GSE SYSTEMS INC, 10-Q filed on 16 May 22
v3.22.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2022
Apr. 30, 2022
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2022  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2022  
Document Fiscal Period Focus Q1  
Document Transition Report false  
Entity File Number 001-14785  
Entity Registrant Name GSE Systems, Inc.  
Entity Central Index Key 0000944480  
Entity Incorporation, State or Country Code DE  
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 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  
Title of 12(b) Security Common Stock, $0.01 Par Value  
Trading Symbol GVP  
Security Exchange Name NASDAQ  
Entity Common Stock, Shares Outstanding   21,013,206
v3.22.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Mar. 31, 2022
Dec. 31, 2021
Current assets:    
Cash and cash equivalents $ 5,448 $ 3,550
Contract receivables, net 10,421 11,257
Prepaid expenses and other current assets 4,299 5,262
Total current assets 20,168 20,069
Equipment, software and leasehold improvements, net 850 839
Software development costs, net 555 532
Goodwill 13,339 13,339
Intangible assets, net 2,760 3,020
Restricted cash - long term 1,583 0
Operating lease right-of-use assets, net 1,047 1,200
Other assets 52 52
Total assets 40,354 39,051
Current liabilities:    
Line of credit 0 1,817
Current portion of long-term note 830 0
Accounts payable 1,133 1,179
Accrued expenses 1,474 1,358
Accrued compensation 2,235 1,452
Billings in excess of revenue earned 5,180 5,029
Accrued warranty 682 667
Income taxes payable 1,781 1,654
Derivative liabilities 1,611 0
Other current liabilities 1,625 1,883
Total current liabilities 16,551 15,039
Long-term note, less current portion 2,955 0
Operating lease liabilities noncurrent 502 790
Other noncurrent liabilities 283 179
Total liabilities 20,291 16,008
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, 22,609,043 and 22,533,005 shares issued, 21,010,132 and 20,934,094 shares outstanding, respectively 226 225
Additional paid-in capital 80,777 80,505
Accumulated deficit (58,018) (54,584)
Accumulated other comprehensive income (loss) 77 (104)
Treasury stock at cost, 1,598,911 shares (2,999) (2,999)
Total stockholders' equity 20,063 23,043
Total liabilities and stockholders' equity $ 40,354 $ 39,051
v3.22.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Mar. 31, 2022
Dec. 31, 2021
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) 22,609,043 22,533,005
Common stock, shares outstanding (in shares) 21,010,132 20,934,094
Treasury stock at cost (in shares) 1,598,911 1,598,911
v3.22.1
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2022
Mar. 31, 2021
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]    
Revenue $ 12,275 $ 13,104
Cost of revenue 9,848 10,176
Gross profit 2,427 2,928
Operating expenses:    
Selling, general and administrative 4,507 3,734
Research and development 142 157
Restructuring charges 0 808
Depreciation 72 76
Amortization of intangible assets 260 340
Total operating expenses 4,981 5,115
Operating loss (2,554) (2,187)
Interest expense, net (148) (54)
Change in fair value of derivative instruments, net (581) 0
Other income, net 16 1
Loss before income taxes (3,267) (2,240)
Provision for (benefit from) income taxes 167 (35)
Net loss $ (3,434) $ (2,205)
Net loss per common share - basic (in dollars per share) $ (0.16) $ (0.11)
Net loss per common share - diluted (in dollars per share) $ (0.16) $ (0.11)
Weighted-average shares outstanding for basic earnings per share (in shares) 20,980,046 20,628,669
