10-Q 1 form10q092819.htm FORM 10-Q 9/28/19
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

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

For the quarterly period ended September 28, 2019
OR

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

For the transition period from _____________ to _____________
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
(Address of Principal Executive Offices) (Zip Code)
(856) 356-4500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. (See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act). (Check one):

Large Accelerated Filer [ ] | Accelerated Filer [ ] | Non-Accelerated Filer [X] | Smaller Reporting Company [X] | Emerging Growth Company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of the Registrant’s class of common stock, as of the latest practicable date.
Common Stock, $0.05 par value, 12,955,847 shares outstanding as of November 7, 2019.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

PART I - FINANCIAL INFORMATION |
| Page
Item 1. | Consolidated Financial Statements |
| Consolidated Balance Sheets as of September 28, 2019 (Unaudited) and December 29, 2018 | 3
| Unaudited Consolidated Statements of Income for the Thirteen and Thirty-Nine Week Periods Ended September 28, 2019 and September 29, 2018 | 4
| Unaudited Consolidated Statements of Comprehensive Income for the Thirty-Nine Week Periods Ended September 28, 2019 and September 29, 2018 | 5
| Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Thirty-Nine Week Period Ended September 28, 2019 | 6
| Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Thirty-Nine Week Period Ended September 29, 2018 | 7
| Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Week Periods Ended September 28, 2019 and September 29, 2018 | 8
| Notes to Unaudited Consolidated Financial Statements | 9
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 42
Item 4. | Controls and Procedures | 42
PART II - OTHER INFORMATION |
Item 1. | Legal Proceedings | 43
Item 1A. | Risk Factors | 43
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 43
Item 3. | Defaults Upon Senior Securities | 43
Item 4. | Mine Safety Disclosures | 43
Item 5. | Other Information | 43
Item 6. | Exhibits | 44
Signatures | 45

2

ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 28, 2019 and December 29, 2018
(In thousands, except share and per share amounts)

| September 28, |  | December 29, |
| 2019 |  | 2018 |
| (Unaudited) |  |  |
Current assets: |  |  |  |
| Cash and cash equivalents | $393 |  | $482 |
| Accounts receivable, net | 57,470 |  | 52,335 |
| Transit accounts receivable | 3,665 |  | 2,569 |
| Prepaid expenses and other current assets | 3,400 |  | 3,425 |
|  | Total current assets | 64,928 |  | 58,811 |
Property and equipment, net | 2,841 |  | 3,485 |
Other assets: |  |  |  |
| Deposits | 210 |  | 214 |
| Goodwill | 16,354 |  | 17,532 |
| Operating right of use asset | 6,290 |  | - |
| Intangible assets, net | 496 |  | 743 |
| Deferred tax assets, net, domestic | 621 |  | 725 |
|  | Total other assets | 23,971 |  | 19,214 |
|  | Total assets | $91,740 |  | $81,510 |

Current liabilities: |  |  |  |
| Accounts payable and accrued expenses | $6,349 |  | $9,969 |
| Transit accounts payable | 4,527 |  | 2,506 |
| Accrued payroll and related costs | 7,057 |  | 9,028 |
| Finance lease payable | 287 |  | - |
| Income taxes payable | 538 |  | 97 |
| Operating right of use liability | 2,275 |  | - |
| Liability for contingent consideration from acquisitions | 388 |  | 1,588 |
|  | Total current liabilities | 21,421 |  | 23,188 |
Deferred tax liability, foreign | 402 |  | 398 |
Finance lease payable | 194 |  | - |
Liability for contingent consideration from acquisitions | 2,673 |  | 3,185 |
Operating right of use liability | 4,264 |  | - |
Borrowings under line of credit | 31,735 |  | 27,540 |
| Total liabilities | 60,689 |  | 54,311 |
Stockholders’ equity: |  |  |  |
| Preferred stock, $1.00 par value; 5,000,000 shares authorized; |  |  |  |
|  | no shares issued or outstanding | - |  | - |
| Common stock, $0.05 par value; 40,000,000 shares authorized; |  |  |  |
|  | 15,779,019 shares issued and 12,955,847 shares outstanding at September 28, 2019 and 15,578,345 shares issued and 12,755,173 shares outstanding at December 29, 2018 | 788 |  | 778 |
| Additional paid-in capital | 108,121 |  | 107,326 |
| Accumulated other comprehensive loss | (2,757 | ) | (2,755 | )
| Accumulated deficit | (60,114 | ) | (63,163 | )
| Treasury stock (2,823,172 shares at September 28, 2019 and |  |  |  |
|  | December 29, 2018) at cost | (14,987 | ) | (14,987 | )
|  | Stockholders’ equity | 31,051 |  | 27,199 |
|  | Total liabilities and stockholders’ equity | $91,740 |  | $81,510 |

3
The accompanying notes are an integral part of these consolidated financial statements.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Thirteen and Thirty-Nine Week Periods Ended September 28, 2019 and September 29, 2018 (Unaudited) (In thousands, except per share amounts)

| Thirteen Weeks Ended |  | Thirty-Nine Weeks Ended |
| September 28, 2019 |  | September 29, 2018 |  | September 28, 2019 |  | September 29, 2018 |
Revenue | $40,250 |  | $42,559 |  | $142,550 |  | $145,081 |
Cost of services | 29,635 |  | 31,571 |  | 106,615 |  | 108,803 |
Gross profit | 10,615 |  | 10,988 |  | 35,935 |  | 36,278 |
Operating costs and expenses |  |  |  |  |  |  |  |
| Selling, general and administrative | 9,498 |  | 9,412 |  | 30,165 |  | 29,909 |
| Depreciation and amortization of property and equipment | 304 |  | 337 |  | 944 |  | 1,116 |
| Amortization of acquired intangible assets | 82 |  | 7 |  | 247 |  | 40 |
| Severance, professional fees and other charges | - |  | - |  | - |  | 1,371 |
Operating costs and expenses | 9,884 |  | 9,756 |  | 31,356 |  | 32,436 |
Operating income | 731 |  | 1,232 |  | 4,579 |  | 3,842 |
Other (expense) income |  |  |  |  |  |  |  |
| Interest expense and other, net | (390 | ) | (305 | ) | (1,276 | ) | (971 | )
| Imputed interest on contingent consideration | 56 |  | - |  | (40 | ) | - |
| Gain (loss) on foreign currency transactions | 8 |  | 10 |  | 41 |  | (19 | )
Other expense, net | (326 | ) | (295 | ) | (1,275 | ) | (990 | )
Income before income taxes | 405 |  | 937 |  | 3,304 |  | 2,852 |
Income tax expense | 70 |  | 253 |  | 255 |  | 736 |
Net income | $335 |  | $684 |  | $3,049 |  | $2,116 |
Basic and diluted net earnings per share | $0.03 |  | $0.06 |  | $0.24 |  | $0.17 |

4
The accompanying notes are an integral part of these consolidated financial statements.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Thirty-Nine Week Periods Ended September 28, 2019 and September 29, 2018 (Unaudited) (In thousands)

| September 28, 2019 |  | September 29, 2018 |
Net income | $3,049 |  | $2,116 |
Other comprehensive loss | (2 | ) | (177 | )
Comprehensive income | $3,047 |  | $1,939 |

5
The accompanying notes are an integral part of these consolidated financial statements.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Thirty-Nine Week Periods Ended September 28, 2019 (Unaudited) (In thousands, except share amounts)

| Common Stock |  | Additional Paid-in Capital |  | Accumulated Other Comprehensive Loss |  | Accumulated Deficit |  | Treasury Stock |  | Total |
| Issued Shares |  | Amount | Shares |  | Amount
Balance, December 29, 2018 | 15,578,345 |  | $778 |  | $107,326 |  | ($2,755 | ) | ($63,163 | ) | 2,823,172 |  | ($14,987 | ) | $27,199 |
Issuance of stock under employee stock purchase plan | 59,451 |  | 3 |  | 162 |  | - |  | - |  | - |  | - |  | 165 |
Translation adjustment | - |  | - |  | - |  | 11 |  | - |  | - |  | - |  | 11 |
Share-based compensation expense | - |  | - |  | 241 |  | - |  | - |  | - |  | - |  | 241 |
Issuance of stock upon vesting of restricted stock units | 57,148 |  | 3 |  | (3 | ) | - |  | - |  | - |  | - |  | - |
Net income | - |  | - |  | - |  | - |  | 1,463 |  | - |  | - |  | 1,463 |
Balance, March 30, 2019 | 15,694,944 |  | $784 |  | $107,726 |  | ($2,744 | ) | (61,700 | ) | 2,823,172 |  | ($14,987 | ) | $29,079 |
Issuance of stock under employee stock purchase plan | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |
Translation adjustment | - |  | - |  | - |  | 12 |  | - |  | - |  | - |  | 12 |
Share-based compensation expense | - |  | - |  | 207 |  | - |  | - |  | - |  | - |  | 207 |
Issuance of stock upon vesting of restricted stock units | 25,000 |  | 1 |  | (1 | ) | - |  | - |  | - |  | - |  | - |
Net income | - |  | - |  | - |  | - |  | 1,251 |  | - |  | - |  | 1,251 |
Balance, June 29, 2019 | 15,719,944 |  | $785 |  | $107,932 |  | ($2,732 | ) | ($60,449 | ) | 2,823,172 |  | ($14,987 | ) | $30,549 |
Issuance of stock under employee stock purchase plan | 59,075 |  | 3 |  | 153 |  | - |  | - |  | - |  | - |  | 156 |
Translation adjustment | - |  | - |  | - |  | (25 | ) | - |  | - |  | - |  | (25 | )
Share-based compensation expense | - |  | - |  | 24 |  | - |  | - |  | - |  | - |  | 24 |
Dividends forfeited | - |  | - |  | 12 |  | - |  | - |  | - |  | - |  | 12 |
Net income | - |  | - |  | - |  | - |  | 335 |  | - |  | - |  | 335 |
Balance, September 28, 2019 | 15,779,019 |  | $788 |  | $108,121 |  | ($2,757 | ) | ($60,114 | ) | 2,823,172 |  | ($14,987 | ) | $31,051 |

