Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2019

[ ]	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	95--1480559
(State or other Jurisdiction of Incorporation)	(I.R.S. Employer Identification No.)

2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613

(Address of Principal Executive Offices) (Zip Code)

(856) 356-4500

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.05 per share		RCMT		The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [ ] NO [X]

Indicate the number of shares outstanding of the Registrant’s class of common stock, as of the latest practicable date.

Common Stock, $0.05 par value, 12,755,173 shares outstanding as of May 9 , 2019.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION

		Page
Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets as of March 30, 2019 (Unaudited) and December 29, 2018	3

	Unaudited Consolidated Statements of Income for the Thirteen Week Periods Ended March 30, 2019 and March 31, 2018	4

	Unaudited Consolidated Statements of Comprehensive Income for the Thirteen Week Periods Ended March 30, 2019 and March 31, 2018	5

	Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Thirteen Week Period Ended March 30, 2019	6

	Unaudited Consolidated Statements of Cash Flows for the Thirteen Week Periods Ended March 30, 2019 and March 31, 2018	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38


PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

Signatures		41

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 30, 2019 and December 29, 2018

(In thousands, except share and per share amounts)

			March 30,	December 29,
			2019	2018
			(Unaudited)
Current assets:
	Cash and cash equivalents		$1,693	$482
	Accounts receivable, net		58,613	52,335
	Transit accounts receivable		826	2,569
	Prepaid expenses and other current assets		3,494	3,425
		Total current assets	64,626	58,811

Property and equipment, net			3,271	3,485

Other assets:
	Deposits		215	214
	Goodwill		17,532	17,532
	Operating right of use asset		5,816	-
	Intangible assets, net		661	743
	Deferred tax assets, net, domestic		690	725
		Total other assets	24,914	19,214

		Total assets	$92,811	$81,510

Current liabilities:
	Accounts payable and accrued expenses			$8,590		$9,969
	Transit accounts payable			810		2,506
	Accrued payroll and related costs			8,161		9,028
	Finance lease payable			290		-
	Income taxes payable			50		97
	Operating right of use liability			1,962		-
	Liability for contingent consideration from acquisitions			1,392		1,588
			Total current liabilities	21,255		23,188

Deferred tax liability, foreign				398		398
Finance lease payable				343		-
Liability for contingent consideration from acquisitions				3,185		3,185
Operating right of use liability				4,122		-
Borrowings under line of credit				34,429		27,540
		Total liabilities		63,732		54,311

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;
			15,694,944 shares issued and 12,871,772 shares outstanding at March 30, 2019 and 15,578,345 shares issued and 12,755,173 shares outstanding at December 29, 2018	784		778
	Additional paid-in capital			107,726		107,326
	Accumulated other comprehensive loss			(2,744	)	(2,755	)
	Accumulated deficit			(61,700	)	(63,163	)
	Treasury stock (2,823,172 shares at March 30, 2019 and
			December 29, 2018) at cost	(14,987	)	(14,987	)
			Stockholders’ equity	29,079		27,199

			Total liabilities and stockholders’ equity	$92,811		$81,510

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

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Thirteen Week Periods Ended March 30, 2019 and March 31, 2018

(Unaudited)

(In thousands, except per share amounts)

		Thirteen Weeks Ended
		March 30, 2019		March 31, 2018

Revenues		$51,595		$50,812
Cost of services		39,078		38,257
Gross profit		12,517		12,555

Operating costs and expenses
	Selling, general and administrative	10,466		10,421
	Depreciation and amortization of property and eq uipment	315		397
	Amortization of acquired intangible assets	82		17
Operating costs and expenses		10,863		10,835

Operating income		1,654		1,720

Other (expense) income
	Interest expense and other, net	(428	)	(266	)
	Imputed interest on contingent consideration	(48	)	-
	Gain (loss) on foreign currency transactions	11		(41	)
Other expense		(465	)	(307	)

Income before income taxes		1,189		1,413
Income tax (benefit) expense		(274	)	362

Net income		$1,463		$1,051

Basic and diluted net earnings per share		$0.11		$0.09

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

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Thirteen Week Periods Ended March 30, 2019 and March 31, 2018

(Unaudited)

(In thousands)

	March 30, 2019	March 31, 2018

Net income	$1,463	$1,051
Other comprehensive gain (loss)	11	(70	)
Comprehensive income	$1,474	$981

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

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Thirteen Week Periods Ended March 30, 2019 and March 31, 2018

(Unaudited)

(In thousands, except share amounts)

	Common Stock		Additional Paid-in Capital	Accumulated Other Comprehensive Loss		Accumulated Deficit		Treasury Stock			Total
	Issued Shares	Amount	Additional Paid-in Capital	Accumulated Other Comprehensive Loss		Accumulated Deficit		Shares	Amount		Total

Balance, December 29, 2018	15,578,345	$778	$107,326	($2,755	)	($63,163	)	2,823,172	($14,987	)	$27,199

Issuance of stock under employee stock purchase plan	59,451	3	162	-		-		-	-		165
Translation adjustment	-	-	-	11		-		-	-		11
Issuance of stock upon vesting of restricted stock units	57,148	3	(3)	-		-		-	-		-
Share-based compensation expense	-	-	241	-		-		-	-		241
Net income	-	-	-	-		1,463		-	-		1,463

Balance, March 30, 2019	15,694,944	$784	$107,726	($2,744	)	($61,700	)	2,823,172	($14,987	)	$29,079

	Common Stock		Additional Paid-in Capital	Accumulated Other Comprehensive Loss		Accumulated Deficit		Treasury Stock			Total
	Issued Shares	Amount	Additional Paid-in Capital	Accumulated Other Comprehensive Loss		Accumulated Deficit		Shares	Amount		Total

Balance, December 30, 2017	15,017,522	$751	$104,540	($2,395	)	($65,878	)	2,823,172	($14,987	)	$22,031

Issuance of stock under employee stock purchase plan	45,408	2	192	-		-		-	-		194
Translation adjustment	-	-	-	(70	)	-		-	-		(70	)
Share-based compensation expense	-	-	112	-		-		-	-		112
Net income	-	-	-	-		1,051		-	-		1,051

Balance, March 31, 2018	15,062,930	$753	$104,844	($2,465	)	($64,827	)	2,823,172	($14,987	)	$23,318

