GSE Systems Inc.

08/15/2022 | Press release | Distributed by Public on 08/15/2022 15:41

Quarterly Report for Quarter Ending June 30, 2022 (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____ to ____

Commission File Number 001-14785
GSE Systems, Inc.
(Exact name of registrant as specified in its charter)

Delaware
52-1868008
(State of incorporation)
(I.R.S. Employer Identification Number)

6940 Columbia Gateway Dr., Suite 470, ColumbiaMD
21046
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (410) 970-7800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
GVP
The NASDAQ Capital Market

There were 21,252,801 shares of common stock, with a par value of $0.01 per share outstanding as of July 31, 2022.

GSE SYSTEMS INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021
3
Unaudited Consolidated Statements of Operations for the Six Months Ended June 30, 2022 and 2021
4
Unaudited Consolidated Statements of Comprehensive (Loss) Income for the Six Months Ended June 30, 2022 and 2021
5
Unaudited Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2022 and 2021
6
Unaudited Consolidated Statements of Cash Flows for Six Months Ended June 30, 2022 and 2021
8
Notes to the Consolidated Financial Statements (unaudited)
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 4.
Controls and Procedures
37
PART II.
OTHER INFORMATION
38
Item 1.
Legal Proceedings
38
Item 1A.
Risk Factors
38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
38
Item 3
Defaults Upon Senior Securities
38
Item 4
Mine Safety Disclosures
38
Item 5.
Other Information
38
Item 6.
Exhibits
39

2
Table of Contents
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATEDBALANCE SHEETS
(in thousands, except share and per share data)

June 30, 2022
December 31, 2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
5,364
$
3,550
Restricted cash, current
 632 -
Contract receivables, net
9,535
11,257
Prepaid expenses and other current assets
2,512
5,262
Total current assets
18,043
20,069
Equipment, software and leasehold improvements, net
829
839
Software development costs, net
571
532
Goodwill
13,339
13,339
Intangible assets, net
2,529
3,020
Restricted cash - long term 951 -
Operating lease right-of-use assets, net
880
1,200
Other assets
51
52
Total assets
$
37,193
$
39,051
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit
$
-
$
1,817
Current portion of long-term note
1,895
-
Accounts payable
1,156
1,179
Accrued expenses
1,471
1,358
Accrued compensation
1,715
1,452
Billings in excess of revenue earned
4,410
5,029
Accrued warranty
507
667
Income taxes payable
1,701
1,654
Derivative liabilities
916 -
Other current liabilities
1,512
1,883
Total current liabilities
15,283
15,039
Long-term note, less current portion
2,243
-
Operating lease liabilities noncurrent
214
790
Other noncurrent liabilities
348
179
Total liabilities
18,088
16,008
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock $0.01par value; 2,000,000shares authorized; noshares issued and outstanding
-
-
Common stock $0.01par value; 60,000,000shares authorized, 22,849,972and 22,533,005shares issued, 21,251,061and 20,934,094shares outstanding, respectively
228
225
Additional paid-in capital
81,324
80,505
Accumulated deficit
(59,419
)
(54,584
)
Accumulated other comprehensive income (loss)
(29
)
(104
)
Treasury stock at cost, 1,598,911shares
(2,999
)
(2,999
)
Total stockholders' equity
19,105
23,043
Total liabilities and stockholders' equity
$
37,193
$
39,051

The accompanying notes are an integral part of these consolidated financial statements.

3
Table of Contents
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

Three months ended
Six months ended
June 30,
2022
June 30,
2021
June 30,
2022
June 30,
2021
Revenue
$
12,745
$
13,522
$
25,020
$
26,626
Cost of revenue
9,573
10,833
19,421
21,009
Gross profit
3,172
2,689
5,599
5,617
Operating expenses:
Selling, general and administrative
4,410
3,522
8,917
7,256
Research and development
182
154
324
311
Restructuring charges
-
-
-
808
Depreciation
72
71
144
147
Amortization of intangible assets
231
303
491
643
Total operating expenses
4,895
4,050
9,876
9,165
Operating loss
(1,723
)
(1,361
)
(4,277
)
(3,548
)
Interest expense, net
(358
)
(49
)
(506
)
(103
)
Change in fair value of derivative instruments, net
695
-
114
-
Other (loss) income, net
(72
)
4,637
(56
)
4,638
(Loss) income before income taxes
(1,458
)
3,227
(4,725
)
987
(Benefit from) provision for income taxes
(57
)
(4
)
110
(39
)
Net (loss) income
$
(1,401
)
$
3,231
$
(4,835
)
$
1,026
Net (loss) income per common share - basic and diluted
$
(0.07
)
$
0.16
$
(0.23
)
$
0.05
Weighted average shares outstanding used to compute net (loss) income per share - basic
21,033,447
20,647,426
21,006,910
20,638,116
Weighted average shares outstanding used to compute net (loss) income per share - diluted
21,033,447 20,702,003 21,006,910 20,638,116

The accompanying notes are an integral part of these consolidated financial statements.

4
Table of Contents
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)

Three months ended
Six months ended
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
Net (loss) income
$
(1,401
)
$
3,231
$
(4,835
)
$
1,026
Cumulative translation adjustment
(106
)
26
75
1,132
Comprehensive (loss) income
$
(1,507
)
$
3,257
$
(4,760
)
$
2,158

The accompanying notes are an integral part of these consolidated financial statements.

5
Table of Contents
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)


Common Stock

Accumulated
Treasury Stock
Six Months Ended
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Other
Comprehensive Loss
Shares
Amount
Total
Balance, January 1, 2022
22,533
$
225
$
80,505
$
(54,584
)
$
(104
)
(1,599
)
$
(2,999
)
$
23,043
Stock-based compensation expense
-
-
1,025
-
-
-
-
1,025
Common stock issued for RSUs vested
317
3
(3
)
-
-
-
-
-
Shares withheld to pay taxes
-
-
(203
)
-
-
-
-
(203
)
Foreign currency translation adjustment
-
-
-
-
75
-
-
75
Net loss
-
-
-
(4,835
)
-
-
-
(4,835
)
Balance, June 30, 2022
22,850
$
228
$
81,324
$
(59,419
)
$
(29
)
(1,599
)
$
(2,999
)
$
19,105
Balance, January 1, 2021
22,193
$
222
$
79,687
$
(65,191
)
$
(1,214
)
(1,599
)
$
(2,999
)
$
10,505
Stock-based compensation expense
-
-
501
-
-
-
-
501
Common stock issued for RSUs vested
268
3
(3
)
-
-
-
-
-
Shares withheld to pay taxes
-
-
(161
)
-
-
-
-
(161
)
Foreign currency translation adjustment
-
-
-
-
1,132
-
-
1,132
Net income
-
-
-
1,026
-
-
-
1,026
Balance, June 30, 2021
22,461
$
225
$
80,024
$
(64,165
)
$
(82
)
(1,599
)
$
(2,999
)
$
13,003

The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)


Common Stock

Accumulated
Treasury Stock
Three Months Ended
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Other
Comprehensive Loss
Shares
Amount
Total
Balance, April 1, 2022
22,609
$
226
$
80,777
$
(58,018
)
$
77
(1,599
)
$
(2,999
)
$
20,063
Stock-based compensation expense
-
-
666
-
-
-
-
666
Common stock issued for RSUs vested
241
2
(2
)
-
-
-
-
-
Shares withheld to pay taxes
-
-
(117
)
-
-
-
-
(117
)
Foreign currency translation adjustment
-
-
-
-
(106
)
-
-
(106
)
Net loss
-
-
-
(1,401
)
-
-
-
(1,401
)
Balance, June 30, 2022
22,850
$
228
$
81,324
$
(59,419
)
$
(29
)
(1,599
)
$
(2,999
)
$
19,105
Balance, April 1, 2021
22,234
$
222
$
79,697
$
(67,396
)
$
(108
)
(1,599
)
$
(2,999
)
$
9,416
Stock-based compensation expense
-
-
463
-
-
-
-
463
Common stock issued for RSUs vested
227
3
(2
)
-
-
-
-
1
Shares withheld to pay taxes
-
-
(134
)
-
-
-
-
(134
)
Foreign currency translation adjustment
-
-
-
-
26
-
-
26
Net income
-
-
-
3,231
-
-
-
3,231
Balance, June 30, 2021
22,461
$
225
$
80,024
$
(64,165
)
$
(82
)
(1,599
)
$
(2,999
)
$
13,003

The accompanying notes are an integral part of these consolidated financial statements.