Weighted average shares outstanding used to compute net loss per share - diluted (in shares) 20,980,046 20,628,669
v3.22.1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2022
Mar. 31, 2021
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS [Abstract]    
Net loss $ (3,434) $ (2,205)
Cumulative translation adjustment 181 1,106
Comprehensive loss $ (3,253) $ (1,099)
v3.22.1
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, 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 $ 0 0 0 0 0 0
Common stock issued for RSUs vested (in shares) 41          
Shares withheld to pay taxes $ 0 (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)  
Balance at Dec. 31, 2021 $ 225 80,505 (54,584) (104) $ (2,999) 23,043
Balance (in shares) at Dec. 31, 2021 22,533       (1,599)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Stock-based compensation expense $ 0 359 0 0 $ 0 359
Common stock issued for RSUs vested $ 1 (1) 0 0 0 0
Common stock issued for RSUs vested (in shares) 76          
Shares withheld to pay taxes $ 0 (86) 0 0 0 (86)
Foreign currency translation adjustment 0 0 0 181 0 181
Net loss 0 0 (3,434) 0 0 (3,434)
Balance at Mar. 31, 2022 $ 226 $ 80,777 $ (58,018) $ 77 $ (2,999) $ 20,063
Balance (in shares) at Mar. 31, 2022 22,609       (1,599)  
v3.22.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Mar. 31, 2022
Mar. 31, 2021
Dec. 31, 2021
Cash flows from operating activities:      
Net loss $ (3,434) $ (2,205)  
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:      
Depreciation 72 76  
Amortization of intangible assets 260 340 $ 300
Amortization of capitalized software development costs 83 97  
Amortization of deferred financing costs 3 3  
Amortization of debt discount 129 0  
Stock-based compensation expense 408 38  
Bad debt expense 0 4  
Change in fair value of derivative instruments, net 581 0  
Deferred income taxes 55 0  
Changes in assets and liabilities:      
Contract receivables, net 846 (1,259)  
Prepaid expenses and other assets 943 (1,737)  
Accounts payable, accrued compensation and accrued expenses 1,028 1,111  
Billings in excess of revenue earned 150 (340)  
Accrued warranty 15 (156)  
Other liabilities (56) 2,070  
Net cash provided by (used in) operating activities 1,083 (1,958)  
Cash flows from investing activities:      
Capital expenditures (81) (153)  
Capitalized software development costs (106) (72)  
Net cash used in investing activities (187) (225)  
Cash flows from financing activities:      
Repayment of line of credit (1,817) (500)  
Payment of insurance premium (282) (203)  
Proceeds from issuance of long-term note, net of debt issuance cost and original issue discount 4,782 0  
Shares withheld to pay taxes (86) (28)  
Net cash provided by (used in) financing activities 2,597 (731)  
Effect of exchange rate changes on cash (12) (39)  
Net increase (decrease) in cash, cash equivalents and restricted cash 3,481 (2,953)  
Cash, cash equivalents and restricted cash at beginning of the period 3,550 6,702 6,702
Cash, cash equivalents and restricted cash at the end of the period 7,031 3,749 3,550
Cash and cash equivalents 5,448 3,749 3,550
Restricted cash included in other long-term assets 1,583 0 0
Total cash, cash equivalents, and restricted cash 7,031 3,749 $ 3,550
Non-cash financing activities      
Discount on issuance of Convertible Note $ 750 $ 0  
v3.22.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2022
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 note 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, 2021 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, 2021, filed with the U.S. Securities and Exchange Commission on March 31, 2022.