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

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Thirteen Week Periods Ended March 30, 2019 and March 31, 2018

(Unaudited)

(In thousands)

				March 30, 2019		March 31, 2018
Cash flows from operating activities:
	Net income			$1,463		$1,051

	Adjustments to reconcile net income to net cash used in operating activities:
		Depreciation and amortization		397		414
		Change in contingent consideration		48		-
		Share-based compensation expense		241		112
		Provision for losses on accounts receivable		11		162
		Deferred income tax expense		36		91
		Changes in assets and liabilities:
			Accounts receivable	(6,264	)	(6,078	)
			Prepaid expenses and other current assets	110		(2	)
			Net of transit accounts receivable and payable	45		(1,243	)
			Accounts payable and accrued expenses	(826	)	(1,212	)
			Accrued payroll and related costs	(872	)	(70	)
			Right of use assets and liabilities	266		-
			Income taxes payable	(210	)	(269	)
	Total adjustments			(7,018	)	(8,095	)
	Net cash used in operating activities			(5,555	)	(7,044	)

Cash flows from investing activities:
	Property and equipment acquired			(101	)	(289	)
	Decrease in deposits			(1	)	(11	)
	Net cash used in investing activities			(102	)	(300	)

Cash flows from financing activities:
	Borrowings under line of credit			27,422		23,716
	Repayments under line of credit			(20,533	)	(18,982	)
	Issuance of stock for employee stock purchase plan			165		194
	Net changes in finance lease obligations			73		-
	Contingent consideration paid			(244	)	-
	Net cash provided by financing activities			6,883		4,928
Effect of exchange rate changes on cash and cash equivalents				(15	)	17
Increase (decrease) in cash and cash equivalents				1,211		(2,399	)
Cash and cash equivalents at beginning of period				482		2,851

Cash and cash equivalents at end of period				$1,693		$452

Supplemental cash flow information:
	Cash paid for:
		Interest		$407		$167
		Income taxes		$14		$304

Non-cash financing activities:
	Vesting of restricted stock units			$217		$ -

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

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

1.	Basis of Presentation

The accompanying consolidated interim financial statements of RCM Technologies, Inc. and subsidiaries (“RCM” or the “Company”) are unaudited. The year-end consolidated balance sheet was derived from audited statements but does not include all disclosures required by accounting principles generally accepted in the United States. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the year ended December 29, 2018 included in the Company’s Annual Report Form 10-K for such period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

The consolidated financial statements for the unaudited interim periods presented include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such interim periods.

Results for the thirteen week periods ended March 30, 2019 are not necessarily indicative of results that may be expected for the full year.

Fiscal Year

The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal year ended December 29, 2018 was a 52-week reporting year. The first fiscal quarters of 2019 and 2018 ended on the following dates, respectively:

Period Ended	Weeks in Quarter	Weeks in Year to Date
March 30, 2019	Thirteen	Thirteen
March 31, 2018	Thirteen	Thirteen

2.	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, revenues 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 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.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

2.	Use of Estimates and Uncertainties (Continued)

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, and transit accounts payable and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature. 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.

3.	Revenue Recognition

The Company records revenue under ASU 2014-09, Revenue from Contracts with Customers ("ASC 606") . Revenues are 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 revenues from several sources. The Company’s Engineering Services and Information Technology Services segments perform consulting and project solution services. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s revenues are invoiced on a time and materials basis.

The following table presents our revenues disaggregated by revenue source for the thirteen week periods ended March 30, 2019 and March 31, 2018:

	March 30, 2019	March 31, 2018
Engineering:
Time and Material	$13,843	$18,655
Fixed Fee	5,169	2,763
Permanent Placement Services	43	-
Total Engineering	$19,055	$21,418

Specialty Health Care:
Time and Material	$23,907	$22,113
Permanent Placement Services	264	521
Total Specialty Health Care	$24,171	$22,634

Information Technology:
Time and Material	$8,308	$6,668
Permanent Placement Services	61	92
Total Information Technology	$8,369	$6,760
	$51,595	$50,812

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

3.	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 revenues 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. Revenues under these arrangements are recognized as the costs on these contracts are incurred. On an infrequent basis, amounts paid in excess of revenues earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying balance sheets. In other instances, revenue is billed and recorded based upon contractual rates per hour. 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 revenues 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, 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.

Deferred revenue was $52 and $150 at March 30, 2019 and December 29, 2018, respectively and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet at those dates. 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. For the thirteen week period ended March 30, 2019, the Company recognized revenue of $134 that was included in deferred revenue at the beginning of the reporting period.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(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:

	March 30, 2019		December 29, 2018
Billed	$30,344		$32,323
Accrued and unbilled	17,180		10,383
Work-in-progress	2,954		2,252
Accounts receivable subject to arbitration	9,566		8,820
Allowance for sales discounts and doubtful accounts	(1,431	)	(1,443	)

Accounts receivable, net	$58,613		$52,335

Unbilled receivables primarily represent revenues earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-progress primarily represents revenues earned under contracts which the Company contractually invoices at future dates.

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’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 and related transit accounts payable were both approximately $0.8 million, for a negligible net receivable, as of March 30, 2019. The transit accounts receivable was $2.6 million and related transit accounts payable was $2.5 million, for a net receivable of $0.1 million, as of December 29, 2018.

The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of March 30, 2019, the total amount of outstanding receivables from this customer on these disputed projects was $9.6 million, subject to potential upward adjustment in damages claimed in the arbitration. Additionally, as part of the arbitration process, the customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of March 30, 2019 the total amount of such counter-claims is anticipated to be at least $10.6 million. The Company believes these counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude by the end of the Company’s fiscal third quarter of 2019. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

5.	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.

Property and equipment are comprised of the following:

	March 30, 2019	December 29, 2018
Computers and systems	$6,038	$7,200
Equipment and furniture	520	600
Leasehold improvements	467	743
	7,024	8,543

Less: accumulated depreciation and amortization	3,753	5,058

Property and equipment, net	$3,271	$3,485

The Company periodically writes off fully depreciated and amortized assets. The Company wrote off fully depreciated and amortized assets of $1,620 and $681 during the thirteen week periods ended March 30, 2019 and March 31, 2018, respectively. Depreciation and amortization expense of property and equipment for the thirteen week periods ended March 30, 2019 and March 31, 2018 was $315 and $397, respectively.

