GSE SYSTEMS INC - Quarter Report: 2021 September (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 September 30, 2021

		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, Columbia MD		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, $.01 Par Value		GVP		The NASDAQ Capital Market

There were 20,900,225 shares of common stock, with a par value of $0.01 per share outstanding as of October 31, 2021.

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 September 30, 2021 (unaudited) and December 31, 2020	3
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	4
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2021 and 2020	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	6
	Unaudited Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2021 and 2020	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	37
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3	Defaults Upon Senior Securities	40
Item 4	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41

Table of Contents

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30, 2021			December 31, 2020
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,043		$	6,702
Contract receivables, net		12,529			10,494
Prepaid expenses and other current assets		4,781			1,554
Total current assets		21,353			18,750

Equipment, software and leasehold improvements, net		792			616
Software development costs, net		575			630
Goodwill		13,339			13,339
Intangible assets, net		3,305			4,234
Operating lease right-of-use assets, net		1,161			1,562
Other assets		58			59
Total assets	$	40,583		$	39,190

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	2,067		$	3,006
PPP Loan, current portion		-			5,034
Accounts payable		1,210			570
Accrued expenses		1,306			1,297
Accrued compensation		2,214			1,505
Billings in excess of revenue earned		4,461			5,285
Accrued warranty		560			665
Income taxes payable		1,597			1,621
Other current liabilities		1,202			2,498
Total current liabilities		14,617			21,481

PPP Loan, noncurrent portion		-			5,034
Operating lease liabilities noncurrent		1,036			1,831
Other noncurrent liabilities		256			339
Total liabilities		15,909			28,685

Commitments and contingencies (Note 16)

Stockholders’ equity:
Preferred stock $0.01 par value; 2,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock $0.01 par value; 60,000,000 shares authorized, 22,499,136 and 22,192,569 shares issued, 20,900,225 and 20,593,658 shares outstanding, respectively		225			222
Additional paid-in capital		80,280			79,687
Accumulated deficit		(52,727	)		(65,191	)
Accumulated other comprehensive loss		(105	)		(1,214	)
Treasury stock at cost, 1,598,911 shares		(2,999	)		(2,999	)
Total stockholders’ equity		24,674			10,505
Total liabilities and stockholders’ equity	$	40,583		$	39,190

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

Table of Contents

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three months ended						Nine months ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020

Revenue	$	14,686		$	12,922		$	41,312		$	44,967
Cost of revenue		11,503			9,603			32,512			33,971
Gross profit		3,183			3,319			8,800			10,996
Operating expenses:
Selling, general and administrative		3,265			2,878			10,521			12,548
Research and development		149			137			460			526
Restructuring charges		(10	)		185			798			195
Loss on impairment		3			-			3			4,302
Depreciation		69			76			216			254
Amortization of intangible assets		286			414			929			1,528
Total operating expenses		3,762			3,690			12,927			19,353
Operating loss		(579	)		(371	)		(4,127	)		(8,357	)

Interest expense, net		(32	)		(128	)		(135	)		(556	)
Gain on derivative instruments, net		-			31			-			35
Other income, net		12,215			(77	)		16,853			(24	)
Income (loss) before income taxes		11,604			(545	)		12,591			(8,902	)
Provision for income taxes		166			116			127			166
Net income (loss)	$	11,438		$	(661	)	$	12,464		$	(9,068	)

Net income (loss) per common share - basic and diluted	$	0.55		$	(0.03	)	$	0.60		$	(0.44	)

Weighted average shares outstanding used to compute net income (loss) per share - basic		20,863,479			20,563,452			20,714,068			20,438,571

Weighted average shares outstanding used to compute net income (loss) per share - diluted		20,863,479			20,563,452			20,714,068			20,438,571

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

Table of Contents

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	Three months ended								Nine months ended
	September 30, 2021				September 30, 2020				September 30, 2021			September 30, 2020
Net income (loss)		$	11,438			$	(661	)		$	12,464		$	(9,068	)
Cumulative translation adjustment			(23	)			84				1,109			104
Comprehensive income (loss)		$	11,415			$	(577	)		$	13,573		$	(8,964	)

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

Table of Contents

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock													Treasury Stock
Three Months Ended	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares			Amount			Total

Balance, July 1, 2021		22,461	$	225	$	80,024		$	(64,165	)	$	(82	)		(1,599	)	$	(2,999	)	$	13,003

Stock-based compensation expense		-		-		283			-			-			-			-			283
Common stock issued for RSUs vested		38		-		-			-			-			-			-			-
Shares withheld to pay taxes		-		-		(27	)		-			-			-			-			(27	)
Foreign currency translation adjustment		-		-		-			-			(23	)		-			-			(23	)
Net income		-		-		-			11,438			-			-			-			11,438

Balance, September 30, 2021		22,499	$	225	$	80,280		$	(52,727	)	$	(105	)		(1,599	)	$	(2,999	)	$	24,674

Balance, July 1, 2020		22,150	$	221	$	79,676		$	(63,061	)	$	(1,826	)		(1,599	)	$	(2,999	)	$	12,011

Stock-based compensation expense		-		-		33			-			-			-			-			33
Common stock issued for RSUs vested		70		1		(1	)		-			-			-			-			-
Shares withheld to pay taxes		-		-		(32	)		-			-			-			-			(32	)
Foreign currency translation adjustment		-		-		-			-			84			-			-			84
Net loss		-		-		-			(661	)		-			-			-			(661	)

Balance, September 30, 2020		22,220	$	222	$	79,676		$	(63,722	)	$	(1,742	)		(1,599	)	$	(2,999	)	$	11,435

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

Table of Contents

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock													Treasury Stock
Nine Months Ended	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares			Amount			Total

Balance, January 1, 2021		22,193	$	222	$	79,687		$	(65,191	)	$	(1,214	)		(1,599	)	$	(2,999	)	$	10,505

Stock-based compensation expense		-		-		784			-			-			-			-			784
Common stock issued for RSUs vested		306		3		(3	)		-			-			-			-			-
Shares withheld to pay taxes		-		-		(188	)		-			-			-			-			(188	)
Foreign currency translation adjustment		-		-		-			-			1,109			-			-			1,109
Net income		-		-		-			12,464			-			-			-			12,464

Balance, September 30, 2021		22,499	$	225	$	80,280		$	(52,727	)	$	(105	)		(1,599	)	$	(2,999	)	$	24,674

Balance, January 1, 2020		21,839	$	218	$	79,400		$	(54,654	)	$	(1,846	)		(1,599	)	$	(2,999	)	$	20,119

Stock-based compensation expense		-		-		357			-			-			-			-			357
Common stock issued for RSUs vested		381		4		(4	)		-			-			-			-			-
Shares withheld to pay taxes		-		-		(77	)		-			-			-			-			(77	)
Foreign currency translation adjustment		-		-		-			-			104			-			-			104
Net loss		-		-		-			(9,068	)		-			-			-			(9,068	)

Balance, September 30, 2020		22,220	$	222	$	79,676		$	(63,722	)	$	(1,742	)		(1,599	)	$	(2,999	)	$	11,435

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

Table of Contents

GSE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months ended
	September 30, 2021			September 30, 2020
Cash flows from operating activities:
Net income (loss)	$	12,464		$	(9,068	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Loss on impairment		3			4,302
Depreciation		216			254
Amortization of intangible assets		929			1,528
Amortization of capitalized software development costs		281			248
Amortization of deferred financing costs		8			155
Gain on PPP loan forgiveness		(10,127	)		-
Stock-based compensation expense		784			357
Bad debt (recovery) expense		(133	)		103
Gain on derivative instruments, net		-			(35	)
Deferred income taxes		-			57
Gain on sale of equipment		-			(5	)
Changes in assets and liabilities:
Contract receivables, net		(1,888	)		6,114
Prepaid expenses and other assets		(5,356	)		983
Accounts payable, accrued compensation and accrued expenses		1,409			(1,536	)
Billings in excess of revenue earned		(831	)		(1,195	)
Accrued warranty		(192	)		(285	)
Other liabilities		2,147			(332	)
Net cash (used in) provided by operating activities		(286	)		1,645

Cash flows from investing activities:
Capital expenditures		(392	)		(4	)
Proceeds from sale of equipment		-			11
Capitalized software development costs		(226	)		(250	)
Net cash used in investing activities		(618	)		(243	)

Cash flows from financing activities:
Proceeds from line of credit		800			4,200
Repayment of line of credit		(1,739	)		(694	)
Repayment of insurance premium		(609	)		-
Repayment of long-term debt		-			(18,480	)
Proceeds from Paycheck Protection Program Loan		-			10,000
Interest rate swap		-			(209	)
Shares withheld to pay taxes		(188	)		(77	)
Deferred financing costs		-			(80	)
Net cash used in financing activities		(1,736	)		(5,340	)
Effect of exchange rate changes on cash		(19	)		(93	)
Net decrease in cash and cash equivalents		(2,659	)		(4,031	)
Cash, cash equivalents at beginning of the period		6,702			11,691
Cash and cash equivalents at the end of the period	$	4,043		$	7,660

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

Table of Contents

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying balance sheet data for the year ended December 31, 2020 was derived from our audited financial statements, but it does not include all disclosures required by U.S. GAAP.

The results of operations for interim periods are not necessarily an indication of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission on April 13, 2021.

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

COVID-19

GSE employees began working remotely during the first quarter of 2020 due to the COVID-19 pandemic and will continue to do so when practical and as mandated by local, state and federal directives and regulations. Employees almost entirely work from home within our Performance Improvement Solutions (“Performance”) segment, except when required to be at the client site for essential project work. Our Performance contracts, which are considered an essential service, are permitted to and mostly continue without pause; however, we have experienced certain delays in new business. For our staff augmentation business, we have seen certain contracts for our Workforce Solutions customers paused or delayed as clients reduce their own on-premise workforces to the minimum operating levels in response to the pandemic; as a result, our Workforce Solutions segment has experienced a decline in its billable employee base since the start of the pandemic. Although we cannot fully estimate the length or gravity of the impact of the COVID-19 pandemic to our business at this time, we have experienced delays in commencing new projects and thus our ability to recognize revenue has been delayed for some contracts. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started to reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. We continue to closely monitor our operating expenses as a result of contract delays and have made adjustments to keep our gross profit at a sustainable level.

Table of Contents

Going Concern

In 2020, we had several projects (primarily in our Workforce Solutions business segment) delayed and new orders postponed because of the COVID-19 pandemic. We amended our credit facility with Citizens Bank, N.A. (“the Bank”) in 2020 based upon expected covenant violations and have been required to curtail term debt in exchange for revised financial covenants. Scheduled term loan repayments and agreed upon curtailment required us to use $18.5 million in available cash to pay-off our term debt in 2020. We signed a Ninth Amendment and Reaffirmation Agreement (the “Ninth Amendment”) with the Bank on March 29, 2021 to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and to adjust the thresholds for future covenants to ease the risk of non-compliance experienced in previous quarters. We have experienced delays in commencing new projects and thus our ability to earn revenue has been delayed for these projects. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started to reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent to June 30, 2021 and we project breaching the Leverage and Fixed Charges ratio covenant (See Note 10). Our working capital position on September 30, 2021 was $6.7 million. On August 5, 2021, the Company received approval from Small Business Administration (“SBA”) that the PPP loan including all accrued interest thereon was forgiven.

The COVID-19 macroeconomic environment is considered fluid and although recovery is anticipated to steadily occur over the next 12 months, issues that could result from the other COVID variants could cause a further decline in revenue or stress our ability to meet covenant requirements. Jurisdictions where our businesses operate across the country are pushing toward re-opening places of business and government support, through the American Rescue Plan Act of 2021, will continue to support the broader economy. We have recorded $5.0 million of employee retention credits (“ERCs”) to be refunded from the IRS and recorded an additional $2.2 million of ERCs from unremitted payroll taxes made available under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). However, the timing of these elements taking place are not predictable and may not serve to mitigate our situation or improve the Company’s health. Following the Ninth Amendment, our new covenant compliance remains dependent on meeting future projections, which are subject to the variability and unknown speed and extent of post-COVID-19 recovery. On November 12, 2021, due to the violation of Q3 2021 leverage ratio, we signed the Tenth Amendment and Reaffirmation Agreement with an effective date of November 12, 2021 to adjust the thresholds for future covenants to ease the risk of non-compliance (See Note 17).

The Company’s management continues to explore raising capital through its access to the public markets or entering into alternative financing arrangements. Furthermore, while recovery has been slower to materialize than expected the Company has experienced an improvement in orders as well as a higher rate of opportunities across business segments. Future negative trends in operating results could be mitigated through various cost cutting measures including adjustments to headcount or compensation, vendor augmentation or delay of investment initiatives in the Company’s corporate office.

These actions, which are further supported by positively trending macroeconomic conditions, and the potential of recovery of business and orders may ease the risk of further bank covenant violations. However, when considering the unpredictability of the above, there continues to be substantial doubt the Company will continue as a going concern.

Note 2 - Recent Accounting Pronouncements

Accounting pronouncements recently adopted

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities, Investments – Equity Method and Joint Ventures, and Derivatives and Hedging, which provides clarity for companies that hold equity securities at cost to first update the fair value of an investment, immediately prior to applying the Equity Method of Accounting; or clarity for companies that enter into forward contracts to purchase additional shares of an equity security that would then require the investee to account for the investment via the Equity Method. This ASU is applicable for public companies starting with fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company adopted ASU 2020-01 on January 1, 2021. This standard did not have a significant impact to our consolidated financial statements since the Company does not currently hold any investments at cost.

In September 2020, the FASB issued ASU 2020-10, Codification Improvements, which is part of an ongoing attempt to improve the consistency of the codification. Previously the option to disclose information in the footnotes to the financial statements was in one of two sections: Disclosure Section (Section 50) or Other Presentation Matters (Section 45). ASU 2020-10 conforms the disclosure requirements into Section 50 and provides additional information on specific guidance that was previously unclear or not included in the codification. This ASU is applicable for public companies starting with fiscal years beginning after December 15, 2020, with early adoption available for interim and annual financial statements not already filed and using the retrospective approach. however, the FASB does not believe that this should change any of the current reporting or disclosure requirements. The Company adopted ASU 2020-10 on January 1, 2021. The adoption of this standard did not have a material impact to our consolidated financial statements.

Table of Contents

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 per Share

Basic earnings per share is based on the weighted average number of outstanding common shares for the period. Diluted earnings per share adjusts the weighted average shares outstanding for the potential dilution that could occur if outstanding vested stock options were exercised. Basic and diluted earnings per share are based on the weighted average number of outstanding shares for the period.

The number of common shares and common share equivalents used in the determination of basic and diluted loss per common share were as follows:

(in thousands, except for share data)	Three months ended					Nine months ended
	September 30, 2021		September 30, 2020			September 30, 2021		September 30, 2020
Numerator:
Net income (loss) attributed to common stockholders	$	11,438	$	(661	)	$	12,464	$	(9,068	)

Denominator:
Weighted-average shares outstanding for basic earnings per share		20,863,479		20,563,452			20,714,068		20,438,571

Effect of dilutive securities:
Employee RSUs		-		-			-		-
Adjusted weighted-average shares outstanding and assumed conversions for diluted earnings per share		20,863,479		20,563,452			20,714,068		20,438,571

Shares related to dilutive securities excluded because inclusion would be anti-dilutive		14,229		66,261			77,871		12,172

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 CARES Act. to extend liquidity to small businesses and assist in retaining employees during the COVID-19 pandemic. On April 23, 2020, GSE was approved for and on the next day received a $10 million loan pursuant to a Paycheck Protection Program Note (the “PPP Loan”) from Citizens Bank, N.A. Pursuant to the CARES Act, the PPP Loan was guaranteed by the U.S. Small Business Administration (“SBA”) and eligible for forgiveness under certain circumstances. Repayment of the PPP Loan was scheduled to begin on August 9, 2021. We applied for forgiveness in Q1 of 2021, and, on August 5, 2021, the Company was notified that the PPP loan was forgiven. We recognized other income of $10.1 million related to this forgiveness in the three and nine months ended September 30, 2021.

Employee Retention Credits (ERC)

Employee retention tax credits, made available under the CARES Act, allow eligible employers to claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees, initially from March 27, 2020 until June 30, 2021, and now extended through September 30, 2021. For the third quarter of 2021, we have applied for a refund of $1.0 million from the IRS with the timely filing of Form 941 and have recognized a benefit of $1.4 million from unremitted payroll taxes as allowable. For the nine months ended September 30, 2021 the Company has applied for a total of $5.0 million from the IRS with the timely filing of Form 941 and 941-X and recognized a benefit of $2.2 million from unremitted payroll taxes as allowable. We recorded other income of $2.1 million and $7.2 million related to the employee retention tax credits earned in the three and nine months ended September 30, 2021, respectively. As of September 30, 2021, the Company received employee retention tax credit refunds totaling $0.7 million with remaining outstanding refunds receivable of $4.3 million.

Note 5 - Contract Receivables

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

The components of contract receivables were as follows:

(in thousands)	September 30, 2021			December 31, 2020

Billed receivables	$	4,521		$	5,694
Unbilled receivables		8,221			5,160
Allowance for doubtful accounts		(213	)		(360	)
Total contract receivables, net	$	12,529		$	10,494

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

During the nine months ended September 30, 2021 and 2020, we recorded bad debt (recovery) expense of $(133) thousand and $103 thousand, respectively.

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

As of September 30, 2021, we had one customer that accounted for 10% of our consolidated contract receivables. As of December 31, 2020, we had no customer that accounted for over 10% of our consolidated contract receivables.

Table of Contents

Note 6 - Goodwill and Intangible Assets

During the three months ended March 31, 2020, we recognized an impairment charge of $4.3 million of certain intangible assets as a result of the valuation analysis performed. The need for the valuation analysis was triggered by the macroeconomic impact of the COVID-19 pandemic on our operations. This analysis did not indicate impairment of goodwill.

Our Step 1 goodwill impairment analysis includes the use of a discounted cash flow model that requires management to make assumptions regarding estimates of growth rates used to forecast revenue, operating margin and terminal value as well as determining the appropriate risk-adjusted discount rates and other factors that impact fair value determinations.

The Company monitors operating results and events and circumstances that may indicate potential impairment of intangible assets. The Company performs an annual intangible assets impairment analysis at the year end, which includes the use of undiscounted cash flow and discounted cash flow models that requires management to make assumptions regarding estimates of growth rates used to forecast revenue, operating margin and terminal value as well as determining the appropriate risk adjusted discount rates and other factors that impact fair value determinations. The current assessment has no indication of impairment.

