GSE SYSTEMS INC, 10-Q filed on 15 Nov 21
v3.21.2
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2021
Oct. 31, 2021
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Quarterly Report true  
Document Period End Date Sep. 30, 2021  
Current Fiscal Year End Date --12-31  
Document Transition Report false  
Entity Registrant Name GSE Systems, Inc.  
Entity Incorporation, State or Country Code DE  
Entity File Number 001-14785  
Entity Tax Identification Number 52-1868008  
Entity Address, Address Line One 6940 Columbia Gateway Dr.  
Entity Address, Address Line Two Suite 470  
Entity Address, City or Town Columbia  
Entity Address, State or Province MD  
Entity Address, Postal Zip Code 21046  
City Area Code 410  
Local Phone Number 970-7800  
Entity Filer Category Non-accelerated Filer  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Small Business true  
Entity Common Stock, Shares Outstanding   20,900,225
Document Fiscal Year Focus 2021  
Document Fiscal Period Focus Q3  
Entity Central Index Key 0000944480  
Title of 12(b) Security Common Stock, $.01 Par Value  
Trading Symbol GVP  
Security Exchange Name NASDAQ  
v3.21.2
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2021
Dec. 31, 2020
Current assets:    
Cash and cash equivalents $ 4,043 $ 6,702
Contract receivables, net 12,529 10,494
Prepaid expenses and other current assets 4,781 1,554
Total current assets 21,353 18,750
Equipment, software and leasehold improvements, net 792 616
Software development costs, net 575 630
Goodwill 13,339 13,339
Intangible assets, net 3,305 4,234
Operating lease right-of-use assets, net 1,161 1,562
Other assets 58 59
Total assets 40,583 39,190
Current liabilities:    
Line of credit 2,067 3,006
PPP Loan, current portion 0 5,034
Accounts payable 1,210 570
Accrued expenses 1,306 1,297
Accrued compensation 2,214 1,505
Billings in excess of revenue earned 4,461 5,285
Accrued warranty 560 665
Income taxes payable 1,597 1,621
Other current liabilities 1,202 2,498
Total current liabilities 14,617 21,481
PPP Loan, noncurrent portion 0 5,034
Operating lease liabilities noncurrent 1,036 1,831
Other noncurrent liabilities 256 339
Total liabilities 15,909 28,685
Commitments and contingencies (Note 16)
Stockholders' equity:    
Preferred stock $0.01 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, 22,499,136 and 22,192,569 shares issued, 20,900,225 and 20,593,658 shares outstanding, respectively 225 222
Additional paid-in capital 80,280 79,687
Accumulated deficit (52,727) (65,191)
Accumulated other comprehensive loss (105) (1,214)
Treasury stock at cost, 1,598,911 shares (2,999) (2,999)
Total stockholders' equity 24,674 10,505
Total liabilities and stockholders' equity $ 40,583 $ 39,190
v3.21.2
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Sep. 30, 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) 22,499,136 22,192,569
Common stock, shares outstanding (in shares) 20,900,225 20,593,658
Treasury stock at cost (in shares) 1,598,911 1,598,911
v3.21.2
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2021
Sep. 30, 2020
Sep. 30, 2021
Sep. 30, 2020
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]        
Revenue $ 14,686 $ 12,922 $ 41,312 $ 44,967
Cost of revenue 11,503 9,603 32,512 33,971
Gross profit 3,183 3,319 8,800 10,996
Operating expenses:        
Selling, general and administrative 3,265 2,878 10,521 12,548
Research and development 149 137 460 526
Restructuring charges (10) 185 798 195
Loss on impairment 3 0 3 4,302
Depreciation 69 76 216 254
Amortization of intangible assets 286 414 929 1,528
Total operating expenses 3,762 3,690 12,927 19,353
Operating loss (579) (371) (4,127) (8,357)
Interest expense, net (32) (128) (135) (556)
Gain on derivative instruments, net 0 31 0 35
Other income, net 12,215 (77) 16,853 (24)
Income (loss) before income taxes 11,604 (545) 12,591 (8,902)
Provision for income taxes 166 116 127 166
Net income (loss) $ 11,438 $ (661) $ 12,464 $ (9,068)
Net income (loss) per common share - basic (in dollars per share) $ 0.55 $ (0.03) $ 0.60 $ (0.44)
Net income (loss) per common share - diluted (in dollars per share) $ 0.55 $ (0.03) $ 0.60 $ (0.44)
Weighted average shares outstanding used to compute net income (loss) per share - basic (in shares) 20,863,479 20,563,452 20,714,068 20,438,571
Weighted average shares outstanding used to compute net income (loss) per share - diluted (in shares) 20,863,479 20,563,452 20,714,068 20,438,571
v3.21.2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2021
Sep. 30, 2020
Sep. 30, 2021
Sep. 30, 2020