6.	Acquisitions

The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. The Company gives no assurance that it will make acquisitions in the future and if they do make acquisitions gives no assurance that such acquisitions will be successful.

Future Contingent Payments

As of March 30, 2019, 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 March 30, 2019 as follows:

Fiscal Year Ending	Total
December 28, 2019 (after March 30, 2019)	$1,355
January 2, 2021	1,478
January 1, 2022	1,744
Estimated future contingent consideration payments	$4,577

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

6.	Acquisitions (Continued)

Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential f uture contingent payments to be made to all active acquisitions are capped at a cumulative maximum of $9.6 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of March 30, 2019. During the thirteen week period ended March 30, 2019, the Company measured the intangibles acquired at fair value on a non-recurring basis. Contingent consideration related to acquisitions are recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.

The Company paid contingent consideration of $0.2 million during the thirteen week period ended March 30, 2019. The Company did not pay contingent consideration during the thirteen week period ended March 31, 2018.

TKE

Effective September 30, 2018, the Company acquired the business operations of Thermal Kinetics Engineering, PLLC, a New York professional limited liability company and Thermal Kinetics Systems, LLC, a New York limited liability company (together, “TKE”). TKE is an established Buffalo-based engineering company providing full service process equipment supply, engineering, development and design services for construction and industrial customers. TKE provides engineering services on construction and industrial processes. At the forefront of new techniques and technologies, TKE is dedicated to providing environmentally friendly, energy-saving solutions. TKE engineers and builds optimal thermal integrations and unique separations approaches for industrial processes and equipment, with clients primarily in the chemical, oil and gas, renewable fuels, pharmaceutical, and industrial manufacturing industries. TKE will complement and expand the Company’s services offerings, providing a stronger depth of experienced engineering resources and capabilities. The preliminary consideration and estimated fair value of assets acquired and liabilities assumed is as follows:

Cash	$1,066
Common stock of the Company	1,878
Contingent consideration, at fair value	2,935
Total consideration	$5,879

The shareholders of TKE are eligible to receive post-closing contingent consideration upon the business exceeding certain base levels of operating income, potentially earned over three years. The amount recorded for the contingent consideration represents the acquisition date fair value of expected consideration to be paid based on TKE’s forecasted operating income during the three year period. Expected consideration was valued based on different possible scenarios for projected operating income. Each case was assigned a probability which was used to calculate an estimate of the forecasted future payments. Then a discount rate was applied to these forecasted future payments to determine the acquisition date fair value to be recorded. At the time of the acquisition, the book and tax basis of assets and liabilities acquired are the same. The acquisition has been accounted for under the purchase method of accounting. The total preliminary estimated purchase price has been allocated as follows:

Fixed assets	$12
Restricted covenants	50
Customer relationships	720
Goodwill	5,847
Less: net liabilities assumed	(750	)
Total consideration	$5,879

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

6.	Acquisitions (Continued)

The results of operations of TKE have been included in the consolidated statement of operations as of the effective date of acquisition. The following revenue and operating income of TKE are included in the Company’s consolidated results of operations:

	March 30, 2019
Revenues	$2,644
Operating income	$383

The following table represents the pro forma revenue and earnings for the thirteen week period ended March 31, 2018:

	Thirteen Week Period Ended March 31, 2018
	Historical	Pro Forma Combined (Unaudited)
Revenues	$50,812	$52,632
Operating income	$1,720	$2,026
Diluted net income per share	$0.09	$0.10

The combined pro forma revenue and operating income for the quarters ended March 30, 2019 and March 31, 2018 were prepared as though the TKE Acquisition had occurred as of January 1, 2018. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of TKE. This summary is not necessarily indicative of what the results of operations would have been had the TKE Acquisition occurred during such period, nor does it purport to represent results of operations for any future periods.

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. The Company has determined that no impairment of goodwill existed during the thirteen week period ended March 30, 2019.

There were no changes in the carrying amount of goodwill for the thirteen week period ended March 30, 2019.

	Engineering	Specialty Health Care	Information Technology	Total

Balance as of March 30, 2019 and December 29, 2018	$13,096	$2,398	$2,038	$17,532

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(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 all periods presented, the Company determined that no impairment of intangible assets exists.

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.

	Thirteen Week Periods Ended
	March 30, 2019	December 29, 2018
Restricted covenants	$45	$51
Customer relationships	616	692

Total intangible assets	$661	$743

Amortization expense of intangible assets for the thirteen week periods ended March 30, 2019 and March 31, 2018 was $82 and $17, respectively.

9.	Line of Credit

The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on August 9, 2018. As amended and restated, the Revolving Credit Facility provides for a $45.0 million revolving credit facility (increased from $40.0 million), no longer has a sub-limit for letters of credit (from a sub-limit of $5.0 million) and expires on August 8, 2023. The amended and restated Revolving Credit Facility provides the Company with waivers from certain financial covenant calculations of up to $1.4 million in the borrowers’ fiscal year ended December 29, 2018 for certain expenses, including severance accrued for the Company’s former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, charges incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive. Except as noted, all material terms remain unchanged.

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. 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 thirteen week period ended March 30, 2019 was 4.7%.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

9.	Line of Credit (Continued)

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. The Company was not in compliance with one of its financial covenants as of March 30, 2019, based on the ratio of funded debt to Company’s operating income before depreciation and amortization (subject to certain other adjustments as defined in the Revolving Credit Facility) for the twelve months ended March 30, 2018. However, the Company obtained a one-time waiver from its lender, Citizens Bank. As of March 30, 2019, the Company was in compliance with all other covenants contained in the Revolving Credit Facility.

Borrowings under the line of credit as of March 30, 2019 and December 29, 2018 were $34.4 million and $27.5 million, respectively. At March 30, 2019 and December 29, 2018 there were letters of credit outstanding for $1.6 million. At March 30, 2019, the Company had availability for additional borrowings under the Revolving Credit Facility of $9.0 million.

