United States, Canada, Puerto Rico and Serbia. The Company and its subsidiaries file a consolidated
United States Federal income tax return and file in various states. The Company’s federal income tax returns have been examined through 2017. The Company has no open
Federal audits as of January 1, 2022. Except for limited exceptions, the Company is no longer subject to audits by state and local tax authorities for tax years prior to 2018. The
Company is no longer subject to audit in Canada for the tax years prior to tax year 2017. The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax
year 2011.
The Company’s future effective tax rates could be adversely affected by changes in the valuation of its deferred tax assets or liabilities or changes in tax laws or interpretations
thereof. In addition, the Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly
assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.
28
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Accrued Bonuses
The Company pays bonuses to certain executive management, field management and corporate employees based on, or after giving consideration to, a variety of financial
performance measures. Bonuses for executive management, field management and certain corporate employees are accrued throughout the year for payment during the first
quarter of the following year, based in part upon anticipated annual results compared to annual budgets. In addition, the Company pays discretionary bonuses to certain
employees, which are not related to budget performance. Variances in actual results versus budgeted amounts can have a significant impact on the calculations and therefore on
the estimates of the required accruals. Accordingly, the actual earned bonuses may be materially different from the estimates used to determine the quarterly accruals.
Performance-Based Restricted Stock Awards
From time-to-time the Company issues performance-based restricted stock awards to its executives. Performance-based restricted stock awards are typically vested based on
certain multi-year performance metrics as determined by the Board of Directors Compensation Committee. The Company will reassess at each reporting date whether achievement
of any performance condition is probable and would begin recognizing additional compensation cost if and when achievement of the performance condition becomes probable.
The Company will then recognize the appropriate expense cumulatively in the year performance becomes probable and recognize the remaining compensation cost over the
remaining requisite service period. If at a later measurement date the Company determines that performance-based restricted stock awards deemed as likely to vest are deemed as
unlikely to vest, the expense recognized will be reversed. These performance-based restricted stock awards typically include dividend accrual equivalents, which means that any
dividends paid by the Company during the vesting period become due and payable after the vesting period on any stock awards that actually vest, if any. Dividends for these
grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. Dividends for
performance-based restricted stock awards that ultimately do not vest are forfeited.
Forward-looking Information
The Company’s growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a
direct impact on the need for engineering, life sciences and information technology services. When the U.S., Canadian or global economies decline, the Company’s operating
performance could be adversely impacted. In addition, global events such as the ongoing COVID-19 pandemic also have a substantial impact on our operations and financial
results. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and diversification of service offerings provides some insulation from
adverse trends. However, general economic declines could result in the need for future cost reductions or changes in strategy.
Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional
employee benefits, licensing or tax requirements with respect to the provision of employment services that may reduce the Company’s future earnings. There can be no
assurance that the Company will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to cover increased costs as a result of any of the
foregoing.
The consulting and employment services market is highly competitive with limited barriers to entry. The Company competes in global, national, regional and local markets with
numerous competitors in all of the Company’s service lines. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and
customers are increasing. The Company expects that the level of competition will remain high in the future, which could limit the Company’s ability to maintain or increase its
market share or profitability.
29
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fiscal Year Ended January 1, 2022 Compared to Fiscal Year Ended January 2, 2021
A summary of operating results for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 is as follows (in thousands):
Fiscal Years Ended
January 1, 2022
January 2, 2021
Revenues
Cost of services
Gross profit
Selling, general and administrative
Depreciation and amortization of property and
equipment
Amortization of acquired intangible assets
Write-off of receivables and professional fees
incurred related to arbitration
Impairment of right of use assets and related costs
Gain on sale of assets
Remeasurement of acquisition-related
contingent consideration
Operating costs and expenses
Operating income (loss)
Other expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Amount
% of Revenue
Amount
$
203,875
150,751
53,124
100.0 $
73.9
26.1
% of Revenue
100.0
74.2
25.8
150,409
111,554
38,855
42,019
20.6
37,791
1,007
95
-
-
(2,420)
(1,713)
38,988
14,136
222
13,914
2,925
10,989
0.5
0.1
-
-
(1.2)
(0.8)
19.2
6.9
0.1
6.8
1.4
1,065
321
8,397
2,231
-
-
49,805
(10,950)
1,107
(12,057)
(3,188)
5.4 $
(8,869)
25.1
0.7
0.2
5.6
1.5
-
-
33.1
(7.3)
0.7
(8.0)
(2.1)
(5.9)
$
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal years ended January 1, 2022 (fiscal 2021) and January 2,
2021 (fiscal 2020) consisted of fifty-two weeks and fifty-three weeks, respectively.
Revenue. Revenue increased 35.5%, or $53.5 million, for the fifty-two week period ended January 1, 2022 as compared to the fifty-three week period ended January 2, 2021 (the
“comparable prior year period”). Revenue increased $8.5 million in the Engineering segment, $38.0 million in the Specialty Health Care segment and $7.0 million in the Life
Sciences and Information Technology segment. See Segment Discussion for further information on revenue changes.
Cost of Services and Gross Profit. Cost of services increased 35.1%, or $39.2 million, for the fifty-two week period ended January 1, 2022 as compared to the comparable prior
year period. Cost of services increased primarily due to the increase in revenue. Cost of services as a percentage of revenue for the fifty-two week period ended January 1, 2022
and the comparable prior year period were 73.9% and 74.2%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.
30
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fiscal Year Ended January 1, 2022 Compared to Fiscal Year Ended January 2, 2021 (Continued)
Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $42.0 million for the fifty-two week period ended January 1, 2022 as compared to
$37.8 million for the comparable prior year period. As a percentage of revenue, SGA expenses were 20.6% for the fifty-two week period ended January 1, 2022 and 25.1% for the
comparable prior year period. See Segment Discussion for further information on SGA expense changes.
Write-off of receivables related to arbitration. The Company recorded a charge of $8.4 million during the comparable prior year period relating to its dispute with a customer that
is a major utility in the United States. This dispute was resolved through binding arbitration April 2020. The charge consisted of $6.7 million for the portion of accounts
receivable previously recognized by the Company that was not awarded by the arbitrator, $0.7 million from other projects with this customer that were not part of the arbitration,
$0.8 million in professional fees related to the dispute and arbitration and $0.2 million of transit accounts receivable associated with disputed projects that were part of the
arbitration. For the fifty-two week period ended January 1, 2022, there was no such charge. See discussion of Contingencies in Note 16 to the Condensed Consolidated Financial
Statements included in this report.
Impairment of Office Leases. During fiscal 2020, in connection with the continuing developments from COVID-19, the Company reduced its leased office space as a result of its
employees moving to a remote work environment. The Company does not believe there is an opportunity to sublet any of the vacant office space due to the current commercial
rental marketplace. This decision and reduction in the use of the office spaces resulted in a right-of-use asset impairment of $1.9 million in fiscal 2020. This loss was determined
by identifying the fair value of the impacted right-of-use assets as compared to the carrying value of the assets as of the measurement date, in accordance with Property, Plant
and Equipment Topic 360 of the FASB ASC. The fair value of the right-of-use assets was based on the remaining term of each lease. In addition, the Company wrote off a total
of $0.3 million in other office lease costs and for obsolete equipment. There were no such charges in fiscal 2021.
Gain on sale of assets. On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices, located in Ontario, Canada. These
two offices were often referred to as Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada. The two Canada
Power Systems offices were part of a reporting unit within the Company’s Engineering segment. The Company recorded a net gain on the sale of these assets and liabilities of
$2.4 million.
Remeasurement of acquisition related contingent consideration. The Company adjusted the forecasted contingent consideration for active acquisition agreements, which
created a discreet gain of $1.7 million.
Other Expense. Other expense consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income, imputed interest
on contingent consideration and gains and losses on foreign currency transactions. Other expense, net decreased by $0.9 million as compared to the comparable prior year
period. Interest expense decreased by $0.4 million, primarily due to decreased borrowing, and also due to a decreased average borrowing rate under the Company’s line of credit.
Other expense, net also decreased by $0.4 million due a gain on foreign currency transactions in the current period as compared to a loss on foreign currency transactions in the
comparable prior year period.
Income Tax Expense (Benefit). The Company recognized $2.9 million of income tax expense for the fifty-two week period ended January 1, 2022, as compared to an income tax
benefit of $3.2 million for the comparable prior year period. The consolidated effective income tax rate for the current period was 21.0% as compared to 26.4% for the comparable
prior year period. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of
Canadian and Serbian pretax income versus U.S. pretax income. The effective income tax rate can also be impacted by discrete permanent differences affecting any period
presented.
31
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fiscal Year Ended January 1, 2022 Compared to Fiscal Year Ended January 2, 2021 (Continued)
The Company considers its 2021 effective income tax rate to be abnormally low, due mainly to permanent differences detailed in footnote 15 in the Company’s financial
statements. The Company estimates its normalized tax rates for fiscal 2021 as 28.5% for the United States, 26.5% for Canada, and 16.5% for Serbia. Based on the fiscal 2021 pretax
income mix, the Company estimates its normalized consolidated tax rate as 27.5%.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based
compensation, and potential tax credits available to the Company. The actual 2021 effective tax rate may vary from the estimate depending on the actual operating income earned
in various jurisdictions, the potential availability of tax credits, and the exercise of stock options and vesting of share-based awards.
Segment Discussion
Engineering
Engineering revenues of $66.2 million for the fifty-two week period ended January 1, 2022 increased 14.7%, or $8.5 million, compared to the comparable prior year period. The
increase in revenue was comprised of the following: increases in Aerospace revenue of $10.9 million, Industrial Processing revenue of $3.6 million, and Energy Services of $0.9
million, offset by a decrease in revenue from the Canadian Power Systems Group of $6.9 million. The increase in Aerospace revenue was primarily due to a new outsourcing
engagement with one of the Company’s major customers that is anticipated to become a multi-year contract. The increase in Industrial Processing revenue was primarily due to
spending increases with several major customers seeking to upgrade their ethanol related production capability. The decrease in the Canadian Power Systems was primarily due
to the sale of this business on July 30, 2021 (see details below). Gross profit decreased by 2.5%, or $0.4 million, as compared to the comparable prior year period. Gross profit
decreased because of the decrease in gross profit margin. Gross profit margin of 24.3% for the current period decreased from 28.6% for the comparable prior year period. The
decrease in gross margin was due to three factors: 1) decreased revenue from the Canadian Power Systems Group, as lower revenue negatively impacted utilization of the
segment’s billable consultants; 2) lower gross margin for the new Aerospace contract than the Engineering segment typically experiences; and 3) rework costs on a fixed price
contract in the Industrial Processing business. The Engineering segment’s SGA expense of $14.2 million increased by $1.2 million due to investment in new personnel to
reposition and generate future growth. The Engineering segment experienced operating income of $5.4 million for the fifty-two week period ended January 1, 2022, as compared to
an operating loss of $5.9 million for the comparable prior year period. The reason for improved operating income was primarily due to three discrete differences between the
current and comparable prior years periods: 1) the gain on sale of assets associated with selling the Canadian Power Systems business (see paragraph below) of $2.4 million in
the current period; 2) the remeasurement of acquisition-related contingent consideration; and 3) the $8.4 million write-off of receivables and professional fees incurred related to a
discrete arbitration in the comparable prior year prior.
On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices, located in Ontario, Canada. These two offices were often
referred to as the Canadian Power Systems business and principally provided engineering services to two major nuclear power providers in Canada. The two Canadian Power
Systems offices were part of a reporting unit within the Company’s Engineering segment. The Company will continue to offer other engineering services in Canada and similar
services in the United States. For the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021, these two offices generated revenue of
$4.9 million and $11.8 million, respectively.
32
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fiscal Year Ended January 1, 2022 Compared to Fiscal Year Ended January 2, 2021 (Continued)
Segment Discussion (Continued)
COVID-19 Impact to Engineering Segment
It is difficult to assess both the current and future impact from COVID-19 to the Engineering segment, due to the high degree of uncertainty around COVID-19 and the duration
and extent of the pandemic. The Engineering segment has seen a decline in its field services work as its personnel has constrained access to client facilities. It is difficult to
determine the impact on revenue from the loss in field services work. The Company believes that an undetermined amount of field services work will eventually return as a
portion of that work is mission-critical to our clients. While the Company has recently seen signs of improvement, given the uncertainties around COVID-19, the Company can
give no assurances that it will see an increase in field services revenue. Additionally, the Company believes that COVID-19 has had a significant adverse impact on the budgets
of many of its Aerospace and Utilities clients. The Company’s Aerospace clients have seen an impact to their commercial lines of business. A number of the Company’s Utility
clients have been impacted by their customers’ inability to pay their monthly electric bills.
The Company has transitioned most of its Engineering workforce to work from home. While this has constituted a significant effort, particularly from a technology standpoint,
the Company believes that this effort has been completed relatively effectively. The Company also believes that its Engineering clients have been generally supportive of these
efforts and believes further that it has not lost any significant, previously awarded work. The Engineering segment continues to see new work proposals, but while recently
improved, not at the same level as seen prior to COVID-19. The Engineering segment’s general response to the effects of COVID-19 is to continue to focus on maximizing gross
margin by focusing on utilization of billable consultants and maximizing the efficiency of its SGA expense. The Company has also invested in new senior personnel, in part
because it anticipates improved demand in the near future. The Company plans to refine its strategy for responding to COVID-19 as necessary as the situation develops.
Specialty Health Care
Specialty Health Care revenue of $98.5 million for the fifty-two week period ended January 1, 2022 increased 62.9%, or $38.0 million, as compared to the comparable prior year
period. The increase in revenue was driven by both the Company’s school and non-school clients. Revenue from school clients for the fifty-two week period ended January 1,
2022 was $55.4 million as compared to $37.3 million for the comparable prior year period. Revenue from non-school clients for the fifty-two week period ended January 1, 2022 was
$43.1 million as compared to $23.2 million for the comparable prior year period. Revenue increases were due to the reopening of Specialty Health Care School clients and
unprecedented demand for health care professionals across all types of clients served. The Specialty Health Care segment’s gross profit increased by 89.4%, or $11.9 million, to
$25.3 million for the fifty-two week period ended January 1, 2022, as compared to $13.4 million for the prior year period. The increase in gross profit was primarily driven by the
increase in revenue, but also a higher gross profit margin. Gross profit margin for the fifty-two week period ended January 1, 2022 increased to 25.7% as compared to 22.1% for
the comparable prior year period. The increase in gross profit margin was primarily due to more normalized revenue and the high demand for certain services. Specialty Health
Care experienced operating income of $5.5 million for the fifty-two week period ended January 1, 2022, as compared to an operating loss of $2.6 million for the comparable prior
year period. The primary reason for the increase in operating income was the increase to gross profit, offset by an increase in SGA expense. SGA expense increased by $3.9
million to $19.5 million, as compared to $15.6 million in the comparable prior year period. The increase in SGA expense was primarily due to replacing our workforce that was
furloughed in the prior year and hiring new employees to help meet increased demand.
33
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fiscal Year Ended January 1, 2022 Compared to Fiscal Year Ended January 2, 2021 (Continued)
Segment Discussion (Continued)
COVID-19 Impact to Specialty Health Care Segment
It is difficult to assess both the current and future impact from COVID-19 to the Specialty Health Care segment, due to the high degree of uncertainty around COVID-19 and the
duration and extent of the pandemic, especially as it may impact schools where many of our personnel work. While the Specialty Health Care segment has a small number of
billable professionals performing services from home, in particular, through its telehealth services offerings, most of its billable staff works at client locations. The majority of the
Specialty Health Care segment’s services are historically delivered at schools and health care facilities. The Company believes that demand for much of its services is very high
as a result of COVID-19. However, health care professionals, such as nurses and doctors, are scarce and difficult to recruit. Also, the Company believes that any major changes
in the pandemic, such as a new variant, could adversely impact revenue. For example, if the Specialty Health Care segment’s school clients were to return to virtual learning, the
Specialty Health Care segment could experience a material decline in revenue.