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) [Abstract]        
Net income (loss) $ 11,438 $ (661) $ 12,464 $ (9,068)
Cumulative translation adjustment (23) 84 1,109 104
Comprehensive income (loss) $ 11,415 $ (577) $ 13,573 $ (8,964)
v3.21.2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' 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 $ 0 357 0 0 $ 0 357
Common stock issued for RSUs vested (in shares) 381          
Common stock issued for RSUs vested $ 4 (4) 0 0 0 0
Shares withheld to pay taxes 0 (77) 0 0 0 (77)
Foreign currency translation adjustment 0 0 0 104 0 104
Net income (loss) 0 0 (9,068) 0   (9,068)
Balance at Sep. 30, 2020 $ 222 79,676 (63,722) (1,742) $ (2,999) 11,435
Balance (in shares) at Sep. 30, 2020 22,220       (1,599)  
Balance at Jun. 30, 2020 $ 221 79,676 (63,061) (1,826) $ (2,999) 12,011
Balance (in shares) at Jun. 30, 2020 22,150       (1,599)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Stock-based compensation expense $ 0 33 0 0 $ 0 33
Common stock issued for RSUs vested (in shares) 70          
Common stock issued for RSUs vested $ 1 (1) 0 0 0 0
Shares withheld to pay taxes 0 (32) 0 0 0 (32)
Foreign currency translation adjustment 0 0 0 84 0 84
Net income (loss) 0 0 (661) 0 0 (661)
Balance at Sep. 30, 2020 $ 222 79,676 (63,722) (1,742) $ (2,999) 11,435
Balance (in shares) at Sep. 30, 2020 22,220       (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 $ 0 784 0 0 $ 0 784
Common stock issued for RSUs vested (in shares) 306          
Common stock issued for RSUs vested $ 3 (3) 0 0 0 0
Shares withheld to pay taxes 0 (188) 0 0 0 (188)
Foreign currency translation adjustment 0 0 0 1,109 0 1,109
Net income (loss) 0 0 12,464 0 0 12,464
Balance at Sep. 30, 2021 $ 225 80,280 (52,727) (105) $ (2,999) 24,674
Balance (in shares) at Sep. 30, 2021 22,499       (1,599)  
Balance at Jun. 30, 2021 $ 225 80,024 (64,165) (82) $ (2,999) 13,003
Balance (in shares) at Jun. 30, 2021 22,461       (1,599)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Stock-based compensation expense $ 0 283 0 0 $ 0 283
Common stock issued for RSUs vested (in shares) 38          
Common stock issued for RSUs vested $ 0 0 0 0 0 0
Shares withheld to pay taxes 0 (27) 0 0 0 (27)
Foreign currency translation adjustment 0 0 0 (23) 0 (23)
Net income (loss) 0 0 11,438 0 0 11,438
Balance at Sep. 30, 2021 $ 225 $ 80,280 $ (52,727) $ (105) $ (2,999) $ 24,674
Balance (in shares) at Sep. 30, 2021 22,499       (1,599)  
v3.21.2
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2021
Sep. 30, 2020
Cash flows from operating activities:    
Net income (loss) $ 12,464 $ (9,068)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:    
Loss on impairment 3 4,302
Depreciation 216 254
Amortization of intangible assets 929 1,528
Amortization of capitalized software development costs 281 248
Amortization of deferred financing costs 8 155
Gain on PPP loan forgiveness (10,127) 0
Stock-based compensation expense 784 357
Bad debt (recovery) expense (133) 103
Gain on derivative instruments, net 0 (35)
Deferred income taxes 0 57
Gain on sale of equipment 0 (5)
Changes in assets and liabilities:    
Contract receivables, net (1,888) 6,114
Prepaid expenses and other assets (5,356) 983
Accounts payable, accrued compensation and accrued expenses 1,409 (1,536)
Billings in excess of revenue earned (831) (1,195)
Accrued warranty (192) (285)
Other liabilities 2,147 (332)
Net cash (used in) provided by operating activities (286) 1,645
Cash flows from investing activities:    
Capital expenditures (392) (4)
Proceeds from sale of equipment 0 11
Capitalized software development costs (226) (250)
Net cash used in investing activities (618) (243)
Cash flows from financing activities:    
Proceeds from line of credit 800 4,200
Repayment of line of credit (1,739) (694)
Repayment of insurance premium (609) 0
Repayment of long-term debt 0 (18,480)
Proceeds from Paycheck Protection Program Loan 0 10,000
Interest rate swap 0 (209)
Shares withheld to pay taxes (188) (77)
Deferred financing costs 0 (80)
Net cash used in financing activities (1,736) (5,340)
Effect of exchange rate changes on cash (19) (93)
Net decrease in cash and cash equivalents (2,659) (4,031)
Cash, cash equivalents at beginning of the period 6,702 11,691
Cash and cash equivalents at the end of the period $ 4,043 $ 7,660
v3.21.2
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 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. All intercompany accounts and transactions have been eliminated in consolidation.

