Rcm Technologies, Inc 10-Q for FY2020 Q3
Rcm Technologies, Inc. (RCMT)
10-Q
2020-11-10
For: 2020-09-26
View Original
Added on
April 07, 2026
About this 10-Q
Rcm Technologies, Inc filed this 10-Q on November 10, 2020, covering the quarter ended September 26, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 26, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $31.56M
- down 21.6% from $40.25M a year earlier
- Net loss
- $244K
- compared with net income of $335K a year earlier
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 September 26, 2020
OR
|
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ____________ to ____________
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
Nevada
|
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, 11,463,655 shares outstanding as of November 10, 2020.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
PART I - FINANCIAL INFORMATION
|
||
|
Page
|
||
|
Item 1.
|
Condensed Consolidated Financial Statements
|
|
|
Condensed Consolidated Balance Sheets as of September 26, 2020 (Unaudited)
and December 28, 2019
|
4
|
|
|
Unaudited Condensed Consolidated Statements of Operations for the Thirteen and
Thirty-Nine Week Periods Ended September 26, 2020 and September 28, 2019
|
5
|
|
|
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income
for the Thirty-Nine Week Periods Ended September 26, 2020 and September 28, 2019
|
6
|
|
|
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
for the Thirty-Nine Week Periods Ended September 26, 2020 and September 28, 2019
|
8
|
|
|
Unaudited Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Week Periods Ended September 26, 2020 and September 28, 2019
|
9
|
|
|
Notes to Unaudited Condensed Consolidated Financial Statements
|
10
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
32
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
52
|
|
Item 4.
|
Controls and Procedures
|
52
|
|
PART II - OTHER INFORMATION
|
||
|
Item 1.
|
Legal Proceedings
|
53
|
|
Item 1A.
|
Risk Factors
|
53
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
54
|
|
Item 3.
|
Defaults Upon Senior Securities
|
54
|
|
Item 4.
|
Mine Safety Disclosures
|
54
|
|
Item 5.
|
Other Information
|
54
|
|
Item 6.
|
Exhibits
|
54
|
|
Signatures
|
55
|
|
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This report and documents incorporated by reference into it may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,”
“expects,” “will,” “goal,” and similar expressions are intended to identify forward-looking statement. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake
no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and
uncertainties include, but are not limited to, risks arising from our providing service to the healthcare industry; the impact of and future effects of the COVlD-19 pandemic or other potential pandemics; having a significant portion of our condensed
consolidated revenues contributed by a concentrated group of customer during the thirty-nine week period ended September 26, 2020; credit and collection risks; our claim experience related to workers’ compensation and general liability insurance; the
effects of changes in, or interpretations of laws and regulations governing, the healthcare industry, our workforce and the services that we provide, including state and local regulations pertaining to the taxability of our services and other
labor-related matters such a minimum wage increases; the Company’s expectations with respect to selling, general, and administrative expense; and the risk factors described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the
fiscal year ended December 28, 2019 and Part II, Item 1A “Risk Factors” of subsequent Quarterly Reports on Form 10-Q, including this Form 10-Q.
|
ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 26, 2020 and December 28, 2019
(In thousands, except share and per share amounts)
|
September 26,
|
December 28,
|
|||||
|
2020
|
2019
|
|||||
|
(Unaudited)
|
||||||
|
Current assets:
|
||||||
|
Cash and cash equivalents
|
$757
|
$1,847
|
||||
|
Accounts receivable, net
|
32,986
|
59,760
|
||||
|
Transit accounts receivable
|
198
|
4,906
|
||||
|
Prepaid expenses and other current assets
|
2,180
|
4,144
|
||||
|
Total current assets
|
36,121
|
70,657
|
||||
|
Property and equipment, net
|
2,359
|
2,717
|
||||
|
Other assets:
|
||||||
|
Deposits
|
169
|
209
|
||||
|
Deferred tax asset, net, domestic
|
2,688
|
-
|
||||
|
Goodwill
|
16,354
|
16,354
|
||||
|
Operating right of use asset
|
4,686
|
5,820
|
||||
|
Intangible assets, net
|
176
|
416
|
||||
|
Total other assets
|
24,073
|
22,799
|
||||
|
Total assets
|
$62,553
|
$96,173
|
||||
|
Current liabilities:
|
|||||||
|
Accounts payable and accrued expenses
|
$7,478
|
$6,220
|
|||||
|
Transit accounts payable
|
901
|
4,552
|
|||||
|
Accrued payroll and related costs
|
8,532
|
7,713
|
|||||
|
Finance lease payable
|
311
|
315
|
|||||
|
Income taxes payable
|
224
|
130
|
|||||
|
Operating right of use liability
|
1,984
|
2,134
|
|||||
|
Liability for contingent consideration from acquisitions
|
500
|
344
|
|||||
|
Total current liabilities
|
19,930
|
21,408
|
|||||
|
Deferred tax liability, foreign
|
379
|
382
|
|||||
|
Deferred tax liability, net, domestic
|
-
|
395
|
|||||
|
Finance lease payable
|
115
|
189
|
|||||
|
Liability for contingent consideration from acquisitions
|
2,322
|
2,714
|
|||||
|
Operating right of use liability, net of current position
|
2,922
|
3,921
|
|||||
|
Borrowings under line of credit
|
13,258
|
34,761
|
|||||
|
Total liabilities
|
38,926
|
63,770
|
|||||
|
Commitments and contingencies (note 16)
|
|||||||
|
Stockholders’ equity:
|
|||||||
|
Preferred stock, $1.00 par value; 5,000,000 shares authorized;
|
|||||||
|
no shares issued or outstanding
|
-
|
-
|
|||||
|
Common stock, $0.05 par value; 40,000,000 shares authorized;
|
|||||||
|
16,144,966 shares issued and 11,463,655 shares outstanding at
September 26, 2020 and 15,826,891 shares issued and 13,003,719 shares outstanding at December 28, 2019
|
807
|
791
|
|||||
|
Additional paid-in capital
|
109,027
|
108,452
|
|||||
|
Accumulated other comprehensive loss
|
(2,704
|
)
|
(2,748
|
)
|
|||
|
Accumulated deficit
|
(66,286
|
)
|
(59,105
|
)
|
|||
|
Treasury stock (4,681,311) shares at September 26, 2020 and
|
|||||||
|
(2,823,172) at December 28, 2019 at cost
|
(17,217
|
)
|
(14,987
|
)
|
|||
|
Stockholders’ equity
|
23,627
|
32,403
|
|||||
|
Total liabilities and stockholders’ equity
|
$62,553
|
$96,173
|
|||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen and Thirty-Nine Week Periods Ended September 26, 2020 and September 28, 2019
(Unaudited)
(In thousands, except per share amounts)
|
|
Thirteen Weeks Ended
|
Thirty-Nine Weeks Ended
|
||||||||
|
September 26,
2020
|
September 28,
2019
|
September 26,
2020
|
September 28,
2019
|
||||||
|
Revenue
|
$31,561
|
$40,250
|
$109,246
|
$142,550
|
|||||
|
Cost of services
|
22,741
|
29,635
|
81,080
|
106,615
|
|||||
|
Gross profit
|
8,820
|
10,615
|
28,166
|
35,935
|
|||||
|
Operating costs and expenses
|
|||||||||
|
Selling, general and administrative
|
8,606
|
9,498
|
27,837
|
30,165
|
|||||
|
Depreciation and amortization of property
and equipment
|
292
|
304
|
793
|
944
|
|||||
|
Amortization of acquired intangible assets
|
80
|
82
|
240
|
247
|
|||||
|
Write-off of receivables and professional fees
Incurred related to arbitration
|
-
|
-
|
8,397
|
-
|
|||||
|
Operating costs and expenses
|
8,978
|
9,884
|
37,267
|
31,356
|
|||||
|
Operating (loss) income
|
(158
|
)
|
731
|
(9,101
|
)
|
4,579
|
|||
|
Other expense (income)
|
|||||||||
|
Interest expense and other, net
|
126
|
390
|
650
|
1,276
|
|||||
|
Imputed interest on contingent consideration
|
36
|
(56
|
)
|
108
|
40
|
||||
|
Loss (gain) on foreign currency transactions
|
91
|
(8
|
)
|
137
|
(41
|
)
|
|||
|
Other expense, net
|
253
|
326
|
895
|
1,275
|
|||||
|
(Loss) income before income taxes
|
(411
|
)
|
405
|
(9,996
|
)
|
3,304
|
|||
|
Income tax (benefit) expense
|
(167
|
)
|
70
|
(2,815
|
)
|
255
|
|||
|
Net (loss) income
|
($244
|
)
|
$335
|
($7,181
|
)
|
$3,049
|
|||
|
Basic and diluted net (loss) earnings per share
|
($0.02
|
)
|
$0.03
|
($0.58
|
)
|
$0.24
|
|||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Thirty-Nine Week Periods Ended September 26, 2020 and September 28, 2019
(Unaudited)
(In thousands)
|
|
September 26,
2020
|
September 28,
2019
|
|||
|
Net (loss) income
|
($7,181
|
)
|
$3,049
|
|
|
Other comprehensive (loss) income
|
44
|
(2
|
)
|
|
|
Comprehensive (loss) income
|
($7,137
|
)
|
$3,047
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Thirty-Nine Week Period Ended September 26, 2020
(Unaudited)
(In thousands, except share amounts)
|
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Accumulated
Deficit
|
Treasury Stock
|
Total
|
|||||||||||
|
Issued
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
|
Balance, December 28, 2019
|
15,826,891
|
$791
|
$108,452
|
($2,748
|
)
|
($59,105
|
)
|
2,823,172
|
($14,987
|
)
|
$32,403
|
|||||
|
Issuance of stock under
employee stock purchase plan
|
57,251
|
3
|
137
|
-
|
-
|
-
|
-
|
140
|
||||||||
|
Translation adjustment
|
-
|
-
|
-
|
(131
|
)
|
-
|
-
|
-
|
(131
|
)
|
||||||
|
Share-based compensation expense
|
-
|
-
|
69
|
-
|
-
|
-
|
-
|
69
|
||||||||
|
Issuance of equity awards
|
60,000
|
3
|
(3)
|
-
|
-
|
-
|
-
|
-
|
||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
(5,945
|
)
|
-
|
-
|
(5,945
|
)
|
||||||
|
Balance, March 28, 2020
|
15,944,142
|
$797
|
$108,655
|
($2,879
|
)
|
($65,050
|
)
|
2,823,172
|
($14,987
|
)
|
$26,536
|
|||||
|
Translation adjustment
|
-
|
-
|
-
|
57
|
-
|
-
|
-
|
57
|
||||||||
|
Share-based compensation expense
|
-
|
-
|
167
|
-
|
-
|
-
|
-
|
167
|
||||||||
|
Issuance of equity awards
|
66,552
|
3
|
(3
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Common stock repurchase
|
-
|
-
|
-
|
-
|
-
|
1,858,139
|
(2,230
|
)
|
(2,230
|
)
|
||||||
|
Net loss
|
-
|
-
|
-
|
-
|
(992
|
)
|
-
|
-
|
(992
|
)
|
||||||
|
Balance, June 27, 2020
|
16,010,694
|
$800
|
$108,819
|
($2,822
|
)
|
($66,042
|
)
|
4,681,311
|
($17,217
|
)
|
$23,538
|
|||||
|
Issuance of stock under
employee stock purchase plan
|
60,732
|
3
|
65
|
-
|
-
|
-
|
-
|
68
|
||||||||
|
Translation adjustment
|
-
|
-
|
-
|
118
|
-
|
-
|
-
|
118
|
||||||||
|
Share-based compensation expense
|
-
|
-
|
147
|
-
|
-
|
-
|
-
|
147
|
||||||||
|
Issuance of equity awards
|
73,540
|
4
|
(4
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Net income
|
-
|
-
|
-
|
-
|
(244
|
)
|
-
|
-
|
(244
|
)
|
||||||
|
Balance, September 26, 2020
|
16,144,966
|
$807
|
$109,027
|
($2,704
|
)
|
($66,286
|
)
|
4,681,311
|
($17,217
|
)
|
$23,627
|
|||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Thirty-Nine Week Period Ended September 28, 2019
(Unaudited)
(In thousands, except share amounts)
|
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated
Other
Comprehensive
Loss
|
Accumulated
Deficit
|
Treasury Stock
|
Total
|
|||||||||||
|
Issued
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
|
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
|
||||||||
|
Share-based compensation expense
|
-
|
-
|
241
|
-
|
-
|
-
|
-
|
241
|
||||||||
|
Issuance of stock upon vesting of
restricted stock units
|
57,148
|
3
|
(3
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
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
|
|||||
|
Translation adjustment
|
-
|
-
|
-
|
12
|
-
|
-
|
-
|
12
|
||||||||
|
Share-based compensation expense
|
-
|
-
|
207
|
-
|
-
|
-
|
-
|
207
|
||||||||
|
Issuance of stock upon vesting of
restricted stock units
|
25,000
|
1
|
(1
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||
|
Net income
|
-
|
-
|
-
|
-
|
1,251
|
-
|
-
|
1,251
|
||||||||
|
Balance, June 29, 2019
|
15,719,944
|
$785
|
$107,932
|
($2,732
|
)
|
($60,449
|
)
|
2,823,172
|
($14,987
|
)
|
$30,549
|
|||||
|
Issuance of stock under
employee stock purchase plan
|
59,075
|
3
|
153
|
-
|
-
|
-
|
-
|
156
|
||||||||
|
Translation adjustment
|
-
|
-
|
-
|
(25
|
)
|
-
|
-
|
-
|
(25
|
)
|
||||||
|
Share-based compensation expense
|
-
|
-
|
24
|
-
|
-
|
-
|
-
|
24
|
||||||||
|
Dividends forfeited
|
-
|
-
|
12
|
-
|
-
|
-
|
-
|
12
|
||||||||
|
Net income
|
-
|
-
|
-
|
-
|
335
|
-
|
-
|
335
|
||||||||
|
Balance, September 28, 2019
|
15,779,019
|
$788
|
$108,121
|
($2,757
|
)
|
($60,114
|
)
|
2,823,172
|
($14,987
|
)
|
$31,051
|
|||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-Nine Week Periods Ended September 26, 2020 and September 28, 2019
(Unaudited)
(In thousands)
|
|
September 26,
2020
|
September 28,
2019
|
||||||
|
Cash flows from operating activities:
|
|||||||
|
Net (loss) income
|
($7,181
|
)
|
$3,049
|
||||
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|||||||
|
Depreciation and amortization
|
1,033
|
1,191
|
|||||
|
Imputed interest on contingent consideration
|
108
|
40
|
|||||
|
Share-based compensation expense
|
383
|
472
|
|||||
|
Provision for losses on accounts receivable
|
7,855
|
125
|
|||||
|
Deferred income tax (benefit) expense
|
(3,086
|
)
|
108
|
||||
|
Changes in assets and liabilities:
|
|||||||
|
Accounts receivable
|
18,891
|
(5,184
|
)
|
||||
|