6
The accompanying notes are an integral part of these consolidated financial statements.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Thirty-Nine Week Periods Ended September 29, 2018 (Unaudited) (In thousands, except share amounts)

| Common Stock |  | Additional Paid-in Capital |  | Accumulated Other Comprehensive Loss |  | Accumulated Deficit |  | Treasury Stock |  | Total |
| Issued Shares |  | Amount | Shares |  | Amount
Balance, December 30, 2017 | 15,017,522 |  | $751 |  | $104,540 |  | ($2,395 | ) | ($65,878 | ) | 2,823,172 |  | ($14,987 | ) | $22,031 |
Issuance of stock under employee stock purchase plan | 45,408 |  | 2 |  | 192 |  | - |  | - |  | - |  | - |  | 194 |
Translation adjustment | - |  | - |  | - |  | (70 | ) | - |  | - |  | - |  | (70 | )
Share-based compensation expense | - |  | - |  | 112 |  | - |  | - |  | - |  | - |  | 112 |
Net income | - |  | - |  | - |  | - |  | 1,051 |  | - |  | - |  | 1,051 |
Balance, March 31, 2018 | 15,062,930 |  | $753 |  | $104,844 |  | ($2,465 | ) | ($64,827 | ) | 2,823,172 |  | ($14,987 | ) | $23,318 |
Issuance of stock under employee stock purchase plan | - |  | - |  | - |  | - |  | - |  | - |  | - |  | - |
Translation adjustment | - |  | - |  | - |  | (71 | ) | - |  | - |  | - |  | (71 | )
Share-based compensation expense | - |  | - |  | 89 |  | - |  | - |  | - |  | - |  | 89 |
Net income | - |  | - |  | - |  | - |  | 381 |  | - |  | - |  | 381 |
Balance, June 30, 2018 | $15,062,930 |  | $753 |  | $104,933 |  | ($2,536 | ) | ($64,446 | ) | 2,823,172 |  | ($14,987 | ) | $23,717 |
Issuance of stock under employee stock purchase plan | 45,469 |  | 2 |  | 189 |  | - |  | - |  | - |  | - |  | 191 |
Translation adjustment | - |  | - |  | - |  | (36 | ) | - |  | - |  | - |  | (36 | )
Share-based compensation expense | - |  | - |  | 121 |  | - |  | - |  | - |  | - |  | 121 |
Net income | - |  | - |  | - |  | - |  | 684 |  | - |  | - |  | 684 |
Balance, September 29, 2018 | 15,108,399 |  | $755 |  | $105,243 |  | ($2,572 | ) | ($63,762 | ) | 2,823,172 |  | ($14,987 | ) | $24,677 |

7
The accompanying notes are an integral part of these consolidated financial statements.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Thirty-Nine Week Periods Ended September 28, 2019 and September 29, 2018 (Unaudited) (In thousands)

| September 28, 2019 |  | September 29, 2018 |
Cash flows from operating activities: |  |  |  |
| Net income | $3,049 |  | $2,116 |
| Adjustments to reconcile net income to net cash used in operating activities: |  |  |  |
|  | Depreciation and amortization | 1,191 |  | 1,156 |
|  | Imputed interest on contingent consideration | 40 |  | - |
|  | Share-based compensation expense | 472 |  | 322 |
|  | Provision for losses on accounts receivable | 125 |  | 945 |
|  | Deferred income tax expense | 108 |  | 104 |
|  | Changes in assets and liabilities: |  |  |  |
|  |  | Accounts receivable | (5,184 | ) | (1,664 | )
|  |  | Prepaid expenses and other current assets | 483 |  | (593 | )
|  |  | Net of transit accounts receivable and payable | 923 |  | (1,560 | )
|  |  | Accounts payable and accrued expenses | (3,366 | ) | (219 | )
|  |  | Accrued payroll and related costs | (1,986 | ) | 905 |
|  |  | Right of use assets and liabilities | 245 |  | - |
|  |  | Income taxes payable | 30 |  | 552 |
| Total adjustments | (6,919 | ) | (52 | )
| Net cash (used in) operating activities | (3,870 | ) | 2,064 |
Cash flows from investing activities: |  |  |  |
| Property and equipment acquired | (301 | ) | (1,414 | )
| Increase (decrease) in deposits | 5 |  | (9 | )
| Net cash used in investing activities | (296 | ) | (1,423 | )
Cash flows from financing activities: |  |  |  |
| Borrowings under line of credit | 72,201 |  | 64,987 |
| Repayments under line of credit | (68,006 | ) | (67,807 | )
| Issuance of stock for employee stock purchase plan | 321 |  | 385 |
| Changes in finance lease obligations | 218 |  | - |
| Contingent consideration paid | (574 | ) | (300 | )
| Net cash provided by (used in) financing activities | 4,160 |  | (2,735 | )
Effect of exchange rate changes on cash and cash equivalents | (83 | ) | (47 | )
Decrease in cash and cash equivalents | (89 | ) | (2,141 | )
Cash and cash equivalents at beginning of period | 482 |  | 2,851 |
Cash and cash equivalents at end of period | $393 |  | $710 |
Supplemental cash flow information: |  |  |  |
| Cash paid for: |  |  |  |
|  | Interest | $1,266 |  | $832 |
|  | Income taxes | $116 |  | $338 |
Non-cash financing activities: |  |  |  |
| Vesting of restricted stock units | $300 |  | $ - |
| Dividends forfeited on unvested restricted share units | (12 | ) | $ - |

8
The accompanying notes are an integral part of these consolidated financial statements.

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

1. | Basis of Presentation

The accompanying consolidated interim financial statements of RCM Technologies, Inc. and subsidiaries (“RCM” or the “Company”) are unaudited. The year-end consolidated balance sheet was derived from audited statements but does not include all disclosures required by accounting principles generally accepted in the United States. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission pertaining to reports on Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto for the year ended December 29, 2018 included in the Company’s Annual Report Form 10-K for such period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
The consolidated financial statements for the unaudited interim periods presented include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows for such interim periods.
Results for the thirteen and thirty-nine week periods ended September 28, 2019 are not necessarily indicative of results that may be expected for the full year.
Fiscal Year
The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal year ended December 29, 2018 was a 52-week reporting year. The third fiscal quarters of 2019 and 2018 ended on the following dates, respectively:

Period Ended | Weeks in Quarter | Weeks in Year to Date
September 28, 2019 | Thirteen | Thirty-Nine
September 29, 2018 | Thirteen | Thirty-Nine

2. | Use of Estimates and Uncertainties

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
The Company uses estimates to calculate an allowance for doubtful accounts on its accounts receivables, adequacy of reserves, goodwill impairment, if any, equity compensation, the tax rate applied and the valuation of certain assets and liability accounts. These estimates can be significant to the operating results and financial position of the Company.
The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company’s costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company’s claims experience or the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty relating to the performance of the general economy, competition, demand for the Company’s services, adverse litigation and claims and the hiring, training and retention of key employees.
9

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

2. | Use of Estimates and Uncertainties (Continued)

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

3. | Revenue Recognition

The Company records revenue under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Revenue is recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as) each performance obligation is satisfied.
The Company derives its revenue from several sources. The Company’s Engineering Services and Information Technology Services segments perform consulting and project solution services. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s revenue is invoiced on a time and materials basis.
The following table presents our revenue disaggregated by revenue source for the thirteen and thirty-nine week periods ended September 28, 2019 and September 29, 2018:

| Thirteen Week Periods Ended |  | Thirty-Nine Week Periods Ended |
| September 28, 2019 |  | September 29, 2018 |  | September 28, 2019 |  | September 29, 2018 |
Engineering: |  |  |  |  |  |  |  |
Time and Material | $13,938 |  | $17,601 |  | $41,309 |  | $56,639 |
Fixed Fee | 1,202 |  | 1,823 |  | 11,469 |  | 5,773 |
Permanent Placement Services | - |  | - |  | - |  | - |
Total Engineering | $15,140 |  | $19,424 |  | $52,778 |  | $62,412 |
Specialty Health Care: |  |  |  |  |  |  |  |
Time and Material | $16,272 |  | $14,760 |  | $63,318 |  | $59,457 |
Permanent Placement Services | 493 |  | 347 |  | 987 |  | 1,142 |
Total Specialty Health Care | $16,765 |  | $15,107 |  | $64,305 |  | $60,599 |
Information Technology: |  |  |  |  |  |  |  |
Time and Material | $8,134 |  | $7,925 |  | $25,084 |  | $21,875 |
Permanent Placement Services | 211 |  | 103 |  | 383 |  | 195 |
Total Information Technology | $8,345 |  | $8,028 |  | $25,467 |  | $22,070 |
| $40,250 |  | $42,559 |  | $142,550 |  | $145,081 |

10

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

3. | Revenue Recognition (Continued)

Time and Material
The Company’s IT and Healthcare segments predominantly recognize revenue through time and material work while its Engineering segment recognizes revenue through both time and material and fixed fee work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenue associated with these time and materials contracts are recognized based on hours worked at contracted rates.
Fixed fee
From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over six to nine-month periods. In instances where project services are provided on a fixed-price basis, revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenue under these arrangements are recognized as the costs on these contracts are incurred. On an infrequent basis, amounts paid in excess of revenue earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying balance sheets. In other instances, revenue is billed and recorded based upon contractual rates per hour. Additionally, some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenue and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable, the work is not complete and the revenue is not recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.
Permanent Placement Services
The Company earns permanent placement fees from providing permanent placement services. These fees are typically based on a percentage of the compensation paid to the person placed with the Company’s client.
Deferred revenue was $288 and $150 at September 28, 2019 and December 29, 2018, respectively and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet at those dates. Revenue is recognized when the service has been performed. Deferred revenue may be recognized over a period exceeding one year from the time it was recorded on the balance sheet. For the thirty-nine week period ended September 28, 2019, the Company recognized revenue of $150 that was included in deferred revenue at the beginning of the reporting period.
11

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

4. | Accounts Receivable, Transit Accounts Receivable and Transit Accounts Payable

The Company’s accounts receivable are comprised as follows:

| September 28, 2019 |  | December 29, 2018 |
Billed | $25,889 |  | $32,323 |
Accrued and unbilled | 17,191 |  | 10,383 |
Work-in-progress | 3,758 |  | 2,252 |
Accounts receivable subject to arbitration | 12,177 |  | 8,820 |
Allowance for sales discounts and doubtful accounts | (1,545 | ) | (1,443 | )
Accounts receivable, net | $57,470 |  | $52,335 |

Unbilled receivables primarily represent revenue earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-progress primarily represents revenue earned under contracts which the Company contractually invoices at future dates.
From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. Pursuant to these agreements, the Company a) may engage subcontractors to provide construction or other services; b) typically earns a fixed percentage of the total project value; and c) assumes no ownership or risks of inventory. Under the terms of the agreements, the Company is typically not required to pay the subcontractor until after the corresponding payment from the Company’s end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount simultaneously as both a “transit account receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does not pay a given transit account payable until the related transit account receivable is collected. The Company is typically obligated to pay the subcontractor or staffing agency whether or not the client pays the Company. The Company’s transit accounts payable generally exceeds the Company’s transit accounts receivable but absolute amounts and spreads fluctuate significantly from quarter to quarter in the normal course of business. The transit accounts receivable was $3.7 million and related transit accounts payable was $4.5 million, for a net payable of $0.8 million, as of September 28, 2019. The transit accounts receivable was $2.6 million and related transit accounts payable was $2.5 million, for a net receivable of $0.1 million, as of December 29, 2018.
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of September 28, 2019 and December 29, 2018, the total amount of outstanding receivables from this customer on these disputed projects was $12.2 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of September 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude prior to reporting its fiscal 2019 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

5. | Property and Equipment

Property and equipment are stated at cost and are depreciated on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated useful lives. The annual rates are 20% for computer hardware and software as well as furniture and office equipment. Leasehold improvements are amortized over the shorter of the estimated life of the asset or the lease term.
Property and equipment are comprised of the following:

| September 28, 2019 |  | December 29, 2018
Computers and systems | $6,043 |  | $7,200
Equipment and furniture | 523 |  | 600
Leasehold improvements | 475 |  | 743
| 7,041 |  | 8,543
Less: accumulated depreciation and amortization | 4,200 |  | 5,058
Property and equipment, net | $2,841 |  | $3,485

The Company periodically writes off fully depreciated and amortized assets. The Company wrote off fully depreciated and amortized assets of $1,803 and $994 during the thirty-nine week periods ended September 28, 2019 and September 29, 2018, respectively. During the thirteen week periods ended September 28, 2019 and September 29, 2018, the Company wrote off $183 and $283, respectively.

