What changed in this filing

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Item 9A. Controls and Procedures

2023-03-16 compared with 2022-04-04 · 834 added, 629 removed, 1001 unchanged (59% of the section changed)

CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. 

Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that those disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

As management prepares and executes a virtual financial close process, for the first time, there could be related implications on the internal controls performed specifically in conjunction with the preparation, review, and filing of this report.

There is a risk that moving to a virtual environment in response to COVID-19 could result in certain controls (e.g., financial closing and reporting controls) being overridden or performed less frequently, or that management could be designing and implementing new controls in response to new risks.

In addition, in instances where relevant controls fail, and there are no compensating controls in place, there may be fewer opportunities to timely identify or remediate control deficiencies.

There were otherwise no changes in the Company’s internal control over financial reporting during the fiscal year ended January 1, 2022, that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Management ’

s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management performed an assessment of the effectiveness of our internal control over financial reporting as of January 1, 2022 based upon criteria in Internal Control-Integrated Framework issued and updated in fiscal 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based on this assessment, management determined that the Company’s internal control over financial reporting was effective as of January 1, 2022, based on the criteria in Internal Control-Integrated Framework issued by COSO.

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter and that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

CONTROLS AND PROCEDURES (CONTINUED)

Planned Material Weakness Remediation Activities (Continued)

We will continue to assess the effectiveness of our internal control over financial reporting and take steps to remediate the known material weaknesses expeditiously.

The implementation of these remediation efforts is in progress, may require additional expenditures to implement, and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, and as a result, the timing of when we will be able to remediate the material weaknesses fully is uncertain.

We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting, which may necessitate further implementation and evaluation time.

Changes in Internal Control Over Financial Reporting

Other than the material weaknesses and remediation efforts described above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

7 unchanged sentences

Except as set forth below, the information required by Item 12 shall be included in the 2023 Proxy Statement and is incorporated herein by reference.

The table below presents certain information as of January 1, 2022 concerning securities issuable in connection with equity compensation plans that have been approved by the Company’s shareholders and that have not been approved by the Company’s shareholders.

The table below presents certain information as of December 31, 2022 concerning securities issuable in connection with equity compensation plans that have been approved by the Company’s shareholders and that have not been approved by the Company’s shareholders.

Plan category

Number of securities

to be potentially issued

Number of securities to

be potentially issued

upon realization of

12 unchanged sentences

approved by security

holders.............................

holders         

Equity compensation plans

not approved by

security holders...............

security holders         

____________________

1 unchanged sentence

____________________

Total..............................

Includes time-based restricted stock units of 371,872, time-based restricted stock awards of 48,756 and performance-based restricted stock units of 125,000, none of which have an exercise price.

Total         

(1) Includes time-based restricted stock units of 274,939 and performance-based restricted stock units of 225,000, none of which have an exercise price.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

7 unchanged sentences

indicated, the file number with respect to each filed document is 1-10245):

Asset Purchase Agreement, dated as of October 7, 2022, by and among RCM Technologies (USA), Inc., TalentHerder LLC and Christopher G.

incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated October 13, 2022, filed with the Securities and Exchange Commission on October 13, 2022.

Articles of Incorporation, as amended;

9 unchanged sentences

Description of Capital Stock;

(Filed herewith)

incorporated by reference to Exhibit 4(a) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the Securities and Exchange Commission on April 4, 2022.

RCM Technologies, Inc.

7 unchanged sentences

incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated December 27, 2012, filed with the Securities and Exchange Commission on December 28, 2012.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

Exhibits (Continued)

Amendment No.

2 unchanged sentences

incorporated by reference to Exhibit 10(x) to the Registrant’s Annual Report on Form 10-K for this fiscal year ended January 1, 2022, filed with the Securities and Exchange Commission on March 8, 2018.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

Exhibits (Continued)

RCM Technologies, Inc.

4 unchanged sentences

incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2021.

‌(10)(g)

Amendment 2022-1 to RCM Technologies, Inc.

2014 Omnibus Equity Compensation Plan ;

incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2022.

‌(10) (h)

Form of Stock Unit Agreement;

incorporated by reference to Exhibit 99.2 to the December 2014 8-K.

‌(10)(h)

‌( 10)(i)

RCM Technologies, Inc.

Change in Control Plan for Selected Executive Management (filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 12, 2015 and incorporated herein by reference).

‌(10)(i)

‌(1 0)(j)

Amendment 2015-3 to the RCM Technologies, Inc.

1 unchanged sentence

incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement for the 2015 Annual Meeting filed with the Securities and Exchange Commission on October 30, 2015.

‌(10)(j)

‌(1 0)(k)

Amendment 2018-4 to the RCM Technologies, Inc.

4 unchanged sentences

incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, filed with the Securities and Exchange Commission on November 12, 2021.

‌(10)(l)

‌(1 0)(m)

Executive Severance Agreement, dated as of June 1, 2018, by and between the Company and Bradley S.

incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 7, 2018.

‌(10)(m)

‌(1 0)(n)

Third Amended & Restated Loan and Security Agreement, dated as of August 9, 2018, by and among the Company and all of its subsidiaries, Citizens Bank of Pennsylvania, a Pennsylvania state chartered bank, in its capacity as administrative agent and arranger, and Citizens Bank of Pennsylvania, as lender;

incorporated by reference to Exhibit 10(d) to the Registrant’s Quarterly Report on Form 10-Q for this fiscal quarter ended June 30, 2018, filed with the Securities and Exchange Commission on August 14, 2018.

‌(10)(n)

First Amendment to Third Amended and Restated Loan Agreement, dated as of August 9, 2018, by and among the Company and all of its subsidiaries, and Citizens Bank, N.A., a national banking association (as successor by merger to Citizens Bank of Pennsylvania), in its capacities as lender and as administrative agent and arranger;

incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2019.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

1 unchanged sentence

‌(10 )(o)

incorporated by reference to Exhibit 99 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2019.

‌(1 0)(p)

Amendment No.

1 unchanged sentence

incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 2, 2020.

‌(10)(p)

‌(10) (q)

Amendment No.

1 unchanged sentence

incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 1, 2020.

Subsidiaries of the Registrant.  (Filed herewith)

Subsidiaries of the Registrant.

(Filed herewith)

Consent of WithumSmith+Brown, PC.

(Filed herewith)

Consent of Macias, Gini & O’Connell, LLP.

(Filed herewith)

Certifications of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.  (Filed herewith)

Certifications of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.  (Filed herewith)

Certifications of Chief Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.  (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)  (Furnished herewith)

Certifications of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

(Filed herewith)

Certifications of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

(Filed herewith)

Certifications of Chief Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

(This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.

Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (Furnished herewith)

Certifications of Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended.

(This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.  Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)  (Furnished herewith)

(This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)

9 unchanged sentences

The Registrant will furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.

Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

FORM 10-K SUMMARY

1 unchanged sentence

RCM Technologies, Inc.

April 4, 2022

March 16, 2023

/s/ Bradley S.

Executive Chairman and President

April 4, 2022

March 16, 2023

Chief Financial Officer, Treasurer and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 

April 4, 2022

March 16, 2023

/s/ Bradley S.

Executive Chairman and President

April 4, 2022

Chief Financial Officer, Treasurer and Secretary

(Principal Financial and Accounting Officer)

April 4, 2022

March 16, 2023

Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)

March 16, 2023

/s/ Chigozie O.

March 16, 2023

/s/ Richard A.

April 4, 2022

March 16, 2023

/s/ Swarna Kakodkar

Swarna Kakodkar

April 4, 2022

March 16, 2023

/s/ Jayanth S.

1 unchanged sentence

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Consolidated Balance Sheets, January 1, 2022 and January 2, 2021

Report of Independent Registered Public Accounting Firm – 

     WithumSmith+Brown, PC

WithumSmith+Brown, PC Internal Control Opinion

Report of Independent Registered Public Accounting Firm – 

     Macias, Gini & O’Connell, LLP.

Consolidated Balance Sheets, December 31, 2022, January 1, 2022

and January 2, 2021

Consolidated Statements of Operations, Fiscal Years Ended

January 1, 2022 and January 2, 2021

     December 31, 2022, January 1, 2022 and January 2, 2021

Consolidated Statements of Comprehensive Income (Loss), Fiscal Years Ended

January 1, 2022 and January 2, 2021

     December 31, 2022, January 1, 2022 and January 2, 2021

Consolidated Statements of Changes in Stockholders’ Equity, Fiscal Years Ended

January 1, 2022 and January 2, 2021

     December 31, 2022, January 1, 2022 and January 2, 2021

Consolidated Statements of Cash Flows, Fiscal Years Ended

January 1, 2022 and January 2, 2021

     December 31, 2022, January 1, 2022 and January 2, 2021

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

RCM Technologies, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of RCM Technologies, Inc.

and Subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of operations, comprehensive income, changes in stockholders’

equity and cash flows for the fiscal year ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the fiscal year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control —

Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2023, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion  

The Company’s management is responsible for these consolidated financial statements.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that responds to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition –

Fixed-Price Contracts

Description of the Matter

As disclosed in Note 1 to the consolidated financial statements, the Company generally recognizes revenue over time as performance obligations are satisfied. 

For fixed price contracts, the Company generally measures its progress to completion using an input measure of total costs incurred divided by total costs expected to be incurred. 

Recognition of revenue and profit over time as performance obligations are satisfied is highly judgmental as it required the Company to prepare estimates of total contract revenue and total contract costs, including costs to complete contracts that are in process. 

These estimates are dependent on a number of subjective factors and involve judgment as changes in these assumptions could have an impact on the amount of revenue recognized.

Audit Response:

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the timing of revenue recognition, including testing the internal controls over the proper accumulation of labor costs by contract as well as the approval of monthly and weekly invoices for accuracy and completeness and reviewing key provisions and deliverables within customer contracts. 

We evaluated management’s application of their revenue recognition policies in the determination of revenue recognition conclusions. 

Our audit procedures included, among other, selecting a sample of revenue transactions and performing the following procedures:

we reviewed the signed contract;

we reviewed the recorded timesheet data related to the selected invoices, which corroborated management's assessment towards the completion of the performance obligation;

and we reviewed the signed contract related to the selected invoice, noting each task has an agreed upon unit price per contract and the unit price matched what was shown on the invoice. 

We also tested for proper revenue recognition cut off.

Business Combination

Description of the Matter

As disclosed in Note 6 to the consolidated financial statements, effective October 2, 2022, the Company acquired the business operations of TalentHerder, LLC (“TalentHerder”). 

The Company applied the acquisition method of accounting for the TalentHerder business combination. 

This methodology requires the Company to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. 

Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill. 

In connection with the TalentHerder acquisition the Company also recorded a liability for contingent consideration related to purchase price payable upon the achievement of future sales to a specific customer. 

We identified the Company's business combination as a critical audit matter because of the significant estimates and judgment in determining the fair values assigned to certain of the acquired assets and assumed liabilities especially those considering management’s assumptions surrounding estimated future cash flows. 

The Company determines fair value using widely accepted valuation techniques, primarily discounted cash flow and market multiple analyses. 

These types of analyses require assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates, net sales growth rates, gross margins, operating expenses, income and future cash flows.

Audit Response:

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over to estimate the fair value of the acquired assets and assumed liabilities and ensure the accuracy of key data used in their fair value calculations. 

We also evaluated the design of key controls used by management to develop their fair value estimate. 

We evaluated the appropriateness of specific key inputs supporting management’s estimate, including the net sales growth rates, gross margins, operating expenses, income and future cash flows. 