Prepaid expenses and other current assets
|
2,270
|
483
|
|||||
|
Net of transit accounts receivable and payable
|
1,056
|
923
|
|||||
|
Accounts payable and accrued expenses
|
1,508
|
(3,366
|
)
|
||||
|
Accrued payroll and related costs
|
825
|
(1,986
|
)
|
||||
|
Right of use assets and liabilities
|
(16
|
)
|
245
|
||||
|
Income taxes payable
|
94
|
30
|
|||||
|
Total adjustments
|
30,921
|
(6,919
|
)
|
||||
|
Net cash provided by (used in) operating activities
|
23,740
|
(3,870
|
)
|
||||
|
Cash flows from investing activities:
|
|||||||
|
Property and equipment acquired
|
(400
|
)
|
(301
|
)
|
|||
|
Decrease in deposits
|
40
|
5
|
|||||
|
Net cash used in investing activities
|
(360
|
)
|
(296
|
)
|
|||
|
Cash flows from financing activities:
|
|||||||
|
Borrowings under line of credit
|
51,366
|
72,201
|
|||||
|
Repayments under line of credit
|
(72,869
|
)
|
(68,006
|
)
|
|||
|
Issuance of stock for employee stock purchase plan
|
208
|
321
|
|||||
|
Changes in finance lease obligations
|
(321
|
)
|
218
|
||||
|
Contingent consideration paid
|
(345
|
)
|
(574
|
)
|
|||
|
Payment of note payable for treasury stock
|
(2,230
|
)
|
-
|
||||
|
Net cash (used in) provided by financing activities
|
(24,191
|
)
|
4,160
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(279
|
)
|
(83
|
)
|
|||
|
(Decrease) increase in cash and cash equivalents
|
(1,090
|
)
|
(89
|
)
|
|||
|
Cash and cash equivalents at beginning of period
|
1,847
|
482
|
|||||
|
Cash and cash equivalents at end of period
|
$757
|
$393
|
|||||
|
Supplemental cash flow information:
|
|||||||
|
Cash paid for:
|
|||||||
|
Interest
|
$922
|
$1,266
|
|||||
|
Income taxes
|
$191
|
$116
|
|||||
|
Non-cash financing activities:
|
|||||||
|
Equity awards issued
|
$364
|
$300
|
|||||
|
Dividends forfeited on unvested restricted share units
|
$ -
|
($12
|
)
|
||||
|
Software purchase under finance lease
|
$258
|
$ -
|
|||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
|
1.
|
Basis of Presentation
|
The accompanying condensed 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 condensed consolidated financial statements and the notes thereto for the year ended December 28, 2019 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 condensed 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 and thirty-nine week periods ended September 26, 2020 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 28, 2019 (fiscal 2019) was a 52-week reporting year. The
current fiscal year ending January 2, 2021 (fiscal 2020) is a 53-week reporting year. The fiscal quarters for the current year (fiscal 2020) and the prior year (fiscal 2019) align as follows:
|
Fiscal 2020 Quarters
|
Weeks
|
Fiscal 2019 Quarters
|
Weeks
|
|
March 28, 2020
|
Thirteen
|
March 30, 2019
|
Thirteen
|
|
June 27, 2020
|
Thirteen
|
June 29, 2019
|
Thirteen
|
|
September 26, 2020
|
Thirteen
|
September 28, 2019
|
Thirteen
|
|
January 2, 2021
|
Fourteen
|
December 28, 2019
|
Thirteen
|
Current Liquidity and Revolving Credit Facility
Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, and meet the other general cash needs of our business. Our liquidity is impacted
by general economic, financial, competitive, and other factors beyond our control. Our liquidity requirements consist primarily of funds necessary to pay our expenses, principally labor-costs, and other related expenditures. We generally satisfy our
liquidity needs through cash provided by operations and, when necessary, our revolving line of credit from Citizens Bank. The Company expects to have positive cash flow over at least the next two quarters and has a great deal of flexibility to reduce
its costs if it becomes necessary. The Company believes that it can satisfy its liquidity needs for at least the next twelve months.
The Company’s liquidity and capital resources as of September 26, 2020, included accounts receivable and total current asset balances of $33.0 million and $36.1 million, respectively. Current
liabilities were $19.9 million as of September 26, 2020, $16.2 million less than total current assets.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
|
1.
|
Basis of Presentation (Continued)
|
Current Liquidity and Revolving Credit Facility (Continued)
The Company experiences volatility in its daily cash flow and, at times, relies on the revolving line of credit to provide daily liquidity for the Company’s financial operations. As of September 26,
2020, the Company was in compliance with all financial covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.
|
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, revenue and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The Company uses estimates to calculate an allowance for doubtful accounts on its accounts receivables, adequacy of reserves, goodwill impairment, if any, equity compensation, the tax rate applied
and the valuation of certain assets and liability accounts. These estimates can be significant to the operating results and financial position of the Company. The estimates are based upon various factors including current and historical trends, as
well as other pertinent industry and regulatory authority information, including the potential future effects of COVID-19. Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to
adjust for known changes.
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company’s costs related to this risk participation are
estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty relating to the performance of the general economy, competition, demand for the Company’s services, adverse litigation and
claims and the hiring, training and retention of key employees.
Fair Value of Financial Instruments
The Company’s carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses, and transit accounts payable
and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature and the line of credit’s variable interest rate. The Company does not have derivative products in place to manage risks related to foreign
currency fluctuations for its foreign operations or for interest rate changes.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
|
3.
|
Revenue Recognition
|
The Company records revenue under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Revenue is recognized when we
satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent
distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance obligations in the contract; (3)
Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as) each performance obligation is satisfied.
The Company derives its revenue from several sources. The Company’s Engineering Services and Information Technology Services segments perform consulting and project solution services. The
Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care facilities amongst others. All of the Company’s segments perform staff augmentation services and derive revenue from
permanent placement fees. The majority of the Company’s revenue is invoiced on a time and materials basis.
The following table presents our revenue disaggregated by revenue source for the thirteen and thirty-nine week periods ended September 26, 2020 and September 28, 2019:
|
Thirteen Week
Periods Ended
|
Thirty-Nine Week
Periods Ended
|
|||||||
|
September 26,
2020
|
September 28,
2019
|
September 26,
2020
|
September 28,
2019
|
|||||
|
Engineering:
|
||||||||
|
Time and Material
|
$10,369
|
$13,938
|
$33,980
|
$41,309
|
||||
|
Fixed Fee
|
4,660
|
1,202
|
9,163
|
11,469
|
||||
|
Permanent Placement Services
|
58
|
-
|
145
|
-
|
||||
|
Total Engineering
|
$15,087
|
$15,140
|
$43,288
|
$52,778
|
||||
|
Specialty Health Care:
|
||||||||
|
Time and Material
|
$8,844
|
$16,272
|
$41,498
|
$63,318
|
||||
|
Permanent Placement Services
|
171
|
493
|
398
|
987
|
||||
|
Total Specialty Health Care
|
$9,015
|
$16,765
|
$41,896
|
$64,305
|
||||
|
Information Technology:
|
||||||||
|
Time and Material
|
$7,347
|
$8,134
|
$23,683
|
$25,084
|
||||
|
Permanent Placement Services
|
112
|
211
|
379
|
383
|
||||
|
Total Information Technology
|
$7,459
|
$8,345
|
$24,062
|
$25,467
|
||||
|
$31,561
|
$40,250
|
$109,246
|
$142,550
|
|||||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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 revenue associated with these time and materials contracts are recognized based on hours worked at
contracted rates.
Fixed fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements
with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee
project. While these master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over six to nine month periods. In instances where project services are provided on a fixed-price basis,
revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenue under these arrangements are recognized as the costs on
these contracts are incurred. On an infrequent basis, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying condensed 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 revenue and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable and the work is not complete and
the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. These fees are typically based on a percentage of the compensation paid to the person placed with the
Company’s client.
There was no deferred revenue as of September 26, 2020. Deferred revenue was $0.4 million as of December 28, 2019 and was included in accounts payable and accrued expenses in the accompanying
condensed consolidated balance sheet at that date. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet. For the
thirty-nine week periods ended September 26, 2020 and September 28, 2019, respectively, the Company recognized revenue of $0.4 million and $0.2 million that was included in deferred revenue at the beginning of each respective reporting period. For
the thirteen week period ended September 26, 2020, the Company recognized $0.3 million that was included in deferred revenue at the beginning of that reporting period. There was no revenue included in deferred revenue at the beginning of the
September 28, 2019 reporting period.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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:
|
September 26,
2020
|
December 28,
2019
|
|||
|
Billed
|
$20,553
|
$29,214
|
||
|
Accrued and unbilled
|
10,424
|
13,824
|
||
|
Work-in-progress
|
3,759
|
4,352
|
||
|
Accounts receivable subject to arbitration
|
-
|
14,095
|
||
|
Allowance for sales discounts and doubtful accounts
|
(1,750
|
)
|
(1,725
|
)
|
|
Accounts receivable, net
|
$32,986
|
$59,760
|
Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-progress primarily represents revenue earned under
contracts which the Company contractually invoices at future dates.
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. Pursuant to these agreements, the
Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project value; and c) assumes no ownership or risks of inventory. Under the terms of the agreements, the Company is
typically not required to pay the subcontractor until after the corresponding payment from the Company’s end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount
simultaneously as both a “transit account receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does not pay a given transit account
payable until the related transit account receivable is collected. The Company is typically obligated to pay the subcontractor or staffing agency whether or not the client pays the Company. The Company’s transit accounts payable generally exceeds
the Company’s transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The transit accounts receivable was $0.2 million and related transit accounts payable was
$0.9 million, for a net payable of $0.7 million, as of September 26, 2020. The transit accounts receivable was $4.9 million and related transit accounts payable was $4.6 million, for a net receivable of $0.3 million, as of December 28, 2019.
The Company had 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 did not pay the balance of accounts receivable the Company believes were owed for certain disputed projects. As of December 28, 2019, the total amount of recorded receivables from
this customer on these disputed projects was $14.1 million. Additionally, as part of the arbitration process, the customer asserted counter-claims of $10.3 million. The arbitrator rendered a decision in this dispute in April 2020, awarding the
Company $7.4 million, and the arbitration award was paid during the thirteen week period ended September 26, 2020. The counter-claims asserted against the Company of $10.3 million were denied in their entirety. For the thirty-nine week period ended
September 26, 2020, the Company recorded a charge of $8.4 million, including $6.7 million constituting the portion of the accounts receivable relating to the disputed projects that was not awarded by the arbitrator, $0.7 million from other projects
with this customer that were not part of the arbitration, $0.8 million in professional fees related to the dispute and arbitration, and $0.2 million of transit accounts receivable associated with disputed projects that were part of the arbitration.