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, the recoverability of deferred tax assets, and valuation of warrants and derivative liability related to our convertible note. Actual results of these and other items not listed could differ from these estimates and those differences could be material.

COVID-19

Prior to COVID 19, most of our Performance Improvement Solutions (Performance) employees worked remotely, and the remainder worked in one of our offices.  With the onset of the COVID-19 pandemic in Q1 2020, all of our employees shifted to working remotely.  For the most part, our employees continue to work remotely but, as an essential services provider, we maintain a modest office footprint in certain locations to allow for employees to work from those offices as project needs may arise.  Throughout the pandemic GSE has complied with local, state and federal directives and regulations. Today, employees almost entirely work from home within our Performance Improvement Solutions segment, except when required to be at the client site for essential project work. Our Performance contracts, which generally are considered essential services, are permitted to and mostly continue without pause. However, we have experienced certain delays in certain new business opportunities. At the onset of the pandemic, many of our Workforce Solutions customers paused or delayed contracts as they shrank their own on-premise workforces to the minimum operating levels in order to mitigate the effects of the pandemic. As a result, our Workforce Solutions segment has experienced a decline in its billable employee base during this time. Over the course of 2021, the Workforce Solutions segment began to increase as clients became more comfortable with employees returning to on-site work.  We cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic to our business at this time and we have experienced delays in commencing new projects and resuming work on existing contracts. Therefore, our ability to recognize revenue has been delayed for some contracts. We have also experienced order reductions, cancellations, and other negative changes to orders due to the pandemic.  As the pandemic landscape has continued to develop and new risks emerge such as the Delta variant and the Omicron variant, our business continues to be affected.  We routinely monitor our operating expenses as a result of contract delays and order reductions; and we have made adjustments to maintain our gross profit at a sustainable level.
v3.22.1
Recent Accounting Pronouncements
3 Months Ended
Mar. 31, 2022
Recent Accounting Pronouncements [Abstract]  
Recent Accounting Pronouncements
Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The FASB reduced the number of accounting models for convertible debt and convertible preferred stock instruments and made certain disclosure amendments to improve the information provided to users. This ASU is applicable for public companies starting with fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. The Company adopted ASU 2020-06 on January 1, 2022, using the modified retrospective approach, and because the Company did not have outstanding financial instruments in scope of the ASU, the adoption did not have an 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.
v3.22.1
Basic and Diluted Loss per Share
3 Months Ended
Mar. 31, 2022
Earnings 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,
 
   
2022
   
2021
 
Numerator:
           
Net loss attributed to common stockholders
  $ (3,434 )   $ (2,205 )
                 
Denominator:
               
Weighted-average shares outstanding for basic earnings per share
    20,980,046       20,628,669  
                 
Effect of dilutive securities:
               
RSUs
    -       -  
                 
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
    20,980,046       20,628,669  
                 
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
    149,271       43,937  
v3.22.1
Coronavirus Aid, Relief and Economic Security Act
3 Months Ended
Mar. 31, 2022
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 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. We applied for and, on April 23, 2020, received a payroll protection program loan in the amount of $10.0 million (the “PPP Loan”) under the CARES Act, as administered by the U.S. Small Business Administration (the “SBA”). The application for receipt of the PPP Loan required us to certify, in good faith, that the attendant economic uncertainty made the loan necessary to support our ongoing operations. The PPP Loan was serviced by Citizens Bank, N.A. (the “Citizens”). The PPP Loan bore interest at a rate of 1% per annum and would mature on April 23, 2022, with the first payment deferred until September 2021. We used the proceeds of the PPP Loan for payroll and related costs, rent and utilities. Pursuant to the regulations promulgated by the SBA, in order to request forgiveness of the PPP Loan, we were required to submit an application to Citizens substantiating that we were entitled to the PPP Loan and used the proceeds of the PPP Loan as permitted under the CARES Act. Citizens reviewed our application for forgiveness and associated documentation, and on February 26, 2021 forwarded our application to the SBA with Citizens’ determination that the loan is fully forgivable. On August 5, 2021, we received notice that full principal amount and all accrued interest thereon of the PPP Loan was formally forgiven by the SBA. We recognized other income of $10.1 million related to this forgiveness during the third quarter of fiscal 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 extended through September 30, 2021. In 2021, we applied for $5.0 million in refunds from the IRS with filing of our 941s and achieved $2.2 million in credits from unremitted payroll taxes as allowed. We recorded other income of $7.2 million related to the employee retention tax credits earned for the year ended December 31, 2021. As of March 31, 2022, we received cumulative employee retention tax credit refunds totaling $1.9 million with remaining outstanding refunds receivable of $3.1 million which was included in the other current assets balance at March 31, 2022. During the first quarter of 2022, we receive employee retention tax credit refunds of $1.1 million which included in the total of $1.9 million received. Subsequent to the quarter end, we received the employee retention tax credit refunds of $1.0 million.
v3.22.1
Contract Receivables
3 Months Ended
Mar. 31, 2022
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, 2022
   