7
Table of Contents
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Six months ended
June 30, 2022
June 30, 2021
Cash flows from operating activities:
Net (loss) income
$
(4,835
)
$
1,026
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation
144
147
Amortization of intangible assets
491
643
Amortization of capitalized software development costs
167
204
Amortization of deferred financing costs
7
5
Amortization of debt discount
 482 -
Stock-based compensation expense
1,101
501
Bad debt expense (recovery)
97
(133
)
Change in fair value of derivative instruments, net
(114
)
-
Deferred income taxes
 77 -
Changes in assets and liabilities:
Contract receivables, net
1,578
(727
)
Prepaid expenses and other assets
3,020
(5,690
)
Accounts payable, accrued compensation and accrued expenses
379
1,510
Billings in excess of revenue earned
(588
)
(599
)
Accrued warranty
(138
)
(179
)
Other liabilities
(229
)
2,163
Net cash provided by (used in) operating activities
1,639
(1,129
)
Cash flows from investing activities:
Capital expenditures
(134
)
(322
)
Capitalized software development costs
(206
)
(149
)
Net cash used in investing activities
(340
)
(471
)

Cash flows from financing activities:
Proceeds from line of credit
- 800
Repayment of line of credit
(1,817
)
(1,489
)
Repayment of insurance premium
(594
)
(406
)
Proceeds from issuance of long-term note and warrants, net of debt issuance cost and original issue discount
4,782
-
Shares withheld to pay taxes
(203
)
(161
)
Net cash provided by (used in) financing activities
2,168
(1,256
)
Effect of exchange rate changes on cash
(70
)
(17
)
Net increase (decrease) in cash, cash equivalents and restricted cash
3,397
(2,873
)
Cash, cash equivalents and restricted cash at beginning of the period
3,550
6,702
Cash, cash equivalents and restricted cash at the end of the period
$
6,947
$
3,829

Cash and cash equivalents
 $ 5,364 $ 3,829
Restricted cash, current
 632 -
Restricted cash included in other long-term assets
 951 -
Total cash, cash equivalents and restricted cash
 $ 6,947 $ 3,829
Supplemental cash flow disclosures:
Non-cash financing activities
Discount on issuance of Convertible Note
 $ 750 $ -

The accompanying notes are an integral part of these consolidated financial statements.

8
Table of Contents
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

GSE Systems, Inc. is a leading provider of professional and technical engineering, staffing services and simulation software to clients in the power and process industries. References in this report to "GSE" or "we" or "our" or "the Company" are to GSE Systems, Inc. and our subsidiaries, collectively.

The consolidated interim financial statements included herein have been prepared by GSE and are unaudited. In the opinion of our management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted. All intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2021 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission on March 31, 2022.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Our most significant estimates relate to revenue recognition on contracts with customers, product warranties, valuation of goodwill and intangible assets acquired including the determination of fair value in impairment tests, valuation of long-lived assets to be disposed of, valuation of stock-based compensation awards, the recoverability of deferred tax assets, and valuation of warrants and derivative liability related to our convertible note. Actual results of these and other items not listed could differ from these estimates and those differences could be material.

COVID-19

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

9
Table of Contents
Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. The FASB reduced the number of accounting models for convertible debt and convertible preferred stock instruments and made certain disclosure amendments to improve the information provided to users. This ASU is applicable for public companies starting with fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. The Company adopted ASU 2020-06 on January 1, 2022, using the modified retrospective approach, and because the Company did not have outstanding financial instruments in scope of the ASU, the adoption did not have an impact to our consolidated financial statements.

Accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On October 16, 2019, the FASB voted to defer the deadlines for private companies and certain small public companies, including smaller reporting companies, to implement the new accounting standards on credit losses. The new effective date is January 1, 2023. As a smaller reporting company, we have elected to defer adoption in line with new deadlines and are currently evaluating the effects, if any, that the adoption of this guidance will have on our consolidated financial position, results of operations and cash flows.

Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.

Note 3 - Basic and Diluted (Loss) Income 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 and warrants 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) income per common share were as follows:

(in thousands, except for share data)
Three months ended
Six months ended
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
Numerator:
Net (loss) income attributed to common stockholders
$
(1,401
)
$
3,231
$
(4,835
)
$
1,026
Denominator:
Weighted-average shares outstanding for basic earnings per share
21,033,447
20,647,426
21,006,910
20,638,116
Effect of dilutive securities:
Employee RSUs
-
54,577
-
-
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share
21,033,447
20,702,003
21,006,910
20,638,116
Shares related to potentially dilutive securities excluded because inclusion would be anti-dilutive
3,185,552
-
2,181,846
20,005

10
Table of Contents
Note 4 - Coronavirus Aid, Relief and Economic Security Act

Paycheck Protection Program Loan (PPP Loan)

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. We applied for and, on April 23, 2020, received a payroll protection program loan in the amount of $10.0 million (the "PPP Loan") under the CARES Act, as administered by the U.S. Small Business Administration (the "SBA"). The application for receipt of the PPP Loan required us to certify, in good faith, that the 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. During the three months ended June 30, 2022, we have received employee retention tax credit refunds from the Internal Revenue Service in the amount of $1.6 million. As of June 30, 2022, we received cumulative employee retention tax credit refunds totaling $3.6 million of the $5.0 million in refunds sought, with remaining outstanding refunds receivable of $1.4 million which was included in the other current assets balance at June 30, 2022.

Note 5 - Contract Receivables

Contract receivables represent our unconditional rights to consideration due from our domestic and international customers. We expect to collect all contract receivables within the next twelve months.

The components of contract receivables were as follows:

(in thousands)
June 30, 2022
December 31, 2021
Billed receivables
$
4,543
$
6,124
Unbilled receivables
6,056
6,143
Allowance for doubtful accounts
(1,064
)
(1,010
)
Total contract receivables, net
$
9,535
$
11,257

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Management reviews collectability of receivables periodically and records an allowance for doubtful accounts to reduce the Company's receivables to their net realizable value when management determines it is probable that we will not be able to collect all amounts due from customers. The allowance for doubtful accounts is based on historical trends of past due accounts, write-offs, specific identification and review of customer accounts.

During the three months ended June 30, 2022 and 2021, we recorded net bad debt expense (recovery) of $97 thousand and $(137) thousand, respectively. During the six months ended June 30, 2022 and 2021, we recorded net bad debt expense (recovery) of $97 thousand and $(133) thousand, respectively.

During the month of July 2022, we invoiced $4.3 million of the unbilled receivables as of June 30, 2022.

Our foreign currency denominated contract receivables, billings in excess of revenue earned and subcontractor accruals that are related to the outstanding foreign exchange contracts are remeasured at the end of each period into our functional currency, using the current exchange rate at the end of the period. The gain or loss resulting from such remeasurement is included in other income, net in the consolidated statements of operations. As of June 30, 2022 and 2021, we recognized a loss on remeasurement of these foreign exchange contracts of $54 thousand and $12 thousand, respectively.