The Company decided to write off the $0.7 million of accounts receivable from other projects not part of the arbitration for business reasons.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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:
|
September 26,
2020
|
December 28,
2019
|
||
|
Computers and systems
|
$4,635
|
$5,628
|
|
|
Equipment and furniture
|
264
|
319
|
|
|
Leasehold improvements
|
226
|
308
|
|
|
5,125
|
6,255
|
||
|
Less: accumulated depreciation and amortization
|
2,766
|
3,538
|
|
|
Property and equipment, net
|
$2,359
|
$2,717
|
The Company periodically writes off fully depreciated and amortized assets. The Company wrote off fully depreciated and amortized assets of $1,529 and $1,803 during the thirty-nine week periods
ended September 26, 2020 and September 28, 2019, respectively. Depreciation and amortization expense of property and equipment for the thirty-nine week periods ended September 26, 2020 and September 28, 2019 was $793 and $944, respectively.
Depreciation and amortization of property and equipment for the thirteen week periods ended September 26, 2020 and September 28, 2019 was $292 and $304, 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 or that if it does make acquisitions, such acquisitions will be successful.
Future Contingent Payments
As of September 26, 2020, 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 September 26, 2020 as follows:
|
Fiscal Year Ending
|
Total
|
|
January 2, 2021 (after September 26, 2020)
|
$ -
|
|
January 1, 2022
|
500
|
|
December 31, 2022
|
2,322
|
|
Estimated future contingent consideration payments
|
$2,822
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 6. |
Acquisitions (Continued)
|
Future Contingent Payments (Continued)
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active
acquisitions after September 26, 2020 are capped at a cumulative maximum of $5.7 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of
September 26, 2020. During the thirty-nine week period ended September 26, 2020, the Company measured contingent consideration at fair value on a non-recurring basis. Contingent consideration related to acquisitions are recorded at fair value level
3 due to the lack of observable market inputs. Changes in fair value are recorded in other (expense) income, net.
For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the acquisition date. The
Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The fair value is estimated using projected future operating results and the corresponding future
earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured
quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the condensed consolidated statements of comprehensive (loss) income. During the measurement period, which may be up to one year from
the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired
or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the condensed consolidated statements of comprehensive (loss) income.
The Company paid $0.3 million of contingent consideration during the thirty-nine week period ended September 26, 2020 and paid $0.6 million during the thirty-nine week period ended September 28,
2019.
| 7. |
Goodwill
|
Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company tests goodwill for impairment on an annual basis as
of the last day of the Company's fiscal year or more frequently if events occur or circumstances change indicating that the fair value of goodwill may be below the carrying amount. During the thirty-nine week period ended September 26, 2020, the
Company reviewed the carrying value of goodwill due to the events and circumstances surrounding the COVID-19 pandemic. While COVID-19 has negatively impacted the Company, and the Company expects this negative impact to continue at least through the
balance of fiscal 2020, the Company did not conclude in such review that this negative impact is permanent. The Company has determined that no other indicators of impairment of goodwill existed during the thirty-nine week periods ended September 26,
2020 and September 28, 2019. As such, no impairment loss on the Company’s goodwill during the thirty-nine week period ended September 26, 2020 was recorded as a result of such review.
The carrying amount of goodwill as of September 26, 2020 and December 28, 2019 is as follows:
|
Engineering
|
Specialty
Health Care
|
Information
Technology
|
Total
|
|||
|
$11,918
|
$2,398
|
$2,038
|
$16,354
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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 the thirty-nine week period ended September 26, 2020, the Company
reviewed the carrying value of its intangible assets due to the events and circumstances surrounding the COVID-19 pandemic. While COVID-19 has negatively impacted the Company, and the Company expects this negative impact to continue at least through
the balance of fiscal 2020, the Company does not believe at this time that this negative impact is permanent. As such, no impairment loss on the Company’s intangible assets during the thirty-nine week period ended September 26, 2020 was recorded as a
result of such review.
All of the Company’s intangible assets are associated with the Engineering segment. Intangible assets other than goodwill are amortized over their useful lives. Intangible assets are carried at
cost, less accumulated amortization.
|
September 26,
2020
|
December 28,
2019
|
|||
|
Restricted covenants
|
$17
|
$28
|
||
|
Customer relationships
|
159
|
388
|
||
|
Total intangible assets
|
$176
|
$416
|
Amortization expense of intangible assets for the thirty-nine week periods ended September 26, 2020 and September 28, 2019 was $240 and $247, respectively. Amortization expense of intangible assets
for the thirteen week periods ended September 26, 2020 and September 28, 2019 was $80 and $82, respectively.
| 9. |
Line of Credit
|
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. As amended and restated, the Revolving Credit Facility
provides for a $45.0 million revolving credit facility, has no sub-limit for letters of credit, and expires on August 8, 2023.
On September 29, 2020, the Company entered into an amendment to its Revolving Credit Facility. The amendment (i) modifies certain aspects of the financial covenants under the Loan Agreement,
including the manner in which the measurement periods for certain components of the financial covenants are determined, (ii) modifies the required compliance levels for certain ratios under the Loan Agreement, and (iii) permitted the repayment of
$2.2 million of indebtedness to a third party incurred in connection with the previously disclosed June 2020 repurchase of stock.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 9. |
Line of Credit (Continued)
|
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London
Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations. 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 thirty-nine week periods ended September 26, 2020 and September 28, 2019 were
2.9% and 4.6%, respectively.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit
Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay dividends. As of September 26, 2020, the Company was in compliance with all covenants
contained in the Revolving Credit Facility (as amended). The Company believes that it will maintain compliance with its
financial covenants for the foreseeable future.
Borrowings under the line of credit as of September 26, 2020 and December 28, 2019 were $13.3 million and $34.8 million, respectively. At September 26, 2020 and December 28,
2019 there were letters of credit outstanding for $1.7 million and $1.6 million, respectively. At September 26, 2020, the Company had availability for additional borrowings under the Revolving Credit Facility of $30.0 million.
The Company is negatively impacted by COVID-19 as more fully described in Footnote 19 as well as the Segment Discussion, and Liquidity and Capital Resources sections in
Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company believes that its current line of credit is adequate to provide the necessary liquidity while COVID-19 impacts its operations. While the Company does
expect to be in compliance with its financial covenants in the line of credit for the foreseeable future, the Company can give no assurance that the line of credit will be available to the Company.
| 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
(loss) per share for the thirteen and thirty-nine week periods ended September 26, 2020 and September 28, 2019 was determined as follows:
|
Thirteen Week Periods Ended
|
Thirty-Nine Week Periods Ended
|
||||||
|
September 26,
2020
|
September 28,
2019
|
September 26,
2020
|
September 28,
2019
|
||||
|
Basic weighted average shares
outstanding
|
11,444,697
|
12,955,198
|
12,393,058
|
12,897,303
|
|||
|
Dilutive effect of outstanding restricted
share units
|
45,411
|
63,416
|
34,181
|
53,628
|
|||
|
Weighted average dilutive shares
outstanding
|
11,490,108
|
13,018,614
|
12,427,739
|
12,950,931
|
|||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 10. |
Per Share Data (Continued)
|
For all periods presented, 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:
|
September 26,
2020
|
December 28,
2019
|
||
|
Time-based restricted stock units outstanding
|
454,386
|
151,725
|
|
|
Performance-based restricted stock units outstanding
|
-
|
240,000
|
|
|
Future grants of options or shares
|
5,573
|
268,326
|
|
|
Shares reserved for employee stock purchase plan
|
149,894
|
267,877
|
|
|
Total
|
609,853
|
927,928
|
| 11. |
Share-Based Compensation
|
At September 26, 2020, 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 for the thirteen week periods ended September 26, 2020, and September 28, 2019 was $147 and $24, respectively. Share-based compensation expense for the thirty-nine
week periods ended September 26, 2020, and September 28, 2019 was $383 and $472, respectively. Neither of the thirty-nine week periods ended September 26, 2020 and September 28, 2019 includes expense associated with performance-based restricted
stock units. For the thirty-nine week period ended September 26, 2020, 40,000 performance-based restricted stock units vested, for which the expense was recognized in the fourth quarter of fiscal 2019. As of September 26, 2020, there were no
performance-based restricted stock units outstanding.
As of September 26, 2020, the Company had $0.7 million of total unrecognized compensation cost related to all time-based non-vested share-based awards and performance-based restricted stock units
outstanding and deemed as likely to vest. The Company expects to recognize this expense over approximately three years. These amounts do not include a) performance-based restricted stock units deemed unlikely to vest, b) the cost of any additional
share-based awards granted in future periods or c) the impact of any potential changes in the Company’s forfeiture rate.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 11. |
Share-Based Compensation (Continued)
|
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 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, originally 625,000, 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 September 26, 2020, under the 2014 Plan, 454,386 time-based shares were outstanding, there were no performance-based restricted share units outstanding and 5,573 shares were available for
awards thereunder.
The market value of equity grants issued for the thirteen week periods ended September 26, 2020 and September 28, 2019 was $108 and $0 respectively. The market value of equity grants for the
thirty-nine periods ended September 26, 2020 and September 28, 2019 was $364 and $300 respectively.
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.
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 on June 29, 2020 (the first business day following the previous offering period) was 60,732. As of September 26, 2020, there were
149,894 shares available for issuance under the Purchase Plan.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 11. |
Share-Based Compensation (Continued)
|
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 condensed consolidated balance sheet. As of September 26, 2020, there were no accrued dividends. 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 thirty-nine week period ended September 26, 2020:
|
Number of
Time-Based
Restricted
Stock Units
|
Weighted
Average
Grant Date Fair
Value per Share
|
||
|
Outstanding non-vested at December 28, 2019
|
151,725
|
$3.64
|
|
|
Granted
|
362,661
|
$2.07
|
|
|
Vested
|
(60,000
|
)
|
$4.62
|
|
Forfeited or expired
|
-
|
-
|
|
|
Outstanding non-vested at September 26, 2020
|
454,386
|
$2.26
|
Based on the closing price of the Company’s common stock of $1.39 per share on September 25, 2020 (the last trading day prior to September 26, 2020), the intrinsic value of the time-based non-vested
restricted stock units at September 26, 2020 was approximately $632. As of September 26, 2020, there was approximately $682 of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over
the average weighted remaining vesting period of the restricted stock units.
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 condensed
consolidated balance sheet. As of September 26, 2020, there were no accrued dividends for performance-based restricted stock units. Dividends for performance-based restricted stock units that ultimately do not vest are forfeited.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 11. |
Share-Based Compensation (Continued)
|
Performance Based Restricted Stock Units (Continued)
To date, the Company has issued performance-based restricted stock units only under the 2014 Plan. The following summarizes the activity in the performance-based restricted stock units during the
thirty-nine week period ended September 26, 2020:
|
Number of
Performance-Based
Restricted
Stock Units
|
Weighted
Average
Grant Date Fair
Value per Share
|
||
|
Outstanding non-vested at December 28, 2019
|
240,000
|
$4.81
|
|
|
Granted
|
-
|
-
|
|
|
Vested
|
(40,000
|
)
|
$4.38
|
|
Forfeited or expired
|
(200,000
|
)
|
$4.89
|
|
Outstanding non-vested at September 26, 2020
|
-
|
-
|
As of September 26, 2020, there were no outstanding 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 additional compensation cost if and when achievement of the performance condition becomes probable. The Company will then recognize the appropriate expense cumulatively in the year performance becomes probable
and recognize the remaining compensation cost over the remaining requisite service period. If at a later measurement date the Company determines that performance-based restricted stock units deemed as likely to vest are deemed as unlikely to vest,
the expense recognized will be reversed.
| 12. |
Treasury Stock Transactions
|
On June 2, 2020, the Company entered into a stock purchase agreement with certain stockholders of the Company, whereby the Company purchased an aggregate of 1,858,139 shares of the Company’s common
stock for a negotiated purchase price of $1.20 per share or $2.2 million in total. The negotiated price of $1.20 per share was less than the lowest trading price of the stock on the day of the repurchase. The consideration paid by the Company
consisted entirely of an unsecured subordinated promissory note for $2.2 million. The note accrues interest at an annual rate of 9.0%, compounded annually, payable quarterly in arrears commencing on September 1, 2020 and continuing on each December
1, March 1, June 1 and September 1 thereafter, and initially had a maturity date of August 10, 2023. On September 25, 2020, the Company retired the subordinated promissory note in the amount of $2.2 million.
The shares repurchased on June 2, 2020 were not purchased under a stock repurchase plan. The Company, at this time, does not have an open repurchase plan. The Company did not repurchase any shares
in the comparable prior year period.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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. In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to
SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original
pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way
the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.
This standard only applies to contracts and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This guidance provides temporary optional expedients and exceptions to accounting
guidance on contract modifications and hedge accounting to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The
Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements and related disclosures.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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 Condensed Consolidated Financial Statements included in its Annual
Report on Form 10-K for the year ended December 28, 2019).
