Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2020 First Quarter Earnings Call. I’m joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with a legal disclaimer, and then I will summarize the operating results for each of our business units before opening it up for questions. Kevin?

Good morning, everyone. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates and assumptions and information currently available to us, and these matters may materially change in the future. Many of these beliefs, estimates and assumptions are subject to rapid changes. For more information on our forward-looking statements and the risks, uncertainties and other factors to which they are subject, please see the periodic reports on Forms 10-K, 10-Q and 8-K that we filed with the SEC, as well as our press releases that we issue from time to time.

Thanks, Kevin. We last spoke about two months ago, but the world has obviously changed since. Like most companies, we are heavily impacted by COVID-19. To put the impact in perspective, we need to discuss the implications by segment. But first, I want to stress several overarching themes. When COVID-19 quickly escalated. our highest priority was the safety of our employees. We very quickly moved most of our billable and non-billable staff to work from home. Though a part of our workforce is accustomed to occasionally working from home, the sheer volume and suddenness of the transition throughout the company required a Herculean effort. We are proud of our entire company for quickly adapting to the new environment. As it pertains to financial performance. In the short-term, our revenue in all three segments is impacted. Our number one focus right now is maximizing cash flow and shrinking our balance sheet. We are reducing debt by aggressively pursuing the reduction and deferment of costs and vigilantly managing accounts receivable. As far as cost reductions are concerned, we need to consider each segment separately, while aggressively applying the same two principles. First, maximizing utilization; and second, reducing SG&A expense. These two overarching themes must be managed carefully in order to maximize cash flow in the short-term, while not harming the company in the long-term. COVID-19 has had the most significant impact on our healthcare staffing segment. Before the pandemic, our healthcare staffing segment was well on its way to another record quarter. But as many of you know, most of our school clients, including New York City, Hawaii and Chicago, abruptly closed in the middle of March. The impact on Q1 was twofold. We lost approximately $3 million in revenue from school personnel that we would have otherwise billed in Q1. We also lost over $1 million in gross profit from this lost revenue in Q1. In addition to our normal margins, we incurred certain payroll costs for the full month of March. To help offset the short-term revenue reduction, our healthcare segment has aggressively reduced its cost structure. After absorbing most statutory mandated non-billable costs for direct personnel in Q1, we have furloughed close to 100% of our billable staff that is not fully utilized. Our utilization rate in healthcare are running at or near 100%. Today, we have reduced SG&A expense by more than $1.5 million on an annualized basis. The actions we have taken enable us to flex our cost structure down over the short-term, while allowing us to ramp up to the 2020/2021 school year, once we gain confidence that the schools are reopening on schedule. As compared to the healthcare – to healthcare, COVID-19 demonstrated less impact on our engineering and IT segments. Though neither group has seen a material reduction in current assignments as a result of COVID-19, both segments have predictably seen a slowing of new business inquiries and proposals. Visibility beyond Q2 is challenging. Though we have several significant opportunities in our engineering pipeline, and we expect pent-up demand for electrical substation field work, the timing of the work is more challenging to predict than usual. As a result, we have also focused on reducing our cost structure in both engineering and IT segments. We are more focused on driving the utilization than ever, while still preserving room for proposal preparation. We are going to great lengths to minimize bench through RIFs, furloughs, converting salaried staff to hourly and increasing the billable hour quotient for senior direct personnel. Consistent with the rest of the company, we are making material reductions in SG&A. For engineering and IT, on an annualized basis, we have eliminated just under $2 million of SG&A expense and delayed previously budgeted expenditures wherever possible. This is in addition to significant SG&A expense reduction in 2019. In summary, during the next two quarters, our primary focus will be cost and debt reduction without sacrificing the long-term progress we have made in the business. While aggressively managing the business to today’s economic reality, the entire RCM team is committed to making sure the company is positioned to grow in a post COVID world. This concludes our prepared remarks. At this time, we will open the call for questions.

All right. [Operator Instructions] And our first question will come from Bill Sutherland.

Good morning, Bill.

Hey, good morning, Kevin. Good morning, Brad. Thanks for taking the questions. So on healthcare, you – Brad, you mentioned 100% – or nearly – it’s never 100%, nearly 100% utilization. Does that mean, I think of the business also having a temporary staffing aspect to it. I just want to understand what you – are you a little more understanding of what you mean by that?

