What changed in this filing

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Item 1A. Risk Factors

2022-04-04 compared with 2021-04-02 · 54 added, 206 removed, 6 unchanged (98% of the section changed)

The Company’s business involves a number of risks, some of which are beyond its control.

The risk and uncertainties described below are not the only ones the Company faces.

Set forth below is a

discussion of the risks and uncertainties that management believes to be material to the Company.

Economic Trends

Adverse global economic conditions, when they occur, may create conditions such as a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and volatility

in credit, equity and fixed income markets.

Any or all of these developments can negatively affect the Company’s business, operating results or financial condition in a number of ways.

For example, current or potential customers may be unable to

fund capital spending programs, new product launches of other similar endeavors whereby they might procure services from the Company, and therefore delay, decrease or cancel purchases of services or not pay or delay paying for previously purchased

In addition, these conditions may cause the Company to incur increased expenses or make it more difficult either to utilize existing debt capacity or otherwise obtain financing for operations, investing activities (including the financing

of any future acquisitions), or financing activities, all of which could adversely affect the Company’s business, financial condition and results of operations.

Global Epidemics

The ongoing COVID-19 pandemic, and associated initiatives to reduce its spread, have adversely affected the Company’s business and financial position, and are expected to continue to do so.

The impacts described in

this risk factor as relating to COVID-19 could arise in the future with respect to any other global pandemics that may occur.

Our business has been, and we expect that it will continue to be, adversely impacted by the effects of the COVID-19 pandemic.

As COVID-19 continues to present various health, business and other challenges globally,

including significant impacts in the United States, we are taking a variety of measures to protect the health and safety of our employees and, especially in the healthcare segment, deploying our resources, including the talents of our employees, to

help the communities we serve meet and overcome the current challenges.

However, public and private sector policies and initiatives to reduce the transmission of COVID-19, such as closures of schools, businesses and manufacturing facilities, the

promotion of social distancing, the adoption of working from home by companies and institutions, and travel restrictions could continue to adversely affect demand for our services and to present challenges to us in delivering these services.

extent to which COVID-19 impacts operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of

the pandemic and the actions to contain COVID-19 or treat its impact, among others.

These impacts on our business could have an adverse effect on our liquidity position and access to capital, including our ability to access our line of credit.

Company can give no assurance that the line of credit will be available in the future.

These factors, in addition to delays in payment (from clients and/or clients in bankruptcy), have resulted in, and could continue to result in, significant additional bad debts in the near future.

Additionally, our

operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs, materials, supplies and equipment used in performing services (including the impact of potential tariffs and COVID-19) could not be

passed on to our clients.

In addition, we believe that to maintain or improve our financial performance we must continue to obtain service agreements with new clients, retain and provide new services to existing clients, achieve modest price

increases on current service agreements with existing clients and/or maintain internal cost reduction strategies at our various operational levels.

Furthermore, we believe that our ability to sustain the internal development of managerial personnel

is an important factor impacting future operating results and the successful execution of our projected growth strategies.

Certainly, the ongoing COVID-19 pandemic makes these objective more difficult to attain.

RISK FACTORS (CONTINUED)

Government Regulations

Staffing firms and employment service providers are generally subject to one or more of the following types of government regulation:

(1) regulation of the employer/employee relationship between a firm and its

employees, including tax withholding or reporting, social security or retirement, benefits, workplace compliance, wage and hour, anti-discrimination, immigration and workers’ compensation;

(2) registration, licensing, record keeping and reporting

requirements;

and (3) federal contractor compliance.

Failure to comply with these regulations could result in the Company incurring penalties and other liabilities, monetary and otherwise.

Highly Competitive Business

The staffing services and outsourcing markets are highly competitive and have limited barriers to entry.

RCM competes in global, national, regional, and local markets with numerous temporary staffing and permanent

placement companies.

Price competition in the staffing industry is significant and pricing pressures from competitors and customers are increasing.

In addition, there is increasing pressure on companies to outsource certain areas of their business

to low cost offshore outsourcing firms.

RCM expects that the level of competition will remain high in the future, which could limit RCM’s ability to maintain or increase its market share or profitability.

Our inability to compete successfully with

our competitors could adversely affect the Company’s business, financial condition and results of operations.