Segment operating (loss) 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
September 26, 2020
|
Engineering
|
Specialty Health Care
|
Information
Technology
|
Corporate
|
Total
|
|||||
|
Revenue
|
$15,087
|
$9,015
|
$7,459
|
$ -
|
$31,561
|
|||||
|
Cost of services
|
10,674
|
6,724
|
5,343
|
-
|
22,741
|
|||||
|
Gross profit
|
4,413
|
2,291
|
2,116
|
-
|
8,820
|
|||||
|
Selling, general and administrative
|
3,359
|
2,989
|
2,258
|
-
|
8,606
|
|||||
|
Depreciation and amortization
|
252
|
82
|
38
|
-
|
372
|
|||||
|
Operating income (loss)
|
$802
|
($780
|
)
|
($180
|
)
|
$ -
|
($158
|
)
|
||
|
Total assets as of September 26, 2020
|
$34,961
|
$14,349
|
$7,858
|
$5,385
|
$62,553
|
|||||
|
Capital expenditures
|
($37
|
)
|
$7
|
$8
|
$271
|
$249
|
|
Thirteen Week Period Ended
September 28, 2019
|
Engineering
|
Specialty Health Care
|
Information
Technology
|
Corporate
|
Total
|
|||||
|
Revenue
|
$15,140
|
$16,765
|
$8,345
|
$ -
|
$40,250
|
|||||
|
Cost of services
|
10,984
|
12,795
|
5,856
|
-
|
29,635
|
|||||
|
Gross profit
|
4,156
|
3,970
|
2,489
|
-
|
10,615
|
|||||
|
Selling, general and administrative
|
2,996
|
4,205
|
2,297
|
-
|
9,498
|
|||||
|
Depreciation and amortization
|
293
|
74
|
19
|
-
|
386
|
|||||
|
Operating income (loss)
|
$867
|
($309
|
)
|
$173
|
$ -
|
$731
|
||||
|
Total assets as of September 28, 2019
|
$53,639
|
$25,822
|
$7,773
|
$4,506
|
$91,740
|
|||||
|
Capital expenditures
|
($11
|
)
|
$2
|
$19
|
$53
|
$63
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
| 14. |
Segment Information (Continued)
|
|
Thirty-Nine Week Period Ended
September 26, 2020
|
Engineering
|
Specialty Health Care
|
Information
Technology
|
Corporate
|
Total
|
|||||
|
Revenue
|
$43,288
|
$41,896
|
$24,062
|
$ -
|
$109,246
|
|||||
|
Cost of services
|
30,673
|
33,037
|
17,370
|
-
|
81,080
|
|||||
|
Gross profit
|
12,615
|
8,859
|
6,692
|
-
|
28,166
|
|||||
|
Selling, general and administrative
|
10,073
|
10,682
|
7,082
|
-
|
27,837
|
|||||
|
Depreciation and amortization
|
720
|
235
|
78
|
-
|
1,033
|
|||||
|
Write-off of receivables and
professional fees incurred
related to arbitration
|
8,397
|
-
|
-
|
-
|
8,397
|
|||||
|
Operating loss
|
($6,575
|
)
|
($2,058
|
)
|
($468
|
)
|
$ -
|
($9,101
|
)
|
|
|
Total assets as of September 26, 2020
|
$34,961
|
$14,349
|
$7,858
|
$5,385
|
$62,553
|
|||||
|
Capital expenditures
|
($7
|
)
|
$17
|
$43
|
$347
|
$400
|
|
Thirty-Nine Week Period Ended
September 28, 2019
|
Engineering
|
Specialty Health Care
|
Information
Technology
|
Corporate
|
Total
|
|||||
|
Revenue
|
$52,778
|
$64,305
|
$25,467
|
$ -
|
$142,550
|
|||||
|
Cost of services
|
38,666
|
49,395
|
18,554
|
-
|
106,615
|
|||||
|
Gross profit
|
14,112
|
14,910
|
6,913
|
-
|
35,935
|
|||||
|
Selling, general and administrative
|
10,486
|
12,990
|
6,689
|
-
|
30,165
|
|||||
|
Depreciation and amortization
|
879
|
250
|
62
|
-
|
1,191
|
|||||
|
Operating income
|
$2,747
|
$1,670
|
$162
|
$ -
|
$4,579
|
|||||
|
Total assets as of September 28, 2019
|
$53,639
|
$25,822
|
$7,773
|
$4,506
|
$91,740
|
|||||
|
Capital expenditures
|
$76
|
$107
|
$36
|
$82
|
$301
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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. Revenue 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. Revenue by geographic area for the thirteen and thirty-nine week periods ended September 26, 2020 and September 28, 2019 are as follows:
|
Thirteen Week Periods Ended
|
Thirty-Nine Week Periods Ended
|
||||||||
|
September 26,
2020
|
September 28,
2019
|
September 26,
2020
|
September 28,
2019
|
||||||
|
Revenue
|
|||||||||
|
U. S.
|
$25,628
|
$34,810
|
$91,793
|
$124,356
|
|||||
|
Canada
|
3,543
|
3,682
|
11,186
|
12,770
|
|||||
|
Puerto Rico
|
1,433
|
1,215
|
4,018
|
3,627
|
|||||
|
Serbia
|
957
|
543
|
2,249
|
1,797
|
|||||
|
$31,561
|
$40,250
|
$109,246
|
$142,550
|
||||||
Total assets by geographic area as of the reported periods are as follows:
|
September 26,
2020
|
December 28,
2019
|
||||
|
Total assets
|
|||||
|
U. S.
|
$39,760
|
$75,724
|
|||
|
Canada
|
14,828
|
13,770
|
|||
|
Puerto Rico
|
2,105
|
2,066
|
|||
|
Serbia
|
5,840
|
4,613
|
|||
|
$62,533
|
$96,173
|
||||
| 15. |
Income Taxes
|
The Company recognized $2.8 million of income tax benefit for the thirty-nine week period ended September 26, 2020, as compared to an income tax expense of $0.3 million for the comparable prior year
period. The consolidated effective income tax rate for the current period was 28.2% as compared to 25.9% for the comparable prior year period. The projected fiscal 2020 income tax rates as of September 26, 2020, were approximately 27.0%, 26.7% 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 comparable prior year period estimated income tax rates were 28.3%, 26.5% and 15.0% in the United States, Canada and Serbia, respectively.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based compensation, and potential
tax credits available to the Company. The actual 2020 effective tax rate may vary from the estimate depending on the actual operating income earned in various jurisdictions, the potential availability of tax credits, and the exercise of stock options
and vesting of share-based awards. The Company's estimate for the 2020 effective tax rate has not been adjusted for any potential impact related to COVID-19.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
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 as of September 26, 2020 are uncertain as no open claims have asserted any specific amounts. As of September 26, 2020, the Company did not have an
accrual for any such liabilities. As described in the following paragraph, these claims were denied in their entireties as a result of the arbitration.
The Company had 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 did not pay the balance of accounts receivable the Company believes were owed for certain disputed projects. As of December 28, 2019, the total amount of recorded receivables from
this customer on these disputed projects was $14.1 million. Additionally, as part of the arbitration process, the customer asserted counter-claims of $10.3 million. The arbitrator rendered a decision in this dispute in April 2020, awarding the
Company $7.4 million, and the arbitration award was paid during the thirteen week period ended September 26, 2020. The counter-claims asserted against the Company of $10.3 million were denied in their entirety. For the thirty-nine week period ended
September 26, 2020, the Company recorded a charge of $8.4 million, including $6.7 million constituting the portion of the accounts receivable relating to the disputed projects that was not awarded by the arbitrator, $0.7 million from other projects
with this customer that were not part of the arbitration, $0.8 million in professional fees related to the dispute and arbitration, and $0.2 million of transit accounts receivable associated with disputed projects that were part of the arbitration.
The Company decided to write off the $0.7 million of accounts receivable from other projects not part of the arbitration for business reasons.
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
|
Leases are recorded in accordance with FASB ASC 842, Leases which requires lessees to recognize a right-of-use (“ROU”) asset and an operating right of use liability for all leases with terms greater
than 12 months and requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases.
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.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
|
17.
|
Leases (Continued)
|
The components of lease expense were as follows:
|
Thirteen Week Periods Ended
|
Thirty-Nine Week Periods Ended
|
|||||||
|
September 26,
2020
|
September 28,
2019
|
September 26,
2020
|
September 28,
2019
|
|||||
|
Operating lease cost
|
$640
|
$654
|
$1,943
|
$1,643
|
||||
|
Amortization of ROU assets
|
$120
|
$72
|
$275
|
$218
|
||||
|
Interest on lease liabilities
|
4
|
1
|
8
|
4
|
||||
|
Total finance lease cost
|
$124
|
$73
|
$283
|
$222
|
||||
Supplemental Cash Flow information related to leases was as follows:
|
Thirteen Week Period Ended
|
Thirty-Nine Week Period Ended
|
|||||||
|
September 26,
2020
|
September 28,
2019
|
September 26,
2020
|
September 28,
2019
|
|||||
|
Cash paid for amounts included in the measurement
of lease liabilities
|
||||||||
|
Operating cash flows from operating leases
|
$659
|
$665
|
$1,986
|
$1,605
|
||||
|
Operating cash flows from finance leases
|
$2
|
$1
|
$6
|
$4
|
||||
|
Financing cash flows from finance leases
|
$167
|
$72
|
$328
|
$216
|
||||
|
Right of use assets obtained in exchange for lease
obligations
|
||||||||
|
Operating leases
|
$318
|
$774
|
$600
|
$7,756
|
||||
|
|
Finance leases
|
$258
|
$ -
|
$258
|
$ -
|
|||
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
|
17.
|
Leases (Continued)
|
Supplemental Balance Sheet information as of September 26, 2020 and December 28, 2019 related to leases was as follows:
|
September 26,
2020
|
December 28,
2019
|
||||
|
Operating leases
|
|||||
|
Operating lease right of use assets
|
$4,686
|
$5,820
|
|||
|
Operating right of use liability - current
|
($1,984
|
)
|
($2,134
|
)
|
|
|
Operating right of use liability - non-current
|
(2,922
|
)
|
(3,921
|
)
|
|
|
Total operating lease liabilities
|
($4,906
|
)
|
($6,055
|
)
|
|
|
Property and equipment - (ROU assets)
|
$1,140
|
$985
|
|||
|
Accumulated depreciation
|
(655
|
)
|
(475
|
)
|
|
|
Property and equipment, net
|
$485
|
$510
|
|||
|
Finance lease liability - current
|
($311
|
)
|
($315
|
)
|
|
|
Finance lease liability - non-current
|
(115
|
)
|
(189
|
)
|
|
|
Total finance lease liabilities
|
($426
|
)
|
($504
|
)
|
|
|
Weighted average remaining lease term
|
|||||
|
Operating leases
|
1.63 Years
|
2.54 Years
|
|||
|
Finance leases
|
1.56 Years
|
1.62 Years
|
|||
|
Weighted average discount rate
|
|||||
|
Operating leases
|
4.24
|
%
|
4.11
|
%
|
|
|
Finance leases
|
2.47
|
%
|
1.78
|
%
|
|
Maturities of lease liabilities are as follows:
|
Fiscal Year
|
Operating Leases
|
Finance
Leases
|
||
|
2020
|
$594
|
$75
|
||
|
2021
|
2,006
|
255
|
||
|
2022
|
1,481
|
108
|
||
|
2023
|
910
|
-
|
||
|
2024
|
187
|
-
|
||
|
Thereafter
|
-
|
-
|
||
|
Total lease payments
|
5,178
|
438
|
||
|
Less: imputed interest
|
(272
|
)
|
(12
|
)
|
|
Total
|
$4,906
|
$426
|
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
18. Stockholder Rights Plan
On May 22, 2020, the Board of Directors of the Company approved a stockholder rights plan (the “Rights Plan”) and declared a dividend distribution to
stockholders of record as of the close of business on June 2, 2020 of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock of the Company. Each Right entitles the holder to purchase from the Company a unit consisting
of one one-hundredth of a share (a “Unit”) of a newly-authorized series of junior participating preferred stock of
the Company, upon the occurrence of certain events, as more fully described below, at a purchase price of $5.60 per Unit.
In connection with the adoption of the stockholder rights plan, the Company designated 250,000 shares of the Company’s authorized shares of Preferred Stock, par value $1.00, as
Series A-3 Junior Participating Preferred Shares, none of which are issued and outstanding. As provided in the Certificate of Designation filed by the Company with the Department of State of the State of Nevada, each Series A-3 Preferred Share shall
entitle the holder 100 votes on all matters submitted to a vote of the stockholders of the Company, subject to adjustment for future dividends and combinations of common stock. The holders of Series A-3 Preferred Shares and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company. The Series A-3 Preferred Shares shall, after issuance, be entitled to receive quarterly dividends in an amount equal to the greater of
$50.00 per share or an amount per share, subject to adjustment, equal to 100 times the aggregate per share amount of all non-cash dividends or other distributions other than a dividend payable in shares of common stock or a subdivision of the
outstanding shares of common stock declared on the common stock since the immediately preceding quarterly dividend payment date of the Series A-3 Preferred Shares, or, with respect to the first such quarterly dividend payment date, since the first
issuance of any share or fraction of a share of the Series A-3 Preferred Shares. The Series A-3 Preferred Shares shall rank junior to all other series of the Company’s Preferred Stock as to the payment of dividends and the distribution of assets,
unless the terms of any such series shall provide otherwise. The Series A-3 Preferred Shares shall not be redeemable. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series A-3
Preferred Shares shall be entitled to receive the greater of $100.00 per share, plus accrued dividends, or an amount per share, subject to adjustment, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock. In
the event the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such event
the Series A-3 Preferred Shares shall at the same time be similarly exchanged or changed in an amount per share, subject to adjustment, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is changed or exchanged. These preferences are protected by customary anti-dilution provisions.