6. | Acquisitions

The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. The Company gives no assurance that it will make acquisitions in the future and if they do make acquisitions gives no assurance that such acquisitions will be successful.
Future Contingent Payments
As of September 28, 2019, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective October 1, 2017, the Company acquired all of the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) (“PSR”) and 2) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”). The Company estimates future contingent payments at September 28, 2019 as follows:

Fiscal Year Ending | Total
December 28, 2019 (after September 28, 2019) | $ -
January 2, 2021 | 388
January 1, 2022 | 1,754
December 31, 2022 | 919
Estimated future contingent consideration payments | $3,061

13

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

6. | Acquisitions (Continued)

Future Contingent Payments (Continued)
Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active acquisitions after September 28, 2019 are capped at a cumulative maximum of $6.3 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of September 28, 2019. During the thirty-nine week period ended September 28, 2019, the Company measured the intangibles acquired at fair value on a non-recurring basis. Contingent consideration related to acquisitions are recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.
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 comprehensive income. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of comprehensive income.
The Company paid contingent consideration of $0.6 million and $0.3 million during the thirty-nine week periods ended September 28, 2019 and September 29, 2018, respectively.
TKE
Effective September 30, 2018, the Company acquired the business operations of Thermal Kinetics Engineering, PLLC, a New York professional limited liability company and Thermal Kinetics Systems, LLC, a New York limited liability company (together, “TKE”). TKE is an established Buffalo-based engineering company providing full service process equipment supply, engineering, development and design services for construction and industrial customers. TKE provides engineering services on construction and industrial processes. TKE engineers and builds optimal thermal integrations and unique separations approaches for industrial processes and equipment, with clients primarily in the chemical, oil and gas, renewable fuels, pharmaceutical, and industrial manufacturing industries. TKE will complement and expand the Company’s services offerings, providing a stronger depth of experienced engineering resources and capabilities. The Company estimated the contingent consideration to be paid to TKE as of the acquisition date and indicated such estimate resulted in a preliminary purchase price and allocation. Those estimates were highly dependent on uncertain estimates. The Company has finalized the purchase price by reducing its original estimate of contingent consideration by $1.2 million. The final estimated fair value of assets acquired and liabilities assumed is as follows:

Cash | $1,066
Common stock of the Company | 1,878
Contingent consideration, at fair value | 1,757
Total consideration | $4,701

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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

6. | Acquisitions (Continued)

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

Fixed assets | $12 |
Restricted covenants | 50 |
Customer relationships | 720 |
Goodwill | 4,669 |
Less: net liabilities assumed | (750 | )
Total consideration | $4,701 |

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

| Thirteen Week |  | Thirty-Nine Week |
| Period Ended September 28, 2019 |  | Period Ended September 28, 2019 |
Revenue | $398 |  | $3,761 |
Operating loss | ($236 | ) | ($63 | )

The following table represents the pro forma revenue and earnings for the thirteen and thirty-nine week periods ended September 29, 2018:

| Thirteen Week Period Ended September 29, 2018 |  | Thirty-Nine Week Period Ended September 29, 2018 |
| Historical |  | Pro Forma Combined (Unaudited) |  | Historical |  | Pro Forma Combined (Unaudited) |
Revenue | $42,559 |  | $44,352 |  | $145,081 |  | $150,161 |
Operating income | $1,232 |  | $1,538 |  | $3,842 |  | $4,760 |
Diluted net income per share | $0.06 |  | $0.07 |  | $0.17 |  | $0.22 |

The combined pro forma revenue and operating income for the quarter ended September 29, 2018 was prepared as though the TKE Acquisition had occurred as of January 1, 2018. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of TKE. This summary is not necessarily indicative of what the results of operations would have been had the TKE Acquisition occurred during such period, nor does it purport to represent results of operations for any future periods.
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

7. | Goodwill

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired in business combinations. The Company tests goodwill for impairment on an annual basis as of the last day of the Company's fiscal year or more frequently if events occur or circumstances change indicating that the fair value of goodwill may be below the carrying amount. The Company has determined that no indicators of impairment of goodwill existed during the thirty-nine week periods ended September 28, 2019 and September 29, 2018.
The changes in the carrying amount of goodwill for the thirty-nine week period ended September 28, 2019 are as follows:

| Engineering |  | Specialty Health Care |  | Information Technology |  | Total |
Balance as of December 29, 2018 | $13,096 |  | $2,398 |  | $2,038 |  | $17,532 |
Adjustment to final TKE purchase price | (1,178 | ) | - |  | - |  | (1,178 | )
Balance as of September 28, 2019 | $11,918 |  | $2,398 |  | $,2038 |  | $16,354 |

8. | Intangible Assets

The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the Company determines that it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell. The Company’s intangible assets consist of customer relationships and non-compete agreements. During all periods presented, the Company determined that no impairment of intangible assets exists.
All of the Company’s intangible assets are associated with the Engineering segment. Intangible assets other than goodwill are amortized over their useful lives. Intangible assets are carried at cost, less accumulated amortization.

| Thirty-Nine Week Periods Ended |
| September 28, 2019 |  | December 29, 2018 |
Restricted covenants | $32 |  | $51 |
Customer relationships | 464 |  | 692 |
Total intangible assets | $496 |  | $743 |

Amortization expense of intangible assets for the thirty-nine week periods ended September 28, 2019 and September 29, 2018 was $247 and $40, respectively. During the thirteen week periods ended September 28, 2019 and September 29, 2018, amortization expense of intangible assets was $82 and $7, respectively.

9. | Line of Credit

The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. As amended and restated, the Revolving Credit Facility provides for a $45.0 million revolving credit facility, has no sub-limit for letters of credit, and expires on August 8, 2023.
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

9. | Line of Credit (Continued)

Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the thirty-nine week periods ended September 28, 2019 and September 29, 2018 were 4.6% and 3.8%, respectively.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay dividends. As of September 28, 2019, the Company was in compliance with all covenants contained in the Revolving Credit Facility.
Borrowings under the line of credit as of September 28, 2019 and December 29, 2018 were $31.7 million and $27.5 million, respectively. At September 28, 2019 and December 29, 2018 there were letters of credit outstanding for $1.6 million. At September 28, 2019, the Company had availability for additional borrowings under the Revolving Credit Facility of $11.7 million.

10. | Per Share Data

The Company uses the treasury stock method to calculate the weighted-average shares used for diluted earnings per share. The number of common shares used to calculate basic and diluted earnings per share for the thirteen and thirty-nine week periods ended September 28, 2019 and September 29, 2018 was determined as follows:

| Thirteen Week Periods Ended |  | Thirty-Nine Week Periods Ended
| September 28, 2019 |  | September 29, 2018 |  | September 28, 2019 |  | September 29, 2018
Basic weighted average shares outstanding | 12,955,198 |  | 12,284,727 |  | 12,897,303 |  | 12,254,415
Dilutive effect of outstanding restricted share units | 63,416 |  | 32,723 |  | 53,628 |  | 24,165
Weighted average dilutive shares outstanding | 13,018,614 |  | 12,317,450 |  | 12,950,931 |  | 12,278,580

For all periods presented, there were no anti-dilutive shares not included in the calculation of common stock equivalents as there were no stock options outstanding.
Unissued shares of common stock were reserved for the following purposes:

| September 28, 2019 |  | December 29, 2018
Time-based restricted stock units outstanding | 120,372 |  | 147,372
Performance-based restricted stock units outstanding | 320,000 |  | 200,000
Future grants of options or shares | 267,551 |  | 442,699
Shares reserved for employee stock purchase plan | 267,877 |  | 386,403
Total | 975,800 |  | 1,176,474

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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

11. | Share-Based Compensation

At September 28, 2019, the Company had two share-based employee compensation plans. The Company measures the fair value of share-based awards, if and when granted, based on the Black-Scholes method and using the closing market price of the Company’s common stock on the date of grant. Awards vest over periods ranging from one to three years and expire within 10 years of issuance. Share-based compensation expense related to time-based awards is amortized in accordance with applicable vesting periods using the straight-line method. The Company expenses performance-based awards only when the performance metrics are likely to be achieved and the associated awards are therefore likely to vest. Performance-based share awards that are likely to vest are also expensed on a straight-line basis over the vesting period but may vest on a retroactive basis or be reversed, depending on when it is determined that they are likely to vest, or in the case of a reversal when they are later determined to be unlikely to vest.
The Company recognized share-based compensation expense of $472 and $322 for the thirty-nine week periods ended September 28, 2019, and September 29, 2018, respectively. During the thirteen week periods ended September 28, 2019 and September 29, 2018, share based compensation expense was $24 and $121, respectively. As of September 28, 2019, all performance-based restricted stock units outstanding were deemed as unlikely to vest.
As of September 28, 2019, the Company had $0.1 million of total unrecognized compensation cost related to all time-based non-vested share-based awards and performance-based restricted stock units outstanding and deemed as likely to vest. The Company expects to recognize this expense over approximately two years. These amounts do not include a) performance-based restricted stock units deemed unlikely to vest, b) the cost of any additional share-based awards granted in future periods or c) the impact of any potential changes in the Company’s forfeiture rate.
Incentive Share-Based Plans
2014 Omnibus Equity Compensation Plan (the 2014 Plan)
The 2014 Plan, approved by the Company’s shareholders in December 2014, provides for the issuance of up to 625,000 shares of the Company’s common stock to officers, non-employee directors, employees of the Company and its subsidiaries or consultants and advisors utilized by the Company. In fiscal 2016, the Company amended and restated the 2014 Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance under the Plan by an additional 500,000 shares so that the total number of shares of stock reserved for issuance under the Plan is 1,125,000 shares. The expiration date of the Plan is December 1, 2026. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant.
As of September 28, 2019, under the 2014 Plan, 120,372 time-based and 320,000 performance-based restricted share units were outstanding and 267,551 shares were available for awards thereunder.
Employee Stock Purchase Plan
The Company implemented the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) with shareholder approval, effective January 1, 2001. Under the Purchase Plan, employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The purchase plan permits eligible employees to purchase shares of common stock through payroll deductions for up to 10% of qualified compensation.
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