Seasonality of Business

As described in “Item 1.

Business,” our operating results are subject to seasonal fluctuations, with reduced demand often occurring during the first quarter of the year when clients are finalizing their engineering and

IT budgets, and also during periods in which there are a substantial amount of holidays and season vacations.

In particular, one of the largest customers in our Specialty Health Care group, the New York City Department of Education, significantly

reduces activity during the third quarter, when schools are closed for summer recess.

Our operating results for any given period may fluctuate as a result of the timing of holidays, vacations and other events, and if we were to experience

unfavorable performance during periods in which we would otherwise expect to have high seasonal demand, we may have limited ability to make up for such performance during periods of seasonally lower demand.

Events Affecting Significant Customers

As disclosed in “Item 1.

Business,” the Company’s five, ten and twenty largest customers accounted for approximately 33.4%, 46.6% and 60.7%, respectively, of revenues for the fiscal year ended

January 2, 2021.

During the fiscal year ended January 2, 2021, New York City Board of Education represented 10.6% of the Company’s revenues.

No other client accounted for 10% or more of total revenues during the year.

The Company’s customers may

be affected by the current state of the economy or developments in the credit markets or may engage in mergers or similar transactions.

In addition, customers may choose to reduce the business they do with RCM for other reasons or no reason.

Company could also be materially impacted by actions of prime contractors whereby the Company derives revenues through a subcontractor relationship.

Should any significant customers experience a downturn in their business that weakens their

financial condition or merge with another company or otherwise cease independent operation, or limit their relationship with us, it is possible that the business that the customer does with the Company would be reduced or eliminated, which could

adversely affect the Company’s business, financial condition and results of operations.

RISK FACTORS (CONTINUED)

Events Affecting Significant Customers (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 fifty-three week period ended January 2, 2021, 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.

Safety Concerns Regarding Nuclear Power Plants;

Limitations on Insurance

New and existing concerns are being expressed in public forums about the safety of nuclear generating units and nuclear fuel.

Among other things, these concerns have led to, and are expected to continue to lead to,

various proposals to regulators and governing bodies in some localities where nuclear facilities are located for legislative and regulatory changes that could lead to the shut-down of nuclear units, denial of license renewal applications,

municipalization of nuclear units, restrictions on nuclear units or other adverse effects on owning and operating nuclear generating units.

Should these concerns or proposals lead to a diminishment of or reduced growth in the nuclear power industry,

the Company’s Engineering segment, which has a focus on the nuclear power industry, could be harmed, and the Company’s business, financial condition and results of operations could be materially adversely affected.

In addition, our liability insurance does not cover accidents occurring at nuclear power facilities.

Should we be found to be responsible for such an event, we may not be able to cover relating damages, and our

business would be adversely affected.

Subcontractors, Transit Accounts Receivable and Transit Accounts Payables Related to Construction Management Contracts

The Company’s Engineering segment has entered into arrangements to provide construction management and engineering services to customers under which arrangements the Company then engages subcontractors to provide the

construction services.

Ultimately, as a primary contractor, the Company is responsible for the nonperformance or negligence of its subcontractors, whom the Company requires to be adequately insured and to issue performance bonds for their

Should a subcontractor not perform or act negligently and should there be inadequate insurance or performance bonds in place, the Company might not be able to mitigate its primary liability to the customer, and the Company’s business,

financial condition and results of operations could be materially adversely affected.

In addition, while payments to subcontractors typically are due from the Company only after the Company receives payment from the ultimate customer, the Company

faces the risk that, should a customer not pay the Company, or should a subcontractor demand payment from the Company prior to the Company’s receipt of payment from its customer, the Company’s business, financial condition and results of operations

could be materially adversely affected.

RISK FACTORS (CONTINUED)

Dependence Upon Personnel

The Company’s operations depend on the continued efforts of its officers and other executive management.

The loss of key officers and members of executive management may cause a significant disruption to the Company’s

RCM also depends on the performance and productivity of its local managers and field personnel.

The Company’s ability to attract and retain new business is significantly affected by local relationships and the quality

of service rendered.

The loss of key managers and field personnel may also jeopardize existing client relationships with businesses that continue to use the Company’s services based upon past relationships with local managers and field personnel.

