GSE SYSTEMS INC, 10-Q filed on 17 May 21
v3.21.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2021
Apr. 30, 2021
Cover page.    
Entity Registrant Name GSE SYSTEMS INC  
Entity Central Index Key 0000944480  
Current Fiscal Year End Date --12-31  
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2021  
Document Fiscal Year Focus 2021  
Document Fiscal Period Focus Q1  
Entity Address, State or Province MD  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Non-accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   20,637,447
v3.21.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Mar. 31, 2021
Dec. 31, 2020
Current assets:    
Cash and cash equivalents $ 3,749 $ 6,702
Contract receivables, net 11,749 10,494
Prepaid expenses and other current assets 1,478 1,554
Total current assets 16,976 18,750
Equipment, software and leasehold improvements, net of accumulated depreciation of $4,891 and $4,816 694 616
Software development costs, net 605 630
Goodwill 13,339 13,339
Intangible assets, net 3,893 4,234
Operating lease right-of-use assets, net 1,413 1,562
Other assets 59 59
Total assets 36,979 39,190
Current liabilities:    
Line of credit 2,506 3,006
PPP Loan, current portion 8,832 5,034
Accounts payable 739 570
Accrued expenses 1,462 1,297
Accrued compensation 2,257 1,505
Billings-in-excess of revenue earned 4,947 5,285
Accrued warranty 587 665
Income taxes payable 1,549 1,621
Other current liabilities 1,596 2,498
Total current liabilities 24,475 21,481
PPP Loan, noncurrent portion 1,260 5,034
Operating lease liabilities noncurrent 1,565 1,831
Other noncurrent liabilities 263 339
Total liabilities 27,563 28,685
Commitments and contingencies (Note 16)
Stockholders' equity:    
Preferred stock $.01 par value, 2,000,000 shares authorized, no shares issued and outstanding 0 0
Common stock $0.01 par value; 60,000,000 shares authorized, 22,233,283 and 22,192,569 shares issued, 23,832,194 and 20,593,658 shares outstanding, respectively 222 222
Additional paid-in capital 79,697 79,687
Accumulated deficit (67,396) (65,191)
Accumulated other comprehensive loss (108) (1,214)
Treasury stock at cost, 1,598,911 shares (2,999) (2,999)
Total stockholders' equity 9,416 10,505
Total liabilities and stockholders' equity $ 36,979 $ 39,190
v3.21.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Mar. 31, 2021
Dec. 31, 2020
Stockholders' equity:    
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares authorized (in shares) 2,000,000 2,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 60,000,000 60,000,000
Common stock, shares issued (in shares) 22,233,283 22,192,569
Common stock, shares outstanding (in shares) 20,634,372 20,593,658
Treasury stock at cost (in shares) 1,598,911 1,598,911
v3.21.1
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]    
Revenue $ 13,104 $ 17,705
Cost of revenue 10,176 13,590
Gross profit 2,928 4,115
Operating expenses:    
Selling, general and administrative 3,734 4,948
Research and development 157 210
Restructuring charges 808 10
Loss on impairment 0 4,302
Depreciation 76 108
Amortization of definite-lived intangible assets 340 670
Total operating expenses 5,115 10,248
Operating loss (2,187) (6,133)
Interest expense, net (54) (241)
Gain (loss) on derivative instruments, net 0 (43)
Other income, net 1 29
Loss before income taxes (2,240) (6,388)
Provision for income taxes (35) (130)
Net loss $ (2,205) $ (6,258)
Net loss per common share - basic (in dollars per share) $ (0.11) $ (0.31)
Net loss per common share - diluted (in dollars per share) $ (0.11) $ (0.31)
Weighted average shares outstanding used to compute net loss per share - basic (in shares) 20,628,669 20,342,933
Weighted average shares outstanding used to compute net loss per share - diluted (in shares) 20,628,669 20,342,933
v3.21.1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS [Abstract]    
Net loss $ (2,205) $ (6,258)
Cumulative translation adjustment 1,106 (186)
Comprehensive loss $ (1,099) $ (6,444)
v3.21.1
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - USD ($)
shares in Thousands, $ in Thousands
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Loss [Member]
Treasury Stock [Member]
Total
Balance at Dec. 31, 2019 $ 218 $ 79,400 $ (54,654) $ (1,846) $ (2,999) $ 20,119
Balance (in shares) at Dec. 31, 2019 21,839       (1,599)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Stock-based compensation expense $ 0 147 0 0 $ 0 147
Common stock issued for RSUs vested (in shares) 140          
Common stock issued for RSUs vested $ 1 (1) 0 0 0 0
Shares withheld to pay taxes 0 (51) 0 0 0 (51)
Foreign currency translation adjustment 0 0 0 (186) 0 (186)
Net loss 0 0 (6,258) 0 0 (6,258)
Balance at Mar. 31, 2020 $ 219 79,495 (60,912) (2,032) $ (2,999) 13,771
Balance (in shares) at Mar. 31, 2020 21,979       (1,599)  
Balance at Dec. 31, 2020 $ 222 79,687 (65,191) (1,214) $ (2,999) 10,505
Balance (in shares) at Dec. 31, 2020 22,193       (1,599)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Stock-based compensation expense $ 0 38 0 0 $ 0 38
Common stock issued for RSUs vested (in shares) 41          
Common stock issued for RSUs vested $ 0 0 0 0 0 0
Shares withheld to pay taxes   (28) 0 0 0 (28)
Foreign currency translation adjustment 0 0 0 1,106 0 1,106
Net loss 0 0 (2,205) 0 0 (2,205)
Balance at Mar. 31, 2021 $ 222 $ 79,697 $ (67,396) $ (108) $ (2,999) $ 9,416
Balance (in shares) at Mar. 31, 2021 22,234       (1,599)  
v3.21.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Dec. 31, 2020
Cash flows from operating activities:      
Net loss $ (2,205) $ (6,258)  
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:      
Loss on impairment 0 4,302  
Depreciation 76 108 $ 108
Amortization of intangible assets 340 670  
Amortization of capitalized software development costs 97 75  
Amortization of deferred financing costs 3 0  
Stock-based compensation expense 38 147  
Bad debt expense 4 93  
(Gain) loss on derivative instruments, net 0 43  
Deferred income taxes 0 57  
Changes in assets and liabilities:      
Contract receivables, net (1,259) 3,453  
Prepaid expenses and other assets (1,737) 525  
Accounts payable, accrued compensation and accrued expenses 1,111 (121)  
Billings-in-excess of revenue earned (340) (1,220)  
Accrued warranty (156) (26)  
Other liabilities 2,070 (207)  
Net cash (used in) provided by operating activities (1,958) 1,641  
Cash flows from investing activities:      
Capital expenditures (153) (1)  
Capitalized software development costs (72) (61)  
Net cash used in investing activities (225) (62)  
Cash flows from financing activities:      
Proceeds from line of credit 0 3,500  
Repayment of line of credit (500) 0  
Payment of insurance premium (203) 0  
Repayment of long-term debt 0 (5,162)  
Shares withheld to pay taxes (28) (51)  
Net cash used in financing activities (731) (1,713)  
Effect of exchange rate changes on cash (39) (197)  
Net decrease in cash and cash equivalents (2,953) (331)  
Cash, cash equivalents at beginning of the period 6,702 11,691 11,691
Cash and cash equivalents at the end of the period $ 3,749 $ 11,360 $ 6,702
v3.21.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2021
Summary of Significant Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

GSE Systems, Inc. is a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. References in this report to "GSE" or "we" or "our" or "the Company" are to GSE Systems, Inc. and our subsidiaries, collectively.

The consolidated interim financial statements included herein have been prepared by GSE and are unaudited. In the opinion of our management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2020 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission on April 13, 2021.

The preparation of financial statements in conformity with U.S. GAAP requires management 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, as well as reported amounts of revenues and expenses during the reporting period. Our most significant estimates relate to revenue recognition on contracts with customers, product warranties, valuation of goodwill and intangible assets acquired including the determination of fair value in impairment tests, valuation of long-lived assets to be disposed of, valuation of stock-based compensation awards, and the recoverability of deferred tax assets. Actual results of these and other items not listed could differ from these estimates and those differences could be material.