As of June 30, 2022 and December 31, 2021,we had no customer that accounted for 10% of our consolidated contract receivables.

Note 6 - Goodwill and Intangible Assets

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets. Management concluded that there were no triggering events that occurred during the six months ended June 30, 2022 and 2021.

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

(in thousands)
As of June 30, 2022
Gross Carrying Amount
Accumulated Amortization
Net
Amortized intangible assets:
Customer relationships
$
8,628
$
(6,788
)
$
1,840
Trade names
1,689
(1,151
)
538
Developed technology
471
(471
)
-
Non-contractual customer relationships
433
(433
)
-
Noncompete agreement
527
(467
)
60
Alliance agreement
527
(435
)
92
Others
167
(167
)
-
Total
$
12,442
$
(9,912
)
$
2,530

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

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Amortization expense related to definite-lived intangible assets totaled $0.2 million and $0.3 million for the three months ended June 30, 2022 and 2021 and $0.5 million and $0.6 million for the six months ended June 30, 2022 and 2021, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:
(in thousands)
Years ended December 31:
2022 remainder
$
419
2023
640
2024
435
2025
335
2026
266
Thereafter
435
Total
$
2,530

Note 7 - Equipment, Software and Leasehold Improvements

Equipment, software and leasehold improvements, net consist of the following:

(in thousands)
June 30, 2022
December 31, 2021
Computer and equipment
$
2,325
$
2,270
Software
2,226
2,150
Leasehold improvements
659
659
Furniture and fixtures
839
839
6,049
5,918
Accumulated depreciation
(5,220
)
(5,079
)
Equipment, software and leasehold improvements, net
$
829
$
839

Depreciation expense was $144 thousand and $147 thousand for the six months ended June 30, 2022 and 2021, respectively. Capitalization of internal-use software cost of $53 thousand and $165 thousand were recorded in software for the three months ended June 30, 2022 and 2021, respectively. Capitalization of internal-use software cost of $76 thousand and $315 thousand were recorded in software for the six months ended June 30, 2022 and 2021, respectively.

Note 8 - Fair Value of Financial Instruments

ASC 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The levels of the fair value hierarchy established by ASC 820 are:

Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability.

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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 June 30, 2022 and December 31, 2021, we considered the recorded value of certain of our financial assets and liabilities, which consist primarily of cash and cash equivalents, contract receivable and accounts payable, to approximate fair value based upon their short-term nature.

Our convertible debt issued in February 2022 (See Note 10) 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 June 30, 2022 was estimated with the following assumptions.
Exercise Price
$ 1.94
Common Stock Price
 $ 1.25
Risk Free Rate
3.0%
Volatility
65%
Term (in years)
4.7 yrs

The following table presents assets and liabilities measured at fair value at June 30, 2022:

(in thousands)
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Derivative liability $ - $ - $ 204 $ 204
Warrant liability
 - - 712 712
Cash settled performance-vesting restricted stock units
 - 76 - 76
Total liabilities $ - $ 76 $ 916 $ 992

The following table presents assets and liabilities measured at fair value at December 31, 2021:

(in thousands)
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Money market funds
$
15
$
-
$
-
$
15
Total assets
$
15
$
-
$
-
$
15

14
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The following table summarizes changes in the fair value of our Level 3 liabilities during the six months ended June 30, 2022.

(in thousands)
Embedded
Redemption Features
Warrant Level 3 Total
Balance at December 31, 2021
$
-
$ - $ -
Derivative liabilities at issuance date
306
- 306
Warrant liabilities at issuance date
 - 724 724
Change in fair value included in gain on derivative instruments, net
(102
)
(12 ) (114 )
Balance at June 30, 2022
$
204
$ 712 $ 916

Note 9 - Stock-Based Compensation

We recognize compensation expense on a pro rata straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff vesting terms. We recognize the cumulative effect of a change in the number of awards expected to vest in compensation expense in the period of change. We have not capitalized any portion of our stock-based compensation. Our forfeiture rate is based on actuals.

During the three months ended June 30, 2022 and 2021, we recognized $0.7 million and $0.5 million of stock-based compensation expense related to equity awards, respectively. We recognized $1.0 million and $0.5 million of stock-based compensation expense related to equity awards for the six months ended June 30, 2022 and 2021, respectively, under the fair value method.

During the three and six months ended June 30, 2022, we granted approximately 946,653 and 960,250 time-based restricted stock units ("RSUs") with an aggregate fair value of approximately $1.4 million and $1.5 million, respectively. During the three and six months ended June 30, 2021, we granted approximately 804,661 time-based RSUs with an aggregate fair value of approximately $1.4 million, respectively. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, and the remainder vest annually in equal amounts over the course of oneto three years.

GSE's 1995 long-term incentive program ("LTIP") provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and employees. Vesting of the performance-vesting restricted stock units ("PRSU") is contingent upon the employee's continued employment and the Company's achievement of certain performance goals during designated performance periods as established by the Compensation Committee of the Company's Board of Directors. We recognize compensation expense, net of estimated forfeitures, for 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 six months ended June 30, 2022, we granted 800,000 PRSUs including 200,000 cash-settled grants to employees. These grants are subject to multiple vesting criteria including reaching a 20-day VWAP of $1.94 prior to the expiration of the awards. Additionally, these shares are subject to a time-vesting restriction and will vest in equal portions over the next 15quarters ending December 31, 2025. The market vesting criteria was achieved in April 2022 for the 800,000 PRSUs which will fully vest over the next 14 quarters. During the three and six months ended June 30, 2021, we did not grant any PRSUs to employees.

We did not grant any stock options for the six months ended June 30, 2022 and 2021.

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Note 10 - Debt

Convertible Note

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

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

Fair value of Warrant Liabilities on issuance
 (724 )
Fair value of Conversion Feature on issuance
 (306 )
Allocated OID costs to Convertible Note
 (96 )
Interest expense accrued on Convertible Note as of June 30, 2022
 482
Balance of Convertible Note as of June 30, 2022
 $ 4,138

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

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

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

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

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

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

The Convertible Note was evaluated as a potentially dilutive security in both periods of loss and income for diluted earnings per share purposes. The Warrant is considered a participating security and was not included in the calculation of basic earnings per share for the period ended June 30, 2022 as Company reflected net loss for this period. The Warrant will be included in the calculation of basic earnings per share in periods of net income.

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

The Company incurred total interest expense related to the Convertible Note, including the amortization of the various discounts, of $353 thousand and $482 thousand for the three and six months ended June 30, 2022, respectively.

Revolving Line of Credit

On March 29, 2021, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021. Pursuant to the Ninth Amendment and Reaffirmation Agreement, the Bank waived the fixed charge coverage ratio and leverage ratio for the quarters 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 $500,000 pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75,000 to reduce the RLOC. We incurred $25,000 fees related to this amendment during the year ended December 31, 2021.

On November 12, 2021, we signed the Tenth Amendment and Reaffirmation Agreement with our bank to waive the fixed charge coverage ratio and leverage ratio for the quarters ending September 30 and December 31, 2021, and we agreed, (i) interest on the outstanding principal amount of the RLOC shall accrue at the interest rate in effect for the RLOC from time to time, but the interest due and payable on the RLOC on each Interest Payment Date shall be determined by subtracting seventy-five (75) basis points from the Applicable Margin and (ii) the seventy-five (75) basis points of accrued interest on the RLOC not paid on any Interest Payment Date pursuant to clause (i) above shall be due and payable on the Termination Date or the date of payment in full of the RLOC. In addition, we agreed, by December 31, 2021, to pay the Bank $250,000 to be applied to the principal amount outstanding under the RLOC. We incurred $15 thousand of amendment fee related to this amendment.

