EDGAR 10-K Filing

Company CIK: 944480
Filing Year: 2023
Filename: 944480_10-K_2023_0001140361-23-018700.json

---

ITEM 1. BUSINESS
ITEM 1.
BUSINESS.
GSE Systems, Inc. (hereinafter referred to as “GSE”, the “Company”, “we”, “us” or “our”), a Nasdaq-listed company trading under the symbol GVP, is a leading provider of engineering services and technology, expert staffing, and simulation software to clients in the power and process industries. We provide customers with simulation, engineering technology, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that help clients fill key vacancies in the organization on a short-term basis, including but not limited to, the following: procedure writing, planning and scheduling; engineering; senior reactor operator (“SRO”) training and certification; technical support and training personnel focused on regulatory compliance and certification in the nuclear power industry.
Our services help our customers provide clean energy to all in a reliable and safe manner. There is growing recognition of the importance of low and zero carbon energy as the United States in particular, and the world in general, races to decarbonize power grids. We are uniquely positioned as one of the largest independent nuclear services companies in the United States to support decarbonization of the power industry. In fact, the more wind and solar that comes onto the grid, the greater zero carbon base-load becomes to ensure grid stability, reliability and safety. Decarbonization is a leading means of delivering environmental equity - ensuring that anyone regardless of background and economic status can benefit from a safe and healthy environment, free of pollution related to carbon intensive power generation. Our operations also include interactive software for tutorials and simulation for the refining, chemical, and petrochemical industries.
We execute projects globally with approximately 278 employees, as of December 31, 2022. We operate from offices in the U.S. and China and with additional employees deployed at client sites. While most of our revenue comes from support provided to the nuclear power industry, we also serve agencies in the United States Department of Energy (“DOE”), the United States Navy and adjacent defense opportunities, and the oil and gas, refining, chemical, and petrochemical markets.
GSE was formed to consolidate the simulation and related businesses of General Physics International Engineering & Simulation, S3 Technologies, and EuroSim. We completed our Initial Public Offering in 1995.
Since 2014, GSE has grown by consolidating and acquiring businesses serving the nuclear power industry. On November 14, 2014, we acquired Hyperspring, LLC (“Hyperspring”). Hyperspring is a nuclear industry focused staffing and training firm that employs highly skilled, high-value professionals primarily filling training and consulting positions on a contract basis for nuclear power plant operators. Hyperspring professionals provide training, operations and maintenance support including: generic fundamentals exams, accreditation training visit preparation, SRO certification, procedure development, work management, tagging/labeling, outage execution, planning/scheduling, corrective action, self-assessments and equipment reliability. On September 20, 2017, we acquired Absolute Consulting, Inc. (“Absolute”). Absolute is a provider of technical consulting and staffing solutions to the global nuclear power industry with expertise in procedure writing, engineering, technical support, scheduling, planning, project management, training, project controls, and corrective actions. On May 11, 2018, we acquired True North Consulting, LLC (“True North”). True North is a provider of engineering solutions to nuclear and non-nuclear power plants with an emphasis on regulatory-driven, American Society of Mechanical Engineers (“ASME”) code programs. On February 15, 2019, we acquired DP Engineering Ltd, Co. (“DP Engineering”). DP Engineering is a specialized provider of high-value engineering services and solutions to the nuclear power industry. Founded in 1995 in Fort Worth, Texas, DP Engineering generates over 90% of its revenue from the nuclear power industry with core expertise in mechanical design; civil/structural design; electrical, instrumentation and controls design; digital controls/cyber security; and fire protection. DP Engineering primarily works under master service agreements as the Engineer of Choice (“EOC”).
FOCUS FOR 2023
As we look ahead to 2023 and beyond, there is a continued focus from the current administration on decarbonizing the power sector, which is recognized as a key means in achieving environmental equity. In 2021, the United States rejoined the Paris Agreement on Climate Change climate accord. Consistent with that decision, the current administration has promoted zero carbon power sources such as nuclear energy and increased public spending in support of the industry and related industries. The bipartisan infrastructure plan passed in 2021, and Inflation Reduction Act passed in August 2022, each included spending elements specifically in support of nuclear power and nuclear technology development.
In light of these continuing policies, there has been a significant increase in the public awareness that nuclear power can be a big part of the grid in order to achieve zero carbon goals. In an article early in 2020, Yale360.com, highlighted the potential of new generation Small Module Reactors (“SMRs”) in driving the achievement of a zero-carbon grid. Nuclear, especially SMRs, are recognized for their potential to replace carbon intensive power generation while maintaining a smaller footprint than existing coal plants. In February 2021, the Montana State Senate approved a feasibility study to evaluate replacing coal fired power generation with SMRs at the Colstrip power plant. Further, the benefits of SMRs are also noted as a key element to restore ecological systems while simultaneously maintaining zero carbon power generation. Idaho GOP Rep. Mike Simpson has proposed a sweeping $33.5 billion plan to save the Pacific Northwest’s iconic salmon that includes breaching four of the most controversial dams in the country. The power generation of the dams would be replaced by building SMRs as part of this plan. As 2022 unfolded, Canada, Poland, the Czech Republic, Bulgaria and Romania have all announced plans to pursue the build out of nuclear power generation, especially initial review of SMRs. These economic and political factors support Management’s view that we are well positioned as one of the few publicly held companies serving the nuclear power industry with essential engineering services, technology and workforce solutions.
Branding
GSE Systems, Inc. remains the legal name of the parent company, publicly traded on Nasdaq under the ticker symbol “GVP”; GSE operations and marketing uses the more distinct trademark “GSE Solutions” and its two divisions “GSE Engineering” and “GSE Workforce Solutions” to communicate GSE’s unique solution areas that offer highly specialized training, engineering design, program compliance, simulation, and technical staffing. Each solution area helps customers reduce risk and optimize performance through a centralized project approach, expert resource management, and a culture of continuous improvement to drive the decarbonization of the power industry.
OPERATING SEGMENTS
We operate through two reportable business segments: Engineering and Workforce Solutions. Each segment focuses on delivering solutions to customers within our target markets. Marketing and communications, accounting, finance, legal, human resources, corporate development, information systems and other administrative services are organized at the corporate or parent level. Business development and sales resources are generally aligned with each segment to support existing customer accounts and new customer development. The business units collaborate to facilitate cross-selling and the development of new solutions. The following is a description of our business segments:
Engineering (approximately 63.0% of revenue)
Our Engineering segment primarily encompasses our power plant high-fidelity simulation solutions, technical engineering services for ASME programs, power plant thermal performance optimization, and interactive computer-based tutorials/simulation focused on the process industry. The Engineering segment includes various simulation products, engineering consulting services, and operation training systems delivered across the industries we serve: primarily in the nuclear, fossil fuel power generation and the process industries. Our simulation solutions include the following: (1) simulation software and services, including operator training systems, for the nuclear power industry, (2) simulation software and services, including operator training systems, for the fossil power industry, and (3) simulation software and services for the process industries used to teach fundamental industry processes and control systems to newly hired employees and for ongoing workforce development and training. We and our predecessors have been providing these services since 1976.
Our Engineering segment also provides the following: (1) in-service testing for engineering programs focused on ASME OM code including Appendix J, balance of plant programs, and thermal performance; (2) in-service inspection for specialty engineering including ASME Section XI; (3) software solutions; and (4) mechanical design, civil/structural design, electrical, instrumentation and controls design, digital controls/cyber security, and fire protection for nuclear power plant design modifications. Our subsidiaries, True North and DP Engineering, typically work as either the EOC or specialty EOC for our clients under master services agreements and are included in our Engineering segment due to their service offerings. We have been providing these engineering solutions and services since 1995.
Workforce Solutions (approximately 37.0% of revenue)
The Workforce Solutions segment supports entire project lifecycles and provides highly specialized and skilled talent throughout the energy and engineering industries. Hyperspring provides training and professional service solutions. Absolute, provides technical and professional staffing and procedure writing experts. Together, our Workforce Solutions team reduces risk and costs, boosts agility and responsiveness, to eliminate non-productive time, all while providing timely, flexible and effective solutions. Examples of some of the highly skilled positions we fulfill are senior reactor operations instructors, procedure writers, project managers, engineers, work management specialists, planners and training material developers. These employees work at our clients’ facilities under client direction. The business model, management focus, margins and other factors clearly separate the business line from the rest of our product and service portfolio. We have been providing these services since 1997.
Financial information is provided in Note 20 of the accompanying consolidated financial statements regarding our business segments and geographic operations and revenue.
BUSINESS STRATEGY, INDUSTRY TRENDS, PRODUCTS AND SERVICES
Business Strategy
Serve existing customers and adjacencies with compelling solutions with a focus on decarbonization:
Our objective has been to create a leading business focused on decarbonizing the power industries by providing a diverse set of highly unique and essential services and technologies, primarily in the nuclear power industry. We are now one of the few, publicly traded engineering and technology companies serving the zero-carbon energy sector of nuclear power and adjacent nuclear markets in Department of Energy, US Navy and related sectors. As a result of this effort and established leadership in key sectors, we are positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. The engineering services and technology that we provide to industry are focused on essential capabilities to help plants extend their operating lifetimes, capture the value of the power they produce on to the grid, produce more power from existing assets, and most importantly operate safely in an optimal manner. In 2023, we are keenly focused on organic growth in the sectors we serve by: cross selling and upselling in our existing markets as we focus on delivering significant value to our customers; creating new and compelling solutions in-house as a result of advancements in our technology offerings in partnership with industry early adopters focused on critical business needs; developing new services through combination of our expertise; expanding into compelling adjacent markets such as clean energy as they may arise with renewed sales focus. The focus on organic growth reflects our need to grow in a self-funded manner to achieve cash flow break even and, ultimately, recover to our pre-pandemic revenue levels.
Cross sell and upsell into existing markets:
For the past several years, we have devoted considerable time and effort to diversify both of the Company segment’s solutions capabilities for the nuclear power sector, via a rollup of essential services providers to the industry. To ensure efficient and streamlined operations for the business, we have brought in new engineering experts who are deeply credentialed in the nuclear power industry. We have also retooled our Workforce Solutions sales and recruiting efforts to ensure we are covering the industry broadly. The business units operate uniformly within their respective structure. This structure greatly enhances the opportunity to cross-sell our capabilities across our entire customer base, fostering an important focus of our sales efforts. This further differentiates us as a comprehensive provider to industry versus providers of specific, niche services. Our expectation is that unified go-to-market efforts, such as cross-selling capabilities, will lead to greater share of available spending within the customer base, which in turn will lead to significant upselling opportunity. Just as the broader economy was impacted by the onset of the pandemic, so too have our end markets been affected. Our perspective is that the industries we serve are quick to respond to a crisis and disruption, but slow to emerge and recover to pre-crisis operations. This is understandable, especially for our primary market of nuclear power. This cycle has been demonstrated in the past with other market and industry disruptions such as the 2008 global economic crisis, the Fukushima disaster in 2011 and, most recently, the global pandemic and its ongoing economic disruption. As with past disasters, our end markets usually catch up to delays in work years after the onset of the disruption. Our Company is positioned to take advantage of the recovery if and when it occurs. As a result of a rejuvenated cross-sell and upsell effort, we are equipped to take this new approach to the market. In particular, with the infrastructure law and Inflation Reduction Act, for the first time there are specific economic incentives from the US Government for nuclear power development and the production of more nuclear baseload power to the grid. We are eager for these incentives to flow to industry spurring the capital investment required to extend the lifetime of the plants and production of more power. With economic incentives in place, the industry can now plan to make such investments. The challenge we are seeing is that the industry is still slow to advance investments that will result in an uptick in business for companies like GSE that serve the section. Although we believe it is only a matter of time that until this rollout progresses but the current pace presents a challenge in the interim. As a key provider of essential services to the nuclear power sector, with a focus on decarbonization, we are poised to benefit from industry investment as it rolls out to the vendor ecosystem. As mentioned, we have spent significant effort during 2022 to retool our Workforce Solutions sales and recruiting efforts and brought in key engineering talent to retool our efforts for the Engineering business. We have also spent significant effort putting in place Master Services Agreements (“MSAs”) with key utility operators. Having this commercial infrastructure in place is a significant step forward to facilitate ease of consumption of our solutions once a decision to do so is made by clients/prospects.
Organic growth through new and compelling technology:
While managing through the pandemic, in parallel, our leadership was investigating compelling opportunities by which we could utilize our capabilities to create significant value for the industry and advance the efforts of decarbonizing the power sector. As a result, we have identified a robust pipeline of new and compelling technology solutions to develop and take to market. Net new solutions, such as Data Validation and Reconciliation (“DVR”) and Thermal System Monitoring (“TSM”), have created new revenue streams with the potential of on-going licensing revenue, software maintenance and services revenue. Additional information on our DVR and TSM developments is included below. GSE has announced a handful of new wins for these new solutions, which were created through our unique combination of our industry/engineering know-how and software development capabilities. As we have demonstrated in the past few years, small wins over time accrue into meaningful revenue on an on-going basis. This is a key element of our organic growth thesis: focusing on creating and bringing to market compelling technology solutions.
Focus on compelling adjacencies in clean energy, defense, and national labs:
Research and development (R&D). We invest in R&D to deliver unique solutions that add value to our end-user markets. Our software tools leverage the high-end expertise of our experienced staff in helping plants operate better and more efficiently. Our software technology together with our deep staff expertise supports multiple industries including the nuclear industry, as a part of the larger decarbonization drive. Our software technology includes decision-support tools for engineering simulation supporting design and plant commissioning, operational performance tools, and training platform.
One area of significant recent enhancement is in improving the thermal performance of power plants. We have introduced the next generation platform in TSM, providing the technology platform to centralize and continuously monitor plant thermal performance. The solution benefits our customers by automating standardized reporting in modern dashboards available to engineers and decision makers across the fleet, leveraging automation to facilitate troubleshooting plant performance issues, reducing time and error with direct access to source data, and applying industry guidelines for problem resolution. This platform also supports integration with DVR (implemented by True North) that enhances the quality of data for plant performance insights, analysis and decision making, providing a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.
In the area of engineering simulations, we deliver nuclear core and Balance-of-Plant modeling and visualization systems to the industry. To address the nuclear industry’s need for more accurate simulation of both normal and accident scenarios, we provide our DesignEP® and RELAP5-HD® solutions. Our entire JADETM suite of simulation software, including industry leading JTOPMERET® and JElectricTM software, provides the most accurate simulation of Balance-of-Plant and electrical systems available to the nuclear and fossil plant simulation market. The significant enhancements we have made to our SimExec® and OpenSimTM platforms enables customers to be more efficient in the daily operation of their simulators. We have brought SimExec® and OpenSimTM together into a next generation unified environment that adds new capabilities as requested by clients and driven by market need.
Additionally, enhancements to training content and delivery continue through the EnVision On-Demand platform, allowing our customers to access training content from anywhere in synchronous and asynchronous modes, thus increasing their efficiency and reducing infrastructure costs. We intend to continue to make pragmatic and measured investments in R&D that first and foremost are driven by the market and complement our growth strategy. Such investments in R&D may result in on-going enhancement of existing solutions as well as the creation of new solutions to serve our target markets, ensuring that we add greater value that is easier to use, at lower total cost of ownership than any alternative available to customers. We have pioneered a number of industry standards and intend to continue to be one of the most innovative companies in our industry. we had R&D expenditures totaling $1.0 million and $0.9 million during the year ended December 31, 2022 and 2021, respectively.
Strengthen and develop our talent while delivering high-quality solutions.
Over the past several years, we have assembled a unique and highly experienced group of talent through organic growth and strategic acquisition. Our engineering team is comprised of design, simulation, regulatory compliance, and performance optimization professionals who are unique to the industry and capable of addressing the entire power generation life cycle.
Our experienced employees and management team are our most valuable resources. The continued integration of our team in parallel with attracting, training, and retaining top talent is critical to our success. To achieve our goals, we intend to remain focused on providing our employees with opportunities to increase client contact within their areas of expertise and to expand and deepen our service offerings. As we refine our product and service areas to best align with the critical areas listed above, we will also integrate and apply our composite employee talent to the fullest extent possible combining employee personal and professional growth opportunities with fulfillment of cutting-edge industry needs. Performance-based incentives including opportunities for stock ownership, bonuses and competitive benefits as benchmarked to our industry and locations will also be utilized to ensure continuity of our approach.
The Company is not immune to the intense pressure and business risks associated with attracting and retaining talented professionals in this current environment. We have developed a strong reputation for quality services based upon our industry-recognized depth of experience, ability to attract and retain quality professionals, and exceptional expertise across multiple service sectors. As we continue to integrate and leverage our individual company components assembled over the past several years, our capabilities and reputation will further strengthen. Attracting and retaining excellent professionals is a key effort for the company.
Industry Trends
Industry needs to build and sustain a highly skilled workforce
We believe a critical ongoing challenge facing the industries we serve is access to, and continued development of, a highly trained and efficient workforce. This challenge manifests primarily in two ways: the increasing pace at which industry knowledge and experience are lost as a significant percentage of the existing experienced workforce reaches retirement age; and the fact that as new power plants come on-line, there is an increased demand for more workers to staff and operate those plants.
In the United States, it is expected the energy industry will lose a large percentage of its workforce within the next few years as baby boomers retire. The industry also has challenges attracting new talent into the workforce. For example, Power Engineering reported that the power sector needs more than 100,000 skilled workers within the next few years to replace retiring baby boomers. Electric, Light, and Power reported that 72% of energy employers currently struggle to find quality candidates and fill open positions. The National Electrical Contractors Association reported that only 7,000 electricians join the field each year, while 10,000 retire. Finally, the Nuclear Energy Institute estimated that 39% of the nuclear workforce were eligible to retire in the next few years. The continued modernization of nuclear industry operations, has strained the industry’s ability to maintain the high standards of training for its workforce, as existing plant simulator systems, which provide a critical environment for training services, are often operating 24 hours a day. As workers retire and new units are added to the power grid, the need to backfill and expand the workforce increases, which has led certain operators to explore streamlining their existing simulator capabilities through the use of dual reference simulators. Other workforce shortages and/or short-term spikes in demand for specialist skills that we offer are similarly positive developments for our business. Further, as new nuclear technologies are researched and developed, such as new reactors and new fuels, the R&D industry needs to identify the right talent to advance those endeavors. Our business is uniquely positioned to identify and provide solutions that offer the best personnel for both short and long-term assignments.
Globally, as more people increase their standard of living, there is an expectation that their demand for power will increase, which in turn will require the on-going construction of power plants to meet this surging demand. The drive to lower carbon emissions from power generation while ensuring a stable baseload to accommodate intermittent energy workforce to operate these plants and keeping their skills current and their certifications in compliance with regulatory requirements is a key challenge facing the global power industry.
Status of decarbonization nuclear power in 2022/2023
According to World Energy Outlook report, 2019 had the second highest energy generation year for nuclear in history. By 2030, nuclear is planned to increase in generation capacity from roughly 400 GW to roughly 450 GW. Most new plants will be built in developing economies such as China and India, and advanced economies will invest to extend the lifetimes and increase the output of existing nuclear reactors to bridge the gap to a new generation of reactors under development. With that said, several western countries have announced plans to develop nuclear power, including but not limited to the United States at Idaho National Laboratory (“INL”) via Utah Associated Municipal Power Systems’ (“UAMPS”), and possibly at Clinch Rive site of TVA, Canada, the United Kingdom, Czech Republic, Poland, Bulgaria and Romania.
Decarbonizing the power sector is a key focus for both advanced and developing nations. As a critical part of zero carbon clean energy, nuclear energy ensures access to abundant, clean, reliable and affordable energy to all who can connect to the grid, no matter a person’s background or status. To combat climate change and the pollution of the atmosphere, nuclear is a key element to decarbonizing the power sector across the world. As more variable sources of power come on to the grid, such as wind and solar, ensuring a stable grid requires baseload, and nuclear is the essential source of economically scalable carbon free baseload. As such, nuclear, wind and solar are tied together in the massive effort to decarbonize economies the world over.
Nuclear provides 10% of the world’s power, and 20% of power for the United States. President Biden has indicated a desire to decarbonize the United States power sector by 2035 and achieve a carbon neutral grid by 2050. The bipartisan infrastructure legislation passed into law in 2021 had specific allocations to enhance the nuclear power sector. To support this effort, the Department of Energy has made significant investment in the development of next generation zero carbon energy production through the development of advanced reactors and/or small modular reactors from Terra Power, X-Energy, NuScale and others.