In order to fulfill the requirements of the Company’s customers, the Company must be able to recruit and retain appropriate personnel for client assignments.

Revolving Credit Facility and Liquidity

If the Company were unable to borrow under its Revolving Credit Facility (see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources –

Financing Activities”), it may adversely affect liquidity, results of operations and financial condition.

The Company’s liquidity depends on its ability to generate sufficient cash flows from operations and, from time to time, borrowings under the

Revolving Credit Facility with the Company’s agent lender Citizens Bank of Pennsylvania.

The Company believes that Citizens Bank is liquid and is not aware of any current risk that they will become illiquid.

At January 2, 2021, the Company had $11.9

million in borrowings under the Revolving Credit Facility outstanding and $1.9 million outstanding under letters of credit, with availability for additional borrowings under the Revolving Credit Facility of $31.2 million.

The Revolving Credit Facility contains various financial and non-financial covenants.

At January 2, 2021, the Company was in compliance with the covenants and other provisions of the Credit Facility.

Any failure to be

in compliance could have a material adverse effect on liquidity, results of operations and financial condition.

Foreign Currency Fluctuations and Changes in Exchange Rates

The Company is exposed to risks associated with foreign currency fluctuations and changes in exchange rates.

RCM’s exposure to foreign currency fluctuations relates to operations in Canada and Serbia, principally

conducted through its Canadian and Serbian subsidiaries.

Exchange rate fluctuations affect the United States dollar value of reported earnings derived from the Canadian operations as well as the carrying value of the Company’s investment in the net

assets related to these operations.

The Company does not engage in hedging activities with respect to foreign operations.

RISK FACTORS (CONTINUED)

Changes in Tax Laws

At any time, United States federal tax laws or the administrative interpretations of those laws may be changed.

As a result, changes in United States federal tax laws could negatively impact our operating results,

financial condition and business operations, and adversely impact the Company’s shareholders.

At any time, tax laws in the Company’s other jurisdictions, Canada, Puerto Rico and Serbia, may also change.

These tax law changes may have a material

impact on the Company’s income tax expense.

Workers’ Compensation and Employee Medical Insurance

The Company self-insures a portion of the exposure for losses related to workers’ compensation and employees’ medical insurance.

The Company has established reserves for workers’ compensation and employee medical

insurance claims based on historical loss statistics and periodic independent actuarial valuations.

Significant differences in actual experience or significant changes in assumptions may materially affect the Company’s future financial results.

Improper Activities of Temporary Professionals Could Result in Damage to Business Reputation, Discontinuation of Client Relationships and Exposure to Liability

The Company may be subject to claims by clients related to errors and omissions, misuse of proprietary information, discrimination and harassment, theft and other criminal activity, malpractice, and other claims

stemming from the improper activities or alleged activities of temporary professionals.

There can be no assurance that current liability insurance coverage will be adequate or will continue to be available in sufficient amounts to cover damages or

other costs associated with such claims.

Claims raised by clients stemming from the improper actions of temporary professionals, even if without merit, could cause the Company to incur significant expense associated with rework costs or other damages related

to such claims.

Furthermore, such claims by clients could damage the Company’s business reputation and result in the discontinuation of client relationships.

Acquisitions May Not Succeed

The Company reviews prospective acquisitions as an element of its growth strategy.

The failure of any acquisition to meet the Company’s expectations, whether due to a failure to successfully integrate any future

acquisition or otherwise, may result in damage to the Company’s financial performance and/or divert management’s attention from its core operations or could negatively affect the Company’s ability to meet the needs of its customers promptly.

International Operations

The Company operates its business in Canada and, to a less significant extent, in Puerto Rico and Serbia.

For the fiscal year ended January 2, 2021, approximately 16.1% of the Company’s revenues were generated outside

the United States.

There are certain risks inherent in conducting business internationally including:

the imposition of trade barriers, foreign exchange restrictions, longer payment cycles, greater difficulties in accounts receivables collection,

difficulties in complying with a variety of foreign laws (including without limitation the U.S.

Foreign Corrupt Practices Act), changes in legal or regulatory requirements, difficulties in staffing and managing foreign operations, complex and

uncertain employment environments, political instability and potentially adverse tax consequences.