Additionally, with the assistance of our internal valuation specialists, we evaluated the appropriateness of unobservable inputs such as weighted average cost of capital, discount rates, future revenue growth, future margin amounts, and terminal values.

/s/ WithumSmith+Brown, PC

We have served as the Company's auditor since 2022.

Red Bank, New Jersey

March 16, 2023

PCAOB ID Number 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

RCM Technologies, Inc.

and Subsidiaries

Opinion on Internal Control Over Financial Reporting

We have audited RCM Technologies, Inc.

and Subsidiaries’

(the “Company”) internal control over financial reporting as of December 31, 2022, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weakness has been identified and included in management’s assessment in section “Item 9A”

Management’s Report on Internal Control over Financial Reporting.

Management has identified that the Company did not design and maintain information technology controls relevant to preparing its financial statements, specifically concerning (i) separation of duties to the SAP ERP and General Ledger.

(ii) adequate restriction of administrator-type access to SAP (iii) program change management controls, and (iv) user access controls that ensure appropriate segregation of duties and adequately restrict user access to financial applications, programs, and data.

As a result, the Company's related process-level IT-dependent manual and automated controls that rely upon the affected ITGCs, or information coming from IT systems with affected ITGCs, were also deemed ineffective.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2022, the related consolidated statements of operations, comprehensive income, changes in stockholders’

equity and cash flows for the fiscal year ended December 31, 2022, and the related notes.

This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report, dated March 16, 2023, on the consolidated financial statements, which expressed an unqualified opinion.

Basis for Opinion  

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ WithumSmith+Brown, PC

Red Bank, New Jersey

March 16, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

RCM Technologies, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of RCM Technologies, Inc.

and Subsidiaries (the “Company") as of January 1, 2022 and January 2, 2021, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’

equity, and cash flows for the years ended January 1, 2022 and January 2, 2021, and the related notes (collectively referred to as the “financial statements”). 

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for the years ended January 1, 2022 and January 2, 2021, in conformity with accounting principles generally accepted in the United States of America. 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. 

Our responsibility is to express an opinion on the Company’s financial statements based on our audits. 

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. 

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. 

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. 

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. 

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. 

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion. 

/s/ Macias Gini & O’Connell LLP

We have served as the Company’s auditor since 2019. 

San Diego, California

April 4, 2022

PCAOB ID Number 324

RCM TECHNOLOGIES, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

January 1, 2022 and January 2, 2021

December 31, 2022, January 1, 2022 and January 2, 2021

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

4 unchanged sentences

48,240  

36,007  

Transit accounts receivable

Prepaid expenses and other current assets

Total current assets

1 unchanged sentence

51,971  

43,934  

Property and equipment, net

3 unchanged sentences

16,354  

Operating right of use asset

Intangible assets, net

Total other assets

1 unchanged sentence

18,942  

22,327  

$ 87,964  

$ 72,852  

$ 68,339  

Current liabilities:

2 unchanged sentences

$ 9,306  

$ 7,497  

Transit accounts payable

2 unchanged sentences

13,027  

12,877  

Finance lease payable

1 unchanged sentence

Operating right of use liability

Liability for contingent consideration from acquisitions

Contingent consideration from acquisitions

Deferred revenue

Total current liabilities

1 unchanged sentence

29,857  

Deferred tax liability, foreign

28,741  

Deferred income taxes, net, foreign

Deferred income taxes, net, domestic

Finance lease payable

Liability for contingent consideration from acquisitions

Contingent consideration from acquisitions, net of current position

Operating right of use liability, net of current position

2 unchanged sentences

11,890  

Total liabilities

1 unchanged sentence

46,883  

Commitments and contingencies (note 16)

46,101  

Contingencies (note 16) and Commitments (note 18)

Stockholders’

1 unchanged sentence

5,000,000 shares authorized;

no shares issued or outstanding

1 unchanged sentence

40,000,000 shares authorized;

17,287,967 shares issued and 9,285,318 shares outstanding at

January 1, 2022 and 16,224,191 shares issued and 11,542,880 shares

outstanding at January 2, 2021

December 31, 2022, 16,903,157 shares issued and 10,290,935 shares

outstanding at January 1, 2022 and 16,224,191 shares issued and

11,542,880 shares outstanding at January 2, 2021

Stock subscription receivable

2 unchanged sentences

111,068  

109,588  

Accumulated other comprehensive loss

Accumulated deficit

Treasury stock ( 6,612,222 shares at January 1, 2022 and

4,681,311 at January 2, 2021) at cost

Treasury stock, 8,002,649 shares at December 31, 2022,

6,612,222 shares at January 1, 2022 and 4,681,311 at January 2, 2021, at cost

Stockholders’

1 unchanged sentence

25,969  

22,238  

Total liabilities and stockholders’

1 unchanged sentence

$ 72,852  

$ 68,339  

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

2 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal Years Ended January 1, 2022 and January 2, 2021

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

(Dollars in thousands, except per share amounts, unless otherwise indicated)

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$ 203,875  

$ 150,409  

Cost of services

3 unchanged sentences

82,927  

53,124  

38,855  

Operating costs and expenses

2 unchanged sentences

42,019  

37,791  

Depreciation and amortization of property and equipment

1 unchanged sentence

Write-off of receivables and professional fees

incurred related to arbitration

related to arbitration

Impairment of right of use assets and related costs

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Remeasurement of acquisition-related

contingent consideration

Operating costs and expenses

Operating costs and expenses, net of gain on sale of assets

54,129  

38,988  

49,805  

Operating income (loss)

28,798  

14,136  

Other expense (income)

1 unchanged sentence

Change in fair value of contingent consideration

Loss (gain) on foreign currency transactions

(Gain) loss on foreign currency transactions

Other expense, net

1 unchanged sentence

28,480  

13,914  

Income tax expense (benefit)

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$ 20,889  

$ 10,989  

Basic net earnings (loss) per share

$ 2.08  

$ 1.00  

Diluted net earnings (loss) per share

$ 2.00  

$ 0.95  

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

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Fiscal Years Ended January 1, 2022 and January 2, 2021

(Dollars in thousands unless otherwise indicated)

 Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

 (Dollars in thousands unless otherwise indicated)

Net income (loss)

$ 10,989  

Other comprehensive (loss) income

Total comprehensive income (loss)

$ 10,840  

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

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’

Fiscal Years Ended January 1, 2022 and January 2, 2021

(Amounts in thousands, except share amounts, unless otherwise indicated)

Comprehensive

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

 (Amounts in thousands, except share amounts, unless otherwise indicated)

Treasury Stock

Comprehensive

Balance, December 28, 2019

15,826,891  

$ 108,452  

2,823,172  

$ 32,403  

Issuance of stock under

employee stock purchase plan

117,983  

Stock subscription receivable

Foreign currency translation

Share-based compensation expense

Equity compensation expense from

awards issued

Issuance of stock upon vesting

of restricted share awards

279,317  

Purchase of treasury stock

1,858,139  

Foreign currency translation

Balance, January 2, 2021

16,224,191  

$ 109,588  

4,681,311  

$ 22,238  

Issuance of stock under

employee stock purchase plan

101,784  

Stock subscription receivable

250,000  

Foreign currency translation

Share-based compensation expense

Equity compensation expense from

awards issued

Issuance of stock upon vesting

of restricted share awards

327,182  

Effect of excess tax deduction

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Purchase of treasury stock

1,930,911  

10,989  

Foreign currency translation

Balance, January 1, 2022

16,903,157  

$ 111,068  

6,612,222  

Issuance of stock under

employee stock purchase plan

Equity compensation expense from

awards issued

Issuance of stock upon vesting

of restricted share awards

Effect of excess tax deduction

over book expense associated with

exercise of equity awards

Common stock issued for

Purchase of treasury stock

Foreign currency translation

Balance, December 31, 2022

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Years Ended January 1, 2022 and January 2, 2021

(Dollars in thousands unless otherwise indicated)

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

 (Dollars in thousands unless otherwise indicated)

Cash flows from operating activities:

Net income (loss)

$ 10,989  

Adjustments to reconcile net income (loss) to net cash provided by

operating activities:

Depreciation and amortization

Gain on sale of assets

Remeasurement of acquisition-related contingent consideration

Impairment of right of use assets and related costs

Change in fair value of contingent consideration

Share-based compensation expense

Equity compensation expense from awards issued

Effect of excess tax deduction on equity awards

Provision for losses on accounts receivable

Deferred income tax expense (benefit)

Amortization of right of use assets

Changes in assets and liabilities:

Changes in operating assets and liabilities:

Accounts receivable

15,947  

Net of transit accounts receivable and payable

Prepaid expenses and other current assets

Net of transit accounts receivable and payable

Accounts payable and accrued expenses

Accrued payroll and related costs

Right of use liabilities

Income taxes payable

Deferred revenue

Total adjustments

34,113  

Total adjustments and changes in operating assets and liabilities

Net cash provided by operating activities

25,244  

Cash flows from investing activities:

Property and equipment acquired

Payments for business acquired

Proceeds from sale of assets

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Borrowings under line of credit

110,481  

73,238  

Repayments under line of credit

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Effect of exchange rate changes on cash and cash equivalents

Decrease in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

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Cash paid for:

$ 1,026  

$ 1,010  

Non-cash investing activities:

Contingent consideration relating to acquisitions

Value of shares issued pursuant to acquisitions

Fixed assets acquired in acquisitions

Non-cash financing activities:

Issuance of accrued share-based compensation

ROU assets obtained in exchange for lease obligations

$ 1,832  

Right of use assets obtained in exchange for lease obligations

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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(the “Company”

or “RCM”) is a premier provider of business and technology solutions designed to enhance and maximize the operational performance of its customers through the adaptation and deployment of advanced engineering, life sciences and information technology services. 

Additionally, the Company provides specialty health care staffing services through its Specialty Health Care Services group. 

RCM’s offices are primarily located in major metropolitan centers throughout North America.

The consolidated financial statements are comprised of the accounts of the Company and its wholly owned subsidiaries. 

All significant intercompany accounts and transactions have been eliminated in consolidation. 

The consolidated financial statements are comprised of the accounts of the Company and its wholly owned subsidiaries.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers its holdings of highly liquid money-market instruments and certificates of deposits to be cash equivalents if the securities mature within 90 days from the date of acquisition. 

The Company considers its holdings of highly liquid money-market instruments and certificates of deposit to be cash equivalents if the securities mature within 90 days from the date of acquisition. 

These investments are carried at cost, which approximates fair value. 

The Company’s cash balances are maintained in accounts held by major banks and financial institutions. 

The majority of these balances may exceed federally insured amounts. 

The Company held $ 21 and $ 42 of cash and cash equivalents in Canadian banks as of January 1, 2022 and January 2, 2021, respectively, which was held principally in Canadian dollars. 

The Company held $ 169 and $ 246 of cash and cash equivalents in Serbian banks as of January 1, 2022 and January 2, 2021, respectively, which was held in various currencies.

The Company has significant cash balances at financial institutions, which, throughout the year, regularly exceed the federally insured limit of $250.

Any loss incurred or lack of access to uninsured funds could have a significant adverse impact on the Company’s financial condition, results of operations and cash flows.

The Company held $ 79 , $ 21 and $ 42 of cash and cash equivalents in Canadian banks as of December 31, 2022, January 1, 2022 and January 2, 2021, respectively, which was held principally in Canadian dollars. 

The Company held $ 203 , $ 169 and $ 246 of cash and cash equivalents in Serbian banks as of December 31, 2022, January 1, 2022 and January 2, 2021, respectively, which was held in various currencies. The Company held $ 16 , $ 2 and $ 6 of cash and cash equivalents in Netherlands banks as of December 31, 2022, January 1, 2022 and January 2, 2021, respectively, which was held in various currencies.