The Specialty Health Care Segment has historically derived much of its revenue from school systems. Many school systems nationwide, including most of the Company’s school
clients, closed down for in-person instruction in March 2020. Most of our school clients have opened primarily in-person, but some also offer virtual lessons. Any announced
plans are subject to rapid changes. There are numerous factors that could influence further decisions of our school clients on their operations. Any shift toward hybrid and
remote operations can have a materially negative impact on revenue generated by the Specialty Healthcare segment. While the Company is optimistic, it is difficult to estimate the
impact of any potential school closures on the Company’s 2022 fiscal year.
Life Sciences and Information Technology
Life Sciences and Information Technology revenue of $39.2 million for the fifty-two week period ended January 1, 2022 increased 21.7%, or $7.0 million, as compared to $32.2
million for the comparable prior year period. The increase in Life Sciences and Information Technology revenue was primarily driven by the Company’s Life Sciences practice.
The Company believes that the Life Sciences industry has not seen a negative impact from COVID-19. Gross profit of $11.7 million for the fifty-two week period ended January 1,
2022 increased 30.5%, or $2.7 million, as compared to $9.0 million for the comparable prior year period. The increase in gross profit was primarily due to the increase in revenue, as
well as an increase in gross profit margin. The Life Sciences and Information Technology gross profit margin for the fifty-two week period ended January 1, 2022 was 30.0% as
compared to 27.9% for the comparable prior year period. The Company attributes the gross profit margin increase to higher revenue from its Life Sciences practice and a
concerted effort to increase gross profit margin through its managed service offerings. SGA expense decreased by $0.9 million to $8.3 million, as compared to $9.2 million in the
comparable prior year period. The decrease in SGA expense was a driven by a concerted effort to reduce SGA expense after the uncertainty around the COVID-19 crisis. The Life
Sciences and Information Technology segment experienced operating income of $3.4 million as compared to an operating loss of $0.2 million for the comparable prior year period.
The increase in operating income was primarily due to the increase in revenue and gross profit, and also the decrease in SGA expense.
34
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Fiscal Year Ended January 1, 2022 Compared to Fiscal Year Ended January 2, 2021 (Continued)
Segment Discussion (Continued)
COVID-19 Impact to Life Sciences and Information Technology Segment
It is difficult to assess both the current and future impact from COVID-19 to the Life Sciences and Information Technology segment, due to the high degree of uncertainty around
COVID-19 and the duration and extent of the pandemic. The Life Sciences and Information Technology segment has seen a decline in its field services work as its personnel has
limited access to client facilities. While the Company has recently seen signs of improvement, given the uncertainties around COVID-19, the Company can give no assurances
that it will see an increase in field services revenue.
The Company has transitioned most of its Life Sciences and Information Technology workforce to work from home. While this has constituted a significant effort, particularly
from a technology standpoint, the Company believes that this effort has been completed relatively effectively. The Company also believes that its Life Sciences and Information
Technology clients have been generally supportive of these efforts and believes further that it has not lost any significant, previously awarded work. The Life Sciences and
Information Technology segment’s general response to the effects of COVID-19 is to continue to focus on maximizing gross margin by focusing on utilization of billable
consultants and maximizing the efficiency of its SGA expense. The Company plans to refine its strategy for responding to COVID-19 as necessary as the situation develops.
35
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Supplemental Operating Results on a Non-GAAP Basis
The following non-GAAP measures, which adjust for the categories of expenses described below are non-GAAP financial measures. Our management believes that these non-
GAAP financial measures (“Adjusted operating income (loss)”, “EBITDA”, “Adjusted EBITDA”, “Adjusted net income (loss)”, and “Adjusted diluted net earnings (loss) per
share”) are useful information for investors, shareholders and other stakeholders of our company in gauging our results of operations on an ongoing basis and to enhance
investors’ overall understanding of our current financial performance and period-to-period comparisons. We believe these non-GAAP financial measures are performance
measures and not liquidity measures. These non-GAAP financial measures should not be considered as an alternative to net income (loss) or operationg income (loss) as
indicators of performance. In addition, neither EBITDA nor Adjusted EBITDA takes into account changes in certain assets and liabilities as well as interest and income taxes
that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance
with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
The following unaudited tables present the Company's GAAP net income and GAAP operating income and the corresponding adjustments used to calculate Adjusted operating
income (loss), EBITDA, Adjusted EBITDA, Adjusted net income (loss) and Adjusted diluted net earnings (loss) per share for the fifty-two week period ended January 1, 2022
and the fifty-three week period ended January 2, 2021.
GAAP operating income (loss)
Adjustments
Write-off of receivables and professional fees
incurred related to arbitration
Impairment of right of use assets and related costs
Gain on sale of assets
Remeasurement of acquisition related
contingent consideration
Adjusted operating income (loss) (non-GAAP)
GAAP net income (loss)
Income tax expense (benefit)
Interest expense, net
Change in fair value of contingent consideration
Depreciation of property and equipment
Amortization of acquired intangible assets
EBITDA (non-GAAP)
Adjustments
Write-off of receivables and professional fees
incurred related to arbitration
Impairment of right of use assets and related costs
Gain on sale of assets
Remeasurement of acquisition related
contingent consideration
Loss (gain) on foreign currency transactions
Adjusted EBITDA (non-GAAP)
Fifty-Two Week
Period Ended
January 1, 2022
Fifty-Three Week
Period Ended
January 2, 2021
$
14,136 $
(10,950)
-
-
(2,420)
(1,713)
10,003 $
10,989 $
2,925
365
52
1,007
95
15,433 $
-
-
(2,420)
(1,713)
(195)
11,105 $
8,397
2,231
-
-
(322)
(8,869)
(3,188)
778
145
1,065
321
(9,748)
8,397
2,231
-
-
184
1,064
$
$
$
$
36
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Supplemental Operating Results on a Non-GAAP Basis (Continued)
GAAP net income (loss)
Adjustments
Write-off of receivables and professional fees
incurred related to arbitration
Impairment of right of use assets and related costs
Gain on sale of assets
Remeasurement of acquisition related
contingent consideration
Tax impact from normalized rate
Adjusted net income (loss) (non-GAAP)
GAAP diluted net earnings (loss) per share
Adjustments
Write-off of receivables and professional fees
incurred related to arbitration
Impairment of right of use assets and related costs
Gain on sale of assets
Remeasurement of acquisition related
contingent consideration
Tax impact from normalized rate
Adjusted diluted net earnings (loss) per share (non-GAAP)
Fifty-Two Week
Period Ended
January 1, 2022
Fifty-Three Week
Period Ended
January 2, 2021
$
10,989 $
-
-
(2,420)
(1,713)
(237)
7,093 $
0.95 $
- $
- $
(0.21)
(0.15)
0.02 $
0.61 $
$
$
$
$
$
$
37
(8,869)
8,397
2,231
-
-
(2,795)
(1,036)
(0.73)
0.69
0.18
-
-
(0.23)
(0.09)
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
The following table summarizes the major captions from the Company’s Consolidated Statements of Cash Flows ($ in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
Fiscal Years Ended
January 1,
2022
January 2, 2021
$
$
$
915 $
6,291 $
(7,554) $
25,244
(460)
(25,632)
Operating activities provided $0.9 million of cash for the fifty-two week period ended January 1, 2022 as compared to $25.2 million in the comparable prior year period. The major
components of cash used in or provided by operating activities in the fifty-two week period ended January 1, 2022 and the comparable prior year period are as follows: net loss or
income and changes in accounts receivable, the net of transit accounts payable and transit accounts receivable, prepaid expenses and other current assets, accounts payable,
accrued expenses and accrued payroll and related costs, and deferred revenue.
For the fifty-two week period ended January 1, 2022, the Company experienced net income of $11.0 million as compared to net loss of $8.9 million for the comparable prior year
period. An increase in accounts receivables in the fifty-two week period ended January 1, 2022, used $14.7 million of cash as compared to providing $15.9 million in the
comparable prior year period. The Company primarily attributes this increase in accounts receivables for the fifty-two week period ended January 1, 2022 to the increase in
revenue for the fifty-two week period ended January 1, 2022, primarily generated during the Company’s fiscal fourth quarter. The decrease in accounts receivable for the fifty-
three week period ended January 2, 2021 was primarily due to the prolonged impact from COVI-19 in fiscal 2020.
While highly variable, the Company’s transit accounts payable typically exceeds the Company’s transit accounts receivable, but absolute amounts and differences fluctuate
significantly from quarter to quarter in the normal course of business. The net of transit accounts payable and transit accounts receivable was a net payable of $1.1 million as of
January 1, 2022 as compared to a net payable of $2.4 million as of January 2, 2021, using $1.3 million of cash during the fifty-two week period ended January 1, 2022. The net of
transit accounts payable and transit accounts receivable was a net payable of $2.4 million as of January 2, 2021 as compared to a net receivable of $0.3 million as of December 28,
2019, providing $2.7 million of cash during the fifty-three week period ended January 2, 2021.
Prepaid expenses and other current assets provided cash of $1.8 million for the fifty-two week period ended January 1, 2022 as compared to using $0.2 million of cash for the
comparable prior year period. The Company attributes changes to prepaid expenses and other current assets, if any, to general timing of payments in the normal course of
business. Since certain expenses are paid before a fiscal year concludes and are amortized over the next fiscal year, prepaid expenses and other current assets generally tend to
increase at the end of a fiscal year and decrease during the first half.
An increase in accounts payable and accrued expenses provided cash of $1.5 million for the fifty-two week period ended January 1, 2022 as compared to $1.6 million for the
comparable prior year period. The Company attributes these changes to a deliberate effort to defer payments for cash flow purposes and general timing of payments to vendors
in the normal course of business. The Company’s accounts payable and accrued expenses balance of $9.3 million as of January 1, 2022 includes $1.6 million for the settlement of a
class action suit in California that alleges the Company did not properly pay its travel nurses overtime wages. This liability was paid in early fiscal January 2022.
38
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
Changes in accrued payroll and related costs provided cash of $0.1 million for the fifty-two week period ended January 1, 2022 as compared to providing cash of $4.6 million for
the fifty-three week period ended January 2, 2021. There are four primary factors that generally impact accrued payroll and related costs: 1) there is a general correlation to
operating expenses as payroll and related costs is the Company’s largest expense group, so as operating costs increase or decrease, absent all other factors, so will the accrued
payroll and related costs; 2) the Company pays the majority of its payroll every two weeks and normally has thirteen weeks in a fiscal quarter, which means that the Company
normally has a major payroll on the last business day of every other quarter; 3) the timing of various payroll related payments varies in the normal course of business; and 4)
most of the Company’s senior management participate in annual incentive plans and while progress advances are sometimes made during the fiscal year, these accrued bonus
balances, to the extent they are projected to be achieved, generally accumulate throughout the year. A significant portion of these incentive plan accruals are typically paid at
the beginning of one fiscal year, pertaining to the prior fiscal year. The Company’s last major payroll for the fifty-two week period ended January 1, 2022 was paid on December
31, 2021. During fiscal 2020, the Company deferred $3.3 million of employer payroll taxes under the CARES Act. Half of these deferred payroll taxes were paid in fiscal December
2021 and the remaining portion must be paid in fiscal December 2022.
Historically, the Company has experienced small deferred revenue balances that have been included in accounts payable and accrued expenses. During the second half of fiscal
2021, the Company’ Industrial Processing group secured several contracts with significant front-loaded payments, thereby generating larger deferred revenue balances than
typically generated. The Company’s deferred revenue balance as of January 1, 2022 was $3.4 million, as compared to $0.4 million as of January 2, 2021, creating positive cash from
operations of $3.0 million for the fifty-two week period ended January 1, 2022. The Company cannot reasonably forecast if it will experience similar deferred revenue balances
over the next several quarters as the timing of contract wins and front-loaded payments is typically haphazard.
Investing Activities
Investing activities provided $6.3 million of cash for the fifty-two week period ended January 1, 2022 and used $0.4 million for the fifty-three week period ended January 2, 2021.
Investing activities used $0.6 million for the purchase of property and equipment in the current period as compared to $0.5 million in the prior year comparable period. The current
period includes $6.9 million in proceeds for the sale of the Company’s Canadian Power Systems business.
Financing Activities
Financing activities used $7.6 million of cash for the fifty-two week period ended January 1, 2022 as compared to $25.6 million in the comparable prior year period. The Company
made net borrowings under its line of credit of $2.3 million during the fifty-two week period ended January 1, 2022 as compared to net payments of $22.9 million in the comparable
prior year period. The Company used $9.0 million to repurchase shares of its common stock in the current period as compared to $2.2 million in the comparable prior year period.
The Company generated cash of $0.1 million and $0.2 million from sales of shares from its equity plans for the current period and the comparable prior year period, respectively.
The Company paid contingent consideration of $0.5 million in the current period as compared to $0.3 million in the comparable prior year period.
39
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i)
LIBOR (London Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter
durations. At the option of Citizens Bank, LIBOR can be replaced with SOFR (Secured Overnight Financing Rate). The LIBOR alternative is being phased out in 2022. Citizens
Bank has not indicated when this switch will occur, but in any event, the Company does not believe there will be any material impact on its borrowing rate. The Company also
pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average
interest rate, including unused line fees, for the fifty-two week period ended January 1, 2022 was 2.0%.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The
Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay
dividends. As of January 1, 2022, the Company was in compliance with all covenants contained in the Revolving Credit Facility (as amended). The Company believes that it will
maintain compliance with its financial covenants for the foreseeable future.
Borrowings under the line of credit as of January 1, 2022 and January 2, 2021 were $14.2 million and $11.9 million, respectively. At both January 1, 2022 and January 2, 2021 there
were letters of credit outstanding for $1.9 million. At January 1, 2022 and January 2, 2021, the Company had availability for additional borrowings under the Revolving Credit
Facility of $28.9 million and $35.1 million, respectively.
In addition to borrowings and sales of shares from its equity plans, the Company may raise capital through sales of shares of common stock under its at the market issuance
program (the “ATM Program”) established under its May 2021 At Market Issuance Sales Agreement with B. Riley Securities, Inc., as the agent (the “Agent”). The ATM
Program allows the Company to offer and sell shares of the common stock having an aggregate sales price of up to $17.9 million from time to time through the Agent. To date,
the Company has not sold any shares under the ATM Program.
On June 2, 2020, the Company entered into a stock purchase agreement with certain stockholders of the Company, whereby the Company purchased an aggregate of 1,858,139
shares of the Company’s common stock for a negotiated purchase price of $1.20 per share or $2.2 million in total. The negotiated price of $1.20 per share was less than the lowest
trading price of the stock on the day of the repurchase. The consideration paid by the Company was in accordance with the safe harbor from liability under certain market
manipulation rules provided by Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and consisted entirely of an unsecured subordinated promissory note for
$2.2 million. The note accrues interest at an annual rate of 9.0%, compounded annually, payable quarterly in arrears commencing on September 1, 2020 and continuing on each
December 1, March 1, June 1 and September 1 thereafter, and has a maturity date of August 10, 2023. Subject to the applicable provisions of the subordination agreement among
the Company, Citizens Bank and the selling stockholders, the note was to become immediately due and payable in the event of a default by the Company. On September 25, 2020,
the Company repaid the subordinated promissory note in full.