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

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

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

(in thousands)	As of December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Impact of Impairment			Net
Amortized intangible assets:
Customer relationships	$	11,730	$	(5,504	)	$	(3,102	)	$	3,124
Trade names		2,467		(1,020	)		(778	)		669
Developed technology		471		(471	)		-			-
Non-contractual customer relationships		433		(433	)		-			-
Noncompete agreement		949		(336	)		(422	)		191
Alliance agreement		527		(277	)		-			250
Others		167		(167	)		-			-
Total	$	16,744	$	(8,208	)	$	(4,302	)	$	4,234

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.4 million for the three months ended September 30, 2021 and 2020, respectively, and $0.9 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively. The following table shows the estimated amortization expense of the definite-lived intangible assets for the next five years and thereafter:

(in thousands)
Years ended December 31:
2021 remainder	$	285
2022		910
2023		640
2024		435
2025		335
Thereafter		700
Total	$	3,305

Table of Contents

Note 7 - Equipment, Software and Leasehold Improvements

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

(in thousands)
	September 30, 2021			December 31, 2020
Computer and equipment	$	2,246		$	2,229
Software		2,059			1,695
Leasehold improvements		659			660
Furniture and fixtures		839			848
		5,803			5,432
Accumulated depreciation		(5,011	)		(4,816	)
Equipment, software and leasehold improvements, net	$	792		$	616

Depreciation expense was $216 thousand and $254 thousand for the nine months ended September 30, 2021 and 2020, respectively. Capitalization of internal-use software cost of $50 thousand and $365 thousand were recorded in software for the three and nine months ended September 30, 2021.

Note 8 - Fair Value of Financial Instruments

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

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

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

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

Level 3: inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

As of September 30, 2021 and December 31, 2020, we considered the recorded value of certain of our financial assets and liabilities, which consist primarily of cash and cash equivalents, contract receivable and accounts payable, to approximate fair value based upon their short-term nature.

For the nine months ended September 30, 2021, we did not have any transfers into or out of Level 3.

Table of Contents

The following table presents assets measured at fair value at September 30, 2021:

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Money market funds	$	15	$	-	$	-	$	15
Total assets		15		-		-		15

The following table presents assets and liabilities measured at fair value at December 31, 2020:

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Money market funds	$	435	$	-	$	-	$	435
Total assets	$	435	$	-	$	-	$	435

Note 9 - Stock-Based Compensation

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

During the three and nine months ended September 30, 2021, we granted approximately 20,000 and 824,661 time-based RSUs with an aggregate fair value of approximately $30 thousand and $1.4 million, respectively. During the three and nine months ended September 30, 2020, we granted approximately 130,000 and 170,000 time-based RSUs with an aggregate fair value of $0.1 million and $0.2 million, respectively. A portion of the time-based RSUs vest quarterly in equal amounts over the course of eight quarters, and the remainder vest annually in equal amounts over the course of one to three years.

GSE’s 1995 long-term incentive program (“LTIP”) provides for the issuance of performance-vesting and time-vesting restricted stock units to certain executives and employees. Vesting of the performance-vesting restricted stock units (“PRSU”) is contingent upon the employee’s continued employment and the Company’s achievement of certain performance goals during designated performance periods as established by the Compensation Committee of the Company’s Board of Directors. We recognize compensation expense, net of estimated forfeitures, for PRSU’s on a straight-line basis over the performance period based on the probable outcome of achievement of the financial targets. At the end of each reporting period, we estimate the number of PRSUs that are expected to vest, based on the probability and extent to which the performance goals will be met, and take into account these estimates when calculating the expense for the period. If the number of shares expected to be earned changes during the performance period, we make a cumulative adjustment to compensation expense based on the revised number of shares expected to be earned.

Table of Contents

During the three and nine months ended September 30, 2021, we did not grant any performance-based RSUs to employees.

During the three months ended September 30, 2020, we did not grant any performance-based RSUs to employees and during the nine months ended September 30, 2020, we granted approximately 512,000 performance-based RSUs to key employees with an aggregate fair-value of $0.6 million. These awards vest over three years based upon achieving certain financial metrics achieved during fiscal 2022 for revenue and Adjusted EBITDA. The Company did not grant any stock options for three and nine months ended September 30, 2021 and 2020.