Fair Value of Financial Instruments

The Company’s carrying value of financial instruments, consisting primarily of accounts receivable, transit accounts receivable, accounts payable and accrued expenses, transit accounts payable and borrowings under line of credit approximates fair value due to their liquidity or their short-term nature and the line of credit’s variable interest rate. 

The Company does not have derivative products in place to manage risks related to foreign currency fluctuations for its foreign operations or for interest rate changes.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are primarily due from trade customers. 

Credit is extended based on evaluation of customers’

financial condition and, generally, collateral is not required. 

Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts.

Accounts outstanding longer than the payment terms are considered past due.

The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. 

The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables previously written off are credited to bad debt expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accrued and Unbilled Accounts Receivable and Work-in-Process

Unbilled receivables primarily represent revenues earned whereby those services are ready to be billed as of the balance sheet ending date.

Work-in-process primarily represents revenues earned under contracts which the Company is contractually precluded from invoicing until future dates as project milestones are realized. 

Unbilled Accounts Receivable and Work-in-Process

Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date.

Work-in-process primarily represents revenue earned under contracts which the Company is contractually precluded from invoicing until future dates as project milestones are realized.

See Note 4 for further details.

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In such situations, the Company acts as an agent under the provisions of FASB ASC 606 “Revenue from Contracts with Customers”

and therefore recognizing revenue on a “net-basis.” 

and therefore recognizes revenue on a “net-basis.” 

The Company records revenue on a “net”

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The Company typically does not pay a given transit account payable until the related transit account receivable is collected.

The Company is typically obligated to pay the subcontractor or staffing agency whether or not the client pays the Company. 

The Company’s transit accounts payable generally exceeds the Company’s transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business.

Property and Equipment

Property and equipment are stated at cost and are depreciated on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated useful lives. 

The annual rates are 20 % for computer hardware and software as well as furniture and office equipment. 

Leasehold improvements are amortized over the shorter of the estimated life of the asset or the lease term. 

Property and equipment are stated at cost, less accumulated depreciation and amortization, and are depreciated or amortized on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated useful lives.

Computer hardware and software, and furniture and office equipment are typically depreciated over five years.

Leasehold improvements are amortized over the shorter of the estimated life of the asset or the lease term.

RCM TECHNOLOGIES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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Intangible Assets

The Company’s intangible assets have been generated through acquisitions. 

The Company maintains responsibility for valuing and determining the useful life of intangible assets. 

As a general rule, the Company amortizes restricted covenants over four years and customer relationships over six years. 

The Company’s intangible assets have been generated through acquisitions.

The Company maintains responsibility for valuing and determining the useful life of intangible assets.

As a general rule, the Company amortizes restricted covenants over four years and customer relationships over six years.

However, circumstances may dictate other amortization terms as determined by the Company and assisted by their third party advisors.

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The Company is required to charge and collect sales tax for all Canadian clients and remits invoiced sales tax monthly to the Canadian taxing authorities whether collected or not.

The Company does not collect the sales tax from its clients until they have paid their respective invoices. 

The Company includes uncollected Canadian sales tax invoiced to clients in its prepaid and other current assets.

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Intangibles - Goodwill and Other.

” 

The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal December each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill may be below its carrying amount.

The Company has three reporting units. 

The Company uses a market-based approach to determine the fair value of the reporting units. 

The Company has three reporting units.

The Company uses a market-based approach to determine the fair value of the reporting units.

This approach uses earnings/revenue multiples of similar companies recently completing acquisitions and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units.

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Simplifying the Test for Goodwill Impairment”

effective January 2, 2021 which has eliminated Step 2 from the goodwill impairment test.

effective December 30, 2017 which has eliminated Step 2 from the goodwill impairment test.

Under this update, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

To satisfy the “Step 0 Test”, the Company reviewed industry and market conditions, reporting unit specific events as well as overall financial performance and found no impairment of goodwill.

The Company did not record a goodwill impairment charge in fiscal years ended January 1, 2022 and January 2, 2021. 

The Company did not record a goodwill impairment charge in fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

There can be no assurance that future indicators of impairment and tests of goodwill impairment will not result in an impairment charge.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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Long-Lived and Intangible Assets

The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 

When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. 

Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell. 

The Company’s intangible assets consist of customer relationships and non-compete agreements. 

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.

In accordance with FASB ASC 350 - 40 “Accounting for Internal Use Software,”

certain costs related to the development or purchase of internal-use software are capitalized and amortized over the estimated useful life of the software.

During the fiscal years ended January 1, 2022 and January 2, 2021, the Company capitalized $ 1,256 and $ 305 , respectively, for software costs. 

The net balance after accumulated depreciation for all software costs capitalized as of January 1, 2022 and January 2, 2021 was $ 1,350 and $ 1,389 , respectively.

The Company makes judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings. 

During the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, the Company capitalized $ 282 , $ 1,256 and $ 305 , respectively, for software costs.

The net balance after accumulated depreciation for all software costs capitalized as of December 31, 2022, January 1, 2022 and January 2, 2021 was $ 977 , $ 1,350 and $ 1,389 , respectively.

The Company makes judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings.

These judgments and interpretations affect the provision for income taxes, deferred tax assets and liabilities and the valuation allowance.

The Company evaluated the deferred tax assets and determined on the basis of objective factors that the net assets will be realized through future years’

taxable income. 

In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required. 

The Company did not have any valuation allowance as of January 1, 2022 or January 2, 2021.

taxable income.

In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required.

The Company did not have any valuation allowance as of December 31, 2022, January 1, 2022 or January 2, 2021.

The Company accounts for income taxes in accordance with FASB ACS 740 “Income Taxes”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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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. 

The Company records revenue under Accounting Standards Codification (“ASC”) Topic 606,  

Revenue from Contracts with Customers .

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:

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and ( 5 ) Recognize revenue when (or as) each performance obligation is satisfied.

The Company derives its revenue from several sources. 

The Company’s Engineering Services and Life Sciences and Information Technology segments perform consulting and project solution services. 

The Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care facilities amongst others. 

The Company derives its revenue from several sources.

The Healthcare segment specializes in long-term and short-term staffing and placement services to hospitals, schools and long-term care facilities amongst others.

The Company’s Engineering Services, Life Sciences and Information Technology segments perform consulting and project solution services.

All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees.

The majority of the Company’s revenue is invoiced on a time and materials basis.

The following table presents our revenues disaggregated by revenue source for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021:

The following table presents our revenue disaggregated by revenue source for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021:

Specialty Health Care:

Time and Material

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$ 59,692  

14,145  

Permanent Placement Services

Total Engineering

Total Specialty Health Care

$ 159,448  

$ 98,495  

Specialty Health Care:

$ 60,481  

Time and Material

1 unchanged sentence

$ 33,937  

$ 28,323  

41,021  

32,168  

29,181  

Permanent Placement Services

Total Specialty Health Care

Total Engineering

$ 85,937  

$ 66,172  

$ 57,715  

Life Sciences and Information Technology:

2 unchanged sentences

$ 37,181  

$ 31,263  

Permanent Placement Services

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$ 284,680  

$ 203,875  

$ 150,409  

RCM TECHNOLOGIES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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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 Healthcare Life Sciences and Information Technology 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. 

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Revenue under these arrangements are recognized as the costs on these contracts are incurred. 

From time-to-time, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying consolidated balance sheets. 

Additionally, some contracts contain “Performance Fees”

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Permanent Placement Services

The Company earns permanent placement fees from providing permanent placement services. 

These fees are typically based on a percentage of the compensation paid to the person placed with the Company’s client. 

The Company guarantees its permanent placements on a prorated basis for 90 days. 

In the event a candidate is not retained for the 90 -day period, the Company will provide a suitable replacement candidate. 

In the event a replacement candidate cannot be located, the Company will provide a prorated refund to the client. 

The Company earns permanent placement fees from providing permanent placement services.

These fees are typically based on a percentage of the compensation paid to the person placed with the Company’s client.

The Company guarantees its permanent placements on a prorated basis for 90 days.

In the event a candidate is not retained for the 90 -day period, the Company will provide a suitable replacement candidate.

In the event a replacement candidate cannot be located, the Company will provide a prorated refund to the client.

An allowance for refunds, based upon the Company’s historical experience, is recorded in the financial statements.

Permanent placement revenue was $ 1.8 million for the fiscal year ended January 1, 2022 and $ 1.5 million for the fiscal year ended January 2, 2021.

The deferred revenue balance as of January 1, 2022 and January 2, 2021 was $ 3.4 million and $ 0.4 million, respectively.

Permanent placement revenue was $ 2.2 million, $ 1.8 million and $ 1.5 million for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

The deferred revenue balance as of December 31, 2022, January 1, 2022 and January 2, 2021 was $ 1.1 million, $ 3.4 million and $ 0.4 million, respectively.

These amounts are included in accounts payable and accrued expense in the accompanying consolidated balance sheets at that date. 

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Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet, although this is an infrequent occurrence. 

In each of the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021, the Company recognized revenue of $ 0.4 million that was included in deferred revenue at the beginning of the period.

In fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, the Company recognized revenue of $ 3.4 million, $ 0.4 million and $0.4 million, respectively, that was included in deferred revenue at the beginning of the period.

RCM TECHNOLOGIES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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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 transit accounts receivable was $ 3.3 million and related transit accounts payable was $ 9.8 million, for a net payable of $ 6.5 million, as of December 31, 2022.

The transit accounts receivable was $ 1.0 million and related transit accounts payable was $ 2.1 million, for a net payable of $ 1.1 million, as of January 1, 2022.

The transit accounts receivable was $ 2.5 million and related transit accounts payable was $ 4.9 million, for a net payable of $ 2.4 million, as of January 2, 2021.

Concentration

During the fiscal year ended January 1, 2022, no client accounted for 10% or more of total revenues. 

As of January 1, 2022, the following clients represented more than 10.0% of the Company’s accounts receivable, net:

Ginkgo Bioworks was 15.3% and Hawaii Department of Education was 14.2%.

No other customer accounted for 10% or more of the Company’s accounts receivable, net.

The Company’s five , ten and twenty largest customers accounted for approximately 35.8 %, 52.5 % and 65.1%, respectively, of the Company’s revenues for the fiscal year ended January 1, 2022.

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

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

As of January 2, 2021, the following clients represented more than 10.0% of the Company’s accounts receivable, net:

New York City Board of Education was 11.8 % and Hawaii Department of Education was 10.6%.

No other customer accounted for 10% or more of the Company’s accounts receivable, net.

The Company’s five , ten and twenty largest customers accounted for approximately 33.4%, 46.6 % and 60.7%, respectively, of the Company’s revenues for the fiscal year ended January 2, 2021.

Concentrations

During the fiscal year ended December 31, 2022, the Company had two customers exceed 10% of consolidated revenue, representing 13.2 % and 12.7 % of consolidated revenue, respectively.

During the fiscal year ended January 1, 2022, no client accounted for 10% or more of consolidated revenue. 

During the fiscal year ended January 2, 2021, one customer exceeded 10% of consolidated revenue, representing 10.6 %.

All customers exceeding 10% of consolidated revenue during the periods presented are included in the Company’s Specialty Health Care segment.

The Company’s five, ten and twenty largest customers accounted for approximately 43.0 %, 53.7 % and 67.0 %, respectively, of the Company’s revenue for the fiscal year ended December 31, 2022.

The Company’s five , ten and twenty largest customers accounted for approximately 35.8 %, 52.5 % and 65.1%, respectively, of the Company’s revenue for the fiscal year ended January 1, 2022.