10.	Per Share Data

The Company uses the treasury stock method to calculate the weighted-average shares used for diluted earnings per share. The number of common shares used to calculate basic and diluted earnings per share for the thirteen week periods ended March 30, 2019 and March 31, 2018 was determined as follows:

	Thirteen Week Periods Ended
	March 30, 2019	March 31, 2018

Basic weighted average shares outstanding	12,856,533	12,238,760
Dilutive effect of outstanding restricted share units	44,301	18,747

Weighted average dilutive shares outstanding	12,900,834	12,257,507

For both the thirteen week periods ended March 30, 2019 and March 31, 2018, there were no anti-dilutive shares not included in the calculation of common stock equivalents as there were no stock options outstanding .

Unissued shares of common stock were reserved for the following purposes:

	March 30, 2019	December 29, 2018

Time-based restricted stock units outstanding	147,372	147,372
Performance-based restricted stock units outstanding	320,000	200,000
Future grants of options or shares	265,551	442,699
Shares reserved for employee stock purchase plan	326,952	386,403

Total	1,059,875	1,176,474

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

11.	Share-Based Compensation

At March 30, 2019, 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 vest over periods ranging from one to three years and expire within 10 years of issuance. 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.

Share-based compensation expense of $241 and $112 was recognized for the thirteen week periods ended March 30, 2019 and March 31, 2018, respectively. The thirteen week period ended March 30, 2019 includes $64 of expense associated with performance-based restricted stock units, whereas the prior period does not include any expense associated with performance-based restricted stock units. All performance-based restricted stock units outstanding as of March 30, 2019 are deemed unlikely to vest.

As of March 30, 2019, the Company had approximately $0.4 million of total unrecognized compensation cost related to all time-based non-vested share-based awards granted under the Company’s various share-based plans, which the Company expects to recognize over approximately a two-year period. These amounts do not include a) performance-based restricted stock units deemed unlikely to vest, b) the cost of any additional share-based awards that may be granted in future periods or c) the impact of any potential changes in the Company’s forfeiture rate.

Incentive Share-Based Plans

2014 Omnibus Equity Compensation Plan (the 2014 Plan)

The 2014 Plan, approved by the Company’s shareholders in December 2014, provides 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, 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 shares so that the total number of shares of stock reserved for issuance under the Plan is 1,125,000 shares. The expiration date of the Plan is December 1, 2026. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant.

As of March 30, 2019, under the 2014 Plan, 147,372 time-based and 320,000 performance-based restricted share units were outstanding and 265,551 shares were available for awards thereunder.

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.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

11.	Share-Based Compensation (Continued)

Employee Stock Purchase Plan (Continued)

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.

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. The number of shares issued at the beginning of the current period (on December 31, 2018) was 59,451. As of March 30, 2019, there were 326,952 shares available for issuance under the Purchase Plan.

Time-Based Restricted Stock Units

From time-to-time the Company issues time-based restricted stock units. These time-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 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 time-based restricted stock units that ultimately do not vest are forfeited.

To date, the Company has issued time-based restricted stock units only under its 2007 Omnibus Equity Compensation Plan and the 2014 Plan. The 2007 Plan has expired and there are no time-based restricted stock units outstanding thereunder. The following summarizes the activity in the time-based restricted stock units under the 2014 Plan during the thirteen week period ended March 30, 2019:

	Number of Time-Based Restricted Stock Units		Weighted Average Grant Date Fair Value per Share
Outstanding non-vested at December 29, 2018	147,372		$4.46
Granted	10,000		$4.03
Vested	(10,000	)	$4.03
Forfeited or expired	-		-
Outstanding non-vested at March 30, 2019	147,372		$4.46

Based on the closing price of the Company’s common stock of $3.94 per share on March 29, 2019 (the last trading day prior to March 30, 2019), the intrinsic value of the time-based non-vested restricted stock units at March 30, 2019 was approximately $581. As of March 30, 2019, there was approximately $355 of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over the vesting period of the restricted stock units.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

11.	Share-Based Compensation (Continued)

Performance Based Restricted Stock Units

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 units 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 units that ultimately do not vest are forfeited.

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 thirteen week period ended March 30, 2019:

	Number of Performance- Based Restricted Stock Units		Weighted Average Grant Date Fair Value per Share
Outstanding non-vested at December 29, 2018	200,000		$5.06
Granted	167,148		$4.35
Vested	(47,148	)	$3.69
Forfeited or expired	-		$ -
Outstanding non-vested at March 30, 2019	320,000		$4.82

As of March 30, 2019, the Company considers the metrics related to the currently outstanding 320,000 performance-based restricted stock units unlikely to be achieved, thus no performance condition is probable of achievement and no compensation cost has been recognized on the performance-based restricted stock units. The Company will reassess at each reporting date whether achievement of any performance condition is probable and would begin recognizing 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.

12.	Treasury Stock Transactions

For both the thirteen week periods ended March 30, 2019 and March 31, 2018, the Company did not have an active stock purchase program and therefore did not purchase any treasury shares.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

13. New Accounting Standards and Updates from the Securities Exchange Commission (“SEC”)

In June 2016, the FASB issued 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. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

In August 2018 the SEC issued the final rule on Disclosures About Changes in Stockholders’ Equity For filings on Form 10-Q, which extends to interim periods the annual requirement in SEC Regulation S-X, Rule 3-04 to disclose (1) changes in stockholders’ equity and (2) the amount of dividends per share for each class of shares (as opposed to common stock only, as previously required). Pursuant to the final rule, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date [interim] periods, with subtotals for each interim period,” i.e., a reconciliation covering each period for which an income statement is presented. Rule 3-04 permits the disclosure of changes in stockholders’ equity (including dividend-per-share amounts) to be made either in a separate financial statement or in the notes to the financial statements. The final rule is effective for all filings made on or after November 5, 2018. The staff of the SEC has indicated it would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. The Company adopted the final rule in its Form 10Q for the quarter ending March 30, 2019. There was no material effect on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. The Company will adopt ASU 2016-02 in the first quarter of 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered between the date of initial application and the effective date. The Company adopted the new standard on December 30, 2018 and chose the effective date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before December 30, 2018. Please refer to footnote 17; Leases for additional disclosure details.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

14.	Segment Information

The Company follows “Disclosures about Segments of an Enterprise and Related Information,” 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 included in its Annual Report on Form 10-K for the year ended December 29, 2018).