December 31, 2021
 
             
Billed receivables
 
$
4,955
   
$
6,124
 
Unbilled receivables
   
6,472
     
6,143
 
Allowance for doubtful accounts
   
(1,006
)
   
(1,010
)
Total contract receivables, net
 
$
10,421
   
$
11,257
 

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, 2022, we recorded no bad debt expense. We recorded $4 thousand bad debt expense during the three months ended March 31, 2021.

During the month of April 2022, we invoiced $2.6 million of the unbilled receivables as of  March 31, 2022.

Our foreign currency denominated contract receivables, billings in excess of revenue earned and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into our functional currency, using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is included in other income, net in the consolidated statements of operations. As of March 31, 2022 and 2021, we recognized a gain on remeasurement of these foreign exchange contracts of $3 thousand and $33 thousand, respectively.

As of March 31, 2022 and December 31, 2021, we had no customer that accounted for 10% of our consolidated contract receivables. On May 10, 2022, we had a customer that notified us of debt restructuring, and we are assessing any potential impact to the Company.
v3.22.1
Goodwill and Intangible Assets
3 Months Ended
Mar. 31, 2022
Goodwill and Intangible Assets [Abstract]  
Goodwill and Intangible Assets
Note 6 - Goodwill and Intangible Assets

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets. Management concluded that there were no triggering events that occurred during the three months ended March 31, 2022 and 2021.

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

(in thousands)
 
As of March 31, 2022
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortized intangible assets:
                 
Customer relationships
 
$
8,628
   
$
(6,622
)
 
$
2,006
 
Trade names
   
1,689
     
(1,130
)
   
559
 
Developed technology
   
471
     
(471
)
   
-
 
Non-contractual customer relationships
   
433
     
(433
)
   
-
 
Noncompete agreement
   
527
     
(451
)
   
76
 
Alliance agreement
   
527
     
(408
)
   
119
 
Others
   
167
     
(167
)
   
-
 
Total
 
$
12,442
   
$
(9,682
)
 
$
2,760
 

(in thousands)
 
As of December 31, 2021
 
   
Gross Carrying
Amount
   
Accumulated
Amortization
   
Net
 
Amortized intangible assets:
                 
Customer relationships
 
$
8,628
   
$
(6,432
)
 
$
2,196
 
Trade names
   
1,689
     
(1,108
)
   
581
 
Developed technology
   
471
     
(471
)
   
-
 
Non-contractual customer relationships
   
433
     
(433
)
   
-
 
Noncompete agreement
   
527
     
(429
)
   
98
 
Alliance agreement
   
527
     
(382
)
   
145
 
Others
   
167
     
(167
)
   
-
 
Total
 
$
12,442
   
$
(9,422
)
 
$
3,020
 

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.3 million for the three months ended March 31, 2022 and 2021, 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:
     
2022 remainder
 
$
649
 
2023
   
640
 
2024
   
435
 
2025
   
335
 
2026
   
266
 
Thereafter
   
435
 
Total
 
$
2,760
 
v3.22.1
Equipment, Software and Leasehold Improvements
3 Months Ended
Mar. 31, 2022
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, 2022
   
December 31, 2021
 
Computer and equipment
 
$
2,328
   
$
2,270
 
Software
   
2,173
     
2,150
 
Leasehold improvements
   
659
     
659
 
Furniture and fixtures
   
839
     
839
 
     
5,999
     
5,918
 
Accumulated depreciation
   
(5,149
)
   
(5,079
)
Equipment, software and leasehold improvements, net
 
$
850
   
$
839
 

Depreciation expense was $72 thousand and $76 thousand for the three months ended March 31, 2022 and 2021, respectively. Capitalization-of internal-use software cost of $23 thousand and $150 thousand were recorded in software for the  three months ended March 31, 2022 and 2021, respectively.
v3.22.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2022
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, 2022 and December 31, 2021, 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.