40
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Current Liquidity and Revolving Credit Facility
Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, and meet the other general cash needs of our business. Our
liquidity is impacted by general economic, financial, competitive, and other factors beyond our control. Our liquidity requirements consist primarily of funds necessary to pay our
expenses, principally labor-costs, and other related expenditures. We generally satisfy our liquidity needs through cash provided by operations and, when necessary, our
revolving line of credit from Citizens Bank. The Company believes it has a great deal of flexibility to reduce its costs if it becomes necessary. The Company believes that it can
satisfy its liquidity needs for at least the next twelve months.
The Company’s liquidity and capital resources as of January 1, 2022, included accounts receivable and total current asset balances of $48.3 million and $51.8 million, respectively.
Current liabilities were $30.1 million as of January 1, 2022 and were exceeded by total current assets by $21.7 million.
The Company experiences volatility in its daily cash flow and, at times, relies on the revolving line of credit to provide daily liquidity for the Company’s financial operations. As
of January 1, 2022, the Company was in compliance with all financial covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance
with its financial covenants for the foreseeable future.
Dividends
All restricted share awards contain a dividend equivalent provision entitling holders to dividends paid between the restricted stock unit grant date and ultimate share distribution
date. As of January 1, 2022, there were no accrued dividends.
While the Company, at this time, has no plans to issue any future dividends, any future payment of dividends will depend upon, among other things, the Company’s earnings,
financial condition, capital requirements, level of indebtedness, contractual restrictions, and other factors that the Board of Directors deems relevant. The Revolving Credit
Facility (as discussed above) prohibits the payment of any dividends or distributions on account of the Company’s capital stock without the prior consent of the majority of the
Company’s lenders.
Commitments and Contingencies
The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as
well as future acquisitions will be derived from one or more of the Revolving Credit Facility (or a replacement thereof), funds generated through operations or future financing
transactions. The Company is subject to legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by
insurance. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the results of operations.
The Company’s business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time
engages in discussions with potential acquisition candidates. The Company has acquired numerous companies throughout its history and those acquisitions have generally
included significant future contingent consideration. As the size of the Company and its financial resources increase however, acquisition opportunities requiring significant
commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No
assurance can be given as to the Company’s future acquisition and expansion opportunities or how such opportunities will be financed.
41
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Commitments and Contingencies (Continued)
The Company is exposed to various asserted claims as of January 1, 2022, where the Company believes it has a probability of loss. Additionally, the Company is exposed to other
asserted claims whereby an amount of loss has not been declared, and the Company cannot determine the potential loss. Any of these various claims could result in an
unfavorable outcome or settlement that exceeds the accrued amounts. However, the Company believes that such matters will not, either individually or in the aggregate, have a
material adverse effect on its business, consolidated financial position, results of operations, or cash flows. As of January 1, 2022, the Company has accrued $2.9 million for
asserted claims. Included in the January 1, 2022 accrual of $2.9 million, the Company has reserved $1.6 million for the settlement of a class-action suit in California that alleges the
Company did not properly pay its travel nurses overtime wages. While the Company believes it did not violate any overtime wage laws, it decided to settle this class action
lawsuit in December 2020. The Company paid the $1.6 million settlement in early January 2022.
The Company utilizes SAP software for its financial reporting and accounting system which was implemented in 1999 and has not undergone significant upgrades since its initial
implementation. The Company plans to upgrade its current system during fiscal 2022. The Company estimates this upgrade or replacement of its financial reporting and
accounting system will cost between $0.5 million and $1.0 million. These estimates are subject to material change.
The Company’s current commitments consist primarily of lease obligations for office space. The Company believes that its capital resources are sufficient to meet its present
obligations and those to be incurred in the normal course of business for at least the next 12 months.
The Company leases office facilities and various equipment under non-cancelable leases expiring at various dates through November 2027. Certain leases are subject to
escalation clauses based upon changes in various factors. The COVID-19 pandemic has had a profound impact on the Company in 2020. This led the Company to review the
guidance in ASC 360-10 to determine if an impairment of a long lived asset had occurred. It was determined that a portion of the office space leased in a number of locations
would not be utilized through the remaining lease term. An impairment of the right of use asset for the unused space of $2.2 million was recorded in 2020.
Maturities of lease liabilities are as follows:
Fiscal Year
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total
Operating
Leases
Finance
Leases
$
$
$
1,579 $
1,097
396
133
50
3,255 $
(122)
3,133 $
446
337
168
-
-
951
(12)
939
42
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Future Contingent Payments
As of January 1, 2022, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective
October 1, 2017, the Company acquired all of the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) (“PSR”) and 2) effective September 30, 2018, the Company
acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”). The Company estimates future contingent payments at
January 1, 2022 as follows:
Fiscal Year Ending
December 31, 2022
December 30, 2023
Estimated future contingent consideration payments
$
$
Total
103
600
703
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be
made to all active acquisitions after January 1, 2022 are capped at a cumulative maximum of $0.7 million. The Company estimates future contingent consideration payments based
on forecasted performance and recorded the fair value of those expected payments as of January 1, 2022. During the fifty-two week period ended January 1, 2022, the Company
measured the intangibles acquired at fair value on a non-recurring basis. Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair
value recorded in other (expense) income, net.
Significant employment agreements are as follows:
Executive Severance Agreements
The Company is a party to Executive Severance Agreements (the “Executive Severance Agreements”) with Mr. Vizi, dated as of June 1, 2018, and Mr. Miller, dated as of February
28, 2014, which set forth the terms and conditions of certain payments to be made by the Company to the executive in the event, while employed by the Company, the executive
experiences (a) a termination of employment unrelated to a “Change in Control” (as defined therein) or (b) there occurs a Change in Control and either (i) the executive’s
employment is terminated for a reason related to the Change in Control or (ii) in the case of Mr. Miller, Mr. Miller the executive remains continuously employed with the Company
for three months following the Change in Control.
Under the terms of the Executive Severance Agreement, if either (a) the executive is involuntarily terminated by the Company for any reason other than “Cause” (as defined
therein), “Disability” (as defined therein) or death, or (b) the executive resigns for “Good Reason” (as defined therein), and, in each case, the termination is not a “Termination
Related to a Change in Control” (as defined below), the executive will receive the following severance payments: (i) an amount equal to 1.5 times the sum of (a) the executive’s
annual base salary as in effect immediately prior to the termination date (before taking into account any reduction that constitutes Good Reason) (“Annual Base Salary”) and (b)
the highest annual bonus paid to the executive in any of the three fiscal years immediately preceding the executive’s termination date (“Bonus”), to be paid in installments over
the twelve month period following the executive’s termination date; and (ii) for a period of eighteen months following the executive’s termination date, a monthly payment equal
to the monthly COBRA premium that the executive is required to pay to continue medical, vision, and dental coverage, for himself and, where applicable, his spouse and eligible
dependents.
43
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Future Contingent Payments (Continued)
Executive Severance Agreements (Continued)
Notwithstanding the above, if the executive has a termination as described above and can reasonably demonstrate that such termination would constitute a Termination Related
to a Change in Control, and a Change in Control occurs within 120 days following the executive’s termination date, the executive will be entitled to receive the payments set forth
below for a Termination Related to a Change in Control, less any amounts already paid to the executive, upon consummation of the Change in Control.
Under the terms of the Executive Severance Agreement, if a Change in Control occurs and (a) the executive experiences a Termination Related to a Change in Control on account
of (i) an involuntary termination by the Company for any reason other than Cause, death, or Disability, (ii) an involuntary termination by the Company within a specified period of
time following a Change in Control (12 months for Mr. Vizi and three months for Mr. Miller) on account of Disability or death, or (iii) a resignation by the executive with Good
Reason; or (b) in the case of Mr. Miller, the executive resigns, with or without Good Reason, which results in a termination date that is the last day of the three month period
following the Change in Control, then the executive will receive the following severance payments: (1) a lump sum payment equal to two times the sum of the executive’s (a)
Annual Base Salary and (b) Bonus; and (2) a lump sum payment equal to 24 multiplied by the monthly COBRA premium cost, as in effect immediately prior to the executive’s
termination date, for the executive to continue medical, dental and vision coverage, as applicable, in such Company plans for himself and, if applicable, his spouse and eligible
dependents. Upon the occurrence of a Change in Control, the Company shall establish an irrevocable rabbi trust and contribute to the rabbi trust the applicable amounts due
under the Executive Severance Agreement. If Mr. Miller receives the Change in Control Payment following his resignation at the end of the three month period following the
Change in Control, he will not be eligible to receive any severance payments under his Executive Severance Agreement.
Mr. Miller’s Executive Severance Agreement provides that if Mr. Miller remains continuously employed for three months following a Change in Control and is employed by the
Company on the last day of such specified period, Mr. Miller will receive a lump sum payment equal to two times the sum of his (a) Annual Base Salary and (b) Bonus (the
“Change in Control Payment”). If Mr. Miller receives the Change in Control Payment, he will not be eligible to receive any severance payments under his Executive Severance
Agreement.
Mr. Saks, along with several other members of the Company’s senior management (not including Mr. Vizi and Mr. Miller), is covered by our Change in Control Plan for Selected
Executive Management (the “CIC Plan”).
Off-Balance Sheet Arrangements
None.
Impact of Inflation
Consulting, staffing, and project services are generally priced based on mark-ups on prevailing rates of pay, and as a result are able to generally maintain their relationship to
direct labor costs. Permanent placement services are priced as a function of salary levels of the job candidates.
The Company’s business is labor intensive; therefore, the Company has a high exposure to increasing health care benefit costs. The Company attempts to compensate for these
escalating costs in its business cost models and customer pricing by passing along some of these increased health care benefit costs to its customers and employees, however,
the Company has not been able to pass on all increases. The Company is continuing to review its options to further control these costs, which the Company does not believe
are representative of general inflationary trends. Otherwise, inflation has not been a meaningful factor in the Company’s operations.
44
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
New Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326). The
new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. In February 2020, the FASB issued ASU
2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and
Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original
pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after
December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of
operations. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This
standard only applies to contracts and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to
reference rate reform. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease
entities’ financial reporting burdens as the market transitions from the LIBOR and other interbank offered rates to alternative reference rates. The Company may elect to apply the
amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and
related disclosures.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio and debt instruments, which primarily consist of the
Revolving Credit Facility. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high
credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. As of January 1, 2022, the Company’s investments consisted of cash and money market funds. The Company does not use interest rate derivative
instruments to manage its exposure to interest rate changes. Based on the Company’s variable-rate line of credit balances during the fifty-two week period ended January 1,
2022, if the interest rate on the Company’s variable-rate line of credit (using an incremental borrowing rate) during the period had been 1.0% higher, the Company’s interest
expense on an annualized basis would have increased by $0.2 million. The Company does not expect any material loss with respect to its investment portfolio.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report of the Company’s Independent Registered Public Accounting Firm, begins on page F-1.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
45
ITEM 9A.
CONTROLS AND PROCEDURES
The Company’s management, under the supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that those disclosure controls and procedures as of the end of
the period covered by this report were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to
the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.
A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
As management prepares and executes a virtual financial close process, for the first time, there could be related implications on the internal controls performed specifically in
conjunction with the preparation, review, and filing of this report. There is a risk that moving to a virtual environment in response to COVID-19 could result in certain controls
(e.g., financial closing and reporting controls) being overridden or performed less frequently, or that management could be designing and implementing new controls in response
to new risks. In addition, in instances where relevant controls fail, and there are no compensating controls in place, there may be fewer opportunities to timely identify or
remediate control deficiencies. There were otherwise no changes in the Company’s internal control over financial reporting during the fiscal year ended January 1, 2022, that
materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of January 1, 2022 based upon criteria in Internal Control-Integrated
Framework issued and updated in fiscal 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management
determined that the Company’s internal control over financial reporting was effective as of January 1, 2022, based on the criteria in Internal Control-Integrated Framework issued
by COSO.
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter and that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
46
ITEM 9B.
OTHER INFORMATION
None
ITEM 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
47
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 shall be included in the 2022 Proxy Statement and is incorporated herein by reference.
PART III
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 shall be included in the 2022 Proxy Statement and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Except as set forth below, the information required by Item 12 shall be included in the 2022 Proxy Statement and is incorporated herein by reference.
The table below presents certain information as of January 1, 2022 concerning securities issuable in connection with equity compensation plans that have been approved by the
Company’s shareholders and that have not been approved by the Company’s shareholders.
Number of securities
to be potentially issued
upon realization of
restricted stock awards
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
issuance under equity
compensation plans,
excluding securities
reflected in column (a)
(c)
545,628(1)
N/A
107,924
_______________
_______________
_______________
Plan category
Equity compensation plans
approved by security
holders.............................
Equity compensation plans
not approved by
security holders...............
Total..............................
545,628(1)
N/A
107,924
(1) Includes time-based restricted stock units of 371,872, time-based restricted stock awards of 48,756 and performance-based restricted stock units of 125,000, none of which
have an exercise price.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 shall be included in the 2022 Proxy Statement and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 shall be included in the 2022 Proxy Statement and is incorporated herein by reference.
48
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. and 2. Financial Statement Schedules -- See “Index to Financial Statements and Schedules” on F-1.
PART IV
3. See Item (b) below.
(b)
Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this report (unless otherwise
indicated, the file number with respect to each filed document is 1-10245):
(3)(a)
(3)(b)
(3)(c)
(3)(d)
(3)(e)
(4)(a)
*(10)(a)
*(10)(b)
*(10)(c)
*(10)(d)
Articles of Incorporation, as amended; incorporated by reference to Exhibit 3(a) to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended October 31, 1994, filed with the Securities and Exchange Commission on January 4, 1995.
Certificate of Amendment of Articles of Incorporation; incorporated by reference to Exhibit A to the Registrant’s Proxy Statement, dated
February 6, 1996, filed with the Securities and Exchange Commission on January 29, 1996.
Certificate of Amendment of Articles of Incorporation; incorporated by reference to Exhibit B to the Registrant’s Proxy Statement, dated
February 6, 1996, filed with the Securities and Exchange Commission on January 29, 1996.
Amended and Restated Bylaws; incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 23, 2014 (the “January 2014 8-K”).
Certificate of Designation of Series A-3 Junior Participating Preferred Stock of RCM Technologies, Inc.; incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 22, 2020 (the “May
2020 8-K”).
Description of Capital Stock. (Filed herewith)
RCM Technologies, Inc. 2000 Employee Stock Incentive Plan, dated January 6, 2000; incorporated by reference to Exhibit A to the
Registrant’s Proxy Statement, dated March 3, 2000, filed with the Securities and Exchange Commission on February 28, 2000.
The RCM Technologies, Inc. 2007 Omnibus Equity Compensation Plan; incorporated by reference to Annex A to the Registrant’s Proxy
Statement, dated April 20, 2007, filed with the Securities and Exchange Commission on April 19, 2007.
Executive Severance Agreement between RCM Technologies, Inc. and Kevin Miller dated December 27, 2012; incorporated by reference
to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated December 27, 2012, filed with the Securities and Exchange
Commission on December 28, 2012.
Amendment No. 1 to Executive Severance Agreement between RCM Technologies, Inc. and Kevin Miller dated December 26, 2017;
incorporated by reference to Exhibit 10(x) to the Registrant’s Annual Report on Form 10-K for this fiscal year ended January 2, 2021, filed
with the Securities and Exchange Commission on March 8, 2018.
49
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
(b)
Exhibits (Continued)
*(10)(e)
*(10)(f)
*(10)(g)
*(10)(h)
*(10)(i)
*(10)(j)
*(10)(k)
*(10)(l)
(10)(m)
(10)(n)
RCM Technologies, Inc. Amended and Restated 2014 Omnibus Equity Compensation Plan (as amended through December 17, 2020);
incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on December 18, 2020.
Amendment to RCM Technologies, Inc. 2014 Omnibus Equity Compensation Plan; incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2021.
Form of Stock Unit Agreement; incorporated by reference to Exhibit 99.2 to the December 2014 8-K.
RCM Technologies, Inc. Change in Control Plan for Selected Executive Management (filed as an exhibit to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on March 12, 2015 and incorporated herein by reference).
Amendment 2015-3 to the RCM Technologies, Inc. 2001 Employee Stock Purchase Plan; incorporated by reference to Exhibit A to the
Registrant’s Definitive Proxy Statement for the 2015 Annual Meeting filed with the Securities and Exchange Commission on October 30,
2015.
Amendment 2018-4 to the RCM Technologies, Inc. 2001 Employee Stock Purchase Plan; incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2018.
Amendment 2021-5 to the RCM Technologies, Inc. Employee Stock Purchase Plan; incorporated by reference to Exhibit A to the
Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, filed with the Securities and Exchange Commission on
November 12, 2021.
Executive Severance Agreement, dated as of June 1, 2018, by and between the Company and Bradley S. Vizi; incorporated by reference to
Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2018.
Third Amended & Restated Loan and Security Agreement, dated as of August 9, 2018, by and among the Company and all of its
subsidiaries, Citizens Bank of Pennsylvania, a Pennsylvania state chartered bank, in its capacity as administrative agent and arranger, and
Citizens Bank of Pennsylvania, as lender; incorporated by reference to Exhibit 10(d) to the Registrant’s Quarterly Report on Form 10-Q for
this fiscal quarter ended June 30, 2018, filed with the Securities and Exchange Commission on August 14, 2018.
First Amendment to Third Amended and Restated Loan Agreement, dated as of August 9, 2018, by and among the Company and all of its
subsidiaries, and Citizens Bank, N.A., a national banking association (as successor by merger to Citizens Bank of Pennsylvania), in its
capacities as lender and as administrative agent and arranger; incorporated by reference to Exhibit 99 to the Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 22, 2019.
50
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
(b)
Exhibits (Continued)
(10)(o)
(10)(p)
(21)
(23.1)
(31.1)
(31.2)
(32.1)
(32.2)
Amendment No. 2 to Third Amended and Restated Loan Agreement, dated as of June 2, 2020, by and among the Company and all of its
subsidiaries, and Citizens Bank, N.A., a national banking association (as successor by merger to Citizens Bank of Pennsylvania), in its
capacities as lender and as administrative agent and arranger; incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on June 2, 2020.
Amendment No. 3 to Third Amended and Restated Loan Agreement, dated as of September 29, 2020, by and among the Company and all
of its subsidiaries, and Citizens Bank, N.A., a national banking association (as successor by merger to Citizens Bank of Pennsylvania), in
its capacities as lender and as administrative agent and arranger; incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on October 1, 2020.
Subsidiaries of the Registrant. (Filed herewith)
Consent of Macias, Gini & O’Connell, LLP. (Filed herewith)
Certifications of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. (Filed herewith)
Certifications of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. (Filed herewith)
Certifications of Chief Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall
not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability
of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith)
Certifications of Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall
not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability
of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith)
51
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
(b)
Exhibits (Continued)
*101.INS
*101.SCH
*101.CAL
*101.LAB
*101.PRE
*101.DEF
XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL document)
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Documents
Inline XBRL Taxonomy Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Constitutes a management contract or compensatory plan or arrangement.
+The Registrant will furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
ITEM 16.
FORM 10-K SUMMARY
None.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Date: April 4, 2022
Date: April 4, 2022
RCM Technologies, Inc.
By:/s/ Bradley S. Vizi
Bradley S. Vizi
Executive Chairman and President
By:/s/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Date: April 4, 2022
Date: April 4, 2022
Date: April 4, 2022
Date: April 4, 2022
Date: April 4, 2022
Date: April 4, 2022
By:/s/ Bradley S. Vizi
Bradley S. Vizi
Executive Chairman and President
By:/s/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
By:/s/ Roger H. Ballou
Roger H. Ballou
Director
By:/s/ Richard A. Genovese
Richard A. Genovese
Director
By:/s/ Swarna Kakodkar
Swarna Kakodkar
Director
By:/s/ Jayanth S. Komarneni
Jayanth S. Komarneni
Director
53
RCM TECHNOLOGIES, INC.
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Consolidated Balance Sheets, January 1, 2022 and January 2, 2021
Consolidated Statements of Operations, Fiscal Years Ended
January 1, 2022 and January 2, 2021
Consolidated Statements of Comprehensive Income (Loss), Fiscal Years Ended
January 1, 2022 and January 2, 2021
Consolidated Statements of Changes in Stockholders’ Equity, Fiscal Years Ended
January 1, 2022 and January 2, 2021
Consolidated Statements of Cash Flows, Fiscal Years Ended
January 1, 2022 and January 2, 2021
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-40
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2022 and January 2, 2021
(Amounts in thousands, except share and per share amounts, unless otherwise indicated)
January 1,
2022
January 2,
2021
Current assets:
Cash and cash equivalents
Accounts receivable, net
Transit accounts receivable
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other assets:
Deposits
Deferred tax assets, net, domestic
Goodwill
Operating right of use asset
Intangible assets, net
Total other assets
Total assets
Current liabilities:
Accounts payable and accrued expenses
Transit accounts payable
Accrued payroll and related costs
Finance lease payable
Income taxes payable
Operating right of use liability
Liability for contingent consideration from acquisitions
Deferred revenue
Total current liabilities
Deferred tax liability, foreign
Finance lease payable
Liability for contingent consideration from acquisitions
Operating right of use liability, net of current position
Borrowings under line of credit
Total liabilities
Commitments and contingencies (note 16)
Stockholders’ equity:
Preferred stock, $1.00 par value; 5,000,000 shares authorized;
no shares issued or outstanding
Common stock, $0.05 par value; 40,000,000 shares authorized;
16,903,157 shares issued and 10,290,935 shares outstanding at
January 1, 2022 and 16,224,191 shares issued and 11,542,880 shares
outstanding at January 2, 2021
Stock subscription receivable
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock (6,612,222 shares at January 1, 2022 and
4,681,311 at January 2, 2021) at cost
Stockholders’ equity
$
$
$
235 $
48,240
1,010
2,486
51,971
1,939
176
535
16,354
1,877
-
18,942
72,852 $
9,306 $
2,064
13,027
437
-
1,502
103
3,418
29,857
142
502
600
1,631
14,151
46,883
734
36,007
2,494
4,699
43,934
2,078
169
3,300
16,354
2,409
95
22,327
68,339
7,497
4,900
12,877
247
436
1,886
500
398
28,741
365
106
2,358
2,641
11,890
46,101
-
-
845
-
111,068
(2,699)
(56,985)
(26,260)
25,969
811
(420)
109,588
(2,550)
(67,974)
(17,217)
22,238
68,339
Total liabilities and stockholders’ equity
$
72,852 $
The accompanying notes are an integral part of these consolidated financial statements.
F-2
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except per share amounts, unless otherwise indicated)
January 1,
2022
January 2,
2021
Revenues
Cost of services
Gross profit
Operating costs and expenses
Selling, general and administrative
Depreciation and amortization of property and equipment
Amortization of acquired intangible assets
Write-off of receivables and professional fees
incurred related to arbitration
Impairment of right of use assets and related costs
Gain on sale of assets
Remeasurement of acquisition-related
contingent consideration
Operating costs and expenses
Operating income (loss)
Other expense (income)
Interest expense and other, net
Change in fair value of contingent consideration
Loss (gain) on foreign currency transactions
Other expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
$
203,875 $
150,751
53,124
42,019
1,007
95
-
-
(2,420)
(1,713)
38,988
14,136
365
52
(195)
222
13,914
2,925
10,989 $
1.00 $
0.95 $
$
$
$
150,409
111,554
38,855
37,791
1,065
321
8,397
2,231
-
-
49,805
(10,950)
778
145
184
1,107
(12,057)
(3,188)
(8,869)
(0.73)
(0.73)
The accompanying notes are an integral part of these consolidated financial statements.
F-3
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands unless otherwise indicated)
Net income (loss)
Other comprehensive (loss) income
Total comprehensive income (loss)
January 1,
2022
January 2,
2021
$
$
10,989 $
(149)
10,840 $
(8,869)
198
(8,671)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Amounts in thousands, except share amounts, unless otherwise indicated)
Balance, December 28, 2019
15,826,891
$
791
Common Stock
Issued
Shares
Amount
Issuance of stock under
employee stock purchase plan
Stock subscription receivable
Foreign currency translation
adjustment
Share-based compensation expense
Issuance of stock upon vesting
of restricted share awards
Purchase of treasury stock
Net loss
117,983
-
-
-
279,317
-
-
6
-
-
-
14
-
-
Stock
Subscription
Receivable
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Treasury Stock
Total
Shares
Amount
$
-
-
-
(420)
-
-
-
-
-
108,452
$
(2,748) $
(59,105)
2,823,172
$
(14,987) $
32,403
202
420
-
528
(14)
-
-
-
-
198
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(8,869)
-
1,858,139
-
-
-
-
-
-
(2,230)
-
208
-
198
528
-
(2,230)
(8,869)
Balance, January 2, 2021
16,224,191
$
811
$
(420) $
109,588
$
(2,550) $
(67,974)
4,681,311
$
(17,217) $
22,238
Issuance of stock under
employee stock purchase plan
Stock subscription receivable
Foreign currency translation
adjustment
Share-based compensation expense
Issuance of stock upon vesting
of restricted share awards
Effect of excess tax deduction
over book expense associated with
exercise of equity awards
Purchase of treasury stock
Net income
101,784
250,000
-
-
327,182
-
-
-
5
13
-
-
16
-
-
-
Balance, January 1, 2022
16,903,157
$
845
$
-
420
-
-
-
-
-
-
-
131
(13)
-
1,358
(16)
20
-
-
-
-
(149)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,989
-
1,930,911
-
$
-
-
-
-
-
-
(9,043)
-
136
420
(149)
1,358
-
20
(9,043)
10,989
$
111,068
$
(2,699) $
(56,985)
6,612,222
$
(26,260) $
25,969
The accompanying notes are an integral part of these consolidated financial statements.
F-5
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands unless otherwise indicated)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization
Gain on sale of assets
Remeasurement of acquisition-related contingent consideration
Impairment of right of use assets and related costs
Change in fair value of contingent consideration
Share-based compensation expense
Effect of excess tax deduction on equity awards
Provision for losses on accounts receivable
Deferred income tax expense (benefit)
Amortization of right of use assets
Changes in assets and liabilities:
Accounts receivable
Net of transit accounts receivable and payable
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Accrued payroll and related costs
Right of use liabilities
Income taxes payable
Deferred revenue
Deposits
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Property and equipment acquired
Proceeds from sale of assets
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings under line of credit
Repayments under line of credit
Issuance of stock for employee stock purchase plan
Changes in finance lease obligations
Contingent consideration paid
Common stock repurchase
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Cash paid for:
Interest
Income taxes
Non-cash financing activities:
Issuance of accrued share-based compensation
ROU assets obtained in exchange for lease obligations
January 1,
2022
January 2,
2021
$
10,989 $
(8,869)
1,102
(2,420)
(1,713)
-
52
1,358
20
(208)
2,542
1,057
(14,710)
(1,317)
1,838
1,518
149
(1,919)
(436)
3,020
(7)
(10,074)
915
(568)
6,859
6,291
110,481
(108,220)
137
(415)
(494)
(9,043)
(7,554)
(151)
(499)
734
235 $
417 $
1,010 $
580 $
1,832 $
1,386
-
-
2,231
145
1,108
-
7,911
(3,712)
1,490
15,947
2,757
(162)
1,587
4,557
(1,529)
304
52
41
34,113
25,244
(460)
-
(460)
73,238
(96,109)
208
(394)
(345)
(2,230)
(25,632)
(265)
(1,113)
1,847
734
1,026
264
492
258
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
RCM Technologies, Inc. (the “Company” or “RCM”) is a premier provider of business and technology solutions designed to enhance and maximize the operational
performance of its customers through the adaptation and deployment of advanced engineering, life sciences and information technology services. Additionally, the
Company provides specialty health care staffing services through its Specialty Health Care Services group. RCM’s offices are primarily located in major metropolitan centers
throughout North America.
The consolidated financial statements are comprised of the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers its holdings of highly liquid money-market instruments and certificates of deposits to be cash equivalents if the securities mature within 90 days
from the date of acquisition. These investments are carried at cost, which approximates fair value. The Company’s cash balances are maintained in accounts held by major
banks and financial institutions. The majority of these balances may exceed federally insured amounts. The Company held $21 and $42 of cash and cash equivalents in
Canadian banks as of January 1, 2022 and January 2, 2021, respectively, which was held principally in Canadian dollars. The Company held $169 and $246 of cash and cash
equivalents in Serbian banks as of January 1, 2022 and January 2, 2021, respectively, which was held in various currencies.
Fair Value of Financial Instruments
The Company’s carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses,
transit accounts payable and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature and the line of credit’s variable interest
rate. The Company does not have derivative products in place to manage risks related to foreign currency fluctuations for its foreign operations or for interest rate changes.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally,
collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful
accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company,
and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables previously written off are credited to bad debt expense.
F- 7
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accrued and Unbilled Accounts Receivable and Work-in-Process
Unbilled receivables primarily represent revenues earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-process primarily
represents revenues earned under contracts which the Company is contractually precluded from invoicing until future dates as project milestones are realized. See Note 4 for
further details.
Transit Accounts Receivable and Transit Accounts Payable
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services.
Pursuant to these agreements, the Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project
value; and c) assumes no ownership or risks of inventory. In such situations, the Company acts as an agent under the provisions of FASB ASC 606 “Revenue from
Contracts with Customers” and therefore recognizing revenue on a “net-basis.” The Company records revenue on a “net” basis on relevant engineering and construction
management projects, which require subcontractor/procurement costs or transit costs. In those situations, the Company charges the client a negotiated fee, which is
reported as net revenue when earned.
Under the terms of the agreements, the Company is typically not required to pay the subcontractor until after the corresponding payment from the Company’s end-client is
received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount simultaneously as both a “transit account
receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company
typically does not pay a given transit account payable until the related transit account receivable is collected. The Company is typically obligated to pay the subcontractor
or staffing agency whether or not the client pays the Company. The Company’s transit accounts payable generally exceeds the Company’s transit accounts receivable but
absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business.
Property and Equipment
Property and equipment are stated at cost and are depreciated on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated
useful lives. The annual rates are 20% for computer hardware and software as well as furniture and office equipment. Leasehold improvements are amortized over the
shorter of the estimated life of the asset or the lease term.
F- 8
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
The Company’s intangible assets have been generated through acquisitions. The Company maintains responsibility for valuing and determining the useful life of intangible
assets. As a general rule, the Company amortizes restricted covenants over four years and customer relationships over six years. However, circumstances may dictate other
amortization terms as determined by the Company and assisted by their third party advisors.
Canadian Sales Tax
The Company is required to charge and collect sales tax for all Canadian clients and remits invoiced sales tax monthly to the Canadian taxing authorities whether collected or
not. The Company does not collect the sales tax from its clients until they have paid their respective invoices. The Company includes uncollected Canadian sales tax
invoiced to clients in its prepaid and other current assets.
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with FASB ASC 350 “Intangibles - Goodwill and Other.” The Company tests
goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change
indicating that the fair value of the goodwill may be below its carrying amount. The Company has three reporting units. The Company uses a market-based approach to
determine the fair value of the reporting units. This approach uses earnings/revenue multiples of similar companies recently completing acquisitions and the ability of our
reporting units to generate cash flows as measures of fair value of our reporting units. The Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” effective January 2, 2021 which has eliminated Step 2 from the goodwill impairment test. Under
this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. To satisfy the “Step 0 Test”, the
Company reviewed industry and market conditions, reporting unit specific events as well as overall financial performance and found no impairment of goodwill.
The Company did not record a goodwill impairment charge in fiscal years ended January 1, 2022 and January 2, 2021. There can be no assurance that future indicators of
impairment and tests of goodwill impairment will not result in an impairment charge.
F- 9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived and Intangible Assets
The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an
asset’s carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less
cost to sell. The Company’s intangible assets consist of customer relationships and non-compete agreements.
Software
In accordance with FASB ASC 350-40 “Accounting for Internal Use Software,” certain costs related to the development or purchase of internal-use software are capitalized
and amortized over the estimated useful life of the software. During the fiscal years ended January 1, 2022 and January 2, 2021, the Company capitalized $1,256 and $305,
respectively, for software costs. The net balance after accumulated depreciation for all software costs capitalized as of January 1, 2022 and January 2, 2021 was $1,350 and
$1,389, respectively.
Income Taxes
The Company makes judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings. These judgments and
interpretations affect the provision for income taxes, deferred tax assets and liabilities and the valuation allowance. The Company evaluated the deferred tax assets and
determined on the basis of objective factors that the net assets will be realized through future years’ taxable income. In the event that actual results differ from these
estimates and assessments, additional valuation allowances may be required. The Company did not have any valuation allowance as of January 1, 2022 or January 2, 2021.
The Company accounts for income taxes in accordance with FASB ACS 740 “Income Taxes” (FASB ASC 740) which requires an asset and liability approach of accounting
for income taxes. FASB ASC 740 requires assessment of the likelihood of realizing benefits associated with deferred tax assets for purposes of determining whether a
valuation allowance is needed for such deferred tax assets. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Company measures its deferred tax assets
and liabilities using the tax rates that the Company believes will apply in the years in which the temporary differences are expected to be recovered or paid. The Company
and its wholly owned United States subsidiaries file a consolidated federal income tax return. The Company also files tax returns in Canada, Puerto Rico and Serbia.
The Company also follows the provisions of FASB ASC 740 which prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in
a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. The Company’s policy is to record interest and
penalty, if any, as interest expense.
F- 10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company records revenue under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Revenue is recognized when we
satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in
exchange for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance
obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or
as) each performance obligation is satisfied.
The Company derives its revenue from several sources. The Company’s Engineering Services and Life Sciences and Information Technology segments perform consulting
and project solution services. The Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care
facilities amongst others. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the
Company’s revenue is invoiced on a time and materials basis.
The following table presents our revenues disaggregated by revenue source for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended
January 2, 2021:
Engineering:
Time and Material
Fixed Fee
Permanent Placement Services
Total Engineering
Specialty Health Care:
Time and Material
Permanent Placement Services
Total Specialty Health Care
Life Sciences and Information Technology:
Time and Material
Permanent Placement Services
Total Life Sciences and Information Technology
F- 11
January 1,
2022
January 2,
2021
$
$
$
$
$
$
$
45,035 $
21,070
67
66,172 $
97,363 $
1,132
98,495 $
38,571 $
637
39,208 $
203,875 $
43,359
14,145
211
57,715
59,692
789
60,481
31,723
490
32,213
150,409
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Time and Material
The Company’s IT and Healthcare segments predominantly recognize revenue through time and material work while its Engineering segment recognizes revenue through
both time and material and fixed fee work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates,
therefore revenue associated with these time and materials contracts are recognized based on hours worked at contracted rates.
Fixed Fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has
master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically
delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span
several years, the Company’s fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-
price basis, revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined
in the contract. Revenue under these arrangements are recognized as the costs on these contracts are incurred. From time-to-time, amounts paid in excess of revenue earned
and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying consolidated balance sheets. Additionally,
some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also
limit revenue and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there
is a specific deliverable and the work is not complete and the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are
expensed when the related revenue is recognized.
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. These fees are typically based on a percentage of the compensation paid to
the person placed with the Company’s client. The Company guarantees its permanent placements on a prorated basis for 90 days. In the event a candidate is not retained
for the 90-day period, the Company will provide a suitable replacement candidate. In the event a replacement candidate cannot be located, the Company will provide a
prorated refund to the client. An allowance for refunds, based upon the Company’s historical experience, is recorded in the financial statements. Permanent placement
revenue was $1.8 million for the fiscal year ended January 1, 2022 and $1.5 million for the fiscal year ended January 2, 2021.
The deferred revenue balance as of January 1, 2022 and January 2, 2021 was $3.4 million and $0.4 million, respectively. These amounts are included in accounts payable and
accrued expense in the accompanying consolidated balance sheets at that date. Revenue is recognized when the service has been performed. Deferred revenue may be
recognized over a period exceeding one year from the time it was recorded on the balance sheet, although this is an infrequent occurrence. In each of the fifty-two week
period ended January 1, 2022 and the fifty-three week period ended January 2, 2021, the Company recognized revenue of $0.4 million that was included in deferred revenue at
the beginning of the period.
F- 12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Transit Receivables and Transit Payables
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services.
Pursuant to these agreements, the Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project
value; and c) assumes no ownership or risks of inventory. Under the terms of the agreements, the Company is typically not required to pay the subcontractor until after the
corresponding payment from the Company’s end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records
this amount simultaneously as both a “transit account receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to
the subcontractor within a few days. The Company typically does not pay a given transit account payable until the related transit account receivable is collected. The
Company is typically obligated to pay the subcontractor or staffing agency whether or not the client pays the Company. The Company’s transit accounts payable generally
exceeds the Company’s transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The
transit accounts receivable was $1.0 million and related transit accounts payable was $2.1 million, for a net payable of $1.1 million, as of January 1, 2022. The transit accounts
receivable was $2.5 million and related transit accounts payable was $4.9 million, for a net payable of $2.4 million, as of January 2, 2021.
Concentration
During the fiscal year ended January 1, 2022, no client accounted for 10% or more of total revenues. As of January 1, 2022, the following clients represented more than 10.0%
of the Company’s accounts receivable, net: Ginkgo Bioworks was 15.3% and Hawaii Department of Education was 14.2%. No other customer accounted for 10% or more of
the Company’s accounts receivable, net. The Company’s five, ten and twenty largest customers accounted for approximately 35.8%, 52.5% and 65.1%, respectively, of the
Company’s revenues for the fiscal year ended January 1, 2022.
During the fiscal year ended January 2, 2021, New York City Board of Education represented 10.6% of the Company’s revenues. No other client accounted for 10% or more
of total revenues during the year. As of January 2, 2021, the following clients represented more than 10.0% of the Company’s accounts receivable, net: New York City Board
of Education was 11.8% and Hawaii Department of Education was 10.6%. No other customer accounted for 10% or more of the Company’s accounts receivable, net. The
Company’s five, ten and twenty largest customers accounted for approximately 33.4%, 46.6% and 60.7%, respectively, of the Company’s revenues for the fiscal year ended
January 2, 2021.
F- 13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation
The functional currency of the Company’s Canadian and Serbian subsidiaries is the local currency. Assets and liabilities are translated at period-end exchange rates. Income
and expense items are translated at weighted average rates of exchange prevailing during the year. Any translation adjustments are included in the accumulated other
comprehensive income account in stockholders’ equity. Transactions executed in different currencies resulting in exchange adjustments are translated at spot rates and
resulting foreign exchange transaction gains and losses are included in the results of operations.
Comprehensive Income
Comprehensive income consists of net income and foreign currency translation adjustments.
Per Share Data
Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated
using the weighted-average number of common shares plus dilutive potential common shares outstanding during the period. Potential dilutive common shares consist of
stock options and other stock-based awards under the Company’s stock compensation plans, when their impact is dilutive. Because of the Company’s capital structure, all
reported earnings pertain to common shareholders and no other adjustments are necessary.
Share - Based Compensation
The Company recognizes share-based compensation over the vesting period of an award based on fair value at the grant date determined using the Black-Scholes option
pricing model. Certain assumptions are used to determine the fair value of stock-based payment awards on the date of grant and require subjective judgment. Because
employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair
value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. Management assesses the assumptions and
methodologies used to calculate estimated fair value of stock-based compensation when share-based awards are granted. Circumstances may change and additional data
may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. If an
employee leaves the firm before the vesting period has been met, those shares are forfeited and removed from the share – based compensation expense calculation. See Note
11 for additional share-based compensation information.
Restricted share awards are recognized at their fair value. The amount of compensation cost is measured on the grant date fair value of the equity instrument issued. The
compensation cost of the restricted share awards is recognized over the vesting period of the restricted share awards on a straight-line basis. Restricted share awards
typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting
period assuming the grantee’s restricted stock unit fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and
accrued expenses on the accompanying consolidated balance sheet. Dividends for restricted share awards that ultimately do not vest are forfeited.
F- 14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was $914 and $800 for the fiscal years ended January 1, 2022 and January 2, 2021, respectively.
Fair Value Measurements
The Company values its financial assets and liabilities based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy was established
that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations
in which all significant inputs are observable or can be derived principally from or corroborated with observable market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible as well as considers counterparty credit risk in its assessment of fair value.
Reclassification
Certain prior year amounts have been reclassified to conform with the current year presentation. These classifications had no effect on the previously reported results of
operations.
2. FISCAL YEAR
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal year ended January 1, 2022 (fiscal 2021) was a 52-
week reporting year. The fiscal year ended January 2, 2021 (fiscal 2020) was a 53-week reporting year.
F- 15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
3. USE OF ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
The Company uses estimates to calculate an allowance for doubtful accounts on its accounts receivables, adequacy of reserves, goodwill impairment, if any, equity
compensation, the tax rate applied and the valuation of certain assets and liability accounts. These estimates can be significant to the operating results and financial
position of the Company. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority
information, including the potential future effects of COVID-19. Management regularly evaluates this information to determine if it is necessary to update the basis for its
estimates and to adjust for known changes.
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company’s costs related to
this risk participation are estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance
programs.
The Company can be affected by a variety of factors including uncertainty relating to the performance of the general economy, competition, demand for the Company’s
services, adverse litigation and claims and the hiring, training and retention of key employees.
Fair Value of Financial Instruments
The Company’s carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses,
transit accounts payable and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature and the line of credit’s variable interest
rate. The Company does not have derivative products in place to manage risks related to foreign currency fluctuations for its foreign operations or for interest rate changes.
The Company re-measures the fair value of the contingent consideration at each reporting period and any change in the fair value from either the passage of time or events
occurring after the acquisition date, is recorded in earnings in the accompanying consolidated statement of operations.
F- 16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
4. ACCOUNTS RECEIVABLE, TRANSIT ACCOUNTS RECEIVABLE AND TRANSIT ACCOUNTS PAYABLE
The Company’s accounts receivable are comprised as follows:
Billed
Accrued and unbilled
Work-in-progress
Allowance for sales discounts and doubtful accounts
Accounts receivable, net
January 1,
2022
January 2,
2021
37,396 $
10,231
1,810
(1,197)
48,240 $
25,926
8,219
3,612
(1,750)
36,007
$
$
Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-progress primarily
represents revenue earned under contracts which the Company contractually invoices at future dates.
5. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
Computers and systems
Equipment and furniture
Leasehold improvements
Less: accumulated depreciation and amortization
Property and equipment, net
January 1,
2022
January 2,
2021
4,133 $
86
159
4,378
2,439
1,939 $
4,686
264
236
5,185
3,107
2,078
$
$
The Company periodically writes off fully depreciated and amortized assets. The Company wrote off fully depreciated and amortized assets of $1,671 and $1,529 during the
fiscal years ended January 1, 2022 and January 2, 2021, respectively. In addition, $713 of assets not fully depreciated were included in the sale of the Canadian Power
Systems business. For the fiscal years ended January 1, 2022 and January 2, 2021, depreciation and amortization expense for property and equipment was $1,007 and $1,065,
respectively.
F- 17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
6. ACQUISITIONS
The purchase method of accounting in accordance with FASB ASC 805, “Business Combination,” was applied for all acquisitions. This requires the cost of an acquisition to
be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess
cost accounted for as goodwill. Goodwill arising from the acquisitions is attributable to expected sales synergies from combining the operations of the acquired business
with those of the Company.
Future Contingent Payments
As of January 1, 2022, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1)
effective October 1, 2017, the Company acquired all of the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) (“PSR”) and 2) effective September 30, 2018, the
Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”). The Company estimates future contingent
payments at January 1, 2022 as follows:
Fiscal Year Ending
December 31, 2022
December 30, 2023
Estimated future contingent consideration payments
$
$
Total
103
600
703
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. In the fourth quarter of 2021, the
Company remeasured the value of its contingent consideration. The primary driver for remeasuring the contingent consideration was the performance by Thermal Kinetics
Engineering (“TKE”) acquired by RCM in 2018. TKE had very high yearly EBIT targets to achieve earn-out consideration. TKE performed quite well but two factors
contributed to TKE not hitting its targets. The first was the COVID-19 pandemic which overlapped earn-out years 2 and 3. TKE had numerous projects in its pipeline that
were delayed or eliminated by prospective clients. The second factor relates to a specific client in earn-out year 2. This client experienced some problems with the product
output, TKE agreed to fix the equipment to keep a valued client happy, thus the additional cost caused TKE to miss its earn-out target. Based on these factors, the Company
decided to amend its asset purchase agreement with TKE to a total of $0.7 million. Potential future contingent payments to be made to all active acquisitions after January 1,
2022 are capped at a cumulative maximum of $0.7 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded
the fair value of those expected payments as of January 1, 2022. Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair value
recorded in other (expense) income, net.
F- 18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
6. ACQUISITIONS (CONTINUED)
For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the
acquisition date. The Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The
fair value is estimated using projected future operating results and the corresponding future earn-out payments that can be earned upon the achievement of specified
operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured
quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of operations. During the
measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the
corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed,
whichever comes first, any subsequent adjustments are recognized in the consolidated statements of operations.
In the fourth quarter of 2021, the Company remeasured the value of its contingent consideration. The primary driver for remeasuring the contingent consideration was the
performance by Thermal Kinetics Engineering (“TKE”) acquired by RCM in 2018. This remeasurement lead to a $1.7M reduction to the contingent consideration liability.
TKE had very high yearly EBIT targets to achieve earn-out consideration. TKE performed quite well but two factors contributed to TKE not hitting its targets. The first was
the COVID-19 pandemic which overlapped earn-out years 2 and 3. TKE had numerous projects in its pipeline that were delayed or eliminated by prospective clients. The
second factor relates to a specific client in earn-out year 2. This client experienced some problems with the product output, TKE agreed to fix the equipment to keep a valued
client happy, thus the additional cost caused TKE to miss its earn-out target. Based on these factors, the Company decided to amend its asset purchase agreement with
TKE.
The Company paid contingent consideration of $0.5 million and $0.3 million during the fifty-two week period ended January 1, 2022 and the fifty-three week period ended
January 2, 2021, respectively.
The changes in the liability for contingent consideration from acquisitions for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January
2, 2021 are as follows:
Balance as of December 28, 2019
Contingent payments made
Changes in fair value of contingent payments
Balance as of January 2, 2021
Contingent payments made
Changes in fair value of contingent consideration
Remeasurement of contingent consideration
Balance as of January 1, 2022
F- 19
$
$
$
3,058
(345)
145
2,858
(494)
52
(1,713)
703
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
6. ACQUISITIONS (CONTINUED)
Sale of Assets
On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices, located in Ontario, Canada. These two offices were often
referred to as Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada. The two Canada Power Systems offices
were part of a reporting unit within the Company’s Engineering segment. The Company will continue to offer other engineering services in Canada and similar services in the
United States. The Company evaluated this transaction under ASC 205-20, discontinued operations and determined it did not meet the requirements to be treated as such.
For the fifty-two week period ended January 1, 2022 and fifty-three week period ended January 2, 2021, these two offices generated revenue of $4.9 million and $11.8 million,
respectively. The Company recorded a gain on the sale of these net assets of $2.4 million. The purchase agreement provides for a typical indemnity escrow held by an
independent escrow agent in the amount of $0.8 million. The escrow has not been recognized in the Company’s financial statements, as the Company does not control the
escrow. Provided there are no asserted indemnity claims, the Company expects to receive the $0.8 million about 18 months from the purchase date.
7. GOODWILL
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company tests goodwill for
impairment on an annual basis as of the last day of the Company's fiscal year or more frequently if events occur or circumstances change indicating that the fair value of
goodwill may be below the carrying amount. During the fifty-two week period ended January 1, 2022, the Company reviewed the carrying value of goodwill due to the
events and circumstances surrounding the COVID-19 pandemic. While COVID-19 has negatively impacted the Company and may continue to negatively impact the
Company in the future, the Company did not conclude in such review that this negative impact is permanent. The Company reviewed industry and market conditions,
reporting unit specific events as well as overall financial performance and determined that no indicators of impairment of goodwill existed during the fifty-two week period
ended January 1, 2022 and fifty-three week period ended January 2, 2021. As such, no impairment loss on the Company’s goodwill during the fifty-two week period ended
January 1, 2022 or the fifty-three week period ended January 2, 2021 was recorded as a result of such review.
The changes in the carrying amount of goodwill for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 are as follows:
Balance as of December 28, 2019
No change in fiscal 2020
Balance as of January 2, 2021
No change in fiscal 2021
Balance as of January 1, 2022
Engineering
Specialty
Health Care
Information
Technology
Total
$
11,918 $
2,398 $
2,038 $
16,354
-
-
-
-
$
11,918 $
2,398 $
2,038 $
16,354
-
-
-
-
$
11,918 $
2,398 $
2,038 $
16,354
F- 20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
8. INTANGIBLE ASSETS
The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s
carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to
sell. The Company’s intangible assets consist of customer relationships and non-compete agreements. During the fifty-two week period ended January 1, 2022, the
Company reviewed the carrying value of its intangible assets due to the events and circumstances surrounding the COVID-19 pandemic. While COVID-19 has negatively
impacted the Company and may continue to negatively impact the Company in the future, the Company did not conclude in such review that this negative impact is
permanent. As such, no impairment loss on the Company’s intangible assets during the fifty-two week period ended January 1, 2022 and the fifty-three week period ended
January 2, 2021 was recorded as a result of such review.
All of the Company’s intangible assets are associated with the Engineering segment. Intangible assets other than goodwill are amortized over their useful lives. Intangible
assets are carried at cost, less accumulated amortization.
Details of intangible assets by class at January 1, 2022 and January 2, 2021:
Restricted covenants
Customer relationships
Total intangible assets
January 1,
2022
January 2,
2021
- $
-
- $
12
83
95
$
$
Amortization of acquired intangible assets for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 was $95 and $321,
respectively. The remaining intangible asset balance will be amortized during fiscal 2021.
F- 21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
9. LINE OF CREDIT
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. As amended and restated, the
Revolving Credit Facility provides for a $45.0 million revolving credit facility, has no sub-limit for letters of credit, and expires on August 8, 2023.
On September 29, 2020, the Company entered into an amendment to its Revolving Credit Facility. The amendment (i) modifies certain aspects of the financial covenants
under the Loan Agreement, including the manner in which the measurement periods for certain components of the financial covenants are determined, (ii) modifies the
required compliance levels for certain ratios under the Loan Agreement, and (iii) permitted the repayment of $2.2 million of indebtedness to a third party incurred in
connection with the previously disclosed June 2020 repurchase of stock.
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives
are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed
over shorter durations. At the option of Citizens Bank, LIBOR can be replaced with SOFR (Secured Overnight Financing Rate). The LIBOR alternative is being phased out in
2022. Citizens Bank has not indicated when this switch will occur, but in any event, the Company does not believe there will be any material impact on its borrowing rate.
The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The
effective weighted average interest rate, including unused line fees, for the fifty-two week period ended January 1, 2022 and fifty-three week period ended January 2, 2021
were 2.0% and 2.7%, respectively.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries.
The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to
pay dividends. As of January 1, 2022, the Company was in compliance with all covenants contained in the Revolving Credit Facility (as amended). The Company believes
that it will maintain compliance with its financial covenants for the foreseeable future.
Borrowings under the line of credit as of January 1, 2022 and January 2, 2021 were $14.2 million and $11.9 million, respectively. At both January 1, 2022 and January 2, 2021,
there were letters of credit outstanding for $1.9 million. At January 1, 2022, the Company had availability for additional borrowings under the Revolving Credit Facility of
$28.9 million.
Impact to Line of Credit from COVID-19
The Company is negatively impacted by COVID-19 as more fully described in Footnote 19 as well as the Segment Discussion, and Liquidity and Capital Resources sections
in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company believes that its current line of credit is adequate to provide the
necessary liquidity while COVID-19 impacts its operations. While the Company does expect to be in compliance with its financial covenants in the line of credit for the
foreseeable future, the Company can give no assurance that the line of credit will be available to the Company.
F- 22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
10. PER SHARE DATA
The Company uses the treasury stock method to calculate the weighted-average shares outstanding used for diluted earnings per share. The number of weighted-average
shares used to calculate basic and diluted earnings per share for the fiscal years ended January 1, 2022 and January 2, 2021 was determined as follows:
Basic weighted average shares outstanding
Dilutive effect of outstanding restricted share awards
Weighted average dilutive shares outstanding
Fiscal Years Ended
January 1,
2022
January 2,
2021
11,035,361
589,740
12,152,042
-
11,625,101
12,152,042
Because the year ended January 2, 2021 recorded a net loss, the otherwise dilutive effect of 46,873 outstanding restricted share awards has not been included in the weighted
average diluted shares outstanding. For the years ended January 1, 2022 and January 2, 2021, there were no anti-dilutive shares included in the calculation of common stock
equivalents.
Unissued shares of common stock were reserved for the following purposes:
Time-based restricted stock awards outstanding
Unvested subscription restricted share awards
Performance-based restricted stock awards outstanding
Future grants of options or shares
Shares reserved for employee stock purchase plan
Total
F- 23
January 1,
2022
January 2,
2021
420,628
-
125,000
107,924
448,110
459,805
250,000
-
520,929
149,894
1,101,662
1,380,628
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
11. SHARE BASED COMPENSATION
At January 1, 2022, the Company had two share-based employee compensation plans. The Company measures the fair value of share-based awards, if and when granted,
based on the Black-Scholes method and using the closing market price of the Company’s common stock on the date of grant. Awards typically vest over periods ranging
from one to three years and expire within 10 years of issuance. The Company may also issue immediately vested equity awards. Share-based compensation expense related
to time-based awards is amortized in accordance with applicable vesting periods using the straight-line method. The Company expenses performance-based awards only
when the performance metrics are likely to be achieved and the associated awards are therefore likely to vest. Performance-based share awards that are likely to vest are also
expensed on a straight-line basis over the vesting period but may vest on a retroactive basis or be reversed, depending on when it is determined that they are likely to vest,
or in the case of a reversal when they are later determined to be unlikely to vest or forfeited.
Share-based compensation expense of $1,358 and $1,108 was recognized for the fiscal years ended January 1, 2022 and January 2, 2021, respectively. Fiscal year ended
January 2, 2021 did not include any expense associated with performance-based awards. As of January 1, 2022, there were 125,000 performance-based restricted stock units
outstanding.
As of January 1, 2022, the Company had $0.7 million of total unrecognized compensation cost related to all time-based non-vested share-based awards outstanding. The
Company expects to recognize this expense over approximately two years. These amounts do not include a) the cost of any additional share-based awards granted in future
periods or b) the impact of any potential changes in the Company’s forfeiture rate.
2014 Omnibus Equity Compensation Plan (the 2014 Plan)
The 2014 Plan, approved by the Company’s shareholders in December 2014, initially provided for the issuance of up to 625,000 shares of the Company’s common stock to
officers, non-employee directors, employees of the Company and its subsidiaries, or consultants and advisors utilized by the Company. In fiscal 2016 and fiscal 2020, the
Company amended and restated the 2014 Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance under the Plan by an
additional 500,000 and 850,000 shares, respectively, so that the total number of shares of stock reserved for issuance under the Plan is 1,975,000 shares. The expiration date
of the Plan is December 17, 2030, unless the 2014 Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders. The
Compensation Committee of the Board of Directors determines the vesting period at the time of grant.
As of January 1, 2022, under the 2014 Plan, 420,628 time-based shares were outstanding, there were 125,000 performance-based restricted stock units outstanding and
107,924 shares were available for awards thereunder.
The market value of equity grants for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 was $2.9 million and $1.5 million
respectively. These amounts are based on the equity price on the last trading day in the period presented.
F- 24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
11. SHARE BASED COMPENSATION (CONTINUED)
Employee Stock Purchase Plan
The Company implemented the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) with shareholder approval, effective January 1, 2001. Under the Purchase Plan,
employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions
at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The purchase plan permits eligible employees to purchase shares
of common stock through payroll deductions for up to 10% of qualified compensation, subject to maximum purchases in any one fiscal year of 3,000 shares.
The Company has two offering periods in the Purchase Plan coinciding with the Company’s first two fiscal quarters and the last two fiscal quarters. Actual shares are issued
on the first business day of the subsequent offering period for the prior offering period payroll deductions. During the fiscal years ended January 1, 2022 and January 2,
2021, there were 101,784 and 117,983 shares issued under the Purchase Plan for net proceeds of $137 and $208, respectively. As of January 1, 2022, there were 448,110 shares
available for issuance under the Purchase Plan. Compensation expense, representing the discount to the quoted market price, for the Purchase Plan for the fiscal years
ended January 1, 2022 and January 2, 2021 was $134 and $44, respectively.
In fiscal 2015, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer
under the Plan by an additional 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,100,000 shares and to
extend the expiration date of the Plan to December 31, 2025. In fiscal 2018, the Company amended the Purchase Plan with shareholder approval to increase the aggregate
number of shares of stock reserved for issuance or transfer under the Plan by an additional 300,000 shares so that the total number of shares of stock reserved for issuance
or transfer under the Plan shall be 1,400,000 shares.
On October 20, 2021, the Company’s Board of Directors approved amendments to the Purchase Plan, subject to the approval of the Company’s shareholders, to increase by
an additional 400,000 the total number of shares of stock reserved for issuance or transfer under the Purchase Plan, and to extend the termination date of the Purchase Plan to
December 31, 2030.
Time-Based Restricted Stock Awards / Stock Subscription Receivable
From time-to-time the Company issues time-based restricted stock awards. These time-based restricted stock awards typically include dividend accrual equivalents, which
means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee’s restricted stock award
fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying
condensed consolidated balance sheet. As of January 1, 2022, there were no accrued dividends. Dividends for time-based restricted stock awards that ultimately do not
vest are forfeited.
F- 25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
11. SHARE BASED COMPENSATION (CONTINUED)
Time-Based Restricted Stock Awards / Stock Subscription Receivable (Continued)
The following summarizes the activity in the time-based restricted stock awards under the 2014 Plan during the fifty-two week period ended January 1, 2022:
Outstanding non-vested at January 2, 2021
Granted
Vested
Forfeited or expired
Outstanding non-vested at January 1, 2022
Number of
Time-Based
Restricted
Stock Awards
Weighted
Average
Grant Date Fair
Value per Share
709,805 $
163,005 $
(452,182) $
-
420,628 $
1.92
3.81
1.89
-
2.69
Based on the closing price of the Company’s common stock of $7.12 per share on December 31, 2021 (the last trading day prior to January 1, 2022), the intrinsic value of the
time-based non-vested restricted stock units at January 1, 2022 was approximately $3.0 million. As of January 1, 2022, there was approximately $0.7 million of total
unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over the average weighted remaining vesting period of the
restricted stock units through fiscal 2024.
In December 2020, the Company granted members of senior management one-time restricted stock awards of an aggregate of 250,000 shares in exchange for a stock
subscription receivable. The shares were acquired by senior management through repayment of the stock subscription receivable from equal biweekly salary reductions over
twelve months beginning in January 2021 and ending in December 2021.
During the fifty-two week period ended January 1, 2022, the Company awarded 125,000 immediately vested share awards at an average price of $2.17. During fiscal 2020, the
Company awarded 100,092 immediately vested share awards at an average price of $1.33.
Performance-Based Restricted Stock Awards
From time-to-time the Company issues performance-based restricted stock units to its executives. Performance-based restricted stock units are typically vested based on
certain multi-year performance metrics as determined by the Board of Directors Compensation Committee. These performance-based restricted stock units typically include
dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period on any
stock awards that actually vest, if any. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on
the accompanying condensed consolidated balance sheet. As of January 1, 2022, there were no accrued dividends for performance-based restricted stock units. Dividends
for performance-based restricted stock units that ultimately do not vest are forfeited.
F- 26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
11. SHARE BASED COMPENSATION (CONTINUED)
To date, the Company has issued performance-based restricted stock units only under the 2014 Plan. The following summarizes the activity in the performance-based
restricted stock units during the fifty-two week period ended January 1, 2022:
Outstanding non-vested at January 2, 2021
Granted
Vested
Forfeited or expired
Outstanding non-vested at January 1, 2022
Number of
Performance-Based
Restricted
Stock Awards
Weighted
Average
Grant Date Fair
Value per Share
-
125,000 $
-
-
125,000 $
-
3.26
-
-
3.26
As of January 1, 2022, there were 125,000 performance-based restricted stock units outstanding. The Company assesses at each reporting date whether achievement of any
performance condition is probable and recognizes the expense when achievement of the performance condition becomes probable. The Company will then recognize the
appropriate expense cumulatively in the year performance becomes probable and recognize the remaining compensation cost over the remaining requisite service period. If at
a later measurement date the Company determines that performance-based restricted stock awards deemed as likely to vest are deemed as unlikely to vest, the expense
recognized will be reversed.
The Company has estimated as of January 1, 2022 that the 125,000 performance-based stock units will be earned in fiscal 2021. The total expense recorded for the 125,000
performance-based stock units earned is $271.