Note 10 - Debt

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

Due to a projected violation of the leverage ratio at the end of the first quarter, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021. Pursuant to the Ninth Amendment and Reaffirmation Agreement, the Bank waived the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and we agreed, for each quarter thereafter, that the fixed charge coverage ratio shall not be less than 1.10 to 1.00. In addition, we agreed to not exceed a maximum leverage ratio starting on September 30, 2021 as follows: (i) 3.25 to 1.00 for the period ending September 30, 2021; (ii) 3.00 to 1.00 for the period ending on December 31, 2021, (iii) 2.75 to 1.00 for the period ending March 31, 2022; (iv) 2.50 to 1.00 for the period ending June 30, 2022 and (v) 2.00 to 1.00 for the periods ending September 30, 2022 and each December 31st, March 31st, June 30th and September 30th thereafter. We were also required to maintain a minimum of $2.5 million in aggregate USA liquidity. As part of the amendment, we agreed, at closing, (i) to make a $0.5 million pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75 thousand to reduce the RLOC. We incurred $25 thousand fees related to this amendment during the year ended December 31, 2020.

Following the Ninth Amendment and Reaffirmation Agreement, we experienced continued delays in commencing new projects and thus our ability to recognize revenue has been delayed for some contracts. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started to reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan has resulted in our breaching the Minimum Liquidity ratio subsequent to both June 30, 2021 and September 30, 2021 as well as a projected breach of the Leverage and Fixed Charges ratio covenants.

We have experienced delays in commencing new projects and thus our ability to recognize revenue has been delayed for some contracts. Reductions in orders and other negative changes to orders experienced at the beginning of the pandemic have started to reverse in 2021, but not at the level expected as ongoing COVID concerns continue to hinder the pace of recovery. This deterioration in the recovery plan has resulted in breaching the Minimum Liquidity ratio subsequent to both June 30, 2021 and at September 30, 2021 as well as projected breaching of the Leverage and Fixed Charges ratio covenant. On November 12, 2021, due to these covenant violations, we signed the Tenth Amendment and Reaffirmation Agreement with an effective date of November 12, 2021 to adjust the thresholds for future covenants to ease the risk of non-compliance (See Note 17).

Table of Contents

Revolving Line of Credit (“RLOC”)

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

We intend to continue using the RLOC for short-term working capital needs when capacity is available and for the issuance of letters of credit in connection with business operations, provided we remain in compliance with our covenants. Letter of credit issuance fees range between 1.25% and 2.00% of the value of the letter of credit, depending on our overall leverage ratio. We pay a fee for unused RLOC quarterly based on the average daily unused balance.

Note 11 - Product Warranty

We accrue for estimated warranty costs at the time the related revenue is recognized and based on historical experience and projected claims. Our System Design and Build contracts generally include a one year base warranty on the systems. The portion of our warranty provision expected to be incurred within 12 months is classified as current within accrued warranty and totals $560 thousand, and the remaining $171 thousand is classified as long-term within other liabilities.

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

(in thousands)
Balance at January 1, 2021	$	922
Current period recovery		(92	)
Current period claims		(100	)
Currency adjustment		1
Balance at September 30, 2021	$	731

Note 12 - Revenue

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. We primarily generate revenue through three distinct revenue streams: (1) System Design and Build (“SDB”), (2) Software and (3) Training and Consulting Services across our Performance and Workforce Solutions segments. We recognize revenue from SDB and software contracts mainly through our Performance segment. We recognize training and consulting service contracts through both segments.

The following table represents a disaggregation of revenue by type of goods or services for three and nine months ended September 30, 2021 and 2020, along with the reporting segment for each category:

(in thousands)	Three months ended				Nine months ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Performance Improvement Solutions segment
System Design and Build	$	1,623	$	2,473	$	4,712	$	9,535
Over time		1,623		2,473		4,712		9,535

Software and Support		814		942		2,393		2,575
Point in time		52		444		274		1,084
Over time		762		498		2,119		1,491

Training and Consulting Services		4,937		3,842		14,212		13,130
Point in time		42		19		126		48
Over time		4,895		3,823		14,086		13,082

Workforce Solutions
Training and Consulting Services		7,312		5,665		19,995		19,727
Point in time		126		-		375		-
Over time		7,186		5,665		19,620		19,727

Total revenue	$	14,686	$	12,922	$	41,312	$	44,967

Table of Contents

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

(in thousands)	Three months ended				Nine months ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Revenue recognized in the period from amounts included in billings in excess of revenue earned at the beginning of the period	$	835	$	1,520	$	4,139	$	6,221

Note 13 - Income Taxes

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

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

Our income tax expense for the interim periods presented is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. Total income tax benefit for the nine months ended September 30, 2021 was comprised mainly of foreign and state tax expense. Total income tax expense for the nine months ended September 30, 2020 was comprised mainly of foreign and state tax expense.

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

Because of our net operating loss carryforwards, we are subject to U.S. federal and state income tax examinations from the year 2000 and forward and are subject to foreign tax examinations by tax authorities for years 2015 and forward.