The Company’s five , ten and twenty largest customers accounted for approximately 33.4%, 46.6 % and 60.7%, respectively, of the Company’s revenue for the fiscal year ended January 2, 2021.

As of December 31, 2022, two clients represented more than 10% of the Company’s accounts receivable, net, representing 16.1 % and 12.5 %, respectively.

As of January 1, 2022, two clients represented more than 10% of the Company’s accounts receivable, net, representing 15.3 % and 14.2 %.

As of January 2, 2021, two clients represented more than 10% of the Company’s accounts receivable, net, representing 11.8 % and 10.6 %, respectively.

RCM TECHNOLOGIES, INC.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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The functional currency of the Company’s Canadian and Serbian subsidiaries is the local currency.

Assets and liabilities are translated at period-end exchange rates. 

Income and expense items are translated at weighted average rates of exchange prevailing during the year. 

Assets and liabilities are translated at period-end exchange rates.

Income and expense items are translated at weighted average rates of exchange prevailing during the year.

Any translation adjustments are included in the accumulated other comprehensive income account in stockholders’

equity. 

Transactions executed in different currencies resulting in exchange adjustments are translated at spot rates and resulting foreign exchange transaction gains and losses are included in the results of operations.

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Per Share Data

Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. 

Diluted net income per share is calculated using the weighted-average number of common shares plus dilutive potential common shares outstanding during the period. 

Potential dilutive common shares consist of stock options and other stock-based awards under the Company’s stock compensation plans, when their impact is dilutive. 

Because of the Company’s capital structure, all reported earnings pertain to common shareholders and no other adjustments are necessary. 

Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period.

Diluted net income per share is calculated using the weighted-average number of common shares plus dilutive potential common shares outstanding during the period.

Potential dilutive common shares consist of stock options and other stock-based awards under the Company’s stock compensation plans, when their impact is dilutive.

Because of the Company’s capital structure, all reported earnings pertain to common shareholders and no other adjustments are necessary.

Share - Based Compensation

The Company recognizes share-based compensation over the vesting period of an award based on fair value at the grant date determined using the Black-Scholes option pricing model. 

Certain assumptions are used to determine the fair value of stock-based payment awards on the date of grant and require subjective judgment. 

Because employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. 

Management assesses the assumptions and methodologies used to calculate estimated fair value of stock-based compensation when share-based awards are granted. 

The Company recognizes share-based compensation over the vesting period of an award based on fair value at the grant date determined using the Black-Scholes option pricing model.

Certain assumptions are used to determine the fair value of stock-based payment awards on the date of grant and require subjective judgment.

Management assesses the assumptions and methodologies used to calculate estimated fair value of stock-based compensation when share-based awards are granted.

Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination.

 If an employee leaves the firm before the vesting period has been met, those shares are forfeited and removed from the share –

based compensation expense calculation.

See Note 11 for additional share-based compensation information.

Restricted share awards are recognized at their fair value. 

The amount of compensation cost is measured on the grant date fair value of the equity instrument issued. 

The compensation cost of the restricted share awards is recognized over the vesting period of the restricted share awards on a straight-line basis. 

Restricted share awards typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee’s restricted stock unit fully vests. 

Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. 

Restricted share awards are recognized at their fair value.

The amount of compensation cost is measured on the grant date fair value of the equity instrument issued.

The compensation cost of the restricted share awards is recognized over the vesting period of the restricted share awards on a straight-line basis.

Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet.

Dividends for restricted share awards that ultimately do not vest are forfeited.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

1 unchanged sentence

Advertising Costs

Advertising costs are expensed as incurred. 

Total advertising expense was $ 914 and $ 800 for the fiscal years ended January 1, 2022 and January 2, 2021, respectively.

Advertising costs are expensed as incurred.

Total advertising expense was $ 925 , $ 914 and $ 800 for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

Fair Value Measurements

10 unchanged sentences

Reclassification

Certain prior year amounts have been reclassified to conform with the current year presentation. 

These classifications had no effect on the previously reported results of operations.

The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. 

The fiscal year ended January 1, 2022 ( fiscal 2021 ) was a 52 -week reporting year. 

The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31.

The fiscal years ended December 31, 2022 ( fiscal 2022 ) and January 1, 2022 ( fiscal 2021 ) consisted of fifty-two weeks each.

The fiscal year ended January 2, 2021 ( fiscal 2020 ) was a 53 -week reporting year.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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. 

The Company uses estimates to determine an allowance for doubtful accounts on its accounts receivable, litigation, medical claims, vacation, goodwill impairment, if any, equity compensation, the tax rate applied and the valuation of certain assets and liability accounts.

In addition, the Company reviews its estimated costs to complete a contract and adjusts those costs when necessary.

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.

The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information.

Management regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes.

3 unchanged sentences

Fair Value of Financial Instruments

The Company does not have derivative products in place to manage risks related to foreign currency fluctuations for its foreign operations or for interest rate changes.

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

3 unchanged sentences

$ 37,396  

Accrued and unbilled

$ 25,926  

10,231  

Work-in-progress

3 unchanged sentences

$ 48,240  

Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date. 

$ 36,007  

Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date.

Work-in-progress primarily represents revenue earned under contracts which the Company contractually invoices at future dates.

5 unchanged sentences

$ 4,133  

$ 4,686  

Equipment and furniture

Leasehold improvements

Laboratory equipment

accumulated depreciation and amortization

2 unchanged sentences

$ 1,939  

$ 2,078  

The Company periodically writes off fully depreciated and amortized assets. 

The Company wrote off fully depreciated and amortized assets of $ 1,671 and $ 1,529 during the fiscal years ended January 1, 2022 and January 2, 2021, respectively. 

In addition, $ 713 of assets not fully depreciated were included in the sale of the Canadian Power Systems business. 

For the fiscal years ended January 1, 2022 and January 2, 2021, depreciation and amortization expense for property and equipment was $ 1,007 and $ 1,065 , respectively.

The Company wrote off fully depreciated and amortized assets of $ 901 , $ 1,671 and $ 1,529 during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

In addition, $ 713 of assets not fully depreciated were included in the sale of the Canadian Power Systems business.

For the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, depreciation and amortization expense for property and equipment was $ 995 , $ 1,007 and $ 1,065 , respectively.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

ACQUISITIONS AND DIVESTITURES

The purchase method of accounting in accordance with FASB ASC 805, “Business Combination,”

was applied for all acquisitions. 

This requires the cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. 

was applied for all acquisitions.

Goodwill arising from the acquisitions is attributable to expected sales synergies from combining the operations of the acquired business with those of the Company.

Future Contingent Payments

As of January 1, 2022, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders:

1 ) effective October 1, 2017, the Company acquired all of the stock of PSR Engineering Solutions d.o.o.

Beograd (Voždovac) (“PSR”) and 2 ) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”).

The Company estimates future contingent payments at January 1, 2022 as follows:

Fiscal Year Ending

December 31, 2022

December 30, 2023

Estimated future contingent consideration payments

Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates.

In the fourth quarter of 2021, the Company remeasured the value of its contingent consideration.

The primary driver for remeasuring the contingent consideration was the performance by Thermal Kinetics Engineering (“TKE”) acquired by RCM in 2018.

TKE had very high yearly EBIT targets to achieve earn-out consideration. 

TKE performed quite well but two factors contributed to TKE not hitting its targets. 

The first was the COVID- 19 pandemic which overlapped earn-out years 2 and 3.

TKE had numerous projects in its pipeline that were delayed or eliminated by prospective clients.  

The second factor relates to a specific client in earn-out year 2.

This client experienced some problems with the product output, TKE agreed to fix the equipment to keep a valued client happy, thus the additional cost caused TKE to miss its earn-out target. 

Based on these factors, the Company decided to amend its asset purchase agreement with TKE to a total of $ 0.7 million.

Potential future contingent payments to be made to all active acquisitions after January 1, 2022 are capped at a cumulative maximum of $0.7 million. 

The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of January 1, 2022. 

Contingent consideration related to acquisitions is recorded at fair value (level 3 ) with changes in fair value recorded in other (expense) income, net.

TalentHerder Acquisition

Effective October 2, 2022, the Company acquired the business operations of TalentHerder, LLC, a California limited liability company.

TalentHerder is a leading talent acquisition services company. 

TalentHerder’s business bridges the gap between in-house and external recruiting, specializing in high-growth companies.

It works with clients to help identify and hire top-quality talent across all critical functions, enabling companies to scale teams quickly, efficiently, and cost-effectively.

TalentHerder’s proven recruitment processes can help scale both in-person and remote working environments for companies across the globe.

The acquisition will bolster the Company’s existing capabilities by expanding its recruitment process outsourcing ("RPO") service footprint, enhancing the Company's candidate sourcing reach, and enabling the Company's in-house recruiting team to respond more rapidly to client needs.

The preliminary consideration and estimated fair value of assets acquired and liabilities assumed is as follows:

$ 4,150  

Common stock of the Company

Contingent consideration, at fair value

Total consideration

$ 6,708  

The seller of TalentHerder is eligible to receive post-closing contingent consideration upon the business exceeding certain base levels of operating income, potentially earned over five years. 

The amount recorded for the contingent consideration represents the acquisition date fair value of expected consideration to be paid based on TalentHerder’s forecasted operating income during the five year period.

Expected consideration was valued based on different possible scenarios for projected operating income. 

Each case was assigned a probability which was used to calculate an estimate of the forecasted future payments. 

Then a discount rate was applied to these forecasted future payments to determine the acquisition date fair value to be recorded. 

The preliminary estimated purchase price has been allocated as follows:

Property and equipment, net

Customer relationships

Total consideration

$ 6,708  

The goodwill is expected to be fully deductible for tax purposes, except for the portion of contingent

consideration which is deductible only when paid.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

ACQUISITIONS (CONTINUED)

For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the acquisition date.

The Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration.

The fair value is estimated using projected future operating results and the corresponding future earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value.

These liabilities are measured quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of operations.

During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of operations.

ACQUISITIONS AND DIVESTITURES (CONTINUED)

In the fourth quarter of 2021, the Company remeasured the value of its contingent consideration.

The primary driver for remeasuring the contingent consideration was the performance by Thermal Kinetics Engineering (“TKE”) acquired by RCM in 2018.

This remeasurement lead to a $1.7M reduction to the contingent consideration liability. 

TKE had very high yearly EBIT targets to achieve earn-out consideration. 

TKE performed quite well but two factors contributed to TKE not hitting its targets. 

The first was the COVID- 19 pandemic which overlapped earn-out years 2 and 3.

The primary driver for remeasuring the contingent consideration was the performance by TKE. 

This remeasurement led to a $ 1.7 million reduction to the contingent consideration liability relating to the TKE acquisition.

TKE had high yearly performance targets to achieve earn-out consideration. 

Two factors primarily contributed to TKE not hitting its performance targets. 

The first was the COVID- 19 pandemic which overlapped earn-out years two and three. 

TKE had numerous projects in its pipeline that were delayed or eliminated by prospective clients.  

The second factor relates to a specific client in earn-out year 2.

This client experienced some problems with the product output, TKE agreed to fix the equipment to keep a valued client happy, thus the additional cost caused TKE to miss its earn-out target. 

Based on these factors, the Company decided to amend its asset purchase agreement with TKE.

The Company paid contingent consideration of $ 0.5 million and $ 0.3 million during the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021, respectively. 

The changes in the liability for contingent consideration from acquisitions for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 are as follows:

The second factor relates to a specific client in earn-out year three. 

This client was dissatisfied with the product output, and TKE agreed to fix the equipment.

The additional cost caused TKE to miss its earn-out target. 