To the extent the Company experiences these risks, the business and results of operations could be adversely affected.

RISK FACTORS (CONTINUED)

Management believes the RCM Technologies, Inc.

name is extremely valuable and important to its business.

The Company endeavors to protect its intellectual property rights and maintain certain trademarks, trade names,

service marks and other intellectual property rights, including The Source of Smart Solutions®.

The Company is not currently aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect the

Company’s use of its proprietary rights.

The Company’s success depends on its ability to successfully obtain and maintain, and prevent misappropriation or infringement of, its intellectual property, maintain trade secret protection, and conduct

operations without violating or infringing on the intellectual property rights of third parties.

Intellectual property litigation is expensive and time-consuming, and it is often difficult, if not impossible, to predict the outcome of such

If the Company is involved in an intellectual property litigation, its business, financial condition and results of operations could be materially adversely affected.

Data Center Capacity and Telecommunication Links

Uninterruptible Power Supply (UPS), card key access, fire suppression, and environmental control systems protect RCM’s datacenter.

All systems are monitored on a 24/7 basis with alerting capabilities via voice or

Uninterruptible Power Supply (UPS), card key access, fire suppression, and environmental control systems protect RCM’s datacenter. 

All systems are monitored on a 24/7 basis with alerting capabilities via voice or email. 

The telecommunications architecture at RCM utilizes managed private circuits from AT&T, which encompasses provisioning redundancy and diversity.

The Company’s ability to protect its data center against damage from fire, power loss, telecommunications failure and other disasters is critical to business operations.

In order to provide many of its services, RCM

must be able to store, retrieve, process and manage large databases and periodically expand and upgrade its capabilities.

Any damage to the Company’s data centers or any failure of the Company’s telecommunication links that interrupts its operations

or results in an inadvertent loss of data could adversely affect the Company’s ability to meet its customers’ needs and their confidence in utilizing the Company for future services.

RCM’s ability to protect its data, provide services and safeguard its installations, as it relates to the IT infrastructure, is in part dependent on several outside vendors with whom the Company maintains service level

The Company’s ability to protect its data center against damage from fire, power loss, telecommunications failure and other disasters is critical to business operations. 

In order to provide many of its services, RCM must be able to store, retrieve, process and manage large databases and periodically expand and upgrade its capabilities. 

Any damage to the Company’s data centers or any failure of the Company’s telecommunication links that interrupts its operations or results in an inadvertent loss of data could adversely affect the Company’s ability to meet its customers’

needs and their confidence in utilizing the Company for future services.

Cyber Security

We are highly dependent on information technology systems to operate our business.

A breakdown, invasion, corruption, destruction or interruption of critical information technology systems by employees, others with

authorized access to our systems or unauthorized persons could negatively impact operations.

In the ordinary course of business, we collect, store and transmit confidential information and it is critical that we do so in a secure manner to maintain

the confidentiality and integrity of such information.

Additionally, we outsource certain elements of our information technology systems to third parties.

As a result of this outsourcing, our third party vendors may or could have access to our

confidential information making such systems vulnerable.

Data breaches of our information technology systems, or those of our third party vendors, may pose a risk that sensitive data may be exposed to unauthorized persons or to the public.

believe that we have taken appropriate security measures to protect our data and information technology systems, and have been informed by our third party vendors that they have as well, there can be no assurance that our efforts will prevent

breakdowns or breaches in our systems, or those of our third party vendors, that could adversely affect our business.

UNRESOLVED STAFF COMMENTS

A breakdown, invasion, corruption, destruction or interruption of critical information technology systems by employees, others with authorized access to our systems or unauthorized persons could negatively impact operations. 

In the ordinary course of business, we collect, store and transmit confidential information and it is critical that we do so in a secure manner to maintain the confidentiality and integrity of such information. 

Additionally, we outsource certain elements of our information technology systems to third parties. 

As a result of this outsourcing, our third party vendors may or could have access to our confidential information making such systems vulnerable. 

Data breaches of our information technology systems, or those of our third party vendors, may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. 

While we believe that we have taken appropriate security measures to protect our data and information technology systems, and have been informed by our third party vendors that they have as well, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems, or those of our third party vendors, that could adversely affect our business.

We control, process, or have access to personal information regarding our own employees or employment candidates, as well as that of many of our customers or other third parties.