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 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.

Going Concern

In 2020, 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.
v3.21.2
Recent Accounting Pronouncements
9 Months Ended
Sep. 30, 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 15, 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.
v3.21.2
Basic and Diluted Loss per Share
9 Months Ended
Sep. 30, 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 number of common shares and common share equivalents used in the determination of basic and diluted loss per common share were as follows:

(in thousands, except for share data)
 
Three months ended
   
Nine months ended
 
   
September 30, 2021
   
September 30, 2020
   
September 30, 2021
   
September 30, 2020
 
Numerator:
                       
     Net income (loss) attributed to common stockholders
 
$
11,438
   
$
(661
)
 
$
12,464
   
$
(9,068
)
                                 
Denominator:
                               
Weighted-average shares outstanding for basic earnings per share
   
20,863,479
     
20,563,452
     
20,714,068
     
20,438,571
 
                                 
Effect of dilutive securities:
                               
Employee RSUs
   
-
     
-
     
-
     
-
 
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
   
20,863,479
     
20,563,452
     
20,714,068
     
20,438,571
 
                                 
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
   
14,229
     
66,261
     
77,871
     
12,172
 
v3.21.2
Coronavirus Aid, Relief and Economic Security Act
9 Months Ended
Sep. 30, 2021
Coronavirus Aid, Relief and Economic Security Act [Abstract]  
Coronavirus Aid, Relief and Economic Security Act
Note 4 - Coronavirus Aid, Relief and Economic Security Act

Paycheck Protection Program Loan (PPP Loan)

On March 27, 2020, the United States enacted the CARES Act. 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 loan pursuant to a Paycheck Protection Program Note (the “PPP Loan”) from Citizens Bank, N.A. Pursuant to the CARES Act, the PPP Loan was guaranteed by the U.S. Small Business Administration (“SBA”) and eligible for forgiveness under certain circumstances. Repayment of the PPP Loan was scheduled to begin on August 9, 2021. We applied for forgiveness in Q1 of 2021, and, on August 5, 2021, the Company was notified that the PPP loan was forgiven. We recognized other income of $10.1 million related to this forgiveness in the three and nine months ended September 30, 2021.

Employee Retention Credits (ERC)

Employee retention tax credits, made available under the CARES Act, allow eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees, initially from March 27, 2020 until June 30, 2021, and now extended through September 30, 2021. For the third quarter of 2021, we have applied for a refund of $1.0 million from the IRS with the timely filing of Form 941 and have recognized a benefit of $1.4 million from unremitted payroll taxes as allowable. For the nine months ended September 30, 2021 the Company has applied for a total of $5.0 million from the IRS with the timely filing of Form 941 and 941-X and recognized a benefit of $2.2 million from unremitted payroll taxes as allowable. We recorded other income of $2.1 million and $7.2 million related to the employee retention tax credits earned in the three and nine months ended September 30, 2021, respectively. As of September 30, 2021, the Company received employee retention tax credit refunds totaling $0.7 million with remaining outstanding refunds receivable of $4.3 million.
v3.21.2
Contract Receivables
9 Months Ended
Sep. 30, 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)
 
September 30, 2021
   
December 31, 2020
 
             
Billed receivables
 
$
4,521
   
$
5,694
 
Unbilled receivables
   
8,221
     
5,160
 
Allowance for doubtful accounts
   
(213
)
   
(360
)
Total contract receivables, net
 
$
12,529
   
$
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 nine months ended September 30, 2021 and 2020, we recorded bad debt (recovery) expense of $(133) thousand and $103 thousand, respectively.

During the month of October 2021, we invoiced $2.6 million of the unbilled receivable as of  September 30, 2021.

As of September 30, 2021, we had one customer that accounted for 10% of our consolidated contract receivables. As of December 31, 2020, we had no customer that accounted for over 10% of our consolidated contract receivables.
v3.21.2
Goodwill and Intangible Assets
9 Months Ended
Sep. 30, 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 recognized an impairment charge of $4.3 million of certain intangible assets as a result of the valuation analysis performed. The need for the valuation analysis was triggered by the macroeconomic impact of the COVID-19 pandemic on our operations. This analysis did not indicate impairment of goodwill.

Our Step 1 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.

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets. The Company performs an annual intangible assets impairment analysis at the year end, which 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. The current assessment has no indication of impairment.

Management concluded that there were no triggering events that occurred during the three and nine months ended September 30, 2021.

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

(in thousands)
 
As of September 30, 2021
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortized intangible assets:
                 
Customer relationships
 
$
8,628
   
$
(6,219
)
 
$
2,409
 
Trade names
   
1,689
     
(1,086
)
   
603
 
Developed technology
   
471
     
(471
)
   
-
 
Non-contractual customer relationships
   
433
     
(433
)
   
-
 
Noncompete agreement
   
527
     
(405
)
   
122
 
Alliance agreement
   
527
     
(356
)
   
171
 
Others
   
167
     
(167
)
   
-
 
Total
 
$
12,442
   
$
(9,137
)
 
$
3,305
 

(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 $0.4 million for the three months ended September 30, 2021 and 2020, respectively, and $0.9 million and $1.5 million for the nine months ended September 30, 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 remainder
 
$
285
 
2022
   
910
 
2023
   
640
 
2024
   
435
 
2025
   
335
 
Thereafter
   
700
 
Total
 
$
3,305
 
v3.21.2
Equipment, Software and Leasehold Improvements
9 Months Ended
Sep. 30, 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)
           
   
September 30, 2021
   
December 31, 2020
 
Computer and equipment
 
$
2,246
   
$
2,229
 
Software
   
2,059
     
1,695
 
Leasehold improvements
   
659
     
660
 
Furniture and fixtures
   
839
     
848
 
     
5,803
     
5,432
 
Accumulated depreciation
   
(5,011
)
   
(4,816
)
Equipment, software and leasehold improvements, net
 
$
792
   
$
616
 

Depreciation expense was $216 thousand and $254 thousand for the nine months ended September 30, 2021 and 2020, respectively. Capitalization of internal-use software cost of $50 thousand and $365 thousand were recorded in software for the three and nine months ended September 30, 2021.
v3.21.2
Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 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 September 30, 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 nine months ended September 30, 2021, we did not have any transfers into or out of Level 3.

The following table presents assets measured at fair value at September 30, 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
 
v3.21.2
Stock-Based Compensation
9 Months Ended
Sep. 30, 2021
Stock-Based Compensation [Abstract]  
Stock-Based Compensation
Note 9 - Stock-Based Compensation

We recognize compensation expense for all equity-based compensation awards issued to employees and directors that are expected to vest. Stock compensation is calculated based upon the fair value of awards as of the grant date. During the three months ended September 30, 2021 and 2020, we recognized $0.3 million in stock-based compensation expense and $33 thousand of stock-based compensation expense related to equity awards, respectively. We recognized $0.8 million and $0.4 million of stock-based compensation expense related to equity awards for the nine months ended September 30, 2021 and 2020, respectively, under the fair value method. In addition to the equity-based compensation expense recognized, the Company recognized stock-based compensation related to the change in the fair value of cash-settled restricted stock units (RSUs) $0 and $6 thousand for the nine months ended September 30, 2021 and 2020, respectively. There was no change in the fair value of cash settled RSUs for the three months ended September 30, 2021 and 2020.

During the three and nine months ended September 30, 2021, we granted approximately 20,000 and 824,661 time-based RSUs with an aggregate fair value of approximately $30 thousand and $1.4 million, respectively. During the three and nine months ended September 30, 2020, we granted approximately 130,000 and 170,000 time-based RSUs with an aggregate fair value of $0.1 million and $0.2 million, respectively. A portion of the time-based 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.
GSE’s 1995 long-term incentive program (“LTIP”) provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and employees. Vesting of the performance-vesting restricted stock units (“PRSU”) is contingent upon the employee’s continued employment and the Company’s achievement of certain performance goals during designated performance periods as established by the Compensation Committee of the Company’s Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSU’s on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.
During the three and nine months ended September 30, 2021, we did not grant any performance-based RSUs to employees.
During the three months ended September 30, 2020, we did not grant any performance-based RSUs to employees and during the nine months ended September 30, 2020, we granted approximately 512,000 performance-based RSUs to key employees with an aggregate fair-value of $0.6 million. These awards vest over three years based upon achieving certain financial metrics achieved during fiscal 2022 for revenue and Adjusted EBITDA. The Company did not grant any stock options for three and nine months ended September 30, 2021 and 2020.
v3.21.2
Debt
9 Months Ended
Sep. 30, 2021
Debt [Abstract]  
Debt
Note 10 - Debt

On December 29, 2016, we entered a 3-year $5.0 million revolving line of credit facility (“RLOC”) with the Citizens Bank, N.A. (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 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 on May 11, 2023 and accrue interest at the 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, now Hyperspring, Absolute, True North, DP Engineering and by any future material domestic subsidiaries (collectively, the "Guarantors"). We subsequently amended and ratified the Credit Agreement a number of times.

More recently, during 2020, the COVID-19 pandemic impacted our operations and our projected ability to comply with certain financial covenants. As such, we amended the credit facility at various dates in 2020 to revise our fixed charge ratio and leverage ratio requirements as well as our Adjusted EBITDA requirement. In exchange for relaxed covenants or waivers of covenants for certain periods, we were required by the Bank to curtail our term debt. During 2020, we repaid approximately $18.5 million of term debt and we were required to meet certain liquidity covenants, which are tested bi-weekly.

Due to a projected violation of the leverage ratio at the end of the first quarter, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021. Pursuant to the Ninth Amendment and Reaffirmation Agreement, the Bank waived the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and we agreed, for each quarter thereafter, that the 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 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 were 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.

Following the Ninth Amendment and Reaffirmation Agreement, we experienced continued 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. This deterioration in the recovery plan has resulted in our breaching the Minimum Liquidity ratio subsequent to both June 30, 2021 and September 30, 2021 as well as a projected breach of the Leverage and Fixed Charges ratio covenants.

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. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent to  both June 30, 2021 and at September 30, 2021 as well as projected breaching of the Leverage and Fixed Charges ratio covenant. On November 12, 2021, due to these covenant violations, 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).

Revolving Line of Credit (“RLOC”)

During the nine months ended September 30, 2021, we paid for $1.7 million and had a draw of $0.8 million on our RLOC. As of September 30, 2021, we had outstanding borrowings of $2.1 million under the RLOC and four letters of credit totaling $1.1 million outstanding to certain of our customers. The total borrowing capacity under RLOC was $3.5 million as of September 30, 2021. After consideration of letters of credit and the $0.5 million reserved for issuance of new letters of credit, there was no amount available for borrowing under the RLOC.

We intend to continue using the RLOC for short-term working capital needs when capacity is available and for the issuance of letters of credit in connection with business operations, provided we remain in compliance with our covenants. 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 a fee for unused RLOC quarterly based on the average daily unused balance.
v3.21.2
Product Warranty
9 Months Ended
Sep. 30, 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 $560 thousand, and the remaining $171 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 recovery
   
(92
)
Current period claims
   
(100
)
Currency adjustment
   
1
Balance at September 30, 2021
 
$
731
 
v3.21.2
Revenue
9 Months Ended
Sep. 30, 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 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 three and nine months ended September 30, 2021 and 2020, along with the reporting segment for each category:

(in thousands)
 
Three months ended
   
Nine months ended
 
   
September 30,
2021
   
September 30,
2020
   
September 30,
2021
   
September 30,
2020
 
Performance Improvement Solutions segment
                       
System Design and Build
 
$
1,623
   
$
2,473
   
$
4,712
   
$
9,535
 
Over time
   
1,623
     
2,473
     
4,712
     
9,535
 
                                 
Software and Support
   
814
     
942
     
2,393
     
2,575
 
Point in time
   
52
     
444
     
274
     
1,084
 
Over time
   
762
     
498
     
2,119
     
1,491
 
                                 
Training and Consulting Services
   
4,937
     
3,842
     
14,212
     
13,130
 
Point in time
   
42
     
19
     
126
     
48
 
Over time
   
4,895
     
3,823
     
14,086
     
13,082
 
                                 
Workforce Solutions
                               
Training and Consulting Services
   
7,312
     
5,665
     
19,995
     
19,727
 
Point in time
   
126
     
-
     
375
     
-
 
Over time
   
7,186
     
5,665
     
19,620
     
19,727
 
                                 
Total revenue
 
$
14,686
   
$
12,922
   
$
41,312
   
$
44,967
 

The following table reflects revenue recognized in the reporting periods presented that was included in contract liabilities from contracts with customers as of the beginning of the periods presented:

(in thousands)
 
Three months ended
   
Nine months ended
 
   
September 30,
2021
   
September 30,
2020
   
September 30,
2021
   
September 30,
2020
 
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period
 
$
835
   
$
1,520
   
$
4,139
   
$
6,221
 
v3.21.2
Income Taxes
9 Months Ended
Sep. 30, 2021
Income Taxes [Abstract]  
Income Taxes
Note 13 - Income Taxes

The following table presents the provision for income taxes and our effective tax rates:

(in thousands)
 