Our convertible debt issued in February 2022 (See Note 11) includes certain embedded redemption features that are required to be bifurcated as embedded derivatives and measured at fair value on a recurring basis. We estimate the fair value using a Monte Carlo simulation based on estimates of our future stock price and assumptions about the possible redemption scenarios.

The Company used the Monte Carlo simulation model to determine the fair value of the Warrants, which required the input of subjective assumptions. The fair value of the Warrants as of March 31, 2022 was estimated with the following assumptions.
 
Exercise Price
  $ 1.94  
         
Common Stock Price
  $ 1.25 - $2.08  
Risk Free Rate
    1.9% - 2.4%
Volatility
    65%

Term (in years)
  4.9 yrs - 5.0 yrs
 

The following table presents assets and liabilities measured at fair value at March 31, 2022:

(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
 
$
3,008
   
$
-
   
$
-
   
$
3,008
 
Total assets
 
$
3,008
   
$
-
   
$
-
   
$
3,008
 
                                 
Derivative liability   $ -     $ -     $ 84     $ 84  
Warrant liability
    -       -       1,527       1,527  
Cash settled performance-vesting restricted stock units
    -       49       -       49  
 Total liabilities   $ -     $ 49     $ 1,611     $ 1,660  

The following table presents assets and liabilities measured at fair value at December 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 summarizes changes in the fair value of our Level 3 liabilities during the three months ended March 31, 2022.

(in thousands)
 
Embedded
Redemption Features
    Warrant     Level 3 Total
 
                   
Balance at December 31, 2021
 
$
-
    $ -     $ -  
Derivative liabilities at issuance date
   
306
      -       306  
Warrant liabilities at issuance date
    -       724       724  
Change in fair value included in gain on derivative instruments, net
   
(222
)
    803       581  
Balance at March 31, 2022
 
$
84
    $ 1,527     $ 1,611  
v3.22.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2022
Stock-Based Compensation [Abstract]  
Stock-Based Compensation
Note 9 - Stock-Based Compensation

We recognize 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. We recognize the cumulative effect of a change in the number of awards expected to vest in compensation expense in the period of change. We have not capitalized any portion of our stock-based compensation. Our forfeiture rate is based on actuals.

During the three months ended March 31, 2022 and 2021, we recognized $0.4 million and $38 thousand of stock-based compensation expense related to equity awards, respectively, under the fair value method.

During the three months ended March 31, 2022, we granted approximately 13,597 time-based restricted stock units (“RSUs”) with an aggregate fair value of approximately $24 thousand. 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. During the three months ended March 31, 2021, we did not grant RSUs to employees.

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 PRSUs 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 months ended March 31, 2022, we granted 800,000 PRSUs including 200,000 cash-settled grants to employees. These grants are subject to multiple vesting criteria including reaching a 20-day VWAP of $1.94 prior to the expiration of the awards. Additionally, these shares are subject to a time-vesting restriction and will vest in equal portions over the next 15 quarters ending December 31, 2022. Subsequent to March 31, 2022, the market vesting criteria was achieved for the 800,000 PRSUs which will fully vest over the next 15 quarters. During the three months ended March 31, 2021, we did not grant any PRSUs to employees.