Information concerning these individuals may also reside in systems controlled by third party vendors with whom we do business.

The legal and regulatory environment concerning data privacy is becoming more complex and challenging, and the potential consequences of non-compliance have become more severe.

The European Union’s General Data Protection Regulation, the California Consumer Privacy Act, the Health Insurance Portability and Accountability Act of 1996 and similar laws impose additional compliance requirements related to the collection, use, processing, transfer, disclosure, and retention of personal information, which can increase operating costs and resources to accomplish.

Any failure to abide by these regulations or to protect such personal information from inappropriate access or disclosure, whether through social engineering or by accident or other cause, could have severe consequences including fines, litigation, regulatory sanctions, reputational damage, and loss of customers or employees.

There can be no assurance that the steps we take to abide by applicable requirements and protect information will meet all current and future regulatory requirements, anticipate all potential methods of unauthorized access, or prevent all inappropriate disclosures.

Any failures to do so could result in governmental enforcement actions, fines, and other penalties, or other liabilities, that could adversely affect our business.

 UNRESOLVED STAFF COMMENTS

Not applicable.

 PROPERTIES

The Company provides specialty professional consulting services, principally performed at various client locations, through 25 administrative and sales offices located in the United States, Puerto Rico, Canada and Serbia.

The majority of the Company’s offices typically consist of 1,000 to 13,000 square feet and are typically leased by the Company for terms of one to five years. 

Offices in larger or smaller markets may vary in size from the typical office. 

The Company does not expect that it will be difficult to maintain or find suitable lease space at reasonable rates in its markets or in areas where the Company contemplates expansion.

The Company’s executive office is located at 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613.

These premises consist of approximately 3,500 square feet and are leased at a rate of approximately $15.00 per square foot per annum for a term ending on November 30, 2025. 

The Company’s operational office is located at 20 Waterview Boulevard, 4 th Floor, Parsippany, NJ 07054-1271.

These premises consist of approximately 9,200 square feet and are leased at a rate of approximately $24.95 per square foot per annum for a term ending on January 31, 2024.

 LEGAL PROCEEDINGS

From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the ordinary business course. 

These matters may relate to professional liability, tax, compensation, contract, competitor disputes, and employee-related matters and include individual and class action lawsuits, as well as inquiries and investigations by governmental agencies regarding the Company’s employment and compensation practices.

Additionally, some of the Company’s clients may also become subject to claims, governmental inquiries and investigations, and legal actions relating to the Company’s professional services.

Depending upon the particular facts and circumstances, the Company may also be subject to indemnification obligations under its contracts with such clients relating to these matters.

As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of losses and possible recoveries. 

The Company may not be covered by insurance as it pertains to some or all of these matters. 

A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. 

The Company records a liability when management believes an adverse outcome from a loss contingency is both probable and the amount, or a range, can be reasonably estimated.

From time to time, the Company must estimate the potential loss even though the party adverse to the Company has not asserted any specific amounts. 

Significant judgment is required to determine both probability of loss and the estimated amount.

The Company reviews its loss contingencies at least quarterly and adjusts its accruals and/or disclosures to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, or other new information, as deemed necessary.

Once established, a provision may change in the future due to new developments or changes in circumstances and could increase or decrease the Company’s earnings in the period that the changes are made. 

The Company is exposed to various asserted claims as of January 1, 2022, where the Company believes it has a probability of loss.

Additionally, the Company is exposed to other asserted claims whereby an amount of loss has not been declared, and the Company cannot determine the potential loss.

Any of these various claims could result in an unfavorable outcome or settlement that exceeds the accrued amounts.

However, the Company believes that such matters will not, either individually or in the aggregate, have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows.

As of January 1, 2022, the Company has accrued $2.9 million for asserted claims. 

Included in the January 1, 2022 accrual of $2.9 million, the Company has reserved $1.6 million for the settlement of a class-action suit in California that alleges the Company did not properly pay its travel nurses overtime wages.

While the Company believes it did not violate any overtime wage laws, it decided to settle this class action lawsuit in December 2020. 

The Company paid the $1.6 million settlement in early January 2022.

The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by insurance.

 MINE SAFETY DISCLOSURES

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors