SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

RCM Technologies, Inc. (the “Company” or “RCM”) is a premier provider of business and technology solutions designed to enhance and maximize the operational performance of its customers through the adaptation and deployment of advanced engineering and information technology services. Additionally, the Company provides specialty health care staffing services through its Specialty Health Care Services group. RCM’s offices are primarily located in major metropolitan centers throughout North America.

The consolidated financial statements are comprised of the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

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

days from the date of acquisition. These investments are carried at cost, which approximates fair value. The Company’s cash balances are maintained in accounts held by major banks and financial institutions. The majority of these balances

may

exceed federally insured amounts. The Company held

$32

and

$52

of cash and cash equivalents in Canadian banks as of

December 29, 2018

and

December 30, 2017,

respectively, which was held principally in Canadian dollars.

Fair Value of Financial Instruments

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

not

have derivative products in place to manage risks related to foreign currency fluctuations for its foreign operations or for interest rate changes.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is

not

required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables previously written off are credited to bad debt expense.

Accrued and Unbilled Accounts Receivable and Work-in-Process

Unbilled receivables primarily represent revenues earned whereby those services are ready to be billed as of the balance sheet ending date. Work-in-process primarily represents revenues earned under contracts which the Company is contractually precluded from invoicing until future dates as project milestones are realized. See Note

for further details.

Transit Receivables and Transit Payables

From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. In certain circumstances, the Company

may

acquire equipment as a purchasing agent for the client for a fee. Pursuant to these agreements, the Company: a)

may

engage subcontractors to provide construction or other services or contracts with manufacturers on behalf of the Company’s clients to procure equipment or fixtures; b) typically earns a fixed percentage of the total project value or a negotiated mark-up on subcontractor or procurement charges as a fee; and c) assumes

ownership or risks of inventory. In such situations, the Company acts as an agent under the provisions of “Overall Considerations of Reporting Revenue Gross as a Principal versus Net as an Agent” and therefore recognizing revenue on a “net-basis.” The Company records revenue on a “net” basis on relevant engineering and construction management projects, which require subcontractor/procurement costs or transit costs. In those situations, the Company charges the client a negotiated fee, which is reported as net revenue when earned.

Under the terms of the agreements, the Company is typically

not

required to pay the subcontractor until after the corresponding payment from the Company’s end-client is received. Upon invoicing the end-client on behalf of the subcontractor or staffing agency the Company records this amount simultaneously as both a “transit account receivable” and “transit account payable” as the amount when paid to the Company is due to and generally paid to the subcontractor within a few days. The Company typically does

not

pay a given transit account payable until the related transit account receivable is collected. The Company’s transit accounts payable usually 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

$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 transit accounts receivable was

$3.0

million and related transit accounts payable was

$4.7

million, for a net liability of

$1.7

million, as of

December 30, 2017.

Property and Equipment

Property and equipment are stated at cost net of accumulated depreciation and amortization and are depreciated or amortized on the straight-line method at rates calculated to provide for retirement of assets at the end of their estimated useful lives. Most hardware and software as well as furniture and office equipment is depreciated or amortized over

five

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

Intangible Assets

The Company’s intangible assets have been generated through acquisitions. The Company maintains responsibility for valuing and determining the useful life of intangible assets. As a general rule, the Company amortizes restricted covenants over

four

years and customer relationships over

six

years. However, circumstances

may

dictate other amortization terms as determined by the Company and assisted by their

third

party advisors.

Canadian Sales Tax

The Company is required to charge and collect sales tax for all Canadian clients and remits invoiced sales tax monthly to the Canadian taxing authorities whether collected or

not.

The Company does

not

collect the sales tax from its clients until they have paid their respective invoices. The Company includes uncollected Canadian sales tax invoiced to clients in its prepaid and other current assets.

Goodwill

Goodwill is

not

amortized but is subject to periodic testing for impairment in accordance with ASC Topic

350

“

Intangibles - Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment”

(“ASC Topic

350”

). The Company tests goodwill for impairment on an annual basis as of the last day of the Company’s fiscal

December

each year or more frequently if events occur or circumstances change indicating that the fair value of the goodwill

may

be below its carrying amount. The Company has

three

reporting units. The Company uses a market-based approach to determine the fair value of the reporting units. This approach uses earnings/revenue multiples of similar companies recently completing acquisitions and the ability of our reporting units to generate cash flows as measures of fair value of our reporting units. The Company adopted Accounting Standards Update (“ASU”)

2017

04,

“Intangibles - Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment” effective

December 30, 2017

which has eliminated Step

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

The Company did

not

record a goodwill impairment charge in the fiscal year ended

December 29, 2018.

For the fiscal year ended

December 30, 2017,

the carrying amount of our Information Technology reporting unit exceeded its fair value; therefore, the Company recorded a goodwill impairment charge of

$3.5

million. This charge is recognized as “Goodwill Impairment” on our Consolidated Statements of Income. Any future decline of our revenue, cash flows and/or stock price

may

give rise to a triggering event that

may

require the Company to record additional impairment charges on goodwill in the future.

During all periods presented, the Company determined that the existing qualitative factors did

not

suggest that an impairment of goodwill exists for both its Engineering and Specialty Healthcare Segments. There can be

assurance that future indicators of impairment and tests of goodwill impairment will

not

result in impairment charges for both its Engineering and Specialty Healthcare segments.

Long-Lived and Intangible Assets

The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. When 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.

Software

In accordance with “Accounting for Costs of Computer Software Developed or Obtained for Internal Use,” certain costs related to the development or purchase of internal-use software are capitalized and amortized over the estimated useful life of the software. During the fiscal years ended

December 29, 2018

and

December 30, 2017,

the Company capitalized approximately

$1,150

and

$594,

respectively, for software costs. The net balance after accumulated depreciation for all software costs capitalized as of

December 29, 2018

and

December 30, 2017

was

$2,255

and

$1,841,

respectively.

Income Taxes

The Company makes judgments and interpretations based on enacted tax laws, published tax guidance, as well as estimates of future earnings. These judgments and interpretations affect the provision for income taxes, deferred tax assets and liabilities and the valuation allowance. The Company evaluated the deferred tax assets and determined on the basis of objective factors that the net assets will be realized through future years’ taxable income. In the event that actual results differ from these estimates and assessments, additional valuation allowances

may

be required. The Company did

not

have any valuation allowance as of

December 29, 2018

December 30, 2017.

The Company accounts for income taxes in accordance with “Accounting for Income Taxes” which requires an asset and liability approach of accounting for income taxes. “Accounting for Income Taxes” requires assessment of the likelihood of realizing benefits associated with deferred tax assets for purposes of determining whether a valuation allowance is needed for such deferred tax assets. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Tax Cuts and Jobs Act, which was enacted in

December 2017,

includes a number of changes to existing United States tax laws, most notably the reduction of the United States corporate income tax rate from up to

35%

21%,

beginning in

2018.

The Company measures its deferred tax assets and liabilities using the tax rates that the Company believes will apply in the years in which the temporary differences are expected to be recovered or paid. As a result, the Company remeasured its deferred tax assets and deferred tax liabilities to reflect the reduction in the United States corporate income tax rate, resulting in a

$1.0

million decrease in the Company’s income tax benefit (or increase in income tax expense) for the fiscal year ended

December 30, 2017.

The Company and its wholly owned United States subsidiaries file a consolidated federal income tax return. The Company also files tax returns in Canada, Puerto Rico and Serbia.

The Company also follows the provisions of “Accounting for Uncertainty in Income Taxes” which prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. The Company’s policy is to record interest and penalty, if any, as interest expense.

Revenue Recognition

As of

December 31, 2017,

the Company adopted Accounting Standards Update ("ASU")

2014

09,

Revenue from Contracts with Customers ("ASC

606"

using the modified retrospective approach. Revenues are recognized when the Company satisfies a performance obligation by transferring services promised in a contract to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. Performance obligations in the Company’s contracts represent distinct or separate service streams that the Company provides to its customers.

We evaluate our revenue contracts with customers based on the

five

-step model under ASC

606:

(

) Identify the contract with the customer; (

) Identify the performance obligations in the contract; (

) Determine the transaction price; (

) Allocate the transaction price to separate performance obligations; and (

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

The Company derives its revenues from several sources. The Company’s Engineering Services and Information Technology Services segments perform consulting and project solution services. All of the Company’s segments perform staff augmentation services and derive revenue from permanent placement fees. The majority of the Company’s revenues are invoiced on a time and materials basis.