These reactors are quickly becoming realty, with a January 2021 announcement of an agreement to facilitate the development of a project proposal for a NuScale-designed plant to be built at the United States Department of Energy (“DOE”) Idaho National Laboratory grounds. Engineering, procurement and construction firm, Fluor, will provide its services for Utah Associated Municipal Power Systems’ (“UAMPS”) Carbon-Free Power Project. The project includes plans for nuclear energy featuring NuScale’s small modular reactor design. NuScale has been a long-time customer, using our simulation technology and engineering services to enhance their reactor design, operations and accelerate NRC licensing efforts. In addition to the NuScale plans, HOLTEC, another firm with SMR technology, is studying the feasibility of building an SMR facility in New Jersey at the Oyster Creek site of a decommissioned traditional nuclear power plant. GE Hitachi Nuclear has also made a number of exciting announcements regarding their SMR technology being considered in Canada, Poland, potentially Clinch River in the United States, and elsewhere. Canada has been moving swiftly forward with their announcement of an SMR new-build to progress at the Ontario Power location.
The SMR momentum has been noted in the mainstream United States press. The Wall Street Journal has noted the significant plans for SMRs being developed in the United States, Canada and elsewhere at an accelerated pace. In addition to the plants currently planned, as mentioned in the above paragraph, proponents of SMRs, view them as serving a complementary role in the smart grid of the future-replacing coal- and gas-fired plants and operating alongside wind and solar.
All of this is part of a broader effort for decarbonization that we, through the aforementioned strategies, plan to exploit for organic growth.
Products and Services
Engineering
Our engineering team, comprised of design, simulation, regulatory compliance, and performance optimization capabilities are unique to the industry and capable of addressing the entire power generation life cycle. As we move forward in alignment with client and industry goals targeting clean energy production and overall decarbonization we are positioned to be at the forefront in three critical areas:
•
optimization of existing generation assets;
•
design support and deployment of advanced reactor designs; and
•
integration with renewable power sources.
Optimizing Existing Generation Assets
As the existing fleet of nuclear reactors age and competitive pressures increase, we find ever increasing significance in being able to provide value to their continued operation. Maximizing power production through a variety of methods such as digital verification and reconciliation, a statistical based analysis used to lower uncertainty, and thus increase recognized power output is instrumental in helping these facilities face current competitive pressures. Other approaches involving safe reduction of testing and inspection requirements, or performance periodicities are also at the forefront of our cost saving techniques with defined services and products providing a clear and positive return on investment. In all cases, these efforts are aligned with keeping this important source of carbon free base power economically and technically viable.
Advanced Reactor Designs & Deployment
Designers of first-of-a-kind plants or existing plants need a highly accurate dynamic simulation platform to model a wide variety of design assumptions and concepts from control strategies to plant behavior to human factors. Because new builds and upgrades to existing plants result in deployment of new technology, often involving the integration of disparate technologies for the first time, a high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, we were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale. Going forward, we also envision many of the optimization techniques and strategies currently emphasized for the existing reactor fleet incorporated with new-build prototypes as they begin to add value and assume a larger component of our clean, carbon free, power requirements. We are grateful to see the positive headlines in the news about nuclear power being recognized as a key means by which to achieve energy security and zero carbon goals. Yet, the Company has yet to see a recovery to pre pandemic levels of spending from the sector. We are focused on organic growth from where pend is flowing today, while positioning ourselves to benefit from these very significant, multi-decade projects that are being announced in the US and overseas.
Renewable Integration
A significant component of overall decarbonization regarding power generation will ultimately fall to renewable sources such as wind, solar, and “green” hydrogen generation. These technologies are individually well on their way towards assuming a significant share of the overall generation make-up and are expected to significantly increase. One of the particular needs is the ability to safely and efficiently integrate these renewable sources with our existing and planned nuclear generation. We are on the cutting edge, working closely with academia and industry support organizations to design, model, and evaluate creative approaches to support this integration. Base load production, renewable availability, and other pertinent factors are at the core of the solutions we are exploring. If and as spending unfold to advanced engineering and simulation solutions for these efforts, GSE should be well positioned to take advantage of this spend.
Engineering Solutions for Decarbonization
With overall decarbonization as a key focus, we will blend our current and future efforts in those areas described above to best support that goal positioning our engineering team as recognized leaders in the pursuit of low carbon energy as the world progresses on the current energy transition efforts. An overview highlighting many areas of our current and planned involvement as well as the associated benefits is summarized below:
With nuclear power being such a high percentage of carbon free power generation, the continued safe and efficient operation of these plants is critical to meeting decarbonization goals. We help the industry achieve these goals through better training and provide engineering services to optimize performance while maintaining regulatory compliance. Our focus is on products and services to improve the efficiency and lower operating costs for existing power generation assets as well as help the next generation of carbon free power plants achieve design approval and plant startup as quickly as possible.
Training plant operators and engineers is critical to safe operations and continued viability of the industry. Using state-of-the-art modeling tools combined with our leading nuclear power modeling expertise, we provide simulation solutions that achieve unparalleled fidelity and accuracy. We have also adapted these solutions to provide highly accurate training across a variety of delivery platforms. These include universal or generic simulators which are excellent in teaching fundamental concepts, systems, and plant behaviors. They are also used by academia for research on improved plant operations, human factors design and the development of automated procedures and decision support systems for the next generation of reactors. Our part task simulators and virtual control panels are cost effective solutions enabling customers broader freedom in where they deliver simulation training and opening the door for plant engineers and maintenance staff to access high fidelity training without interrupting the operator training program. Our full scope simulators use the most sophisticated modeling technology. For these reasons, we have delivered more nuclear power plant simulators than any other company in the world.
We deliver training products through the cloud. This delivery method reduces our customers’ infrastructure and ownership costs and provides anytime, anywhere access to rich learning content. Innovative Critical Thinking Exercises enable autonomous simulation training to take place, reducing the burden on instructors and increasing training touch time for students and employees. All of which enable the training organization to be more flexible and efficient.
Our simulation solutions not only address industry training needs, but are used for simulation assisted engineering, the process of using simulation to virtually test and commission plant designs prior to construction. Because new builds and upgrades to existing plants result in deployment of new technology, our high-fidelity simulator enables designers to model the interaction between systems in advance of construction. With our combination of simulation technology and expert engineering, we were chosen to build first-of-a-kind simulators for the AP1000, PBMR, and small modular reactors such as those being built by NuScale. This technique reduces design costs, accelerates design approvals, de-risks projects, and provides clients with a tool to sell their new plant designs to both customers and regulators. In essence, enabling our customers to get to market faster.
Beyond training, our technology is used to improve the efficiency of existing power generation assets. Our TSM System provide live insights into plant operations, by monitoring performance of key plant equipment, analyzes degradation and advises actions to be taken. When combined with DVR techniques, we can help reduce operating and maintenance cost. DVR enhances the quality of data for analysis and decision making, providing a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.
Our EP-Plus software suite provides one common platform for all engineering programs, helping client engineers keep track of engineering program inspection and monitoring requirements aimed at safe plant operations. This reduces the engineering workload of our customers, saving costs and enabling staff to focus on the most critical activities.
All of these technologies leverage the vast experience and industry expertise of our engineering team. Our engineering team helps our clients throughout the entire plant lifecycle. We are the Engineer of Choice (“EOC”) in areas such as:
•
Design engineering for plant mechanical, electrical, I&C, civil and structural, fire protection and cyber systems
•
Engineering programs addressing ASME codes, balance of plant programs other regulatory programs and economic driven programs such as plant thermal performance
•
Simulation engineering for nuclear, thermal and process plant training and virtual commissioning
We see organic growth through closer integration of these engineering activities and technologies to provide solutions to improve the performance of our customers’ people and plants.
Workforce Solutions
As our customers’ experienced employees retire or pursue other opportunities, access to industry experts is essential to ensure ongoing quality operations. Our Workforce Solutions segment provides flexible staffing services, knowledge transfer support, end to end workforce management programs, procedures services, and specialized training programs and services. Staffing and training needs change over time and, in turn, our clients appreciate having options. We offer flexible services including fixed-price, discrete projects, new or updated methods, customized search, or specialized courses in contrast to traditional straight staff augmentation. Further, we emphasize fully understanding the unique needs of each customer, and ensure we have the ability to provide the needed solutions.
The industries we serve need talent, including operating personnel, procedure writers, engineers, operators, technical professionals, and instructors, just to name a few. Our customers need talent who can step in and use, as well as, update the client’s operating methods, procedures, training material and more. Finding technical professionals, who know the needed subject matters, can perform the work or teach it to others and can adapt quickly to the client’s culture is critical. We provide qualified professionals, instructors and turnkey projects/courses that work within the client’s system and complement the methods they already have in place.
We provide expert support through workforce solutions, consulting, or turnkey projects for procedure writing, technical engineers, project managers, training material upgrade and development, outage execution, planning and scheduling, corrective actions programs, and equipment reliability. Examples of our training program courses include senior reactor operator (“SRO”) certification, generic fundamentals training, and simulation supervisor training. Our Workforce Solutions segment includes traditional staffing services, such as temporary and direct hire, as well as customized approaches in which we work with our customers to evaluate their specific needs and put together a strategic plan specifically to meet their unique needs. Workforce solutions is not only a complement to our other service offerings; it often leads the way as the preferred method for many of our clients to execute entire projects and/or supplement their own staff during project peak periods or with specialized skill sets that are often hard to find. Our industry experts give our customers the ability to ramp up quickly, eliminate risks, and provide more flexible options as situations often demand.
In addition to the core training and staffing business lines in the nuclear sector, we continue to see organic growth opportunity with our Workforce Solutions segment by expanding our service offerings to meet the evolving needs of the energy and engineering industries as well as other opportunities that support decarbonization and major infrastructure projects. Due to the our team’s composition and direct industry experience, we are well positioned to expand our Workforce Solutions segment offerings through our existing relationships and industry knowledge. This growth is occurring both with existing and new customers. We place great emphasis on cross-selling the services offered by our Workforce Solutions segment with our Engineering segment (and vice versa). The Workforce Solutions segment continues expanding our footprint with companies dedicated to the support of decarbonization, and that success is demonstrated by contract awards, scope expansion, and targeted opportunities to support engineering, manufacturing, and construction projects with companies dedicated to clean energy solutions. We continue to better position ourselves to support these opportunities with strategic hires and staff alignment. As the recent increases in employment transition have demonstrated, companies must also be able to adapt quickly to evolving staffing needs. This has certainly been demonstrated with companies needing to adjust compensation packages, adjusting and allowing more employees to work remotely, and expanding options for acquiring the needed talent. Employees are making changes in their professional lives for many reasons, and our Workforce Solutions offers our customers added support and more flexibility to support ever-changing needs. In fact, Workforce Solutions is uniquely positioned for growth in these types of employment environments. Our flexible solutions, and specialized industry experience position us both for current and future staffing needs.
We recognize the necessity to listen to the needs of our customers and provide the right solution. Whether the answer is one of our traditional service offerings or putting together a customized approach, we have the capabilities to help our customers get the job done. We  bring together the collection of skills we have amassed over more than 40 years beginning with our traditional roots in custom high-fidelity simulation and training solutions for the power industries, extended through the acquisition of specialized engineering capabilities, enhanced by the entry and intermediate level training solutions of EnVision, backed by the extensive Workforce Solutions services of Absolute and Hyperspring, and now strengthened by our ability to successfully adapt, diversify, and offer a solutions based approach with our Workforce Solutions.
CUSTOMER AND LOCATIONS
For almost 50 years, we have been developing next-generation, custom training simulation technologies. Since we built the first commercial full-scope nuclear power plant simulator in 1971, we have completed more than 1,100 installations across the power and process industries in 50 countries.
In 2022, approximately 16.0% of our revenue was generated from end-users outside the United States and we have a concentration of revenue from one individual customer, which accounted for 13.6% of our consolidated revenue, respectively. A small representative list of our customer base includes: ABB Inc., American Electric Power, Bechtel Hanford National Laboratory, Duke Energy, EDF Energy (United Kingdom), Emerson Process Management, Entergy Nuclear Operations Inc, Exelon, Constellation, PSEG Nuclear, Inc., Siemens AG (Germany), Southern Nuclear Operating Company, Inc., Savannah River Nuclear Solutions, LLC, Slovenkse Elektrarne, A.S. (Slovakia), Tennessee Valley Authority, and Westinghouse Electric Co. Hydrocarbon and chemical process customers include numerous large oil refineries and chemical plants such as BP (worldwide), Statoil ASA (Norway), Chevron, Shell Oil Company (worldwide), Total (Belgium), and Valero (USA).
MARKETING AND SALES
We market our products and services through a network of direct sales staff, agents and representatives, and strategic alliance partners. Market-oriented business and customer account teams define and implement specific campaigns to pursue opportunities.
We continue to have a proactive public relations program, issuing non-financial press releases to announce product development and significant deliveries, as well as our presence at numerous industry trade shows and technical conferences. We are active on numerous social media platforms and strive to build a strong presence across all media that our clients use to find information about us. Our goal is to provide useful information at each stage of the client’s journey with us.
Our ability to support our multi-facility, international, and multinational clients is facilitated by our network of offices and strategic partners in the U.S. and overseas. In addition to our office located in China, our ability to conduct international business is enhanced by our multilingual and multicultural workforce. We have strategic relationships with system integrators and agents representing its interests in Bulgaria, Japan, Malaysia, Singapore, South Korea, Taiwan, Ukraine and various locations in the Gulf Coast Countries of the Middle East.
COMPETITION
In the nuclear simulation market, we compete directly with firms primarily from Canada, France and the U.S., such as L-3 MAPPS Inc., a subsidiary of Harris (Canada), CORYS T.E.S.S (France) and Western Services Corporation. In the fossil simulation market, we compete with smaller companies in the U.S. and overseas. In the process industry, our main competition comes from large digital control system/automation companies such as Honeywell and Schneider. In our engineering market, we compete with firms primarily from North America such as Enercon Services, Kinectrics, Sargent & Lundy, and AECOM.
The Workforce Solutions business services include technical professional and training-related and services as well as staff augmentation solutions. Competitors of the Company for these services include but is not limited to the following: GP Strategies (acquired by LTG in 2021), The Westwind Group, Professional Training Technologies, and Western Technical Services. The competition for staff augmentation includes: System One, Aerotek, and Peak Technical. Competition with staff augmentation is further impacted by wide scale industry consolidation as a result of the growing movement toward use of Managed Staffing Providers (MSPs). As some competitors have been forced to close their doors, MSP models have caused other to lose market share, as MSPs can offer a clearer picture of which companies can best deliver. By conducting in depth reviews and ensuring strategic alignment with MSP providers, the Company’s Workforce Solutions segment has continuously found success with the MSP models and avoided the missteps that have impacted other competitors in this regard.
Competitive Advantages
Although there is competition in various industry niches, few companies in our space compare to our engineering, simulation and performance optimization expertise, especially for the nuclear power industry. Few of our competitors serve the broader engineering market and few work across the full spectrum of energy markets addressing clean energy sources and decarbonization initiatives, specifically, existing nuclear generation, advanced reactor applications, and ongoing integration with renewable power sources. Our unique combination of talent and expertise, built through organic and acquisition-based growth has positioned us perfectly to align with the clean energy initiatives of our clients and the industry at large.
Full Spectrum Support. Over the past several years we have assembled a unique and highly experienced group of talent through organic growth and strategic acquisition. Our Engineering team comprised of design, simulation, regulatory compliance, and performance optimization capabilities are unique to the industry and capable of addressing the entire power generation life cycle. A major and ongoing attribute associated with this unique grouping of expertise is our multi-tiered approach aimed at leveraging the aggregate strengths and abilities of our resource components towards maximizing client and shareholder value. This centers on the following key areas:
•
Retain and strengthen our “Base” revenue through optimization of current capabilities and established client relationships.
•
Integrate our product and service areas to provide more comprehensive or enhanced solutions when internal or external value can be identified.
•
Explore, evaluate, and develop new collaborative service areas, products, and solutions closely aligned with internal core strengths, client goals, and overall industry clean power initiatives.
Base Revenue and Strategic Integration. We will continue to build upon the Engineering segment’s historical success of maintaining our client connections by providing clear and immediate returns to the customer, such as optimized power generation and efforts that reduce or extend testing and inspection requirements. In parallel, we are aggressively evaluating ways to integrate and package our design, simulation, and plant performance components to further enhance client benefit. In many cases this is structured with our historical base scope of supply proposed as the stand-alone foundation with optional scopes included to deliver a more integrated comprehensive solution if desired.
New Product / Service Areas. A dedicated, strategically focused exercise centered on evaluation of core capabilities, potential adjacencies, client needs, and industry direction has resulted in several new product or service initiatives within our Engineering group. Further development, expansion, and application of existing product lines and associated services have moved to the forefront of this effort with the added benefit of minimizing engineering and information technology level of effort while maintaining very high client benefit. Additional competitive advantage are also present through client contracts which help fund the R&D components of the initiatives.
Proprietary Software Tools. We developed a library of proprietary software tools including auto-code generators and first principles-based system models that substantially improve and expedite the design, production and integration, testing and modification of software and systems. These tools are used to automatically generate the computer code and systems models required for specific functions commonly used in simulation applications, thereby enabling us or our customers to develop repeatable high-fidelity, real-time software quickly, accurately and at lower costs. We also have an expertise integrating third-party engineering codes into our simulation environment, thereby offering some of the most sophisticated technical solutions in the market. We have a substantial library of process-specific simulation models and e-learning modules aimed at the oil and gas, refining and specialty chemicals markets. Lastly, our TSM platform is being used as a plant performance reporting tool and as the graphical user interface for our DVR service initiatives which provide high value client return through power recovery and other optimization strategies. This platform also serves as the foundation for our new product service initiatives with numerous optional modules and applications under consideration.
Performance Expertise. We are a leading innovator and developer of engineering directed solutions for the power generation industry. Our design, simulation, and plant performance resources are fully engaged with industry developments and client requirements routinely providing answers to our clients most pressing needs. Design modifications addressing base generation usage for nuclear facilities, optimization of power production through innovative statistical analysis, and real-time simulation software producing high-fidelity, real-time plant simulation are representative examples. As of December 31, 2022, we employed a highly educated and experienced multinational workforce of approximately 278 employees, including approximately 136 engineers and scientists in fields such as nuclear, chemical, mechanical and electrical engineering, applied mathematics and computer sciences, and approximately 71 instructors and plant operations staff specialists.
Unique Combination of Talent. Few in our market space bring together the sophistication of simulation technology with the engineering expertise, training expertise and plant performance expertise to provide the holistic people and plant engineering solutions as well as we do.
Reputation for Customer Satisfaction. As part of its ISO-9001:2015 Quality Program Certification, we measure customer satisfaction across numerous factors such as On-Time Delivery, Problem Solving, and Customer Communication. In each category measured, we routinely exceed customer expectations.
Training Curricula
We have developed hundreds of detailed courses and simulator exercise material and specific industrial applications including oil and gas refining, gas-oil production, nuclear and combined cycle gas turbine power plant and desalination.
Our Workforce Solutions business is mostly focused on training and operations support. Our trainers and consultants provide their services at customer facilities which allows us to interface with our customers directly in the course of doing business versus only periodically calling on customers. Our proximity gives us a significant competitive advantage in that we can immediately offer and implement solutions rather than contending with lengthy bid processes.
INTELLECTUAL PROPERTY
We depend upon our intellectual property rights in our proprietary technologies and our distinctive trade and service marks. We maintain a portfolio of: trademarks and servicemarks (both registered and unregistered) on our logos, product and service names, and other elements of trade dress; copyrights (both registered and unregistered) on written materials including software code, manuals, and other creative works; trade secret protections on its proprietary technologies and methodologies; and licenses from third parties to use and commercially exploit other protected intellectual property. While such trademarks, copyrights, trade secrets, and inbound licenses as a group are of material importance to us, we do not consider any one trademark, copyright, trade secret, or license to be of such importance that the loss or expiration thereof would materially affect us. We distribute our software products under software license agreements that grant customers nonexclusive and nontransferable licenses for the use of the products. Usage of our licensed on-premise software is restricted to designated computers at specified sites, unless the customer obtains a site-wide license for its use of the software. Our software products delivered as a service (SaaS) over the internet also contain customer verifications and usage limitations. We employ not only software and hardware security measures to prevent unauthorized use of its software, but also detailed contractual terms and limitations within our license and service agreements to prohibit unauthorized usage or reproduction. We offer our customers both perpetual software licenses with unlimited duration (as long as the customer complies with the license terms) and term-limited software licenses and usage agreements.
We do not own any patents. We believe that all of our trademarks are valid and will have an unlimited duration as long as they are adequately protected and sufficiently used. We have numerous registered U.S. trademarks, including word and design trademarks on: GSE Systems®, GSE Solutions®, JTOPMERET®, RELAP5-HD®, VPanel®, and SimExec® among others, as well as a design trademark on the “GSE” logo. We believe that our international trademark protection is adequate to our business needs. We also claim trademark rights to various other product and service offerings including DesignEP™, Java Application and Development Environment (JADE)™, OpenSim™, PSA-HD™, SimSuite Pro™, SmartTutor™, THOR™, and Xtreme I/S™, among others. Despite these protections, we cannot be sure that we have protected or will be able to protect our intellectual property adequately, that the unauthorized disclosure or use of our intellectual property will be prevented, that others have not or will not develop similar technology independently, or, to the extent we own any patents in the future, that others have not or will not be able to design around those patents. Furthermore, the laws of certain countries in which our products are sold do not protect our products and intellectual property rights to the same extent as do the laws of the United States.
GOVERNMENT REGULATIONS
Our operations are directly and indirectly affected by political developments and both domestic and foreign governmental regulations. We cannot determine the extent to which changing political priorities, new legislation, new regulations or changes in existing laws or regulations may affect our future operations, positively or negatively.
INDUSTRIES SERVED
The following chart illustrates the approximate percentage of our 2022 and 2021 consolidated revenue by industries served:
Years ended December 31,
Nuclear power
%
%
Fossil fuel power
%
%
Process
%
%
Total
%
%
BACKLOG
As of December 31, 2022, we had approximately $32.9 million of total gross revenue in backlog compared to $41.3 million as of December 31, 2021. Most of our contract terms are for less than 24 months. Our backlog includes only those amounts that have been funded and authorized and does not reflect the full amounts we may receive over the term of such contracts. Our backlog includes future expected revenue at contract rates, excluding contract renewals or extensions that are at the discretion of the client. We calculate backlog without regard to possible project reductions or expansions or potential cancellations unless and until we have reason to believe that such changes may occur.
Backlog is expressed in terms of gross revenue and, therefore, may include significant estimated amounts of third-party or pass-through costs to subcontractors and other parties. Because backlog is not a defined accounting term, our computation of backlog may not necessarily be comparable to that of our industry peers.
HUMAN CAPITAL
As of December 31, 2022, we had approximately 278 employees, which include 193 in our Engineering segment and 85 in our Workforce Solutions segment. The 278 employees are comprised of 222 fulltime employees and 56 part time employees, Excluding our Workforce Solutions segment, which consists primarily of specialized instructors, our employee attrition rate for 2022 among all staff was approximately 10.2%. To date, we have been able to locate and engage highly qualified employees as needed and we expect our growth efforts to be addressed through attracting top talent.
Our people are what make us who we are today. Not only does it depend on employing highly skilled professionals but also people who can work together, effectively and collaboratively, as a team, whether departmental, cross functional, or cross company. Our employees come from diverse backgrounds as well as a diverse geography, and we look to attract people by offering a positive and welcoming work environment, strong management and leadership teams, along with a competitive compensation and benefit package.
Talent Management
We are committed to recruiting, hiring, retaining, and developing the most talented and skilled professionals and graduates available in the job market. Our approach to talent management includes a rigorous selection process followed by coaching, training, and knowledge transfer. We differentiate our program from typical performance management programs by focusing on the manager’s role. HR provides support but the day-to-day interactions that ensure the employee’s success come from the manager. They coach and develop employees through their active and regular interactions. This is a critical part of both current performance as well as knowledge transfer from our more experienced staff that may be nearing the end of their career, to our less experienced. Training takes place internally and across our companies to take advantage of our SMEs in our industry. As a result of this we can integrate different talent pools to be interchangeable across projects. In addition, we offer a tuition reimbursement that allows employees to further their education or attend external professional development programs.
Compensation & Benefits
We offer market competitive compensation and benefit programs for our employees in order to attract and retain superior talent. In addition to competitive base wages, additional benefits provided include: a Long-Term Incentive Stock Option Plan, a Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and employee assistance programs.
Diversity & Inclusion
A diverse and inclusive workforce adds value to our Company and helps us succeed. We believe diversity is important because it provides varied insight and varied perspectives which results in innovative thinking, better decision making and faster problem solving. Having a diverse workforce also brings different skill sets and experiences that are shared throughout the Company. Our culture, which is collaborative in nature, provides for inclusion of all employees in all aspects of our work.
Health, Safety, & COVID-19
The health and safety of our employees is of paramount importance to us. Our OSHA records show that we have had zero recordable injuries/illnesses as defined by OSHA in the past five years, and we attribute that to our employees working carefully so they don’t get injured. We provide everyone a safety manual to the employees that work at power plants are also provided with the necessary safety training on site.
During COVID-19, our employees have faced the challenges of maintaining their mental health. In response to this, we have provided multiple mental health resources for our employees and their families as well as a wellness program that incentivizes and motivates people to eat healthy, get some form of exercise, and destress. We also offer an Employee Assistance Program (“EAP”) and full access to mental health providers through our health partner, Cigna. And in order for our employees to be able to assist in the virtual learning environment with their children, we have offered flexible work schedules to accommodate their needs.
COVID-19
As of December 31, 2022, we have implemented a pilot hybrid work program with the option for managers to determine if, and when, their team members are required to come to the office. As our employee are geographically disbursed a majority of our employees continue to work remotely except when required to be at the client site for essential project work. 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. Our Engineering segment’s (see Item 7) 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 segment (see Item 7) customers paused or delayed contracts as they shrank their own on-premises 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. Since the beginning of 2022, the Workforce Solutions segment began to receive an increase in opportunities shifting greatly to direct hire openings, rather than the normal hourly billable base.
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. We experienced order reductions, cancellations, and other negative changes to orders due to the pandemic. 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.

---

ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS.
The following are some of the factors that we believe could cause our actual results to differ materially from historical results and from the results contemplated by the forward-looking statements contained in this report and other public statements we have made. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. Most of these risks are generally beyond our control. If any of the risks or uncertainties described below, or any such other or additional risks and uncertainties actually occurs, our business, results of operations and financial condition could be materially and adversely affected. The following information should be read in conjunction with Item 1 - Business, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes under Item 8 - Financial Statements and Supplementary Data.
RISKS RELATED TO A NASDAQ DELISTING EVENT
If we are unable to maintain compliance with Nasdaq’s listing requirements, our common stock may be delisted from The Nasdaq Stock Market, which would allow our Lender to deliver a demand for payment, result in an event of default under that certain February 23, 2022 Senior Convertible Note, could have a material adverse effect on the Company’s financial condition and could make it more difficult for holders of the Company’s common stock to sell their shares.
The company’s common stock is listed on the Nasdaq Capital Market and we are therefore subject to its continued listing requirements, including requirements with respect to the market value of publicly-held shares, market value of listed shares, minimum bid price per share, and minimum stockholder’s equity, among others, and requirements relating to board and committee independence. If we fail to satisfy one or more of these continued listing requirements, our common stock may be delisted from the Nasdaq Capital Market. On November 4, 2022, the Company received a written notice (from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) stating that the Company failed to maintain a minimum closing bid price of $1.00 per share for the prior 30 consecutive trading day period, as set forth in Nasdaq Listing Rule 5550(a)(2).
Under that certain Senior Convertible Promissory Note issued by the Company to Lind Global Fund II LP (“Lind”) on February 23, 2022 (the Note”), if our common stock ceases to be listed on Nasdaq (or another stock exchange), Lind (or the holder of such note) may deliver a demand for payment to the Company and, if such a demand is delivered, the Company shall, within ten (10) Business Days following receipt of the demand for payment from the Holder, pay all of the outstanding principal amount or, at its election, Lind 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 eighty percent (80%) of the average of the three (3) lowest daily variable average weighted prices during the twenty (20) 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 Note, which would trigger certain obligation under the Note including, but not limited to, causing an amount equal one hundred twenty percent (120%) of the outstanding principal amount of the Note to immediately become due.
Delisting from Nasdaq also may adversely affect our ability to raise additional financing through the public or private sale of equity securities, may significantly affect the ability of investors to trade our securities and may negatively affect the value and liquidity of our common stock. Delisting also could have other negative results, including the potential loss of investor confidence or interest in strategic transactions or opportunities, as well as negatively impact our ability to recruit and retain personnel through equity incentive awards.
The notice provided that we have a period of 180 calendar days, or until May 3, 2023, to regain compliance with the minimum bid price requirement. During this period, our common stock will continue to trade on the Nasdaq Capital Market.
We intend to actively monitor the closing bid price of our common stock and will evaluate available options to regain compliance with the minimum bid price requirement. However, there can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with any of the other Nasdaq continued listing requirements.
The Company’s Board may determine to implement a reverse stock split to attempt to regain compliance with the minimum bid price requirement. However, there can be no assurance that the reverse stock split, if approved by the stockholders and implemented, will increase the market price of our common stock in proportion to the reverse split ratio or result in a sustained increase in the market price of our common stock. In addition, it is possible that the reduced number of issued shares of common stock resulting from a reverse stock split could adversely affect the liquidity of our common stock.
RISKS RELATED TO MACROECONOMIC CONDITIONS AND GLOBAL CONDITIONS
The COVID-19 pandemic continues to impact our business and a regional epidemic or global pandemic, including the worsening of the COVID-19 pandemic, may adversely affect our business operations and financial condition.
In March 2020, the World Health Organization declared the COVID-19 virus a global pandemic and then-President Donald J. Trump declared a national emergency in the United States. This pandemic caused substantial disruptions to populations, including economic markets and businesses, worldwide. Regulations and restrictions to ensure public safety, adopted at varying times and extents in the affected locations, had serious adverse impacts on economic markets and the operation of businesses in those locations. The COVID-19 pandemic increased macroeconomic and stock market volatility and uncertainty. Parts of our business were and continue to be adversely affected by the COVID-19 pandemic. In response to the pandemic, varying restrictions have been implemented, either by government order or by voluntary measures, such as temporary closures or restrictions on business operations, and/or the imposition of social distancing, quarantine, remote work, or other limitations on in-person meetings. The timing and severity of these imposed restrictions varied and, while most have been lifted, restrictions could be reinstated at any time. These disruptions adversely affected our customers’ operations and our business, most prominently by increasing costs and delaying customer projects and expenditures. The lingering impact of COVID-19 may continue to adversely impact our business for an indeterminate amount of time.
Additionally, other regional epidemics or global pandemics, depending upon their duration and severity, could have a material adverse effect on our business. Depending on the severity and duration of these disruptions and the subsequent supply chain effects, customer demand, our ability to meet demand, and our revenue and profit margins, may continue to be negatively impacted.
Due to the uncertainty of the severity and duration of COVID-19 and other potential events, the extent and effectiveness of containment and mitigation measures that may be taken by governmental authorities or voluntarily, to the extent an epidemic or global pandemic has or may adversely impact our business, such impact may also heighten other risks set forth in this Section 1A - Risk Factors.
Our business is subject to risks related to global economic conditions, including inflation, consumer demand, global supply chain challenges and other macroeconomic issues that could have an adverse effect on our business and financial performance.
General economic downturns impacting our key customers and global markets can adversely affect our business operations, demand for our products and our financial results. The global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including higher interest rates, relatively high levels of inflation, strained supply chains and expectations of lower economic growth, which have put pressure on our business. For example, Russia’s invasion of Ukraine in the first quarter of 2022 and the resulting geopolitical responses lessened international demand for our simulation products. When challenging macroeconomic conditions such as these exist, our customers may delay, decrease or cancel purchases from us and may also delay payment or fail to pay us altogether. Suppliers may have difficulty filling our orders and distributors may have difficulty getting our products to customers, which may affect our ability to meet customer demands and result in a loss of business. Weakened global economic conditions may also result in unfavorable changes in our product prices and product mix and lower profit margins. All of these factors could have a material adverse effect on demand for our products, our financial condition and our results of operations.
We are subject to a wide variety of laws and regulations, and these may change.
Our businesses are subject to regulation by U.S. federal and state laws, and foreign laws, government regulations and policies, and other administrative requirements. Changes to laws or regulations may require us to modify our business objectives if existing practices become more restricted, subject to escalating costs, or prohibited outright. Particular risks include possible curtailment of our intended business activities or strategies as a result of changed or new regulatory risks arising from federal laws and regulations, such as laws and regulations regarding export of sensitive technologies or technical information or changed interpretations of existing laws and regulations. Our business and the industries in which we operate are also at times being reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties, or the assertion of private litigation claims and damages. Any significant change to laws, regulations, enforcement policies, or liability regimes, or other actions by government bodies having jurisdiction over our business, may have material adverse effects on our business and profitability. We have only limited ability to foresee, plan for, or influence changes to these requirements.
RISKS RELATED TO OUR INDUSTRY
Our business is largely dependent on sales to the nuclear power industry. Any significant disruption in this industry would have a material adverse effect upon our revenue and profitability.
In both 2022 and 2021, 89.0% and 91.0% of our revenue, respectively, was from customers in the nuclear power industry. We expect to derive a significant portion of our revenue from customers in the nuclear power industry for the foreseeable future. Market demand for, and our ability to supply nuclear power plant simulators and related products and services is dependent on the continued operation of nuclear power plants globally and, to a lesser extent, on the construction of new nuclear power plants. A wide range of factors affect the continued operation and construction of nuclear power plants, including the political, regulatory and legal environment in which they operate, the availability and cost of alternative means of power generation, the occurrence of future nuclear incidents, such as the one which occurred at the Fukushima Daiichi nuclear plant in 2011, and general economic conditions. Significant regulatory changes in the U.S. or abroad could materially affect demand for our products, the profitability of our service deliveries to nuclear power industry customers, and the overall efficacy of our current business model.
Customer concentration in the U.S. nuclear power industry subjects us to risks and uncertainty, which we may not be able to mitigate through diversification.
The U.S. nuclear industry has significant customer concentration with a limited number of entities owning all of the 92 nuclear reactors currently operating in the United States. In 2022, we continued to experience high customer concentration with respect to each of our businesses. Indeed, one customer accounted for 13.6% of our total consolidated revenue for the year-ended December 31, 2022. We monitor our customer concentration and seek to diversify our customer base within this concentrated industry. In addition to pursuing diversification strategies and expanding relationships with targeted customers, we mitigate the associated customer concentration risk by developing meaningful relationships with each nuclear power plant, which are often separately responsible for vendor selection and individual procurement decisions.
The nuclear power industry, our largest customer group, is associated with a number of hazards which could create significant liabilities.
Our business could expose us to third party claims with respect to product, environmental and other similar liabilities. Although we have sought protection from these potential liabilities through a variety of legal and contractual provisions as well as through liability insurance, the effectiveness of such protections has not been fully tested. Certain of our products and services are used by the nuclear power industry primarily in operator training. Although our contracts for such products and services typically contain provisions designed to protect us from potential liabilities associated with such use, there can be no assurance that we would not be materially adversely affected by claims or actions which may potentially arise due to factors that may be outside of our direct control.
The industries in which we operate are highly competitive. This competition may prevent us from raising prices at the same pace at which our costs increase.
Our businesses operate in highly competitive environments with both domestic and foreign competitors, many of whom have substantially greater financial, marketing, and other resources than we do. The principal factors affecting competition in our industries include price, technological proficiency, ease of system configuration and use, product reliability, applications expertise, engineering support, local presence, personal relationships, and the relative financial stability of the competitor. We believe competition in the simulation fields may further intensify in the future as a result of advances in technology, consolidations and strategic alliances among competitors, increased costs required to develop new technology and the increasing importance of software content in systems and products. Because our business has a significant international component, changes in the value of the dollar could adversely affect our ability to compete internationally and could reduce our profitability on international business opportunities that we do win. Any of these competitive factors, or any combination of two or more factors, could make it more difficult for us to bid successfully on new projects, or to complete projects at profit margins that we consider reasonable. An inability or reduced ability to win new work would have a material adverse impact on our backlog and revenue, and an inability or reduced ability to secure reasonable profit margins on projects awarded to us would have a material adverse impact on our profitability and overall results of operations.
RISKS RELATED TO OUR PRODUCTS, SERVICES, AND BUSINESS PRACTICES
Our simulation business is dependent on product innovation and research and development, which costs are incurred prior to realization of revenue for new products and improvements.
We believe that our success will depend in large part on our ability to maintain and enhance our current product line, develop new products, maintain technological competitiveness and meet an expanding range of customer needs. Our product development activities are aimed at the development and expansion of our library of software modeling tools, the improvement of our display systems and workstation technologies, and the advancement and upgrading of our simulation technology. The life cycles for software modeling tools, graphical user interfaces, and simulation technology are variable and largely determined by competitive pressures and the evolution of software and standards that may be controlled by third parties. Consequently, we will need to continue to make significant investments in research and development to enhance and expand our capabilities in these areas and to maintain our competitive advantage. We cannot control, and we may be unable to predict accurately, the development and evolution of these competitive pressures and external software and standards. We may be unable to monetize our investment in research and development in a timely manner, or at all. Unexpected or excessive delays in realizing a return on these investments may have a material and adverse effect on our cash position, results of operations, and financial condition.
Our backlog is subject to unexpected adjustments and cancellations and may not be a reliable indicator of future revenues or earnings.
Backlog represents products or services that our customers have committed by contract or purchase order to purchase from us and that we have not yet delivered or recognized as revenue. Our backlog as of December 31, 2022 and 2021 was $32.9 million and $41.3 million, respectively. There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits. Because of project cancellations or changes in project scope and schedule, we cannot predict with certainty whether or when backlog services will be performed, or products delivered. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed to us. Our poor project performance could increase the cost associated with a project. Thus, delays, suspensions, cancellations, payment defaults, scope changes and poor project execution could materially reduce or eliminate the revenues and profits that we actually realize from projects in backlog. Reductions in our backlog due to cancellation or modification by a customer or for other reasons may adversely affect, potentially to a material extent, the revenues and earnings we actually receive from contracts and orders included in our backlog. Many, but not all, of the contracts in our backlog provide for cancellation fees in the event customers cancel projects. These cancellation fees usually provide for reimbursement of our out-of-pocket costs and payments, for work performed prior to cancellation including varying percentages of the profits we would have realized had the contract been completed. We usually have no contractual right to payment for all of the lost revenue or lost profits in the event of cancellation of the contracts and orders reflected in our backlog, however. Projects may remain in our backlog for extended periods of time. If we experience significant project terminations, suspensions, or scope adjustments to contracts reflected in our backlog, our financial condition, results of operations and cash flows may be adversely impacted.
RISKS RELATED TO FOREIGN OPERATIONS
Our sales to foreign customers expose us to risks associated with operating internationally.
Sales of products and services to end users outside the United States accounted for approximately 16% of our consolidated revenue in 2022 and 12% of consolidated revenue in 2021. Consequently, our businesses are subject to a variety of risks that are specific to international operations, including the following:
•
export laws and regulations that could erode our profit margins or restrict the export of some or all of our products;
•
compliance with the U.S. Foreign Corrupt Practices Act and similar non-U.S. regulations;
•
the burden and cost of compliance with foreign laws, treaties and technical standards generally, as well as responding to changes in those requirements;
•
contract award and funding delays;
•
potential restrictions on transfers of funds;
•
potential difficulties in accounts receivable collection;
•
currency fluctuations, including costs and potentially limited availability of viable hedging options;
•
import and export duties and value added or other taxes;
•
transportation and communication delays and interruptions;
•
differences in insurance availability and coverage in some jurisdictions;
•
difficulties involving strategic alliances and managing foreign sales agents or representatives;
•
uncertainties arising from foreign local business practices and cultural considerations; and
•
potential military conflicts and political risks, including particularly the current conflict between Russia and Ukraine
•
potential disruption of our international business due to the worldwide COVID-19 virus outbreak.
In December 2019, an outbreak of the COVID-19 virus was reported in Wuhan, China. On March 11, 2020, the World Health Organization declared the COVID-19 virus a global pandemic. The pandemic did adversely affect our international customers’ operations, our employees, and our employee productivity. It also impacted the ability of our subcontractors, partners, and suppliers to operate and fulfill their contractual obligations, and result in an increase in costs, delays or disruptions in performance. These supply chain effects, and the direct effect of the virus and the disruption on our employees and operations, may continue to negatively impact both our ability to meet customer demand and our revenue and profit margins.
In late February 2022, following rising tensions between the regions, Russian military forces launched significant military action against Ukraine, and sustained tension, conflict, and disruption in the region is expected. We do not have employees or operations in Russia or Ukraine, but we do have customers who do business in these countries or surrounding countries. Such operations and customers may be adversely affected by the continued conflict and any related disruptions, sanctions or other governmental actions.