COVID-19

GSE employees began working remotely during the first quarter of 2020 due to the COVID-19 pandemic and will continue to do so when practical and as mandated by local, state and federal directives and regulations. Employees almost entirely work from home within our Performance Improvement Solutions (“Performance”) segment, except when required to be at the client site for essential project work. Our Performance contracts, which are considered an essential service, are permitted to and mostly continue without pause; however, we have experienced certain delays in new business. For our staff augmentation business, we have seen certain contracts for our Nuclear Industry Training and Consulting (“NITC” or “workforce solutions”) customers paused or delayed as clients reduce their own on-premise workforces to the minimum operating levels in response to the pandemic; as a result, our NITC segment has experienced a decline in its billable employee base since the start of the pandemic. Although we cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic to our business at this time, we have experienced delays in commencing new projects and thus our ability to recognize revenue has been delayed for some contracts. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started to reverse in Q1 2021. We continue to closely monitor our operating expenses as a result of contract delays and have made adjustments to keep our gross profit at a sustainable level.

Going Concern

In 2020, we had several projects (primarily in our NITC business segment) delayed and new orders postponed because of the COVID-19 pandemic. We amended our credit facility with Citizens Bank, N.A. (“the Bank”) in 2020 based upon expected covenant violations and have been required to curtail term debt in exchange for revised financial covenants. Scheduled term loan repayments and agreed upon curtailment required us to use $18.5 million in available cash to pay-off our term debt in 2020. We signed a Ninth Amendment and Reaffirmation Agreement (the “Ninth Amendment”) with the Bank on March 29, 2021 to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and to adjust the thresholds for future covenants to ease the risk of non-compliance experienced in previous quarters (See Note 10). Our working capital position on March 31, 2021 was a deficit of $7.5 million. This working capital deficit was primarily due to the $8.8 million of current maturities on our PPP loan at March 31, 2021. We expect the PPP loan will be forgiven and have not received any indications to the contrary (See Note 4). If the PPP loan is not forgiven, in part or in whole, we will work with our bank to extend repayment terms as permitted to mitigate the impact on our cash flows. However, if unforgiven and unamended, our PPP loan would be due on April 23, 2022, in part or in whole, and may stress our free cash flow and the business to a degree that may cause our covenants to fail.

The COVID-19 macroeconomic environment is considered fluid and although recovery is anticipated to steadily occur over the next 12 months, a further decline will stress our ability to meet covenant requirements. Further continuance of delays in commencing work on outstanding orders or a continued loss of orders, and further disruption of our business because of worker illness or mandated shutdowns may also exacerbate the situation. Jurisdictions where our businesses operate across the country are pushing toward re-opening places of business and government support, through the American Rescue Plan Act of 2021, will continue to support the broader economy. However, the timing of these elements taking place are not predictable and may not serve to mitigate our situation or improve our specific company's health. Following the Ninth Amendment, our new covenant compliance remains dependent on meeting future projections, which are subject to the variability and unknown speed and extent of post-COVID-19 recovery.

We became eligible for the Employee Retention Credit for the first quarter of 2021 and have applied for a refund of $2.4 million dollars in April 2021. We believe we are eligible to receive the employee retention credit in the second quarter of 2021 and are currently reducing our payroll taxes as permitted under the Coronavirus Aid, Relief and Economic Security Act (See Note 17).

The Company's management continues to explore raising capital through its access to the public markets or entering into alternative finance arrangements. Continued negative trends in operating results could be mitigated through various cost cutting measures including adjustments to headcount or compensation, vendor augmentation or delay of investment initiatives in the Company's corporate office.

These actions, which are further supported by positively trending macroeconomic conditions, and the potential of recovery of business and orders may ease the risk of further bank covenant violations. However, when considering the unpredictability of the above, there continues to be substantial doubt the Company will continue as a going concern.

v3.21.1
Recent Accounting Pronouncements
3 Months Ended
Mar. 31, 2021
Recent Accounting Pronouncements [Abstract]  
Recent Accounting Pronouncements
Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities, Investments – Equity Method and Joint Ventures, and Derivatives and Hedging, which provides clarity for companies that hold equity securities at cost to first update the fair value of an investment, immediately prior to applying the Equity Method of Accounting; or clarity for companies that enter into forward contracts to purchase additional shares of an equity security that would then require the investee to account for the investment via the Equity Method. This ASU is applicable for public companies starting with fiscal years beginning after December 31, 2020 and interim periods within those fiscal years. The Company adopted ASU 2020-01 on January 1, 2021. This standard did not have a significant impact to our consolidated financial statements since the Company does not currently hold any investments at cost.

In September 2020, the FASB issued ASU 2020-10, Codification Improvements, which is part of an ongoing attempt to improve the consistency of the codification. Previously the option to disclose information in the footnotes to the financial statements was in one of two sections: Disclosure Section (Section 50) or Other Presentation Matters (Section 45). ASU 2020-10 conforms the disclosure requirements into Section 50 and provides additional information on specific guidance that was previously unclear or not included in the codification. This ASU is applicable for public companies starting with fiscal years beginning after December 15, 2020, with early adoption available for interim and annual financial statements not already filed and using the retrospective approach. however, the FASB does not believe that this should change any of the current reporting or disclosure requirements. The Company adopted ASU 2020-10 on January 1, 2021. The adoption of this standard did not have a material impact to our consolidated financial statements.

Accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On October 16, 2019, the FASB voted to defer the deadlines for private companies and certain small public companies, including smaller reporting companies, to implement the new accounting standards on credit losses. The new effective date is January 1, 2023. As a smaller reporting company, we have elected to defer adoption in line with new deadlines and are currently evaluating the effects, if any, that the adoption of this guidance will have on our consolidated financial position, results of operations and cash flows.

Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.

v3.21.1
Basic and Diluted Loss per Share
3 Months Ended
Mar. 31, 2021
Basic and Diluted Loss per Share [Abstract]  
Basic and Diluted Loss per Share
Note 3 - Basic and Diluted Loss per Share

Basic earnings per share is based on the weighted average number of outstanding common shares for the period. Diluted earnings per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised. Basic and diluted earnings per share are based on the weighted average number of outstanding shares for the period.

The weighted average number of common shares and common share equivalents used in the determination of basic and diluted loss per share were as follows:

(in thousands, except for share amounts)
 
Three months ended
 
  
March 31,
 
  
2021
  
2020
 
Numerator:
      
Net (loss) income attributed to common stockholders
 
$
(2,205
)
 
$
(6,258
)
         
Denominator:
        
Weighted-average shares outstanding for basic earnings per share
  
20,628,669
   
20,342,933
 
         
Effect of dilutive securities:
        
Employee stock options and warrants
  
-
   
-
 
         
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
  
20,628,669
   
20,342,933
 
         
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
  
43,937
   
59,421
 

v3.21.1
Paycheck Protection Program Loan
3 Months Ended
Mar. 31, 2021
Paycheck Protection Program Loan [Abstract]  
Paycheck Protection Program Loan
Note 4 - Paycheck Protection Program Loan

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act’s purpose is to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. On April 23, 2020, GSE was approved for and on the next day received a $10 million PPP Loan (“PPP Loan” or “Loan”) from the Small Business Administration (SBA) as part of the CARES Act from the Bank. On June 5, 2020, the Paycheck Protection Program Flexibility Act (“PPPFA”) was signed into law. This new law acted to ease some of the burden of the first legislation in order to expand the amount of forgiveness available.

The aim of the PPP Loan is to provide funding for businesses for certain payroll and nonpayroll costs. Proceeds for the PPP Loan are eligible for complete forgiveness, if used at least 60% for payroll cost with up to 40% for certain other nonpayroll costs. Forgiveness for amounts less than the total amount of the PPP Loan ($10 million) is allowed, retaining 60/40 requirements, but will be limited based upon the amount of funds used for payroll costs and further reduced by a full-time employee and salary/hourly rate wage reduction limitation. GSE has relied primarily on eligible wages and expenses and is well within the ratios.