The following table presents our revenues disaggregated by revenue source for the

fifty-two

week periods ended

December 29, 2018

and

December 30, 2017:

	December 29, 2018		December 30, 2017
Engineering:
Time and material	$	71,639	$	71,894
Fixed fee		14,424		10,859
Permanent placement services		15		-
Total Engineering	$	86,078	$	82,753

Specialty Health Care:
Time and material	$	82,153	$	69,033
Permanent placement services		1,510		2,283
Total Specialty Health Care	$	83,663	$	71,316

Information Technology:
Time and material	$	30,361	$	32,320
Permanent placement services		250		348
Total Information Technology	$	30,611	$	32,668
	$	200,352	$	186,737

Time and Material

The Company’s IT and Healthcare segments predominantly recognize revenue through time and material work while its Engineering segment recognizes revenue through both time and material and fixed fee work. The Company’s time and material contracts are typically based on the number of hours worked at contractually agreed upon rates, therefore revenues associated with these time and materials contracts are recognized based on hours worked at contracted rates.

Fixed fee

From time to time and predominantly in our Engineering segment, the Company will enter into contracts requiring the completion of specific deliverables. The Company has master services agreements with many of its customers that broadly define terms and conditions. Actual services performed under fixed fee arrangements are typically delivered under purchase orders that more specifically define terms and conditions related to that fixed fee project. While these master services agreements can often span several years, the Company’s fixed fee purchase orders are typically performed over

six

nine

month periods. In instances where project services are provided on a fixed-price basis, revenue is recorded in accordance with the terms of each contract. In certain instances, revenue is invoiced at the time certain milestones are reached, as defined in the contract. Revenues under these arrangements are recognized as the costs on these contracts are incurred. On an infrequent basis, amounts paid in excess of revenues earned and recognized are recorded as deferred revenue, included in accounts payable and accrued expenses on the accompanying balance sheets. In other instances, revenue is billed and recorded based upon contractual rates per hour. Additionally, some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when earned. Some contracts also limit revenues and billings to specified maximum amounts. Provisions for contract losses, if any, are made in the period such losses are determined. For contracts where there is a specific deliverable, the work is

not

complete and the revenue is

not

recognized, the costs incurred are deferred as a prepaid asset. The associated costs are expensed when the related revenue is recognized.

Permanent Placement Services

The Company earns permanent placement fees from providing permanent placement services. Fees for placements are recognized at the time the candidate commences employment. The Company guarantees its permanent placements on a prorated basis for

days. In the event a candidate is

not

retained for the

-day period, the Company will provide a suitable replacement candidate. In the event a replacement candidate cannot be located, the Company will provide a prorated refund to the client. An allowance for refunds, based upon the Company’s historical experience, is recorded in the financial statements. Permanent placement revenues were

$1.8

million and

$2.6

million for the fiscal years ended

December 29, 2018

and

December 30, 2017,

respectively.

The deferred revenue balance as of

December 29, 2018

was

$0.2

million, as compared to

$0.6

million as of

December 30, 2017.

These amounts are included in accounts payable and accrued expense in the accompanying consolidated balance sheets at that date. Revenue is recognized when the service has been performed. Deferred revenue

may

be recognized over a period exceeding

one

year from the time it was recorded on the balance sheet, although this is an infrequent occurrence. For the

fifty-two

week period ended

December 29, 2018,

the Company recognized revenue of

$0.6

million that was included in deferred revenue at the beginning of the reporting period.

Transit Receivables and Transit Payables

From time to time, the Company’s Engineering segment enters into agreements to provide, among other things, construction management and engineering services. In certain circumstances, the Company

may

acquire equipment as a purchasing agent for the client for a fee. Pursuant to these agreements, the Company: a)

may

fifty-two

week period ended

December 29, 2018,

total gross billings, including both transit cost billings and the Company’s earned fees, was

$32.9

million, for which the Company recognized

$23.4

million of its net fee as revenue. During the

fifty-two

week period ended

December 30, 2017,

total gross billings, including both transit cost billings and the Company’s earned fees, was

$38.9

million, for which the Company recognized

$26.1

million of its net fee as revenue. The net fee revenue from these agreements represented

11.7%

of the Company’s total revenues for the

fifty-two

week period ended

December 29, 2018

as compared to

14.0%

for the comparable prior year period.