Outstanding non-vested at December 28, 2019
Granted – time-based vesting
Granted – performance-based vesting
Vested
Forfeited or expired
Outstanding non-vested at January 2, 2021
Granted – time-based vesting
Granted – performance-based vesting
Vested
Forfeited or expired
Outstanding non-vested at January 1, 2022
Number of
Restricted
Stock Awards
Weighted Average
Grant Date Fair
Value per Share
391,725 $
719,805 $
-
(179,225) $
(222,500) $
709,805 $
163,005 $
125,000 $
(452,182) $
-
545,628 $
4.36
1.88
-
3.78
4.55
1.92
3.81
3.26
1.89
-
2.82
Based on the closing price of the Company’s common stock of $7.12 per share on December 31, 2021, the intrinsic value of all outstanding unvested equity awards at
January 1, 2022 was $3.9 million.
F- 27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
12. TREASURY STOCK TRANSACTIONS
On January 13, 2021, the Company’s Board of Directors authorized a program to repurchase shares of the Company’s common stock constituting, in the aggregate, up to an
amount not to exceed $7.5 million. All of these repurchases are conducted under the safe harbor from liability under certain market manipulation rules provided by Rule
10b-18 under the Securities Exchange act of 1934, as amended. On November 12, 2021, the Company’s Board of Directors further increased the total amount available to
repurchase shares up to an amount not to exceed $19.1 million (including the initial $7.5 million authorized), consistent with the maximum limitation set forth by the
Company’s revolving line of credit. The program is designed to provide the Company with enhanced flexibility over the long term to optimize its capital structure. Shares of
the common stock may be repurchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time at the discretion of
the Company.
During the fifty-two week period ended January 1, 2022, the Company purchased 1,930,911 shares at an average price of $4.68 per share. As of January 1, 2022, the Company
has $10.1 million available for future treasury stock purchases.
On June 2, 2020, the Company entered into a stock purchase agreement with certain stockholders of the Company, whereby the Company purchased an aggregate of
1,858,139 shares of the Company’s common stock for a negotiated purchase price of $1.20 per share or $2.2 million in total. The negotiated price of $1.20 per share was less
than the lowest trading price of the stock on the day of the repurchase. The consideration paid by the Company consisted entirely of an unsecured subordinated
promissory note for $2.2 million. The note accrued interest at an annual rate of 9.0%, compounded annually, payable quarterly in arrears commencing on September 1, 2020
and continuing on each December 1, March 1, June 1 and September 1 thereafter, and initially had a maturity date of August 10, 2023. On September 25, 2020, the Company
repaid the subordinated promissory note in the amount of $2.2 million. The shares repurchased on June 2, 2020 were not purchased under a stock repurchase plan.
13. NEW ACCOUNTING STANDARDS
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326).
The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. In February 2020, the FASB
issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective
date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in
fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not
anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its consolidated financial
statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This
standard only applies to contracts and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due
to reference rate reform. This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to
ease entities’ financial reporting burdens as the market transitions from the LIBOR and other interbank offered rates to alternative reference rates. The Company may elect to
apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its consolidated financial
statements and related disclosures.
F- 28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
14. SEGMENT INFORMATION
The Company follows ASC280, “Segment Reporting,” which establishes standards for companies to report information about operating segments, geographic areas and
major customers. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies (see Note 1 to the
Company’s Consolidated Financial Statements).
Segment operating income (loss) includes selling, general and administrative expenses directly attributable to that segment as well as charges for allocating corporate costs
to each of the operating segments. The following tables reflect the results of the reportable segments consistent with the Company’s management system:
Fiscal Year Ended
January 1, 2022
Revenue
Cost of services
Gross profit
Selling, general and administrative
Depreciation and amortization of
property and equipment
Amortization of acquired intangible assets
Remeasurement of acquisition-related
contingent consideration
Gain on sale of assets
Operating income (loss)
Total assets as of January 1, 2022
Capital expenditures
Engineering
Specialty Health
Care
Information
Technology
Corporate
Total
$
66,172 $
98,495 $
39,208 $
- $
203,875
50,109
73,177
27,465
16,063
25,318
11,743
14,210
19,490
8,319
521
95
(1,713)
(2,420)
373
113
-
-
-
-
-
-
5,370 $
5,455 $
3,331 $
-
-
-
-
-
-
-
- $
28,343 $
481 $
32,809 $
563 $
8,676 $
173 $
3,024 $
359 $
F- 29
150,751
53,124
42,019
1,007
95
(1,713)
(2,420)
14,136
72,852
1,576
$
$
$
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
14. SEGMENT INFORMATION (CONTINUED)
Fiscal Year Ended
January 2, 2021
Revenue
Cost of services
Gross profit
Selling, general and administrative
Depreciation and amortization of
property and equipment
Amortization of acquired intangible assets
Write-off of receivables and
professional fees incurred
related to arbitration
Impairment of right of use assets and
related costs
Operating income (loss)
Total assets as of January 2, 2021
Capital expenditures
Engineering
Specialty Health
Care
Information
Technology
Corporate
Total
$
57,715 $
60,481 $
32,213 $
- $
150,409
41,227
47,116
23,211
16,488
13,365
13,021
15,601
638
321
8,397
-
319
-
-
-
9,002
9,169
108
-
-
-
-
-
-
-
-
111,554
38,855
37,791
1,065
321
-
8,397
2,231
2,231
(10,950)
68,339
460
$
$
$
(5,889) $
(2,555) $
(275) $
(2,231) $
33,782 $
26 $
19,141 $
36 $
7,498 $
48 $
7,918 $
350 $
The Company derives a majority of its revenue from offices in the United States. Revenues reported for each operating segment are all from external customers. The
Company is domiciled in the United States and its segments operate in the United States, Canada, Puerto Rico and Serbia. Revenues by geographic area for the fiscal years
ended January 1, 2022 and January 2, 2021 are as follows:
Revenues
United States
Canada
Puerto Rico
Serbia
Fiscal Year Ended
January 1,
2022
January 2,
2021
$
$
186,169 $
9,578
5,237
2,891
203,875 $
126,238
15,310
5,702
3,159
150,409
F- 30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
14. SEGMENT INFORMATION (CONTINUED)
Total assets by geographic area as of the reported periods are as follows:
Total Assets
United States
Canada
Puerto Rico
Serbia
15. INCOME TAXES
Fiscal Year Ended
January 1,
2022
January 2,
2021
$
$
67,296 $
1,327
963
3,266
72,852 $
56,308
7,067
1,483
3,481
68,339
Generally, the Company’s relative income or loss generated in each of its jurisdictions can materially impact the consolidated effective income tax rate of the Company,
particularly the ratio of Canadian and Serbian pretax income, versus United States pretax income. The consolidated effective income tax rate for fiscal 2021 was 21.0% as
compared to 26.4% for the comparable prior year period. The Company’s United States Federal statutory tax rate for the fifty-two week period ended January 1, 2022 and the
comparable prior year period, before any adjustments, was 21.0%. The income tax provisions reconciled to the tax computed at the United States Federal statutory rate for
both fiscal 2021 and 2020 are as follows:
Federal statutory rate
Tax expense on taxable (loss)
income at federal statutory rate
State and Puerto Rico income taxes,
net of Federal income tax benefit
Permanent differences domestic
Permanent differences foreign
Remeasurement of contingent consideration
Intangible asset deferred tax liability true-up
Foreign income tax rates
Adjustments to prior year federal taxes
Other
Total income tax expense
F- 31
January 1,
2022
January 2,
2021
21.0%
2,922
$
519
(114)
(657)
(359)
491
89
46
(12)
$
2,925
21.0%
(2,532)
(535)
154
-
-
-
(21)
(53)
(201)
(3,188)
$
$
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
15. INCOME TAXES (CONTINUED)
The components of income tax expense are as follows:
Current
Federal
State and local
Foreign
Deferred
Federal
State
Foreign
Total
Fiscal Years Ended
January 1,
2022
January 2,
2021
$
$
47 $
45
292
384
2,152
612
(223)
2,541
2,925 $
(32)
174
382
524
(2,844)
(851)
(17)
(3,755)
(3,188)
The components of earnings before income taxes by United States and foreign jurisdictions were as follows:
United States
Foreign jurisdictions
A reconciliation of the unrecognized tax benefits for the year January 1, 2022:
Fiscal Years Ended
January 1,
2022
January 2,
2021
$
$
10,880 $
3,034
13,914 $
(13,898)
1,841
(12,057)
Unrecognized Tax Benefits
Balance as of December 28, 2019
Gross increases: tax positions in prior period
Gross increases: tax positions in current period
Balance as of January 2, 2021
Gross increases: tax positions in prior period
Gross increases: tax positions in current period
Balance as of January 1, 2022
$
$
$
$
$
$
-
-
-
-
1,196
1,196
The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the
settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, it is
reasonably possible that the balance of gross unrecognized tax benefits will not change during the next 12 months. However, changes in the occurrence, expected outcomes
and timing of those events could cause the Company’s current estimate to change materially in the future.
F- 32
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
15. INCOME TAXES (CONTINUED)
The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes and records such amounts to interest expense. The
Company recorded no expense for penalties or interest in the fiscal years ended January 1, 2022 and January 2, 2021.
At January 1, 2022 and January 2, 2021, deferred tax assets and liabilities consist of the following:
Deferred tax assets:
Allowance for doubtful accounts
Federal and state net operating loss carryforward
Reserves and accruals
Lease liability
Other
Total deferred tax assets
Deferred tax liabilities:
Acquisition amortization, net
Prepaid expense deferral
Bonus depreciation to be reversed
Right of use assets
Canada deferred tax liability, net
Total deferred tax liabilities
Total deferred tax assets (liabilities), net
January 1,
2022
January 2,
2021
297 $
1,153
800
844
314
3,408
(1,428)
(552)
(392)
(501)
(142)
(3,015)
393 $
455
2,634
881
1,174
318
5,462
(716)
(602)
(280)
(564)
(365)
(2,527)
2,935
$
$
The Company has gross net operating losses of $2.9 million and $8.6 million to be applied to the net income of future federal and state tax returns, respectively. The principal
amount of the federal net operating loss has an unlimited life. The Company conducts business in many states. Net operating losses in these states expire at differing
periods but the majority of these expire from 2038 through 2040.
The Company conducts its operations in multiple tax jurisdictions in the United States, Canada, Puerto Rico and Serbia. The Company and its subsidiaries file a consolidated
United States Federal income tax return and file in various states. The Company’s federal income tax returns have been examined through 2017. The Company has no open
federal audits as of January 1, 2022. The Company is no longer subject to audits by state and local tax authorities for tax years prior to 2018. The Company is no longer
subject to audit in Canada for the tax years prior to tax year 2017. The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax year 2011. The
Company has no open state audits as of January 1, 2022.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based
compensation, and potential tax credits available to the Company.
F- 33
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
16. CONTINGENCIES
From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the ordinary business course. These matters may relate to professional
liability, tax, compensation, contract, competitor disputes, and employee-related matters and include individual and class action lawsuits, as well as inquiries and
investigations by governmental agencies regarding the Company’s employment and compensation practices. Additionally, some of the Company’s clients may also become
subject to claims, governmental inquiries and investigations, and legal actions relating to the Company’s professional services. Depending upon the particular facts and
circumstances, the Company may also be subject to indemnification obligations under its contracts with such clients relating to these matters.
As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of losses and possible recoveries. The
Company may not be covered by insurance as it pertains to some or all of these matters. A determination of the amount of the provision required for these commitments and
contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. The Company records a liability when management believes an
adverse outcome from a loss contingency is both probable and the amount, or a range, can be reasonably estimated. From time to time, the Company must estimate the
potential loss even though the party adverse to the Company has not asserted any specific amounts. Significant judgment is required to determine both probability of loss
and the estimated amount. The Company reviews its loss contingencies at least quarterly and adjusts its accruals and/or disclosures to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel, or other new information, as deemed necessary. Once established, a provision may change in the future due to new
developments or changes in circumstances and could increase or decrease the Company’s earnings in the period that the changes are made.
The Company is exposed to various asserted claims as of January 1, 2022, where the Company believes it has a probability of loss. Additionally, the Company is exposed to
other asserted claims whereby an amount of loss has not been declared, and the Company cannot determine the potential loss. Any of these various claims could result in an
unfavorable outcome or settlement that exceeds the accrued amounts. However, the Company believes that such matters will not, either individually or in the aggregate,
have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. As of January 1, 2022, the Company has accrued $2.9
million for asserted claims. Included in the January 1, 2022 accrual of $2.9 million, the Company has reserved $1.6 million for the settlement of a class-action suit in California
that alleges the Company did not properly pay its travel nurses overtime wages. While the Company believes it did not violate any overtime wage laws, it decided to settle
this class action lawsuit in December 2020. The Company paid the $1.6 million settlement in early January 2022.
F- 34
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
17. RETIREMENT PLANS
Profit Sharing Plans
The Company maintains a 401(k) profit sharing plan for the benefit of eligible employees in the United States and other similar plans in Canada, Puerto Rico and Serbia (the
“Retirement Plans”). The 401(k) plan includes a cash or deferred arrangement pursuant to Section 401(k) of the Internal Revenue Code sponsored by the Company to
provide eligible employees an opportunity to defer compensation and have such deferred amounts contributed to the 401(k) plan on a pre-tax basis, subject to certain
limitations. The Company, at the discretion of the Board of Directors, may make contributions of cash to match deferrals of compensation by participants in the Retirement
Plans. Contributions to the Retirement Plans charged to operations by the Company for the fiscal years ended January 1, 2022 and January 2, 2021 were $721 and $217,
respectively.
18. COMMITMENTS
Executive Severance Agreements
The Company is a party to Executive Severance Agreement (the “Executive Severance Agreement”) each of Bradley S. Vizi, the Company's Executive Chairman and President
(dated as of June 1, 2018), and Kevin Miller, the Company’s Chief Financial Officer (dated as of February 28, 2014, as amended), which set forth the terms and conditions of
certain payments to be made by the Company to the executive in the event, while employed by the Company, such executive experiences (a) a termination of employment
unrelated to a “Change in Control” (as defined therein) or (b) there occurs a Change in Control and either (i) the executive’s employment is terminated for a reason related to
the Change in Control or (ii) in the case of Mr. Miller, the executive remains continuously employed with the Company for a period of three months following the Change in
Control. Each Executive Severance Agreement also provide for certain payments, if either (a) the executive is involuntarily terminated by the Company for any reason other
than “Cause” (as defined therein), “Disability” (as defined therein) or death, or (b) the executive resigns for “Good Reason” (as defined therein), and, in each case, the
termination is not a “Termination Related to a Change in Control” (as defined therein).
Leases
Leases are recorded in accordance with FASB ASC 842, Leases which requires lessees to recognize a right-of-use (“ROU”) asset and an operating right of use liability for all
leases with terms greater than 12 months and requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases.
At January 1, 2021, in connection with the continuing developments from COVID-19, the Company reduced its leased office space as a result of its employees moving to a
remote work environment. The Company does not believe there is an opportunity to sublet any of the vacant office space due to the current commercial rental marketplace.
This decision and reduction in the use of the office spaces resulted in a right-of-use asset impairment of $1.9 million. This loss was determined by identifying the fair value of
the impacted right-of-use assets as compared to the carrying value of the assets as of the measurement date, in accordance with Property, Plant and Equipment Topic of
the FASB ASC. The fair value of the right-of-use assets was based on the remaining term of each lease. In addition, the Company wrote off a total of $0.3 million in other
office lease costs and obsolete equipment.