We did not grant any stock options for three months ended March 31, 2022 and 2021.
v3.22.1
Debt
3 Months Ended
Mar. 31, 2022
Debt [Abstract]  
Debt
Note 10 - Debt

Convertible Note

On February 23, 2022, we entered into a Securities Purchase Agreement, as amended, with Lind Global Fund II LP (“Lind Global”), pursuant to which we issued to Lind Global a two-year, secured, interest-free convertible promissory note in the amount of $5.75 million (the “Convertible Note”) and a common stock purchase warrant to acquire 1,283,732 shares of our common stock (the “Warrant”). The Convertible Note does not bear interest but was issued at a $0.75 million discount (“OID”). We received proceeds of approximately $4.8 million net of the OID and expenses.

   
Amount
 
       
Convertible Note issued
 
$
5,750
 
Debt discount
   
(750
)
Issuance cost:
       
Commitment fee
   
(175
)
Balance of investor’s counsel fees
   
(43
)
Net proceeds of Convertible Note
 
$
4,782
 

       
Fair value of Warrant Liabilities on issuance
    (724 )
Fair value of Conversion Feature on issuance
    (306 )
Allocated OID costs to Convertible Note
    (96 )
Interest expense accrued on Convertible Note as of March 31, 2022
    129  
         
Balance of Convertible Note as of March 31, 2022
  $ 3,785  

The Convertible Note provides for monthly principal repayments of $319 thousand beginning 180 days from issuance.  Payments can be made in the form of cash, shares, or a combination of both at the discretion of GSE.

The Convertible Note is convertible into our common stock at any time after the earlier of six months from issuance of the Convertible Note or the date of an effective registration statement filed with the SEC covering the underlying shares. The conversion price of the Convertible Note is initially equal to $1.94 per share, subject to customary adjustments. The Convertible Note matures in February of 2024, although we are permitted to prepay the Convertible Note, provided that Lind Global shall have the option to convert up to one third of the outstanding principal of the Convertible Note at a price per share equal to the lessor of the Repayment Share price or the conversion price (as described below). The Convertible Note is guaranteed by each of our subsidiaries and is secured by a first priority lien on all of our assets. The Convertible Note is not subject to any financial covenants and events of default under the Convertible Note are limited to events related to payment, certain events pertaining to the underlying shares of common stock and other customary events including, but not limited to, bankruptcy or insolvency. Upon the occurrence of an event of default, the Convertible Note will become immediately due and payable, subject to any cure periods described in the Convertible Note, and the customer may demand that all or a portion of the outstanding principal amount be converted into shares of common stock at the lower of the then current conversion price and 80% of the average of the three lowest daily volume-weighted average price (“VWAPs”) during the twenty days prior to delivery of the conversion notice. If there is a change of control of the Company, Lind Global has the right to require us to prepay the outstanding principal amount of the Convertible Note.

A portion of the proceeds of the Convertible Note were used to repay, in full, all outstanding indebtedness owed to Citizens Bank, N.A. (“Citizens”), and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens was terminated. We will continue to maintain a cash management account and certain letters of credit with Citizens and, accordingly, have entered into a certain Cash Management Agreement with Citizens, as well as certain Cash Pledge Agreements in amounts corresponding to the current outstanding letters of credits with customers.

The Warrant entitles Lind Global to purchase up to 1,283,732 shares of our common stock until February 23, 2027, at an exercise price of $1.94 per share, subject to customary adjustments described therein.  The Warrant is recorded at fair value upon issuance of $0.7 million and is classified as a current liability to be remeasured at each reporting period (see Note 8). The discount created by allocating proceeds to the Warrant results in a debt discount to be amortized as additional interest expense over the term of the Convertible Note.

The Company evaluated the Convertible Note and concluded that certain embedded redemption features are required to be accounted for as a derivative liability. Embedded redemption features were recorded at fair value upon issuance of $0.3 million and are classified as current liabilities to be remeasured at each reporting period (see Note 8). The discount created by allocating proceeds to the derivative liability results in a debt discount to be amortized as additional interest expense over the term of the Convertible Notes. The Warrant is accounted for as a derivative liability based on certain features included within the Convertible Note which caused the Company to not be able to assert that it would have sufficient shares in all cases to be able to settle the warrant. As such, the initial proceeds (approximately $4.8 million, net of original issue discounts and other payments to lender) were allocated first to the fair value of the Warrant with the residual allocated to the Convertible Note host instrument. The proceeds allocated to the Convertible Note were further allocated first to the bifurcated derivative liability based on its fair value with the residual being allocated to the Convertible Note host instrument.