Segment operating income 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:

Thirteen Week Period Ended March 30, 2019	Engineering	Specialty Health Care	Information Technology	Corporate	Total
Revenue	$19,055	$24,171	$8,369	$ -	$51,595
Cost of services	14,357	18,533	6,188	-	39,078
Gross profit	4,698	5,638	2,181	-	12,517
Selling, general and administrative	3,816	4,495	2,155	-	10,466
Depreciation and amortization	285	91	21	-	397
Operating income	$597	$1,052	$5	$ -	1,654
Total assets as of March 30, 2019	$48,158	$29,348	$8,291	$7,014	$92,811
Capital expenditures	$62	$16	$13	$10	$101

Thirteen Week Period Ended March 31, 2018	Engineering	Specialty Health Care	Information Technology		Corporate	Total
Revenue	$21,418	$22,634	$6,760		$ -	$50,812
Cost of services	15,724	17,384	5,149		-	38,257
Gross profit	5,694	5,250	1,611		-	12,555
Selling, general and administrative	4,122	4,470	1,829		-	10,421
Depreciation and amortization	283	105	26		-	414
Operating income (loss)	$1,289	$675	($244	)	$ -	$1,720
Total assets as of March 31, 2018	$36,578	$24,884	$6,573		$6,517	$74,552
Capital expenditures	$109	$40	$9		$131	$289

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

14.	Segment Information (Continued)

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 thirteen week periods ended March 30, 2019 and March 31, 2018 are as follows:

		Thirteen Week Periods Ended
		March 30, 2019	March 31, 2018
Revenues
	U. S.	$45,302	$41,591
	Canada	4,588	7,629
	Puerto Rico	1,203	983
	Serbia	502	609
		$51,595	$50,812

Total assets by geographic area as of the reported periods are as follows:

		March 30, 2019	December 29, 2018
Total assets
	U. S.	$73,566	$61,417
	Canada	13,121	14,230
	Puerto Rico	1,999	1,954
	Serbia	4,125	3,909
		$92,811	$81,510

15.	Income Taxes

The Company recognized $0.3 million of income tax benefit for the thirteen week period ended March 30, 2019, as compared to an income tax expense of $0.4 million for the comparable prior year period. The Company recognized a tax benefit of $0.6 million due to a verbal settlement with the U.S. Internal Revenue Service regarding an uncertain tax position from a previous tax year. Otherwise, the consolidated effective income tax rate for the current period was 27.4% as compared to 25.6% for the comparable prior year period. Not including the discrete tax benefit of $0.6 million due to the verbal settlement, the projected fiscal 2019 income tax rates as of March 30, 2019 were approximately 28.1%, 26.5% and 15.1% in the United States, Canada and Serbia, respectively. 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 consolidated effective income tax rate for the thirteen week period ended March 30, 2019 was higher than the comparable prior year period was primarily due to the reduction in the rate of Serbian pretax income to consolidated pretax income. The comparable prior year period estimated income tax rates were 27.9%, 26.5% and 14.8% in the United States, Canada and Serbia, respectively, and yielded a consolidated effective income tax rate of approximately 25.6% for the thirteen week period ended March 31, 2018.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(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 normal course of business. 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. 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. Asserted claims in these matters sought approximately $10.6 million in damages (as further described below) as of March 30, 2019 . As of March 30, 2019 , the Company did not have an accrual for any such liabilities.

The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of March 30, 2019 the total amount of outstanding receivables from this customer on these disputed projects was $9.6 million, subject to potential upward adjustment in damages claimed in the arbitration. Additionally, as part of the arbitration process, the customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of March 30, 2019 , the total amount of such counter-claims is anticipated to be at least $10.6 million. The Company believes these counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude by the end of the Company’s fiscal third quarter of 2019. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.

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.

17.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) , which requires lessees to recognize a right-of-use (“ROU”) asset and a lease 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. The accounting applied by a lessor is largely unchanged from that applied under the prior standard. After the issuance of Topic 842, the FASB clarified the guidance through several ASUS; hereinafter the collection of lease guidance is referred to as “ASC 842”.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

17.	Leases (Continued)

On December 30, 2018, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning December 30, 2018 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases . The standard had a material impact on the Company’s Consolidated Condensed Balance Sheet but did not have a significant impact on the Company’s consolidated net earnings and cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for finance leases remained substantially unchanged. For leases that commenced before the effective date of ASC 842, the Company elected the permitted practical expedients to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates before December 30, 2018.

As a result of the cumulative impact of adopting ASC 842, the Company recorded operating lease ROU assets of $3.9 million and operating lease liabilities of $4.1 million as of December 30, 2018, primarily related to real estate and office equipment leases, based on the present value of the future lease payments on the date of adoption.

The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, ROU 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. ROU 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 commencement date in determining the present value of lease payments . The ROU asset also consists of any lease incentives received. The lease terms used to calculate the ROU 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:

		Thirteen Week Period Ended March 30, 2019

Operating lease cost		$439

Finance lease cost
	Amortization of ROU assets	$73
	Interest on lease liabilities	1
Total finance lease cost		$74

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

17.	Leases (Continued)

Supplemental Cash Flow information related to leases was as follows:

		Thirteen Week Period Ended March 30, 2019

Cash paid for amounts included in the measurement of lease liabilities
	Operating cash flows from operating leases	$382
	Operating cash flows from finance leases	2
	Financing cash flows from finance leases	72

Right of use assets obtained in exchange for lease obligations
	Operating leases	6,208
	Finance leases	-

Supplemental Balance Sheet information related to leases was as follows:

Operating leases
	Operating lease right of use assets	$5,816

	Other current liabilities	($1,962	)
	Operating lease liabilities	(4,122	)
	Total operating lease liabilities	($6,084	)

Finance leases
	Property and equipment - (ROU assets)	$874
	Accumulated depreciation	(242	)
	Property and equipment, net	$632

	Other current liabilities	($290	)
	Other long term liabilities	(343	)
	Total finance lease liabilities	($633	)

Weighted average remaining lease term
	Operating leases	2.09 Years
	Finance leases	2.20 Years

Weighted average discount rate
	Operating leases	4.00%
	Finance leases	0.90%

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts, unless otherwise indicated)

17.	Leases (Continued)

Maturities of lease liabilities are as follows:

Fiscal Years Ending	Operating Leases		Finance Leases
2019	$1,630		$221
2020	1,781		287
2021	1,233		132
2022	977		-
2023	776		-
Thereafter	156		-

Total lease payments	6,553		640
Less: imputed interest	(469	)	(7	)
Total	$6,084		$633

