| 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, 2022 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, 2022, filed with the U.S. Securities and Exchange Commission on April 17, 2023.
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.
Liquidity and Going Concern
The accompanying consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern
and in accordance with U.S. GAAP. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and satisfy
its liabilities and commitments in the normal course of business. Pursuant to the requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one
year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company
as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability
to continue as a going concern. The mitigating effect of management’s plans, however, are only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements
are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that
the financial statements are issued. Management determined that the implemented plans to mitigate relevant conditions may not alleviate management's concerns that raise substantial doubt about the Company’s ability to continue as a going
concern within the twelve months ended April 30, 2024.
On November 4, 2022, the Company received a notification letter from NASDAQ related to NASDAQ Listing Rules informing us that the Company
no longer meets the requirement to maintain a minimum bid price of $1.00 per share. The Company filed a Form 8-K on November 8,
2022, to disclose receipt of this letter. The Company had an initial 180-day period (or until May 3, 2023) to cure this
deficiency by maintaining a closing bid price of $1 per share for at least 10 consecutive trading days, and if compliance was not achieved within the initial 180 calendar days we could petition NASDAQ for an additional period of 180 calendar days in
which to increase the stock price. Anticipating that it would not regain compliance with the NASDAQ minimum closing bid price requirement by May 3, 2023, on April 19, 2023, the Company submitted a request for an additional 180-day period within which to regain compliance. On May 4, 2023, the Company received a letter from NASDAQ advising that the 180-day extension – expiring on October 30, 2023 – had been granted due to the facts that the Company:
|
•
|
had met the market value of publicly held shares requirement for continuing listing,
|
|
•
|
had met all other listing requirements for NASDAQ (other than bid price requirement), and
|
|
•
|
had provided written notice to NASDAQ with a plan of how it intends to regain compliance with the bid price requirement during
the second 180-day period.
|
The Company’s plan to regain compliance includes continuing to monitor the closing bid price of its Common Stock and, if appropriate,
implementing available options including, but not limited to, undertaking a reverse stock split of its outstanding securities at a ratio within the range of one-for-five to one-to-ten, which will have the initial effect of
multiplying the trading price of the Company’s Common Stock by the same ratio. Because such an action requires stockholder approval, the Company has put the matter before its stockholders for approval at the 2023 annual meeting of
stockholders, which is scheduled to be held on June 12, 2023. If the stockholders approve the measure, we believe that compliance with the NASDAQ minimum bid price listing requirement will be achieved well before the expiration of the
second 180-day period. In furtherance of the Company’s plan to regain compliance, the Company has undertaken the following
specific steps:
|
•
|
The Company’s Board of Directors considered and approved a resolution on April 3, 2023, to conduct a reverse stock split of
one-for-five to one-to-ten,
to put the matter before stockholders at the June 2023 annual meeting, and authorizing Management to file the necessary Proxy Statements to effectuate submission of the matter to stockholders;
|
|
•
|
The Company filed a Definitive Proxy Statement with the SEC on May 2, 2023 containing this proposal and commenced mailing of
notices to stockholders with instructions for obtaining copies of the proxy materials and voting their shares;
|
|
•
|
Stockholders will vote on the proposed reverse stock split at the annual meeting, which is scheduled to be held on June 12,
2023; and
|
|
•
|
If the reverse stock split is approved by stockholders, and if the closing bid price on the Company’s Common Stock does not
increase, the Board of Directors will cause the Company to effectuate the reverse stock split in a manner intended to achieve compliance well in advance of October 30, 2023.
|
If compliance is not achieved prior to October 30, 2023, and consequently a delisting letter is issued, the Company may request a hearing
before the NASDAQ Hearing Panel with regard to delisting, which may have the effect of staying the delisting and provide the Company with the opportunity to present its further plans to regain compliance. If the Company’s Common Stock
ceases to be listed on NASDAQ, Lind Global Fund II LP (“Lind Global”), as the holder of that certain two-year, secured,
interest-free convertible promissory note in the amount of $5.75 million (the “Convertible Note”) (see Note 10 for further
details), may deliver a notice of event of default together with a demand for payment to the Company for payment in full. If such a demand is delivered, the Company shall, within ten business days, pay all of the outstanding principal amount or, at its election, Lind Global may elect to convert all or a portion of the outstanding principal
amount and the conversion price shall be adjusted to the lower of the then-current conversion price and 80% of the average of
the three lowest daily variable average weighted prices during the twenty trading days prior to delivery. Additionally, if we are unable to maintain our listing on NASDAQ, it will constitute an event of default under the Convertible
Note, which would trigger certain obligations under the Convertible Note including, but not limited to, causing an amount equal to 120%
of the outstanding principal amount of the Convertible Note to immediately become due. Although there can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement within the time period(s)
permitted by NASDAQ or maintain compliance with any of the other NASDAQ continued listing requirements, we believe we will be able to remediate the noncompliance.
The Company has incurred operating losses and has not demonstrated an ability to generate cash in excess of its operating expenses for a
sustained period of time. During the year ended December 31, 2022, the Company generated a loss from operations of $14.4 million,
which includes non-cash impairment charges of long-lived assets and goodwill from our Workforce Solutions segment totaling $7.5
million. During the three months ended March 31, 2023, the Company generated a loss from operations of $2.8 million. As of March
31, 2023, the Company had domestic unrestricted cash and cash equivalents of $1.3 million which is not sufficient to fund the
Company’s planned operations through one year after the date the consolidated financial statements are issued. These factors create substantial doubt about the Company’s ability to continue as a going concern for at least one year after the
date that our audited consolidated financial statements are issued.
In making this assessment we performed a comprehensive analysis of our current circumstances and to alleviate these conditions, management
is monitoring the Company’s performance and evaluating strategies to obtain the required additional funding for future operations. These strategies may include, but are not limited to, restructuring of operations to grow revenues and
decrease expenses, obtaining equity financing, issuing debt, or entering into other financing arrangements. The analysis used to determine the Company’s ability to continue as a going concern does not include cash sources outside the
Company’s direct control that management expects to be available within the next twelve months.
|