Well, most of our healthcare staffing business is naturally 100% other than sick time and paid time off. We don’t have a lot of bench in the healthcare staffing segment, but we do have some bench and we have bench, particularly in two areas. We have bench with supervisors that we use in the schools that are meant to be partially billable. And in some cases, not billable at all or built into the rates of the people that we staff in schools. We also have a number of therapists that are salaried. And so they can have bench time as well. The guys do a fantastic job of keeping utilization in the 97%, 98% range under normal times. March, we got hammered a little bit because of statutory requirements, they were kind of back toward in Illinois and New York. And then, of course, we do have salary therapists that we didn’t necessarily put to work right away. And some of our supervisors, some of which we needed to lay off, but can’t just lay them off with 24 hours notice, right? So necessarily depending on years of service and all that. But – so you have a fair amount of bench time in March, unfortunately, which when Brad gave this sort of the loss revenue versus the loss gross profit, you’ll see that the ratio is kind of out of whack in terms of our normal margins. And that’s just because we wound up having extra costs for the last two weeks of March that didn’t go against any revenue. But we are very, very focused in all three business lines in maximizing gross margin going forward. And as you mentioned, we’ll never have a 100% utilization…

Yes.

… 100.0%, but we’re running around 99% right now, 90% – upper 98%, 99%, and some weeks, pretty close to 100%.

Yes.

The main point is that we’re always focused on gross margin and utilization, but we’re even more focused on it right now, because it’s just critical to maximizing our cash flow.

And the other issue, of course, is the outlook for the fall. I guess, I assume you have to go with a couple of different assumptions. If you begin to think that it could be delayed, are you working with other opportunities to place people?

Yes. Yes, certainly. We are looking at many different opportunities. I would say, the two most promising of new things that we’re looking at would be COVID testing, both in testing centers and we’re rolling out of corporate product of – when I say testing, that means screening centers. So not actual COVID testing – screening centers. So we are offering a service to large corporations to have on-site nurses to do temperature screenings and check with the employees as they come into work everyday. That’s probably not going to take off right away, because a lot of people aren’t working in offices right now. But for a lot of businesses, that’s going to change. So we have that offering ready to go right now. We’ve got a number of clients that are interested in that service. In terms of what that’s going to generate in revenue, it’s really hard to say. And then the other area is that, we have seen an uptick in providing nurses to commercial screening centers, like airports, for instance, and hospitals and state governments. And we have not seen significant revenue from that yet. But we’re optimistic that will grow over time. One of the things that’s been interesting, though, is that there’s so much chaos in the healthcare market right now. We’re not seeing – we’re seeing a lot of demand for nurses, but we’re not seeing as much execution, as we would like to see. But we think that over time, we’ll get better with it. The other thing that we’re offering is telehealth to the school. So we are doing a small amount – our therapists are doing some teletherapy. It’s not a giant amount of revenue. But we may also be doing some teletherapy or telehealth in some other schools, certainly schools don’t reopen. I think that they’ll be looking at this more seriously than they are right now. It’s our opinion that – and again, this is just our opinion, but it’s our opinion that the schools will be opened for the 2020/2021 year and exactly when and how they open, may be different for New York versus Chicago versus Hawaii, right, because they’re all different – they all have different exposures to the virus.

Yes, exactly. Okay. And then wanted to – you talked about some good demand in the transmission and distribution area, the power gen. And I’m just kind of curious how you think? And you were building some good backlog, just wondering how you’re thinking about the potential conversion, or are you thinking about just be deferred or – as opposed to canceled?

We’re not getting any sense that any of our major projects are going to be canceled. In fact, I can tell you, we haven’t had any big project or – that we’re bidding on and we’re working on before and the clients has said, we’re not doing this for the foreseeable future, that hasn’t happened. I think we would be kidding ourselves if we even think that some of the stuff that the clients have not executed on isn’t going to get delayed. Of course, some of the stuff is going to get delayed. We are seeing a decent amount of proposal activity in the T&D space. So we’re encouraged by that. We also think that there’s going to be a lot of pent-up demand for field services that isn’t getting done right now. I mean, there’s very few people allowed in even visit a lot of our utility points. But at some point, safety, field service type work, like that work has to get done. The walk downs and all kinds of work needs to get done. So, we’re cautiously optimistic about engineering. But it’s like, as Brad said on the prepared remarks, it’s just – the visibility is a big, big challenge, particularly past Q2. But we have not seen a big erosion in any of our current work in engineering or IT. We are seeing a slowdown in proposals. But even the last week or so, we’ve seen a couple of nice proposals come out of T&D. And so we’re cautiously optimistic about those two business going forward with the asterisk that we don’t know what the hell we don’t know.

And then, I know in your business, the only silver lining is your cash improves when things get slower. And I guess, that’s – we can expect a decent cash quarter?