Based on these factors, the Company determined to amend its asset purchase agreement with TKE, whereby TKE could receive maximum contingent consideration of $ 0.4 million in 2022 and $ 0.3 million in 2023.

TKE earned $ 0.3 million in 2022, so the Company recorded a remeasurement of contingent consideration for $ 0.1 million in 2022.

Potential future contingent payments to be made to all active acquisitions after December 31, 2022 are capped at a cumulative maximum of $ 11.8 million.

The Company paid contingent consideration of $ 0.1 million, $ 0.5 million and $ 0.3 million during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

The changes in the liability for contingent consideration from acquisitions for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 are as follows:

Balance as of December 28, 2019

8 unchanged sentences

Balance as of January 1, 2022

Contingent payments made

Remeasurement of contingent consideration

Acquisition of TalentHerder

Balance as of December 31, 2022

$ 2,442  

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

ACQUISITIONS (CONTINUED)

Sale of Assets

ACQUISITIONS AND DIVESTITURES (CONTINUED)

Future Contingent Payments

As of December 31, 2022, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former sellers:

1 ) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”), and 2 ) effective October 2, 2022, the Company acquired certain assets of TalentHerder LLC.

The Company estimates future contingent payments at December 31, 2022 as follows:

Fiscal Years Ending

December 30, 2023

Estimated future contingent consideration payments

$ 2,442  

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.

These liabilities are measured quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of operations.

Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. 

The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of December 31, 2022. 

Contingent consideration related to acquisitions is recorded at fair value (level 3 ) with changes in fair value recorded in other (expense) income, net.

Divestiture of Assets

On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices, located in Ontario, Canada.

These two offices were often referred to as Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada.

The two Canada Power Systems offices were part of a reporting unit within the Company’s Engineering segment.

1 unchanged sentence

The Company evaluated this transaction under ASC 205 - 20, discontinued operations and determined it did not meet the requirements to be treated as such. 

For the fifty-two week period ended January 1, 2022 and fifty-three week period ended January 2, 2021, these two offices generated revenue of $ 4.9 million and $ 11.8 million, respectively. 

The Company recorded a gain on the sale of these net assets of $ 2.4 million. 

The purchase agreement provides for a typical indemnity escrow held by an independent escrow agent in the amount of $ 0.8 million.

The escrow has not been recognized in the Company’s financial statements, as the Company does not control the escrow.

Provided there are no asserted indemnity claims, the Company expects to receive the $ 0.8 million about 18 months from the purchase date.

For the fiscal years ended January 1, 2022 and January 2, 2021, these two offices generated revenue of $ 4.9 million and $ 11.8 million. 

The purchase agreement provided for a typical indemnity escrow held by an independent escrow agent, the proceeds of which will equal up to $ 0.7 million, net of contingent sale bonuses for former management.

The Company received a portion of the escrow during the fiscal year ended December 31, 2022. 

The remaining escrow balance has not been recognized in the Company’s financial statements, as the Company does not control the escrow. 

Provided there are no asserted indemnity claims, the Company expects to receive up to $ 0.4 million net of bonuses during the first half of fiscal 2023.

RCM TECHNOLOGIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

1 unchanged sentence

The Company tests goodwill for impairment on an annual basis as of the last day of the Company's fiscal year or more frequently if events occur or circumstances change indicating that the fair value of goodwill may be below the carrying amount. 

During the fifty-two week period ended January 1, 2022, the Company reviewed the carrying value of goodwill due to the events and circumstances surrounding the COVID- 19 pandemic. 

While COVID- 19 has negatively impacted the Company and may continue to negatively impact the Company in the future, the Company did not conclude in such review that this negative impact is permanent. 

The Company reviewed industry and market conditions, reporting unit specific events as well as overall financial performance and determined that no indicators of impairment of goodwill existed during the fifty-two week period ended January 1, 2022 and fifty-three week period ended January 2, 2021. 

As such, no impairment loss on the Company’s goodwill during the fifty-two week period ended January 1, 2022 or the fifty-three week period ended January 2, 2021 was recorded as a result of such review. 

The changes in the carrying amount of goodwill for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 are as follows:

During the fiscal year ended December 31, 2022, the Company reviewed the carrying value of goodwill due to the events and circumstances surrounding the COVID- 19 pandemic and endemic.

While COVID- 19 has at times negatively impacted the Company and may continue to negatively impact the Company in the future, the Company did not conclude in such review that this negative impact is permanent.

The Company reviewed industry and market conditions, reporting unit specific events as well as overall financial performance and determined that no indicators of impairment of goodwill existed during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

As such, no impairment loss on the Company’s goodwill during the fiscal years ended December 31, 2022, January 1, 2022 or January 2, 2021 was recorded as a result of such review.

The changes in the carrying amount of goodwill for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 are as follows:

Specialty Health Care

Balance as of December 28, 2019

15 unchanged sentences

$ 16,354  

Acquisition of TalentHerder

Balance as of December 31, 2022

$ 11,918  

$ 2,398  

$ 7,831  

$ 22,147  

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

1 unchanged sentence

When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. 

Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell. 

The Company’s intangible assets consist of customer relationships and non-compete agreements. 

During the fifty-two week period ended January 1, 2022, the Company reviewed the carrying value of its intangible assets due to the events and circumstances surrounding the COVID- 19 pandemic.

As such, no impairment loss on the Company’s intangible assets during the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 was recorded as a result of such review.

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 fiscal year ended December 31, 2022, the Company reviewed the carrying value of its intangible assets due to the events and circumstances surrounding the COVID- 19 pandemic and endemic.

As such, no impairment loss on the Company’s intangible assets during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 was recorded as a result of such review.

All of the Company’s intangible assets are associated with the Engineering segment. 

1 unchanged sentence

Intangible assets are carried at cost, less accumulated amortization.

Details of intangible assets by class at January 1, 2022 and January 2, 2021:

Details of intangible assets by class at December 31, 2022, January 1, 2022 and January 2, 2021:

Restricted covenants

1 unchanged sentence

Total intangible assets

Amortization of acquired intangible assets for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 was $ 95 and $ 321 , respectively.

The remaining intangible asset balance will be amortized during fiscal 2021.

Amortization of acquired intangible assets for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 was $ 46 , $ 95 and $ 321 , respectively.

The remaining intangible asset balance will be amortized through fiscal 2027.

Estimated future amortization expense, by fiscal years, for these intangibles assets are as follows:

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

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.

The Company’s 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. 

At the option of Citizens Bank, LIBOR can be replaced with SOFR (Secured Overnight Financing Rate).

The LIBOR alternative is being phased out in 2022.

Citizens Bank has not indicated when this switch will occur, but in any event, the Company does not believe there will be any material impact on its borrowing rate.

(i) SOFR (Secured Overnight Financing Rate) (which replaced LIBOR (London Interbank Offered Rate) upon the phasing out of LIBOR), plus applicable margin, typically borrowed in fixed 30 -day increments, 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 fifty-two week period ended January 1, 2022 and fifty-three week period ended January 2, 2021 were 2.0 % and 2.7 %, respectively.

All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. 

The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay dividends. 

As of January 1, 2022, the Company was in compliance with all covenants contained in the Revolving Credit Facility (as amended).

 The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.   

Borrowings under the line of credit as of January 1, 2022 and January 2, 2021 were $ 14.2 million and $ 11.9 million, respectively. 

At both January 1, 2022 and January 2, 2021, there were letters of credit outstanding for $ 1.9 million.

At January 1, 2022, the Company had availability for additional borrowings under the Revolving Credit Facility of $ 28.9 million.

Impact to Line of Credit from COVID- 19

The Company is negatively impacted by COVID- 19 as more fully described in Footnote 19 as well as the Segment Discussion, and Liquidity and Capital Resources sections in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company believes that its current line of credit is adequate to provide the necessary liquidity while COVID- 19 impacts its operations. 

While the Company does expect to be in compliance with its financial covenants in the line of credit for the foreseeable future, the Company can give no assurance that the line of credit will be available to the Company.

Unused line fees are recorded as interest expense.

The effective weighted average interest rate, including unused line fees, for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 were 2.2 %, 2.0 % and 2.7 %, respectively.

However, during the Company’s fiscal fourth quarter of 2022, it experienced a weighted average interest rate of 5.2 %, including unused line.

The Company believes its fourth quarter interest rate is more reflective of rates expected in the near term.

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 the Company’s ability to borrow in order to pay dividends.

As of December 31, 2022, the Company was in compliance with all covenants contained in the Revolving Credit Facility (as amended).

The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.

Borrowings under the line of credit as of December 31, 2022, January 1, 2022 and January 2, 2021 were $ 8.8 million, $ 14.2 million and $ 11.9 million, respectively.

At December 31, 2022, January 1, 2022 and January 2, 2021, there were letters of credit outstanding for $ 1.9 million.

At December 31, 2022, the Company had availability for additional borrowings under the Revolving Credit Facility of $ 34.3 million.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

PER SHARE DATA

The Company uses the treasury stock method to calculate the weighted-average shares outstanding used for diluted earnings per share. 

The number of weighted-average shares used to calculate basic and diluted earnings per share for the fiscal years ended January 1, 2022 and January 2, 2021 was determined as follows:

The Company uses the treasury stock method to calculate the weighted-average shares outstanding used for diluted earnings per share.

The number of weighted-average shares used to calculate basic and diluted earnings per share for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 was determined as follows:

Fiscal Years Ended

2 unchanged sentences

11,035,361  

12,152,042  

Dilutive effect of outstanding restricted share awards

390,488  

589,740  

Weighted average dilutive shares outstanding

1 unchanged sentence

11,625,101  

Because the year ended January 2, 2021 recorded a net loss, the otherwise dilutive effect of 46,873 outstanding restricted share awards has not been included in the weighted average diluted shares outstanding. 

For the years ended January 1, 2022 and January 2, 2021, there were no anti-dilutive shares included in the calculation of common stock equivalents.

12,152,042  

For the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, there were no anti-dilutive shares 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:

2 unchanged sentences

420,628  

459,805  

Unvested subscription restricted share awards

2 unchanged sentences

225,000  

125,000  

Future grants of options or shares

1 unchanged sentence

107,924  

520,929  

Shares reserved for employee stock purchase plan

3 unchanged sentences

1,754,852  

1,101,662  

1,380,628  

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SHARE BASED COMPENSATION

At January 1, 2022, the Company had two share-based employee compensation plans.

The Company measures the fair value of share-based awards, if and when granted, based on the Black-Scholes method and using the closing market price of the Company’s common stock on the date of grant. 

Awards typically vest over periods ranging from one to three years and expire within 10 years of issuance. 

The Company may also issue immediately vested equity awards. 

Share-based compensation expense related to time-based awards is amortized in accordance with applicable vesting periods using the straight-line method. 

The Company expenses performance-based awards only when the performance metrics are likely to be achieved and the associated awards are therefore likely to vest. 

Performance-based share awards that are likely to vest are also expensed on a straight-line basis over the vesting period but may vest on a retroactive basis or be reversed, depending on when it is determined that they are likely to vest, or in the case of a reversal when they are later determined to be unlikely to vest or forfeited. 

Share-based compensation expense of $ 1,358 and $ 1,108 was recognized for the fiscal years ended January 1, 2022 and January 2, 2021, respectively. 

Fiscal year ended January 2, 2021 did not include any expense associated with performance-based awards. 

As of January 1, 2022, there were 125,000 performance-based restricted stock units outstanding.

As of January 1, 2022, the Company had $ 0.7 million of total unrecognized compensation cost related to all time-based non-vested share-based awards outstanding.

The Company expects to recognize this expense over approximately two years. 