During the six months ended June 30, 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 June 30, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.
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Table of Contents
Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. Our System Design and Build contracts generally include a one year base warranty on the systems. The portion of our warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $507 thousand, and the remaining $98 thousand is classified as long-term within other non current liabilities.

The activity in the accrued warranty accounts during the current period is as follows:

(in thousands)
Balance at January 1, 2022
$
748
Current period recovery
(31
)
Current period claims
(98
)
Currency adjustment
(14
)
Balance at June 30, 2022
$
605

Note 12 - Revenue

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. We primarily generate revenue through three distinct revenue streams: (1) System Design and Build ("SDB"), (2) Software and (3) Training and Consulting Services across our Performance and Workforce Solutions segments. We recognize revenue from SDB and software contracts mainly through our Performance segment. We recognize training and consulting service contracts through both segments.
The following table represents a disaggregation of revenue by type of goods or services for the six months ended June 30, 2022 and 2021, along with the reporting segment for each category:

(in thousands)
Three months ended
Six months ended
June 30,
2022
June 30,
2021
June 30,
2022
June 30,
2021
Performance Improvement Solutions segment
System Design and Build
$
2,042
$
1,227
$
3,443
$
3,089
Over time
2,042
1,227
3,443
3,089
Software and Support
1,178
766
1,937
1,579
Point in time
87
127
175
222
Over time
1,091
639
1,762
1,357
Training and Consulting Services
4,733
4,869
8,970
9,275
Point in time
727
16
1,145
84
Over time
4,006
4,853
7,825
9,191
Workforce Solutions
Training and Consulting Services
4,792
6,660
10,670
12,683
Point in time
-
163
-
249
Over time
4,792
6,497
10,670
12,434
Total revenue
$
12,745
$
13,522
$
25,020
$
26,626

18
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The following table reflects revenue recognized in the reporting periods presented that was included in contract liabilities from contracts with customers as of the beginning of the periods presented:

(in thousands)
Three months ended
Six months ended
June 30,
2022
June 30,
2021
June 30,
2022
June 30,
2021
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period
$
1,036
$
1,115
$
2,492
$
3,304
Note 13 - Income Taxes

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

(in thousands)
Three months ended
Six months ended
June 30,
2022
June 30,
2021
June 30,
2022
June 30,
2021
(Loss) income before income taxes
$
(1,458
)
$
3,227
$
(4,725
)
$
987
(Benefit from) provision for income taxes
(57
)
(4
)
110
(39
)
Effective tax rate
3.9
%
(0.1
)%
(2.3
)%
(4.0
)%

Our income tax expense for the interim periods presented is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax expense for the six months ended June 30, 2022 was comprised mainly of current foreign and state tax expense, as well as deferred federal and state tax expense related to the portion of goodwill which cannot be offset by deferred tax assets. Total income tax benefit six months ended June 30, 2021 was comprised mainly of foreign tax benefit and state tax expense.

Our effective income tax rate was 3.9% and (2.3)% for the three and six months ended June 30, 2022, respectively. For the three and six months ended June 30, 2022, the difference between our income tax expense and (benefit) at an effective tax rate of 3.9% and (2.3)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, and discrete item adjustments for U.S. and foreign taxes. For the three and six months ended June 30, 2021, the difference between our income tax benefit at an effective rate of (0.1)% and (4.0)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. entity, and discrete item adjustments for U.S. and foreign taxes.

Because of our net operating loss carryforwards, we are subject to U.S. federal and state income tax examinations from the year 2000 and forward and are subject to foreign tax examinations by tax authorities for years 2016 and forward.

An uncertain tax position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense.

We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. We have evaluated all positive and negative evidence and determined that we will continue to assess a full valuation allowance on our U.S., China, and Slovakia net deferred assets as of June 30, 2022. We have determined that it is not more likely than not that the Company will realize the benefits of its deferred taxes in the U.S. and foreign jurisdictions. The Company has a deferred tax liability in the amount of $170 thousand at June 30, 2022 related to the portion of Goodwill which cannot be offset by deferred tax assets.

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Note 14 - Leases

We have lease agreements with lease and non-lease components, which are accounted for as a single lease. We apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Lease contracts are evaluated at inception to determine whether they contain a lease and whether we obtain the right to control an identified asset. The following table summarizes the classification of operating ROU assets and lease liabilities on the consolidated balance sheets (in thousands):

As of
Operating Leases
Classification
June 30, 2022
December 31, 2021
Leased Assets
Operating lease - right of use assets
Long term assets
$
880
$
1,200
Lease Liabilities
Operating lease liabilities - Current
Other current liabilities
1,188
1,205
Operating lease liabilities
Long term liabilities
214
790

$
1,402
$
1,995

We executed a sublease agreement with a tenant to sublease 850 square feet from the Sykesville office space on September 13, 2021. This agreement is in addition to the previous sublease for 3,650 square feet entered into on May 1, 2019. The addition of the second sublease is for a portion of the space previously abandoned in December 2019. The sublease does not relieve us of our primary lease obligation. The lessor agreements are all considered operating leases, maintaining the historical classification of the underlying lease. We do not recognize any underlying assets for the subleases as a lessor of operating leases. The net amount received from the sublease is recorded within selling, general and administrative expenses.

The table below summarizes lease income and expense recorded in the consolidated statements of operations incurred during the three and six months ended June 30, 2022 and 2021, (in thousands):

Three months ended
Six months ended
Lease Cost
Classification
June 30,
2022
June 30,
2021
June 30,
2022
June 30,
2021
Operating lease cost (1)
Selling, general and administrative expenses
$
174
$
177
$
360
$
369
Short-term leases costs (2)
Selling, general and administrative expenses
15
14
30
30
Sublease income (3)
Selling, general and administrative expenses
(19
)
(32
)
(37
)
(64
)
Net lease cost
$
170
$
159
$
353
$
335

(1) Includes variable lease costs which are immaterial.
(2) Includes leases maturing less than twelve months from the report date.
(3) Sublease portfolio consists of three tenants, which sublease parts of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

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The Company is obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of June 30, 2022 are as follows (in thousands):

(in thousands)
Gross Future
Minimum Lease
Payments
2022 remainder
$
645
2023
673
2024
122
2025
10
2026
3
Thereafter
 -
Total lease payments
$
1,453
Less: Interest
51
Present value of lease payments
$
1,402

We calculated the weighted-average remaining lease term, presented in years below and the weighted-average discount rate for our operating leases. As noted in our lease accounting policy, we use the incremental borrowing rate as the lease discount rate.

Lease Term and Discount Rate
June 30, 2022
December 31, 2021
Weighted-average remaining lease term (years)

Operating leases
1.36
1.80
Weighted-average discount rate
Operating leases
5.00 % 5.00 %

The table below sets out the classification of lease payments in the consolidated statement of cash flows.

(in thousands)
Six months ended
Cash paid for amounts included in measurement of liabilities
June 30, 2022
June 30, 2021
Operating cash flows used in operating leases
$
642
$
639

Note 15 - Segment Information

We have two reportable business segments. The Performance Improvement Solutions segment provides simulation, training and engineering products and services delivered across the breadth of industries we serve. Solutions include simulation for both training and engineering applications. 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 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.