Initially, the Rights are not exercisable and are attached to each existing
outstanding share of the Company’s Common Stock. The Rights will separate and become
exercisable if a person or group acquires 10% or more of the Company’s Common Stock in a transaction, including the open market purchase of shares, not approved by our Board. If a person or group acquires 10%, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right’s exercise price (subject
to adjustment as provided in the Rights Plan), a number of shares of the Company’s Common Stock having a then-current market value of twice the exercise price. The Rights Plan will cause substantial dilution to a person or group that attempts to acquire control of the Company on terms or in a manner not approved by our Board.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts, unless otherwise indicated)
|
18. Stockholder Rights Plan (Continued)
The initial issuance of the Rights as a dividend had no financial accounting or reporting impact. The fair value of the Rights was nominal because the Rights were not
exercisable when issued and no value is attributable to them. Additionally, the Rights do not meet the definition of a liability under generally accepted accounting principles in the United States and are therefore not accounted for as a long-term
obligation. Accordingly, unless the Rights become exercisable as discussed above, the Rights Plan has no impact on the Company’s Condensed Consolidated Financial Statements.
The Company’s Board of Directors may redeem the Rights for $0.001 per Right at any time before an event that causes the Rights to become exercisable. The Rights will expire on
May 22, 2021, unless the Rights have previously been redeemed by the Board of Directors.
The Rights Plan is not intended to interfere with any merger, tender or exchange offer or other business combination approved by our Board. Nor does the Rights Plan prevent our Board
from considering any offer that it considers to be in the best interest of its stockholders.
19. COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to present various health, business and other challenges
throughout the United States. As a result, we have temporarily closed most of our office locations, with most of our workforce working from home, and have seen a reduction in customer demand, all resulting in a negative impact on Company revenue,
gross profit, and operating income. The duration and ultimate magnitude of the disruption remains uncertain. Therefore, while we experienced a negative impact during the first half of fiscal 2020, we expect this matter to negatively impact our
business, results of operations, and financial position also through at least the second half of fiscal 2020 and possibly beyond, and the related financial impact cannot be reasonably estimated at this time. Please see more detailed disclosure by
segment in our Segment Discussion and the impact to our condensed consolidated financial position under Financial Activities under Liquidity and Capital Resources, all in Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
|
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 effects of the COVID-19 pandemic; (iii) the Company’s
ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients; (iv) the Company’s ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired
businesses; (v) the Company’s relationships with and reliance upon significant customers, and ability to collect accounts receivable from such customers; (vi) risks associated with foreign currency fluctuations and changes in exchange rates,
particularly with respect to the Canadian dollar; (vii) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (viii) the adverse effect a potential decrease in
the trading price of the Company’s common stock would have upon the Company’s ability to acquire businesses through the issuance of its securities; (ix) the Company’s ability to obtain financing on satisfactory terms; (x) the reliance of the Company
upon the continued service of its executive officers; (xi) the Company’s ability to remain competitive in the markets that it serves; (xii) the Company’s ability to maintain its unemployment insurance premiums and workers compensation premiums;
(xiii) the risk of claims being made against the Company associated with providing temporary staffing services; (xiv) the Company’s ability to manage significant amounts of information and periodically expand and upgrade its information processing
capabilities; (xv) the risk of cyber attacks on our information technology systems or those of our third party vendors; (xvi) the Company’s ability to remain in compliance with federal and state wage and hour laws and regulations; (xvii)
uncertainties in predictions as to the future need for the Company’s services; (xviii) uncertainties relating to the allocation of costs and expenses to each of the Company’s operating segments; (ix) the costs of conducting and the outcome of
litigation, arbitrations and other business disputes involving the Company, and the applicability of insurance coverage with respect to any such litigation; (xx) the results of, and costs relating to, any interactions with shareholders of the Company
who may pursue specific initiatives with respect to the Company’s governance and strategic direction, including without limitation a contested proxy solicitation initiated by such shareholders, or any similar such interactions; and (xxi) other
economic, competitive, health and governmental factors affecting the Company’s operations, markets, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made.
Except as required by law, the Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends or circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
COVID-19 Considerations
The Company’s priorities during the COVID-19 pandemic are protecting the health and safety of our employees and, especially in the healthcare segment, deploying our resources, including the talents of our employees, to
help the communities we serve meet and overcome the current challenges. In the future, the pandemic may continue to cause reduced demand for our services if, for example, the pandemic results in a prolonged recessionary economic environment affecting
industries in which we serve; however, since certain services that we offer are essential to the daily lives of our customers, we believe that over the long term, there will continue to be demand for our services.
Our ability to continue to operate without any significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has
endeavored to follow the recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our customer facilities. For the thirty-nine week period ended September 26, 2020,
while our revenue, gross profit and operating income were negatively impacted, we maintained the consistency of our operations, to a substantial degree, during the onset of the COVID-19 pandemic. We intend to continue to adhere to our employee safety
measures as we seek to ensure that any disruptions to our operations remain as limited as possible during the pandemic. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain
(for example, an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q. For additional information on how
COVID-19 has impacted operations and our financial position, please refer to the Segment Discussion and Liquidity and Capital Resources sections in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
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 revenue and operations can be substantial, resulting in significant volatility
in the Company’s financial performance.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to present various health, business and other challenges throughout the United States.
As a result, we have temporarily closed most of our office locations, with most of our workforce working from home, and have seen a reduction in customer demand, all resulting in a negative impact on Company revenue, gross profit and operating
income. The duration and ultimate magnitude of the disruption remains uncertain. We experienced a negative impact during the first half of fiscal 2020 and we expect this matter to negatively impact our business, results of operations, and financial
position also through at least the second half of fiscal 2020 and possibly beyond. The related financial impact cannot be reasonably estimated at this time. Please see more detailed disclosure by segment in our Segment Discussion and the impact to
our condensed consolidated financial position under Financial Activities under Liquidity and Capital Resources, all in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Company believes it has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility and built an efficient pricing structure. The Company is
committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical focus offering an integrated suite of services through a global delivery platform.
The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today’s business climate. However, the process of designing, developing and implementing
business and technology solutions is becoming increasingly complex. The Company believes that many businesses today are focused on return on investment analysis in prioritizing their initiatives. This has had an adverse impact on spending by
current and prospective clients for many emerging new solutions.
Nonetheless, the Company continues to believe that businesses must implement more advanced information technology and engineering solutions to upgrade their systems, applications and processes so that they can maximize
their productivity and optimize their performance in order to maintain a competitive advantage. Although working under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications and
processes of significant strategic value. This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business critical systems,
applications and processes.
The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The billing rates and profit margins for project
management and solutions services are generally higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes
revenue from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly
rates that are established for each of the Company’s consultants based upon their skill level, experience and the type of work performed.
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.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Overview (Continued)
Costs of services consist primarily of salaries and compensation-related expenses for billable consultants and employees, including payroll taxes, employee benefits and insurance. Selling, general and administrative
expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and
benefits of personnel responsible for corporate activities, including the Company’s corporate marketing, administrative and financial reporting responsibilities and acquisition program. The Company records these expenses when incurred. Corporate
overhead expenses are allocated to the segments based on revenue for the purpose of segment financial reporting.
Critical Accounting Policies and Use of Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our 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 revenue 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 Condensed Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies, in our
Annual Report on Form 10-K for the year ended December 28, 2019. 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
28, 2019.
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. In addition, global events such as the ongoing COVID-19 pandemic also have a substantial impact
on our operations and financial results. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and diversification of service offerings provides some insulation from adverse trends. However, general economic
declines could result in the need for future cost reductions or changes in strategy.
Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional employee benefits, licensing or tax requirements
with respect to the provision of employment services that may reduce the Company’s future earnings. There can be no assurance that the Company will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to
cover increased costs as a result of any of the foregoing.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Forward-looking Information (Continued)
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.
Thirteen Week Period Ended September 26, 2020 Compared to Thirteen Week Period Ended September 28, 2019
A summary of operating results for the thirteen week periods ended September 26, 2020 and September 28, 2019 is as follows (in thousands):
|
September 26, 2020
|
September 28, 2019
|
|||||||
|
Amount
|
% of Revenue
|
Amount
|
% of Revenue
|
|||||
|
Revenue
|
$31,561
|
100.0
|
$40,250
|
100.0
|
||||
|
Cost of services
|
22,741
|
72.1
|
29,635
|
73.6
|
||||
|
Gross profit
|
8,820
|
27.9
|
10,615
|
26.4
|
||||
|
Selling, general and administrative
|
8,606
|
27.3
|
9,498
|
23.6
|
||||
|
Depreciation and amortization of property and equipment
|
292
|
0.9
|
304
|
0.8
|
||||
|
Amortization of acquired intangible assets
|
80
|
0.2
|
82
|
0.2
|
||||
|
8,978
|
28.4
|
9,884
|
24.6
|
|||||
|
Operating (loss) income
|
(158
|
)
|
(0.5
|
)
|
731
|
1.8
|
||
|
Other expense, net
|
253
|
0.8
|
326
|
0.8
|
||||
|
(Loss) income before income taxes
|
(411
|
)
|
(1.3
|
)
|
405
|
1.0
|
||
|
Income tax (benefit) expense
|
(167
|
)
|
(0.5
|
)
|
70
|
0.2
|
||
|
Net (loss) income
|
($244
|
)
|
(0.8
|
)
|
$335
|
0.8
|
||
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended September 26, 2020 and September 28, 2019 consisted of thirteen weeks each.
Revenue. Revenue decreased 21.6%, or $8.7 million, for the thirteen week period ended September 26, 2020 as compared to the thirteen week period ended September 28, 2019 (the
“comparable prior year period”). Revenue decreased $0.1 million in the Engineering segment, $7.7 million in the Specialty Health Care segment and $0.9 million in the Information Technology segment. See more detailed disclosure by segment in our
Segment Discussion.
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 condensed consolidated results in
U.S. dollars the condensed 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 September 26, 2020,
the Company generated total revenue from its Canadian clients of $3.5 million in U.S. dollars at an Exchange Rate of 75.0% as compared to $3.7 million in U.S. dollars at an Exchange Rate of 75.7% for the comparable prior year period.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirteen Week Period Ended September 26, 2020 Compared to Thirteen Week Period Ended September 28, 2019 (Continued)
Cost of Services and Gross Profit. Cost of services decreased 23.3%, or $6.9 million, for the thirteen week period ended September 26, 2020 as compared to the comparable prior
year period. Cost of services decreased primarily due to the decrease in revenue. Cost of services as a percentage of revenue for the thirteen week periods ended September 26, 2020 and September 28, 2019 was 72.1% and 73.6%, respectively. See
Segment Discussion for further information regarding changes in cost of services and gross profit.
Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $8.6 million for the thirteen week period ended September 26, 2020 as compared to
$9.5 million for the comparable prior year period. As a percentage of revenue, SGA expenses were 27.3% for the thirteen week period ended September 26, 2020 and 23.6% 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 decreased by $0.1 million as compared to the comparable prior year period. The primary component of the decrease related to interest expense, which
decreased primarily due to a decreased average borrowing and a decreased borrowing rate under the Company’s line of credit. The primary reason for the decreased average borrowing rate was change in macroeconomic borrowing rates.