These amounts do not include a) the cost of any additional share-based awards granted in future periods or b) the impact of any potential changes in the Company’s forfeiture rate. 

2014 Omnibus Equity Compensation Plan (the 2014 Plan)

The 2014 Plan, approved by the Company’s shareholders in December 2014, initially provided for the issuance of up to 625,000 shares of the Company’s common stock to officers, non-employee directors, employees of the Company and its subsidiaries, or consultants and advisors utilized by the Company. 

In fiscal 2016 and fiscal 2020, the Company amended and restated the 2014 Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance under the Plan by an additional 500,000 and 850,000 shares, respectively, so that the total number of shares of stock reserved for issuance under the Plan is 1,975,000 shares. 

The expiration date of the Plan is December 17, 2030, unless the 2014 Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders. 

The Compensation Committee of the Board of Directors determines the vesting period at the time of grant. 

As of January 1, 2022, under the 2014 Plan, 420,628 time-based shares were outstanding, there were 125,000 performance-based restricted stock units outstanding and 107,924 shares were available for awards thereunder.

The market value of equity grants for the fifty-two week period ended January 1, 2022 and the fifty-three week period ended January 2, 2021 was $ 2.9 million and $ 1.5 million respectively. 

These amounts are based on the equity price on the last trading day in the period presented.

At December 31, 2022, the Company had two share-based employee compensation plans, the Employee Stock Purchase Plan and the 2014 Omnibus Equity Compensation Plan.

Awards typically vest over periods ranging from one to five years and expire within 10 years of issuance.

The Company may also issue immediately vested equity awards.

Share-based compensation expense related to time-based awards is amortized in accordance with applicable vesting periods using the straight-line method.

The Company expenses performance-based awards only when the performance metrics are likely to be achieved and the associated awards are therefore likely to vest.

Share-based compensation expense of $ 1.6 million, $ 1.4 million, and $ 1.1 million was recognized for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

Share-based compensation for performance-based equity agreements were $ 0.8 million and $ 0.4 million for the fiscal years ended December 31, 2022 and January 1, 2022.

There was no performance-based equity expense for the fiscal year ended January 2, 2021.

As of December 31, 2022, there were 225,000 performance-based restricted stock units outstanding.

As of December 31, 2022, the Company had $ 1.6 million of total unrecognized compensation cost, with approximately $ 0.5 million related to time-based non-vested share-based awards outstanding and $ 1.1 million related to performance-based non-vested share-based awards outstanding.

The Company expects to recognize the expense associated with time-based non-vested share-based awards through fiscal 2027.

If earned, the Company will recognize the expense associated with performance-based non-vested share-based awards straight-line through fiscal 2023.

These amounts do not include a) the cost of any additional share-based awards granted after December 31, 2022 or b) the impact of any potential changes in the Company’s forfeiture rate.

Incentive Share-Based Plans

Employee Stock Purchase Plan

The Company implemented the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) with shareholder approval, effective January 1, 2001.

Under the Purchase Plan, employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of 85 % of the fair market value of the stock at the commencement or end of the offering period.

The purchase plan permits eligible employees to purchase shares of common stock through payroll deductions for up to 10 % of qualified compensation, subject to maximum purchases in any one fiscal year of 3,000 shares.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SHARE BASED COMPENSATION (CONTINUED)

Employee Stock Purchase Plan

The Company implemented the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) with shareholder approval, effective January 1, 2001. 

Employee Stock Purchase Plan (Continued)

In fiscal 2015, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Purchase 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 Purchase 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 Purchase 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.

In fiscal 2021, 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 Purchase Plan by an additional 400,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,800,000 shares and the termination date of the Purchase Plan was extended to December 31, 2030.

The Company has two offering periods in the Purchase Plan coinciding with the Company’s first two fiscal quarters and the last two fiscal quarters.

Actual shares are issued on the first business day of the subsequent offering period for the prior offering period payroll deductions.

During the fiscal years ended January 1, 2022 and January 2, 2021, there were 101,784 and 117,983 shares issued under the Purchase Plan for net proceeds of $ 137 and $ 208 , respectively. 

As of January 1, 2022, there were 448,110 shares available for issuance under the Purchase Plan. 

Compensation expense, representing the discount to the quoted market price, for the Purchase Plan for the fiscal years ended January 1, 2022 and January 2, 2021 was $ 134 and $ 44 , respectively.

In fiscal 2015, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Plan by an additional 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,100,000 shares and to extend the expiration date of the Plan to December 31, 2025. 

In fiscal 2018, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Plan by an additional 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,400,000 shares.

On October 20, 2021, the Company’s Board of Directors approved amendments to the Purchase Plan, subject to the approval of the Company’s shareholders, to increase by an additional 400,000 the total number of shares of stock reserved for issuance or transfer under the Purchase Plan, and to extend the termination date of the Purchase Plan to December 31, 2030.

Time-Based Restricted Stock Awards / Stock Subscription Receivable

From time-to-time the Company issues time-based restricted stock awards. 

These time-based restricted stock awards typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee’s restricted stock award fully vests. 

Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet. 

As of January 1, 2022, there were no accrued dividends. 

Dividends for time-based restricted stock awards that ultimately do not vest are forfeited.   

During the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, there were 83,879 , 101,784 and 117,983 shares issued under the Purchase Plan for net proceeds of $ 0.4 million, $ 0.1 million and $ 0.2 million, respectively.

As of December 31, 2022, there were 364,231 shares available for issuance under the Purchase Plan.

Compensation expense, representing the discount to the quoted market price, for the Purchase Plan for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 was $ 0.3 million, $ 0.1 million and $ 44 , respectively.

2014 Omnibus Equity Compensation Plan (the 2014 Plan)

In fiscal 2016, fiscal 2020 and fiscal 2022, the Company amended, or amended and restated, the 2014 Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance under the Plan by an additional 500,000 , 850,000 and 1,000,000 shares, respectively, so that the total number of shares of stock reserved for issuance under the Plan is 2,975,000 shares. 

The expiration date of the Plan is December 17, 2030, unless the 2014 Plan is terminated earlier by the Board or is extended by the Board with the approval of the stockholders. 

The Compensation Committee of the Board of Directors determines the vesting period at the time of grant.

All stock awards typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee’s stock award fully vests.

Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet.

As of December 31, 2022, there were no accrued dividends.

Dividends for stock awards that ultimately do not vest are forfeited.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SHARE BASED COMPENSATION (CONTINUED)

Time-Based Restricted Stock Awards / Stock Subscription Receivable (Continued)

The following summarizes the activity in the time-based restricted stock awards under the 2014 Plan during the fifty-two week period ended January 1, 2022:

2014 Omnibus Equity Compensation Plan (the 2014 Plan) (Continued)

As of December 31, 2022, under the 2014 Plan, 274,939 time-based shares were outstanding, 225,000 performance-based restricted stock units were outstanding and 890,682 shares were available for awards thereunder.

The intrinsic value of all equity grants for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 was $ 3.5 million, $ 2.9 million and $ 1.5 million respectively.

These amounts are based on the equity price on the last trading day in the period presented.

Time-Based Restricted Stock Awards

From time-to-time the Company issues time-based restricted stock awards.

The following summarizes the activity in the time-based restricted stock awards under the 2014 Plan during the fiscal year ended December 31, 2022:

Grant Date Fair

7 unchanged sentences

Forfeited or expired

Outstanding non-vested at January 1, 2022

$ 1.95  

Outstanding non-vested at December 31, 2022

274,939  

Based on the closing price of the Company’s common stock of $ 7.12 per share on December 31, 2021 ( the last trading day prior to January 1, 2022), the intrinsic value of the time-based non-vested restricted stock units at January 1, 2022 was approximately $ 3.0 million. 

As of January 1, 2022, there was approximately $ 0.7 million of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over the average weighted remaining vesting period of the restricted stock units through fiscal 2024.

$ 3.59  

Based on the closing price of the Company’s common stock of $ 12.34 per share on December 30, 2022 ( the last trading day prior to December 31, 2022), the intrinsic value of the time-based non-vested restricted stock units at December 31, 2022 was approximately $ 0.6 million.

As of December 31, 2022, there was approximately $ 0.5 million of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over the average weighted remaining vesting period of the restricted stock units through fiscal 2027.

In December 2020, the Company granted members of senior management one -time restricted stock awards of an aggregate of 250,000 shares in exchange for a stock subscription receivable.

The shares were acquired by senior management through repayment of the stock subscription receivable from equal biweekly salary reductions over twelve months beginning in January 2021 and ending in December 2021. 

During the fifty-two week period ended January 1, 2022, the Company awarded 125,000 immediately vested share awards at an average price of $2.17.

During fiscal 2020, the Company awarded 100,092 immediately vested share awards at an average price of $ 1.33 .

Performance-Based Restricted Stock Awards

From time-to-time the Company issues performance-based restricted stock units to its executives. 

Performance-based restricted stock units are typically vested based on certain multi-year performance metrics as determined by the Board of Directors Compensation Committee.

These performance-based restricted stock units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period on any stock awards that actually vest, if any. 

Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet. 

As of January 1, 2022, there were no accrued dividends for performance-based restricted stock units. 

Dividends for performance-based restricted stock units that ultimately do not vest are forfeited.  

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SHARE BASED COMPENSATION (CONTINUED)

To date, the Company has issued performance-based restricted stock units only under the 2014 Plan. 

The following summarizes the activity in the performance-based restricted stock units during the fifty-two week period ended January 1, 2022:

Performance-Based Restricted Stock Awards

From time-to-time the Company issues performance-based restricted stock units to its executives. 

Performance-based restricted stock units are typically vested based on certain multi-year performance metrics as determined by the Board of Directors Compensation Committee.

The following summarizes the activity in the performance-based restricted stock units during the fiscal year ended December 31, 2022:

Performance-Based

4 unchanged sentences

$ 3.26  

225,000  

$ 8.73  

$ 3.26  

Forfeited or expired

Outstanding non-vested at January 1, 2022

Outstanding non-vested at December 31, 2022

225,000  

$ 8.73  

As of January 1, 2022, there were 125,000 performance-based restricted stock units outstanding.

As of December 31, 2022, there were two outstanding grants for performance-based restricted stock units issued to Bradley Vizi, the Company’s Chief Executive Officer:

1 ) In January 2022, the Company issued a performance-based restricted stock unit grant of up to 125,000 shares based on fiscal 2022 performance (the “2022 Grant”).

 The Company issued 125,000 shares under the 2022 Grant in January 2023, which was substantially expensed in fiscal 2022;

2 ) In December 2022, the Company issued a performance-based restricted stock unit grant of 100,000 shares, subject to increase up to 125,000 shares, based on fiscal 2023 performance (the “2023 Grant”).

The Company has not made a determination as to how many shares it expects to issue under the 2023 Grant.

The Company assesses at each reporting date whether achievement of any performance condition is probable and recognizes the expense when achievement of the performance condition becomes probable. 

1 unchanged sentence

If at a later measurement date, the Company determines that performance-based restricted stock awards deemed as likely to vest are deemed as unlikely to vest, the expense recognized will be reversed. 

The Company has estimated as of January 1, 2022 that the 125,000 performance-based stock units will be earned in fiscal 2021.

The total expense recorded for the 125,000 performance-based stock units earned is $271.

Share-based compensation for performance-based equity agreement was $ 0.8 million and $ 0.4 million for the fiscal years ended December 31, 2022 and January 1, 2022, respectively. 

There was no performance-based equity expense for the fiscal year ended January 2, 2021.

During the fiscal year ended December 31, 2022, the Company awarded 1,000 immediately vested share awards at an average price of $ 18.48 .