Three months ended
   
Nine months ended
 
   
September 30,
2021
   
September 30,
2020
   
September 30,
2021
   
September 30,
2020
 
Income (loss) before income taxes
 
$
11,604
   
$
(545
)
 
$
12,591
   
$
(8,902
)
Provision for income taxes
   
166
   
116
     
127
   
166
 
Effective tax rate
   
1.4
%
   
(21.3
)%
   
1.0
%
   
(1.9
)%

Our income tax expense 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 nine months ended September 30, 2021 was comprised mainly of foreign and state tax expense. Total income tax expense for the nine months ended September 30, 2020 was comprised mainly of foreign and state tax expense.
Our effective income tax rate was 1.4% and 1.0% for the three and nine months ended September 30, 2021, respectively. For the three and nine months ended September 30, 2021, the difference between our income tax expense at an effective tax rate of 1.4% and 1.0% respectively, and 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 September 30, 2020, the difference between our income tax expense at an effective tax rate of (21.3%) and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax position for certain U.S. and 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. For the nine months ended September 30, 2020, the difference between our income tax expense at an effective tax rate of (1.9%) and the U.S. statutory federal income tax rate of 21% was primarily due to permanent differences, accruals related to uncertain tax positions for certain U.S. and foreign tax contingencies, a change in tax valuation allowance in our U.S. and China subsidiaries, discrete item adjustments for the U.S. and foreign taxes, and the impact of the loss for impairment.

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 $0.9 million of tax benefit that will be realized in the fourth 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 we will continue to assess a full valuation allowance on our U.S., China, and Slovakia net deferred assets as of September 30, 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.
v3.21.2
Leases
9 Months Ended
Sep. 30, 2021
Leases [Abstract]  
Leases
Note 14 - Leases

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
 
September 30, 2021
   
December 31, 2020
 
                 
Leased Assets
               
Operating lease - right of use assets
 
Long term assets
 
$
1,161
   
$
1,562
 
                     
Lease Liabilities
                   
Operating lease liabilities - Current
 
Other current liabilities
   
1,085
     
1,138
 
Operating lease liabilities
 
Long term liabilities
   
1,036
     
1,831
 
        
$
2,121
   
$
2,969
 

We executed a sublease agreement with a tenant to sublease 850 square feet from the Sykesville office space on September 13, 2021. This agreement is in addition to the two previous subleases for 3,650 square feet and 3,822 square feet entered into on May 1, 2019 and April 1, 2017, respectively. The addition of the third sublease is for a portion of the space previously abandoned in December 2019. The sublease does not relieve us of our primary lease obligation. The lessor agreements are all 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 the three and nine months ended September 30, 2021 and 2020, (in thousands):

         
Three months ended
   
Nine months ended
 
Lease Cost
 
Classification
 
September 30,
2021
   
September 30,
2020
   
September 30,
2021
   
September 30,
2020
 
                             
Operating lease cost (1)
 
Selling, general and administrative expenses
 
$
179
   
$
207
   
$
548
   
$
625
 
Short-term leases costs (2)
 
Selling, general and administrative expenses
   
15
     
-
     
45
     
1
 
Sublease income (3)
 
Selling, general and administrative expenses
   
(32
)
   
(33
)
   
(96
)
   
(97
)
Net lease cost
 
 
 
$
162
   
$
174
   
$
497
   
$
529
 

(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 three 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 September 30, 2021 are as follows (in thousands):

 (in thousands)
 
Gross Future
Minimum Lease
Payments
 
2021 remainder
 
$
291
 
2022
   
1,171
 
2023
   
638
 
2024
   
122
 
2025
   
10
 
Thereafter     3
 
Total lease payments
 
$
2,235
 
Less: Interest
   
114
 
Present value of lease payments
 
$
2,121
 

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
 
September 30, 2021
   
December 31, 2020
 
Weighted-average remaining lease term (years)
 
   
 
Operating leases
   
2.02
     
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)
 </