Income Tax (Benefit) Expense. The Company recognized $0.2 million of income tax benefit for the thirteen week period ended September 26, 2020, as compared to an income tax
expense of $0.1 million for the comparable prior year period. The consolidated effective income tax rate for the current period was 40.6% as compared to 17.3% for the comparable prior year period. The projected fiscal 2020 income tax rates as of
September 26, 2020, were approximately 27.0%, 26.7% 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.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based compensation, and potential tax credits
available to the Company. The actual 2020 effective tax rate may vary from the estimate depending on the actual operating income earned in various jurisdictions, the potential availability of tax credits, and the exercise of stock options and vesting
of share-based awards. The Company's estimate for the 2020 effective tax rate has not been adjusted for any potential impact related to COVID-19.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirteen Week Period Ended September 26, 2020 Compared to Thirteen Week Period Ended September 28, 2019 (Continued)
Segment Discussion
Engineering
Engineering revenues of $15.1 million for the thirteen week period ended September 26, 2020 decreased 0.4%, or $0.1 million, as compared to the comparable prior year period. The decrease was principally due to
decreases of $1.5 million from the Company’s Aerospace Group and $0.4 million from the Canadian Power Systems Group offset by an increase of $1.8 million from the Company’s Energy Services/Industrial Processing Group. The Company attributes the
revenue decline in its Aerospace Group to a decrease in spending from its clients because of the impact from COVID-19. Gross profit increased by 6.2%, or $0.3 million, as compared to the comparable prior year period. Gross profit margin of 29.3% for
the current period increased from 27.5% for the comparable prior year period. The increase in gross profit and gross profit margin was primarily due to a concerted effort to improve utilization of the Engineering segment’s billable consultants and a
focus on higher-margin project work as opposed to lower-margin staffing. The Engineering segment experienced operating income of $0.8 million for the thirteen week period ended September 26, 2020, as compared to operating income of $0.9 million for
the comparable prior year period. The primary reason for the decline in operating income was an increase to SGA expense of $0.3 million. SGA expense increased to $3.3 million in the current period from $3.0 million in the comparable prior year
period. The increase in SGA expense was primarily due to a higher allocation of corporate SGA expense.
COVID-19 Impact to Engineering Segment
It is difficult to assess both the current and future impact from COVID-19 to the Engineering segment, due to the high degree of uncertainty around COVID-19 and the duration and extent of the pandemic. The Engineering
segment has seen a decline in its field services work as its personnel has limited access to client facilities. It is difficult to determine the impact on revenue from the loss in field services work. The Company believes that an undetermined amount
of field services work will eventually return as a portion of that work is mission-critical to our clients. However, given the uncertainties around COVID-19, the Company can give no assurances that it will see an increase in field services revenue.
The Company has transitioned most of its Engineering workforce to work from home. While this has constituted a significant effort, particularly from a technology standpoint, the Company believes that this effort has
been completed relatively effectively. The Company also believes that its Engineering clients have been generally supportive of these efforts and believes further that it has not lost any significant, previously awarded work. The Engineering segment
continues to see new work proposals, but not at the same level as seen prior to COVID-19. The Engineering segment’s general response to the effects of COVID-19 is to continue to focus on maximizing gross margin by focusing on utilization of billable
consultants and maximizing the efficiency of its SGA expense. The Engineering segment and the Company, as a whole, is focused on reducing its SGA expense in the short-term while not harming the Company in the long-term. The Company plans to refine
its strategy for responding to COVID-19 as necessary as the situation develops.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirteen Week Period Ended September 26, 2020 Compared to Thirteen Week Period Ended September 28, 2019 (Continued)
Segment Discussion (Continued)
Specialty Health Care
Specialty Health Care revenue of $9.0 million for the thirteen week period ended September 26, 2020 decreased 46.2%, or $7.7 million, as compared to the comparable prior year period. The decrease was primarily driven
by school closures related to COVID-19 (see below). The Specialty Health Care segment’s gross profit decreased by 42.3%, or $1.7 million, to $2.3 million for the thirteen week period ended September 26, 2020, as compared to $4.0 million for the
prior year period. The decrease in gross profit was primarily driven by a decrease in revenue and partially offset by an increase in gross profit margin. Gross profit margin for the thirteen week period ended September 26, 2020 increased to 25.4% as
compared to 23.7% for the comparable prior year period. The Company primarily attributes the increase in gross profit margin to a mix shift in the Specialty Health Care’s school clients to higher margin services. Specialty Health Care experienced an
operating loss of $0.8 million for the thirteen week period ended September 26, 2020, as compared to an operating loss of $0.3 million for the comparable prior year period. The primary reason for the decrease in operating income was the decrease to
revenue and gross profit, offset by a decrease to SGA expense. SGA expense decreased by $1.2 million to $3.0 million, as compared to $4.2 million in the comparable prior year period. The decrease in SGA expense was primarily due to a concerted
effort to reduce SGA expense in response to the impact of COVID-19 on school services revenue, a decrease in variable SGA expense related to gross profit, and a lower allocation of corporate-generated SGA expense.
COVID-19 Impact to Specialty Health Care Segment
It is difficult to assess both the current and future impact from COVID-19 to the Specialty Health Care segment, due to the high degree of uncertainty around COVID-19 and the duration and extent of the pandemic,
especially as it may impact schools where many of our personnel work. While the Company has worked to transition a portion of its Specialty Health Care workforce to work from home, this has been a difficult task. The Specialty Health Care segment has
a small number of billable professionals performing services from home, in particular, telehealth services. The Specialty Health Care segment’s telehealth services are primarily a new service offering. The majority of the Specialty Health Care
segment’s services are historically delivered at schools and health care facilities. The Company believes that demand for much of its non-school services is high as a result of COVID-19. However, health care professionals, such as nurses and doctors,
are scarce and difficult to recruit. Furthermore, the demand for non-COVID-19 related healthcare services is reduced at this time.
The Specialty Health Care Segment has historically derived much of its revenue from school systems. Many school systems nationwide, including most of the Company’s school clients, closed down for in-person instruction
in March 2020. Some have reopened partially with a combination of in-person and virtual lessons, while some have remained entirely virtual. The Company has limited information on when, and in what manner, they will reopen in a comparable manner
before COVID-19. Many schools are under pressure by employee unions to reduce or eliminate in-person classes. Any announced plans are subject to rapid changes.
The Specialty Health Care's largest school clients are the New York City Department of Education, the Hawaii Department of Education, and the Chicago Public School System. There are numerous factors that could
influence further decisions of these school systems on their operations. Any shift toward hybrid and remote operations has a materially negative impact on revenue generated by the Specialty Healthcare segment.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirteen Week Period Ended September 26, 2020 Compared to Thirteen Week Period Ended September 28, 2019 (Continued)
Segment Discussion (Continued)
The Specialty Health Care segment generated approximately $3.9 million in revenue from schools for the thirteen weeks ended September 26, 2020, as compared to approximately $10.4 million for the comparable prior year
period. It is difficult to estimate the impact of the school closures and reopenings on the balance of the Company’s fiscal 2020 and beyond. The Company believes that at some point in the future, its school clients will return to a normalized level
of operations. However, the Company can give no assurance of when or even if this normalization will occur. As a point of comparison, the Specialty Health Care Segment generated $19.4 million of revenue from its school clients for the thirteen week
period ended December 28, 2019.
The Specialty Health Care segment continues to see new work proposals related to non-school related revenue streams. The Specialty Health Care segment’s general response to the effects of COVID-19 is to continue to
focus on maximizing gross margin by focusing on utilization of billable personnel and maximizing the efficiency of its SGA expense. The Specialty Health Care segment has made significant reductions to its SGA cost structure. The Specialty Health Care
segment and the Company, as a whole, are focused on reducing SGA expense in the short-term while not harming the Company in the long-term. The Company plans to refine its strategy for responding to COVID-19 as necessary as the situation develops.
Information Technology
Information Technology revenue of $7.5 million for the thirteen week period ended September 26, 2020 decreased 10.6%, or $0.8 million, as compared to $8.3 million for the comparable prior year period. The Information
Technology segment’s revenue declined across most of its lines of business. The Company generally attributes the decrease to the impact of COVID-19 as its runoff of backlog has not been adequately replaced with new business. Gross profit of $2.1
million for the thirteen week period ended September 26, 2020 decreased 15.0%, or $0.4 million, as compared to $2.5 million for the comparable prior year period. The decrease in gross profit was primarily due to the decrease in revenue and a decline
in gross profit margin. The Information Technology gross profit margin for the thirteen week period ended September 26, 2020 was 28.4% as compared to 29.8% for the comparable prior year period. The Company attributes the gross margin decrease to
lower utilization of the Information Technology’s fixed labor consultants and the impact from COVID-19. The Information Technology segment experienced an operating loss of $0.2 million as compared to operating income of $0.2 for the comparable prior
year period. The decrease in operating loss was primarily due to the decrease in revenue and gross profit.
COVID-19 Impact to Information Technology Segment
It is difficult to assess both the current and future impact from COVID-19 to the Information Technology segment, due to the high degree of uncertainty around COVID-19 and the duration and extent of the pandemic. The
Information Technology segment has seen a decline in its field services work as its personnel has limited access to client facilities. It is difficult to determine the impact on revenue from the loss in field services work.
The Company has transitioned most of its Information Technology workforce to work from home. While this has constituted a significant effort, particularly from a technology standpoint, the Company believes that this
effort has been completed relatively effectively. The Company also believes that its Information Technology clients have been generally supportive of these efforts and believes further that it has not lost any significant, previously awarded work.
The Information Technology segment continues to see new work proposals, but not at the same level as seen prior to COVID-19. The Information Technology segment’s general response to the effects of COVID-19 is to continue to focus on maximizing gross
margin by focusing on utilization of billable consultants and maximizing the efficiency of its SGA expense. The Information Technology segment and the Company, as a whole, is focused on reducing its SGA expense in the short-term while not harming the
Company in the long-term. The Company plans to refine its strategy for responding to COVID-19 as necessary as the situation develops.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirty-Nine Week Period Ended September 26, 2020 Compared to Thirty-Nine Week Period Ended September 28, 2019
A summary of operating results for the thirty-nine week periods ended September 26, 2020 and September 28, 2019 is as follows (in thousands):
|
September 26, 2020
|
September 28, 2019
|
|||||||
|
Amount
|
% of Revenue
|
Amount
|
% of Revenue
|
|||||
|
Revenue
|
$109,246
|
100.0
|
$142,550
|
100.0
|
||||
|
Cost of services
|
81,080
|
74.2
|
106,615
|
74.8
|
||||
|
Gross profit
|
28,166
|
25.8
|
35,935
|
25.2
|
||||
|
Selling, general and administrative
|
27,837
|
25.5
|
30,165
|
21.2
|
||||
|
Depreciation and amortization of property and equipment
|
793
|
0.7
|
944
|
0.7
|
||||
|
Amortization of acquired intangible assets
|
240
|
0.2
|
247
|
0.1
|
||||
|
Write-off of receivables and professional fees incurred
related to arbitration
|
8,397
|
7.7
|
-
|
-
|
||||
|
37,267
|
34.1
|
31,356
|
22.0
|
|||||
|
Operating (loss) income
|
(9,101
|
)
|
(8.3
|
)
|
4,579
|
3.2
|
||
|
Other expense, net
|
895
|
0.8
|
1,275
|
0.9
|
||||
|
(Loss) income before income taxes
|
(9,996
|
)
|
(9.1
|
)
|
3,304
|
2.3
|
||
|
Income tax (benefit) expense
|
(2,815
|
)
|
(2.6
|
)
|
255
|
0.2
|
||
|
Net (loss) income
|
($7,181
|
)
|
(6.5
|
)
|
$3,049
|
2.1
|
||
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended September 26, 2020 and September 28, 2019 consisted of thirty-nine weeks each.
Revenue. Revenue decreased 23.4%, or $33.3 million, for the thirty-nine week period ended September 26, 2020 as compared to the thirty-nine week period ended September 28, 2019
(the “comparable prior year period”). Revenue decreased $9.5 million in the Engineering segment, $22.4 million in the Specialty Health Care segment and $1.4 million in the Information Technology segment. See more detailed disclosure by segment in
our Segment Discussion.
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 condensed consolidated results in
U.S. dollars the condensed 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 thirty-nine week period ended September 26,
2020, the Company generated total revenue from its Canadian clients of $11.2 million in U.S. dollars at an Exchange Rate of 73.9% as compared to $12.8 million in U.S. dollars at an Exchange Rate of 75.2% for the comparable prior year period.
Cost of Services and Gross Profit. Cost of services decreased 24.0%, or $25.5 million, for the thirty-nine week period ended September 26, 2020 as compared to the comparable
prior year period. Cost of services decreased primarily due to the decrease in revenue. Cost of services as a percentage of revenue for the thirty-nine week periods ended September 26, 2020 and September 28, 2019 was 74.2% and 74.8%, 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)
|
Thirty-Nine Week Period Ended September 26, 2020 Compared to Thirty-Nine Week Period Ended September 28, 2019 (Continued)
Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $27.8 million for the thirty-nine week period ended September 26, 2020 as compared
to $30.2 million for the comparable prior year period. As a percentage of revenue, SGA expenses were 25.5% for the thirty-nine week period ended September 26, 2020 and 21.2% for the comparable prior year period. See Segment Discussion for further
information on SGA expense changes.
Write-off of receivables and professional fees incurred related to arbitration. The Company recorded a charge of $8.4 million during the thirty-nine week period ended September
26, 2020 relating to its dispute with a customer that is a major utility in the United States. This dispute was resolved through binding arbitration April 2020. The charge consisted of $6.7 million for the portion of accounts receivable previously
recognized by the Company that was not awarded by the arbitrator, $0.7 million from other projects with this customer that were not part of the arbitration, $0.8 million in professional fees related to the dispute and arbitration and $0.2 million of
transit accounts receivable associated with disputed projects that were part of the arbitration. The Company decided to write off the $0.7 million of accounts receivable from other projects not part of the arbitration for business reasons. For the
thirty-nine week period ended September 28, 2019, there were no such impairment charges.