11. | Share-Based Compensation (Continued)

Incentive Share-Based Plans (Continued)
Employee Stock Purchase Plan (Continued)
In fiscal 2015, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Plan by an additional 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,100,000 shares and to extend the expiration date of the Plan to December 31, 2025. In fiscal 2018, the Company amended the Purchase Plan with shareholder approval to increase the aggregate number of shares of stock reserved for issuance or transfer under the Plan by an additional 300,000 shares so that the total number of shares of stock reserved for issuance or transfer under the Plan shall be 1,400,000 shares.
The Company has two offering periods in the Purchase Plan coinciding with the Company’s first two fiscal quarters and the last two fiscal quarters. Actual shares are issued on the first business day of the subsequent offering period for the prior offering period payroll deductions. The number of shares issued at the beginning of the current period (on July 1, 2019) was 59,075. As of September 28, 2019, there were 267,877 shares available for issuance under the Purchase Plan.
Time-Based Restricted Stock Units
From time-to-time the Company issues time-based restricted stock units. These time-based restricted stock units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee’s restricted stock unit fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. As of September 28, 2019, there was $40 in accrued dividends. Dividends for time-based restricted stock units that ultimately do not vest are forfeited.
To date, the Company has issued time-based restricted stock units only under its 2007 Omnibus Equity Compensation Plan and the 2014 Plan. The 2007 Plan has expired and there are no time-based restricted stock units outstanding thereunder. The following summarizes the activity in the time-based restricted stock units under the 2014 Plan during the thirty-nine week period ended September 28, 2019:

| Number of Time-Based Restricted Stock Units |  | Weighted Average Grant Date Fair Value per Share
Outstanding non-vested at December 29, 2018 | 147,372 |  | $4.46
Granted | 20,000 |  | $3.73
Vested | (35,000 | ) | $4.41
Forfeited or expired | (12,000 | ) | $5.84
Outstanding non-vested at September 28, 2019 | 120,372 |  | $4.22

Based on the closing price of the Company’s common stock of $3.04 per share on September 27, 2019 (the last trading day prior to September 28, 2019), the intrinsic value of the time-based non-vested restricted stock units at September 28, 2019 was approximately $366. As of September 28, 2019, there was approximately $138 of total unrecognized compensation cost related to time-based restricted stock units, which is expected to be recognized over the vesting period of the restricted stock units.
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

11. | Share-Based Compensation (Continued)

Performance Based Restricted Stock Units
From time-to-time the Company issues performance-based restricted stock units to its executives. Performance-based restricted stock units are typically vested based on certain multi-year performance metrics as determined by the Board of Directors Compensation Committee. These performance-based restricted stock units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period on any stock units that actually vest, if any. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. As of September 28, 2019, there were no accrued dividends. Dividends for performance-based restricted stock units that ultimately do not vest are forfeited.
To date, the Company has issued performance-based restricted stock units only under the 2014 Plan. The following summarizes the activity in the performance-based restricted stock units during the thirty-nine week period ended September 28, 2019:

| Number of Performance-Based Restricted Stock Units |  | Weighted Average Grant Date Fair Value per Share
Outstanding non-vested at December 29, 2018 | 200,000 |  | $5.06
Granted | 167,148 |  | $4.35
Vested | (47,148 | ) | $3.69
Forfeited or expired | - |  | $ -
Outstanding non-vested at September 28, 2019 | 320,000 |  | $4.82

As of September 28, 2019, the Company currently considers the metrics of the total outstanding 320,000 performance-based restricted stock units as unlikely to be achieved. The Company will reassess at each reporting date whether achievement of any performance condition is probable and would begin recognizing additional compensation cost if and when achievement of the performance condition becomes probable. The Company will then recognize the appropriate expense cumulatively in the year performance becomes probable and recognize the remaining compensation cost over the remaining requisite service period. If at a later measurement date the Company determines that performance-based restricted stock units deemed as likely to vest are deemed as unlikely to vest, the expense recognized will be reversed. As of September 28, 2019, there was approximately $1.5 million of total unrecognized compensation cost related to performance-based restricted stock units deemed likely to vest.

12. | Treasury Stock Transactions

For both the thirty-nine week periods ended September 28, 2019 and September 29, 2018, the Company did not have an active stock purchase program and therefore did not purchase any treasury shares.
13. New Accounting Standards and Updates from the Securities Exchange Commission (“SEC”)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.
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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

14. | Segment Information

The Company follows “Disclosures about Segments of an Enterprise and Related Information,” which establishes standards for companies to report information about operating segments, geographic areas and major customers. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies (see Note 1 to the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 29, 2018).
Segment operating income includes selling, general and administrative expenses directly attributable to that segment as well as charges for allocating corporate costs to each of the operating segments. The following tables reflect the results of the reportable segments consistent with the Company’s management system:

Thirteen Week Period Ended September 28, 2019 | Engineering |  | Specialty Health Care |  | Information Technology |  | Corporate |  | Total
Revenue | $15,140 |  | $16,765 |  | $8,345 |  | $ - |  | $40,250
Cost of services | 10,984 |  | 12,795 |  | 5,856 |  | - |  | 29,635
Gross profit | 4,156 |  | 3,970 |  | 2,489 |  | - |  | 10,615
Selling, general and administrative | 2,996 |  | 4,205 |  | 2,297 |  | - |  | 9,498
Depreciation and amortization | 293 |  | 74 |  | 19 |  | - |  | 386
Operating income (loss) | $867 |  | ($309 | ) | $173 |  | $ - |  | $731
Total assets as of September 28, 2019 | $53,639 |  | $25,822 |  | $7,773 |  | $4,506 |  | $91,740
Capital expenditures | ($11 | ) | $2 |  | $19 |  | $53 |  | $63

Thirteen Week Period Ended September 29, 2018 | Engineering |  | Specialty Health Care |  | Information Technology |  | Corporate |  | Total
Revenue | $19,424 |  | $15,106 |  | $8,029 |  | $ - |  | $42,559
Cost of services | 14,049 |  | 11,665 |  | 5,857 |  | - |  | 31,571
Gross profit | 5,375 |  | 3,441 |  | 2,172 |  | - |  | 10,988
Selling, general and administrative | 3,780 |  | 3,648 |  | 1,984 |  | - |  | 9,412
Depreciation and amortization | 236 |  | 85 |  | 23 |  | - |  | 344
Operating income (loss) | $1,359 |  | ($292 | ) | $165 |  | $ - |  | $1,232
Total assets as of September 29, 2018 | $40,643 |  | $18,874 |  | $7,110 |  | $6,801 |  | $73,428
Capital expenditures | $465 |  | $151 |  | $90 |  | $110 |  | $816

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RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

14. | Segment Information (Continued)

Thirty-Nine Week Period Ended September 28, 2019 | Engineering |  | Specialty Health Care |  | Information Technology |  | Corporate |  | Total
Revenue | $52,778 |  | $64,305 |  | $25,467 |  | $ - |  | $142,550
Cost of services | 38,666 |  | 49,395 |  | 18,554 |  | - |  | 106,615
Gross profit | 14,112 |  | 14,910 |  | 6,913 |  | - |  | 35,935
Selling, general and administrative | 10,486 |  | 12,990 |  | 6,689 |  | - |  | 30,165
Depreciation and amortization | 879 |  | 250 |  | 62 |  | - |  | 1,191
Operating income | $2,747 |  | $1,670 |  | $162 |  | $ - |  | $4,579
Total assets as of September 28, 2019 | $53,639 |  | $25,822 |  | $7,773 |  | $4,506 |  | $91,740
Capital expenditures | $76 |  | $107 |  | $36 |  | $82 |  | $301

Thirty-Nine Week Period Ended September 29, 2018 | Engineering |  | Specialty Health Care |  | Information Technology |  | Corporate |  | Total
Revenue | $62,412 |  | $60,599 |  | $22,070 |  | $ - |  | $145,081
Cost of services | 45,706 |  | 46,822 |  | 16,275 |  | - |  | 108,803
Gross profit | 16,706 |  | 13,777 |  | 5,795 |  | - |  | 36,278
Selling, general and administrative | 12,006 |  | 12,255 |  | 5,648 |  | - |  | 29,909
Depreciation and amortization | 785 |  | 294 |  | 77 |  | - |  | 1,156
Severance, professional fees and other charges | - |  | - |  | - |  | 1,371 |  | 1,371
Operating income (loss) | $3,915 |  | $1,228 |  | $70 |  | ($1,371 | ) | $3,842
Total assets as of September 29, 2018 | $40,643 |  | $18,874 |  | $7,110 |  | $6,801 |  | $73,428
Capital expenditures | $856 |  | $207 |  | $108 |  | $243 |  | $1,414

22

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

14. | Segment Information (Continued)

The Company derives a majority of its revenue from offices in the United States. Revenue reported for each operating segment are all from external customers. The Company is domiciled in the United States and its segments operate in the United States, Canada, Puerto Rico and Serbia. Revenue by geographic area for the thirteen and thirty-nine week periods ended September 28, 2019 and September 29, 2018 are as follows:

|  | Thirteen Week Periods Ended |  | Thirty-Nine Week Periods Ended |
|  | September 28, 2019 |  | September 29, 2018 |  | September 28, 2019 |  | September 29, 2018 |
Revenue |  |  |  |  |  |  |  |
| U. S. | $34,810 |  | $34,729 |  | $124,356 |  | $118,364 |
| Canada | 3,682 |  | 6,308 |  | 12,770 |  | 21,942 |
| Puerto Rico | 1,215 |  | 1,113 |  | 3,627 |  | 3,142 |
| Serbia | 543 |  | 409 |  | 1,797 |  | 1,633 |
|  | $40,250 |  | $42,559 |  | $142,550 |  | $145,081 |