While we have and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of our foreign business, we cannot ensure that such measures will be adequate. During the years ended December 31, 2022 and 2021, we did not have revenues greater than 10% from any individual foreign country.
Exports and sales to certain foreign countries, including the People’s Republic of China, are subject to regulatory, political, and other risks.
The export and sale of our services and technology to certain foreign countries including China, are subject to U.S. export control regulations. Export control policy pertaining to China and other countries may be enforced through laws and regulations administered by the Department of Commerce and the Department of Energy, and jurisdiction with regard to the export and sale of our services and technology may be overlapping and unclear. Specific governmental authorizations may be required before we can export our services or technology to countries such as China or collaborate with foreign entities or foreign individuals located in countries such as China. These restrictions include our own wholly-owned Chinese subsidiary and its employees. If export or other authorizations are required and not granted, or are significantly delayed, our international business plans pertaining to China and other countries could be materially affected. Further, our exports and sales to China and other countries with respect to which the United States may have shifting or negative diplomatic and trade relations, including sales made by or through our wholly-owned Chinese subsidiary, expose us to particular risks associated with the political and regulatory relationship between the U.S. and China and between the U.S. and such other countries.
In October 2018, DOE announced the tightening of certain export control restrictions with regard to the export of nuclear technology to China, including certain presumptive denials with regard to the export of identified nuclear technologies to China. Although we do not believe that these policy changes cover our technologies or services, additional restrictions pertaining to U.S. regulation and policy pertaining to international trade with China could adversely affect our business in China and the performance of our Chinese subsidiary.
Finally, violation of export control regulations, including those pertaining to China, could subject us to fines and other penalties, such as losing the ability to export for a period of years, which would limit our revenue growth opportunities and significantly hinder our attempts to expand our business internationally. Although we take steps to monitor and ensure our compliance with all applicable export laws and regulations, we are nevertheless exposed to political and regulatory risks that we may not be able to mitigate fully and that may have a material adverse effect upon our international business operations.
Our operations within China subject us to risks and uncertainties relating to the laws and regulations of China.
Our business and operations within China may be adversely affected by China’s continuously evolving internal policies, laws and regulations, including those relating to nuclear technology, trade, taxation, import and export tariffs or restrictions, currency controls, cybersecurity and data protection, indigenous innovation and the promotion of a domestic nuclear industry, and intellectual property rights and enforcement and protection of those rights. Enforcement of existing laws or agreements in China may be inconsistent. In addition, changes in the political environment, governmental policies, international trade policies and relations, or U.S. - China relations could result in revisions to laws or regulations or their interpretation and enforcement, exposure of our proprietary intellectual property to risk of loss, increased taxation, trade sanctions, the imposition of import duties or tariffs, restrictions on imports or exports, currency revaluations, or retaliatory actions by the Chinese government in response to U.S. actions, any or all of which could have an adverse effect on our business plans and operating results.
RISKS RELATED TO OUR FINANCIAL CONDITIONS, ACCOUNTING, AND CONTRACTS
If we cannot comply with the financial or other restrictive covenants in our credit agreement, or obtain waivers or other relief from our lender, we may cause an event of default to occur, which could result in loss of our sources of liquidity and acceleration of our debt.
In order to fund general working capital needs, repayment of indebtedness, and other corporate purposes, we entered into a Securities Purchase Agreement with Lind Global Fund II LP (“Lind Global”) in March 22, 2022. 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 will reach maturity in February of 2024, although we are permitted to prepay the Convertible Note, subject to certain restrictions. We may not be able to refinance or restructure this Convertible Note or any other debt, sell assets or raise equity, in each case on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity.
Although management determined at December 31, 2022 that there was not substantial doubt for the Company to continue as a going concern through March 31, 2024, our inability to generate sufficient cash flow to satisfy repayment obligations or to refinance or restructure these obligations on commercially reasonable terms could have a material adverse effect on our business, financial condition, results of operations and cash flows. Upon the occurrence of an event of default under the Convertible Note, or another credit arrangement, our lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable. If we were unable to repay all outstanding amounts in full, our lenders could exercise various remedies including instituting foreclosure proceedings against our assets pledged to them as collateral to secure that debt.
Our PPP Loan eligibility and forgiveness remains subject to audit for compliance with applicable SBA Requirements
As a result of the COVID-19 pandemic, we sought and obtained support through various business assistance programs. 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 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), as administered by the 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. 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. Under the terms of the PPP Loan, we must retain all records relating to our PPP Loan for a period of six years from the date the loan was forgiven. During this period, our PPP Loan eligibility and loan forgiveness application are subject to review and audit by the SBA. We are aware of the requirements of the PPP Loan and believe we are within the eligibility threshold and have used the loan proceeds in accordance with the PPP Loan forgiveness requirements. We have retained all necessary documentation supporting our eligibility. If, despite our actions and good faith belief that we satisfied all eligibility requirements for the PPP Loan, we are made subject to an audit and are found to have been ineligible to receive the PPP Loan or forgiveness thereof, or are found in violation of any of the laws or regulations that apply to us in connection with the PPP Loan, we may be subject to penalties, including significant civil, criminal, and administrative penalties and could be required to repay the PPP Loan. An audit by the SBA could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial conditions.
Our revenue, results of operations, and cash flows may suffer upon the loss of a significant customer.
For the years ended December 31, 2022 and 2021, three customers have provided more than 10% of Workforce Solutions segment’s revenues:
Years ended December 31,
Customer A
%
%
Customer B
%
%
Customer C
%
%
Hyperspring and Absolute, which together comprise our Workforce Solutions segment, may lose a significant customer if any existing contract with such customer expires without extension, renewal, or negotiation or if it is terminated by the customer prior to expiration, to the extent such early termination is permitted by the contract. A number of Hyperspring’s and Absolute’s contracts typically are subject to expiration during each year, and either company may lose any of these contracts if we are unable to extend, renew, or renegotiate the contracts. The loss of any significant customer would adversely affect our Workforce Solutions segment’s revenue, results of operations, and cash flows.
For the years ended December 31, 2022 and 2021, two customers have provided more than 10% of Engineering segment’s revenues, respectively:
Years ended December 31,
Customer E
%
%
Customer F
%
%
Absolute, True North, and DP Engineering, which together comprise our Engineering segment, may lose a significant customer if any existing contract with such customer expires without extension, renewal, or negotiation or if it is terminated by the customer prior to expiration, to the extent such early termination is permitted by the contract. A majority of the contracts entered into by our Engineering businesses are able to be terminated by our customer on relatively short notice without cause or further compensation. The loss of any significant customer would adversely affect our Engineering segment’s revenue, results of operations, and cash flows.
Customer E also provided 13.6% of our total consolidated revenue for the years ended December 31, 2022.
Our expense levels are based upon our expectations as to future revenue, and we may be unable to adjust spending to compensate for a revenue shortfall. Accordingly, any revenue shortfall would likely have a disproportionate effect on our operating results.
Our revenue was $47.7 million and $55.2 million for the years ended December 31, 2022 and 2021, respectively. We incurred an operating loss of $14.4 million and $6.0 million for the years ended December 31, 2022 and 2021, respectively. Our operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, including purchasing patterns, timing of launch or release of new products and enhancements by us and our competitors, and fluctuating global economic conditions. Because our expense levels are based in part on our expectations as to future revenue and includes certain fixed, pre-negotiated, and prepaid costs, we may be unable to adjust spending in a timely manner to compensate for any revenue shortfall. Because of this lag in response time, such revenue shortfalls likely would have a disproportionate adverse effect on our operating results. Additionally, as we have seen, industry spend has been very slow to ramp back after the onset of the pandemic in 2020. While the pandemic effects on society have largely passed, there is still a significant reticence on behalf of the industry to ramp spending back up. While meaningful plans for capital investment have been noted, those plans have elongated times to convert to the types of spend that have a direct positive impact on our business. This continues lag poses a risk to our business.
A deterioration in sales delayed pipeline opportunities, and overall downward performance could result in write-downs of goodwill and other intangible assets.
In conjunction with business acquisitions, we record goodwill and other intangible assets and review their fair value for impairment annually as of December 31, or on an interim basis if impairment indicators are present, such as a significant reduction in our market capitalization, significant declines in operating performance or disruptions to the business that could reduce our future cash flow. As of September 30, 2022, the
reduced forecast related to the Workforce Solutions business segment was material enough to be considered a triggering event that could result in impairment of our long-lived assets. As such, we performed an interim analysis to determine if an impairment existed in accordance with ASC 350 & ASC 360.
Our Goodwill impairment analysis, which includes the use of discounted cash flow models that requires management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, and risk-adjusted discount rates determined the carrying value of Workforce Solutions exceeded the Fair Value by $7.0 million. As such, impairment of the related goodwill was recorded in the three months ended September 30, 2022.
we also performed an interim analysis to determine if an impairment existed at September 30, 2022 by its individual asset groupings, which we determined to be at the subsidiary level. We used a discounted cash flow analysis to determine the fair value of our asset group, and we concluded that the carrying value of the definite-lived intangible assets of Absolute, a business unit of the Workforce Solutions segment, exceeded its fair value by $0.5 million, and we recorded a loss on impairment for this amount as of September 30, 2022. No impairment was identified related to any other asset groupings.
Write-down of goodwill and other intangible assets in the current and future accounting periods may have an impact on our value, results of operations, and price of our common stock.
We are currently a party to multiple fixed price contracts and will continue to enter into similar contracts in the future. If we are not able to estimate accurately or control costs on such projects, the profitability of such projects could be reduced.
A significant portion of our revenue is attributable to contracts entered into on a fixed price basis, which enable us to benefit from cost savings, but expose us to the risk of cost overruns. If our initial estimates are incorrect regarding our costs of performance under these contracts, or if unanticipated circumstances arise, we could experience cost overruns that could result in reduced profits or even net losses on these contracts. Our financial condition is dependent upon our ability to maximize our earnings from our contracts. Lower earnings or losses caused by cost overruns could have a negative impact on our financial results.
Under our time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under cost-reimbursable contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and are paid a fee, which may be fixed, or performance based. In both cases, however, if our costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs even under a time and materials or cost-reimbursable contract.
Our inability to successfully estimate and manage costs on each of these contract types may materially and adversely affect our financial condition.
We use derivative instruments in the normal course of our business which could result in financial losses and exposure to other risks that negatively impact our net income (loss) and business operational efficiency.
While we had no foreign exchange contracts outstanding as of December 31, 2022, and did not enter into any foreign exchange contracts in 2022, we have periodically entered into forward foreign exchange contracts to manage market risks associated with the fluctuations in foreign currency exchange rates on foreign-denominated trade receivables. We could recognize financial losses as a result of volatility in the market values of these contracts or if a derivative instrument counterparty fails to perform. We attempt to minimize credit exposure by limiting counterparties to internationally recognized financial institutions, but even these counterparties are subject to default and contract risk and this risk is beyond our control. We also engage in interest rate hedging transactions in the ordinary courses of our business to mitigate the risk that amounts borrowed under our credit facility at floating interest rates may be affected by adverse rate movements. Depending on future business, market, and interest rate environments, however, these hedging transactions may not be effective to mitigate the financial impact of the risks for which they were put into place sufficiently to justify their expense. Additionally, we may need or wish to avail ourselves of other forms of hedging or derivative instruments in the future depending on our business needs, and these other types of derivative instruments may be subject to the same and other risks and may not be available to us on a cost-effective or risk-controlled basis, if at all. The unavailability of viable and cost effective risk management, hedging, or similar instruments now or in the future could adversely impact our business operational efficiency or results.
We issue letters of credit, performance, advance payment, and bid bonds in the normal course of our business which could result in financial losses that negatively impact our net income (loss).
We may be required to issue letters of credit, performance, advance payment, and bid bonds to our customers and potential customers as a normal part of our business activities. Our customers may have the ability to draw upon these performance bonds in the event we fail to cure a material breach of the contract within a specified period after receiving notice from the customer regarding the nature of the breach. For the year ended December 31, 2022, we did not issue any advance payment or performance bonds, but we may be required to do so in the future to secure contract awards. As of December 31, 2022, we had four letters of credit outstanding for customers in the respective amounts of $513,300, $359,674, $118,800, and $60,000 for an aggregate outstanding amount of $1,051,774.
Our ability to use our net operating loss (NOL) carryforward and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards, and other pre-change tax attributes (such as research tax credits) to offset its post-change income or tax liabilities may be limited. We may experience ownership changes in the future as a result of shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
RISKS RELATED TO INTELLECTUAL PROPERTY
We rely upon our intellectual property rights for the success of our business, but the steps we have taken to protect our intellectual property may be inadequate.
Although we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are important to establishing and maintaining a technological leadership position, our business depends, in part, on the strength of our intellectual property rights in our proprietary technology and information. We rely upon a combination of trade secret, copyright, and trademark law, contractual arrangements and technical means to protect our intellectual property rights. We enter into confidentiality agreements with our employees, consultants, joint venture and alliance partners, customers, and other third parties that are granted access to our proprietary information, and we limit access to and distribution of our proprietary information. There can be no assurance, however, that we have protected or will be able to protect our proprietary technology and information adequately, that the unauthorized disclosure or use of our proprietary information will be prevented, that others have not or will not develop similar technology or information independently, or, to the extent we own any patents in the future, that others have not or will not be able to design around those future patents. Furthermore, the laws of certain countries in which our products are sold do not protect our products and intellectual property rights to the same extent as the laws of the United States. Our inability to protect our intellectual property rights from infringement, dilution, or loss could make it more difficult for us to generate revenue from the offer, licensure, and sale of our products and services and could enable third parties to compete with us more effectively.
Third-party claims that we allegedly infringe the intellectual property rights of others may be costly to defend or settle and could damage our business.
We cannot be certain that our software and services do not infringe issued patents, copyrights, trademarks or other intellectual property rights of third parties. We may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of intellectual property rights of third parties by us or our licensees concerning their use of our software products and integration technologies and services. Third parties may bring claims of infringement directly against us, or because our software is integrated with our customers’ networks and business processes, as well as other software applications against us, our customers, and our business partners or software suppliers, if the cause of the alleged infringement cannot easily be determined.
Claims of alleged infringement may have a material adverse effect on our business and may discourage potential customers from doing business with us on acceptable terms, if at all, even if the claims are ultimately adjudicated to have no merit, dismissed, or settled. Defending against claims of infringement may be time-consuming and may result in substantial costs and diversion of resources, including our management’s attention to our business. Furthermore, a party making an infringement claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our software or require that we re-engineer some or all of our products or modules. Claims of intellectual property infringement also might require us to enter costly royalty or license agreements. We may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Our business, operating results and financial condition could be harmed significantly if any of these events were to occur, and the price of our common stock could be adversely affected. In addition, we have agreed, and may agree in the future, to indemnify certain of our customers against claims that our software infringes upon the intellectual property rights of others. Although we carry general liability insurance, our current insurance coverage may not apply to, and likely would not protect us entirely or at all from, liability that may be imposed under any of the types of claims described above.
RISKS RELATED TO CYBER SECURITY
Cyber security incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems, and maintenance of backup and protective systems), cyber security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cyber security incident include reputational damage, litigation with third parties, civil or regulatory liability for loss of sensitive or protected information such as personal data, incident response costs, diminution in the value of our investment in research, development and engineering, loss of intellectual property, and increased cyber security protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.
RISKS RELATED TO ATTRACTING AND RETAINING TALENT
We are dependent on our management team, and the loss of or the inability to attract and retain one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.
Our future success is substantially dependent on the continued services and continuing contributions of our executive officers and other key personnel. The loss of the services of any of our executive officers or other key personnel could harm our business. Our future success also depends on our ability to continue to attract, retain, and motivate highly skilled employees. If we are not able to attract and retain key skilled personnel, our business could be harmed and our revenue, profitability, and overall results of operations could be materially impacted.
A failure to attract and retain technical personnel could reduce our revenue and our operational effectiveness.
There is a continuing demand for qualified technical personnel in the industries within which we operate. We believe that our future growth and success will depend upon our ability to attract, train and retain such personnel. Our design and development efforts, particularly within our Engineering business segment, depend on hiring and retaining qualified technical personnel. An inability to attract or maintain a sufficient number of technical personnel could have a material adverse effect on our contract performance or on our ability to capitalize on market opportunities.
RISKS RELATED TO STATE LAW
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of our Company, even if that change may be considered beneficial by some shareholders.
The existence of some provisions of our certificate of incorporation and bylaws and Delaware law could discourage, delay or prevent a change in control of our Company that a shareholder may consider favorable. These include provisions:
•
providing that our Board of Directors fixes the number of members of the board and fills all vacancies on the Board of Directors;
•
providing for the division of our Board of Directors into three classes with staggered terms;
•
limiting who may call special meetings of shareholders;
•
prohibiting shareholder action by written consent, thereby requiring shareholder action to be taken at a meeting of the shareholders;
•
establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted on by shareholders at shareholder meetings;
•
establishing supermajority vote requirements for certain amendments to our certificate of incorporation and bylaws;
•
limiting the right of shareholders to remove directors; and
•
authorizing the issuance of “blank check” preferred stock, which could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which may have an anti-takeover effect with respect to transactions not approved in advance by our Board of Directors, including discouraging takeover attempts that might result in a premium over the market price for shares of our common stock.
We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal and are not intended to make our Company immune from takeovers. These provisions apply even if the offer may be considered beneficial by some shareholders, however, and could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of our Company and our shareholders.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.

---

ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES.
We are headquartered in Columbia, Maryland. On March 5, 2018, we entered into our headquarters lease agreement to rent 5,309 square feet through September 30, 2024. On December 15, 2022, following a March 18, 2022 building fire that impacted our space and ensuing dispute among us and the landlord, we terminated our lease for 1332 Londontown Boulevard, Eldersburg, Maryland (our former headquarters) and entered into a release and settlement agreement whereby we agreed to pay, and the landlord agreed to accept, a reduced monthly payment through May 1, 2023 in exchange for early termination of the lease.
In addition, we lease office space domestically; Columbia Maryland; Montrose, Colorado; Fort Worth, Texas, and internationally in Beijing, China. Our leases for these facilities have terms ending between 2022 and 2025. See Note 6 and 17 to our consolidated financial statements for information regarding our restructuring activity and leases.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS.
We are, from time to time, involved in ordinary routine litigation incidental to the conduct of our business. Neither we nor any of our subsidiaries are a party to, nor is any of our property the subject of, any material pending legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business, financial condition or results of operations.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the NASDAQ Stock Market Exchange, where it trades under the symbol “GVP”. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as reported by the NASDAQ Stock Market Exchange for each full quarterly period within the two most recent fiscal years:
On March 31, 2023, there were 23,560,807 shares of our common stock outstanding. As of the latest record date, we had 708 holders of record. This number does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
RESERVED.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. Our primary market is the nuclear power industry, predominantly in the United States, but also serving the global nuclear sector with projects in the United Kingdom, Slovakia, Korea, Japan and elsewhere. We also serve natural adjacencies to the commercial nuclear power market such as the United States Department of Energy, and the broader nuclear ecosystem. We additionally serve other heavy industry sectors such as refining, petrochemical, Liquefied Natural Gas (‘LNG”) and others, with staffing services and our simulation technology and know-how. We provide customers with simulation, engineering and plant services that help clients reduce risks associated with operating their plants, increase revenue through improved plant and employee performance, and lower costs through improved operational efficiency. In addition, we provide professional services that help clients fill key vacancies in their respective organizations, primarily in procedures, engineering, technical support and training focused on regulatory compliance and certification in the nuclear power industry. Our operations also include interactive computer-based tutorials and simulation software for the refining, chemical, and petrochemical industries.
In 2021, we participated in the Employee Retention Credit (ERC) program available under the CARES Act. The Company recognized total cumulative ERC credits in other income of $7.2 million 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. There was a remaining receivable of $1.0 million at December 31, 2022. We subsequently received a refund payment of $0.9 million in January 2023.
Results of Operations.
The following table sets forth the results of operations for the periods presented expressed as a percentage of revenue.