The SBA has stated that PPP loans above $2 million will be subject to audit for appropriate usage of the funds and confirmation of loan forgiveness. GSE has stated, as part of the initial application, that the receipt of such funds were required in order to maintain its employees during the pandemic, and GSE was confident in its ability to report on the proper use the funds and obtain full forgiveness. GSE has also prepared and performed extensive review in its submission of the mandated Form 3590 – PPP Loan Necessity Questionnaire and remains confident to that end.

The terms of the loan are as follows: The July 5 legislation provides for an automatic 10 month deferment, after the coverage period, on the first payment, placing it on August 9, 2021. Subsequent payments, in accordance with our loan documentation, will occur monthly in equal monthly proportions, beginning with the first full month following the deferment period and will be comprised of principal and interest, with the loan fully due on April 23, 2022. Although the first payment is not required until September 2021, the loan balance accrues at an interest rate of 1% from April 23, 2020. If the loan is forgiven, the related interest incurred is also forgiven.

We realized all possible PPP Loan (“PPP Loan” or “Loan”) forgiveness expenses through the 24 week coverage period during the 2020 fiscal year. We have applied for forgiveness in Q1 of 2021, with expected response in Q2 of 2021. Any balance unforgiven by the SBA and accruing 1% interest since inception will be payable starting on the date instructed by the SBA and in equal monthly payments with the final balance due by April 23, 2022. Loan forgiveness is achieved by applying for forgiveness with the Company’s lender, the Bank, with expenses eligible for forgiveness as incurred and receiving final clearance from the SBA. The Bank has successfully completed their review and provided the loan forgiveness application and support to the SBA on February 26, 2021 for their process to begin, legislated to take no more than an additional 90 days. Upon receipt of the funds, a Loan Payable – PPP balance of $10 million was recorded and related interest expense is being accrued. As of December 31, 2020, GSE reported half of the loan balance and accrued interest as a short term payable.

The PPP Loan contains events of default and other provisions customary for a loan of this type. The Payroll Protection Program provides that (1) the use of PPP Loan amount shall be limited to certain qualifying expenses, (2) 100% of the principal amount of the loan is guaranteed by the Small Business Administration.

The SBA provides for certain customary events of default, including if the Company (i) fails to do anything required by the Note and other Loan Documents; (ii) does not disclose, or anyone acting on its behalf does not disclose, any material fact to the Bank or the SBA; (iii) makes, or anyone acting on its behalf makes, a materially false or misleading representation to lender or the SBA; (iv) reorganizes, merges, consolidates or otherwise changes ownership or business structure without the Bank’s prior written consent; (v) takes certain prohibited actions after the Bank makes a determination that the PPP Loan is not entitled to full forgiveness. Upon default the Bank may require immediate payment of all amounts owing under the PPP Loan or file suit and obtain judgment.

As of March 31, 2021, we had $10 million of outstanding PPP Loan and accrued interest of $93 thousand as debt, which we classified $8.8 million as current and $1.3 million as noncurrent in our consolidated balance sheets. We recorded $25 thousand of interest expense during the three months ended March 31, 2021.

As of March 31, 2021, the Company was in full compliance with respect to the PPP Loan and believes the eligible expenses accumulated during the coverage period satisfy forgiveness criteria.

v3.21.1
Contract Receivables
3 Months Ended
Mar. 31, 2021
Contract Receivables [Abstract]  
Contract Receivables
Note 5 - Contract Receivables
Contract receivables represent our unconditional rights to consideration due from our domestic and international customers. We expect to collect all contract receivables within the next twelve months.

The components of contract receivables were as follows:

(in thousands)
 
March 31, 2021
  
December 31, 2020
 
       
Billed receivables
 
$
5,202
  
$
5,694
 
Unbilled receivable
  
6,906
   
5,160
 
Allowance for doubtful accounts
  
(359
)
  
(360
)
Total contract receivables, net
 
$
11,749
  
$
10,494
 

Management reviews collectability of receivables periodically and records an allowance for doubtful accounts to reduce the Company's receivables to their net realizable value when management determines it is probable that we will not be  able to collect all amounts due from customers. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, specific identification and review of customer accounts.

During the three months ended March 31, 2021 and 2020, we recorded bad debt expense of $4 thousand and $93 thousand, respectively.

During the month of April 2021, we invoiced $2.0 million of the unbilled amounts as of the three months ended March 31, 2021.

As of March 31, 2021 and December 31, 2020 , we had no customer that accounted over 10% of our consolidated contract receivables.

v3.21.1
Goodwill and Intangible Assets
3 Months Ended
Mar. 31, 2021
Goodwill and Intangible Assets [Abstract]  
Goodwill and Intangible Assets
Note 6 - Goodwill and Intangible Assets

During the three months ended March 31, 2020, we determined that the impact of the COVID-19 pandemic on the Company’s operations was an indicator of a triggering event that could result in potential impairment of goodwill. As such we performed a Step 1 goodwill analysis whereby, we compared the fair value of each reporting unit to its respective carrying value. Based upon this analysis, we determined the fair value of goodwill at the reporting unit levels exceeded the carrying value and thus there was no impairment for the period ended March 31, 2020. The Step 1 analysis was updated as of December 31, 2020 for our annual impairment test and did not identify any impairment of goodwill as of such date.

Our goodwill impairment analysis includes the use of a discounted cash flow model that requires management to make assumptions regarding estimates of growth rates used to forecast revenue, operating margin and terminal value as well as determining the appropriate risk-adjusted discount rates and other factors that impact fair value determinations.

Due to the impact of the COVID-19 pandemic, definite-lived intangible assets were reviewed for impairment. The undiscounted cash flows evidenced impairment for the DP Engineering asset group. As such, we used a discounted cash flow model to determine the fair value of the DP Engineering asset group and recorded an impairment charge of $4.3 million for the period ended March 31, 2020.

The Company’s intangible assets impairment analysis includes the use of undiscounted cash flow and discounted cash flow models that requires management to make assumptions regarding estimates of growth rates used to forecast revenue, operating margin and terminal value as well as determining the appropriate risk adjusted discount rates and other factors that impact fair value determinations.

Management concluded that there were no triggering events that occurred during the three months ended March 31, 2021.

The following table shows the gross carrying amount and accumulated amortization of definite-lived intangible assets:

(in thousands)
 
As of March 31, 2021
 
  
Gross Carrying Amount
  
Accumulated Amortization
  
Net
 
Amortized intangible assets:
         
Customer relationships
 
$
8,628
  
$
(5,772
)
 
$
2,856
 
Trade names
  
1,689
   
(1,042
)
  
647
 
Developed technology
  
471
   
(471
)
  
-
 
Non-contractual customer relationships
  
433
   
(433
)
  
-
 
Noncompete agreement
  
527
   
(360
)
  
167
 
Alliance agreement
  
527
   
(304
)
  
223
 
Others
  
167
   
(167
)
  
-
 
Total
 
$
12,442
  
$
(8,549
)
 
$
3,893
 

(in thousands)
 
As of December 31, 2020
 
  
Gross Carrying Amount
  
Accumulated Amortization
  
Impact of Impairment
  
Net
 
Amortized intangible assets:
            
Customer relationships
 
$
11,730
  
$
(5,504
)
 
$
(3,102
)
 
$
3,124
 
Trade names
  
2,467
   
(1,020
)
  
(778
)
  
669
 
Developed technology
  
471
   
(471
)
  
-
   
-
 
Non-contractual customer relationships
  
433
   
(433
)
  
-
   
-
 
Noncompete agreement
  
949
   
(336
)
  
(422
)
  
191
 
Alliance agreement
  
527
   
(277
)
  
-
   
250
 
Others
  
167
   
(167
)
  
-
   
-
 
Total
 
$
16,744
  
$
(8,208
)
 
$
(4,302
)
 
$
4,234
 

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:
(in thousands)
   
Years ended December 31:
   
2021
 
$
874
 
2022
  
910
 
2023
  
640
 
2024
  
435
 
2025
  
334
 
Thereafter
  
700
 
Total
 
$
3,893
 

v3.21.1
Equipment, Software and Leasehold Improvements
3 Months Ended
Mar. 31, 2021
Equipment, Software and Leasehold Improvements [Abstract]  
Equipment, Software and Leasehold Improvements
Note 7 -  Equipment, Software and Leasehold Improvements