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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:

Three months ended
Six months ended
(in thousands)
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
Revenue:
Performance
$
7,953
$
6,862
$
14,350
$
13,943
Workforce Solutions
4,792
6,660
10,670
12,683
Total revenue
12,745
13,522
25,020
26,626
Operating loss
Performance
(1,713
)
(1,131
)
(4,108
)
(2,534
)
Workforce Solutions
(10
)
(230
)
(169
)
(1,014
)
Operating loss
(1,723
)
(1,361
)
(4,277
)
(3,548
)
Interest expense, net
(358
)
(49
)
(506
)
(103
)
Change in fair value of derivative instruments, net
695
-
114
-
Other (loss) income, net
(72
)
4,637
(56
)
4,638
(Loss) income before income taxes
$
(1,458
)
$
3,227
$
(4,725
)
$
987

Note 16 - 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, would have a material effect on our consolidated results of operations, financial position or cash flows. We expense legal defense costs as incurred.

Cautionary Statement Regarding Forward-Looking Statements

This report and the documents incorporated by reference herein contain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are based on management's assumptions, expectations and projections about us, and the industry within which we operate, and that have been made pursuant to the Private Securities Litigation Reform Act of 1995 reflecting our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate", "believe", "continue", "estimate", "intend", "may", "plan", "potential", "predict", "expect", "should", "will" and similar expressions, or the negative of these terms or other comparable terminology, have been used to identify these forward-looking statements. These forward-looking statements may also use different phrases. These statements regarding our expectations reflect our current beliefs and are based on information currently available to us. Accordingly, these statements by their nature are subject to risks and uncertainties, including those listed under Part II, Item 1A - Risk Factors in our most recent annual report on Form 10-K, which could cause our actual growth, results, performance and business prospects and opportunities to differ from those expressed in, or implied by, these forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Except as otherwise required by federal securities law, we are not obligated to update or revise these forward-looking statements to reflect new events or circumstances. We caution you that a variety of factors, including but not limited to the factors described under Part II, Item 1A - Risk Factors in our most recent annual report on Form 10-K, could cause our business conditions and results to differ materially from what is contained in forward-looking statements.

Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in Item 1A - Risk Factors in our most recent annual report on Form 10-K in connection with any forward-looking statements that may be made by us. You should not place undue reliance on any forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in proxy statements, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC.

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Item 2.
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. 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.

Early in 2020 as the COVID-19 pandemic unfolded, the end markets that we serve, namely the power industries, delayed certain essential services and dramatically cut back on non-essential services. Although these delays and reductions impacted us, as an essential services provider to an essential industrial base, we benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. Additionally, staffing shortages have resulted in new opportunities for our Workforce Solutions segment. In 2021, the effects of the pandemic still impacted the end markets we serve, but those effects have been mitigated by a number of factors, including the following: the pandemic largely has had a targeted effect on the population; a number of vaccines in the market being distributed and, despite logistical challenges, making substantial progress for those in most need; the economy of the United States has not had as much disruption as was initially feared, which has benefited our end markets; and most importantly our end markets seem poised to contract with us for essential services that had been delayed as a result of the pandemic. At the beginning of 2022, we have publicly announced a number of contract wins, which we hope will be a harbinger of a more attractive business environment for the power industries we serve.

As a result of the COVID-19 pandemic, we have sought and obtained support through various business assistance programs. We applied for and, on April 23, 2020, received the PPP Loan under the CARES Act, as administered by the SBA. We used the PPP Loan proceeds to sustain our business during the pandemic, as intended, and we were eligible for full forgiveness of the loan under the CARES act. 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.

In 2021, we participated in the Employee Retention Credit (ERC) program available under the CARES Act. The Company recognized total cumulative ERC credits of $7.2 millionconsisting of both refunds sought by the Company and credits from unremitted payroll taxes. 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. For the three months ended June 30, 2022, we received refunds of $1.6 million with a remaining receivable of $1.4 million at June 30, 2022.

On September 9, 2021, President Biden released the COVID-19 Action Plan, Path Out of the Pandemic (the "Plan"), with the stated goal of getting more people vaccinated. As part of the Plan, Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors (the "Order"), creates the Safer Federal Workforce Task Force (the "Task Force"), which released guidance for U.S. Government contractors and their subcontractors. This guidance included mandatory vaccination of all employees working on or for a government contract, either directly or indirectly, by January 4, 2022 (subject to medical and religious exemptions). As a part of the Plan and Order, President Biden also directed, the Department of Labor's Occupational Safety and Health Administration ("OSHA") to issue an Emergency Temporary Standard ("ETS") requiring that all employers with at least 100 employees ensure that their U.S.-based employees are fully vaccinated for COVID-19 or obtain a negative COVID-19 test at least once a week. On November 4, 2021, OSHA issued this ETS, however the implementation of the ETS was blocked by federal appeals courts, pending resolution of ongoing litigation challenging the constitutionality of the ETS, and the ETS was withdrawn by OSHA on January 25, 2022. OSHA, however has not withdrawn the proposed rule that would effectuate the same mandate, and it cannot be known whether OSHA may reissue the ETS or otherwise issue new emergency temporary standards imposing similar mandates. We have already received notice by both government customers and prime contractors serving government customers regarding the vaccination requirement and its application to our business with those customers. As an employer of more than 100 employees, we would also be subject to the ETS or a similar mandate should it become effective. It is possible that additional jurisdictions where we do business may impose similar mandates that would apply to our employees. In addition, certain of our customers may require vaccines for those of our employees who provide on-site service at their facilities. We will continue to monitor the status of these or other mandates or regulations and their application to us and our business.

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General Business Environment

We operate through two reportable business segments: Performance Improvement Solutions and Workforce Solutions. The Workforce Solutions segment is referred to as workforce solutions to account for the increasing activity outside of our core nuclear industry focus. 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 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:

Performance Improvement Solutions (approximately 57% of revenue for the six months ended June 30, 2022)

Our Performance Improvement Solutions 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 Performance Solutions segment includes various simulation products, engineering services, and operation training systems delivered across the industries we serve primarily nuclear and 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. GSE and its predecessors have been providing these services since 1976.

Our engineering solutions include 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 GSE True North Consulting and GSE DP Engineering businesses typically work as either the engineer of choice or specialty engineer of choice for our clients under master services agreements and are included in our Performance Improvement Solutions segment due to their service offerings. GSE has been providing these engineering solutions and services since 1995.

Workforce Solutions (approximately 43% of revenue for the six months ended June 30, 2022)

Workforce Solutions provides highly specialized and skilled nuclear operations instructors, procedure writers, technical engineers, and other consultants to the nuclear power industry. These employees work at our clients' facilities under client direction. Examples of these highly skilled positions are senior reactor operations instructors, procedure writers, project managers, work management specialists, planners and training material developers. This business is managed through Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate the business line from the rest of the Company's product and service portfolio. GSE has been providing these services since 1997.

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. We are now one of the leading, 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 defense sectors. As a result of this effort and established leadership position in key sectors, we are positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In 2022, we will keenly focus 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 in a manner of excellence; create new and compelling solutions in-house as a result of advancing our technology offerings in sponsorship with industry early adopters focused on critical business need; develop new services as a result of combining our expertise; expand into compelling adjacent markets such as clean energy as they may arise with renewed sales focus.
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Table of Contents
Cross sell and upsell into existing markets:
For the past several years, we have devoted considerable time and effort to diversify the Company'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 all of the engineering services together into one organization under one leader, and the Workforce Solutions teams together as one team under one leader. The business units operate uniformly within their respective structure. As such, the opportunity to cross-sell the capabilities across the entire customer base is greatly enhanced. This further differentiates us as a unique provider to industry vs. providers of specific niche services. The unified go-to-market efforts, such as cross-selling capability should lead to greater share of available spending within the customer base, which in turn should lead to significant upselling opportunity. As a result of a rejuvenated marketing effort, we are equipped to take this new approach to market. In particular, with the US government rejoining the Paris Climate Agreement and driving to decarbonize the energy grid by 2035, and create a carbon neutral economy by 2050, decarbonization of the energy sector will require significant investment for decades to come. As a key provider of essential services to the power sector, with a focus on decarbonization, we are poised to benefit from and exploit this investment.

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 annuities through license revenue, software maintenance and services revenue. More on DVR and TSM 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.

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Table of Contents
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 JADETMsuite of simulation software, including industry leading JTOPMERET®and JElectricTMsoftware, 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 OpenSimTMplatforms 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. During the three months ended June 30, 2022 and 2021, we have made R&D investments totaling $182 thousand and $154 thousand, respectively. During the six months ended June 30, 2022 and 2021, we have made R&D investments totaling $324 thousand and $311 thousand, 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 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.

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.

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.

Employees

As of June 30, 2022, we had approximately 286 employees, which includes approximately 197 employees in our Performance segment and approximately 89 employees in our Workforce Solutions segment.

Backlog

As of June 30, 2022, we had approximately $34.0 million of total gross revenue backlog, which included $27.5 million of Performance backlog and $6.5 million of Workforce Solutions backlog. With respect to our backlog, it 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 such changes may occur.

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Table of Contents
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 U.S. GAAP measurement, our computation of backlog may not necessarily be comparable to that of our industry peers.

Product and Services

Performance Improvement Solutions
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

•
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.

Renewable Integration
A significant component of overall decarbonization regarding power generation will ultimately fall to renewable sources such as wind, solar, and hydro 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.

Engineering Solutions for Decarbonization
With overall decarbonization as our primary 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 Clean Energy. An overview highlighting many areas of our current and planned involvement as well as the associated benefits is summarized below:

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Table of Contents
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.

Even prior to the COVID pandemic, we had delivered training products though 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

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Table of Contents
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 to operate and train existing and new employees how to operate nuclear plants is essential to ensure safe, ongoing plant operation. In addition, operating and training needs change over time and sometimes our clients require fixed-price, discrete projects, new or updated methods, or specialized courses in contrast to straight staff augmentation. The industry needs operating personnel, including procedure writers, engineers, operators and instructors who can step in and use, as well as, update the client's operating methods, procedures, training material and more. Finding technical professionals and instructors, who know the subject, can perform the work or teach it to others and can adapt 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 operating or training methods they already have in place. Examples of our training program courses include senior reactor operator ("SRO") certification, generic fundamentals training, and simulation supervisor training. We also 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. Our Workforce Solutions segment include 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 staffing 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 significant organic growth opportunity with our Workforce Solutions segment by expanding our service offerings to meet the evolving needs of the energy industry as well as other opportunities that support decarbonization and major infrastructure projects. Due to the experience within our team, 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 are placing a greater emphasis on cross-selling the services offered by our Workforce Solutions segment with our Performance Improvement Solutions segment. The Workforce Solutions segment continues expanding our footprint with companies dedicated to the support of decarbonization, and our success is showing with contract awards, scope expansion, and targeted opportunities to support engineering, manufacturing, and construction projects with companies dedicated to clean energy solutions. We have continued 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 adjusting and allowing more employees to work from home, but it's not the only answer. Employees are making changes in their professional lives for many reasons, and our workforce solutions offer 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 its 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.

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Table of Contents
Results of Operations

The following table sets forth our results of operations, expressed in thousands of dollars and as a percentage of revenue:

Three Months Ended
Six Months Ended
(in thousands)
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
$

%
$

%
$

%
$

%
Revenue
$
12,745
100.0
%
$
13,522
100.0
%
$
25,020
100.0
%
$
26,626
100.0
%
Cost of revenue
9,573
75.1
%
10,833
80.1
%
19,421
77.6
%
21,009
78.9
%
Gross profit
3,172
24.9
%
2,689
19.9
%
5,599
22.4
%
5,617
21.1
%
Operating expenses:
Selling, general and administrative
4,410
34.6
%
3,522
26.0
%
8,917
35.6
%
7,256
27.3
%
Research and development
182
1.4
%
154
1.1
%
324
1.3
%
311
1.2
%
Restructuring charges
-
0.0
%
-
0.0
%
-
0.0
%
808
3.0
%
Loss on impairment
-
0.0
%
-
0.0
%
-
0.0
%
-
0.0
%
Depreciation
72
0.6
%
71
0.5
%
144
0.6
%
147
0.6
%
Amortization of intangible assets
231
1.8
%
303
2.2
%
491
2.0
%
643
2.4
%
Total operating expenses
4,895
38.4
%
4,050
30.0
%
9,876
39.5
%
9,165
34.4
%
Operating loss
(1,723
)
(13.5
)%
(1,361
)
(10.1
)%
(4,277
)
(17.2
)%
(3,548
)
(13.4
)%
Interest expense, net
(358
)
(2.8
)%
(49
)
(0.4
)%
(506
)
(2.0
)%
(103
)
(0.4
)%
Change in fair value of derivative instruments, net
695
5.5
%
-
0.0
%
114
0.5
%
-
0.0
%
Other (loss) income, net
(72
)
(0.6
)%
4,637
34.3
%
(56
)
(0.2
)%
4,638
17.4
%
(Loss) income before income taxes
(1,458
)
(11.4
)%
3,227
23.9
%
(4,725
)
(18.9
)%
987
3.7
%
(Benefit from) provision for income taxes
(57
)
(0.4
)%
(4
)
0.0
%
110
0.4
%
(39
)
(0.1
)%
Net (loss) income
$
(1,401
)
(11.0
)%
$
3,231
23.9
%
$
(4,835
)
(19.3
)%
$
1,026
3.9
%

Revenue

Consolidated revenue for the three months ended June 30, 2022 totaled $12.7 million, which was 6% less than the $13.5 million of revenue for the three months ended June 30, 2021. Revenue for the six months ended June 30, 2022 totaled $25.0 million, which was 6% less than the $26.6 million of revenue for the six months ended June 30, 2021.

Three Months Ended
Six Months Ended
(in thousands)
June 30,
2022
June 30,
2021
Change
June 30,
2022
June 30,
2021
Change
Revenue:
$

%
$

%
Performance
$
7,953
$
6,862
1,091
16
%
$
14,350
$
13,943
407
3
%
Workforce Solutions
4,792
6,660
(1,868
)
(28
)%
10,670
12,683
(2,013
)
(16
)%
Total revenue
$
12,745
$
13,522
(777
)
(6
)%
$
25,020
$
26,626
(1,606
)
(6
)%

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Performance Improvement Solutions revenue for the three months ended June 30, 2022 totaled $8.0 million, which was a 16% increase from the $6.9 million of revenue for the three months ended June 30, 2021. The increase in revenue was primarily attributable to large simulator and upgrade projects offset by lower revenue in consulting services. Total Performance Improvement Solutions orders of $3.8 million and $5.8 million were recorded for the three months ended June 30, 2022, respectively.

Performance Improvement Solutions revenue for the six months ended June 30, 2022 totaled $14.4 million, which was a 3% increase from the $13.9 million of revenue for the six months ended June 30, 2021. The increase of revenue was primarily attributable to several significant simulator upgrade projects which began later in 2021 with continued work performed in the first six months of 2022. Total Performance Improvement Solutions orders of $10.2 million and $11.4 million were recorded for the six months ended June 30, 2022 and 2021, respectively.

For the three months ended June 30, 2022, Workforce Solutions revenue decreased by 28% to $4.8 million compared to revenue of $6.7 million for the three months ended June 30, 2021. The decrease in revenue was due to a minor reduction in staffing needs from our major customers. Total new orders of $3.1 million and $5.0 million were recorded for the three months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022, Workforce Solutions revenue decreased by 16% to $10.7 million compared to revenue of $12.7 million for the six months ended June 30, 2021. The decrease in revenue was primarily due to the wind down of large projects resulting in a reduction in demand for staffing from our major customers. Total new orders of $7.8 million and $12.4 million were recorded for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, our backlog was $34.0 million, of which, $27.5 million was attributed to the Performance segment and $6.5 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 our Performance segment and $9.5 million to Workforce Solutions.

Gross Profit

Gross profit was $3.2 million and 24.9% of revenue and $2.7 million and 19.9% of revenue for the three months ended June 30, 2022 and 2021, respectively. Gross profit was $5.6 million and 22.4% of revenue and $5.6 million and 21.1% of revenue for the six months ended June 30, 2022 and 2021, respectively.

(in thousands)
Three Months Ended
Six Months Ended
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
$

%
$

%
$

%
$

%
Gross profit:
Performance Improvement Solutions
$
2,568
32.3
%
$
1,760
25.6
%
$
4,383
30.5
%
$
3,952
28.3
%
Workforce Solutions
604
12.6
%
929
13.9
%
1,216
11.4
%
1,665
13.1
%
Total gross profit
$
3,172
24.9
%
$
2,689
19.9
%
$
5,599
22.4
%
$
5,617
21.1
%

The Performance Improvement Solutions segment's gross profit increased by $0.8 million during three months ended June 30, 2022 over three months ended June 30, 2021. The Performance Improvement Solutions segment's gross profit increased by $0.4 million during six months ended June 30, 2022 over six months ended June 30, 2021. The increase is primarily related to an increase in large simulator build and upgrade projectsawarded this year.

The Workforce Solutions segment's gross profit decreased by $0.3 million during three months ended June 30, 2022 over the three months ended June 30, 2021. The Workforce Solutions segment's gross profit decreased by $0.4 million during the six months ended June 30, 2022 over the six months ended June 30, 2021. The decrease in the three months and six months ended June 30, 2022 was primarily due to the reduction in the demand from existing customers for additional workforce professionals.

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Table of Contents
Selling, general and administrative expenses ("SG&A")

Selling, general and administrative (SG&A) expenses totaled $4.4 million and $3.5 million for the six months ended June 30, 2022 and 2021, respectively. Selling, general and administrative (SG&A) expenses totaled $8.9 million and $7.3 million for the six months ended June 30, 2022 and 2021, respectively. Fluctuations in the components of SG&A spending were as follows.

Three months ended
Six months ended
(in thousands)
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
Corporate charges
$
3,375
$
2,632
$
6,857
$
5,390
Business development
721
749
1,560
1,516
Facility operation & maintenance (O&M)
216
268
393
468
Bad debt expense
97
(137
)
97
(133
)
Other
1
10
10
15
Total
$
4,410
$
3,522
$
8,917
$
7,256

Corporate charges

During the three months ended June 30, 2022, corporate charges increased by $0.7 million over the same period of the prior year. During the six months ended June 30, 2022 corporate charges increased by $1.5 million over the same period of the prior year. The increase was primarily due to a $0.6 million increase in stock compensation expense, a $0.4 million increase in indirect labor & burden cost due to increased headcount and a $0.5 million increase in legal fees and other business expenses during the six months ended June 30, 2022.

Business developmentexpenses

Business development expense decreased $28 thousand during the three months ended June 30, 2022 over the same period of the prior year. Business development expense increased $44 thousand during the six months ended June 30, 2022 over the same period of the prior fiscal year. The increase was primarily due to increased recruiting fees and Indirect Labor & Burden due to increased headcount during the six months ended June 30, 2022.

Facility operation & maintenance ("O&M")

Facility O&M expenses decreased $52 thousand for three months ended June 30, 2022, compared to the same period in 2021. Facility O&M expenses decreased $75 thousand for six months ended June 30, 2022, compared to the same period in 2021. The decrease in facility O&M during fiscal 2022 was mainly due to an increased allocation of facility cost from O&M to COGS.

Bad debt (recovery) expense

We recorded $97 thousand and $(137) thousand of bad debt expense (recovery) during the three months ended June 30, 2022 and 2021, respectively. We recorded $97 thousand and $(133) thousand of bad debt expense (recovery) during the six months ended June 30, 2022 and 2021, respectively.

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 $182 thousand and $154 thousand for the three months ended June 30, 2022 and 2021, respectively. Research and development costs totaled $324 thousand and $311 thousand for the six months ended June 30, 2022 and 2021, respectively. The increase was mainly due to higher headcount.

Restructuring

We recorded no restructuring charges for the three and six months ended June 30, 2022. During the three and six months ended June 30, 2021, we recorded restructuring charges of $0 thousand and $808 thousand, respectively. The decrease was mainly due to final charges related to the liquidation of our Sweden operations during the prior period, pursuant to our foreign restructuring plan.

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Table of Contents
Depreciation

We recorded depreciation expense of $72 thousand and $71 thousand for the three months ended June 30, 2022 and 2021, respectively. Depreciation expense was $144 thousand and $147 thousand for the six months ended June 30, 2022 and 2021, respectively. The reduction of $3 thousand for the six months ended June 30, 2022 over the same period in 2021 was due primarily to assets becoming fully depreciated in 2022.

Amortization of intangible assets

Amortization expense related to definite-lived intangible assets totaled $231 thousand and $303 thousand for the three months ended June 30, 2022 and 2021, respectively, and $491 thousand and $643 thousand for the six months ended June 30, 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.

Interest expense, net

Interest expense totaled $358 thousand and $49 thousand for the three months ended June 30, 2022 and 2021, respectively. Interest expense totaled $506 thousand and $103 thousand for the six months ended June 30, 2022 and 2021, respectively. The increase for the three and six month periods was due to an increase in total indebtedness compared to prior period.

Other (loss) income, net

For the three months ended June 30, 2022 and 2021, we recognized other (loss) income, net of $(0.1) million and $4.6 million, respectively. For the six months ended June 30, 2022 and 2021, we recognized other income, net of $(0.1) million and $4.6 million, respectively. The decrease was primarily due to the recording of $5.1 million Employee Retention Credit during the 2021 period offset by a VAT write-off of $0.5 million. 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 were informed by our tax advisor that this VAT refund was no longer collectable.

Income tax (benefit) expense

Income tax expense for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax benefit of $(57) thousand for the three months ended June 30,2022 was comprised mainly of current foreign tax benefit and state tax expense. The total income tax benefit of $(4) thousand for the three months ended June 30, 2021was comprised mainly of foreign tax benefit and state tax expense. Total income tax expense of $110 thousand for the six months ended June 30, 2022 was comprised mainly of current foreign and state tax expense and deferred federal and state tax expense related to the portion of goodwill which cannot be offset by deferred tax assets. Total tax benefit of $(39) thousand for the six months ended June 30, 2021 was comprised mainly of foreign tax benefit and state tax expense.

Our income effective tax rate was 3.9% and (2.3)% for the three and six months ended June 30, 2022, respectively. For the three and six months ended June 30, 2022, the difference between our income tax expense and (benefit), at an effective tax rate of 3.9% and (2.3)% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. entity, the permanent disallowance of interest expense related to disqualified debt, and discrete item adjustments for U.S. and foreign taxes.