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

| September 28, 2019 |  | December 29, 2018 |
Total assets |  |  |  |
| U. S. | $72,814 |  | $61,417 |
| Canada | 12,316 |  | 14,230 |
| Puerto Rico | 1,997 |  | 1,954 |
| Serbia | 4,616 |  | 3,909 |
|  | $91,740 |  | $81,510 |

15. | Income Taxes

The Company recognized $0.3 million of income tax expense for the thirty-nine week period ended September 28, 2019, as compared to an income tax expense of $0.7 million for the comparable prior year period. The Company recognized a tax benefit of $0.6 million during the Company’s first fiscal quarter of 2019 due to a verbal settlement with the U.S. Internal Revenue Service regarding an uncertain tax position from a previous tax year. Otherwise, the consolidated effective income tax rate for the current period was 25.9% as compared to 25.8% for the comparable prior year period. Not including the discrete tax benefit of $0.6 million due to the verbal settlement, the projected fiscal 2019 income tax rates as of September 28, 2019 were approximately 28.3%, 26.5% and 15.0% in the United States, Canada and Serbia, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income versus U.S. pretax income. The comparable prior year period estimated income tax rates were 28.1%, 26.5% and 15.2% in the United States, Canada and Serbia, respectively, and yielded a consolidated effective income tax rate of approximately 25.8% for the thirty-nine week period ended September 29, 2018. The consolidated effective income tax rate for the thirty-nine week period ended September 28, 2019 was higher than the comparable prior year period primarily due to the reduction in Serbian pretax income relative to consolidated pretax income.
23

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

16. | Contingencies

From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. As such, the Company is required to assess the likelihood of any adverse outcomes to these matters as well as potential ranges of losses and possible recoveries. The Company may not be covered by insurance as it pertains to some or all of these matters. A determination of the amount of the provision required for these commitments and contingencies, if any, which would be charged to earnings, is made after careful analysis of each matter. Once established, a provision may change in the future due to new developments or changes in circumstances and could increase or decrease the Company’s earnings in the period that the changes are made. Asserted claims in these matters sought approximately $10.3 million in damages (as further described below) as of September 28, 2019. As of September 28, 2019, the Company did not have an accrual for any such liabilities.
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of September 28, 2019 and December 29, 2018, the total amount of outstanding receivables from this customer on these disputed projects was $12.2 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of September 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude prior to reporting its fiscal 2019 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may not be covered by insurance.

17. | Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months and requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. The accounting applied by a lessor is largely unchanged from that applied under the prior standard. After the issuance of Topic 842, the FASB clarified the guidance through several ASUS; hereinafter the collection of lease guidance is referred to as “ASC 842”.
24

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

17. | Leases (Continued)

On December 30, 2018, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning December 30, 2018 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases. The standard had a material impact on the Company’s Consolidated Condensed Balance Sheet but did not have a significant impact on the Company’s consolidated net earnings and cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for finance leases remained substantially unchanged. For leases that commenced before the effective date of ASC 842, the Company elected the permitted practical expedients to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates before December 30, 2018.
As a result of the cumulative impact of adopting ASC 842, the Company recorded operating lease ROU assets of $3.9 million and operating lease liabilities of $4.1 million as of December 30, 2018, primarily related to real estate and office equipment leases, based on the present value of the future lease payments on the date of adoption.
The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset also consists of any lease incentives received. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. The Company has lease agreements which require payments for lease and non-lease components. The Company has elected to account for these as a single lease component with the exception of its real estate leases.
The components of lease expense were as follows:

| Thirteen Week Period Ended September 28, 2019 |  | Thirty-Nine Week Period Ended September 28, 2019
Operating lease cost | $654 |  | $1,643
| Amortization of ROU assets | $72 |  | $218
| Interest on lease liabilities | 1 |  | 4
Total finance lease cost | $73 |  | $222

25

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

17. | Leases (Continued)

Supplemental Cash Flow information related to leases was as follows:

| Thirteen Week Period Ended September 28, 2019 | Thirty-Nine Week Period Ended September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities |  |
| Operating cash flows from operating leases | $665 | $1,605
| Operating cash flows from finance leases | 1 | 4
| Financing cash flows from finance leases | 72 | 216
Right of use assets obtained in exchange for lease obligations
| Operating leases | 774 | 7,756
| Finance leases | - | -

Supplemental Balance Sheet information as of September 28, 2019 related to leases was as follows:

Operating leases |  |
| Operating lease right of use assets | $6,290 |
| Other current liabilities | ($2,275 | )
| Operating lease liabilities | (4,264 | )
| Total operating lease liabilities | ($6,539 | )
Finance leases |
| Property and equipment - (ROU assets) | $867 |
| Accumulated depreciation | (387 | )
| Property and equipment, net | $480 |
| Other current liabilities | ($287 | )
| Other long term liabilities | (194 | )
| Total finance lease liabilities | ($481 | )
Weighted average remaining lease term |  |
| Operating leases | 2.24 Years |
| Finance leases | 1.7 Years |
Weighted average discount rate |  |
| Operating leases | 4.09 | %
| Finance leases | 1.23 | %

26

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts, unless otherwise indicated)

17. | Leases (Continued)

Maturities of lease liabilities are as follows:

Fiscal Year Ending | Operating Leases |  | Finance Leases |
2019 | $673 |  | $73 |
2020 | 2,289 |  | 284 |
2021 | 1,715 |  | 130 |
2022 | 1,266 |  | - |
2023 | 877 |  | - |
Thereafter | 186 |  | - |
Total lease payments | 7,006 |  | 487 |
Less: imputed interest | (467 | ) | (6 | )
Total | $6,539 |  | $481 |

18. Severance, Professional Fees and Other Charges
The Company recorded $1.4 million in severance, professional fees and other charges for the thirty-nine week period ended September 29, 2018. These charges include severance accrued for the Company’s former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, totaling approximately $0.9 million. The additional charges of $0.5 million incurred related to transactional financial advisory fees, legal fees associated with defending an ongoing lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive. The Company did not incur any such charges in the comparable current year period.
19. Subsequent Event
Amendment to Loan Agreement
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. See Note 9.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made by RCM Technologies, Inc. (“RCM” or the “Company”) are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions; the use by businesses of outsourced solutions, such as those offered by the Company, in connection with such adoption; the Company’s strategic and business initiatives and growth strategies; and the outcome of litigation (at both the trial and appellate levels) and arbitrations, or other business disputes, involving the Company. Readers are cautioned that such forward-looking statements, as well as others made by the Company, which may be identified by words such as “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “believe,” and similar expressions, are only predictions and are subject to risks and uncertainties that could cause the Company’s actual results and financial position to differ materially from such statements. Such risks and uncertainties include, without limitation: (i) unemployment and general economic conditions affecting the provision of information technology and engineering services and solutions and the placement of temporary staffing personnel; (ii) the Company’s ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients; (iii) the Company’s ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (iv) the Company’s relationships with and reliance upon significant customers, and ability to collect accounts receivable from such customers; (v) risks associated with foreign currency fluctuations and changes in exchange rates, particularly with respect to the Canadian dollar; (vi) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (vii) the adverse effect a potential decrease in the trading price of the Company’s common stock would have upon the Company’s ability to acquire businesses through the issuance of its securities; (viii) the Company’s ability to obtain financing on satisfactory terms; (ix) the reliance of the Company upon the continued service of its executive officers; (x) the Company’s ability to remain competitive in the markets that it serves; (xi) the Company’s ability to maintain its unemployment insurance premiums and workers compensation premiums; (xii) the risk of claims being made against the Company associated with providing temporary staffing services; (xiii) the Company’s ability to manage significant amounts of information and periodically expand and upgrade its information processing capabilities; (xiv) the risk of cyber attacks on our information technology systems or those of our third party vendors; (xv) the Company’s ability to remain in compliance with federal and state wage and hour laws and regulations; (xvi) uncertainties in predictions as to the future need for the Company’s services; (xvii) uncertainties relating to the allocation of costs and expenses to each of the Company’s operating segments; (xviii) the costs of conducting and the outcome of litigation, arbitrations and other business disputes involving the Company, and the applicability of insurance coverage with respect to any such litigation; (ixx) the results of, and costs relating to, any interactions with shareholders of the Company who may pursue specific initiatives with respect to the Company’s governance and strategic direction, including without limitation a contested proxy solicitation initiated by such shareholders, or any similar such interactions; and (xx) other economic, competitive and governmental factors affecting the Company’s operations, markets, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Except as required by law, the Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Overview
RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on revenue and operations can be substantial, resulting in significant volatility in the Company’s financial performance.
The Company believes it has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility and built an efficient pricing structure. The Company is committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical focus offering an integrated suite of services through a global delivery platform.
The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today’s business climate. However, the process of designing, developing and implementing business and technology solutions is becoming increasingly complex. The Company believes that many businesses today are focused on return on investment analysis in prioritizing their initiatives. This has had an adverse impact on spending by current and prospective clients for many emerging new solutions.
Nonetheless, the Company continues to believe that businesses must implement more advanced information technology and engineering solutions to upgrade their systems, applications and processes so that they can maximize their productivity and optimize their performance in order to maintain a competitive advantage. Although working under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications and processes of significant strategic value. This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business critical systems, applications and processes.
The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions services are generally higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes revenue from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly rates that are established for each of the Company’s consultants based upon their skill level, experience and the type of work performed.
The majority of the Company’s services are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation on the nature and scope of the assignment is necessary. Although contracts normally relate to longer-term and more complex engagements, they do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days’ notice. The Company, from time to time, enters into contracts requiring the completion of specific deliverables. Typically these contracts are for less than one year. The Company recognizes revenue on these deliverables at the time the client accepts and approves the deliverables.
Costs of services consist primarily of salaries and compensation-related expenses for billable consultants and employees, including payroll taxes, employee benefits and insurance. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company’s corporate marketing, administrative and financial reporting responsibilities and acquisition program. The Company records these expenses when incurred. Corporate overhead expenses are allocated to the segments based on revenue for the purpose of segment financial reporting.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Critical Accounting Policies and Use of Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. In our unaudited interim condensed consolidated financial statements, estimates are used for, but not limited to, accounts receivable and allowance for doubtful accounts, goodwill, long-lived intangible assets, accounting for stock options and restricted stock units, insurance liabilities, accounting for income taxes and accrued bonuses.
A summary of our significant accounting policies is included in our Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 29, 2018. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 29, 2018.
Recently Issued Accounting Pronouncements
A discussion of the recently issued accounting pronouncements is set forth in Note 13, New Accounting Standards, in the unaudited interim condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
Forward-looking Information
The Company’s growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on the need for engineering and information technology services. When the U.S., Canadian or global economies decline, the Company’s operating performance could be adversely impacted. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and diversification of service offerings provides some insulation from adverse trends. However, declines in the economy could result in the need for future cost reductions or changes in strategy.
Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional employee benefits, licensing or tax requirements with respect to the provision of employment services that may reduce the Company’s future earnings. There can be no assurance that the Company will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to cover increased costs as a result of any of the foregoing.
The consulting and employment services market is highly competitive with limited barriers to entry. The Company competes in global, national, regional and local markets with numerous competitors in all of the Company’s service lines. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and customers are increasing. The Company expects that the level of competition will remain high in the future, which could limit the Company’s ability to maintain or increase its market share or profitability.
30

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirteen Week Period Ended September 28, 2019 Compared to Thirteen Week Period Ended September 29, 2018
A summary of operating results for the thirteen week periods ended September 28, 2019 and September 29, 2018 is as follows (in thousands):

| September 28, 2019 |  | September 29, 2018 |
| Amount |  | % of Revenue |  | Amount |  | % of Revenue |
Revenue | $40,250 |  | 100.0 |  | $42,559 |  | 100.0 |
Cost of services | 29,635 |  | 73.6 |  | 31,571 |  | 74.2 |
Gross profit | 10,615 |  | 26.4 |  | 10,988 |  | 25.8 |
Selling, general and administrative | 9,498 |  | 23.6 |  | 9,412 |  | 22.1 |
Depreciation and amortization of property and equipment | 304 |  | 0.8 |  | 337 |  | 0.8 |
Amortization of acquired intangible assets | 82 |  | 0.2 |  | 7 |  | - |
| 9,884 |  | 24.6 |  | 9,756 |  | 22.9 |
Operating income | 731 |  | 1.8 |  | 1,232 |  | 2.9 |
Other expense | (326 | ) | 0.8 |  | (295 | ) | (0.7 | )
Income before income taxes | 405 |  | 1.0 |  | 937 |  | 2.2 |
Income tax expense | 70 |  | 0.2 |  | 253 |  | 0.6 |
Net income | $335 |  | 0.8 |  | $684 |  | 1.6 |

The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended September 28, 2019 and September 29, 2018 consisted of thirteen weeks each.
Revenue. Revenue decreased 5.4%, or $2.3 million, for the thirteen week period ended September 28, 2019 as compared to the thirteen week period ended September 29, 2018 (the “comparable prior year period”). Revenue decreased $4.3 million in the Engineering segment, increased $1.7 million in the Specialty Health Care segment and increased $0.3 million in the Information Technology segment. Effective September 30, 2018, the Company’s Engineering segment acquired the business operations of Thermal Kinetics Engineering and affiliate (together, “TKE”). This new business unit generated $0.4 million in revenue for the thirteen week period ended September 28, 2019. See Segment Discussion for further information on revenue changes.
The Company has material operations in Canada, primarily from the Company’s Engineering segment; this business is conducted primarily in Canadian dollars. Since the Company reports its consolidated results in U.S. dollars the consolidated results are subject to potentially material fluctuations as a result of changes in the Canadian dollar to U.S. dollar exchange rate (the “Exchange Rate”). For the thirteen week period ended September 28, 2019, the Company generated total revenue from its Canadian clients of $3.7 million in U.S. dollars at an Exchange Rate of 75.7% as compared to $6.3 million in U.S. dollars at an Exchange Rate of 76.5% for the comparable prior year period.
Cost of Services and Gross Profit. Cost of services decreased 6.1%, or $1.9 million, for the thirteen week period ended September 28, 2019 as compared to the comparable prior year period. Cost of services decreased primarily due to the decrease in revenue. Cost of services as a percentage of revenue for the thirteen week periods ended September 28, 2019 and September 29, 2018 was 73.6% and 74.2%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirteen Week Period Ended September 28, 2019 Compared to Thirteen Week Period Ended September 29, 2018 (Continued)
Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $9.5 million for the thirteen week period ended September 28, 2019 as compared to $9.4 million for the comparable prior year period. As a percentage of revenue, SGA expenses were 23.6% for the thirteen week period ended September 28, 2019 and 22.1% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.
Other Expense. Other expense consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income, imputed interest on contingent consideration and gains and losses on foreign currency transactions. Other expense, net increased to $0.4 million as compared to $0.3 million for the comparable prior year period. The primary component of the increase was interest expense which increased due to increased borrowings under the Company’s line of credit. The primary reason for the increased borrowing was to fund the Company’s increase in accounts receivable during the thirteen week period ended September 28, 2019, as compared to the comparable prior year period.
Income Tax Expense. The Company recognized $0.1 million of income tax expense for the thirteen week period ended September 28, 2019, as compared to $0.3 million for the comparable prior year period. The consolidated effective income tax rate for the current period was 17.3% as compared to 27.0% for the comparable prior year period. The projected fiscal 2019 income tax rates as of September 28, 2019 were approximately 28.3%, 26.5% and 15.1% in the United States, Canada and Serbia, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income versus U.S. pretax income. The consolidated effective income tax rate for the thirteen week period ended September 28, 2019 was lower than the comparable prior year period was primarily due to the increase in Serbian pretax income relative to consolidated pretax income.
Segment Discussion
Engineering
Engineering revenue of $15.1 million for the thirteen weeks ended September 28, 2019 decreased 22.1%, or $4.3 million, as compared to the comparable prior year period. The primary components were a decrease of $1.9 million from the Company’s Energy Services Group, a decrease of $1.8 million from the Company’s Canadian Power Systems Group, and a decrease of $0.6 million from the Company’s Aerospace Group, partially offset by an increase of $0.4 million from the TKE acquisition. The Company attributes these revenue declines to decreased spending on the part of its Canadian Power Systems and Aerospace clients, increased competition from other vendors to its Canadian Power Systems clients, and timing of large projects from the Company’s Energy Services clients. Gross profit decreased by 22.7%, or $1.2 million, as compared to the comparable prior year period. Gross profit decreased primarily because of the decrease in revenue. Gross margin of 27.5% for the current period decreased from 27.7% for the comparable prior year period. The gross margin decrease was primarily due to lower utilization on the Company’s fixed labor consultant base. SGA expense of $3.0 million decreased by $0.8 million as compared to the comparable prior year period. The decrease in SGA expense was primarily due to a concerted effort to reduce cost inefficiencies and a lower allocation of corporate-generated SGA expense relative to the Company’s other two segments. The Engineering segment operating income experienced a decrease of $0.5 million for the thirteen weeks ended September 28, 2019, as compared to the comparable prior year period, as the decrease in gross profit was offset by the decrease in SGA expense.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirteen Week Period Ended September 28, 2019 Compared to Thirteen Week Period Ended September 29, 2018 (Continued)
Segment Discussion (Continued)
Specialty Health Care
Specialty Health Care revenue of $16.8 million for the thirteen weeks ended September 28, 2019 increased 11.0%, or $1.7 million, as compared to the comparable prior year period. The increase was primarily driven by increases of $1.4 million from the New York City office and $0.7 million from the Honolulu office, offset by a decrease of $0.4 million from the travel nursing staffing group. The primary reason for revenue increases in New York City and Hawaii was the incremental addition of paraprofessionals billed on school contracts. The Company primarily attributes the decline in revenue from its travel nursing staffing group to increased competition from large national competitors. The Specialty Health Care segment’s gross profit increased by 15.4%, or $0.5 million, to $4.0 million for the thirteen weeks ended September 28, 2019, as compared to $3.5 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenue. Gross profit margin for the thirteen weeks ended September 28, 2019, increased to 23.7% as compared to 22.8% for the comparable prior year period. Specialty Health Care experienced an operating loss of $0.3 million for both thirteen week periods presented. SGA expense increased by $0.6 million, primarily due to the need to increase SGA infrastructure expense to support the increased activity levels associated with higher revenue and a higher allocation of corporate-generated SGA expense.
Information Technology
Information Technology revenue of $8.3 million for the thirteen weeks ended September 28, 2019 increased 3.9%, or $0.3 million, as compared to $8.0 million for the comparable prior year period. The Company attributes this increase to investments in management and sales personnel. Gross profit of $2.5 million for the thirteen weeks ended September 28, 2019, increased 14.6%, or $0.3 million, as compared to $2.2 million for the comparable prior year period. The increase in gross profit was primarily due to an increase in gross profit margin and the increase in revenue. The Information Technology gross profit margin for the thirteen weeks ended September 28, 2019, was 29.8% as compared to 27.1% for the comparable prior year period. The Company attributes the gross margin increase to higher utilization of the Information Technology’s fixed labor consultants. The Information Technology segment experienced operating income of $0.2 million for both thirteen week periods presented. SGA expense increased by $0.3 million, primarily due to a higher allocation of corporate-generated SGA expense, and the need to increase SGA infrastructure expense to support the increased activity levels associated with higher revenue.
33

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirty-Nine Week Period Ended September 28, 2019 Compared to Thirty-Nine Week Period Ended September 29, 2018
A summary of operating results for the thirty-nine week periods ended September 28, 2019 and September 29, 2018 is as follows (in thousands):

| September 28, 2019 |  | September 29, 2018 |
| Amount |  | % of Revenue |  | Amount |  | % of Revenue |
Revenue | $142,550 |  | 100.0 |  | $145,081 |  | 100.0 |
Cost of services | 106,615 |  | 74.8 |  | 108,803 |  | 75.0 |
Gross profit | 35,935 |  | 25.2 |  | 36,278 |  | 25.0 |
Selling, general and administrative | 30,165 |  | 21.2 |  | 29,909 |  | 20.6 |
Depreciation and amortization of property and equipment | 944 |  | 0.7 |  | 1,156 |  | 0.8 |
Amortization of acquired intangible assets | 247 |  | 0.1 |  | - |  | - |
Severance, professional fees and other charges | - |  | - |  | 1,371 |  | 1.0 |
| 31,356 |  | 22.0 |  | 32,436 |  | 22.4 |
Operating income | 4,579 |  | 3.2 |  | 3,842 |  | 2.6 |
Other expense | (1,275 | ) | 0.9 |  | (990 | ) | (0.6 | )
Income before income taxes | 3,304 |  | 2.3 |  | 2,852 |  | 2.0 |
Income tax expense | 255 |  | 0.2 |  | 736 |  | 0.5 |
Net income | $3,049 |  | 2.1 |  | $2,116 |  | 1.5 |