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 information technology and engineering services and solutions and the placement of temporary staffing personnel; (ii) the Company’s ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients; (iii) the Company’s ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (iv) the Company’s relationships with and reliance upon significant customers, and ability to collect accounts receivable from such customers; (v) risks associated with foreign currency fluctuations and changes in exchange rates, particularly with respect to the Canadian dollar; (vi) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (vii) 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; (viii) the Company’s ability to obtain financing on satisfactory terms; (ix) the reliance of the Company upon the continued service of its executive officers; (x) the Company’s ability to remain competitive in the markets that it serves; (xi) the Company’s ability to maintain its unemployment insurance premiums and workers compensation premiums; (xii) the risk of claims being made against the Company associated with providing temporary staffing services; (xiii) the Company’s ability to manage significant amounts of information and periodically expand and upgrade its information processing capabilities; (xiv) the risk of cyber attacks on our information technology systems or those of our third party vendors; (xv) the Company’s ability to remain in compliance with federal and state wage and hour laws and regulations; (xvi) uncertainties in predictions as to the future need for the Company’s services; (xvii) uncertainties relating to the allocation of costs and expenses to each of the Company’s operating segments; (xviii) 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; (ixx) 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 (xx) other economic, competitive 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.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Overview

RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on revenues and operations can be substantial, resulting in significant volatility in the Company’s financial performance.

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 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 revenues 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.

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.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Critical Accounting Policies and Use of Estimates

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited interim condensed 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 revenues and expenses during the reporting period. In our unaudited interim condensed 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 units, insurance liabilities, accounting for income taxes and accrued bonuses.

A summary of our significant accounting policies is included in our Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies , in our Annual Report on Form 10-K for the year ended December 29, 2018. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 29, 2018.

Recently Issued Accounting Pronouncements

A discussion of the recently issued accounting pronouncements is set forth in Note 13, New Accounting Standards, in the unaudited interim condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q and is incorporated herein by reference.

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 and information technology services. When the U.S., Canadian or global economies decline, the Company’s operating performance could be adversely impacted. 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, declines in the economy 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.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirteen Week Period Ended March 30, 2019 Compared to Thirteen Week Period Ended March 31, 2018

A summary of operating results for the thirteen week periods ended March 30, 2019 and March 31, 2018 is as follows (in thousands):

	March 30, 2019				March 31, 2018
	Amount		% of Revenue		Amount		% of Revenue
Revenues	$51,595		100.0		$50,812		100.0
Cost of services	39,078		75.7		38,257		75.3
Gross profit	12,517		24.3		12,555		24.7

Selling, general and administrative	10,466		20.3		10,421		20.5
Depreciation and amortization of property and equipment	315		0.6		397		0.8
Amortization of acquired intangible assets	82		0.2		17		-
	10,863		21.1		10,835		21.3

Operating income	1,654		3.2		1,720		3.4
Other expense	(465	)	0.9		(307	)	0.6

Income before income taxes	1,189		2.3		1,413		2.8
Income tax (benefit) expense	(274	)	(0.5	)	362		0.7

Net income	$1,463		2.8		$1,051		2.1

The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended March 30, 2019 and March 31, 2018 consisted of thirteen weeks each.

Revenues. Revenues increased 1.5%, or $0.8 million, for the thirteen week period ended March 30, 2019 as compared to the thirteen week period ended March 31, 2018 (the “comparable prior year period”). Revenues decreased $2.3 million in the Engineering segment, increased $1.5 million in the Specialty Health Care segment and increased $1.6 million in the Information Technology segment. Effective September 30, 2018, the Company’s Engineering segment acquired the business operations of Thermal Kinetics Engineering and affiliate (together, “TKE”). This new business unit generated $2.6 million in revenues for the thirteen week period ended March 30, 2019. See Segment Discussion for further information on revenue changes.

The Company has material operations in Canada, primarily from the Company’s Engineering segment; this business is conducted primarily in Canadian dollars. Since the Company reports its consolidated results in U.S. dollars the consolidated results are subject to potentially material fluctuations as a result of changes in the Canadian dollar to U.S. dollar exchange rate (the “Exchange Rate”). For the thirteen week period ended March 30, 2019, the Company generated total revenues from its Canadian clients of $4.6 million in U.S. dollars at an Exchange Rate of 75.1% as compared to $7.6 million in U.S. dollars at an Exchange Rate of 79.0% for the comparable prior year period.

Cost of Services and Gross Profit. Cost of services increased 2.1%, or $0.8 million, for the thirteen week period ended March 30, 2019 as compared to the comparable prior year period. Cost of services increased due to the increase in revenues. Cost of services as a percentage of revenues for the thirteen week periods ended March 30, 2019 and March 31, 2018 was 75.7% and 75.3%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirteen Week Period Ended March 30, 2019 Compared to Thirteen Week Period Ended March 31, 2018 (Continued)

Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $10.5 million for the thirteen week period ended March 30, 2019 as compared to $10.4 million for the comparable prior year period. As a percentage of revenues, SGA expenses were 20.3% for the thirteen week period ended March 30, 2019 and 20.5% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.

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 increased to $0.5 million as compared to $0.3 million for the comparable prior year period. The primary component of the increase was interest expense which increased due to increased borrowings under the Company’s line of credit. The primary reason for the increased borrowing was to fund the Company’s increase in accounts receivable of $6.3 million during the thirteen week period ended March 30, 2019.

Income Tax Expense . The Company recognized $0.3 million of income tax benefit for the thirteen week period ended March 30, 2019, as compared to an income tax expense of $0.4 million for the comparable prior year period. The Company recognized a tax benefit of $0.6 million due to a verbal settlement with the U.S. Internal Revenue Service regarding an uncertain tax position from a previous tax year. Otherwise, the consolidated effective income tax rate for the current period was 27.4% as compared to 25.6% for the comparable prior year period. Not including the discrete tax benefit of $0.6 million due to the verbal settlement, the projected fiscal 2019 income tax rates as of March 30, 2019 were approximately 28.1%, 26.5% and 15.1% in the United States, Canada and Serbia, respectively. 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 consolidated effective income tax rate for the thirteen week period ended March 30, 2019 was higher than the comparable prior year period was primarily due to the reduction in the rate of Serbian pretax income to consolidated pretax income.