F- 35
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
18. COMMITMENTS (CONTINUED)
Leases (Continued)
The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, right of use assets represent the Company’s right to use an
underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Right of use assets and lease liabilities are
recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit
interest rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease
payments. The right of use asset also consists of any lease incentives received. The lease terms used to calculate the right of use asset and related lease liability include
options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a
straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the
accelerated interest method of recognition. The Company has lease agreements which require payments for lease and non-lease components. The Company has elected to
account for these as a single lease component with the exception of its real estate leases.
The components of lease expense were as follows:
Operating lease cost
Finance lease cost
Amortization of right of use assets
Interest on lease liabilities
Total finance lease cost
Supplemental Cash Flow information related to leases was as follows:
Cash paid for amounts included in the
measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right of use assets obtained in exchange for lease obligations
Operating leases
Finance leases
F- 36
Fifty-Two Week
Period Ended
January 1, 2022
Fifty-Three Week
Period Ended
January 2, 2021
1,891 $
401 $
9
410 $
2,524
366
10
376
Fifty-Two Week
Period Ended
January 1, 2022
Fifty-Three Week
Period Ended
January 2, 2021
1,957 $
9 $
415 $
830 $
1,002 $
2,589
7
402
1,257
258
$
$
$
$
$
$
$
$
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
18. COMMITMENTS (CONTINUED)
Leases (Continued)
Supplemental Balance Sheet information as of January 1, 2022 related to leases was as follows:
Operating leases
Operating lease right of use assets
Operating right of use liability - current
Operating right of use liability - non-current
Total operating lease liabilities
Finance leases
Property and equipment - (right of use assets)
Accumulated depreciation
Property and equipment, net
Finance lease liability - current
Finance lease liability - non-current
Total finance lease liabilities
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
Fifty-Two Week
Period Ended
January 1, 2022
Fifty-Three Week
Period Ended
January 2, 2021
$
$
$
$
$
$
$
1,877
$
(1,502) $
(1,631)
(3,133) $
1,367
$
(375)
992
$
(437) $
(502)
(939) $
2,409
(1,886)
(2,641)
(4,527)
1,140
(746)
394
(247)
(106)
(353)
1.80 Years
2.34 years
2.03 Years
1.45 Years
3.32%
1.15%
4.06%
2.63%
F- 37
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
18. COMMITMENTS (CONTINUED)
Leases (Continued)
Maturities of lease liabilities are as follows:
Fiscal Year
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total
19. RELATED PARTY TRANSACTIONS
There have been no related party transactions during the time periods presented.
F- 38
Operating
Leases
Finance
Leases
$
$
$
1,579 $
1,097
396
133
50
3,255 $
(122)
3,133 $
446
337
168
-
-
951
(12)
939
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended January 1, 2022 and January 2, 2021
(Dollars in thousands, except share and per share amounts, unless otherwise indicated)
20. STOCKHOLDER RIGHTS PLAN
On May 22, 2020, the Board of Directors of the Company approved a stockholder rights plan (the “Rights Plan”) and declared a dividend distribution to stockholders of
record as of the close of business on June 2, 2020 of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock of the Company. Each Right
entitled the holder to purchase from the Company a unit consisting of one one-hundredth of a share (a “Unit”) of a newly-authorized series of junior participating preferred
stock of the Company, upon the occurrence of certain events, at a purchase price of $5.60 per Unit.
The initial issuance of the Rights as a dividend had no financial accounting or reporting impact. The fair value of the Rights was nominal because the Rights were not
exercisable when issued and no value is attributable to them. Additionally, the Rights did not meet the definition of a liability under generally accepted accounting principles
in the United States and were therefore not accounted for as a long-term obligation. Accordingly, the Rights Plan had no impact on the Company’s Consolidated Financial
Statements.
The Rights expired in accordance with their terms on May 22, 2021 and the Rights Plan is no longer in effect.
21. COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to present various health, business
and other challenges throughout the United States. As a result, we have temporarily closed or reduced most of our office locations, with most of our workforce working from
home, and have seen a reduction in customer demand. The duration and ultimate magnitude of the disruption remains uncertain. Therefore, we experienced a negative impact
during fiscal 2020 and fiscal 2021, and this matter may continue to negatively impact our business, results of operations, and financial position throughout fiscal 2022 and
possibly beyond, and the related financial impact cannot be reasonably estimated at this time.
F- 39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
RCM Technologies, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of RCM Technologies, Inc. and Subsidiaries (the “Company") as of January 1, 2022 and January 2, 2021, and
the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years ended January 1, 2022 and
January 2, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of January 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for the years ended January 1, 2022 and January
2, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not,
by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate
F-40
Realizability of deferred tax assets
Description of the Matter
As discussed in Note 15 to the financial statements, the Company had gross deferred tax assets of $3.4 million, of which $1.2 million related to net operating loss carryforwards as
of January 1, 2022, and a gross deferred tax liability of $3.0 million. The assessment of the realizability of these deferred tax assets is based on the Company’s evaluation of
available evidence to determine whether sufficient future taxable income will be generated to allow for the realization of such deferred tax assets. The Company records a
valuation allowance to reduce its deferred tax assets to an amount that is more than 50% likely of being realized.
We identified the evaluation of the realizability of deferred tax assets as a critical audit matter. A high degree of auditor judgment was necessary to assess the evidence used by
the Company to evaluate the realizability of deferred tax assets relating to the net operating loss carryforwards. Specifically, assessing the Company’s determination of the
reversal of existing taxable temporary differences, cumulative pre-tax losses and the relevance of such losses to forecasted future taxable income required subjective auditor
judgment. In addition, specialized skills were required to evaluate the Company’s application of income tax regulations.
How We Addressed the Matter in Our Audit
We evaluated the design and obtained an understanding of certain internal controls related to the Company’s income tax process. This included controls related to the
application of income tax regulations and the Company’s consideration of available evidence to determine whether sufficient future taxable income will be generated to allow for
the realization of existing deferred tax assets. We involved income tax professionals with specialized skills and knowledge, who assisted in evaluating the Company’s application
of income tax regulations used in its realizability analysis. This included evaluating the scheduling of the reversal of existing taxable temporary differences to assess the
utilization of net operating loss carryforwards in each tax jurisdiction before their scheduled expiration. We evaluated the Company’s consideration of cumulative pre-tax losses
and the net deferred tax position in assessing whether deferred tax assets were more than 50% likely of being realized.
/s/ Macias, Gini & O’Connell LLP
We have served as the Company’s auditor since 2019.
Macias, Gini & O’Connell, LLP
San Diego, California
Firm ID 324
April 4, 2022
F-41
DESCRIPTION OF CAPITAL STOCK
Exhibit (4)(a)
The following description of the terms of the common stock of RCM Technologies, Inc. (the "Company,” "we,” "our” or "us”) sets forth certain general terms
and provisions of our common stock. This section also summarizes relevant provisions of Nevada law. The following summary of the terms of our common stock
does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the applicable provisions of Nevada law and our Articles of
Incorporation, as amended (the "Articles of Incorporation”) and our Amended and Restated Bylaws, as amended (the "Bylaws”), copies of which are filed with, or
incorporated by reference into, our Annual Reports on Form 10-K.
Capital Stock
Our authorized capital stock currently consists of 40,000,000 shares of common stock, $0.05 par value per share, and 5,000,000 shares of preferred stock, $1.00
par value per share.
Common Stock
The holders of our common stock are entitled to one vote for every share standing in the name of the stockholder in the books of the Company on any matter
submitted to the stockholders, including the election of directors. Holders of the common stock do not have any preemptive rights so long as the common stock
remains registered pursuant to section 12 of the Securities Exchange Act of 1934, as amended. Holders of the common stock do not have any cumulative voting
rights. The holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of legally available funds. Upon
our liquidation or dissolution, the holders of common stock will be entitled to share ratably in those of our assets that are legally available for distribution to
stockholders after payment of liabilities and subject to the prior rights of any holders of preferred stock then outstanding. All of the outstanding shares of common
stock are fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of shares of any
series of preferred stock that may be issued in the future.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock. Subject to limitations prescribed by Nevada law and the Articles of Incorporation, the
Preferred Stock shall be divided into and from time to time may be issued in classes and in series within any class and our board of directors is hereby authorized
to make such division into classes and series, to determine the number of shares of any such class or series, and to determine the designation, voting rights,
preferences, limitations and special rights, if any, of the shares of each such class or series. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our Company and may adversely affect the voting and other rights of the holders of our common stock, which could
have an adverse impact on the market price of our common stock.
Certain Articles of Incorporation, Bylaws and Statutory Provisions
The provisions of the Articles of Incorporation and Bylaws and of the Nevada Business Corporation Act summarized below may have an anti-takeover effect
and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in such stockholder’s best interest, including an attempt that
might result in the receipt of a premium over the market price for our shares.
Limitation of Liability of Officers and Directors
Nevada law currently provides that our directors will not be personally liable to our Company or our stockholders for monetary damages for any act or omission
as a director other than in the following circumstances:
● the director breaches his fiduciary duty to our Company or our stockholders and this breach involves intentional misconduct, fraud or a knowing violation of
law; or
● our Company makes an unlawful payment of a dividend or unlawful stock purchases, redemptions or other distributions.
As a result, neither we nor our stockholders have the right, through stockholders’ derivative suits on our behalf, to recover monetary damages against a director
for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, except in the situations described above. Nevada law allows
the articles of incorporation of a corporation to provide for greater liability of the corporation’s directors. Our Articles of Incorporation do not provide for such
expanded liability.
Special Meetings of Stockholders
The Bylaws provide that special meetings of stockholders may be called only by a majority of the members of our board or upon the written request of
stockholders, in accordance with, and subject to, the provisions of the Bylaws, from stockholders who hold, in the aggregate, not less than twenty percent (20%) of
the voting power of our outstanding shares.
Stockholder Action; Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Articles of Incorporation provide that stockholders may take action by written consent if such consent is signed by the holders of record of the outstanding
shares of the Company having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted, and otherwise may only take action at duly called annual or special meetings. In addition, our Bylaws
establish advance notice procedures for:
● stockholders to nominate candidates for election as a director; and
● stockholders to propose topics for consideration at stockholders’ meetings.
Stockholders must notify our corporate secretary in writing prior to the meeting at which the matters are to be acted upon or directors are to be elected. The
notice must contain the information specified in our Bylaws. To be timely, the notice must be delivered to, or mailed and received at, the principal executive offices
of the Company not less than ninety (90) days nor more than one hundred twenty (120) days prior to the one-year anniversary of the immediately preceding year’s
annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting is called for a date that
is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered, or mailed
and received, not later than the ninetieth (90th) day prior to such annual meeting or, if later, the tenth (10th) day following the day on which public disclosure of the
date of such annual meeting was first made. In the case of a special meeting of stockholders called to elect directors, the stockholder notice must be delivered to,
or mailed and received by, the Secretary of the Company at its principal executive offices not earlier than the one hundred twentieth (120th) day prior to such
special meeting and not later than the ninetieth (90th) day prior to such special meeting or, if later, the tenth (10th) day following the day on which public disclosure
(as defined in Section 3.13(h)) of the date of such special meeting was first made. These provisions may preclude some stockholders from bringing matters before
the stockholders at an annual or special meeting or from nominating candidates for director at an annual or special meeting.
Election and Removal of Directors
Our board of directors is elected each year by our stockholders for a term expiring at the next annual meeting of stockholders. Our stockholders may remove
directors with our without cause by the affirmative vote of the holders of two-thirds (2/3) of the combined voting power of all the then issued and outstanding
shares of stock of all classes and series of the Company entitled to vote generally for the election of Directors, thereon, voting together as a single class. Our
board of directors may elect a director to fill a vacancy created by the expansion of the board of directors.
Nevada Anti-Takeover Statutes
Business Combinations Act
We are subject to Nevada’s anti-takeover law under the Nevada Business Corporation Act, known as the Business Combinations Act. This law provides that
specified persons who, together with affiliates and associates, own, or, with respect to affiliates or associates of ours who within two years did own, 10% or more
of the outstanding voting stock of a corporation cannot engage in specified business combinations with the corporation for a period of two years after the date on
which the person became an interested stockholder. The law defines the term "business combination” to encompass a wide variety of transactions with or caused
by an interested stockholder, including mergers, asset sales and other transactions in which the interested stockholder receives or could receive a benefit on other
than a pro rata basis with other stockholders. This provision would then have an anti-takeover effect for transactions not approved in advance by our board of
directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock.
Control Shares Act
The Nevada Business Corporation Act provides that, in certain circumstances, a stockholder who acquires a controlling interest in a corporation, defined in the
statute as an interest in excess of a 1/5, 1/3 or 1/2 interest, has no voting rights in the shares acquired that caused the stockholder to exceed any such threshold,
unless the corporation’s other stockholders, by majority vote, grant voting rights to such shares. We may opt out of this act by amending our by-laws either before
or within ten days after the relevant acquisition of shares. Presently, our amended and restated by-laws do not opt out of this act.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock Transfer & Trust Company, LLC. Its address is 59 Maiden Lane, New York, New
York 10005.
Listing
Our common stock is listed on the NASDAQ Capital Market under the symbol "RCMT.”
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Cataract, Inc.
PSR Engineering Solutions d.o.o. Beograd (Voždovac)
RCM Technologies Canada Corp.
RCM Technologies (USA), Inc.
RCM Technologies Netherlands B.V.
RCMT Delaware, Inc.
RCMT Europe Holdings, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of RCM Technologies, Inc. on Form S‐8 (Nos. 333-261767, 333-251516, 333-222151, 333-200826, 333-
165482, 333-145904, 333-61306, 333-80590, 333-48089, 333-52206 and 333-52480) and on Form S-3 (No. 333-252148) of our report dated April 4, 2022, related to our audits of the
consolidated financial statements of RCM Technologies, Inc. as of January 1, 2022 and January 2, 2021, and for the years then ended, which report appears in this Annual Report
on Form 10-K.
/s/ Macias Gini & O’Connell LLP
Macias Gini & O’Connell LLP
San Diego, California
April 4, 2022
EXHIBIT 31.1
CERTIFICATION REQUIRED BY
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Bradley S. Vizi, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc. (the "registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: April 4, 2022
/s/Bradley S. Vizi
Bradley S. Vizi
Executive Chairman and President
EXHIBIT 31.2
CERTIFICATION REQUIRED BY
RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Kevin D. Miller, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc. (the "registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: April 4, 2022
/s/Kevin D. Miller
Kevin D. Miller
Chief Financial Officer, Treasurer and Secretary
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the "Company”) for the fiscal year ended January 1, 2022, as filed with the Securities and
Exchange Commission on the date hereof (the "Report”), I, Bradley S. Vizi, Executive Chairman and President of the Company, certify, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended (15 U.S.C. section 78m (a)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Bradley S. Vizi
Bradley S. Vizi
Executive Chairman and President
April 4, 2022
A signed original of this written statement required by Section 906 has been provided to RCM Technologies, Inc. and will be retained by RCM Technologies, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the "Company”) for the fiscal year ended January 1, 2022, as filed with the Securities and
Exchange Commission on the date hereof (the "Report”), I, Kevin D. Miller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended (15 U.S.C. section 78m (a)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Kevin D. Miller
Kevin D. Miller
Chief Financial Officer, Treasurer and Secretary
April 4, 2022
A signed original of this written statement required by Section 906 has been provided to RCM Technologies, Inc. and will be retained by RCM Technologies, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.