RCM Technologies Inc

ITEM 1A. RISK FACTORS (CONTINUED)

Events Affecting Significant Customers

As disclosed in Item 1. Business, during the fiscal year ended December 28January 3, 20246, the Company had two customers exceeding 10% of consolidated revenue, representing 19.520.8% and 14.13.6% of consolidated revenue. The Companys five, ten and twenty largest customers accounted for approximately 48.551.0%, 60.14.9% and 70.65.0%, respectively, of the Companys revenue for the fiscal year ended December 28January 3, 20246. The Companys customers may be affected by the current state of the economy or developments in the credit markets or may engage in mergers or similar transactions. In addition, customers may choose to reduce the business they do with the Company for other reasons or no reason. The Company could also be materially impacted by actions of prime contractors whereby the Company derives revenue through a subcontractor relationship. Should any significant customers experience a downturn in their business that weakens their financial condition or merge with another company or otherwise cease independent operation, or limit their relationship with us, it is possible that the business that the customer does with the Company would be reduced or eliminated, which could adversely affect the Companys business, financial condition and results of operations.

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

The Companys Engineering segment has entered into arrangements to provide construction management and engineering services to customers under which arrangements the Company then engages subcontractors to provide the construction services. Ultimately, as a primary contractor, the Company is responsible for the nonperformance or negligence of its subcontractors, whom the Company requires to be adequately insured and to issue performance bonds for their assignment. Should a subcontractor not perform or act negligently and should there be inadequate insurance or performance bonds in place, the Company might not be able to mitigate its primary liability to the customer, and the Companys business, financial condition and results of operations could be materially adversely affected. In addition, while payments to subcontractors typically are due from the Company only after the Company receives payment from the ultimate customer, the Company faces the risk that, should a customer not pay the Company, or should a subcontractor demand payment from the Company prior to the Companys receipt of payment from its customer, the Companys business, financial condition and results of operations could be materially adversely affected.

Dependence Upon Personnel

The Companys operations depend on the continued efforts of its officers and other executive management. The loss of key officers and members of ethe executive management mteam may cause a significant disruption to the Companys business.

The Company also depends on the performance and productivity of its local managers and field personnel. The Companys ability to attract and retain new business is significantly affected by local relationships and the quality of service rendered. The loss of key managers and field personnel may also jeopardize existing client relationships with businesses that continue to use the Companys services based upon past relationships with local managers and field personnel. In order to fulfill the requirements of To meet the Companys customers' requirements, the Company must be able to recruit and retain appropriate personnel for client assignments.

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Revolving Credit Facility and Liquidity

If the Company were unable to borrow under its Revolving Credit Facility (see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Financing Activities), it may adversely affect the Companys liquidity, results of operations and financial condition. The Companys liquidity depends on its ability to generate sufficient cash flows from operations and, from time to time, borrowings under the Revolving Credit Facility with the Companys agent lender Citizens Bank of Pennsylvania. The Company believes that Citizens Bank is liquid and is not aware of any current risk that they will become illiquid. However, should Citizens Bank experience limitations on its liquidity, our access to capital and thus our own liquidity could be adversely affected. At December 28January 3, 20246, the Company had $35.024.7 million in borrowings under the Revolving Credit Facility outstanding and $7.413.2 million outstanding under letters of credit, with availability for additional borrowings under the Revolving Credit Facility of $22.67.1 million.

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) SOFR (Secured Overnight Financing Rate), plus applicable margin or (ii) the agent banks 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.

All borrowings under the Fifth Amended and Restated Loan Agreement remain collateralized with substantially all of the Companys assets, as well as the capital stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as a covenant that restricts the Companys ability to borrow in order to pay dividends. As of December 28January 3, 20246, the Company was in compliance with all covenants contained in the Revolving Credit Facility. The Company believes that it will maintain compliance with its financial covenants for the foreseeable future.

Foreign Currency Fluctuations and Changes in Exchange Rates

The Company is exposed to risks associated with foreign currency fluctuations and exchanges in ex rate change rates. The Companys exposure to foreign currency fluctuations relates to operations in Canada, Germany, and Serbia, principally conducted through its Canadian, German, and Serbian subsidiaries. Exchange rate fluctuations affect the United States dollar value of reported earnings derived from the foreign operations as well as the carrying value of the Companys investment in the net assets related to these operations. The Company does not engage in hedging activities with respect to for its foreign operations.

Changes in Tax Laws

At any time, United States federal tax laws or their administrative interpretations of those laws may be changed. As a result, changes in United States federal tax laws could negatively impact our operating results, financial condition and business operations, and adversely impact the Companys shareholders. At any time, tax laws in the Companys other jurisdictions, Canada, Germany, the Philippines, Puerto Rico, and Serbia, may also change. These tax law changes may have a materially impact on the Companys income tax expense.