($ in thousands)
Years ended December 31,
%
%
Revenue
$
47,734
100.0
%
$
55,183
100.0
%
Cost of revenue
35,824
75.0
%
43,325
78.5
%
Gross profit
11,910
25.0
%
11,858
21.5
%
Operating expenses
Selling, general and administrative
17,028
35.7
%
14,908
27.0
%
Research and development
1.3
%
1.1
%
Restructuring charges
0.0
%
1.4
%
Goodwill and intangible asset impairment charge
7,505
15.7
%
0.0
%
Depreciation
0.6
%
0.5
%
Amortization of definite-lived intangible assets
1.8
%
1,213
2.2
%
Total operating expenses
26,316
55.1
%
17,832
32.3
%
Operating loss
(14,406
)
(30.2
%)
(5,974
)
(10.8
%)
Interest expense
(1,272
)
(2.7
%)
(159
)
(0.3
%)
Change in fair value of derivative instruments, net
1.0
%
0.0
%
Other (loss) income, net
(91
)
-0.2
%
16,884
30.6
%
(Loss) income before taxes
(15,292
)
(32.0
%)
10,770
19.5
%
Provision for income taxes
0.1
%
0.3
%
Net (loss) income
$
(15,343
)
(32.1
%)
$
10,607
19.2
%
Comparison of the Years Ended December 31, 2022 to December 31, 2021.
Revenue. Revenue for the year ended December 31, 2022, totaled $47.7 million, which was 13.5% less than the $55.2 million of revenue for the year ended December 31, 2021.
(in thousands)
Year ended December 31,
Change
Revenue:
$
%
Engineering
$
29,919
$
28,140
1,779
6.3
%
Workforce Solutions
17,815
27,043
(9,228
)
(34.1
)%
Total revenue
$
47,734
$
55,183
(7,449
)
(13.5
)%
Engineering revenue increased 6.3% from $28.1 million to $29.9 million for the years ended December 31, 2021 and 2022, respectively. The increase of revenue was primarily attributable to increased work on POC and improved utilization of personnel on T&M projects. We recorded total Engineering orders of $22.0 million and $30.0 million for the years ended December 31, 2022 and 2021, respectively.
For the year ended December 31, 2022, Workforce Solutions revenue decreased 34.1% to $17.8 million compared to revenue of $27.0 million for the year ended December 31, 2021. The decrease in revenue was primarily due to the wind down of large projects and a reduction in demand for staffing from our major customers as reflected in the reduction in orders won year over year. We recorded total new orders of $17.6 million and $26.5 million for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, our backlog was $32.9 million, $23.8 million was attributed to the Engineering segment and $9.1 million was attributed to the Workforce Solutions segment. As of December 31, 2021, our backlog was $41.3 million with $31.8 million attributed to the Engineering segment and $9.5 million attributed to the Workforce Solutions segment.
Gross profit. Gross profit was $11.9 million, or 25.0% of revenue, for the year ended December 31, 2022 compared to $11.9 million, or 21.5% of revenue, for the year ended December 31, 2021.
($ in thousands)
Years ended December 31,
%
%
Gross profit:
Engineering
$
9,557
31.9
%
$
8,124
28.9
%
Workforce Solutions
2,353
13.2
%
3,734
13.8
%
Consolidated gross profit
$
11,910
25.0
%
$
11,858
21.5
%
The Engineering segment’s gross profit increased by $1.4 million during fiscal year 2022 over fiscal year 2021. The increase is primarily related to improved mix of higher margins projects, shorter lead times and improved processes.
The Workforce Solutions segment’s gross profit decreased by $1.4 million during fiscal year 2022 over fiscal year 2021. The decrease in gross profit was primarily due to the wind down of higher margin projects, the reduction in the demand from existing customers for additional workforce professionals, and higher cost of resources.
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses totaled $17.0 million and $14.9 million for the years ended December 31, 2022 and 2021, respectively. Fluctuations in the components of SG&A spending were as follows:
($ in thousands)
Years ended December 31,
%
%
Selling, general and administrative expenses:
Corporate charges
$
12,795
75.1
%
$
10,305
69.1
%
Business development
3,256
19.1
%
3,024
20.3
%
Facility operation & maintenance (O&M)
4.3
%
5.8
%
Bad debt expense
1.3
%
4.6
%
Other
0.1
%
0.1
%
Total
$
17,028
100.0
%
$
14,908
100.0
%
Corporate charges increased $2.5 million in 2022 compared to 2021. The increase was primarily due to a $0.9 million increase in stock compensation expense, a $0.9 million increase in indirect labor & burden cost due to increased corporate headcount, a $0.3 million increase related to consultants, and a $0.2 million increase in legal fees and other business expenses during the fiscal year 2022.
Business development charges increased $0.2 million in 2022 compared to 2021. The increase was primarily due to increased recruiting fees, commission expense, and Indirect Labor & Burden due to increased headcount in 2022.
Facility O&M expenses decreased $0.1 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease during the fiscal year 2022 was mainly due to an increased allocation of facility cost from O&M to COGS, and the Sykesville lease termination in December 2022.
Bad debt expense. We recorded bad debt expense of $0.2 million and $0.7 million for the years ended December 31, 2022 and December 31, 2021, respectively. GSE’s bad debt allowance is based on historical trends of past due accounts, write-offs, and specific identification of certain billed or unbilled receivables that are deemed to have significant collection risk.
Research and development. Research and development costs consist primarily of software engineering personnel and other related costs. Research and development costs, net of capitalized software, totaled $0.6 million for both the years ended December 31, 2022 and 2021.
Goodwill and Intangible asset impairment charge. We recognized a $7.5 million goodwill and intangible asset impairment charge for the year ended December 31, 2022. We recognized a $3 thousand ROU asset impairment during the fiscal year 2021. In the interim period ended September 30, 2022, we determined that the deterioration in sales, decline in revenues, delayed pipeline opportunities, and overall downward performance results and the forecast related to the Workforce Solutions business segment was material enough to be considered a triggering event that could result in impairment of our long-lived assets. As a result of the ASC 350 and 360 analysis, there was determined to be an impairment of both the goodwill and intangible assets, totaling $7.5 million.
Depreciation. Depreciation expense totaled $0.3 million for the years ended December 31, 2022 and 2021.
Amortization of definite-lived intangible assets. Amortization expense related to definite-lived intangible assets totaled $0.9 million and $1.2 million for the years ended December 31, 2022 and 2021, respectively. The decrease in amortization expense was primarily due to the amortization of Customer Contracts and Relationships, which are amortized at a declining rate over the 15-year useful life. As the Intangible Assets for Workforce Solutions were fully impaired at September 30, 2022, we expect amortization expense to continue to decline in future years.
Interest expense. Interest expense totaled $1.3 million and $0.2 million for the years ended December 31, 2022 and 2021. The
increase was due to an increase in total indebtedness compared to prior fiscal year.
Other (loss) income, net. The Company recognized other (loss) income, net of $(0.1) million and $16.9 million for the years ended December 31, 2022 and 2021, respectively. The decrease was primarily due to $10.1 million of PPP loan forgiveness granted during the year ended December 31, 2021. Additionally, we recorded $7.2 million Employee Retention Credit during the year ended December 31, 2021 offset by a Value-Added Tax (VAT) write-off of $0.5 million during the second quarter of 2021. We paid VAT taxes for subcontractor equipment purchase and had pursued the collection of this VAT refund for multiple years. In May of 2021, we determined this VAT refund was no longer collectable.
Provision for Income Taxes. The Company files tax returns in the United States federal jurisdiction and in several state and foreign jurisdictions. Because of the net operating loss carryforwards, the Company is subject to U.S. federal and state income tax examinations for tax years 2003, and forward, and is subject to foreign tax examinations by tax authorities for the years 2017 and forward. Open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.
The Company’s tax expense in 2022 was $51 thousand, representing an annual effective tax rate of (0.3)%, and consisted of $137 thousand of current tax provision and $(86) thousand of deferred tax (benefit) related to the removal of the portion of goodwill which cannot be offset by deferred tax assets. The Company’s tax expense in 2021 was $163 thousand, representing an annual effective rate of 1.5% and consisted of $70 thousand of current tax provision and $93 thousand of deferred tax liability.
The significant change of $1.7 million in net operating loss carryforwards was primarily driven by the generation of Federal and state net operating losses during the current year.
The difference between the effective rate and statutory rate primarily resulted from a change in valuation allowance, permanent differences, including adjustments related to the convertible debt, accruals related to uncertain tax positions, the tax impact of stock compensation forfeitures, and state tax expense. Please see Note 14 for additional information.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements, management makes several estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses. Those accounting estimates that have the most significant impact on our operating results and place the most significant demands on management’s judgment are discussed below. For all of these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates may require adjustment.
Revenue Recognition. We derive our revenue through three broad revenue streams: 1) System Design and Build (“SDB”), 2) software, and 3) training and consulting services. We recognize revenue from SDB and software contracts mainly through the Engineering segment and revenue from training and consulting services through both the Engineering segment and Workforce Solutions segment.
The SDB contracts are typically fixed-price and consist of initial design, engineering, assembly and installation of training simulators which include hardware, software, labor, and post contract support (“PCS”) on the software. We generally have two main performance obligations for an SDB contract: the training simulator build and PCS period. The training simulator build performance obligation generally includes hardware, software, and labor. The transaction price under the SDB contracts is allocated to each performance obligation based on its standalone selling price. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method as our performance creates or enhances assets with no alternative use to us, and we have an enforceable right to payment for performance completed to date. Cost-to-cost input method best measures the progress toward complete satisfaction of the performance obligation. PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.
In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue accordingly. Estimated contract costs are reviewed and revised periodically as the work progresses, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses are identified. Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to our revenue recognition as a significant change in the estimates can cause the our revenue and related margins to change significantly from the amounts estimated in the early stages of the project.
The SDB contracts generally provide a one-year base warranty on the systems. The base warranty is not accounted for as a separate performance obligation under the contract because it does not provide the customer with a service in addition to the assurance that the completed project complies with agreed-upon specifications. Warranties extended beyond our typical one-year period, if any, are evaluated on a case by case basis to determine if it provides more than just assurance that the product operates as intended, which would require carve-out as a separate performance obligation.
Revenue from the sale of perpetual standalone and term software licenses, which do not require significant modification or customization, is recognized upon its delivery to the customer. Revenue from the sale of cloud-based subscription-based software licenses is recognized ratably over the term of such licenses following delivery to the customer. Delivery is considered to have occurred when the customer receives a copy of the software and is able to use and benefit from the software.
A software license sale contract with multiple performance obligations typically includes the following elements: license, installation and training services and PCS. The total transaction price of a software license sale contract is typically fixed and is allocated to the identified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license revenue is recognized when the software license is delivered to the customer; installation and training revenue is recognized when the installation and training is completed without regard to a detailed evaluation of the point in time criteria due to the short-term nature of the installation and training services (one to two days on average); and PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.
The contracts within the training and consulting services revenue stream are either time and materials (“T&M”) based or fixed-price based. Under a typical T&M contract, we are compensated based on the number of hours of approved time provided by workers and the bill rates which are fixed per type of work, as well as approved expenses incurred. Our customers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with Accounting Standards Codification (“ASC”) 606-10-55-18, we elected to apply the “right to invoice” practical expedient, under which we recognize revenue in the amount to which we have the right to invoice. The invoice amount represents the number of hours of approved time worked by each worker multiplied by the bill rate for the type of work, as well as approved expenses incurred. Under a typical fixed-price contract, we recognize the revenue on a percentage of completion basis as it relates to construction contracts with revenue recognized based on project delivery over time. Revenue from the sale of short-term contracts with a delivery period of one month or less is recognized in the month completed.
For contracts with multiple performance obligations, we allocate the contract price to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers.
Impairment of Intangible Assets, including Goodwill. Our intangible assets impairment analysis includes the use of undiscounted cash flow and discounted cash flow models that require management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates and future economic factors that may impact each asset group. We review goodwill and intangible assets for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We test goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP (See Note 7).
Capitalization of Computer Software Development Costs. In accordance with U.S. GAAP, we capitalize computer software development costs incurred after technological feasibility has been established, but prior to the release of the software product for sale to customers. Once the product is available to be sold, we amortize the costs, on a straight-line method, over the estimated useful life of the product, which is typically three years. As of December 31, 2022, we have net capitalized software development costs of $0.6 million. On an annual basis, and more frequently as conditions indicate, we assess the recovery of the unamortized software development costs by estimating the net undiscounted cash flows expected to be generated by the sale of the product. If the undiscounted cash flows are not sufficient to recover the unamortized software costs, we will write-down the investment to its estimated fair value based on future discounted cash flows. The excess of any unamortized computer software costs over the related net realizable value is written down and charged to operations. Included
in capitalized software development costs are certain expenses associated with the development software services. These are similarly capitalized, although not subjected to the same recoverability considerations. Significant
changes in the sales projections could result in an impairment with respect to the capitalized software that is reported on our consolidated balance sheets.
Deferred Income Tax Valuation Allowance. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Management makes a regular assessment of the ability to realize our deferred tax assets. In making this assessment, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of our deferred tax liabilities and projected future taxable income in making this assessment. A valuation allowance is recorded to reduce the total deferred income tax asset to its realizable value. As of December 31, 2022, our largest deferred tax asset was $7.9 million of net operating losses. It primarily relates to a U.S. net operating loss carryforward of $7.8 million; $4.6 million of the net operating loss carryforward expires in various amounts between 2023 and 2037; $3.2 million of the net operating loss carryforward is an indefinite-lived deferred tax asset. We do not believe that it is more likely than not that we will be able to realize our deferred tax assets for our U.S. and foreign deferred tax assets as of December 31, 2022, and therefore we have recorded a $12.6 million valuation allowance for our net deferred tax assets. The Company has a deferred tax liability in the amount of $6 thousand at December 31, 2022 related to the portion of goodwill which cannot be offset by deferred tax assets.
Liquidity and Capital Resources.
As of December 31, 2022, we had cash and cash equivalents of $2.8 million compared to $3.6 million at December 31, 2021.
As of December 31, 2022, we have current restricted cash and long-term restricted cash of $1.1 million and $0.5 million, respectively. We have restricted cash of $1.1 million to secure four letters of credit with various customers and $0.5 million to secure our corporate credit card program.
Management believes the Company is positioned for growth and a rebound from COVID-19 Pandemic, the Company has determined that there is substantial doubt about our ability to continue as a going concern through April 17, 2024. The inability to generate sufficient cash flow to satisfy repayment obligations or to refinance or restructure debt obligations on commercially reasonable terms could have a material adverse effect on our business, financial condition, results of operations and cash flows.
For the years ended December 31, 2022 and 2021, net cash provided by operating activities was $0.7 million and used in operating activities was $(0.2) million, respectively. The year over year increase in cash flows provided by operating activities was primarily driven by ERC refunds and increased collections from contract receivables.
Net cash used in investing activities. For the year ended December 31, 2022, net cash used in investing activities was $(0.6) million compared to net cash of $(0.8) million used in investing activities in the prior year. The decrease in cash outflow in 2022 was primarily related to lower capital expenditures.
Net cash provided by (used in) financing activities. For the years ended December 31, 2022 and 2021, net cash provided by financing activities was $0.8 million and used in financing activities was $2.2 million, respectively. The increase in cash provided by financing activities of $3.1 million was primarily driven by $4.8 million of proceeds received from issuance of the Convertible Note, offset by a $1.8 million repayment of the line of credit during fiscal year 2022.
Paycheck Protection Program Loan (“PPP Loan”)
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 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. 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.
Convertible Note
During the twelve months ended December 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 December 31, 2022, we had four letters of credit totaling $1.1 million outstanding to certain of our customers which were secured with restricted cash.
Foreign Exchange
A portion of our international sales revenue has been and may be received in a currency other than the currency in which the expenses relating to such revenue are paid. Accordingly, we periodically enter into forward foreign exchange contracts to manage the market risks associated with the fluctuations in foreign currency exchange rates. As of December 31, 2022, we did not hold a position in forward foreign exchange contracts.
Other Matters
Management believes inflation has not had a material impact on our operations.
EBITDA and Adjusted EBITDA Reconciliation (in thousands)
References to “EBITDA” mean net (loss) income, before taking into account interest expense (income), provision for income taxes, depreciation and amortization. References to Adjusted EBITDA exclude the impact of litigation, goodwill and intangible asset impairment charge, employee retention credit, PPP loan and accumulated interest forgiveness, restructuring charges, stock-based compensation expense, change in fair value of derivative instruments, and VAT write-off. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles (GAAP). Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other GAAP measures, are useful to investors to evaluate our results because it excludes certain items that are not directly related to our core operating performance that may, or could, have a disproportionate positive or negative impact on our results for any particular period. Investors should recognize that EBITDA and Adjusted EBITDA might not be comparable to similarly-titled measures of other companies. This measure should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable GAAP measure in accordance with SEC Regulation G follows:
Three Months Ended
Twelve Months Ended
December 31,
December 31,
Net (loss) income
$
(1,516
)
$
(1,857
)
$
(15,343
)
$
10,607
Interest expense, net
1,272
Provision for income taxes
Depreciation and amortization
1,511
1,865
EBITDA
(669
)
(1,358
)
(12,509
)
12,794
Litigation
-
(22
)
-
(22
)
Goodwill and intangible asset impairment charge
-
-
7,505
Employee retention credit
-
-
-
(7,162
)
PPP loan and accumulated interest forgiveness
-
-
-
(10,127
)
Restructuring charges
-
-
-
Stock-based compensation expense
1,954
1,043
Change in fair value of derivative instruments, net
(100
)
(19
)
(477
)
(19
)
VAT write-off
-
-
-
Adjusted EBITDA
$
(407
)
$
(1,140
)
$
(3,527
)
$
(2,242
)
Adjusted Net (Loss) Income and Adjusted EPS Reconciliation (in thousands, except per share amounts)
References to Adjusted net (loss) income exclude the impact of litigation, goodwill and intangible asset impairment charge, employee retention credit, PPP loan and accumulated interest forgiveness, restructuring charges, stock-based compensation expense, change in fair value of derivative instruments, VAT write-off, amortization of intangible assets related to acquisitions, release of valuation allowance, and income tax expense impact of adjustments. Adjusted Net Income and adjusted earnings per share (adjusted EPS) are not measures of financial performance under GAAP. Management believes adjusted net income and adjusted EPS, in addition to other GAAP measures, are useful to investors to evaluate our results because they exclude certain items that are not directly related to our core operating performance and non-cash items that may, or could, have a disproportionate positive or negative impact on our results for any particular period. These measures should be considered in addition to, and not as a substitute for or superior to, any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP adjusted net income and adjusted EPS to GAAP net income, the most directly comparable GAAP financial measure, is as follows:
Three Months ended
Twelve Months ended
December 31,
December 31,
(unaudited)
(unaudited)
audited
audited
Net (loss) income
$
(1,516
)
$
(1,857
)
$
(15,343
)
$
10,607
Litigation
-
(22
)
-
(22
)
Goodwill and intangible asset impairment charge
-
-
7,505
Employee retention credit
-
-
-
(7,162
)
PPP loan and accumulated interest forgiveness
-
-
-
(10,127
)
Restructuring charges
-
-
-
Stock-based compensation expense
1,954
1,043
Change in fair value of derivative instruments, net
(100
)
(19
)
(477
)
(19
)
VAT write-off
-
-
-
Amortization of intangible assets related to acquisitions
1,213
Valuation allowance
-
-
Income tax expense impact of adjustments
-
-
Adjusted net loss
$
(1,086
)
$
(1,063
)
$
(5,493
)
$
(2,924
)
Diluted (loss) earnings per common share
$
(0.07
)
$
(0.09
)
$
(0.72
)
$
0.51
Adjusted loss per common share - Diluted
$
(0.05
)
$
(0.05
)
$
(0.26
)
$
(0.14
)
Weighted average shares outstanding - Diluted
22,136,313
20,901,005
21,362,897
20,761,191

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required of a smaller reporting company.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
GSE Systems, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the Years ended December 31, 2022 and 2021
Consolidated Statements of Comprehensive (Loss) Income for the Years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Shareholders’ Equity for the Years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors, and Audit Committee
GSE Systems, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of GSE Systems, Inc. and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses from operations for the year ended December 31, 2022. In addition, the continued decline in revenues has significantly impacted the Company’s operating results and raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
At December 31, 2022, the Company carried a goodwill balance of $6.3 million. As discussed in Notes 1 and 7 of the financial statements, the Company reviews goodwill for impairment at the reporting unit level annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may be greater than its fair value. The Company’s goodwill impairment analysis includes the use of a discounted cash flow model that requires management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, and risk- adjusted discount rates. The Company also made certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units. The Company completed its annual quantitative analysis as of December 31, 2022, and concluded that the fair values of each of its reporting units exceeded their respective carrying values.