Other Expense. Other expense consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income, imputed interest on
contingent consideration and gains and losses on foreign currency transactions. Other expense, net decreased to $0.9 million as compared to $1.3 million for the comparable prior year period. The primary component of the decrease related to interest
expense, which decreased primarily due to a decreased average borrowing and a decreased borrowing rate under the Company’s line of credit. The primary reason for the decreased average borrowing rate was change in macroeconomic borrowing rates.
Income Tax (Benefit) Expense. The Company recognized $2.8 million of income tax benefit for the thirty-nine week period ended September 26, 2020, as compared to an income tax
expense of $0.3 million for the comparable prior year period. The consolidated effective income tax rate for the current period was 28.2% as compared to 25.9% for the comparable prior year period. The projected fiscal 2020 income tax rates as of
September 26, 2020, were approximately 27.0%, 26.7% 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.
Differences between the effective tax rate and the applicable U.S. federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based compensation, and potential tax credits
available to the Company. The actual 2020 effective tax rate may vary from the estimate depending on the actual operating income earned in various jurisdictions, the potential availability of tax credits, and the exercise of stock options and vesting
of share-based awards. The Company's estimate for the 2020 effective tax rate has not been adjusted for any potential impact related to COVID-19.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirty-Nine Week Period Ended September 26, 2020 Compared to Thirty-Nine Week Period Ended September 28, 2019 (Continued)
Segment Discussion
Engineering
Engineering revenues of $43.3 million for the thirty-nine week period ended September 26, 2020 decreased 18.0%, or $9.5 million, as compared to the comparable prior year period. The decrease was due to decreases of
$4.0 million from the Company’s Energy Services/Industrial Processing Group, $3.8 million from the Company’s Aerospace Group, and $1.7 million from the Company’s Canadian Power Systems Group. The Company attributes these revenue declines to
decreased spending on the part of several of its larger clients, a decrease in demand for power generation services, increased competition from other vendors to its Canadian Power Systems and Aerospace clients, timing of large projects from the
Company’s Energy Services clients, and the impact of COVID-19. Gross profit decreased by 10.6%, or $1.5 million, as compared to the comparable prior year period. Gross profit decreased primarily because of the decrease in revenue, offset by
improvement to gross profit margin. Gross profit margin of 29.1% for the current period increased from 26.7% for the comparable prior year period. The increase in gross margin was primarily due to a concerted effort to improve utilization of the
Engineering segment’s billable consultants and a focus on higher-margin project work as opposed to lower-margin staffing. The Engineering segment experienced an operating loss of $6.6 million for the thirty-nine week period ended September 26, 2020,
as compared to operating income of $2.7 million for the comparable prior year period. The primary reason for the operating loss in the current period was the $8.4 million write-off of receivables and professional fees incurred related to a discrete
arbitration, offset by a decrease of $0.4 million to SGA expense. The decrease in SGA expense was primarily due to a concerted effort to reduce expenses to an efficient level commensurate with current revenue and gross profit.
COVID-19 Impact to Engineering Segment
It is difficult to assess both the current and future impact from COVID-19 to the Engineering segment, due to the high degree of uncertainty around COVID-19 and the duration and extent of the pandemic. The Engineering
segment has seen a decline in its field services work as its personnel has limited access to client facilities. It is difficult to determine the impact on revenue from the loss in field services work. The Company believes that an undetermined amount
of field services work will eventually return as a portion of that work is mission-critical to our clients. However, given the uncertainties around COVID-19, the Company can give no assurances that it will see an increase in field services revenue.
The Company has transitioned most of its Engineering workforce to work from home. While this has constituted a significant effort, particularly from a technology standpoint, the Company believes that this effort has
been completed relatively effectively. The Company also believes that its Engineering clients have been generally supportive of these efforts and believes further that it has not lost any significant, previously awarded work. The Engineering segment
continues to see new work proposals, but not at the same level as seen prior to COVID-19. The Engineering segment’s general response to the effects of COVID-19 is to continue to focus on maximizing gross margin by focusing on utilization of billable
consultants and maximizing the efficiency of its SGA expense. The Engineering segment and the Company, as a whole, is focused on reducing its SGA expense in the short-term while not harming the Company in the long-term. The Company plans to refine
its strategy for responding to COVID-19 as necessary as the situation develops.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirty-Nine Week Period Ended September 26, 2020 Compared to Thirty-Nine Week Period Ended September 28, 2019 (Continued)
Segment Discussion (Continued)
Specialty Health Care
Specialty Health Care revenue of $41.9 million for the thirty-nine week period ended September 26, 2020 decreased 34.8%, or $22.4 million, as compared to the comparable prior year period. The decrease in revenue was
primarily driven by school closures related to COVID-19 (see below). The Specialty Health Care segment’s gross profit decreased by 40.6%, or $6.1 million, to $8.9 million for the thirty-nine week period ended September 26, 2020, as compared to $14.9
million for the prior year period. The decrease in gross profit was primarily driven by a decrease in revenue and a decrease in gross profit margin. Gross profit margin for the thirty-nine week period ended September 26, 2020 decreased to 21.1% as
compared to 23.2% for the comparable prior year period. The Company primarily attributes the decrease in gross profit margin to a mix shift as the Specialty Health Care’s non-school services typically generate lower gross margin than school services.
Specialty Health Care experienced an operating loss of $2.1 million for the thirty-nine week period ended September 26, 2020, as compared to operating income of $1.7 million for the comparable prior year period. The primary reason for the decrease in
operating income was the decrease to revenue, gross profit, and gross profit margin, primarily resulting from sudden school closures (see below). SGA expense decreased by $2.3 million to $10.7 million, as compared to $13.0 million in the comparable
prior year period. The decrease in SGA expense was primarily due to a concerted effort to reduce SGA expense in response to the impact of COVID-19 on school services revenue, a decrease in variable SGA expense related to gross profit, and a lower
allocation of corporate-generated SGA expense.
COVID-19 Impact to Specialty Health Care Segment
It is difficult to assess both the current and future impact from COVID-19 to the Specialty Health Care segment, due to the high degree of uncertainty around COVID-19 and the duration and extent of the pandemic,
especially as it may impact schools where many of our personnel work. While the Company has worked to transition a portion of its Specialty Health Care workforce to work from home, this has been a difficult task. The Specialty Health Care segment has
a small number of billable professionals performing services from home, in particular, telehealth services. The Specialty Health Care segment’s telehealth services are primarily a new service offering. The majority of the Specialty Health Care
segment’s services are historically delivered at schools and health care facilities. The Company believes that demand for much of its non-school services is very high as a result of COVID-19. However, health care professionals, such as nurses and
doctors, are scarce and difficult to recruit. Furthermore, the demand for non-COVID-19 related healthcare services is reduced at this time.
The Specialty Health Care Segment has historically derived much of its revenue from school systems. Many school systems nationwide, including most of the Company’s school clients, closed down for in-person instruction
in March 2020. Some have reopened partially with a combination of in-person and virtual lessons, while some have remained entirely virtual. The Company has limited information on when, and in what manner, they will reopen in a comparable manner
before COVID-19. Many schools are under pressure by employee unions to reduce or eliminate in-person classes. Any announced plans are subject to rapid changes.
The Specialty Health Care's largest school clients are the New York City Department of Education, the Hawaii Department of Education, and the Chicago Public School System. There are numerous factors that could
influence further decisions of these school systems on their operations. Any shift toward hybrid and remote operations has a materially negative impact on revenue generated by the Specialty Healthcare segment.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirty-Nine Week Period Ended September 26, 2020 Compared to Thirty-Nine Week Period Ended September 28, 2019 (Continued)
Segment Discussion (Continued)
The Specialty Health Care segment generated approximately $27.0 million in revenue from schools for the thirty-nine weeks ended September 26, 2020, as compared to approximately $46.2 million for the comparable prior
year period. It is difficult to estimate the impact of the school closures and reopenings on the balance of the Company’s fiscal 2020 and beyond. The Company believes that at some point in the future, its school clients will return to a normalized
level of operations. However, the Company can give no assurance of when or even if this normalization will occur. As a point of comparison, the Specialty Health Care Segment generated $19.4 million of revenue from its school clients for the thirteen
week period ended December 28, 2019.
The Specialty Health Care segment continues to see new work proposals related to non-school related revenue streams. The Specialty Health Care segment’s general response to the effects of COVID-19 is to continue to
focus on maximizing gross margin by focusing on utilization of billable personnel and maximizing the efficiency of its SGA expense. The Specialty Health Care segment has made significant reductions to its SGA cost structure. The Specialty Health Care
segment and the Company, as a whole, are focused on reducing SGA expense in the short-term while not harming the Company in the long-term. The Company plans to refine its strategy for responding to COVID-19 as necessary as the situation develops.
Information Technology
Information Technology revenue of $24.1 million for the thirty-nine week period ended September 26, 2020 decreased 5.5%, or $1.4 million, as compared to $25.5 million for the comparable prior year period. The
Information Technology segment’s revenue declined across most of its lines of business. The Company generally attributes the decrease to the impact of COVID-19 as its runoff of backlog has not been adequately replaced with new business. Gross profit
of $6.7 million for the thirty-nine week period ended September 26, 2020 decreased 3.2%, or $0.2 million, as compared to $6.9 million for the comparable prior year period. The decrease in gross profit was primarily due to the decrease in revenue,
partially offset by an increase in gross profit margin. The Information Technology gross profit margin for the thirty-nine week period ended September 26, 2020 was 27.8% as compared to 27.1% for the comparable prior year period. The Company
attributes the gross profit margin increase to higher utilization of the Information Technology’s fixed labor consultants and a concerted effort to increase gross profit margin. SGA expense increased by $0.4 million to $7.1 million. The increase in
SGA expense was primarily due to increased investments in management and sales personnel and a higher allocation of corporate-generated SGA expense. The Information Technology segment experienced an operating loss of $0.5 million as compared to $0.2
million operating income for the comparable prior year period. The decrease in operating income was primarily due to the decrease in revenue and gross profit and the increase in SGA expense.
It is difficult to assess both the current and future impact from COVID-19 to the Information Technology segment, due to the high degree of uncertainty around COVID-19 and the duration and extent of the pandemic. The
Information Technology segment has seen a decline in its field services work as its personnel has limited access to client facilities. It is difficult to determine the impact on revenue from the loss in field services work.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Thirty-Nine Week Period Ended September 26, 2020 Compared to Thirty-Nine Week Period Ended September 28, 2019 (Continued)
Segment Discussion (Continued)
COVID-19 Impact to Information Technology Segment
The Company has transitioned most of its Information Technology workforce to work from home. While this has constituted a significant effort, particularly from a technology standpoint, the Company believes that this
effort has been completed relatively effectively. The Company also believes that its Information Technology clients have been generally supportive of these efforts and believes further that it has not lost any significant, previously awarded work.
The Information Technology segment continues to see new work proposals, but not at the same level as seen prior to COVID-19. The Information Technology segment’s general response to the effects of COVID-19 is to continue to focus on maximizing gross
margin by focusing on utilization of billable consultants and maximizing the efficiency of its SGA expense. The Information Technology segment and the Company, as a whole, is focused on reducing its SGA expense in the short-term while not harming the
Company in the long-term. The Company plans to refine its strategy for responding to COVID-19 as necessary as the situation develops.
Liquidity and Capital Resources
The following table summarizes the major captions from the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
|
Thirty-Nine Week Periods Ended
|
|||||
|
September 26,
2020
|
September 28,
2019
|
||||
|
Cash (used in) provided by:
|
|||||
|
Operating activities
|
$23,740
|
($3,870
|
)
|
||
|
Investing activities
|
($360
|
)
|
($296
|
)
|
|
|
Financing activities
|
($24,191
|
)
|
$4,160
|
||
Operating Activities
Operating activities provided $23.7 million of cash for the thirty-nine week period ended September 26, 2020 as compared to using $3.9 million in the comparable prior year period. The major components of cash provided
by or used in operating activities in the thirty-nine week period ended September 26, 2020 and the comparable prior year period are as follows: net loss or income and changes in accounts receivable, the net of transit accounts payable and transit
accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and accrued payroll and related costs.
For the thirty-nine week period ended September 26, 2020, the Company experienced a net loss of $7.2 million as compared to net income of $3.0 million for the comparable prior year period. A decrease in accounts
receivables in the thirty-nine week period ended September 26, 2020, exclusive of the impact of the arbitration resolution, provided $18.9 million of cash as compared to using $5.2 million in the comparable prior year period. The Company primarily
attributes this decrease in accounts receivables for the thirty-nine week period ended September 26, 2020 to the decrease in revenue for the thirty-nine week period ended September 26, 2020 as compared to the thirty-nine week period ended December
28, 2019 and the collection of the arbitration award.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
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 net payable of $0.7 million as of September 26, 2020 and a net receivable of $0.4 million as of December 28, 2019, generating $1.1 million of cash during the thirty-nine week
period ended September 26, 2020. The net of transit accounts payable and transit accounts receivable was a net payable of $0.9 million as of September 28, 2019 and negligible as of December 29, 2018, generating $0.9 million of cash during the
thirty-nine week period ended September 28, 2019.