Equipment, software and leasehold improvements, net consist of the following:

(in thousands)
      
 
 
March 31, 2021
  
December 31, 2020
 
Computer and equipment
 
$
2,233
  
$
2,229
 
Software
  
1,845
   
1,695
 
Leasehold improvements
  
659
   
660
 
Furniture and fixtures
  
848
   
848
 
 
  
5,585
   
5,432
 
Accumulated depreciation
  
(4,891
)
  
(4,816
)
Equipment, software and leasehold improvements, net
 
$
694
  
$
616
 

Depreciation expense was $76 thousand and $108 thousand for the three months ended March 31, 2021 and 2020, respectively. Capitalization of internal-use software cost of $150 thousand was recorded in software for the three months ended March 31, 2021.

v3.21.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2021
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments
Note 8 - Fair Value of Financial Instruments
ASC 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The levels of the fair value hierarchy established by ASC 820 are:

Level 1:  inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2:  inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3:  inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

As of March 31, 2021 and December 31, 2020, we considered the recorded value of certain of our financial assets and liabilities, which consist primarily of cash and cash equivalents, contract receivable and accounts payable, to approximate fair value based upon their short-term nature.

For the three months ended March 31, 2021, we did not have any transfers into or out of Level 3.

The following table presents assets measured at fair value at March 31, 2021:

(in thousands)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
 
             
Money market funds
 
$
15
  
$
-
  
$
-
  
$
15
 
Total assets
  
15
   
-
   
-
   
15
 

The following table presents assets and liabilities measured at fair value at December 31, 2020:

(in thousands)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
 
             
Money market funds
 
$
435
  
$
-
  
$
-
  
$
435
 
Total assets
  
435
   
-
   
-
   
435
 

v3.21.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2021
Stock-Based Compensation [Abstract]  
Stock-Based Compensation
Note 9 - Stock-Based Compensation

The Company recognizes compensation expense on a pro rata straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff vesting terms. The Company recognizes the cumulative effect of a change in the number of awards expected to vest in compensation expense in the period of change. The Company has not capitalized any portion of its stock-based compensation. The Company’s forfeiture rate is based on actuals.

During the three months ended March 31, 2021 and 2020, the Company recognized $38 thousand and $147 thousand, respectively, of stock-based compensation expense under the fair value method.

During the three months ended March 31, 2021, we did not grant RSUs to employees.

During three months ended March 31, 2020, we granted approximately 30,000 time-vesting RSUs to employees with an aggregate fair value of approximately $43 thousand. A portion of the time-vesting RSUs vest quarterly in equal amounts over the course of eight quarters, and the remainder vest annually in equal amounts over the course of one to three years. The fair value of the time-vesting RSUs is expensed ratably over the requisite service period, which ranges from one year to three years.

During the three months ended March 31, 2020, we granted approximately 510,000 performance-based RSUs to key employees with an aggregate fair-value of $600 thousand. These awards vest over three years based upon achieving certain financial metrics achieved during fiscal 2022 for revenue and Adjusted EBITDA.

We did not grant stock options for the three months ended March 31, 2021 or 2020.

v3.21.1
Debt
3 Months Ended
Mar. 31, 2021
Debt [Abstract]  
Debt
Note 10 - Debt

On December 29, 2016, we entered a 3-year $5.0 million revolving line of credit facility with the Bank to fund general working capital needs and acquisitions. On May 11, 2018, we entered into the Amended and Restated Credit and Security Agreement (the “Credit Agreement” or the “Credit Facility”) to (a) expand the $5.0 million revolving line of credit (the “RLOC”) to include a letter of credit sub-facility and not be subject to a borrowing base and (b) to add a $25 million term loan facility, available to finance permitted acquisitions over the following 18 months. The credit facility was subject to certain financial covenants and reporting requirements  and was scheduled to mature in five years on May 11, 2023 and accrued interest at the one-month USD LIBOR, plus a margin that varies depending on our overall leverage ratio. The RLOC had required monthly payments of only interest, with principal due at maturity, while our term loan draws required monthly payments of principal and interest based on an amortization schedule. Our obligations under the Credit Agreement are guaranteed by our wholly owned subsidiaries; Hyperspring, Absolute, True North, DP Engineering and by any future material domestic subsidiaries (collectively, "the Guarantors").

On January 6, 2020, due to an expected violation of our covenants, we entered into the Sixth Amendment and Reaffirmation Agreement with an effective date of December 31, 2019, with our Bank to relax the fixed charge coverage ratio and leverage ratio and delay testing of both financial covenants. We agreed to an additional covenant, requiring us  to maintain a consolidated Adjusted EBITDA target of $4.3 million, tested quarterly as of December 31, 2019, March 31, 2020 and June 30, 2020. Further, we agreed to maintain a minimum USA liquidity of at least $5.0 million in the aggregate, tested bi-weekly as of the fifteenth and the last day of each month, beginning on December 31, 2019 and until June 30, 2020. In addition to the revised covenants, we agreed to make accelerated principal payments of $3.0 million on January 6, 2020; $1.0 million on March 31, 2020; and $1.0 million on June 30, 2020. We incurred $20 thousand of debt issuance costs related to this amendment.
 
On April 17, 2020, effective March 31, 2020, we entered into the Seventh Amendment and Reaffirmation Agreement, which required us to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00, tested quarterly as of the last day of each quarter, beginning with the quarter ending June 30, 2021. In addition, we agreed to not exceed a maximum leverage ratio, tested quarterly as of the last day of each quarter and beginning with the quarter ending September 30, 2020 as follows: (i) 3.00 to 1.00 for the period ending on September 30, 2020; (ii) 2.50 to 1.00 for the period ending on December 31, 2020; and (iii) 2.25 to 1.00 for the period ending on March 31, 2021 and for the periods ending December 31, March 31, June 30 and September 30, thereafter. We additionally agreed to make accelerated principal payments of $0.75 million on April 17, 2020 and $0.5 million on June 30, 2020. We incurred $50 thousand of debt issuance costs related to this amendment.

On August 28, 2020, we signed the Eighth Amendment and Reaffirmation Agreement, “the Eighth Amendment”, with an effective date of June 29, 2020, due to violating our minimum Adjusted EBITDA covenant during the three months ended June 30, 2020. As part of the amendment, we agreed to pay $10 million to the Bank during the three months ended September 30, 2020, of which $0.7 million was paid to reduce our RLOC. We paid $9.1 million of our long-term debt and paid out $0.2 million for the unwinding of the interest rate swap agreement during the quarter. We incurred $10 thousand in additional debt issuance costs related to the amendment, which we expensed along with a $70 thousand previously deferred debt issuance cost during the year ended December 30, 2020.

The Eighth Amendment removed our minimum Adjusted EBITDA covenant and changed our other debt covenants on an ongoing basis as follows: our maximum fixed charge coverage ratio will be tested quarterly as of the last day of each quarter, beginning with the quarter ending December 31, 2021 and must be 1.00 to 1.00; our leverage ratio will be tested quarterly, starting on March 31, 2021 as follows: (i) 3.00 to 1.00 for the period ending March 31, 2021; (ii) 2.75 to 1.00 for the period ending on June 30, 2021, (iii) 2.50 to 1.00 for the period ending on September 30, 2021, and (iv) 2.00 to 1.00 for the period ending on December 31, 2021 and for the periods ending on each December 31st, March 31st, June 30th and September 30th thereafter. We are also required to maintain a minimum of $3.5 million in aggregate USA liquidity, which was tested on September 15, 2020 and will be tested bi-weekly on an on-going basis.

