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. All intercompany accounts and transactions have been eliminated
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.
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 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 Workforce
Solutions 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 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. 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.
we had several projects (primarily in our Workforce Solutions 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. We have experienced delays in commencing new projects and thus our ability to earn revenue has been delayed for these projects. Reductions in orders and other negative changes to orders experienced at the beginning
of the pandemic have started to reverse in 2021, but not at the level expected as ongoing
COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent to June 30, 2021 and we project breaching the Leverage and Fixed Charges ratio covenant (See Note 10).
Our working capital position on September 30, 2021 was $6.7 million. On August 5, 2021, the Company received approval from Small Business Administration (“SBA”) that the PPP loan including all accrued interest thereon was forgiven.
The COVID-19 macroeconomic environment is considered fluid and although recovery is anticipated to steadily occur over the next 12 months, issues that could result from the other
COVID variants could cause a further decline in revenue or stress our ability to meet covenant requirements. 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. We have recorded $5.0
million of employee retention credits (“ERCs”) to
be refunded from the IRS and recorded an additional $2.2 million of ERCs from unremitted payroll taxes made available under
the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). However, the timing of these elements taking place are not predictable and may not serve to mitigate our
situation or improve the 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. On November 12, 2021, due to the violation of Q3 2021 leverage ratio, we signed the Tenth Amendment and Reaffirmation Agreement with an
effective date of November 12, 2021 to adjust the thresholds for future covenants to ease the risk of non-compliance (See Note 17).
The Company’s management continues to explore raising capital through its access to the public markets or entering into alternative financing arrangements. Furthermore, while recovery
has been slower to materialize than expected the Company has experienced an improvement in orders as well as a higher rate of opportunities across business segments. Future 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.