Table of Contents

An uncertain tax position taken or expected to be taken in a tax return is recognized in the consolidated financial statements when it is more likely than not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Interest and penalties related to income taxes are accounted for as income tax expense. The Company has an estimated $0.9 million of tax benefit that will be realized in the fourth quarter of 2021 upon the expiration of the statute of limitations of the tax year in which the uncertain tax position was taken.

We recognize deferred tax assets to the extent that it is believed that these assets are more likely than not to be realized. We have evaluated all positive and negative evidence and determined that we will continue to assess a full valuation allowance on our U.S., China, and Slovakia net deferred assets as of September 30, 2021. We have determined that it is not more likely than not that the Company will realize the benefits of its deferred taxes in the U.S. and foreign jurisdictions.

Note 14 - Leases

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

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

		As of
Operating Leases	Classification	September 30, 2021		December 31, 2020

Leased Assets
Operating lease - right of use assets	Long term assets	$	1,161	$	1,562

Lease Liabilities
Operating lease liabilities - Current	Other current liabilities		1,085		1,138
Operating lease liabilities	Long term liabilities		1,036		1,831
		$	2,121	$	2,969

We executed a sublease agreement with a tenant to sublease 850 square feet from the Sykesville office space on September 13, 2021. This agreement is in addition to the two previous subleases for 3,650 square feet and 3,822 square feet entered into on May 1, 2019 and April 1, 2017, respectively. The addition of the third sublease is for a portion of the space previously abandoned in December 2019. The sublease does not relieve us of our primary lease obligation. The lessor agreements are all considered operating leases, maintaining the historical classification of the underlying lease. We do not recognize any underlying assets for the subleases as a lessor of operating leases. The net amount received from the sublease is recorded within selling, general and administrative expenses.

The table below summarizes lease income and expense recorded in the consolidated statements of operations incurred during the three and nine months ended September 30, 2021 and 2020, (in thousands):

		Three months ended						Nine months ended
Lease Cost	Classification	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020

Operating lease cost ⁽¹⁾	Selling, general and administrative expenses	$	179		$	207		$	548		$	625
Short-term leases costs ⁽²⁾	Selling, general and administrative expenses		15			-			45			1
Sublease income⁽³⁾	Selling, general and administrative expenses		(32	)		(33	)		(96	)		(97	)
Net lease cost		$	162		$	174		$	497		$	529

(1) Includes variable lease costs which are immaterial.

(2) Includes leases maturing less than twelve months from the report date.

(3) Sublease portfolio consists of three tenants, which sublease parts of our principal executive office located at 1332 Londontown Blvd, Suite 200, Sykesville, MD.

Table of Contents

The Company is obligated under certain noncancelable operating leases for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of September 30, 2021 are as follows (in thousands):

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

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

Lease Term and Discount Rate	September 30, 2021			December 31, 2020
Weighted-average remaining lease term (years)
Operating leases		2.02			2.64
Weighted-average discount rate
Operating leases		5.00	%		5.00	%

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

(in thousands)	Nine months ended
Cash paid for amounts included in measurement of liabilities	September 30, 2021		September 30, 2020
Operating cash flows used in operating leases	$	958	$	1,015

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.

Table of Contents

Workforce Solutions segment provides specialized workforce solutions primarily to the nuclear industry, working at clients’ facilities. This business is managed through our Hyperspring and Absolute subsidiaries. The business model, management focus, margins and other factors clearly separate this business line from the rest of the GSE product and service portfolio.

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

	Three months ended						Nine months ended
(in thousands)	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020

Revenue:
Performance	$	7,375		$	7,257		$	21,318		$	25,240
Workforce Solutions		7,311			5,665			19,994			19,727
Total revenue		14,686			12,922			41,312			44,967

Operating loss
Performance		(466	)		(74	)		(3,000	)		(2,041	)
Workforce Solutions		(110	)		(1,249	)		(1,124	)		(2,105	)
Litigation		-			952			-			91
Loss on impairment		(3	)		-			(3	)		(4,302	)

Operating loss		(579	)		(371	)		(4,127	)		(8,357	)

Interest expense, net		(32	)		(128	)		(135	)		(556	)
Gain on derivative instruments, net		-			31			-			35
Other income, net		12,215			(77	)		16,853			(24	)
Income (loss) before income taxes	$	11,604		$	(545	)	$	12,591		$	(8,902	)

Note 16 - Commitments and Contingencies

Joyce v. Absolute Consulting, Inc.

On August 17, 2020, Absolute entered into a Settlement Agreement with the plaintiffs, with a maximum settlement amount of $1.5 million, which required Court approval. On September 8, 2020, the Settlement Agreement between Absolute and the plaintiffs was ratified by the Court, and the case was dismissed, although the parties remain bound by the terms of the settlement agreement. Following Court approval, Absolute made an initial payment toward the settlement amount, including legal fees, of $625 thousand. After the passing of an opt-in notice period expired, the final cost of settling this case, including plaintiff’s attorney fees was approximately $1.4 million.