Concentration

During the fiscal year ended

December 29, 2018,

New York City Board of Education represented

13.0%

of the Company’s revenues.

other client accounted for

10%

or more of total revenues during the year. As of

December 29, 2018

the following clients represented more than

10.0%

of the Company’s accounts receivable, net: New York Power Authority was

22.7%

and New York City Board of Education was

16.0%.

As of

December 29, 2018,

New York Power Authority total accounts receivable balance (including transit accounts receivable) was

23.3%

of the total of accounts receivable, net and transit accounts receivable.

other customer accounted for

10%

or more of the Company’s accounts receivable, net or total accounts receivable balance (including transit accounts receivable). The Company’s five,

ten

and

twenty

largest customers accounted for approximately

40.9%,

54.6%

and

67.4%,

respectively, of the Company’s revenues for the fiscal year ended

December 29, 2018.

During the fiscal year ended

December 30, 2017,

Sikorsky Aircraft represented

10.4%

of the Company’s revenues.

other client accounted for

10%

or more of total revenues during the year. As of

December 30, 2017

the following clients represented more than

10.0%

of the Company’s accounts receivable, net: New York City Board of Education was

14.9%

and New York Power Authority was

11.9%.

As of

December 30, 2017,

New York Power Authority total accounts receivable balance (including transit accounts receivable) was

14.0%

of the total of accounts receivable, net and transit accounts receivable.

other customer accounted for

10%

or more of the Company’s accounts receivable, net or total accounts receivable balance (including transit accounts receivable). The Company’s five,

ten

and

twenty

largest customers accounted for approximately

37.9%,

51.4%

and

65.2%,

respectively, of the Company’s revenues for the fiscal year ended

December 30, 2017.

Foreign Currency Translation

The functional currency of the Company’s Canadian and Serbian subsidiaries is the local currency. Assets and liabilities are translated at period-end exchange rates. Income and expense items are translated at weighted average rates of exchange prevailing during the year. Any translation adjustments are included in the accumulated other comprehensive income account in stockholders’ equity. Transactions executed in different currencies resulting in exchange adjustments are translated at spot rates and resulting foreign exchange transaction gains and losses are included in the results of operations.

Comprehensive Income

Comprehensive income consists of net income and foreign currency translation adjustments.

Per Share Data

Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted-average number of common shares plus dilutive potential common shares outstanding during the period. Potential dilutive common shares consist of stock options and other stock-based awards under the Company’s stock compensation plans, when their impact is dilutive. Because of the Company’s capital structure, all reported earnings pertain to common shareholders and

other adjustments are necessary.

Share - Based Compensation

The Company recognizes share-based compensation over the vesting period of an award based on fair value at the grant date determined using the Black-Scholes option pricing model. Certain assumptions are used to determine the fair value of stock-based payment awards on the date of grant and require subjective judgment. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models

may

not

provide a reliable single measure of the fair value of the employee stock options. Management assesses the assumptions and methodologies used to calculate estimated fair value of stock-based compensation when share-based awards are granted. Circumstances

may

change and additional data

may

become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. See Note

for additional share-based compensation information.

Restricted share units are recognized at their fair value. The amount of compensation cost is measured on the grant date fair value of the equity instrument issued. The compensation cost of the restricted share units is recognized over the vesting period of the restricted share units on a straight-line basis. Restricted share units typically include dividend accrual equivalents, which means that any dividends paid by the Company during the vesting period become due and payable after the vesting period assuming the grantee’s restricted stock unit fully vests. Dividends for these grants are accrued on the dividend payment dates and included in accounts payable and accrued expenses on the accompanying consolidated balance sheet. Dividends for restricted share units that ultimately do

not

vest are forfeited.

Advertising Costs

Advertising costs are expensed as incurred. Total advertising expense was

$671

and

$700

for the fiscal years ended

December 29, 2018

and

December 30, 2017,

respectively.

Fair

alue

easurements

The Company values its financial assets and liabilities based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a fair value hierarchy was established that prioritizes observable and unobservable inputs used to measure fair value into

three

broad levels, which are described below:

Level

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level

inputs.

Level

Observable inputs other than Level

prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data.

Level

Unobservable inputs are used when little or

market data is available. The fair value hierarchy gives the lowest priority to Level

inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.