On March 29, 2021, due to a projected violation of Q1 2021 leverage ratio, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021, with our bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and we agreed, for each quarter hereafter, fixed charge coverage ratio shall not be less than 1.10 to 1.00. In addition, we agreed to not exceed a maximum leverage ratio and starting on September 30, 2021 as follows: (i) 3.25 to 1.00 for the period ending September 30, 2021; (ii) 3.00 to 1.00 for the period ending on December 31, 2021, (iii) 2.75 to 1.00 for the period ending March 31, 2022; (iv) 2.50 to 1.00 for the period ending June 30, 2022 and (v) 2.00 to 1.00 for the periods ending September 30, 2022 and each December 31st, March 31st, June 30th and September 30th thereafter. We are also required to maintain a minimum of $2.5 million in aggregate USA liquidity. As part of the amendment, we agreed, at closing, (i) to make a $0.5 million pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75 thousand to reduce the RLOC. We incurred $25 thousand fees related to this amendment during the year ended December 31, 2020.

Revolving Line of Credit (“RLOC”)
 
During the three months ended March 31, 2021, we paid down $0.5 million on our RLOC as part of the Ninth Amendment as discussed above. As of March 31, 2021, we had outstanding borrowings of $2.5 million under the RLOC and three letters of credit totaling $933 thousand outstanding to certain of our customers. After consideration of letters of credit, the amount available under the RLOC was approximately $0.3 million with a $4.25 million total borrowing capacity as of March 31, 2021.

We intend to continue using the RLOC for short-term working capital needs and the issuance of letters of credit in connection with business operations provided, we remain in compliance with our covenants. As discussed above, we signed the Ninth Amendment on our credit facility as such our covenants have been waived through June 30, 2021. Letter of credit issuance fees range between 1.25% and 2.00% of the value of the letter of credit, depending on our overall leverage ratio. We pay an unused RLOC fee quarterly based on the average daily unused balance.

Paycheck Protection Program Loan

We applied for the PPP Loan with the Bank, which was approved by the bank and funded on April 23, 2020, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the CARES Act). The PPP Loan matures on April 23, 2022, and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred for ten months after the last day of the covered period, August 9, 2021. The PPP Loan contains events of default and other provisions customary for a loan of this type. The Payroll Protection Program provides that (1) the use of PPP Loan amount shall be limited to certain qualifying expenses, (2) 100% of the principal amount of the loan is guaranteed by the Small Business Administration and (3) an amount up to the full principal amount may qualify for loan forgiveness in accordance with the terms of CARES Act. We are not yet able to determine the amount that might be forgiven. As of March 31, 2021, the Company was in full compliance with respect to the PPP Loan and believes the eligible expenses accumulated during the coverage period satisfy forgiveness criteria. Forgiveness was applied for with the SBA, through our bank on February 26, 2021.

v3.21.1
Product Warranty
3 Months Ended
Mar. 31, 2021
Product Warranty [Abstract]  
Product Warranty
Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. Our System Design and Build contracts generally include a one-year base warranty on the systems. The portion of our warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $587 thousand, and the remaining $179 thousand is classified as long-term within other liabilities.

The activity in the accrued warranty accounts during the current period is as follows:

(in thousands)
   
Balance at January 1, 2021
 
$
922
 
Current period provision
  
(119
)
Current period claims
  
(36
)
Currency adjustment
  
(1
)
Balance at March 31, 2021
 
$
766
 

v3.21.1
Revenue
3 Months Ended
Mar. 31, 2021
Revenue [Abstract]  
Revenue
Note 12 - Revenue

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. We primarily generate revenue through three distinct revenue streams: (1) System Design and Build (“SDB”), (2) Software and (3) Training and Consulting Services across our Performance and NITC (workforce solutions) segments. We recognize revenue from SDB and software contracts mainly through our Performance segment. We recognize training and consulting service contracts through both segments.

The following table represents a disaggregation of revenue by type of goods or services for the three months ended March 31, 2021 and 2020, along with the reportable segment for each category:

(in thousands)
  
Three months ended
 
  
March 31, 2021
  
March 31, 2020
 
Performance Improvement Solutions segment
      
System Design and Build
 
$
1,862
  
$
3,813
 
Point in time
  
-
   
-
 
Over time
  
1,862
   
3,813
 
         
Software and Support
  
813
   
910
 
Point in time
  
95
   
640
 
Over time
  
718
   
270
 
         
Training and Consulting Services
  
4,406
   
4,988
 
Point in time
  
68
   
29
 
Over time
  
4,338
   
4,959
 
         
Nuclear Industry Training and Consulting segment
        
Training and Consulting Services
  
6,023
   
7,994
 
Point in time
  
86
   
-
 
Over time
  
5,937
   
7,994
 
         
Total revenue
 
$
13,104
  
$
17,705
 

SDB contracts are typically fixed-priced, and we receive payments based on a billing schedule established in our contracts. We generally have two main performance obligations: (1) the training simulator build and (2) the Post Contract Support (“PCS”) period. Fees for PCS are normally paid in advance of the related service period. The training simulator build performance obligation generally includes hardware, software, and labor. The transaction price under the SDB contracts is allocated to each performance obligation based on its standalone selling price. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method. In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue over time as control transfers to a customer. Estimated contract costs are reviewed and revised periodically during the contract period, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses become known.

Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to the Company’s revenue recognition as a significant change in the estimates can cause the Company’s revenue and related margins to change significantly from previous estimates.

Management judgments and estimates involved in the initial creation and subsequent updates to the Company’s estimates-at-completion and related profit recognized are critical to our revenue recognition associated with SDB contracts. Inputs and assumptions requiring significant management judgment included anticipated direct labor, subcontract labor, and other direct costs required to deliver on unfinished performance obligations.

The transaction price for Software contracts is generally fixed, and we recognize revenue upon delivery of the software, with fees due in advance or shortly after delivery of the software.

We recognize Training and Consulting Services revenue as services are provided, and we bill our customers for these services at fixed intervals (i.e., weekly, biweekly or monthly) based on contract terms.

Contract asset, which we classify as unbilled receivables, relates to performance under the contract for obligations that are satisfied but not yet billed. Contract assets are recognized as revenue as they occur.

Contract liability, which we classify as billing-in-excess of revenue earned, relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied.

The following table reflects the revenue recognized in the reporting periods that were included in contract liabilities from contracts with customers:

(in thousands)
  
Three months ended
 
  
March 31, 2021
 
March 31, 2020
 
Revenue recognized in the period from amounts included in Billings in Excess of Revenue Earned at the beginning of the period
 
$
2,189
  
$
3,762
 

v3.21.1
Income Taxes
3 Months Ended
Mar. 31, 2021
Income Taxes [Abstract]  
Income Taxes
Note 13 - Income Taxes

The following table shows the provision for (benefit from) income taxes and our effective tax rates:

(in thousands)
 
Three months ended
 
  
March 31, 2021
 
March 31, 2020
 
Loss before income taxes
 
$
(2,240
)
 
$
(6,388
)
Provision for (benefit from) income taxes
  
(35
)
  
(130
)
Effective tax rate
  
1.6
%
  
2.0
%

Our income tax benefit for the interim periods presented is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax benefit for the three months ended March 31, 2021 and 2020 was comprised mainly of foreign and state tax benefit.

Our income effective tax rate was 1.6% and 2.0% for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, the difference between our income tax benefit at an effective tax rate of 1.6% and a benefit at the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. entity, and discrete item adjustments for U.S. and foreign taxes. For the three months ended March 31, 2020, the difference between income tax benefit at an effective tax rate of 2.0% and a benefit at the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. and China subsidiaries, and discrete item adjustments for U.S. and foreign taxes.

Because of our net operating loss carryforwards, we are subject to U.S. federal and state income tax examinations from the year 2000 and forward and are subject to foreign tax examinations by tax authorities for years 2015 and forward.

An uncertain tax position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense. The Company has an estimated $0.8 million of tax benefit that will be realized in the third quarter of 2021 upon the expiration of the statute of limitations of the tax year in which the uncertain tax position was taken.