We identified the Company’s goodwill impairment assessment as a critical audit matter. The principal considerations for our determination is the high degree of auditor judgment and subjectivity in evaluating management’s significant assumptions used in the discounted cash flow model, particularly as it relates to evaluating revenue growth rates, operating margins and discount rates. Furthermore, auditing certain of these inputs and assumptions made by management requires the use of an auditor-employed valuation specialist.
The primary procedures we performed to address this critical audit matter included:
•
Obtained an understanding of management’s goodwill impairment assessment process, including management’s assessment of the significant inputs and assumptions utilized in determining the reporting unit fair value.
•
Evaluated management’s forecasted revenue growth rates and operating margins by comparing actual results to management’s historical forecasts.
•
Performed sensitivity analyses over management’s significant assumptions including forecasted revenue growth rates and operating margins when assessing the overall impact on the estimate of fair value compared to the carrying value.
•
Utilizing personnel with specialized knowledge and skills in valuation, we evaluated the significant assumptions in assessing the appropriateness of the fair value methodology utilized, including:
o
Evaluating the reasonableness of certain assumptions used in the discounted cash flow model including the discount rates used by management by comparing it to a range of discount rates developed using existing market information, and
o
Evaluating the mathematical accuracy of the calculations included in the fair value methodology.
Revenue Recognition - Estimated Costs to Complete
As described in Notes 1 and 5 to the financial statements, the Company derives its revenue through three broad revenue streams: 1) System Design and Build (SDB), 2) Software, and 3) Training and Consulting services. The transaction price under the SDB contracts is allocated to each performance obligation based on its standalone selling price and the Company recognizes revenue for certain performance obligations over time as control is transferred to a customer using the cost- to-cost input method based on actual costs incurred to date relative to the total estimated costs. Estimated contract costs are reviewed and revised periodically during the contract period, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Management’s judgments and estimates involved in the initial creation and subsequent updates to the Company’s estimated costs to complete and related profit recognized are critical for revenue recognition associated with SDB contracts. Inputs and assumptions requiring significant management judgments included anticipated direct labor, subcontract labor, and other direct costs required to deliver on unfinished performance obligations. Significant changes to cost estimates can result in variances in revenue and related margins.
We identified revenue recognition associated with SDB contracts as a critical audit matter. The principal considerations for our determination are the high degree of auditor judgment and subjectivity in evaluating management’s process, including the design of internal controls, in developing estimates and assumptions involved in the creation and subsequent updates to the Company’s estimated costs to complete, particularly as it relates to evaluating anticipated direct labor, subcontract labor, and other direct costs.
The primary procedures we performed to address this critical audit matter included:
•
Obtained an understanding of management’s process for applying the cost-to-cost method to SDB contracts, including management’s process for developing and revising accurate estimated costs to complete on contracts in process.
•
For a sample of contracts, we evaluated inputs and assumptions requiring significant management judgments included within the Company’s estimation of costs to complete and performed the following:
o
Inspected the underlying contract, related amendments, and change orders, if any, to test the existence of customer arrangements and obtain an understanding of the contractual requirements and related performance obligation(s).
o
Tested actual costs incurred to date and assessed the relative progress toward satisfying the performance obligation(s) of the contract.
o
Evaluated the estimation of costs to complete including anticipated direct labor, subcontract labor, and other direct cost by:
■
Inquiring of financial and operational personnel of the Company and evaluating factors within the cost to complete estimates that may demonstrate indication of potential management bias.
■
Inspecting correspondences, if any, between the Company and the customer regarding actual to-date and expected performance.
■
Evaluating the sufficiency of the Company’s assessment of contract performance risks included within the estimated costs to complete.
■
Performing a “look back” analysis by comparing the Company’s historical estimates of costs to complete to actual costs incurred in subsequent documentation to assess the Company’s ability to develop reliable cost estimates.
•
Obtained account reconciliations of unbilled receivables and billings in excess of revenue earned as of December 31, 2022, evaluated the accuracy and completeness of the schedules, agreed such reconciliations to the trial balance to determine whether reconciling items were appropriate and isolated and investigated all unbilled receivables with no recent activity.
Going Concern
As described further in Note 1 to the financial statements, the Company has experienced continued declines in revenue that has impacted operations. The Company also received a delisting notice from NASDAQ for failure to maintain the required minimum bid price. The inability to cure this matter would result in an event of default on the Company’s debt. Moreover, management has assessed the Company’s current liquidity position and its projected cash flows from operations and determined they are not sufficient to meet the Company’s obligations as they come due at least one year from the issuance date of these financial statements.
We identified the Company’s going concern assessment as a critical audit matter. The principal considerations for our determination are the high degree of auditor judgment and subjectivity involved in evaluating management’s plan to cure the NASDAQ noncompliance and the growth rate assumptions utilized in their cash flow forecast.
The primary procedures we performed to address this critical audit matter included:
•
Obtained an understanding of management’s process for developing its projections including testing the completeness and accuracy of the underlying data used in the cash flow forecast.
•
Evaluated the probability of management’s plans to alleviate the substantial doubt that has been raised.
•
Obtained an understanding and evaluated management’s plan to cure NASDAQ noncompliance.
•
Evaluated management’s growth rate assumptions used in the development of its forecast by assessing historical budget to actual comparisons.
•
Performed a sensitivity analysis over the projected growth rates and operating margins used in management’s cash flow projections.
•
Evaluated the adequacy of the financial statement disclosure regarding the Company’s liquidity and compared the disclosure to other audit evidence obtained to determine consistency with or contradictory to the Company’s liquidity disclosure.
/s/ FORVIS, LLP (formerly, Dixon Hughes Goodman LLP)
We have served as the Company’s auditor since 2020.
Tysons, VA
April 17, 2023
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
ASSETS
Current assets:
Cash and cash equivalents
$
2,789
$
3,550
Restricted cash, current
1,052
-
Contract receivables, net
10,064
11,257
Prepaid expenses and other current assets
2,165
5,262
Total current assets
16,070
20,069
Equipment, software and leasehold improvements, net
Software development costs, net
Goodwill
6,299
13,339
Intangible assets, net
1,687
3,020
Restricted cash - long term
-
Operating lease right-of-use assets, net
1,200
Other assets
Total assets
$
26,496
$
39,051
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit
$
-
$
1,817
Current portion of long-term note
3,038
-
Accounts payable
1,262
1,179
Accrued expenses
2,084
1,358
Accrued compensation
1,071
1,452
Billings in excess of revenue earned
4,163
5,029
Accrued warranty
Income taxes payable
1,774
1,654
Derivative liabilities
-
Other current liabilities
1,286
1,883
Total current liabilities
15,651
15,039
Long-term note, less current portion
-
Operating lease liabilities noncurrent
Other noncurrent liabilities
Total liabilities
16,265
16,008
Commitments and contingencies (Note 22)
Shareholders' equity:
Preferred stock $0.01 par value; 2,000,000 shares authorized; no shares issued and outstanding
-
-
Common stock $0.01 par value; 60,000,000 shares authorized, 24,046,806 and 22,533,005 shares issued, 22,447,895 and 20,934,094 shares outstanding, respectively
Additional paid-in capital
82,911
80,505
Accumulated deficit
(69,927
)
(54,584
)
Accumulated other comprehensive income (loss)
(104
)
Treasury stock at cost, 1,598,911 shares
(2,999
)
(2,999
)
Total shareholders' equity
10,231
23,043
Total liabilities and shareholders' equity
$
26,496
$
39,051
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
Revenue
$
47,734
$
55,183
Cost of revenue
35,824
43,325
Gross profit
11,910
11,858
Operating expenses
Selling, general and administrative
17,028
14,908
Research and development
Restructuring charges
-
Goodwill and intangible asset impairment charge
7,505
Depreciation
Amortization of definite-lived intangible assets
1,213
Total operating expenses
26,316
17,832
Operating loss
(14,406
)
(5,974
)
Other income and expenses, net
Interest expense
(1,272
)
(159
)
Change in fair value of derivative instruments, net
Other (loss) income, net
(91
)
16,884
(Loss) income before taxes
(15,292
)
10,770
Provision for income taxes
Net (loss) income
$
(15,343
)
$
10,607
Net (loss) income per common share - basic
$
(0.72
)
$
0.51
Diluted (loss) income per common share
$
(0.72
)
$
0.51
Weighted average shares outstanding used to compute net loss per share - basic
21,362,897
20,761,191
Weighted average shares outstanding - Diluted
21,362,897
20,761,191
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
Years ended December 31,
Net (loss) income
$
(15,343
)
$
10,607
Cumulative translation adjustment
1,110
Comprehensive (loss) Income
$
(15,233
)
$
11,717
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
Common
Stock
Additional
Paid-in
Accumulated
Accumulated
Other
Comprehensive
Treasury Stock
Shares
Amount
Capital
Deficit
Loss
Shares
Amount
Total
Balance, January 1, 2021
22,193
$
$
79,687
$
(65,191
)
$
(1,214
)
(1,599
)
$
(2,999
)
$
10,505
Stock-based compensation expense
-
-
1,043
-
-
-
-
1,043
Common stock issued for RSUs vested
(3
)
-
-
-
-
-
Shares withheld to pay taxes
-
-
(222
)
-
-
-
-
(222
)
Foreign currency translation adjustment
-
-
-
-
1,110
-
-
1,110
Net income
-
-
-
10,607
-
-
-
10,607
Balance, December 31, 2021
22,533
$
$
80,505
$
(54,584
)
$
(104
)
(1,599
)
$
(2,999
)
$
23,043
Stock-based compensation expense
-
-
1,859
-
-
-
-
1,859
Common stock issued for RSUs vested
(5 )
-
-
-
-
-
Shares withheld to pay taxes
-
-
(263 )
-
-
-
-
(263 )
Foreign currency translation adjustment
-
-
-
-
-
-
Repayment of convertible note in shares
-
-
-
-
Net loss
-
-
-
(15,343 )
-
-
-
(15,343 )
Balance, December 31, 2022
24,047
$
$ 82,911
$ (69,927 )
$
(1,599 )
$ (2,999 )
$ 10,231
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
Cash flows from operating activities:
Net (loss) income
$
(15,343
)
$
10,607
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Goodwill and intangible asset impairment charge
7,505
Depreciation
Amortization of intangible assets
1,213
Amortization of capitalized software development costs
Amortization of deferred financing costs
Amortization of debt discount
1,289
-
Gain on PPP loan forgiveness
-
(10,127
)
Stock-based compensation expense
1,954
1,043
Bad debt expense
Gain on derivative instruments, net
(477
)
(19
)
Deferred income taxes
(86
)
Changes in assets and liabilities:
Contract receivables, net
(1,397
)
Prepaid expenses and other assets
3,710
(3,517
)
Accounts payable, accrued compensation and accrued expenses
Billings in excess of revenue earned
(829
)
(270
)
Accrued warranty
(239
)
(176
)
Other liabilities
Net cash provided by (used in) operating activities
(153
)
Cash flows from investing activities:
Capital expenditures
(238
)
(506
)
Capitalized software development costs
(380
)
(270
)
Net cash used in investing activities
(618
)
(776
)
Cash flows from financing activities:
Proceeds from line of credit
-
Repayment of line of credit
(1,817
)
(1,989
)
Repayment of insurance premium financing
(1,068
)
(812
)
Proceeds from issuance of long-term debt and warrants
5,750
-
Payments of debt issuance and original discount on issuance of long-term debt and warrants
(968
)
-
Principal repayment of convertible note
(839
)
-
Tax paid for shares withheld
(263 )
(222
)
Net cash provided by (used in) financing activities
(2,223
)
Effect of exchange rate changes on cash
(89
)
-
Net increase (decrease) in cash and cash equivalents
(3,152
)
Cash, cash equivalents and restricted cash at beginning of year
3,550
6,702
Cash, cash equivalents and restricted cash at the end of year
$
4,376
$
3,550
Cash and cash equivalents
$
2,789
$
3,550
Restricted cash, current
1,052
-
Restricted cash included in other long-term assets
-
Total cash, cash equivalents and restricted cash
$ 4,376
$ 3,550
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and
1. Summary of Significant Accounting Policies
Principles of consolidation
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,” the “Company,” “we” and “our” are to GSE Systems, Inc. and its subsidiaries, collectively. All intercompany balances and transactions have been eliminated in consolidation.
Accounting estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate the estimates used, including, but not limited to those related to revenue recognition on long-term contracts, allowance for doubtful accounts, product warranties, valuation of goodwill and intangible assets acquired, impairment of long-lived assets to be disposed of, valuation of stock-based compensation awards and the recoverability of deferred tax assets. Actual results could differ from these estimates.
Business combinations
Business combinations are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) ASC 805, Business Combinations, using the acquisition method. Under the acquisition method, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized at fair value on the acquisition date, which is the date on which control is transferred to us. Any excess purchase price is recorded as goodwill. Transaction costs associated with business combinations are expensed as incurred.
Revenues and the results of operations of the acquired business are included in the accompanying consolidated statements of operations commencing on the date of acquisition.
Acquisitions may include contingent consideration payments based on future financial measures of an acquired company. Under ASC 805, contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to estimated fair value, and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated statements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates, and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.
Revenue recognition
We derive our revenue through three broad revenue streams: 1) System Design and Build (“SDB”), 2) software, and 3) training and consulting services. We recognize revenue from SDB and software contracts mainly through the Engineering segment and the training and consulting service contracts through both the Engineering segment and Workforce Solutions segment.
The SDB contracts are typically fixed-price and consist of initial design, engineering, assembly and installation of training simulators which include hardware, software, labor, and PCS on the software. We generally have two main performance obligations for an SDB contract: (1) the training simulator build and (2) the PCS period. The training simulator build performance obligation generally includes hardware, software, and labor. The transaction price under the SDB contracts is allocated to each performance obligation based on its standalone selling price. We recognize the training simulator build revenue over the construction and installation period using the cost-to-cost input method. In applying the cost-to-cost input method, we use the actual costs incurred to date relative to the total estimated costs to measure the work progress toward the completion of the performance obligation and recognize revenue over time as control transfers to a customer. Estimated contract costs are reviewed and revised periodically during the contract period, and the cumulative effect of any change in estimates is recognized in the period in which the change is identified. Estimated losses are recognized in the period such losses become known.
Uncertainties inherent in the performance of contracts include labor availability and productivity, material costs, change order scope and pricing, software modification and customer acceptance issues. The reliability of these cost estimates is critical to our revenue recognition as a significant change in the estimates can cause our revenue and related margins to change significantly from previous estimates.
Management judgments and estimates involved in the initial creation and subsequent updates to our estimates-at-completion and related profit recognized are critical for our revenue recognition associated with SDB contracts. Inputs and assumptions requiring significant management judgment included anticipated direct labor, subcontract labor, and other direct costs required to deliver on unfinished performance obligations.
The SDB contracts generally provide a one-year base warranty on the systems. The base warranty will not be accounted for as a separate performance obligation under the contract because it does not provide the customer with a service in addition to the assurance that the completed project complies with agreed-upon specifications. Warranties extended beyond our typical one-year period will be evaluated on a case-by-case basis to determine if it provides more than just assurance that the product operates as intended, which requires carve-out as a separate performance obligation.
Revenue from the sale of perpetual standalone and term software licenses, which do not require significant modification or customization, is recognized upon its delivery to the customer. Revenue from the sale of cloud-based, subscription-based software licenses is recognized ratably over the term of such licenses following delivery to the customer. Delivery is considered to have occurred when the customer receives a copy of the software and is able to use and benefit from the software.
A software license sale contract with multiple deliverables typically includes the following elements: license, installation and training services, and PCS. The total transaction price of a software license sale contract is typically fixed and is allocated to the identified performance obligations based on their relative standalone selling prices. Revenue is recognized as the performance obligations are satisfied. Specifically, license revenue is recognized when the software license is delivered to the customer; installation and training revenue are recognized when the installation and training are completed without regard to a detailed evaluation of the point in time criteria due to the short-term nature of the installation and training services (one to two days on average); and PCS revenue is recognized ratably over the service period, as PCS is deemed as a stand-ready obligation.
The contracts within the training and consulting services revenue stream are either T&M based or fixed-price based. Under a typical T&M contract, we are compensated based on the number of hours of approved time provided by temporary workers and the bill rates which are fixed by type of work, as well as approved expenses incurred. The customers are billed on a regular basis, such as weekly, biweekly or monthly. In accordance with ASC 606-10-55-18, Revenue from contracts with customers, we elected to apply the “right to invoice” practical expedient, under which we recognize revenue in the amount to which we have the right to invoice. The invoice amount represents the number of hours of approved time worked by each temporary worker multiplied by the bill rate for the type of work, as well as approved expenses incurred. Under a typical fixed-price contract, we recognize the revenue on a Percentage of Completion basis as it relates to construction contracts with revenue recognized based on project delivery over time.
For contracts with multiple performance obligations, we allocate the contract price to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers.
We recognize training and consulting services revenue as services are performed and bill our customers for services that we have provided on a regular basis (i.e. weekly, biweekly or monthly).
Contract asset relates to performance under the contract for obligations that are satisfied but not yet billed, which we classify as contract receivables, net.
Contract liability, which we classify as billing-in-excess of revenue earned, relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied.
Cash and cash equivalents
Cash and cash equivalents represent cash and highly liquid investments including money market accounts with maturities of three months or less at the date of purchase. Cash and cash equivalents may at times exceed the FDIC insured limits.
Contract receivables, net and contract liabilities
Contract receivables, net include recoverable costs for both billed and unbilled receivables. Unbilled receivables include amounts earned in performance of services that have not been invoiced. Contract liabilities include billings in excess of revenue earned on contracts in advance of work performed. Generally, such amounts will be earned and recognized over the next twelve months.
Billed receivables are recorded at invoiced amounts. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, specific identification and review of customer accounts.
Impairment of long-lived assets
Long-lived assets, such as equipment, purchased software, capitalized software development costs, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized at the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell and would no longer be depreciated.
Development expenditures
Development expenditures incurred to meet customer specifications under contracts are charged to cost of revenue. Company sponsored development expenditures are either charged to operations as incurred and are included in research and development expenses or are capitalized as software development costs. The amounts incurred for Company sponsored development activities relating to the development of new products and services or the improvement of existing products and services, were approximately $1.0 million and $0.9 million for the year ended December 31, 2022 and 2021, respectively. Of these amounts, the Company capitalized approximately $0.4 million and $0.3 million for the year ended December 31, 2022 and 2021, respectively.
Equipment, software and leasehold improvements, net
Equipment and purchased software are recorded at cost and depreciated using the straight-line method with estimated useful lives ranging from three years to ten years. Leasehold improvements are amortized over the term of the lease or the estimated useful life, whichever is shorter, using the straight-line method. Upon sale or retirement, the cost and related depreciation are eliminated from the respective accounts and any resulting gain or loss is included in operations. Maintenance and repairs are charged to expense as incurred.
Software development costs
Certain computer software development costs, including direct labor costs, are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when the software product is commercially available for general release to customers. Amortization of capitalized computer software development costs is included in cost of revenue and is determined using the straight-line method over the remaining estimated economic life of the product, typically three years. On an annual basis, or more frequently as conditions indicate, we assess the recovery of the unamortized software development costs by estimating the net undiscounted cash flows expected to be generated by the sale of the product. If the undiscounted cash flows are not sufficient to recover the unamortized software cost we will write-down the carrying amount of such asset to its estimated fair value based on the future discounted cash flows. The excess of any unamortized computer software costs over the related fair value is written down and charged to operations. Included in capitalized software development costs are certain expenses associated with the development software as a service. Significant changes in the sales projections could result in an impairment with respect to the capitalized software that is reported on our consolidated balance sheets.
Goodwill and intangible assets
Our intangible assets include amounts recognized in connection with business acquisitions, including customer relationships, trade names, non-compete agreements and alliance agreements.
Our intangible assets impairment analysis includes the use of undiscounted and discounted cash flow models that requires management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows.
Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible asset, except for contract backlog and contractual customer relations, which are recognized in proportion to the related project revenue streams. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. We do not have any intangible assets with indefinite useful lives.
Goodwill represents the excess of costs over fair value of assets of businesses acquired. We review goodwill for impairment annually as of December 31 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. We test goodwill at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP. We have determined that we have two reporting units, which are the same as our two operating segments: (i) Engineering and (ii) Workforce Solutions.
We completed our annual quantitative step 1 analysis as of December 31, 2022 and 2021 and concluded that the fair values of each of our reporting units exceeded their respective carrying values.