During the fiscal year ended January 1, 2022, the Company awarded 125,000 immediately vested share awards at an average price of $ 2.17 .

During fiscal 2020, the Company awarded 100,092 immediately vested share awards at an average price of $ 1.33 .

RCM TECHNOLOGIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SHARE BASED COMPENSATION (CONTINUED)

Number of Restricted

Weighted Average

29 unchanged sentences

$ 2.82  

Based on the closing price of the Company’s common stock of $ 7.12 per share on December 31, 2021, the intrinsic value of all outstanding unvested equity awards at January 1, 2022 was $ 3.9 million. 

RCM TECHNOLOGIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Granted –

time-based vesting

56,500  

$ 8.07  

Granted –

performance-based vesting

100,000  

$ 11.96  

$ 3.46  

Forfeited or expired

$ 1.95  

Outstanding non-vested at December 31, 2022

499,939  

$ 5.91  

Based on the closing price of the Company’s common stock of $ 12.34 per share on December 30, 2022, the intrinsic value of all outstanding unvested equity awards at December 31, 2022 was $ 6.2 million.

TREASURY STOCK TRANSACTIONS

On January 13, 2021, the Company’s Board of Directors authorized a program to repurchase shares of the Company’s common stock constituting, in the aggregate, up to an amount not to exceed $ 7.5 million. 

All of these repurchases are conducted under the safe harbor from liability under certain market manipulation rules provided by Rule 10b - 18 under the Securities Exchange act of 1934, as amended.

On November 12, 2021, the Company’s Board of Directors further increased the total amount available to repurchase shares up to an amount not to exceed $ 19.1 million (including the initial $7.5 million authorized), consistent with the maximum limitation set forth by the Company’s revolving line of credit.

On January 13, 2021, the Company’s Board of Directors authorized a program to repurchase shares of the Company’s common stock up to an amount not to exceed $ 7.5 million.

All of these repurchases are conducted under the safe harbor from liability pursuant to certain market manipulation rules provided by Rule 10b - 18 under the Securities Exchange act of 1934, as amended.

On November 12, 2021, the Company’s Board of Directors further increased the total amount available to repurchase shares up to an amount not to exceed $ 19.1 million (including the initial $7.5 million authorized on January 13, 2021), consistent with the maximum limitation set forth by the Company’s revolving line of credit.

The program is designed to provide the Company with enhanced flexibility over the long term to optimize its capital structure.

Shares of the common stock may be repurchased in the open market or through negotiated transactions.

Shares of the common stock may be repurchased on the open market or through negotiated transactions.

The program may be terminated or suspended at any time at the discretion of the Company. 

During the fifty-two week period ended January 1, 2022, the Company purchased 1,930,911 shares at an average price of $ 4.68 per share. 

As of January 1, 2022, the Company has $ 10.1 million available for future treasury stock purchases.

On June 2, 2020, the Company entered into a stock purchase agreement with certain stockholders of the Company, whereby the Company purchased an aggregate of 1,858,139 shares of the Company’s common stock for a negotiated purchase price of $ 1.20 per share or $ 2.2 million in total.

The negotiated price of $1.20 per share was less than the lowest trading price of the stock on the day of the repurchase. 

The consideration paid by the Company consisted entirely of an unsecured subordinated promissory note for $ 2.2 million.

The note accrued interest at an annual rate of 9.0 %, compounded annually, payable quarterly in arrears commencing on September 1, 2020 and continuing on each December 1, March 1, June 1 and September 1 thereafter, and initially had a maturity date of August 10, 2023 .

On September 25, 2020, the Company repaid the subordinated promissory note in the amount of $ 2.2 million. 

The shares repurchased on June 2, 2020 were not purchased under a stock repurchase plan.

During the fiscal year ended December 31, 2022, the Company purchased 1,309,427 shares at an average price of $ 12.63 per share.

During the fiscal year ended January 1, 2022, the Company purchased 1,930,911 shares at an average price of $ 4.68 per share.

During the fiscal year ended January 2, 2021, the Company purchased 1,858,139 shares at an average price of $ 1.20 per share.

As of December 31, 2022, the Company has $ 10.2 million available for future treasury stock purchases.

RCM TECHNOLOGIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

NEW ACCOUNTING STANDARDS

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016 - 13, Financial Instruments - Credit Losses (Topic 326 ).

The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. 

In February 2020, the FASB issued ASU 2020 - 02, Financial Instruments-Credit Losses (Topic 326 ) and Leases (Topic 842 ) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

6 unchanged sentences

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This standard only applies to contracts and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform.

This guidance provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities’

financial reporting burdens as the market transitions from the LIBOR and other interbank offered rates to alternative reference rates.

In December 2022, the FASB issued ASU No.

2022 - 06, Deferral of the sunset date of Topic 848.

This update defers the sunset date from December 31, 2022 to December 31, 2024. 

The Company may elect to apply the amendments prospectively through December 31, 2024.

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SEGMENT INFORMATION

2 unchanged sentences

The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies (see Note 1 to the Company’s Consolidated Financial Statements).

Segment operating income (loss) includes selling, general and administrative expenses directly attributable to that segment as well as charges for allocating corporate costs to each of the operating segments. 

The following tables reflect the results of the reportable segments consistent with the Company’s management system:

Fiscal Year Ended

December 31, 2022

Life Sciences

$ 159,448  

$ 85,937  

$ 39,295  

$ 284,680  

Cost of services

111,543  

64,218  

25,992  

201,753  

47,905  

21,719  

13,303  

82,927  

Selling, general and administrative

27,661  

17,272  

53,395  

Depreciation and amortization of

property and equipment

Amortization of acquired intangible assets

Remeasurement of acquisition-related

contingent consideration

Gain on sale of assets

Operating income

$ 19,818  

$ 4,299  

$ 4,681  

$ 28,798  

Total assets as of December 31, 2022

$ 34,062  

$ 33,447  

$ 15,778  

$ 4,677  

$ 87,964  

Property and equipment acquired

$ 1,152  

RCM TECHNOLOGIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SEGMENT INFORMATION (CONTINUED)

Fiscal Year Ended

January 1, 2022

Specialty Health Care

Life Sciences

$ 98,495  

21 unchanged sentences

Gain on sale of assets

Operating income (loss)

Operating income

$ 5,454  

8 unchanged sentences

$ 72,852  

Capital expenditures

Property and equipment acquired

$ 1,576  

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SEGMENT INFORMATION (CONTINUED)

1 unchanged sentence

January 2, 2021

Specialty Health Care

Life Sciences

$ 60,481  

22 unchanged sentences

related costs

Operating income (loss)

Operating (loss)

Total assets as of January 2, 2021

4 unchanged sentences

$ 68,339  

Capital expenditures

Property and equipment acquired

The Company derives a majority of its revenue from offices in the United States.

Revenues reported for each operating segment are all from external customers. 

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.

Revenues by geographic area for the fiscal years ended January 1, 2022 and January 2, 2021 are as follows:

Revenue by geographic area for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 are as follows:

Fiscal Year Ended

5 unchanged sentences

$ 284,680  

$ 203,875  

$ 150,409  

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

SEGMENT INFORMATION (CONTINUED)

6 unchanged sentences

$ 87,964  

Generally, the Company’s relative income or loss generated in each of its jurisdictions can materially impact the consolidated effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income, versus United States pretax income. 

The consolidated effective income tax rate for fiscal 2021 was 21.0 % as compared to 26.4 % for the comparable prior year period. 

The Company’s United States Federal statutory tax rate for the fifty-two week period ended January 1, 2022 and the comparable prior year period, before any adjustments, was 21.0 % .

The income tax provisions reconciled to the tax computed at the United States Federal statutory rate for both fiscal 2021 and 2020 are as follows:

$ 72,852  

$ 68,339  

The consolidated effective income tax rate for fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 were 26.7 %, 21.0 % and 26.4 %, respectively. 

The Company’s United States Federal statutory tax rate for fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, before any adjustments, was 21.0%.

The income tax provisions reconciled to the tax computed at the United States Federal statutory rate for fiscal years 2022, 2021 and 2020 are as follows:

Federal statutory rate

2 unchanged sentences

$ 5,981  

$ 2,922  

State and Puerto Rico income taxes,

2 unchanged sentences

Permanent differences foreign

Excess tax deduction over GAAP deduction

for equity awards vested in current year

Remeasurement of contingent consideration

2 unchanged sentences

Adjustments to prior year federal taxes

Total income tax expense

Total income tax expense (benefit)

$ 7,591  

$ 2,925  

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

INCOME TAXES (CONTINUED)

The components of income tax expense are as follows:

The components of income tax expense (benefit) are as follows:

Fiscal Years Ended

$ 2,962  

State and local

$ 7,591  

The components of earnings before income taxes by United States and foreign jurisdictions were as follows:

$ 2,925  

The components of earnings (loss) before income taxes by United States and foreign jurisdictions were as follows:

Fiscal Years Ended

1 unchanged sentence

$ 26,722  

$ 10,880  

Foreign jurisdictions

$ 28,480  

A reconciliation of the unrecognized tax benefits for the year January 1, 2022:

$ 13,914  

A reconciliation of the unrecognized tax benefits for the year December 31, 2022:

Unrecognized Tax Benefits

12 unchanged sentences

$ 1,196  

The total amount of unrecognized tax benefits relating to the Company’s tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations.

Although the outcomes and timing of such events are highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits will not change during the next 12  months.

However, changes in the occurrence, expected outcomes and timing of those events could cause the Company’s current estimate to change materially in the future.

Gross increases:

tax positions in prior period

Gross increases:

tax positions in current period

Balance as of December 31, 2022

$ 1,196  

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

INCOME TAXES (CONTINUED)

Although the outcomes and timing of such events are highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits will not change during the next 12  months.

However, changes in the occurrence, expected outcomes and timing of those events could cause the Company’s current estimate to change materially in the future.

The Company accounts for penalties or interest related to uncertain tax positions as part of its provision for income taxes and records such amounts to interest expense. 

The Company recorded no expense for penalties or interest in the fiscal years ended January 1, 2022 and January 2, 2021.

At January 1, 2022 and January 2, 2021, deferred tax assets and liabilities consist of the following:

The Company recorded no expense for penalties or interest in the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

At December 31, 2022, January 1, 2022 and January 2, 2021, deferred tax assets and liabilities consist of the following:

Deferred tax assets:

11 unchanged sentences

Total deferred tax liabilities

Total deferred tax assets (liabilities), net

Total deferred tax (liabilities) assets, net

$ 2,935  

The Company has gross net operating losses of $ 2.9 million and $ 8.6 million to be applied to the net income of future federal and state tax returns, respectively.

The principal amount of the federal net operating loss has an unlimited life.

The Company conducts business in many states.

Net operating losses in these states expire at differing periods but the majority of these expire from 2038 through 2040.

The Company no longer has any operating losses to carry forward.

The Company conducts its operations in multiple tax jurisdictions in the United States, Canada, Puerto Rico and Serbia.

The Company and its subsidiaries file a consolidated United States Federal income tax return and file in various states.

The Company’s federal income tax returns have been examined through 2017.

The Company has no open federal audits as of January 1, 2022.

The Company and its subsidiaries file a consolidated United States Federal income tax return and file in various states. 

The Company has no open federal audits as of December 31, 2022.

The Company is no longer subject to audits by state and local tax authorities for tax years prior to 2019.

1 unchanged sentence

The Company is no longer subject to audit in Puerto Rico for the tax years prior to tax year 2012.

The Company has no open state audits as of January 1, 2022.

The Company has no open state audits as of December 31, 2022.