Prepaid expenses and other current assets provided cash of $2.3 million for the thirty-nine week period ended September 26, 2020 as compared to $0.5 million of cash for the comparable prior year period. The Company
attributes changes to prepaid expenses and other current assets, if any, to general timing of payments in the normal course of business.
An increase in accounts payable and accrued expenses provided cash of $1.5 million for the thirty-nine week period ended September 26, 2020 as compared to using $3.4 million of cash for the comparable prior year
period. The Company attributes these changes to a deliberate effort to defer payments for cash flow purposes and general timing of payments to vendors in the normal course of business.
Changes in accrued payroll and related costs provided $0.8 million for the thirty-nine week period ended September 26, 2020 as compared to using $2.0 million for the thirty-nine week period September 28, 2019. There
are four primary factors that generally impact accrued payroll and related costs: 1) there is a general correlation to operating expenses as payroll and related costs is the Company’s largest expense group, so as operating costs increase or decrease,
absent all other factors, so will the accrued payroll and related costs; 2) the Company pays the majority of its payroll every two weeks and normally has thirty-nine weeks in a fiscal quarter, which means that the Company normally has a major payroll
on the last business day of every other quarter; 3) the timing of various payroll related payments varies in the normal course of business; and 4) most of the Company’s senior management participate in annual incentive plans and while progress
advances are sometimes made during the fiscal year, these accrued bonus balances, to the extent they are projected to be achieved, generally accumulate throughout the year. A significant portion of these incentive plan accruals are typically paid at
the beginning of one fiscal year, pertaining to the prior fiscal year. The Company’s last major payroll for the thirty-nine week period ended September 26, 2020 was paid on September 25, 2020. Unique to fiscal 2020 and the primary reason for the
increase in accrued payroll and related costs, as of September 26, 2020, the Company also deferred $2.0 million of employer payroll taxes under the CARES Act. These deferred payroll taxes must be paid in two equal installments at the end of calendar
years 2021 and 2022.
Investing Activities
Investing activities used $0.4 million of cash for the thirty-nine week period ended September 26, 2020 and $0.3 million for the thirty-nine week period September 28, 2019. Investing activities for both periods
presented were primarily related to expenditures for property and equipment.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Financing Activities
Financing activities used $24.2 million of cash for the thirty-nine week period ended September 26, 2020 as compared to providing $4.2 million in the comparable prior year period. The Company made net payments under
its line of credit of $21.5 million during the thirty-nine week period ended September 26, 2020 as compared to net borrowings of $4.2 million in the comparable prior year period. The primary reasons for net payments during the thirty-nine week
period ended September 26, 2020 was the decrease of $18.9 million in accounts receivable and the $4.8 million in net cash provided by all other operating activities. The Company generated cash of $0.2 million and $0.3 million from sales of shares
from its equity plans for the current period and the comparable prior year period, respectively. The Company also used $2.2 million to retire a note payable incurred to repurchase the Company’s common stock. The Company paid $0.3 million of
contingent consideration during the thirty-nine week period ended September 26, 2020 and paid $0.6 million during the thirty-nine week period ended September 28, 2019.
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. As amended and restated, the Revolving Credit Facility provides for a $45.0
million revolving credit facility, has no sub-limit for letters of credit, and expires on August 8, 2023.
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 thirty-nine week period ended September 26, 2020 was 2.9%.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay dividends. As of September 26, 2020, the Company was in compliance with all covenants contained in the Revolving
Credit Facility (as amended). The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.
Borrowings under the line of credit as of September 26, 2020 and December 28, 2019 were $13.3 million and $34.8 million, respectively. At September 26, 2020 and December 28, 2019 there were letters of credit
outstanding for $1.7 million and $1.6 million, respectively. At September 26, 2020, the Company had availability for additional borrowings under the Revolving Credit Facility of $30.0 million.
On June 2, 2020, the Company entered into a stock purchase agreement with certain stockholders of the Company, whereby the Company purchased an aggregate of 1,858,139 shares of the Company’s common stock for a
negotiated purchase price of $1.20 per share or $2.2 million in total. The negotiated price of $1.20 per share was less than the lowest trading price of the stock on the day of the repurchase. The consideration paid by the Company consisted entirely
of an unsecured subordinated promissory note for $2.2 million. The note accrues interest at an annual rate of 9.0%, compounded annually, payable quarterly in arrears commencing on September 1, 2020 and continuing on each December 1, March 1, June 1
and September 1 thereafter, and has a maturity date of August 10, 2023. Subject to the applicable provisions of the subordination agreement among the Company, Citizens Bank and the selling stockholders, the note was to become immediately due and
payable in the event of a default by the Company. On September 25, 2020, the Company retired the subordinated promissory note in full.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Impact to Line of Credit from COVID-19
The Company is negatively impacted by COVID-19. While COVID-19 is expected to negatively impact revenue, gross profit, and operating income for an undetermined period of time, the Company nevertheless does expect to
generate positive cash flow over a short-term period. The Company expects to experience a significant reduction in its accounts receivable. Executive management is focused on reducing its debt at this time. The Company, as a whole, is focused on
maximizing the utilization of its billable personnel and reducing its SGA expense in the short-term while not harming the Company in the long-term. The Company plans to refine its strategy for responding to COVID-19 as the situation develops. The
Company believes that its current line of credit is adequate to provide the necessary liquidity while COVID-19 impacts its operations. The Company believes that it will be in compliance with the financial covenants in the line of credit for the
foreseeable future.
Current Liquidity and Revolving Credit Facility
Liquidity is a measure of our ability to meet potential cash requirements, maintain our assets, fund our operations, and meet the other general cash needs of our business. Our liquidity is impacted by general economic,
financial, competitive, and other factors beyond our control. Our liquidity requirements consist primarily of funds necessary to pay our expenses, principally labor-costs, and other related expenditures. We generally satisfy our liquidity needs
through cash provided by operations and, when necessary, our revolving line of credit from Citizens Bank. The Company expects to have positive cash flow over at least the next two quarters and has a great deal of flexibility to reduce its costs if it
becomes necessary. The Company believes that it can satisfy its liquidity needs for at least the next twelve months.
The Company’s liquidity and capital resources as of September 26, 2020, included accounts receivable and total current asset balances of $33.0 million and $36.1 million, respectively. Current liabilities were $19.9
million as of September 26, 2020 and were exceeded by total current assets by $16.2 million.
The Company experiences volatility in its daily cash flow and, at times, relies on the revolving line of credit to provide daily liquidity for the Company’s financial operations. As of September 26, 2020, the Company
was in compliance with all financial covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.
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 had 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 did not pay the balance of accounts receivable the Company believes were owed for certain disputed projects. As of December 28, 2019, the total amount of recorded receivables from this customer on
these disputed projects was $14.1 million. Additionally, as part of the arbitration process, the customer asserted counter-claims of $10.3 million. The arbitrator rendered a decision in this dispute in April 2020, awarding the Company $7.4 million,
and the arbitration award was paid during the thirteen week period ended September 26, 2020. The counter-claims asserted against the Company of $10.3 million were denied in their entirety. For the thirty-nine week period ended September 26, 2020, the
Company recorded a charge of $8.4 million, including $6.7 million constituting the portion of the accounts receivable relating to the disputed projects that was not awarded by the arbitrator, $0.7 million from other projects with this customer that
were not part of the arbitration, $0.8 million in professional fees related to the dispute and arbitration, and $0.2 million of transit accounts receivable associated with disputed projects that were part of the arbitration. The Company decided to
write off the $0.7 million of accounts receivable from other projects not part of the arbitration for business reasons.
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. 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 May 2024. Certain leases are subject to escalation clauses based upon changes in various
factors.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
Liquidity and Capital Resources (Continued)
Future Contingent Payments
Maturities of lease liabilities are as follows:
|
Fiscal Year
|
Operating Leases
|
Finance
Leases
|
||
|
2020
|
$594
|
$75
|
||
|
2021
|
2,006
|
255
|
||
|
2022
|
1,481
|
108
|
||
|
2023
|
910
|
-
|
||
|
2024
|
187
|
-
|
||
|
Thereafter
|
-
|
-
|
||
|
Total lease payments
|
5,178
|
438
|
||
|
Less: imputed interest
|
(272
|
)
|
(12
|
)
|
|
Total
|
$4,906
|
$426
|
As of September 26, 2020, 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 September 26, 2020 as follows:
|
Fiscal Year Ending
|
Total
|
|
January 2, 2021 (after September 26, 2020)
|
$ -
|
|
January 1, 2022
|
500
|
|
December 31, 2022
|
2,322
|
|
Estimated future contingent consideration payments
|
$2,822
|
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active acquisitions after
September 26, 2020 are capped at a cumulative maximum of $5.7 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of September 26, 2020.
During the thirty-nine week period ended September 26, 2020, 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.
|
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 September 26, 2020, 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 thirty-nine week period ended September 26, 2020, 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.
As management prepares and executes a virtual financial close process, for the first time, there could be related implications on the internal controls performed specifically in conjunction with the preparation,
review, and filing of this report. There is a risk that moving to a virtual environment in response to COVID-19 could result in certain controls (e.g., financial closing and reporting controls) being overridden or performed less frequently, or that
management could be designing and implementing new controls in response to new risks. In addition, in instances where relevant controls fail, and there are no compensating controls in place, there may be fewer opportunities to timely identify or
remediate control deficiencies. There were otherwise no changes in the Company’s internal control over financial reporting during the quarter ended September 26, 2020, 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 Condensed Consolidated Financial Statements included in Item 1 of this report.
|
ITEM 1A.
|
RISK FACTORS
|
For information regarding factors that could affect the Company’s business, see the risk factors discussed under Part I, Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended
December 28, 2019. The risk factor set forth below is in addition to the risk factors discussed therein
An epidemic or pandemic, including the ongoing COVID-19 pandemic, and the initiatives to reduce its transmission have adversely affected the Company’s business and financial position, and are
expected to continue to do so.
Our business has been, and we expect that it will continue to be, adversely impacted by the effects of epidemic outbreaks such as the novel coronavirus (COVID-19) that has been declared a pandemic by the World Health
Organization. As COVID-19 continues to present various health, business and other challenges globally, including significant impacts in the United States, we are taking a variety of measures to protect the health and safety of our employees and,
especially in the healthcare segment, deploying our resources, including the talents of our employees, to help the communities we serve meet and overcome the current challenges. However, public and private sector policies and initiatives to reduce
the transmission of COVID-19, such as closures of schools, businesses and manufacturing facilities, the promotion of social distancing, the adoption of working from home by companies and institutions, and travel restrictions could continue to
adversely affect demand for our services and to present challenges to us in delivering these services. The extent to which this coronavirus impacts operations will depend on future developments, which are highly uncertain and cannot be predicted
with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of this coronavirus and the actions to contain the coronavirus or treat its impact, among others. These impacts on our business could
have an adverse effect on our liquidity position and access to capital, including our ability to access our line of credit. The Company can give no assurance that the line of credit will be available in the future.
These factors, in addition to delays in payment (from clients and/or clients in bankruptcy), have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our
operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) could not be
passed on to our client.
In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, retain and provide new services to existing clients, achieve modest price increases on
current service agreements with existing clients and/or maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an
important factor impacting future operating results and the successful execution of our projected growth strategies.
|
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
|
|
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
|
|
ITEM 6.
|
EXHIBITS (CONTINUED)
|
|
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: November 10, 2020
|
By: /s/ Bradley S. Vizi
|
||
|
Bradley S. Vizi
Executive Chairman and President
(Principal Executive Officer and
Duly Authorized Officer of the Registrant)
|
|||
|
Date: November 10, 2020
|
By: /s/ Kevin D. Miller
|
||
|
Kevin D. Miller
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
|
|||
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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):
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(a)
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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
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(b)
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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.
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Date: November 10, 2020
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/s/ Bradley S. Vizi
Bradley S. Vizi
Executive Chairman and President
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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.;
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):
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(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
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(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.
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Date: November 10, 2020
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/s/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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 September 26, 2020 (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: November 10, 2020
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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:
(1) The Company’s periodic report on Form 10-Q for the quarter ended September 26, 2020 (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/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer
Date: November 10, 2020
61
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Exhibit 31.1
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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):
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(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.
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Date: November 10, 2020
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/s/ Bradley S. Vizi
Bradley S. Vizi
Executive Chairman and President
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Exhibit 31.2
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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.;
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.
|
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Date: November 10, 2020
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/s/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer
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Exhibit 32.1
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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 September 26, 2020 (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: November 10, 2020
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Exhibit 32.2
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RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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:
(1) The Company’s periodic report on Form 10-Q for the quarter ended September 26, 2020 (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/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer
Date: November 10, 2020