Workers Compensation and Employee Medical Insurance

The Company self-insures a portion of theits exposure for losses related tto workers compensation and employees medical insurance losses. The Company has established reserves for workers compensation and employee medical insurance claims based on historical loss statistics and periodic independent actuarial valuations. Significant differences in actual experience or significant changes in assumptions may materially affect the Companys future financial results.

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

The Company may be subject to claims by clients related to errors and omissions, misuse of proprietary information, discrimination and harassment, theft and other criminal activity, malpractice, and other claims stemming from the improper activities or alleged activities of temporary professionals. There can be no assurance that current liability insurance coverage will be adequate or will continue to be available in sufficient amounts to cover damages or other costs associated with such claims.

Claims raised by clients stemming from the improper actions of temporary professionals, even if without merit, could cause the Company to incur significant expense associated with rework costs or other damages related to such claims. Furthermore, such claims by clients could damage the Companys business reputation and result in the discontinuation of client relationships.

Acquisitions May Not Succeed

The Company reviews prospective acquisitions as an element of its growth strategy. The failure of any acquisition to meet the Companys expectations, whether due to a failure to successfully integrate any future acquisition or otherwise, may result in damage to the Companys financial performance and/or divert managements attention from its core operations, or could negatively affect the Companys ability to meet the needs of its customers promptly.

International Operations

The Company operates its business in Canada, Germany, the Philippines, Puerto Rico, and Serbia. For the fiscal year ended December 28January 3, 20246, approximately 7.89.1% of the Companys revenue wereas generated outside the United States. There are certain risks inherent in conducting business internationally including: the imposition of trade barriers, the enactment of tariffs, foreign exchange restrictions, longer payment cycles, greater difficulties in accounts receivables collection, difficulties in complying with a variety of foreign laws (including without limitation the U.S. Foreign Corrupt Practices Act), changes in legal or regulatory requirements, including as to laws and regulations governing economic and trade sanctions, difficulties in staffing and managing foreign operations, complex and uncertain employment environments, political instability and potentially adverse tax consequences. Our operations in Serbia could be adversely affected by the current conflict between Ukraine and Russia, with which Serbia has substantial ties. Should sanctions against Russia affect Russia in a way that causes adverse economic consequences tofor Serbia, or if such sanctions were to be extended to countries that might be considered to be in alignmented with Russia, this could have a negative impact on our employees or operations both within and outside Serbia. To the extent the Company experiences these risks, the business and results of operations could be adversely affected.

Tariffs or Other Restrictions Imposed on Foreign Imports by the U.S. and Related Countermeasures

If significant tariffs or other restrictions are imposed on r threatened on foreign businesses by the U.S., and relaaffected countermeasures are ries taken by impac related foreign countriesermeasures, our business and results of operations could be adversely affected. During the first months of PresidFor example, recent Trump's second term,U.S. tariffs imposed or the U.S. announcreatened the imposition of additional substanton goods, material tariffs on impors, and products from various countries, including China, Canada where we do business, and and Mexico, and the subject countries indicated their intention to imposey retaliatory actions taken by such counter measures. Factors relating to these disputes ries, could reduce demand for our services, result in the loss of lead to customers losses, and harm our competitive position in key markets. Additionally, ongoing trade tensions and uncertainty regarding future trade policies could negatively impact global economic conditions and consumer confidence, further affecting our business and results of operations.

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Global Epidemics

As was the case with the COVID-19 pandemic and its endemic, and associated initiatives to reduce its spread, any otherfuture global pandemics or endemics that may occur in the future ccould adversely affect the Companys business and financial position. For example, public and private sector policies and initiatives to reduce the transmission of a highly transmissible disease, such as closures of schools, businesses, and manufacturing facilities, the promotion of social distancing, the adoption of working from home by companies and institutions, and travel restrictions could adversely affect demand for our services and present challenges to us in delivering these services. These impacts on our business could have an aadverse ely affect on our liquidity position and access to capital, including our ability to access odraw on our line of credit.

These factors, in addition to delays in along with payment delays, could continue to result in significant bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor -related costs, materials, supplies, and equipment used into performing services couldwere not be passed on to our clients. In addition, we believe that to maintain or improve our financial performance, we must continue to obtain service agreements with new clients, retain and provide new services to existing clients, achieve modest price increases on current service agreements with existing clients, and/or maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and the successful execution of our projected growth strategies. A future pandemic could make these objectives more difficult to attain.