The direct and incremental costs incurred are allocated to the Convertible Note and the Warrant based on a systematic and rational approach. The costs allocated to the Warrant have been expensed as incurred while those allocated to the Convertible Note have been capitalized and will be amortized as interest expense over the life of the Convertible Note based on the effective interest rate. The Company will record ongoing changes to the fair value of the derivative liabilities as other non-operating income (expense).

The Convertible Note was evaluated as a potentially dilutive security in both periods of loss and income for diluted earnings per share purposes. The Warrant is considered a participating security and was not included in the calculation of basic earnings per share for the period ended March 31, 2022 as Company reflected net loss for this period. The Warrant will be included in the calculation of basic earnings per share in periods of net income.

The issuance costs with respect to the Convertible Note, which are recorded as a debt discount, are deferred and amortized using effective interest method as additional interest expense over the terms of the Convertible Note.

The Company incurred total interest expense related to the Convertible Note, including the amortization of the various discounts, of $129 thousand for the three months ended March 31, 2022.

Revolving Line of Credit

During the three months ended March 31, 2022, using proceeds from the Convertible Note, we repaid in full, all outstanding indebtedness of $1.8 million owed to Citizens, and the Amended and Restated Credit and Security Agreement between us, our subsidiaries, and Citizens has been terminated. Certain letters of credit remain in place with Citizens. As of March 31, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.

On March 29, 2021, 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. 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 $500,000 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 $75,000 to reduce the RLOC. We incurred $25,000 fees related to this amendment during the year ended December 31, 2021.

On November 12, 2021 we signed the Tenth Amendment and Reaffirmation Agreement with our bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending September 30 and December 31, 2021, and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the interest rate in effect for the RLOC from time to time, but the interest due and payable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and (ii) the seventy-five (75) basis points of accrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of payment in full of the RLOC. In addition, we agreed, by December 31, 2021, to pay the Bank $250,000 to be applied to the principal amount outstanding under the RLOC. We incurred $15 thousand of amendment fee related to this amendment.
v3.22.1
Product Warranty
3 Months Ended
Mar. 31, 2022
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 $682 thousand, and the remaining $81 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, 2022
 
$
748
 
Current period recovery
   
31
Current period claims
   
(11
)
Currency adjustment
   
(5
)
Balance at March 31, 2022
 
$
763
 
v3.22.1
Revenue
3 Months Ended
Mar. 31, 2022
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 Improvement Solutions and Workforce Solutions segments. We recognize revenue from SDB and software contracts mainly through our Performance Improvement Solutions 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, 2022 and 2021, along with the reportable segment for each category:

 
 
Three months ended
 
(in thousands)  
March 31, 2022
   
March 31, 2021
 
Performance Improvement Solutions
           
System Design and Build
 
$
1,412    
$
1,862  
Point in time
    -       -  
Over time
    1,412       1,862  
     
     
 
Software and Support
    372       813  
Point in time
    45       95  
Over time
    327       718  
     
     
 
Training and Consulting Services
    4,613       4,406  
Point in time
    418       68  
Over time
    4,195       4,338  
     
     
 
Workforce Solutions
   
     
 
Training and Consulting Services
    5,878       6,023  
Point in time
    -       86  
Over time
    5,878       5,937  
     
     
 
Total revenue
 
$
12,275    
$
13,104  

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, 2022
   
March 31, 2021
 
Revenue recognized in the period from amounts included in Billings in Excess of Revenue Earned at the beginning of the period
 
$
1,456
   
$
2,189
 
v3.22.1
Income Taxes
3 Months Ended
Mar. 31, 2022
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, 2022
 