Segment Discussion

Engineering

Engineering revenues of $19.1 million for the thirteen week period ended March 30, 2019 decreased 11.0%, or $2.3 million, as compared to the comparable prior year period. The decrease was due to a decrease of $2.1 million from the Company’s Canadian Power Systems Group, a decrease of $1.9 million from the Company’s Energy Services Group, and a decrease of $1.0 million from the Company’s Aerospace Group, offset by a $2.6 million increase from the TKE acquisition. The Company attributes these revenue declines to decreased spending on the part of its Canadian Power Systems and Aerospace clients, increased competition from other vendors to its Canadian Power Systems clients, and timing of large projects from the Company’s Energy Services clients. Gross profit decreased 17.5%, or $1.0 million, as compared to the comparable prior year period. Gross profit decreased because of the decrease in revenue and decrease in gross margin. Gross margin of 24.7% for the current period decreased from 26.6% for the comparable prior year period. The gross margin decrease was primarily due to lower utilization on the component of the Company’s consultant base that is fixed. The Engineering segment operating income decreased by $0.7 million to $0.6 million for the thirteen week period ended March 30, 2019, as compared to $1.3 million for the comparable prior year period. The decrease in operating income was primarily due to the decreases in revenues, gross profit and gross margin, offset by a decrease of $0.3 million to SGA expense. The decrease in SGA expense was primarily due to a lower allocation of corporate-generated SGA expense relative to the Company’s other two segments.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirteen Week Period Ended March 30, 2019 Compared to Thirteen Week Period Ended March 31, 2018 (Continued)

Segment Discussion (Continued)

Specialty Health Care

Specialty Health Care revenues of $24.2 million for the thirteen week period ended March 30, 2019 increased 6.8%, or $1.5 million, as compared to the comparable prior year period. The primary drivers of the increase in the revenues for the Specialty Health Care segment were increases of $2.0 million from the New York City office, $0.9 million from the Honolulu office, and $0.2 million from the HIM practice, offset primarily by decreases in revenue of $1.1 million from the travel nursing staffing group, $0.3 million from the Chicago office, and $0.2 million from the Permanent Placement Group. The primary reason for revenue increases in New York City and Hawaii was the incremental addition of paraprofessionals billed on school contracts. The Company primarily attributes the decline in revenue from its travel nursing staffing group to increased competition from large national competitors. The Specialty Health Care segment’s gross profit increased by 7.4%, or $0.4 million, to $5.6 million for the thirteen week period ended March 30, 2019 as compared to $5.2 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenue. Gross profit margin for the thirteen week period ended March 30, 2019 increased slightly to 23.3% as compared to 23.2% for the comparable prior year period. Specialty Health Care experienced operating income of $1.1 million for the thirteen week period ended March 30, 2019 as compared to $0.7 million for the comparable prior year period. The primary reason for the increase in operating income was the increase to revenue and gross profit. SGA expense increased by a small amount, primarily due to the need to increase SGA infrastructure expense in order to support the increased activity levels associated with higher revenues and a higher allocation of corporate-generated SGA expense.

Information Technology

Information Technology revenues of $8.4 million for the thirteen week period ended March 30, 2019 increased 23.8%, or $1.6 million, as compared to $6.8 million for the comparable prior year period. The Company experienced increases to revenue from all its Information Technology business lines. The Company attributes these increases to investments in management and sales personnel. Gross profit of $2.2 million for the thirteen week period ended March 30, 2019 increased 35.4%, or $0.6 million, as compared to $1.6 million for the comparable prior year period. The increase in gross profit was primarily due to the increase in revenues and also impacted by an increase in gross profit margin. The Information Technology gross profit margin for the thirteen week period ended March 30, 2019 was 26.1% as compared to 23.8% for the comparable prior year period. The Company attributes the gross margin increase to a focus on higher margin services and improved utilization of its consultants. The Information Technology segment experienced negligible operating income in the current period as compared to an operating loss of $0.2 million for the comparable prior year period. The improvement in operating performance was primarily driven by the increase in revenue and gross profit, offset by an increase of $0.3 million in SGA expense. The increase in SGA expense was primarily due to increases to investments in management and sales personnel and a higher allocation of corporate-generated SGA expense.

ITEM 2.

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):

		Thirteen Week Periods Ended
		March 30, 2019		March 31, 2018
Cash (used in) provided by:
	Operating activities	($5,482	)	($7,044	)
	Investing activities	($102	)	($300	)
	Financing activities	$6,810		$4,928

Operating Activities

Operating activities used $5.5 million of cash for the thirteen week period ended March 30, 2019 as compared to using $7.0 million in the comparable prior year period. The major components of cash used in or provided by operating activities in the thirteen week period ended March 30, 2019 and the comparable prior year period are as follows: net income and changes in accounts receivable, the net of transit accounts payable and transit accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and accrued payroll and related costs.

Net income for the thirteen week period ended March 30, 2019 was $1.5 million as compared to $1.1 million for the comparable prior year period. An increase in accounts receivables in the thirteen week period ended March 30, 2019 used $6.3 million of cash as compared to $6.1 million in the comparable prior year period. The Company attributes the increase in accounts receivables for the thirteen week period ended March 30, 2019 to several different clients in both its Engineering and Specialty Health Care segments that experienced temporary delays in its approval and payment processes. The Company anticipates that its accounts receivable balance relative to revenues will improve during fiscal 2019.

The Company’s transit accounts payable usually 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 negligible net receivable as of March 30, 2019 and December 29, 2018, respectively, so the cash impact during the thirteen week period ended March 30, 2019 was also negligible. The net of transit accounts payable and transit accounts receivable was a net liability of $0.5 million and $1.7 million as of March 31, 2018 and December 30, 2017, respectively, so the cash impact during the thirteen week period ended March 31, 2018 used $1.2 million in cash.

Prepaid expenses and other current assets provided $0.1 million of cash for the thirteen week period ended March 30, 2019 and negligible cash million 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.

A decrease in accounts payable and accrued expenses used $0.8 million for the thirteen week period ended March 30, 2019 as compared to $1.2 million of cash for the comparable prior year period. The Company attributes these changes to general timing of payments to vendors in the normal course of business.

ITEM 2.