Yes, yes. You can expect a decent cash quarter. And I believe in both Q2 and Q3 and we are going to be hyper-focused on cash flow going forward. No matter, how long this lasts, we realize it’s critical for us to be at least cash flow neutral. But really, we’re driving towards being cash flow positive and we’re definitely be cash flow positive in Q2 and Q3.

Okay. That’s it from me. Thanks again, guys.

All right. At this time, there are no further questions in queue. [Operator Instructions] It does look like our next question will come from Alex Rygiel. Alex, your line is now open.

Good morning, Alex.

Good morning, Kevin and Brad. How are you today?

Oh, good. Good.

Good to hear.

A couple of random questions. First, how many healthcare professionals are on assignment today? And what was the percentage of healthcare billable staff that was furloughed?

I don’t have those exact numbers in front of me, Alex. But I would tell you that, just off the top of my head about probably more than two-thirds of our healthcare staff was furloughed. In terms of our billable staff, probably, 70%, at least, 70%, 75% maybe.

Okay.

And we – and as furloughed quite a few non-billable people as well unfortunately that were [indiscernible]

As it relates to that, 70% to 75%, I’m assuming that, in theory, they wouldn’t come back on until the fall. School season starts up again, is that fair?

Oh, yes, that’s pretty fair. I mean, we’re going to – we’re looking for work for all of them. But realistically, best case scenario is we find work for a handful of our furloughed billable staff. But we are looking for work. We have a big goal of nurses that we’re looking to place wherever we can. As far as the professionals are concerned, there’s not much we can do for them in the short-term.

Sure. And then can you update us on your debt covenants and where you stand right now?

Well, we have a waiver for Q1, the way that our formula works for Q1, our debt-to-EBITDA ratio after was 4.4. That’s higher than we’d like to see it. It’s above where we’re supposed to be. I would say was – I would – this is my characterization, but I feel like getting the waiver from Citizens Bank was relatively easy and automatic. If we need waivers in the future, I feel reasonably confident that that won’t be an issue, provided that we execute on our end in terms of paying down debt and having positive cash flow, which we will. So I don’t see that as an issue going forward. We’ve been with Citizens Bank for over 20 years. And through thick and thin, they stood behind us. It’s been mostly fixed fortunately. We barely rarely needed to get any kind of waivers or amendments. But when we have in the past, it’s never been a problem. And every indication that we’re getting from Citizens Bank today is no problem, keep doing what you’re doing and we’ll stand behind you.

As it relates to the arbitration settlement, correct me, maybe I was wrong, but I thought there might be three of them that were outstanding with up to maybe 14 million on the books [Multiple Speakers] or just one?

Yes. There was three major projects involved in one arbitration. So the arbitration is complete. So it’s finished. That’s the best news about the arbitration is we are done.

Excellent. And then can you be cash flow positive in the second quarter in the special childcare business?

Yes.

Excellent. That’s it for me. Thank you.

Okay. Thank you, Alex.

All right, Speakers, it doesn’t look like we have any more questions in queue. Do you want me to reprompt or…

We’ll go.

We’re getting some, I think. We do have one from [Steve Bulva] [ph]. Do you want to take that as a final question?

Please? That would be great.

Hey, good morning. Good morning, Kevin.

Good morning, Steve.

In regard to the arbitration, did you receive any cash that you hadn’t received already as a result of that?

We have not received the cash yet. We do not know exactly when we’re going to get that. But we’re hopeful, we’ll get it in Q2.

How much is that?

$7.4 million.

And the write-off was $8 million. Is that right?

$8 million. $8.0 million.

$8 million, okay. What – when was that finalized that arbitration?

In April, few weeks ago.

Okay. Does it – do the – your balance sheet or [Multiple Speakers]?

Yes. The balance sheet – the condensed balance sheet in the press release reflects – does reflect it, and full balance sheet that will be in our Q that we expect to file today will also reflect it. So we close it at a subsequent event, but since it’s material and important, we incorporated that into our income statement and balance sheet.

Okay. What’s – how optimistic are you that you’ll collect the selling for in during the quarter?

I’m not really sure, Steve. I think there’s a pretty good chance. It doesn’t make a lot of sense for our clients to not pay it. Without getting into any details, there’s a few barbed wires in the decision that would incentivize them to pay it. So if they don’t pay it, I think it would be an unwise decision. But I never thought we’d get into this position in the first place. So it’s hard for me to project what they’re going to do.

Okay. Switching over to COVID, do you qualify for any PPP money?

We do not. We’re too large.

Okay. That’s all I have.

Okay. Thank you, Steve. Thank you for your interest in. All right.

Yes. There’s no further questions in queue.

Thank you for attending RCM’s first quarter conference call. We look forward to our next update in early August.

Ladies and gentlemen, this concludes your call. You may now disconnect your lines.