The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. The fiscal quarters ended September 28, 2019 and September 29, 2018 consisted of thirty-nine weeks each.
Revenue. Revenue decreased 1.7%, or $2.5 million, for the thirty-nine week period ended September 28, 2019 as compared to the thirty-nine week period ended September 29, 2018 (the “comparable prior year period”). Revenue decreased $9.6 million in the Engineering segment, increased $3.7 million in the Specialty Health Care segment and increased $3.4 million in the Information Technology segment. Effective September 30, 2018, the Company’s Engineering segment acquired the business operations of Thermal Kinetics Engineering and affiliate (together, “TKE”). This new business unit generated $3.8 million in revenue for the thirty-nine week period ended September 28, 2019. See Segment Discussion for further information on revenue changes.
The Company has material operations in Canada, primarily from the Company’s Engineering segment; this business is conducted primarily in Canadian dollars. Since the Company reports its consolidated results in U.S. dollars the consolidated results are subject to potentially material fluctuations as a result of changes in the Canadian dollar to U.S. dollar exchange rate (the “Exchange Rate”). For the thirty-nine week period ended September 28, 2019, the Company generated total revenue from its Canadian clients of $12.8 million in U.S. dollars at an Exchange Rate of 75.2% as compared to $21.9 million in U.S. dollars at an Exchange Rate of 77.7% for the comparable prior year period.
Cost of Services and Gross Profit. Cost of services decreased 2.0%, or $2.2 million, for the thirty-nine week period ended September 28, 2019 as compared to the comparable prior year period. Cost of services decreased due to the decrease in revenue. Cost of services as a percentage of revenue for the thirty-nine week periods ended September 28, 2019 and September 29, 2018 were 74.8% and 75.0%, respectively. See Segment Discussion for further information regarding changes in cost of services and gross profit.
34

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirty-Nine Week Period Ended September 28, 2019 Compared to Thirty-Nine Week Period Ended September 29, 2018 (Continued)
Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses were $30.2 million for the thirty-nine week period ended September 28, 2019 as compared to $29.9 million for the comparable prior year period. As a percentage of revenue, SGA expenses were 21.2% for the thirty-nine week period ended September 28, 2019 and 20.6% for the comparable prior year period. See Segment Discussion for further information on SGA expense changes.
Severance, Professional Fees and Other Charges. The Company did not incur any comparative severance, professional fees and other charges for the thirty-nine week period ended September 28, 2019 as compared to $1.4 million for the thirty-nine week period ended September 29, 2018. The fiscal 2018 charges include severance accrued for the Company’s former chief executive officer and related payroll taxes, continuation of certain benefits and professional fees, totaling approximately $0.9 million. The additional charges of $0.5 million incurred related to transactional financial advisory fees, legal fees associated with defending a frivolous lawsuit with a competitor of the Company, and search fees associated with hiring a senior executive.
Other Expense. Other expense consists of interest expense, unused line fees and amortized loan costs on the Company’s line of credit, net of interest income imputed interest on contingent consideration and gains and losses on foreign currency transactions. Other expense, net increased to $1.4 million as compared to $1.0 million for the comparable prior year period. The primary component of the increase was interest expense which increased due to increased borrowings under the Company’s line of credit. The primary reason for the increased borrowing was to fund the Company’s increase in accounts receivable during the thirty-nine week period ended September 28, 2019, as compared to the comparable prior year period.
Income Tax Expense. The Company recognized $0.3 million of income tax expense for the thirty-nine week period ended September 28, 2019, as compared to $0.7 million for the comparable prior year period. The Company recognized a tax benefit of $0.6 million due to a verbal settlement with the U.S. Internal Revenue Service regarding an uncertain tax position from a previous tax year. Otherwise, the consolidated effective income tax rate for the current period was 25.9% as compared to 25.8% for the comparable prior year period. Not including the discrete tax benefit of $0.6 million due to the verbal settlement, the projected fiscal 2019 income tax rates as of September 28, 2019 were approximately 28.3%, 26.5% and 15.0% in the United States, Canada and Serbia, respectively. The relative income or loss generated in each jurisdiction can materially impact the overall effective income tax rate of the Company, particularly the ratio of Canadian and Serbian pretax income versus U.S. pretax income. The consolidated effective income tax rate for the thirty-nine week period ended September 28, 2019 was higher than the comparable prior year period primarily due to the reduction in Serbian pretax income relative to consolidated pretax income.
35

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirty-Nine Week Period Ended September 28, 2019 Compared to Thirty-Nine Week Period Ended September 29, 2018 (Continued)
Segment Discussion
Engineering
Engineering revenues of $52.8 million for the thirty-nine weeks ended September 28, 2019 decreased 15.4%, or $9.6 million, as compared to the comparable prior year period. The decrease was due to a decrease of $7.1 million from the Company’s Energy Services Group, a decrease of $5.3 million from the Company’s Canadian Power Systems Group, and a decrease of $1.7 million from the Company’s Aerospace Group, partially offset by an increase of $3.8 million from the TKE acquisition. The Company attributes these revenue declines to decreased spending on the part of its Canadian Power Systems and Aerospace clients, increased competition from other vendors to its Canadian Power Systems clients, and timing of large projects from the Company’s Energy Services clients. Gross profit decreased by 15.5%, or $2.6 million, as compared to the comparable prior year period. Gross profit decreased primarily because of the decrease in revenue. Gross margin of 26.7% for the current period decreased slightly from 26.8% for the comparable prior year period. The Engineering segment operating income decreased by $1.2 million to $2.7 million for the thirty-nine weeks ended September 28, 2019, as compared to $3.9 million for the comparable prior year period. The decrease in operating income was primarily due to the decreases in revenue and gross profit, and offset by a decrease of $1.5 million to SGA expense. The decrease in SGA expense was primarily due to a lower allocation of corporate-generated SGA expense relative to the Company’s other two segments.
Specialty Health Care
Specialty Health Care revenue of $64.3 million for the thirty-nine weeks ended September 28, 2019 increased 6.1%, or $3.7 million, as compared to the comparable prior year period. The increase was primarily driven by increases of $5.2 million from the New York City office, and $2.4 million from the Honolulu office, offset by decreases of $2.5 million from the travel nursing staffing group, $0.8 million from the Chicago office, $0.4 million from the Locum Tenens Group, $0.1 million from the HIM practice, and $0.1 million from the Permanent Placement Group. The primary reason for revenue increases in New York City and Hawaii was the incremental addition of paraprofessionals billed on school contracts. The Company primarily attributes the decline in revenue from its travel nursing staffing group to increased competition from large national competitors. The Specialty Health Care segment’s gross profit increased by 8.2%, or $1.1 million, to $14.9 million for the thirty-nine weeks ended September 28, 2019, as compared to $13.8 million for the prior year period. The increase in gross profit was primarily driven by the increase in revenue. Gross profit margin for the thirty-nine weeks ended September 28, 2019, increased to 23.2% as compared to 22.7% for the comparable prior year period. The Company primarily attributes the increase in gross profit margin to bill rate increases on certain major school contracts. Specialty Health Care experienced operating income of $1.7 million for the thirty-nine weeks ended September 28, 2019, as compared to $1.2 million for the comparable prior year period. The primary reason for the increase in operating income was the increase to revenue and gross profit. SGA expense increased by $0.7 million to $13.0 million, as compared to $12.3 million in the comparable prior year period. The increase in SGA expense was primarily due to the need to increase SGA infrastructure expense to support the increased activity levels associated with higher revenue and a higher allocation of corporate-generated SGA expense.
36

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Thirty-Nine Week Period Ended September 28, 2019 Compared to Thirty-Nine Week Period Ended September 29, 2018 (Continued)
Segment Discussion (Continued)
Information Technology
Information Technology revenue of $25.5 million for the thirty-nine weeks ended September 28, 2019 increased 15.4%, or $3.4 million, as compared to $22.1 million for the comparable prior year period. The Company experienced increases to revenue from all its Information Technology business lines. The Company attributes these increases to investments in management and sales personnel. Gross profit of $6.9 million for the thirty-nine weeks ended September 28, 2019, increased 19.3%, or $1.1 million, as compared to $5.8 million for the comparable prior year period. The increase in gross profit was primarily due to the increase in revenue. The Information Technology gross profit margin for the thirty-nine weeks ended September 28, 2019, was 27.1% as compared to 26.3% for the comparable prior year period. The Company attributes the gross margin increase to higher utilization of the Information Technology’s fixed labor consultants. SGA expense increased by $1.0 million to $6.7 million. The increase in SGA expense was primarily due to increased investments in management and sales personnel and a higher allocation of corporate-generated SGA expense. The Information Technology segment experienced a negligible increase to operating income as the increase in gross profit approximately offset the increase in SGA expense.
Liquidity and Capital Resources
The following table summarizes the major captions from the Company’s Consolidated Statements of Cash Flows (in thousands):

| Thirty-Nine Week Periods Ended |
| September 28, 2019 |  | September 29, 2018 |
Cash (used in) provided by: |  |  |  |
| Operating activities | ($3,870 | ) | $2,064 |
| Investing activities | ($296 | ) | ($1,423 | )
| Financing activities | $4,160 |  | ($2,735 | )

Operating Activities
Operating activities used $3.9 million of cash for the thirty-nine week period ended September 28, 2019 as compared to providing $2.1 million in the comparable prior year period. The major components of cash used in or provided by operating activities in the thirty-nine week period ended September 28, 2019 and the comparable prior year period are as follows: net income and changes in accounts receivable, the net of transit accounts payable and transit accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and accrued payroll and related costs.
Net income for the thirty-nine week period ended September 28, 2019 was $3.0 million as compared to $2.1 million for the comparable prior year period. An increase in accounts receivables in the thirty-nine week period ended September 28, 2019 used $5.2 million of cash as compared to $1.7 million in the comparable prior year period. The Company attributes the increase in accounts receivables for the thirty-nine week period ended September 28, 2019 to several different clients in both its Engineering and Specialty Health Care segments that experienced temporary delays in its approval and payment processes. The Company anticipates that its accounts receivable balance relative to revenue will improve during the fourth quarter of fiscal 2019.
37