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 used $0.9 million for the thirteen week period ended March 30, 2019 and $0.1 million for the thirteen week period March 31, 2018. There are three 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; and 3) 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 thirteen week period ended March 30, 2019 was paid on March 29, 2019.

Investing Activities

Investing activities used cash of $0.1 million and $0.3 million for the thirteen week periods ended March 30, 2019 and March 31, 2018, respectively. Investing activities for both periods presented were primarily related to expenditures for property and equipment.

Financing Activities

Financing activities provided $6.8 million of cash for the thirteen week period ended March 30, 2019 as compared to providing $4.9 million in the comparable prior year period. The Company made net borrowings under its line of credit of $6.9 million during the thirteen week period ended March 30, 2019 as compared to $4.7 million in the comparable prior year period. The primary reason for net borrowings during the thirteen week period ended March 30, 2019 was to fund the $6.3 million increase in accounts receivable. The Company generated cash of $0.2 million from sales of shares from its equity plans for the current and prior year periods. The Company paid $0.2 million in contingent consideration during the thirteen week period ended March 30, 2019, as compared to no payments in the comparable prior year period.

The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on August 9, 2018. As amended and restated, the Revolving Credit Facility provides for a $45.0 million revolving credit facility (increased from $40.0 million), no longer has a sub-limit for letters of credit (from a sub-limit of $5.0 million) and expires on August 8, 2023. The amended and restated Revolving Credit Facility provides the Company with waivers from certain financial covenant calculations of up to $1.4 million in the borrowers’ fiscal year ending on December 31, 2018 for certain expenses, including severance accrued for the Company’s former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, charges incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive. Except as noted, all material terms remain unchanged.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)

Financing Activities (Continued)

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 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. The Company was not in compliance with one of its financial covenants as of March 30, 2019, based on the ratio of funded debt to Company’s operating income before depreciation and amortization (subject to certain other adjustments as defined in the Revolving Credit Facility) for the twelve months ended March 30, 2018. However, the Company obtained a one-time waiver from its lender, Citizens Bank. While it cannot give any assurance to such effect, the Company believes that it will be in compliance upon issuance of its consolidated financial statements for the thirteen weeks ended June 29, 2019, or, if not in compliance, will be able to obtain another waiver from Citizens Bank. As of March 30, 2019, the Company was in compliance with all other covenants contained in the Revolving Credit Facility.

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.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)

Commitments and Contingencies (Continued)

The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of March 30, 2019, the total amount of outstanding receivables from this customer on these disputed projects was $9.6 million, subject to potential upward adjustment in damages claimed in the arbitration. Additionally, as part of the arbitration process, the customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of March 30, 2019, the total amount of such counter-claims is anticipated to be at least $10.6 million. The Company believes these counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude by the end of the Company’s fiscal third quarter of 2019. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.

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 believes that it will become necessary to upgrade or replace its SAP financial reporting and accounting system. The Company has not determined when this contemplated replacement may be necessary, but may undertake a comprehensive review of the system during fiscal 2019. The Company estimates this upgrade or replacement of their financial reporting and accounting system will cost between $1.0 million and $2.0 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 March 2024. Certain leases are subject to escalation clauses based upon changes in various factors.

Maturities of lease liabilities are as follows:

Fiscal Years Ending	Operating Leases		Finance Leases
2019	$1,630		$221
2020	1,781		287
2021	1,233		132
2022	977		-
2023	776		-
Thereafter	156		-

Total lease payments	6,553		640
Less: imputed interest	(469	)	(7	)
Total	$6,084		$633

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Future Contingent Payments

Fiscal Year Ending	Total
December 28, 2019 (after March 30, 2019)	$1,333
January 2, 2021	1,478
January 1, 2022	1,744
Estimated future contingent consideration payments	$4,577

ITEM 3.

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 March 30, 2019, 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 thirteen week period ended March 30, 2019, 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 $0.3 million. The Company does not expect any material loss with respect to its investment portfolio.

ITEM 4.

CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief 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 Chief Executive Officer and Chief 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.

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 30, 2019, that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See discussion of Contingencies in Note 16 to the Consolidated Financial Statements included in Item 1 of this report.

ITEM 1A.

RISK FACTORS

There have been no material changes from the risk factors disclosed in the “Risk Factors” sections (Item 1A) of the Company’s Annual Report on Form 10-K for the year ended December 29, 2018.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

31.1 *	Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2 *	Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1 **	Certification of Principal 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.)

32.2 **	Certification of Principal 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.)

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extension Schema Document

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*	XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Documents

101.DEF*	XBRL Taxonomy Definition Linkbase Document

__________

* Filed herewith

** Furnished herewith

RCM TECHNOLOGIES, INC.

SIGNATURES

Pursuant to the requirements 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.

	RCM Technologies, Inc.
Date: May 9, 2019	By: /s/ Bradley S. Vizi
		Bradley S. Vizi Executive Chairman and President (Principal Executive Officer and Duly Authorized Officer of the Registrant)

Date: May 9, 2019		By: /s/ Kevin D. Miller
			Kevin D. Miller Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer of the Registrant)

Exhibit 31.1

RCM TECHNOLOGIES, INC.

CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

CERTIFICATION

I, Bradley S. Vizi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;

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 functions):

(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: May 9, 2019

/s/ Bradley S. Vizi

Bradley S. Vizi

Executive Chairman and President

Exhibit 31.2

RCM TECHNOLOGIES, INC.

CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

CERTIFICATION

I, Kevin D. Miller, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;

(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: May 9, 2019

/s/ Kevin D. Miller

Kevin D. Miller

Chief Financial Officer

Exhibit 32.1

RCM TECHNOLOGIES, INC.

CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Bradley S. Vizi, Executive Chairman and President of RCM Technologies, Inc., a Nevada corporation (the “Company”), hereby certify that, to my knowledge:

(1) The Company’s periodic report on Form 10-Q for the quarter ended March 30, 2019 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Form 10-Q 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

Date: May 9, 2019

Exhibit 32.2

RCM TECHNOLOGIES, INC.

CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

I, Kevin D. Miller, Chief Financial Officer of RCM Technologies, Inc., a Nevada corporation (the “Company”), hereby certify that, to my knowledge:

(2) The information contained in the Form 10-Q 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

Date: May 9, 2019

RCM Technologies (NASDAQ:RCMT)
Historical Stock Chart
From Mar 2024 to Apr 2024