RCM Technologies, Inc.: Form 10-Q for the period ended Jul 4, 2026

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 life sciences, information technology, and engineering solutions—including AI and specifically Agentic AI, Quality by Design (QbD), and process automation—to upgrade their systems, applications, and processes. By leveraging AI, organizations can enhance data-driven decision-making and predictive analytics, while QbD principles ensure that quality is built into every stage of development and operations. Process automation further streamlines workflows, reduces manual intervention, and increases operational efficiency. These integrated approaches enable companies to maximize productivity and optimize performance, maintaining a competitive advantage even when operating under budgetary, personnel, and expertise constraints. As companies are driven to support increasingly complex systems, applications, and processes of significant strategic value, the demand for outsourcing—especially in areas involving AI, QbD, and automation—continues to rise. The Company believes that its current and prospective clients are actively evaluating the potential for outsourcing business-critical systems, applications, and processes that incorporate these advanced methodologies.

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 used for certain more complex assignments, where engagements are for longer terms or precise documentation of the nature and scope of the assignment is necessary. Although contracts normally relate to longer-term, more complex engagements, they do not oblige the customer to purchase a minimum level of services and are generally terminable by the customer with 60 to 90 days’ notice. The Company, from time to time, enters contracts requiring the completion of specific deliverables. Typically, these contracts are for less than one year. The Company recognizes revenue from these deliverables when the client accepts and approves them.

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 personnel salaries and benefits for business development, recruiting, operating activities, and training, as well as corporate overhead expenses. Corporate overhead expenses relate to the salaries and benefits of personnel responsible for corporate activities, including the Company’s corporate marketing, administrative, and financial reporting responsibilities, as well as its acquisition program. The Company records these expenses when incurred.

The Company’s exposure to market risk from changes in interest rates relates primarily to its investment portfolio and debt instruments, which consist primarily of the Revolving Credit Facility. The Company has no derivative financial instruments in its portfolio. The Company invests in instruments that meet high credit-quality standards. The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk, and reinvestment risk. As of July 4, 2026, 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 Revolving Credit Facility balances during the twenty-six weeks ended July 4, 2026, if the interest rate on the Company’s variable-rate Revolving Credit Facility (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 $0.4 million. The Company does not expect any material loss on its investment portfolio.

These material weaknesses did not result in a misstatement of our annual or interim consolidated financial statements. However, these material weaknesses could lead to a misstatement of substantially all account balances or disclosures, resulting in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected. Notwithstanding the identified material weaknesses, management believes the consolidated financial statements, as included in Part I, Item 1 of this Quarterly Report on Form 10-Q, present the Company's financial condition and results of operations fairly, in all material respects.

Material Weakness Remediation Activities

To address these material weaknesses, management, with oversight from the Audit Committee, has commenced actions to enhance the Company's control framework and policies, maintain evidence of control procedure operation, and improve our control environment. During the quarter ended July 4, 2026, the Company also initiated a broader Finance Operations Transformation program designed to strengthen and scale its finance operating model, including its people, processes, technology and governance. As part of this program, management has initiated near-term stabilization activities focused on strengthening the existing control environment while beginning to assess opportunities for long-term process and technology improvements. During the quarter ended July 4, 2026, management initiated remediation activities, including reassessing financial reporting risks and the design of related controls, enhancing documentation standards for management review controls, and beginning the design of improvements to the Company's financial reporting and internal control processes.

Our ongoing mediation efforts related to the above-identified material weaknesses include, but are not limited to:

• Reevaluate the overall control environment using a risk-based approach by performing a comprehensive assessment of financial reporting risks, reassessing the design and adequacy of existing controls and monitoring activities, and implementing enhancements to ensure controls are appropriately aligned with identified risks and operate effectively across the organization.
• Strengthen management review controls by integrating standardized documentation requirements into the review process to ensure analyses, thresholds, conclusions, and follow-up actions are clearly supported.
• Improve quarter-close controls by reevaluating the design, timing, and documentation requirements and implementing a structured close calendar with clear deadlines, ownership, and escalation protocols.
• Implement targeted training for personnel involved in financial reporting and internal control activities to strengthen understanding of the Company's internal control over financial reporting framework, including Sarbanes-Oxley requirements and expectations for the design, execution, documentation, precision of review, and timeliness required to support the effective operation of management review controls and other key financial reporting controls.
• Update its production application suite to phase out legacy timekeeping systems, implement a software development tool and update procedures to enhance change management documentation, and centralize provisioning and deprovisioning for remaining timekeeping systems via an IT ticketing system.

During the quarter ended July 4, 2026, management initiated activities under its remediation plan and will continue to assess the effectiveness of its internal control over financial reporting and take steps to remediate the known material weaknesses expeditiously. These remediation and stabilization activities are being coordinated with the Company's broader Finance Operations Transformation program and are subject to ongoing senior management review as well as Audit Committee oversight. The implementation of these remediation efforts is in progress, may require additional expenditures to implement, and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. As a result, the timing of when we will be able to complete the remediation of the material weaknesses is uncertain. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting, which may necessitate further implementation and evaluation time.

Changes in Internal Control over Financial Reporting

Other than the continued remediation efforts relating to the material weaknesses described above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended July 4, 2026, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

For information regarding factors that could affect the Company’s business, see the risk factors discussed under Part I, Item 1A, Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2026.