Differences between the effective tax rate and the applicable U.S.

federal statutory rate may arise, primarily from the effect of state and local income taxes, share-based compensation, and potential tax credits available to the Company.

The actual 2022 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.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

INCOME TAXES (CONTINUED)

Under APB 23, foreign earnings are generally not subject to US tax until repatriated or deemed repatriated under the anti-deferral rules. 

The Company has determined that as of December 31, 2022, all current and future earnings in its foreign subsidiaries will be permanently reinvested.  

Based on this determination, the anti-deferral rules have no material impact on the Company.

CONTINGENCIES

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

From time to time, the Company is a defendant 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.

5 unchanged sentences

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.

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 the probability of loss and the estimated amount.

The Company reviews its loss contingencies at least quarterly and it 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.

The Company could increase or decrease its earnings in the period that the changes are made. 

The Company is exposed to various asserted claims as of December 31, 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.

1 unchanged sentence

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.

As of December 31, 2022, the Company has accrued $ 2.9 million for asserted claims. 

In April 2022, a client of the Company’s Industrial Processing Group alleged that a system partially designed by the Company is not operating as intended and that the Company is responsible.

The Company has not determined if it has any liability.

In the event of liability, the Company believes its damages are contractually limited to an amount no higher than $ 3.3 million.

Furthermore, the Company believes that if it were found liable, any damages would be covered by insurance, subject to a deductible of $ 0.5 million and maximum coverage of $ 5.0 million.

While the Company attempts to find a mutually agreeable solution, the Company has reserved $0.5 million for this project.

The Company can give no assurance that its liability is limited to $3.3 million or that liability over $0.5 million, if any, will be covered by insurance.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

RETIREMENT PLANS

Profit Sharing Plans

The Company maintains a 401 (k) profit sharing plan for the benefit of eligible employees in the United States and other similar plans in Canada, Puerto Rico and Serbia (the “Retirement Plans”). 

The 401 (k) plan includes a cash or deferred arrangement pursuant to Section 401 (k) of the Internal Revenue Code sponsored by the Company to provide eligible employees an opportunity to defer compensation and have such deferred amounts contributed to the 401 (k) plan on a pre-tax basis, subject to certain limitations. 

The Company, at the discretion of the Board of Directors, may make contributions of cash to match deferrals of compensation by participants in the Retirement Plans. 

Contributions to the Retirement Plans charged to operations by the Company for the fiscal years ended January 1, 2022 and January 2, 2021 were $ 721 and $ 217 , respectively.

The Company maintains a 401 (k) profit sharing plan for the benefit of eligible employees in the United States and other similar plans in Canada, Puerto Rico and Serbia (the “Retirement Plans”).

The Company, at the discretion of the Board of Directors, may make contributions of cash to match deferrals of compensation by participants in the Retirement Plans.

Contributions to the Retirement Plans charged to operations by the Company for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 were $ 626 , $ 721 and $ 217 , respectively.

Executive Severance Agreements

The Company is a party to Executive Severance Agreement (the “Executive Severance Agreement”) each of Bradley S.

Vizi, the Company's Executive Chairman and President (dated as of June 1, 2018), and Kevin Miller, the Company’s Chief Financial Officer (dated as of February 28, 2014, as amended), which set forth the terms and conditions of certain payments to be made by the Company to the executive in the event, while employed by the Company, such executive experiences (a) a termination of employment unrelated to a “Change in Control”

The Company is a party to an Executive Severance Agreement (the “Executive Severance Agreement”) with each of Bradley S.

Vizi, the Company's Executive Chairman and President (dated as of June 1, 2018), and Kevin D.

Miller, the Company’s Chief Financial Officer (dated as of February 28, 2014, as amended), which set forth the terms and conditions of certain payments to be made by the Company to the executive in the event, while employed by the Company, such executive experiences (a) a termination of employment unrelated to a “Change in Control”

(as defined therein) or (b) there occurs a Change in Control and either (i) the executive’s employment is terminated for a reason related to the Change in Control or (ii) in the case of Mr.

6 unchanged sentences

Leases are recorded in accordance with FASB ASC 842, Leases which requires lessees to recognize a right-of-use (“ROU”) asset and an operating right of use liability for all leases with terms greater than 12 months and requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases.

At January 1, 2021, in connection with the continuing developments from COVID- 19, the Company reduced its leased office space as a result of its employees moving to a remote work environment. 

The Company does not believe there is an opportunity to sublet any of the vacant office space due to the current commercial rental marketplace. 

This decision and reduction in the use of the office spaces resulted in a right-of-use asset impairment of $ 1.9 million.

This loss was determined by identifying the fair value of the impacted right-of-use assets as compared to the carrying value of the assets as of the measurement date, in accordance with Property, Plant and Equipment Topic of the FASB ASC. 

At January 1, 2021, in connection with the continuing developments from COVID- 19, the Company reduced its leased office space as a result of its employees moving to a remote work environment.

The Company does not believe there is an opportunity to sublet any of the vacant office space due to the current commercial rental marketplace.

This decision and reduction in the use of the office spaces resulted in a right-of-use asset impairment of $ 1.9 million during the Company’s fiscal year 2020.

The fair value of the right-of-use assets was based on the remaining term of each lease.

In addition, the Company wrote off a total of $ 0.3 million in other office lease costs and obsolete equipment. 

In addition, the Company wrote off a total of $ 0.3 million in other office lease costs and obsolete equipment during fiscal year 2020.

RCM TECHNOLOGIES, INC.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

COMMITMENTS (CONTINUED)

10 unchanged sentences

The components of lease expense were as follows:

Fifty-Two Week

January 1, 2022

Fifty-Three Week

January 2, 2021

Fiscal Years Ended

Operating lease cost

1 unchanged sentence

$ 1,891  

$ 2,524  

Finance lease cost

3 unchanged sentences

Supplemental Cash Flow information related to leases was as follows:

Fifty-Two Week

January 1, 2022

Fifty-Three Week

January 2, 2021

Cash paid for amounts included in the

measurement of lease liabilities

Cash paid for amounts included in the measurement

of lease liabilities

Operating cash flows from operating leases

1 unchanged sentence

$ 1,957  

$ 2,589  

Operating cash flows from finance leases

3 unchanged sentences

$ 2,790  

$ 1,257  

Finance leases

3 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

COMMITMENTS (CONTINUED)

Leases (Continued)

Supplemental Balance Sheet information as of January 1, 2022 related to leases was as follows:

Fifty-Two Week

January 1, 2022

Fifty-Three Week

January 2, 2021

Supplemental Balance Sheet information as of December 31, 2022, January 1, 2022 and January 2, 2021 related to leases was as follows:

Operating leases

2 unchanged sentences

$ 1,877  

$ 2,409  

Operating right of use liability - current

5 unchanged sentences

$ 1,367  

$ 1,140  

Accumulated depreciation

3 unchanged sentences

Total finance lease liabilities

Weighted average remaining lease term

Weighted average remaining lease term in years

Operating leases

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

Fiscal Years Ended December 31, 2022, January 1, 2022 and January 2, 2021

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

COMMITMENTS (CONTINUED)

3 unchanged sentences

Total lease payments

$ 3,255  

imputed interest

$ 4,281  

RELATED PARTY TRANSACTIONS

There have been no related party transactions during the time periods presented. 

RCM TECHNOLOGIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended January 1, 2022 and January 2, 2021

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

STOCKHOLDER RIGHTS PLAN

On May 22, 2020, the Board of Directors of the Company approved a stockholder rights plan (the “Rights Plan”) and declared a dividend distribution to stockholders of record as of the close of business on June 2, 2020 of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock of the Company.

Each Right entitled the holder to purchase from the Company a unit consisting of one one -hundredth of a share (a “Unit”) of a newly-authorized series of junior participating preferred stock of the Company, upon the occurrence of certain events, at a purchase price of $ 5.60 per Unit.

The initial issuance of the Rights as a dividend had no financial accounting or reporting impact.

The fair value of the Rights was nominal because the Rights were not exercisable when issued and no value is attributable to them.

Additionally, the Rights did not meet the definition of a liability under generally accepted accounting principles in the United States and were therefore not accounted for as a long-term obligation. 

Accordingly, the Rights Plan had no impact on the Company’s Consolidated Financial Statements.

The Rights expired in accordance with their terms on May 22, 2021 and the Rights Plan is no longer in effect.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID- 19 ) as a pandemic, which continues to present various health, business and other challenges throughout the United States.

As a result, we have temporarily closed or reduced most of our office locations, with most of our workforce working from home, and have seen a reduction in customer demand.

The duration and ultimate magnitude of the disruption remains uncertain.

Therefore, we experienced a negative impact during fiscal 2020 and fiscal 2021, and this matter may continue to negatively impact our business, results of operations, and financial position throughout fiscal 2022 and possibly beyond, and the related financial impact cannot be reasonably estimated at this time.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

RCM Technologies, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of RCM Technologies, Inc.

and Subsidiaries (the “Company") as of January 1, 2022 and January 2, 2021, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’

equity, and cash flows for the years ended January 1, 2022 and January 2, 2021, and the related notes (collectively referred to as the “financial statements”). 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. 

Our responsibility is to express an opinion on the Company’s financial statements based on our audits. 

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. 

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. 

Accordingly, we express no such opinion.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. 

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion. 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate

Realizability of deferred tax assets

Description of the Matter

As discussed in Note 15 to the financial statements, the Company had gross deferred tax assets of $3.4 million, of which $1.2 million related to net operating loss carryforwards as of January 1,  2022, and a gross deferred tax liability of $3.0 million.

The assessment of the realizability of these deferred tax assets is based on the Company’s evaluation of available evidence to determine whether sufficient future taxable income will be generated to allow for the realization of such deferred tax assets.

The Company records a valuation allowance to reduce its deferred tax assets to an amount that is more than 50% likely of being realized.

We identified the evaluation of the realizability of deferred tax assets as a critical audit matter.

A high degree of auditor judgment was necessary to assess the evidence used by the Company to evaluate the realizability of deferred tax assets relating to the net operating loss carryforwards.

Specifically, assessing the Company’s determination of the reversal of existing taxable temporary differences, cumulative pre-tax losses and the relevance of such losses to forecasted future taxable income required subjective auditor judgment.

In addition, specialized skills were required to evaluate the Company’s application of income tax regulations.

How We Addressed the Matter in Our Audit

We evaluated the design and obtained an understanding of certain internal controls related to the Company’s income tax process.

This included controls related to the application of income tax regulations and the Company’s consideration of available evidence to determine whether sufficient future taxable income will be generated to allow for the realization of existing deferred tax assets.

We involved income tax professionals with specialized skills and knowledge, who assisted in evaluating the Company’s application of income tax regulations used in its realizability analysis.

This included evaluating the scheduling of the reversal of existing taxable temporary differences to assess the utilization of net operating loss carryforwards in each tax jurisdiction before their scheduled expiration.

We evaluated the Company’s consideration of cumulative pre-tax losses and the net deferred tax position in assessing whether deferred tax assets were more than 50% likely of being realized.

/s/ Macias, Gini & O’Connell LLP

We have served as the Company’s auditor since 2019. 

Macias, Gini & O’Connell, LLP

San Diego, California

April 4, 2022

There have been no related party transactions during the time periods presented.

SUBSEQUENT EVENTS

For the period subsequent to December 31, 2022 and through March 15, 2023, the Company purchased 437,486 shares of the Company’s common stock as part of its Treasury Stock Repurchase Program, at an average price of $13.38, totaling $4.4 million.

As of March 15, 2023, the Company has $4.4 million available for future treasury stock purchases.

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 9A. Controls and Procedures