March 31, 2021
 
Income (loss) before income taxes
 
$
(3,267
)
 
$
(2,240
)
Provision for income taxes
   
167
   
(35
)
Effective tax rate
   
(5.1
)%
   
1.6
%

Our income tax expense or 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 expense for the three months ended March 31, 2022 was comprised mainly of current foreign and state tax expense, as well as deferred federal and state tax expense related to the portion of goodwill which cannot be offset by deferred tax assets. Total income tax benefit for the three months ended March 31, 2021 was comprised mainly of foreign tax benefit, partially offset by state tax expense.

Our income effective tax rate was (5.1)% and 1.6% for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, the difference between our income tax expense at an effective tax rate of (5.1)% and a benefit at the U.S. statutory federal income tax rate of 21% a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, accruals related to uncertain tax positions for certain foreign tax contingencies, and discrete item adjustments for U.S. and foreign taxes. For the three months ended March 31, 2021, the difference between 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. 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 2016 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.

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, 2022. 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. The Company has a deferred tax liability in the amount of $148 thousand at March 31, 2022 related to the portion of Goodwill which cannot be offset by deferred tax assets.
v3.22.1
Leases
3 Months Ended
Mar. 31, 2022
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
 
March 31, 2022
   
December 31, 2021
 
                 
Leased Assets
               
Operating lease - right of use assets
 
Long term assets
 
$
1,047
   
$
1,200
 
                     
Lease Liabilities
                   
Operating lease liabilities - Current
 
Other current liabilities
   
1,227
     
1,205
 
Operating lease liabilities
 
Long term liabilities
   
502
     
790
 
        
$
1,729
   
$
1,995
 

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 previous sublease for 3,650 square feet entered into on May 1, 2019. The addition of the second 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 three months ended March 31, 2022 and 2021, (in thousands):

   
 
Three months ended
 
Lease Cost
 
Classification
 
March 31,
2022
   
March 31,
2021
 
                 
Operating lease cost (1)
 
Selling, general and administrative expenses
 
$
186
   
$
192
 
Short-term leases costs (2)
 
Selling, general and administrative expenses
   
15
     
16
 
Sublease income (3)
 
Selling, general and administrative expenses
   
(18
)
   
(32
)
Net lease cost
 
 
 
183
   
$
176
 

(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, 2022 are as follows (in thousands):

(in thousands)
 
Gross Future
Minimum Lease
Payments
 
2022 remainder
 
$
993
 
2023
   
675
 
2024
   
122
 
2025
   
10
 
2026
   
-
 
Total lease payments
 
$
1,800
 
Less: Interest
   
71
 
Present value of lease payments
 
$
1,729
 

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, 2022
   
December 31, 2021
 
Weighted-average remaining lease term (years)
 
   
 
Operating leases
   
1.58
     
1.80
 
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, 2022
   
March 31, 2021
 
Operating cash flows used in operating leases
 
$
299
   
$
327
 
v3.22.1
Segment Information
3 Months Ended
Mar. 31, 2022
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. Examples of 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 American Society of Mechanical Engineers (“ASME”) code and ASME Section XI. We provide these services across all market segments through our GSE Performance Solutions, Inc. (“GSE Performance”), True North Consulting, LLC (“True North”) and DP Engineering Ltd., Co. (“DP Engineering”) subsidiaries. Example training applications include turnkey and custom training services. Contract terms are typically less than two years.

The Workforce Solutions segment provides specialized workforce solutions primarily to the nuclear industry, working at clients’ facilities. This business is managed through our Hyperspring, LLC (“Hyperspring”) and Absolute Consulting, Inc. (“Absolute”) subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of our products and services portfolio.

The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated income before income tax expense (benefit). Inter-segment revenue is eliminated in consolidation and is not significant.

(in thousands)
 
Three months ended
 
   
March 31, 2022
   
March 31, 2021