Our goodwill impairment analysis includes the use of a discounted cash flow model that requires management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, and risk-adjusted discount rates. We make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
Foreign currency translation
The United States Dollar (USD) is our functional currency and that of our subsidiaries operating in the United States. The functional currency of each of our foreign subsidiaries is the currency of the economic environment in which the subsidiary primarily does business. Our foreign subsidiaries’ financial statements are translated into USD using the exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated into USD using the period-end spot foreign exchange rates. Income and expenses are translated at the average exchange rate for the year. Equity accounts are translated at historical exchange rates. The effects of these translation adjustments are cumulative translation adjustments, which are reported as a component of accumulated other comprehensive (loss) income included in the consolidated statements of changes in shareholders’ equity.
For any business transaction that is in a currency different from the entity’s functional currency, we record a gain or loss based on the difference between the exchange rate at the transaction date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) to the foreign currency realized gain (loss) account in the consolidated statements of operations.
Income taxes
Income taxes are provided under the asset and liability method. Under this method, deferred income taxes are determined based on the differences between the consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. A provision is made for our current liability for federal, state and foreign income taxes and the change in our deferred income tax assets and liabilities.
We establish accruals for uncertain tax positions taken or expected to be taken in a tax return when it is not more likely than not (i.e., a likelihood of more than fifty percent) 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. Favorable or unfavorable adjustment of the accrual for any particular issue would be recognized as an increase or decrease to income tax expense in the period of a change in facts and circumstances. Interest and penalties related to income taxes are accounted for as income tax expense.
Stock-based compensation
Stock-based compensation expense is based on the grant-date fair value estimated in accordance with the provisions of ASC 718, Compensation-Stock Compensation. Compensation expense related to restricted stock unit (RSU) awards is recognized on a pro rata straight-line basis based of the fair value of share awards that are scheduled to vest during the requisite service period. Compensation expense related to performance-vesting restricted stock unit (PRSU) awards is recognized on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. The Company can also elect to issue cash-settled RSUs or PRSUs which are subject to fair value remeasurement at each reporting date.
Significant customers and concentration of credit risk
For the year ended December 31, 2022, we have a concentration of revenue from one individual customer, which accounted for 13.6% of our consolidated revenue. For the year ended December 31, 2021, we have a concentration of revenue from one individual customer, which accounted for 13.8% of our consolidated revenue. No other individual customer accounted for more than 10% of our consolidated revenue in 2022 or 2021.
As of December 31, 2022 and 2021, we have no customer that accounted over 10% of the Company’s consolidated contract receivables.
Fair values of financial instruments
The carrying amounts of current assets and current liabilities reported in the consolidated balance sheets approximate fair value due to their short term duration.
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 generally accepted accounting principles in the United States of America. 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 17, 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 8K on November 8, 2022, to disclose receipt of this letter. The Company has 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. If compliance is not achieved within these 180 calendar days we can petition NASDAQ for an additional period of 180 calendar days in which to increase the stock price. The second 180-day period may be available and will expire on October 30, 2023, if the Company:
•
Meets the market value of publicly held shares requirement for continuing listing
•
Meets all other listing requirements for NASDAQ (other than bid price requirement), and
•
Provides written notice to NASDAQ with a plan how it intends to regain compliance with the bid price requirement during the second 180-day period; provided, however, that if it does not appear to NASDAQ this it is possible for the Company to cure the deficiency, GSE will not be eligible for the additional grace period.
GSE will submit its request for the additional 180-day compliance period on or about April 19, 2023. The Company’s plan to regain compliance will include implementing a one-for-five to one-to-ten reverse stock split, which will have the initial effect of tripling the trading price of the Company’s stock. Such an action requires stockholder approval, so the Company will put the matter before its stockholders for approval at the 2023 annual meeting of stockholders 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. Thus, as part of the Company’s petition for additional time within which to regain compliance, the Company will notify NASDAQ of the following specific planned steps:
•
The Company’s Board of Directors considered and approved a resolution on April 3, 2023, to conduct a reverse stock split of 1-for-5 to 1-for-10, 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
•
We will prepare and file a Preliminary Proxy Statement with the SEC containing this measure in April 2023
•
We will file and mail a Definitive Proxy Statement to stockholders containing the reverse stock split proposal on or about May 2, 2023
•
Stockholders will vote on the proposed reverse stock split on June 12, 2023
•
If the reverse stock split is approved by stockholders, the Company will effectuate it as quickly thereafter as administratively possible, and
•
Following effectuation of the reverse stock split, the Company would expect to regain compliance with the NASDAQ minimum bid price listing requirement with a few weeks, well before the end of the second 180-day period.
If compliance within the prescribed period is not achieved, or if NASDAQ does not approve the Company’s petition for an additional 180-day period in which to achieve compliance, and consequently a delisting letter is issued the Company will request a hearing before the NASDAQ Hearing Panel which will stay the delisting and GSE will present its plan to regain compliance. Such plan will include the Company’s Board implementing the reverse stock split described above to regain compliance with the minimum bid price requirement, or taking additional measures that may be available. If our common stock ceases to be listed on NASDAQ, Lind may deliver a demand for payment to the Company for payment in full of our Convertible Note held with them and, if such a demand is delivered, the Company shall, within ten (10) business days pay all of the outstanding principal amount or, at its election, Lind 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 eighty percent (80%) of the average of the three (3) lowest daily variable average weighted prices during the twenty (20) 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 Note, which would trigger certain obligation under the Note including, but not limited to, causing an amount equal one hundred twenty percent (120%) of the outstanding principal amount of the 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. As of December 31, 2022, the Company had domestic unrestricted cash and cash equivalents of $2.0 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.
2. Recent Accounting Pronouncements
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 effective date is January 1, 2023. We are adopting in the quarter ending March 31, 2023. We are evaluating the effect this standard may have on our consolidated financial statements.
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.
3. Earnings 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) earnings per share were as follows:
(in thousands, except for per share data)
Years ended December 31,
Numerator:
Net income (loss) attributed to common shareholders
$
(15,343
)
$
10,607
Denominator:
Weighted-average shares outstanding for basic earnings per share
21,362,897
20,761,191
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
21,362,897
20,761,191
Shares related to dilutive securities excluded because inclusion would be anti-dilutive
2,525,420
-
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 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 Internal Revenue Service 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 December 31, 2022, we received cumulative employee retention tax credit refunds totaling $4.0 million of the $5.0 million in refunds sought, with remaining outstanding refunds receivable of $1.0 million which was included in the other current assets balance at December 31, 2022. Subsequently, in January 2023, we received a refund of $0.9 million.
5. 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 Engineering and Workforce Solutions segments. We recognize revenue from SDB and software contracts mainly through our Engineering 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 years ended December 31, 2022 and 2021, along with the reportable segment for each category:
(in thousands)
Twelve Months Ended December 31,
Engineering segment
System Design and Build - Over time
$
6,595
$
6,168
Software
4,684
4,767
Point in time
Over time
3,763
4,424
Training and Consulting Services
18,640
17,316
Point in time
1,846
Over time
18,395
15,470
Workforce Solutions segment
Training and Consulting Services
17,815
26,932
Point in time
Over time
17,753
26,456
Total revenue
$
47,734
$
55,183
The following table reflects the balance of contract liabilities and the revenue recognized in the reporting period that was included in the contract liabilities from contracts with customers:
(in thousands)
December 31, 2022
December 31, 2021
Billings in excess of revenue earned (BIE)
$
4,163
$
5,029
Revenue recognized in the period from amounts included in BIE at the beginning of the period
$
3,785
$
4,708
As of December 31, 2022, the aggregate amount of transaction price allocated to the remaining performance obligations of SDB, software and fixed-price training and consulting services contracts is $15.6 million. We will recognize the revenue as the performance obligations are satisfied, which is expected to occur over the next twelve months.
Part of the training and consulting services contracts are T&M based. Under a typical T&M contract, we are compensated based on the number of hours of approved time provided by temporary workers and the bill rates, which are fixed by type of work, as well as approved expenses incurred. We have elected to use the optional exemption under ASC 606-10-50-14(b) Revenue from contracts with customers, pursuant to which we have excluded disclosures of transaction prices allocated to remaining performance obligations under such contracts and when we expect to recognize the revenue.
6. Restructuring expenses
International Restructuring
On December 27, 2017, the Board of Directors approved an international restructuring plan to streamline and optimize our global operations. Beginning in December 2017, we have been in the process of consolidating our engineering services and R&D activities to Maryland and ceasing an unprofitable non-core business in the United Kingdom (UK). As a result, we have closed our offices in Nyköping, Sweden; Chennai, India; and Stockton-on-Tees, UK. These actions are designed to improve our productivity by eliminating duplicate employee functions, increasing our focus on our core business, improving efficiency and maintaining the full range of engineering capabilities while reducing costs and organizational complexity.
We eliminated approximately 40 positions due to these changes, primarily in Europe and India, and have undertaken other related cost-savings measures. As a result of these efforts, we have recorded total restructuring charges of approximately $3.9 million, primarily related to workforce reductions, contracts termination costs and asset write-offs due to the exit activities. We recorded a restructuring charge of $0.8 million for the year ended December 31, 2021. In addition to the restructuring costs incurred to date, we charged $1.2 million of cumulative translation adjustments against net (loss) income and an approximately $0.8 million of tax benefit was realized upon liquidation of these foreign entities for the year ended December 31, 2021. There were no restructuring costs incurred in the year ended December 31, 2022.
7. Goodwill and Intangible Assets
The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets.
During the three months ended September 30, 2022, we determined that the deterioration in sales delayed pipeline opportunities, and overall downward performance results and the forecast related to the Workforce Solutions business segment was material enough to be considered a triggering event that could result in impairment of our long-lived assets. As such, we performed an interim analysis to determine if an impairment existed at September 30, 2022 in accordance with ASC 350 & ASC 360.
ASC 350 Indefinite-Lived Asset Testing - Based on the triggering event indicated above we performed an interim analysis to determine if an impairment of the Workforce Solutions business unit existed at September 30, 2022. Our Goodwill impairment analysis, which includes the use of discounted cash flow models that requires management to make assumptions regarding estimates of revenue growth rates and operating margins used to calculate projected future cash flows, and risk-adjusted discount rates determined the carrying value of Workforce Solutions exceeded the Fair Value by $7.0 million. As such, impairment of the related goodwill was recorded in the three months ended September 30, 2022.
ASC 360 Long-Lived Asset Testing - Based on the triggering event indicated above we also performed an interim analysis to determine if an impairment existed at September 30, 2022 by its individual asset groupings, which we determined to be at the subsidiary level. We used a discounted cash flow analysis to determine the fair value of our asset group, and we concluded that the carrying value of the definite-lived intangible assets of Absolute, a business unit of the Workforce Solutions segment, exceeded its fair value by $0.5 million, and we recorded a loss on impairment for this amount as of September 30, 2022. No impairment was identified related to any other asset groupings.
Management determined no additional triggering impact occurred during the year ended December 31, 2022.
The following table shows the gross carrying amount and accumulated amortization of definite-lived intangible assets:
(in thousands)
As of December 31, 2022
Gross Carrying Amount
Accumulated Amortization
Impact of
Impairment
Net
Amortized intangible assets:
Customer relationships
$
8,628
$
(7,050
)
$ (464 )
$
1,114
Trade names
1,689
(1,196
)
-
Developed technology
(471
)
-
-
Non-contractual customer relationships
(433
)
-
-
Noncompete agreement
(486
)
-
Alliance agreement
(488
)
-
Others
(167
)
-
-
Total
$
12,442
$
(10,291
)
$
(464 )
$
1,687
(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
)
Developed technology
(471
)
-
Non-contractual customer relationships
(433
)
-
Noncompete agreement
(429
)
Alliance agreement
(382
)
Others
(167
)
-
Total
$
12,442
$
(9,422
)
$
3,020
Amortization expense related to definite-lived intangible assets totaled 0.9 million and $1.2 million for the years ended December 31, 2022 and 2021, respectively. The following table details the estimated amortization expense of the definite-lived intangible assets for the next five years:
(in thousands)
Years ended December 31:
$
Thereafter
$
1,687
Goodwill
(in thousands)
Goodwill
Impairment
Net
Engineering
$
8,278
$
(3,370
)
$
4,908
Workforce Solutions
8,431
(7,040
)
1,391
Net book value at December 31, 2022
$
16,709
$
(10,410
)
$
6,299
Goodwill
Impairment
Net
Engineering
$
8,278
$
(3,370
)
$
4,908
Workforce Solutions
8,431
-
8,431
Net book value at December 31, 2021
$
16,709
$
(3,370
)
$
13,339
8. Contract Receivables
Contract receivables represent our unconditional rights to consideration due from a broad base of both domestic and international customers. Net contract receivables are considered to be collectible within twelve months.
Recoverable costs and accrued profit not billed represent costs incurred and associated profit accrued on contracts that will become billable upon future milestones or completion of contracts. The components of contract receivables are as follows:
(in thousands)
December 31,
Billed receivables
$
6,074
$
6,124
Unbilled receivables
5,146
6,143
Allowance for doubtful accounts
(1,156
)
(1,010
)
Total contract receivables, net
$
10,064
$
11,257
Management reviews collectability of receivables periodically and records an allowance for doubtful accounts to reduce our receivables to their net realizable value when it is probable that we will not be able to collect all amounts due according to the contractual terms of the receivable. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, and specific identification and review of customer accounts. During the years ended December 31, 2022 and 2021, we recorded bad debt expense of $221 thousand and $677 thousand, respectively.
During January 2023, we invoiced $1.9 million of the unbilled amounts related to the balance at December 31, 2022.
The activity in the allowance for doubtful accounts is as follows:
(in thousands)
As of and for the
Years ended December 31,
Beginning balance
$
1,010
$
Current year provision
Current year write-offs
(7
)
(28
)
Currency adjustment
(68 )
Ending balance
$
1,156
$
1,010
9. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
(in thousands)
December 31,
Income tax receivable
$
$
Prepaid expenses
ERC receivable
1,028
4,064
Other current assets
Total
$
2,165
$
5,262
Other current assets primarily include Employee Retention Credits not yet received as of December 31, 2022. Subsequent to the year end, we received the employee retention tax credit refunds of $0.9 million, which was included in the other current assets balance at December 31, 2022. Prepaid expenses primarily include prepayment for insurance and other subscription-based services.
10. Equipment, Software and Leasehold Improvements
Equipment, software and leasehold improvements, net consist of the following:
(in thousands)
December 31,
Computer and equipment
$
2,363
$
2,270
Software
2,291
2,150
Leasehold improvements
Furniture and fixtures
6,151
5,918
Accumulated depreciation
(5,379
)
(5,079
)
Equipment, software and leasehold improvements, net
$
$
Depreciation expense was approximately $0.3 million for the years ended December 31, 2022 and 2021.
Capitalization of internal-use software costs of $0.1 million and $0.5 million related to the ongoing systems upgrade and implementation effort were recorded in software for the twelve months ended December 31, 2022 and 2021, respectively.
11. Product Warranty
Accrued warranty
For contracts that contain a warranty provision, we provide an accrual for estimated future warranty costs based on historical experience and projected claims. Our contracts may contain warranty provisions ranging from one year to five years. The current portion of the accrued warranty is presented separately on the consolidated balance sheets within current liabilities whereas the noncurrent portion is included in other liabilities.
The activity in the accrued warranty accounts is as follows:
(in thousands)
As of and for the
years ended December 31,
Beginning balance
$
$
Current year provision
(44
)
(43
)
Current year claims
(195
)
(133
)
Currency adjustment
(7
)
Ending balance
$
$
The current and non-current warranty balance is as follows:
December 31,
Current
$
$
Non-current
Total Warranty
$
$
12. Fair Value of Financial Instruments
ASC 820, Fair Value Measurement (ASC 820) 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 December 31, 2022 and 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 13) 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 and Cash-Settled PRSUs, which required the input of subjective assumptions. The fair value of the Warrants as of December 31, 2022 was estimated with the following assumptions.
Exercise Price
$
1.94
Common Stock Price
$
0.72
Risk Free Rate
4.0%
Volatility
65.0%
Term (in years)
4.2yrs.
The following table presents assets measured at fair value at December 31, 2022:
Quoted Prices
in Active Markets
for Identical Assets
Significant
Other Observable
Inputs
Significant
Unobservable
Inputs
(in thousands)
(Level 1)
(Level 2)
(Level 3)
Total
Derivative liability
$
-
$
-
$
$
Warrant liability
-
-
Cash settled performance-vesting restricted stock units
-
-
Total assets
$
-
$
-
$
$
The following table presents assets measured at fair value at December 31, 2021:
(in thousands)
Embedded
Redemption
Features
Warrant
Cash Settled PRSUs
Level 3 Total
Balance at December 31, 2021
$
-
$
-
$
-
$
-
Derivative liabilities at issuance date
-
-
Warrant liabilities at issuance date
-
-
Change in FV included in gain on derivative instruments, net
(21
)
(457
)
-
(478
)
Stock compensation less payments made
-
-
Balance at December 31, 2022
$
$
$
$
13. 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 December 31, 2022
1,289
Principal and interest payments for the year ended December 31, 2022
(1,597
)
Balance of Convertible Note as of December 31, 2022
$
3,348
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 following table details the future principal payments of the Convertible Note:
(in thousands)
Years ended December 31:
$
3,833
Thereafter
-
$
4,153
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 12). 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 12). 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 December 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.
At December 31, 2022, the outstanding debt under the Convertible Note agreement was as follows:
Principal
Debt Discounts
Net
Current portion of Long-Term Debt
$
3,833
$
(795
)
$
3,038
Long-Term Debt less current portion
(10
)
Balance of Convertible Note as of December 31, 2022
$
4,153
$
(805
)
$
3,348
The Company incurred total interest expense related to the Convertible Note, including the amortization of the various discounts, of $1.3 million for the year ended December 31, 2022.
Revolving Line of Credit (“RLOC”)
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 Citizens Bank, N.A. (the "Bank") waived the fixed charge coverage ratio and leverage ratio for the quarters ended 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 $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, 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 $0.25 million to be applied to the principal amount outstanding under the RLOC. We incurred $15 thousand of amendment fee related to this amendment.
In February 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 December 31, 2022, we had four letters of credit totaling $1.1 million outstanding to our certain customers which were secured with restricted cash.
14. Income Taxes
The consolidated income before income taxes, by domestic and foreign sources, is as follows:
(in thousands)
Years ended December 31,
Domestic
$
(15,128
)
$
13,351
Foreign
(164
)
(2,581
)
Total
$
(15,292
)
$
10,770
The provision (benefit) for income taxes is as follows:
(in thousands)
Years ended December 31,
Current:
Federal
$
-
$
(75
)
State
Foreign
Subtotal
Deferred:
Federal
(47
)
State
(39
)
Foreign
-
-
Subtotal
(86
)
Total
$
$
The effective income tax rate for the years ended December 31, 2022 and 2021 differed from the statutory federal income tax rate as presented below:
Effective Tax Rate percentage (%)
Years ended December 31,
Statutory federal income tax rate
21.0
%
21.0
%
State income taxes, net of federal tax benefit
2.4
%
2.1
%
Effect of foreign operations
(0.3
)%
(0.2
)%
Effect of foreign restructuring
0.0
%
2.3
%
Change in valuation allowance
(20.7
)%
2.3
%
PPP loan forgiveness
0.0
%
(19.5
)%
Stock-based compensation
(0.9
)%
1.0
%
Convertible Note transactions
(1.2 )%
0.0 %
Uncertain tax positions
(0.7
)%
(7.5
)%
Other
0.1
%
0.0
%
Effective tax rate
(0.3
)%
1.5
%
The difference between the effective tax rate and statutory rate in 2022 primarily resulted from a change in valuation allowance, permanent differences related to disallowed interest expense and mark-to-market adjustments on the Convertible Note which is a disqualified debt instrument for tax purposes, accruals related to uncertain tax positions, the tax impact of stock compensation vests and forfeitures, and state tax expense.
Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A summary of the tax effect of the significant components of the deferred income tax assets and liabilities is as follows:
(in thousands)
As of December 31,
Deferred tax assets:
Net operating loss carryforwards
$
7,853
$
6,180
Accruals
Reserves
Stock-based compensation expense
Intangible assets
2,356
2,368
Goodwill
1,551
Operating lease liability
Fixed assets
Sec. 174 R&D costs
-
Other
Total deferred tax asset
13,071
10,912
Valuation allowance
(12,572
)
(9,410
)
Total deferred tax asset less valuation allowance
1,502
Deferred tax liabilities:
Software development costs
(59
)
(135
)
Indefinite-lived intangibles
(346
)
(1,190
)
Operating lease - right of use asset
(100
)
(253
)
Other
-
(17
)
Total deferred tax liability
(505
)
(1,595
)
Net deferred tax liability
$
(6
)
$
(93
)
We file tax returns in the United States federal jurisdiction and in several state and foreign jurisdictions. Because of the net operating loss carryforwards, we are subject to U.S. federal and state income tax examinations for tax years 2003 and forward, and is subject to foreign tax examinations by tax authorities for the years 2017 and forward. Open tax years related to state and foreign jurisdictions remain subject to examination but are not considered material to our financial position, results of operations or cash flows.