33
Table of Contents
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. Our most significant estimates relate to revenue recognition on contracts with customers, product warranties, valuation of goodwill and intangible assets acquired, valuation of stock-based compensation awards and the recoverability of deferred tax assets. These critical accounting policies and estimates are discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in our most recent Annual Report on Form 10-K, filed with the SEC on March 31, 2022. In addition, in the quarter ended March 31, 2022, we established mark-to-market liabilities related to certain common stock purchase warrants and certain embedded features included in our convertible debt. The fair values of these are estimated upon issuance and at each reporting period thereafter. For all accounting policies described in this document, management cautions that future events rarely develop exactly as forecasted and even our best estimates may require adjustment as facts and circumstances change.

Liquidity and Capital Resources

As of June 30, 2022, our cash, cash equivalents and restricted cash totaled $6.9 million, compared to $3.6 million as of December 31, 2021.

As of June 30, 2022, we have long-term restricted cash of $1.0 million. 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.

For the six months ended June 30, 2022 and 2021, net cash provided by operating activities were $1.6 million and net cash used in operating activities were $1.1 million, respectively. The increase in cash flows provided by operating activities was primarily driven by ERC refunds and increased collections in the six months ended June 30, 2022 and slower billing in the first half of 2021.

Net cash used in investing activities totaled $0.3 million and 0.5 million for the six months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022 and 2021, net cash provided by financing activities was $2.2 million and net cash used in financing activities was $1.3 million, respectively. The increase in cash provided by financing activities of $3.4 million was primarily driven by $4.8 million of proceeds received from issuance of Convertible Note, offset by a $1.8 million repayment of the line of credit during the six months ended June 30, 2022.

Paycheck Protection Program Loan

We applied for and, on April 23, 2020, received the PPP Loan under the CARES Act, as administered by the SBA (further described in Note 4 to Consolidated Financial Statements). 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.

Credit Facilities

On February 23, 2022, the Company issued a Convertible Note (further described in Note 10 to Consolidated Financial Statements). The proceeds received from the Convertible Note were used to repayin 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. As of June 30, 2022, we had four letters of credit totaling $1.1 million outstanding to certain customers which were secured with restricted cash.

34
Table of Contents
Non-GAAP Financial Measures

Adjusted EBITDA

References to "EBITDA" mean net (loss) income, before considering interest expense, provision for income taxes, depreciation and amortization. References toAdjusted EBITDA excludes employee retention credit, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments and VAT write-off. EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP. Management believes EBITDA and Adjusted EBITDA, in addition to operating profit, net income and other U.S. GAAP measures, are useful to investors to evaluate the Company's results because it excludes certain items that are not directly related to the Company's 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 U.S. GAAP. A reconciliation of non-GAAP EBITDA and Adjusted EBITDA to the most directly comparable U.S. GAAP measure in accordance with SEC Regulation G follows:

Three Months Ended
Six Months Ended
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
Net (loss) income
$
(1,401
)
$
3,231
$
(4,835
)
$
1,026
Interest expense, net
358
49
506
103
Provision for income taxes
(57
)
(4
)
110
(39
)
Depreciation and amortization
387
481
802
994
EBITDA
(713
)
3,757
(3,417
)
2,084
Employee retention credit
-
(5,075
)
-
(5,075
)
Restructuring charges
-
-
-
808
Stock-based compensation expense
693
463
1,101
501
Change in fair value of derivative instruments, net
(695
)
-
(114
)
-
VAT write-off
-
450
-
450
Adjusted EBITDA
$
(715
)
$
(405
)
$
(2,430
)
$
(1,232
)

35
Table of Contents
Adjusted Net Loss and Adjusted Loss per Share Reconciliation

References to Adjusted Net (Loss) Income excludes the employee retention credit, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, VAT write off and amortization of intangible assets related to acquisitions. Adjusted Net Loss and Adjusted Loss per Share (adjusted EPS) are not measures of financial performance under U.S. GAAP. Management believes adjusted net loss and adjusted loss per share, in addition to other U.S. GAAP measures, are useful to investors to evaluate the Company's results because they exclude certain items that are not directly related to the Company's 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, such as stock-based compensation expense. 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 U.S. GAAP. A reconciliation of non-GAAP adjusted net loss and adjusted loss per share to U.S. GAAP net loss, the most directly comparable U.S. GAAP financial measure, is as follows:

(in thousands)
Three Months Ended
Six Months Ended
June 30, 2022
June 30, 2021
June 30,
2022
June 30,
2021
Net (loss) income
$
(1,401
)
$
3,231
$
(4,835
)
$
1,026
Employee retention credit
-
(5,075
)
-
(5,075
)
Restructuring charges
-
-
-
808
Stock-based compensation expense
693
463
1,101
501
Change in fair value of derivative instruments, net
(695
)
-
(114
)
-
VAT write-off
-
450
-
450
Amortization of intangible assets related to acquisitions
231
303
491
643
Adjusted net loss
$
(1,172
)
$
(628
)
$
(3,357
)
$
(1,647
)
Adjusted net loss per common share - diluted
$
(0.06
)
$
(0.03
)
$
(0.16
)
$
(0.08
)
Weighted average shares outstanding used to compute adjusted net loss per share - diluted(1)
21,033,447
20,647,426
21,006,910
20,638,116

(1) During the three and six months ended June 30, 2022, we reported a U.S. GAAP net loss and an adjusted net loss. Accordingly there was no dilutive shares from RSUs included in the adjusted net loss per share calculation that were considered anti-dilutive when calculating the net loss per share.
(1) During the three and six months ended June 30, 2021, we reported a GAAP net income and an adjusted net loss. Accordingly there were 54,577 of dilutive shares that were excluded in the adjusted net loss per share calculation that were included when calculating the diluted net income per common share for the three months ended June 30, 2021.

Item 3.
Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

36
Table of Contents
Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report and our annual report, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective; we are currently in remediation of our internal controls to address material weaknesses identified in our Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022, and in our form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 15, 2022.

Through management's evaluation of controls as of December 31, 2021 it was determined that the material weakness related to management's review of reconciliations over unbilled receivables and billings in excess of revenue earned were unremediated. In the course of our assessment of the internal control over financial reporting as of March 31, 2022, we identified an additional material weakness in our control environment related to the review of the financial statements. No additional material weaknesses were identified in the course of our assessment of our internal controls as of June 30, 2022, and we continue to remediate the material weaknesses identified as of December 31, 2021, and as of March 31, 2022.

Our remediation of the remaining control weakness from 2021 included the hiring of additional skilled personnel to prepare and review reconciliations over unbilled receivables and billings in excess of revenue earned and to continue to enhance our processes to reconcile, review, and evaluate the unbilled receivables and billing in excess of revenue accounts on a monthly basis. In the interim, we will utilize members of the financial management team to perform the review of such reconciliations. As it relates to the control weakness identified in the period ended March 31, 2022, remediation and testing will be performed over the review of financial statements with focused attention on proper presentation of elements of the financial statements. Remediation procedures will include developing enhanced documentation of review steps performed prior to distributing financial statements for reporting. As well as concluding on the financial presentation for items noted on a list of significant and unusual transactions identified for the respective reporting period.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Limitation of Effectiveness of Controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

37
Table of Contents
PART II - OTHER INFORMATION

Item 1.
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 1A.
Risk Factors

The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.
Defaults Upon Senior Securities

None

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

38
Table of Contents
Item 6.
Exhibits

31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002, filed herewith.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase

39
Table of Contents
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 15, 2022
GSE SYSTEMS, INC.
/S/ KYLE J. LOUDERMILK
Kyle J. Loudermilk
Chief Executive Officer
(Principal Executive Officer)
/S/ EMMETT A. PEPE
Emmett A. Pepe
Chief Financial Officer
(Principal Financial and Accounting Officer)


40