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)
Operating Activities (Continued)
The Company’s transit accounts payable usually exceeds the Company’s transit accounts receivable, but absolute amounts and differences fluctuate significantly from quarter to quarter in the normal course of business. The net of transit accounts payable and transit accounts receivable was a net payable of $0.9 million as of September 28, 2019 and negligible as of December 29, 2018, generating $0.9 million of cash during the thirty-nine week period ended September 28, 2019. The net of transit accounts payable and transit accounts receivable was a net payable of $0.1 million and $1.7 million as of September 29, 2018 and December 30, 2017, respectively, so the cash impact during the thirty-nine week period ended September 29, 2018 used $1.6 million in cash.
Prepaid expenses and other current assets provided $0.5 million of cash for the thirty-nine week period ended September 28, 2019 as compared to using $0.6 million of cash for the comparable prior year period. The Company attributes changes to prepaid expenses and other current assets, if any, to general timing of payments in the normal course of business.
A decrease in accounts payable and accrued expenses used $3.4 million for the thirty-nine week period ended September 28, 2019 as compared to $0.2 million of cash for the comparable prior year period. The Company attributes these changes to general timing of payments to vendors in the normal course of business.
Changes in accrued payroll and related costs used $2.0 million for the thirty-nine week period ended September 28, 2019 as compared to providing $0.9 million for the thirty-nine week period September 29, 2018. There are three primary factors that generally impact accrued payroll and related costs: 1) there is a general correlation to operating expenses as payroll and related costs is the Company’s largest expense group, so as operating costs increase or decrease, absent all other factors, so will the accrued payroll and related costs; 2) the Company pays the majority of its payroll every two weeks and normally has thirteen weeks in a fiscal quarter, which means that the Company normally has a major payroll on the last business day of every other quarter; and 3) most of the Company’s senior management participate in annual incentive plans and while progress advances are sometimes made during the fiscal year, these accrued bonus balances, to the extent they are projected to be achieved, generally accumulate throughout the year. A significant portion of these incentive plan accruals are typically paid at the beginning of one fiscal year, pertaining to the prior fiscal year. The Company’s last major payroll for the thirty-nine week period ended September 28, 2019 was paid on September 27, 2019.
Investing Activities
Investing activities used cash of $0.3 million and $1.4 million for the thirty-nine week periods ended September 28, 2019 and September 29, 2018, respectively. Investing activities for both periods presented were primarily related to expenditures for property and equipment.
Financing Activities
Financing activities provided $4.2 million of cash for the thirty-nine week period ended September 28, 2019 as compared to using $2.7 million in the comparable prior year period. The Company made net borrowings under its line of credit of $4.2 million during the thirty-nine week period ended September 28, 2019 as compared to net repayments $2.8 million in the comparable prior year period. The primary reason for net borrowings during the thirty-nine week period ended September 28, 2019 was to fund the $5.2 million increase in accounts receivable. The Company generated cash of $0.3 million from sales of shares from its equity plans for the current period and $0.4 million for the comparable prior year period. The Company paid $0.6 million in contingent consideration during the thirty-nine week period ended September 28, 2019, as compared to $0.3 million in the comparable prior year period.
38

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
The Company and its subsidiaries amended and restated its Revolving Credit Facility with Citizens Bank of Pennsylvania on October 18, 2019. As amended and restated, the Revolving Credit Facility provides for a $45.0 million revolving credit facility, has no sub-limit for letters of credit, and expires on August 8, 2023.
Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, typically borrowed in fixed 30-day increments or (ii) the agent bank’s prime rate generally borrowed over shorter durations. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn. Unused line fees are recorded as interest expense. The effective weighted average interest rate, including unused line fees, for the thirty-nine week period ended September 28, 2019 was 4.6%.
All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility contains various financial and non-financial covenants, such as a covenant that restricts on the Company’s ability to borrow in order to pay dividends. As of September 28, 2019, the Company was in compliance with all covenants contained in the Revolving Credit Facility.
Borrowings under the line of credit as of September 28, 2019 and December 29, 2018 were $31.7 million and $27.5 million, respectively. At September 28, 2019 and December 29, 2018 there were letters of credit outstanding for $1.6 million. At September 28, 2019, the Company had availability for additional borrowings under the Revolving Credit Facility of $11.7 million.
Commitments and Contingencies
The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as well as future acquisitions will be derived from one or more of the Revolving Credit Facility (or a replacement thereof), funds generated through operations or future financing transactions. The Company is subject to legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the results of operations.
39

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)
Commitments and Contingencies (Continued)
The Company’s business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time engages in discussions with potential acquisition candidates. The Company has acquired numerous companies throughout its history and those acquisitions have generally included significant future contingent consideration. As the size of the Company and its financial resources increase however, acquisition opportunities requiring significant commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No assurance can be given as to the Company’s future acquisition and expansion opportunities or how such opportunities will be financed.
The Company has a dispute with a customer that is a major utility in the United States. Both parties agreed in fiscal 2017 to resolve this dispute through binding arbitration. Arbitration hearings with this customer started in fiscal 2018. Essentially, the customer has not paid the balance of accounts receivable the Company believes are owed for certain disputed projects. As of September 28, 2019 and December 29, 2018, the total amount of outstanding receivables from this customer on these disputed projects was $12.2 million and $8.9 million, respectively, subject to potential upward adjustment in damages claimed in arbitration. Additionally, as part of the arbitration process, the customer has asserted counter-claims. While the total amount of asserted counter-claims is unknown as of September 28, 2019, the total amount of such counter-claims is anticipated to be at least $10.3 million. The Company believes these counter-claims are retaliatory in nature. Prior to the Company asserting its claims, the customer had not asserted any counter-claims. The Company believes these counter-claims asserted by its customer have no merit and were merely asserted as a strategy to reduce the Company’s own claims in any arbitration award or potential settlement agreement. The Company believes that its accounts receivable balance, subject to reserves, is fully collectible. Furthermore, the Company believes that this arbitration will conclude prior to reporting its fiscal 2019 financial results. While the Company believes the customer’s counter-claims to be frivolous and without merit, it can give no assurances that it will ultimately not have to pay all or a portion of such counter-claims. The Company is continuing work on one of the engagements that have given rise to this dispute and also on several engagements from the same client that are not currently part of the arbitration.
The Company utilizes SAP software for its financial reporting and accounting system which was implemented in 1999 and has not undergone significant upgrades since its initial implementation. The Company believes that it will become necessary to upgrade or replace its SAP financial reporting and accounting system. The Company has not determined when this contemplated replacement may be necessary. The Company estimates this upgrade or replacement of their financial reporting and accounting system will cost between $1.0 million and $2.0 million. These estimates are subject to material change.
The Company’s current commitments consist primarily of lease obligations for office space. The Company believes that its capital resources are sufficient to meet its present obligations and those to be incurred in the normal course of business for at least the next 12 months.
The Company leases office facilities and various equipment under non-cancelable leases expiring at various dates through May 2024. Certain leases are subject to escalation clauses based upon changes in various factors.
40

ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Liquidity and Capital Resources (Continued)
Commitments and Contingencies (Continued)
Maturities of lease liabilities are as follows:

Fiscal Year Ending | Operating Leases |  | Finance Leases |
2019 | $673 |  | $73 |
2020 | 2,289 |  | 284 |
2021 | 1,715 |  | 130 |
2022 | 1,266 |  | - |
2023 | 877 |  | - |
Thereafter | 186 |  | - |
Total lease payments | 7,006 |  | 487 |
Less: imputed interest | (467 | ) | (6 | )
Total | $6,539 |  | $481 |

Future Contingent Payments
As of September 28, 2019, the Company had two active acquisition agreements whereby additional contingent consideration may be earned by the former shareholders: 1) effective October 1, 2017, the Company acquired all of the stock of PSR Engineering Solutions d.o.o. Beograd (Voždovac) (“PSR”) and 2) effective September 30, 2018 the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC (together, “TKE”). The Company estimates future contingent payments at September 28, 2019 as follows:

Fiscal Year Ending | Total
December 28, 2019 (after September 28, 2019) | $ -
January 2, 2021 | 388
January 1, 2022 | 1,754
December 31, 2022 | 919
Estimated future contingent consideration payments | $3,061

Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates. Potential future contingent payments to be made to all active acquisitions after September 28, 2019 are capped at a cumulative maximum of $6.3 million. The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of September 28, 2019. During the thirty-nine week period ended September 28, 2019, the Company measured the intangibles acquired at fair value on a non-recurring basis. Contingent consideration related to acquisitions are recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.
41

ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio and debt instruments, which primarily consist of the Revolving Credit Facility. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. As of September 28, 2019, the Company’s investments consisted of cash and money market funds. The Company does not use interest rate derivative instruments to manage its exposure to interest rate changes. Based on the Company’s variable-rate line of credit balances during the thirteen week period ended September 28, 2019, if the interest rate on the Company’s variable-rate line of credit (using an incremental borrowing rate) during the period had been 1.0% higher, the Company’s interest expense on an annualized basis would have increased by $0.3 million. The Company does not expect any material loss with respect to its investment portfolio.

ITEM 4. | CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 28, 2019, that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
42

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION

ITEM 1. | LEGAL PROCEEDINGS

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

ITEM 1A. | RISK FACTORS

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

ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. | DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. | MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. | OTHER INFORMATION

None.
43

ITEM 6. | EXHIBITS

31.1* | Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2* | Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1** | Certification of Principal Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
32.2** | Certification of Principal Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
101.INS* | XBRL Instance Document
101.SCH* | XBRL Taxonomy Extension Schema Document
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Documents
101.DEF* | XBRL Taxonomy Definition Linkbase Document

__________
* Filed herewith
** Furnished herewith
44

RCM TECHNOLOGIES, INC. SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | RCM Technologies, Inc.
Date: November 7, 2019 |  | By: /s/ Bradley S. Vizi
|  |  | Bradley S. Vizi Executive Chairman and President (Principal Executive Officer and Duly Authorized Officer of the Registrant)

Date: November 7, 2019 |  | By: /s/ Kevin D. Miller
|  |  | Kevin D. Miller Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer of the Registrant)

45

Exhibit 31.1

RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Bradley S. Vizi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2019 |  | /s/ Bradley S. Vizi Bradley S. Vizi Executive Chairman and President

46

Exhibit 31.2

RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Kevin D. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2019 |  | /s/ Kevin D. Miller Kevin D. Miller Chief Financial Officer

47

Exhibit 32.1

RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Bradley S. Vizi, Executive Chairman and President of RCM Technologies, Inc., a Nevada corporation (the “Company”), hereby certify that, to my knowledge:
(1) The Company’s periodic report on Form 10-Q for the quarter ended September 28, 2019 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
* * *
/s/ Bradley S. Vizi
Bradley S. Vizi
Executive Chairman and President
Date: November 7, 2019
48

Exhibit 32.2

RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Kevin D. Miller, Chief Financial Officer of RCM Technologies, Inc., a Nevada corporation (the “Company”), hereby certify that, to my knowledge:
(1) The Company’s periodic report on Form 10-Q for the quarter ended September 28, 2019 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
* * *
/s/ Kevin D. Miller
Kevin D. Miller
Chief Financial Officer
Date: November 7, 2019
49