In assessing the ability to realize our deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Our ability to realize the deferred tax assets depends primarily upon the preponderance of positive evidence that could be demonstrated by three-year cumulative positive earnings, reversal of existing deferred temporary differences, and generation of sufficient future taxable income to allow for the utilization of deductible temporary differences.
As of each reporting date, our management considers new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred tax assets to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. This analysis is performed on a jurisdiction by jurisdiction basis.
We performed an analysis of the valuation allowance position for its worldwide deferred tax assets and determined that a valuation allowance continues to be necessary on its U.S. and foreign deferred tax assets at December 31, 2022.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (the TCJA) eliminated the option to deduct research and development expenses currently and requires taxpayers to amortize such costs over a period of five years for expenses incurred in the United States and a period of 15 years for expenses incurred outside the United States. While it is possible the federal government may enact future legislation which would defer or repeal this provision of the TCJA, there is no assurance such legislation will be enacted or whether, if enacted, such legislation would be enacted on a retrospective basis to 2022. This provision of the TCJA resulted in an increase of $129 thousand in deferred tax assets, and an equal increase to the Company's valuation allowance, during the year ended December 31, 2022 related to research and development expenses incurred during the period. There was no material impact to the Company's current or deferred tax provision or operating cash flows during the year ended December 31, 2022 as a result of this provision of the TCJA given the Company incurred net operating losses (NOLs) during the period. The Company does not currently expect this provision of the TCJA will have a material impact on its tax provision or operating cash flows for the year ended December 31, 2023, however, the actual impact of this provision to future periods is uncertain as of this time.
As of December 31, 2022, our largest deferred tax asset was $7.9 million of net operating losses. It primarily relates to a U.S. net operating loss carryforward of $7.8 million; $4.6 million of the net operating loss carryforward expires in various amounts between 2023 and 2037; $3.2 million of the net operating loss carryforward is an indefinite-lived deferred tax asset. We do not believe that it is more likely than not that we will be able to realize its deferred tax assets for its U.S. and foreign deferred tax assets at December 31, 2022 and therefore we have maintained a $12.6 million valuation allowance for our net deferred tax assets. The Company has a deferred tax liability in the amount of $6 thousand at December 31, 2022 related to the portion of Goodwill which cannot be offset by deferred tax assets.
As of December 31, 2022 and 2021, our consolidated cash and cash equivalents totaled $2.8 million and $3.6 million, respectively, including cash and cash equivalents held at non-U.S. entities totaling $0.8 million and $1.2 million, respectively. The non-U.S. entities include operating subsidiaries located in China. We do not assert permanent reinvestment in China. Accordingly, we analyzed the cumulative earnings and profits and determined the US deferred liability related to this position is immaterial.
Uncertain Tax Positions
During 2022 and 2021, we recorded tax liabilities for certain foreign tax contingencies. We recorded these uncertain tax positions in Income taxes payable on the consolidated balance sheets.
The following table outlines our uncertain tax liabilities, including accrued interest and penalties for each jurisdiction:
China
Ukraine
South Korea
UK
U.S.
(in thousands)
Tax
Interest and Penalties
Tax
Interest and Penalties
Tax
Interest and Penalties
Tax
Interest and Penalties
Tax
Interest and Penalties
Total
Balance, January 1, 2021
$
$
$
$
$
$
$
$
$
$
$
2,440
Increases
-
-
-
-
-
Decreases
-
-
(14
)
(10
)
(38
)
-
-
-
(793
)
(12
)
(867
)
Balance, December 31, 2021
$
$
$
-
$
-
$
$
$
$
$
-
$
-
$
1,702
Increases
-
-
-
-
-
-
-
Decreases
(17
)
-
-
-
(22
)
-
(5
)
-
-
-
(44
)
Balance, December 31, 2022
$
$
$
-
$
-
$
$
$
$
$
-
$
-
$
1,774
15. Capital Stock
The total authorized shares of capital stock we are authorized to issue equals 62,000,000 total shares of stock of which 60,000,000 are designated as common stock and 2,000,000 are designated as preferred stock. Our Board of Directors has the authority to establish one or more classes of preferred stock and to determine, within any class of preferred stock, the preferences, rights and other terms of such class.
As of December 31, 2022, the Company has reserved 7,281,758 shares of common stock for issuance; zero are reserved for shares upon exercise of outstanding stock options and 2,124,251 are reserved for shares upon vesting of restricted stock units. There are 1,718,242 shares available for future grants under the Plan (as further defined below).
16. Stock-Based Compensation
Long-term incentive plan
During 1995, we established the 1995 Long-Term Incentive Stock Option Plan (the “Plan”), which permits the granting of stock options (including incentive stock options and nonqualified stock options) stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards or any combination of these to employees, directors or consultants. The Plan was amended and restated effective April 22, 2016 and expires on April 21, 2026; the total number of shares that could be issued under the Plan is 7,281,758. As of December 31, 2022, 5,157,507 shares have been issued under the Plan, zero stock options and 2,124,251 restricted stock units (RSUs) were outstanding under the Plan, while 1,718,242 shares remain for future grants under the Plan.
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 years ended December 31, 2022 and 2021, we recognized $2.0 million and $1.0 million, respectively, of stock-based compensation expense under the fair value method. Accordingly, we recognized associated deferred income tax expense of $140 thousand and $111 thousand before valuation allowance, respectively, during the years ended December 31, 2022 and 2021. During the years ended December 31, 2022 and 2021, there were no stock-based compensation expense related to the change in fair value of cash-settled RSUs, which we account for as a liability.
On February 23, 2022, we entered into a Securities Purchase Agreement 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”) (See Note 13).
Restricted Stock Units
During the years ended December 31, 2022 and 2021, we issued RSUs to employees which vest upon the achievement of specific market-based or time-based measures. The fair value for RSU's is calculated based on the stock price on the grant date and expensed ratably over the requisite service period as market-based results achieved, which ranges between one year and five years. The following table summarizes the information about vested and unvested restricted stock units for the years ended December 31, 2022 and 2021.
Number of Shares
Weighted Average
Fair Value
Nonvested RSUs at January 1, 2021
1,719,732
$
1.36
RSUs granted
983,661
1.69
RSUs forfeited
(631,367
)
0.88
RSUs vested
(476,361
)
1.71
Nonvested RSUs at December 31, 2021
1,595,665
$
1.77
Nonvested RSUs at January 1, 2022
1,595,665
$
1.77
RSUs granted
1,790,250
1.49
RSUs forfeited
(472,969
)
2.13
RSUs vested
(788,695
)
1.68
Nonvested RSUs at December 31, 2022
2,124,251
$
1.40
As of December 31, 2022, we had $1.2 million of unrecognized compensation expense related to the RSUs expected to be recognized on a pro-rata straight line basis over a weighted average remaining service period of approximately 1.5 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 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 year ended December 31, 2022, we granted approximately 990,250 RSUs with an aggregate fair value of approximately $1.5 million. During the year ended December 31, 2021, we granted approximately 983,661 time-based RSUs with an aggregate fair value of approximately $1.7 million. During the year ended December 31, 2022, we vested 588,695 RSUs compared to 476,361 RSUs vested during the year ended December 31, 2021. 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 year ended December 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, and a time-vesting restriction, which will vest in equal portions over the next 15 quarters ending December 31, 2025. During the year ended December 31, 2022, we vested 200,000 PRSUs, of which, 50,000 PRSUs were cash-settled, respectively. No PRSUs were vested during the year ended December 31, 2021. The market vesting criteria was achieved in April 2022 for the 800,000 PRSUs which will fully vest over the next 12 quarters. During the year ended December 31, 2021, we did not grant any PRSUs to employees.
17. 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. The operating lease ROU amortization was $632 thousand and $605 thousand for the twelve months ended December 31, 2022 and 2021, respectively.
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)
Operating Leases
Classification
December 31, 2022
December 31, 2021
Leased Assets
Operating lease - right of use assets
Long term assets
$
$
1,200
Lease Liabilities
Operating lease liabilities - Current
Other current liabilities
1,205
Operating lease liabilities
Long term liabilities
$
$ 1,995
We entered into a lease agreement to lease 2,200 square feet of office space on September 26, 2022, and the lease term will end on November 30, 2024. On December 15, 2022, following a March 18, 2022 building fire that impacted our space and ensuing dispute among us and the landlord, we terminated our lease for 1332 Londontown Boulevard, Eldersburg, Maryland (our former headquarters) and entered into a release and settlement agreement whereby we agreed to pay, and the landlord agreed to accept, a reduced monthly payment through May 1, 2023 in exchange for early termination of the lease. The lease termination resulted in a gain of $94 thousand and is reflected in other (loss) income, net for the year ended December 31, 2022. As a part of this agreement, we assigned both active subleases to the landlord effective as of the execution date.
The table below summarizes the lease income and expenses recorded in the consolidated statements of operations incurred year to date ended December 31, 2022, (in thousands):
Lease Cost
Classification
Twelve months ended
December 31, 2022
Operating lease cost (1)
Selling, general and administrative expenses
$
Short-term leases costs (2)
Selling, general and administrative expenses
Sublease income (3)
Selling, general and administrative expenses
(62
)
Net lease cost
$
(1) Includes variable lease costs which are immaterial.
(2) Include leases maturing less than twelve months from the report date.
(3) Sublease
portfolio consists of 2 tenants, which sublease parts of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.
We are obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under our noncancelable operating leases as of December 31, 2022 are as follows:
(in thousands)
Gross Future
Minimum Lease
Payments
$
Thereafter
-
Total
$
Less: Interest
Present value of lease payments
$
We have 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
Twelve months ended
December 31, 2022
Weighted-average remaining lease term (years)
Operating leases
1.51
Weighted-average discount rate
Operating leases
5.00
%
There was right-of-use assets obtained in exchange for operating lease liabilities of $60 thousand during the year ended December 31, 2022. The table below sets out the classification of lease payments in the consolidated statements of cash flows:
(in thousands)
Twelve months ended December 31,
Cash paid for amounts included in measurement of liabilities
Cash paid for amounts included in measurement of liabilities
$
1,233
$
1,326
18. Employee Benefits
We have a qualified defined contribution plan that covers all U.S. employees under Section 401(k) of the Internal Revenue Code. Under this plan, our stipulated basic contribution matches a portion of the participants’ contributions based upon a defined schedule for eligible employees. Our contributions to the plan were approximately $293 thousand and $290 thousand for the years ended December 31, 2022 and 2021, respectively.
19. Segment Information
We have two reportable business segments. The Engineering segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Workforce Solutions include simulation for both training and engineering applications. Example engineering services include, but are not limited to, plant design verification and validation, thermal performance evaluation and optimization programs, and engineering programs for plants for American Society of Mechanical Engineers ("ASME") code and ASME Section XI. The Company provides these services across all market segments through our Performance, True North consulting, and DP Engineering subsidiaries. Example training applications include turnkey and custom training services. Contract terms are typically less than two years.
Workforce Solutions segment provides specialized workforce solutions primarily to the nuclear industry, working at clients’ facilities. This business is managed through our Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.
The following table 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 taxes. Inter-segment revenue is eliminated in consolidation and is not significant.
(in thousands)
Years ended December 31,
Revenue:
Engineering
$
29,919
$
28,140
Workforce Solutions
17,815
27,043
Total revenue
47,734
55,183
Gross profit
Engineering
9,557
8,124
Workforce Solutions
2,353
3,734
Total gross profit
11,910
11,858
Operating loss
Engineering
(6,388
)
(4,425
)
Workforce Solutions
(8,018
)
(1,549
)
Operating loss
(14,406
)
(5,974
)
Interest expense
(1,272
)
(159
)
Change in fair value of derivative instruments, net
Other (loss) income, net
(91
)
16,884
(Loss) income before taxes
$
(15,292
)
$
10,770
The operating loss above for the year ended December 31, 2022 includes goodwill and intangible asset impairment charge of $7.5 million for Workforce Solutions. There was no impairment recognized for the same periods in 2021 for Workforce Solutions. The operating loss above for the year ended December 31, 2021 includes impairment of ROU assets of $3 thousand for Engineering. There was no impairment recognized for the same periods in 2022 for Engineering.
Additional information relating to segments is as follows:
(in thousands)
December 31,
Engineering
$
21,705
$
23,742
Workforce Solutions
4,791
15,309
Total assets
$
26,496
$
39,051
For the years ended December 31, 2022 and 2021, 89% and 91%, respectively, of our consolidated revenue was from customers in the nuclear power industry. We design, develop and deliver business and technology solutions to the energy industry worldwide. Revenue, operating (loss) income and total assets for our United States, European, and Asian subsidiaries as of and for the years ended December 31, 2022 and 2021 are as follows:
(in thousands)
Year ended December 31, 2022
United States
Europe
Asia
Consolidated
Revenue
$
46,622
$
-
$
1,112
$
47,734
Operating loss
$
(14,225
)
$
-
$
(181
)
$
(14,406
)
Net assets, at December 31
$
24,631
$
-
$
1,865
$
26,496
(in thousands)
Year ended December 31, 2021
United States
Europe
Asia
Consolidated
Revenue
$
54,203
$
-
$
$
55,183
Operating loss
$
(3,351
)
$
(1,746
)
$
(877
)
$
(5,974
)
Net assets, at December 31
$
35,932
$
-
$
3,119
$
39,051
Revenues by geographic location above are attributed to the contracting entity. Therefore, revenues from a foreign customer that contracted directly with our U.S. entity are included in revenues from the United States. All revenues in Asia were attributable to our Chinese subsidiary.
Alternatively, revenue from customers domiciled in foreign countries were approximately 16% and 12%, of our consolidated 2022 and 2021 revenue, respectively. Revenue from foreign countries where our customers reside were all individually less than 10% of our consolidated revenue during 2022 and 2021.
20. Supplemental Disclosure of Cash Flow Information
(in thousands)
Year ended December 31,
Cash paid for interest and income taxes:
Interest
$
$
Income taxes
$
$
Non-cash financing activities:
Financing insurance premium
$ -
$
Repayment of convertible note in shares
$
$ -
Discount on issuance of convertible note
$
$
-
21. Non-consolidated Variable Interest Entity
Through our wholly owned subsidiary, DP Engineering, we effectively hold a 48% membership interest in DP-NXA Consultants LLC (“DP-NXA”).
DP-NXA was established to provide industrial services that include civil, structural, architectural, electrical, fire protection, plumbing, mechanical consulting engineering services to customers. DP-NXA sub-contracts their work to its two owners, NXA Consultants LLC (“NXA”), which owns 52% of the entity, and DP Engineering. DP Engineering and NXA contributed $48 thousand and $52 thousand, respectively, for 48% and 52% interest in DP-NXA. DP Engineering recorded the contributed cash as an equity investment.
We evaluated the nature of DP Engineering’s investment in DP-NXA and determined that DP-NXA is a variable interest entity (“VIE”). Since we do not have the power to direct activities that most significantly impact DP-NXA, we are not DP-NXA’s primary beneficiary. Furthermore, we concluded that we do not hold a controlling financial interest in DP-NXA since NXA, the VIE’s majority owner, makes all operational and business decisions. We account for DP Engineering’s investment in DP-NXA using the equity method of accounting due to the fact DP Engineering exerts significant influence with its 48% of membership interest, but does not control the financial and operating decisions.
Our maximum exposure to any losses incurred by DP-NXA is limited to DP Engineering’s investment. As of December 31, 2022, DP Engineering has not made any additional contributions to DP-NXA and we believe DP Engineering’s maximum exposure to any losses incurred by DP-NXA was not material. As of December 31, 2022, we do not have existing guarantee with or to DP-NXA, or any third-party work contracted with it.
For the year ended December 31, 2022, the carrying value of the investment in DP-NXA was zero. We do not have any investment income or loss from DP-NXA for the year ended December 31, 2022.
22. Commitments and Contingencies
Per ASC 450 Accounting for Contingencies, the Company reviews potential items and areas where a loss contingency could arise. In the opinion of management, we are not a party to any legal proceeding, the outcome of which, in management’s opinion, individually or in the aggregate, which would be reasonably possible to have a material effect on our consolidated results of operations, financial position or cash flows. We expense legal defense costs as incurred.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules promulgated by the Securities and Exchange Commission’s and the forms and information required to be disclosed by us in such reports is accumulated and communicated to management, including our Chief Executive Officer (“CEO”), who is our principal executive officer, and our Chief Financial Officer (“CFO”), who is our principal financial officer, to allow timely decisions regarding required disclosure. Based on an evaluation of our disclosure controls and procedures as of December 31, 2022, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management, including our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on management’s assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2022. Management recognizes there is a reasonable possibility that a material misstatement of our annual or interim financial statements might not be prevented or detected timely.
Remediation of previously identified Material Weaknesses
As previously disclosed in Part II Item 9A Controls and Procedures in our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part I Item 4 Controls and Procedures in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, we identified material weaknesses in our internal control over financial reporting as follows:
•
Internal control over management review of reconciliations over unbilled receivables and billing in excess of revenue earned.
•
Control environment related to the review of financial statements.
During 2022 we completed the following enhancements to strengthen internal controls over financial reporting in connection with our previously disclosed remediation plan:
•
Hired additional skilled personnel to prepare and review reconciliations over unbilled receivables and billing in excess of revenue earned.
•
Enhanced processes to reconcile, review, and evaluate the unbilled receivables and billing in excess of revenue earned accounts.
•
Expanded controls surrounding review of financial statements with focused attention on proper presentation of elements of the financial statements, and enhanced documentation of review steps performed prior to distributing financial statements for reporting, as well as for conclusion on the financial presentation for items noted on a list of significant and unusual transactions identified for the respective reporting period.
As of December 31, 2022, management determined the enhancements to controls noted above have been in place for a sufficient period of time and has concluded, through testing, that the previously identified material weaknesses have been remediated.
(c) Changes in Internal Control over Financial Reporting
Other than described above in 9(b), Management’s Annual Report on Internal Control over Financial reporting, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION.
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item, including items 401, 405, and 407 of Regulation S-K, is incorporated by reference to the section captioned “Directors and Executive Officers” in our definitive Proxy Statement for the Annual Meeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report on Form 10-K.
We have adopted a Conduct of Business Policy that applies to its directors, officers, and employees, including its principal executive officer, and principal financial officer. The Conduct of Business Policy is available on our website at www.gses.com. In addition, we have adopted a Code of Ethics for its principal executive officer and senior financial officers which is also available on our website. We will post on its website information about any amendment to, or waiver from, any provision of the Code of Ethics that applies to its principal executive officer, principal financial officer, or principal accounting officer.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this item will either be set forth under the “Executive Compensation” section in the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report on Form 10-K.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.
The information required by this item will be either set forth under the sections captioned “Voting Securities and Principal Holders Thereof,” and “Executive Compensation” in the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report on Form 10-K.
The following table sets forth the equity compensation plan information for the year ended December 31, 2022:
Plan Category
Number of
Securities to
be Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(a)
Weighted
Average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights
(b)
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column (a))
(c)
Equity compensation plans approved by security holders
Options
-
$
-
RSUs
2,124,251
1.40
2,124,251
$
1.40
1,868,242
Equity compensation plans not approved by security holders
-
$
-
-
Total
2,124,251
$
1.40
1,868,242
Table above excludes 150,000 RSUs granted under our 1995 Long-Term Incentive Plan that are settled in cash instead of shares.
For a description of the material terms of our stock-based compensation plans, see Notes to the consolidated financial statements in Item 8 of this report.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this item will be either set forth under the “Directors and Executive Officers” section in the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report on Form 10-K.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item will be either set forth under the “Audit Committee Pre-Approval of Audit and Non-Audit Services” section in the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders and incorporated herein by reference or will be provided in an amendment to this Annual Report on Form 10-K.

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) List of Financial Statements
The following financial statements are included in Item 8:
GSE Systems, Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firms (PCAOB ID 686)
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations for the years ended December 31, 2022 and 2021
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2022 and 2021
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
(a) (2) List of Schedules
All other schedules to the consolidated financial statements are omitted as the required information is presented in the consolidated financial statements or related notes.
(a) (3) List of Exhibits
The Exhibits which are filed with this report or which are incorporated by reference are set forth in the Exhibit index hereto.