We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. We have evaluated all positive and negative evidence and determined that it will continue to assess a full valuation allowance on our U.S., Chinese, and Slovakian net deferred assets as of March 31, 2021. We have determined that it is not more likely than not that the Company will realize the benefits of its deferred taxes in the U.S. and foreign jurisdictions.

v3.21.1
Leases
3 Months Ended
Mar. 31, 2021
Leases [Abstract]  
Leases
Note 14 - Leases

According to ASC 842 Leases (Topic 842), for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Leases generally have remaining terms of one to six years, whereas leases with an initial term of twelve months or less are
not recognized on our consolidated balance sheet. We recognize lease expense for minimum lease payments on a straight-line basis over the term of the lease. We maintain leases of office facilities and equipment, and certain leases include options to renew or terminate. Renewal options are exercisable based upon our discretion and vary based on the nature of each lease, with renewal periods generally ranging from one to five years. The term of the lease includes renewal periods, only if we are reasonably certain that we will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, we consider several factors, including but not limited to, the cost of moving to another location, the cost of disruption to our operations, the purpose or location of the leased asset and the terms associated with extending the lease.

Operating lease Right-of-Use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets represent the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. Our real estate leases, which are comprised primarily of office spaces, represent most of our remaining lease liability. Most of our lease payments are fixed, although an immaterial portion of payments are variable in nature. These lease payments vary based on changes in facts and circumstances related to the use of the ROU asset and are recorded as incurred. We use an incremental borrowing rate based on rates available at commencement in determining the present value of future payments.

We have lease agreements with lease and non-lease components, which are accounted for as a single lease. We apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Lease contracts are evaluated at inception to determine whether they contain a lease and whether we obtain the right to control an identified asset. The following table summarizes the classification of operating ROU assets and lease liabilities on the consolidated balance sheets (in thousands):

  
As of
 
Operating Leases
Classification
 
March 31, 2021
  
December 31, 2020
 
        
Leased Assets
 
      
Operating lease - right of use assets
Long term assets
 
$
1,413
  
$
1,562
 
 
 
        
Lease Liabilities
 
        
Operating lease liabilities - Current
Other current liabilities
  
1,121
   
1,138
 
Operating lease liabilities
Long term liabilities
  
1,565
   
1,831
 
 
  
 
$
2,686
  
$
2,969
 

We executed a sublease agreement with a tenant to sublease 3,650 square feet from the office space in Sykesville on May 1, 2019. This agreement is in addition to the 3,822 of square feet previously subleased, which was entered into on April 1, 2017. The sublease does not relieve us of our primary lease obligation. The lessor agreements are both considered operating leases, maintaining the historical classification of the underlying lease. We do not recognize any underlying assets for the subleases as a lessor of operating leases. The net amount received from the sublease is recorded within selling, general and administrative expenses.

The table below summarizes lease income and expense recorded in the consolidated statements of operations incurred during three months ended March 31, 2021, (in thousands):

  
Three months ended
 
Lease Cost
Classification
 
March 31, 2021
  
March 31, 2020
 
        
Operating lease cost (1)
Selling, general and administrative expenses
 
$
192
  
$
321
 
Short-term leases costs (2)
Selling, general and administrative expenses
  
16
   
1
 
Sublease income (3)
Selling, general and administrative expenses
  
(32
)
  
(32
)
Net lease cost
 
 
$
176
  
$
290
 

(1) Includes variable lease costs which are immaterial.
(2) Includes leases maturing less than twelve months from the report date.
(3) Sublease portfolio consists of two tenants, which sublease parts of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

The Company is obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of March 31, 2021 are as follows (in thousands):

 (in thousands)
 
Gross Future
Minimum Lease
Payments
 
2021 remainder
 
$
941
 
2022
  
1,166
 
2023
  
631
 
2024
  
116
 
2025
  
3
 
Total lease payments
 
$
2,857
 
Less: Interest
  
171
 
Present value of lease payments
 
$
2,686
 

We calculated the weighted-average remaining lease term, presented in years below and the weighted-average discount rate for our operating leases. As noted in our lease accounting policy, we use the incremental borrowing rate as the lease discount rate.

Lease Term and Discount Rate
 
March 31, 2021
 
December 31, 2020
Weighted-average remaining lease term (years)
 
 
  
         Operating leases
 
2.42
 
2.64
Weighted-average discount rate
 
 
  
         Operating leases
 
5.00%
 
5.00%

The table below sets out the classification of lease payments in the consolidated statement of cash flows.

(in thousands)
 
Three months ended
 
Cash paid for amounts included in measurement of liabilities
 
March 31, 2021
  
March 31, 2020
 
       
Operating cash flows used in operating leases
 
$
327
  
$
339
 

v3.21.1
Segment Information
3 Months Ended
Mar. 31, 2021
Segment Information [Abstract]  
Segment Information
Note 15 - Segment Information

We have two reportable business segments. The Performance Improvement Solutions segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. Example engineering services include, but are not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for ASME code and ASME Section XI. The Company provides these services across all market segments through our Performance, True North consulting, and DP Engineering subsidiaries. Example training applications include turnkey and custom training services. Contract terms are typically less than two years.

On February 15, 2019, through our wholly-owned subsidiary GSE Performance Solutions, Inc., the Company entered into the DP Engineering Purchase Agreement, to purchase 100% of the membership interests in DP Engineering. DP Engineering is a provider of value-added technical engineering solutions and consulting services to nuclear power plants with an emphasis on preparation and implementation of design modifications during plant outages. For reporting purposes, DP Engineering is included in our Performance segment due to similarities in services provided including engineering solutions and implementation of design modifications to the nuclear power sector.

The Nuclear Industry Training and Consulting (workforce solutions) segment provides specialized workforce solutions primarily to the nuclear industry, working at clients’ facilities. This business is managed through our Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.

The following table summarizes the revenue and operating results attributable to our reportable segments and includes a reconciliation of segment revenue to consolidated revenue and segment loss to consolidated loss before income taxes. Inter-segment revenue is eliminated in consolidation and is not significant.

(in thousands)
 
Three months ended
 
  
March 31, 2021
  
March 31, 2020
 
Revenue:
      
Performance Improvement Solutions
 
$
7,081
  
$
9,711
 
Nuclear Industry Training and Consulting
  
6,023
   
7,994
 
Total revenue
 
$
13,104
  
$
17,705
 
         
Operating loss
        
Performance Improvement Solutions
 
$
(1,403
)
 
$
(1,272
)
Nuclear Industry Training and Consulting
  
(784
)
  
(559
)
Loss on impairment
  
-
   
(4,302
)
Operating loss
  
(2,187
)
  
(6,133
)
         
Interest expense, net
  
(54
)
  
(241
)
Gain (loss) on derivative instruments, net
  
-
   
(43
)
Other income, net
  
1
   
29
 
Loss before income taxes
 
$
(2,240
)
 
$
(6,388
)
         

v3.21.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2021
Commitments and Contingencies [Abstract]  
Commitments and Contingencies
Note 16 - Commitments and Contingencies

Joyce v. Absolute Consulting, Inc.

On March 29, 2019, a former employee of Absolute Consulting, Inc., filed a putative class action against Absolute and the Company, Joyce v. Absolute Consulting Inc., case number 1:19 cv 00868 RDB, in the United States District Court for the District of Maryland. The lawsuit alleged that the plaintiff and certain other employees were not properly compensated for overtime hours worked. The Company was subsequently dismissed from the case, leaving Absolute as the sole defendant.

On August 17, 2020, Absolute entered into a Settlement Agreement with the plaintiffs, with a maximum settlement amount of $1.5 million, which required Court approval. On September 8, 2020, the Settlement Agreement between Absolute and the plaintiffs was ratified by the Court, and the case was dismissed, although the parties remain bound by the terms of the settlement agreement. Following Court approval, Absolute made an initial payment toward the settlement amount, including legal fees, of $625 thousand. After the passing of an opt-in notice period expired, the final cost of settling this case, including plaintiff’s attorney fees was approximately $1.4 million. As of March 31, 2021, approximately $15 thousand of the outstanding liability remains to be paid and we are expecting this to occur as payment information is confirmed with the plaintiff’s attorneys over the next few quarters.

On September 29, 2020, the Company received $952 thousand from a general escrow account, originally set up as part of the Company’s purchase of Absolute during fiscal 2017. The Company presented the loss on Joyce legal settlement and the benefit from the proceeds from the release of escrow from the Absolute transaction in selling, general and administrative expenses, in the amount of $477 thousand for the year ended December 31, 2020.