Trademarks

Management believes the RCM Technologies, Inc.s name is extremely valuable and important to its business. The Company endeavors to protect its intellectual property rights and to maintain certain trademarks, trade names, service marks, and other intellectual property rights, including The Source of Smart Solutions and Industries of Tomorrow, Today wit, for which a trademark application submitted for the use of the latterhas been submitted. The Company is not currently aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect the Companys use of its proprietary rights. The Companys success depends on its ability to successfully obtain and maintain, and its intellectual preoperty, prevent its misappropriation or infringement of, its intellectual property, , maintain trade secret protection, and conduct operations without violating or infringing on the intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming, and it is often difficult, if not impossible, to predict theits outcome of such litigation. If the Company is involved in intellectual property litigation, its business, financial condition, and results of operations could be materially adversely affected.

Data Center Capacity and Telecommunication Links

Uninterruptible Power Supply (UPS), card key access, fire suppression, and environmental control systems protect the Companys data center. All systems are monitored on a 24/7 basis , with alerting capabilitiess sent via voice or email. The Company's telecommunications architecture at the Company utilizes managed private circuits from ATT, which encompasses provisioning rinclude redundancy and diversity.

The Companys ability to protect its data center against damage from fire, power lossoutages, telecommunications failures, and other disasters is critical to its business operations. In order to To provide many of its services, the Company must be able to store, retrieve, process, and manage large databases and periodically expand and upgrade its capabilities. Any damage to the Companys data centers or any failure of the Companys telecommunication links that interrupts its operations or results in an inadvertent loss of data could adversely affect the Companys ability to meet its customers needs and their confidence in utilizing the Company for future services.

The Companys ability to protect its data, provide services, and safeguard its installations, as it  relatesd to theits IT infrastructure, is, in part, dependent on several outside vendors with whom the Company maintains service -level agreements.

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Cyber Security

We are highly dependent on information technology systems to operate our business. A breakdown, invasion, corruption, destruction, or interruption of critical information technology systems by employees, others with authorized access to our systems, or unauthorized persons could negatively impact operations. In the ordinary course of business, we collect, store, and transmit confidential information, and it is critical that we do so in a secure manner to maintain the confidentiality and integrity of such information. Additionally, we outsource certain elements of our information technology systems to third parties. As a result of this outsourcing, our third -party vendors may or could have access to our confidential information, making such systems vulnerable. Data breaches of our information technology systems, or those of our third -party vendors, may expose a risk that ssensitive data may be exposed to unauthorized persons or to the public.

We have experienced cybersecurity eveincidents and disruptions such as , including viruses and attacks targeting our information technology systems. Such prior events have not had a material impact on our financial condition, results of operations, or liquidity. However, future threats could have a materially adverse impact on our company by, among other things, causing harm to our business, financial condition, results of operations, or reputation; disrupting our operations; exposing us to potential liability, regulatory actions, and loss of business; and challenging our eligibility for future work on sensitive systems. Due to the evolving nature of these security threats, the potential impact of any future incident cannot be predicted. Our insurance coverage may not be adequatesufficient to cover all the costs related to cybersecurity attacks or disruptions resulting from such eventsthem.

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

Environmental Matters and Climate Change

The Company and many of its customers are subject to regulation by federal, state, and international environmental laws, including those relating to climate change, that are subject to rapid changely evolving, which could result in regulatory uncertainty as well as potentialnd significant increases in compliance costs. There can be no assurance that the steps we take to abide by applicable requirements will meet all current and future regulatoryions. Any failures to do so could result in governmental enforcement actions, fines, and other penalties, or other liabilities, that could adversely affect our business.

Data Privacy

We control, process, or have access to personal information regarding our own employees or employment candidates, as well as that of many of our customers or other third parties. Information concerning these individuals may also reside in systems controlled by third -party vendors with whom we do business. The legal and regulatory environment concerningfor data privacy is becoming more complex and challenging, and the potential consequences of non-compliance havare becomeing more severe. The European Unions General Data Protection Regulation, the California Consumer Privacy Act, the Health Insurance Portability and Accountability Act of 1996, and similar laws impose additional compliance requirements related to the collection, use, processing, transfer, disclosure, and retention of personal information, which can increase operating costs and resources to accomplish. Any failure to abide by these regulations or to protect such personal information from inappropriate access or disclosure, whether through social engineering or by , accident, or other cause, could have severe consequences, including fines, litigation, regulatory sanctions, reputational damage, and loss of customers or employees. There can be no assurance that the steps we take to abide by applicable requirements and protect information will meet all current and future regulatory requirements, anticipate all potential methods of unauthorized access, or prevent all inappropriate disclosures. Any failures to do so could result in governmental enforcement actions, fines, and other penalties, or other liabilities, that could adversely affect our business.

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