Per ASC 450 Accounting for Contingencies, the Company reviews potential items and areas where a loss contingency could arise. In the opinion of management, we are not a party to any legal proceeding, the outcome of which, in management’s opinion, individually or in the aggregate, would have a material effect on our consolidated results of operations, financial position or cash flows, other than as noted above. We expense legal defense costs as incurred.

The Company is involved in litigation in the ordinary course of business. While it is too early to determine the outcome of such matters, management does not expect the resolution of these matters to have a material impact on the Company’s financial position or results of operations.

v3.21.1
Subsequent Events
3 Months Ended
Mar. 31, 2021
Subsequent Events [Abstract]  
Subsequent Events
Note 17 - Subsequent Events

On April 14, 2021, Swedish Companies Registration Office (Bolagsverket) registered the closure of the GSE Power Systems AB liquidation.

We became eligible for the Employee Retention Credit for the first quarter of 2021 and have applied for a refund of $2.4 million in April 2021. We believe we are eligible to receive the employee retention credit in the second quarter of 2021 and are currently reducing our payroll taxes as permitted under the Coronavirus Aid, Relief and Economic Security Act.

v3.21.1
Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2021
Summary of Significant Accounting Policies [Abstract]  
Basis of Preparation
Basis of Presentation

GSE Systems, Inc. is a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. References in this report to "GSE" or "we" or "our" or "the Company" are to GSE Systems, Inc. and our subsidiaries, collectively.

The consolidated interim financial statements included herein have been prepared by GSE and are unaudited. In the opinion of our management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2020 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission on April 13, 2021.

The preparation of financial statements in conformity with U.S. GAAP requires management 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, as well as reported amounts of revenues and expenses during the reporting period. Our most significant estimates relate to revenue recognition on contracts with customers, product warranties, valuation of goodwill and intangible assets acquired including the determination of fair value in impairment tests, valuation of long-lived assets to be disposed of, valuation of stock-based compensation awards, and the recoverability of deferred tax assets. Actual results of these and other items not listed could differ from these estimates and those differences could be material.

Going Concern
Going Concern

In 2020, we had several projects (primarily in our NITC business segment) delayed and new orders postponed because of the COVID-19 pandemic. We amended our credit facility with Citizens Bank, N.A. (“the Bank”) in 2020 based upon expected covenant violations and have been required to curtail term debt in exchange for revised financial covenants. Scheduled term loan repayments and agreed upon curtailment required us to use $18.5 million in available cash to pay-off our term debt in 2020. We signed a Ninth Amendment and Reaffirmation Agreement (the “Ninth Amendment”) with the Bank on March 29, 2021 to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and to adjust the thresholds for future covenants to ease the risk of non-compliance experienced in previous quarters (See Note 10). Our working capital position on March 31, 2021 was a deficit of $7.5 million. This working capital deficit was primarily due to the $8.8 million of current maturities on our PPP loan at March 31, 2021. We expect the PPP loan will be forgiven and have not received any indications to the contrary (See Note 4). If the PPP loan is not forgiven, in part or in whole, we will work with our bank to extend repayment terms as permitted to mitigate the impact on our cash flows. However, if unforgiven and unamended, our PPP loan would be due on April 23, 2022, in part or in whole, and may stress our free cash flow and the business to a degree that may cause our covenants to fail.

The COVID-19 macroeconomic environment is considered fluid and although recovery is anticipated to steadily occur over the next 12 months, a further decline will stress our ability to meet covenant requirements. Further continuance of delays in commencing work on outstanding orders or a continued loss of orders, and further disruption of our business because of worker illness or mandated shutdowns may also exacerbate the situation. Jurisdictions where our businesses operate across the country are pushing toward re-opening places of business and government support, through the American Rescue Plan Act of 2021, will continue to support the broader economy. However, the timing of these elements taking place are not predictable and may not serve to mitigate our situation or improve our specific company's health. Following the Ninth Amendment, our new covenant compliance remains dependent on meeting future projections, which are subject to the variability and unknown speed and extent of post-COVID-19 recovery.

We became eligible for the Employee Retention Credit for the first quarter of 2021 and have applied for a refund of $2.4 million dollars in April 2021. We believe we are eligible to receive the employee retention credit in the second quarter of 2021 and are currently reducing our payroll taxes as permitted under the Coronavirus Aid, Relief and Economic Security Act (See Note 17).

The Company's management continues to explore raising capital through its access to the public markets or entering into alternative finance arrangements. Continued negative trends in operating results could be mitigated through various cost cutting measures including adjustments to headcount or compensation, vendor augmentation or delay of investment initiatives in the Company's corporate office.

These actions, which are further supported by positively trending macroeconomic conditions, and the potential of recovery of business and orders may ease the risk of further bank covenant violations. However, when considering the unpredictability of the above, there continues to be substantial doubt the Company will continue as a going concern.

v3.21.1
Recent Accounting Pronouncements (Policies)
3 Months Ended
Mar. 31, 2021
Recent Accounting Pronouncements [Abstract]  
Recent Accounting Pronouncements Adopted and Not Yet Adopted
Accounting pronouncements recently adopted

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities, Investments – Equity Method and Joint Ventures, and Derivatives and Hedging, which provides clarity for companies that hold equity securities at cost to first update the fair value of an investment, immediately prior to applying the Equity Method of Accounting; or clarity for companies that enter into forward contracts to purchase additional shares of an equity security that would then require the investee to account for the investment via the Equity Method. This ASU is applicable for public companies starting with fiscal years beginning after December 31, 2020 and interim periods within those fiscal years. The Company adopted ASU 2020-01 on January 1, 2021. This standard did not have a significant impact to our consolidated financial statements since the Company does not currently hold any investments at cost.

In September 2020, the FASB issued ASU 2020-10, Codification Improvements, which is part of an ongoing attempt to improve the consistency of the codification. Previously the option to disclose information in the footnotes to the financial statements was in one of two sections: Disclosure Section (Section 50) or Other Presentation Matters (Section 45). ASU 2020-10 conforms the disclosure requirements into Section 50 and provides additional information on specific guidance that was previously unclear or not included in the codification. This ASU is applicable for public companies starting with fiscal years beginning after December 15, 2020, with early adoption available for interim and annual financial statements not already filed and using the retrospective approach. however, the FASB does not believe that this should change any of the current reporting or disclosure requirements. The Company adopted ASU 2020-10 on January 1, 2021. The adoption of this standard did not have a material impact to our consolidated financial statements.

Accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On October 16, 2019, the FASB voted to defer the deadlines for private companies and certain small public companies, including smaller reporting companies, to implement the new accounting standards on credit losses. The new effective date is January 1, 2023. As a smaller reporting company, we have elected to defer adoption in line with new deadlines and are currently evaluating the effects, if any, that the adoption of this guidance will have on our consolidated financial position, results of operations and cash flows.

Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.

v3.21.1
Basic and Diluted Loss per Share (Tables)
3 Months Ended
Mar. 31, 2021
Basic and Diluted Loss per Share [Abstract]  
Earnings (Loss) Per Share, Basic and Diluted
The weighted average number of common shares and common share equivalents used in the determination of basic and diluted loss per share were as follows:

(in thousands, except for share amounts)
 
Three months ended
 
  
March 31,
 
  
2021
  
2020
 
Numerator:
      
Net (loss) income attributed to common stockholders
 
$
(2,205
)
 
$
(6,258
)
         
Denominator:
        
Weighted-average shares outstanding for basic earnings per share
  
20,628,669
   
20,342,933
 
         
Effect of dilutive securities:
        
Employee stock options and warrants
  
-
   
-
 
         
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
  
20,628,669
   
20,342,933
 
         
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
  
43,937
   
59,421
 

v3.21.1
Contract Receivables (Tables)
3 Months Ended
Mar. 31, 2021
Contract Receivables [Abstract]  
Contract Receivables
The components of contract receivables were as follows:

(in thousands)
 
March 31, 2021
  
December 31, 2020
 
       
Billed receivables
 
$
5,202
  
$
5,694
 
Unbilled receivable
  
6,906
   
5,160
 
Allowance for doubtful accounts
  
(359
)
  
(360
)
Total contract receivables, net
 
$
11,749
  
$
10,494
 

v3.21.1
Goodwill and Intangible Assets (Tables)
3 Months Ended
Mar. 31, 2021
Goodwill and Intangible Assets [Abstract]  
Schedule of Acquired Finite-Lived Intangible Assets by Major Class
The following table shows the gross carrying amount and accumulated amortization of definite-lived intangible assets:

(in thousands)
 
As of March 31, 2021
 
  
Gross Carrying Amount
  
Accumulated Amortization
  
Net
 
Amortized intangible assets:
         
Customer relationships
 
$
8,628
  
$
(5,772
)
 
$
2,856
 
Trade names
  
1,689
   
(1,042
)
  
647
 
Developed technology
  
471
   
(471
)
  
-
 
Non-contractual customer relationships
  
433
   
(433
)
  
-
 
Noncompete agreement
  
527
   
(360
)
  
167
 
Alliance agreement
  
527
   
(304
)
  
223
 
Others
  
167
   
(167
)
  
-
 
Total
 
$
12,442
  
$
(8,549
)
 
$
3,893
 

(in thousands)
 
As of December 31, 2020
 
  
Gross Carrying Amount
  
Accumulated Amortization
  
Impact of Impairment
  
Net
 
Amortized intangible assets:
            
Customer relationships
 
$
11,730
  
$
(5,504
)
 
$
(3,102
)
 
$
3,124
 
Trade names
  
2,467
   
(1,020
)
  
(778
)
  
669
 
Developed technology
  
471
   
(471
)
  
-
   
-
 
Non-contractual customer relationships
  
433
   
(433
)
  
-
   
-
 
Noncompete agreement
  
949
   
(336
)
  
(422
)
  
191
 
Alliance agreement
  
527
   
(277
)
  
-
   
250
 
Others
  
167
   
(167
)
  
-
   
-
 
Total
 
$
16,744
  
$
(8,208
)
 
$
(4,302
)
 
$
4,234
 

Finite-Lived Intangible Assets, Future Amortization Expense
Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:
(in thousands)
   
Years ended December 31:
   
2021
 
$
874
 
2022
  
910
 
2023
  
640
 
2024
  
435
 
2025
  
334
 
Thereafter
  
700
 
Total
 
$
3,893
 

v3.21.1
Equipment, Software and Leasehold Improvements (Tables)
3 Months Ended
Mar. 31, 2021
Equipment, Software and Leasehold Improvements [Abstract]  
Equipment, Software and Leasehold Improvements
Equipment, software and leasehold improvements, net consist of the following:

(in thousands)
      
 
 
March 31, 2021
  
December 31, 2020
 
Computer and equipment
 
$
2,233
  
$
2,229
 
Software
  
1,845
   
1,695
 
Leasehold improvements
  
659
   
660
 
Furniture and fixtures
  
848
   
848
 
 
  
5,585
   
5,432
 
Accumulated depreciation
  
(4,891
)
  
(4,816
)
Equipment, software and leasehold improvements, net
 
$
694
  
$
616
 

v3.21.1
Fair Value of Financial Instruments (Tables)
3 Months Ended
Mar. 31, 2021
Fair Value of Financial Instruments [Abstract]  
Assets and Liabilities Measured at Fair Value
The following table presents assets measured at fair value at March 31, 2021:

(in thousands)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
 
             
Money market funds
 
$
15
  
$
-
  
$
-
  
$
15
 
Total assets
  
15
   
-
   
-
   
15
 

The following table presents assets and liabilities measured at fair value at December 31, 2020:

(in thousands)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  
Significant
Other Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
 
             
Money market funds
 
$
435
  
$
-
  
$
-
  
$
435
 
Total assets
  
435
   
-
   
-
   
435
 

v3.21.1
Product Warranty (Tables)
3 Months Ended
Mar. 31, 2021
Product Warranty [Abstract]  
Activities in the Accrued Warranty Accounts
The activity in the accrued warranty accounts during the current period is as follows:

(in thousands)
   
Balance at January 1, 2021
 
$
922
 
Current period provision
  
(119
)
Current period claims
  
(36
)
Currency adjustment
  
(1
)
Balance at March 31, 2021
 
$
766
 

v3.21.1
Revenue (Tables)
3 Months Ended
Mar. 31, 2021
Revenue [Abstract]  
Disaggregation of Revenue
The following table represents a disaggregation of revenue by type of goods or services for the three months ended March 31, 2021 and 2020, along with the reportable segment for each category:

(in thousands)
  
Three months ended
 
  
March 31, 2021
  
March 31, 2020
 
Performance Improvement Solutions segment
      
System Design and Build
 
$
1,862
  
$
3,813
 
Point in time
  
-
   
-
 
Over time
  
1,862
   
3,813
 
         
Software and Support
  
813
   
910
 
Point in time
  
95
   
640
 
Over time
  
718
   
270
 
         
Training and Consulting Services
  
4,406
   
4,988
 
Point in time
  
68
   
29
 
Over time
  
4,338
   
4,959
 
         
Nuclear Industry Training and Consulting segment
        
Training and Consulting Services
  
6,023
   
7,994
 
Point in time
  
86
   
-
 
Over time
  
5,937
   
7,994
 
         
Total revenue
 
$
13,104
  
$
17,705
 

Balance of Contract Liabilities and Revenue Recognized in Reporting Period
The following table reflects the revenue recognized in the reporting periods that were included in contract liabilities from contracts with customers:

(in thousands)
  
Three months ended
 
  
March 31, 2021
 
March 31, 2020
 
Revenue recognized in the period from amounts included in Billings in Excess of Revenue Earned at the beginning of the period
 
$
2,189
  
$
3,762
 

v3.21.1
Income Taxes (Tables)
3 Months Ended
Mar. 31, 2021
Income Taxes [Abstract]  
Income Before Income Taxes by Domestic and Foreign Sources
The following table shows the provision for (benefit from) income taxes and our effective tax rates:

(in thousands)
 
Three months ended
 
  
March 31, 2021
 
March 31, 2020
 
Loss before income taxes
 
$
(2,240
)
 
$
(6,388
)
Provision for (benefit from) income taxes
  
(35
)
  
(130
)
Effective tax rate
  
1.6
%
  
2.0
%

v3.21.1
Leases (Tables)
3 Months Ended
Mar. 31, 2021
Leases [Abstract]  
Classification of Operating ROU Assets and Lease Liabilities on the Balance Sheet
Lease contracts are evaluated at inception to determine whether they contain a lease and whether we obtain the right to control an identified asset. The following table summarizes the classification of operating ROU assets and lease liabilities on the consolidated balance sheets (in thousands):

  
As of
 
Operating Leases
Classification
 
March 31, 2021
  
December 31, 2020
 
        
Leased Assets
 
      
Operating lease - right of use assets
Long term assets
 
$
1,413
  
$
1,562
 
 
 
        
Lease Liabilities
 
        
Operating lease liabilities - Current
Other current liabilities
  
1,121
   
1,138
 
Operating lease liabilities
Long term liabilities
  
1,565
   
1,831
 
 
  
 
$
2,686
  
$
2,969
 

Lease Income and Expenses
The table below summarizes lease income and expense recorded in the consolidated statements of operations incurred during three months ended March 31, 2021, (in thousands):

  
Three months ended
 
Lease Cost
Classification
 
March 31, 2021
  
March 31, 2020
 
        
Operating lease cost (1)
Selling, general and administrative expenses
 
$
192
  
$
321
 
Short-term leases costs (2)
Selling, general and administrative expenses
  
16
   
1
 
Sublease income (3)
Selling, general and administrative expenses
  
(32
)
  
(32
)
Net lease cost
 
 
$
176
  
$
290
 

(1) Includes variable lease costs which are immaterial.
(2) Includes leases maturing less than twelve months from the report date.
(3) Sublease portfolio consists of two tenants, which sublease parts of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

Future Minimum Lease Payments
The Company is obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of March 31, 2021 are as follows (in thousands):

 (in thousands)
 
Gross Future
Minimum Lease
Payments
 
2021 remainder
 
$
941
 
2022
  
1,166
 
2023
  
631