On September 29, 2020, the Company received $1.0 million from a general escrow account, originally set up as part of the Company’s purchase of Absolute during fiscal 2017. The Company presented the loss on Joyce legal settlement and the benefit from the proceeds from the release of escrow from the Absolute transaction in selling, general and administrative expenses, in the amount of $0.5 million for the year ended December 31, 2020.

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, other than as noted above. We expense legal defense costs as incurred.

Table of Contents

Note 17 - Subsequent Events

On November 12, 2021, due to the violation of Q3 2021 leverage ratio, we signed the Tenth Amendment and Reaffirmation Agreement with an effective date of November 12, 2021, 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. RLOC Amount” means (i) $3,500,000 (ii) on each date a payment in the amount of $250,000 is made pursuant to Subsection 2.1.5(d), the RLOC Amount immediately prior to such payment reduced by $250,000 and (iii) on March 31, 2022 and on each June 30, September 30, December 31 and March 31 thereafter, the RLOC Amount immediately prior to each such date reduced by $37,500. In addition, we agreed, by December 31, 2021, we will pay the Bank $250,000 to be applied to the principal amount outstanding under the RLOC. Commencing on March 31, 2022 and on each June 30, September 30, December 31 and March 31 thereafter, we will pay the Bank $75,000 to be applied to the principal amount outstanding under the RLOC. In addition, within the fifth (5th) Business Day after we have received, subsequent to November 1, 2021, Employee Retention Credits in an aggregate amount not less than $500,000, we will pay the Bank $250,000 to be applied to the principal amount outstanding under the RLOC. We are also required to maintain a minimum of $2.25 million in aggregate USA liquidity. We incurred $15 thousand of amendment fee related to this amendment.

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 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 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.

Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

GSE is 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 systematically help clients fill key vacancies in the organization on a short-term basis, 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 GSE serves, namely the power industries, delayed certain essential services and dramatically cut back on non-essential services. Although this impacted GSE, as an essential services provider to an essential industrial base, GSE benefited from maintaining a baseline of business to continue and align itself to the realities of the pandemic. In 2021, the effects of the pandemic are still impacting the end markets we serve, but those effects may be mitigated for a number of factors, including the following: the pandemic largely has had a targeted effect on the population; there now are a number of vaccines in the market being distributed and, despite logistical challenges, making solid 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 the end markets of GSE seem poised to spend to catch up on essential services that had been delayed as a result of the pandemic. In the end of 2020 and through the end of the third quarter of 2021, we have had a number of significant contract wins that have been publicly announced, which we hope will be a harbinger of a more solid 2021 business environment.

As a result of the COVID-19 pandemic, we have sought and obtained support through various business assistance programs. On April 23, 2020, we received $10 million in funds under the Paycheck Protection Program (PPP), a part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The loan was serviced by Citizens Bank, N.A. (the “Bank”), and the application for these funds required us to, in good faith, certify that the current economic uncertainty made the loan necessary to support our ongoing operations. We used funds for payroll and related costs, rent and utilities. The receipt of these funds, and the forgiveness of the PPP Loan attendant to these funds, was dependent on our ability to adhere to the forgiveness criteria. The PPP Loan bore interest at a rate of 1% per annum and matures on April 23, 2022, with the first payment deferred until September 2021. Under the terms of the PPP Loan, certain amounts would be forgiven if they were used in accordance with the CARES Act. On August 5, 2021, the Company was notified that the Small Business Administration ("SBA") had forgiven the PPP loan including all accrued interest thereon was forgiven.

During the second quarter of 2021, we performed analysis to determine our first quarter 2021 eligibility for the Employee Retention Credit available under the CARES Act . We amended certain payroll tax filings and applied for a refund of $2.4 million dollars in April 2021. For the second quarter of 2021, we have applied for a refund of $1.8 million dollars from the IRS with the timely filing of Form 941 and have already recognized a benefit of $0.9 million dollars in value from unremitted payroll taxes as allowable. For the third quarter of 2021, we have applied for a refund of $1.0 million from the IRS with the timely filing of Form 941 and have recognized a benefit of $1.4 million in value from unremitted payroll taxes as allowable.

GSE entered into a contract with a subcontractor to purchase large equipment from Siemens to build a simulator for project SLE-005 in December 2018. The total contract price was about $2.7 million and included VAT taxes of approximately $450 thousand. GSE paid the VAT taxes and had pursued the collection of this VAT refund for a couple of years. In May 2021, we were informed that this VAT refund was no longer collectable. As a result, we wrote off this VAT receivable.

On September 9, 2021, President Biden released his 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). We have been put on notice by both government customers and prime contractors serving government customers of the COVID-19 vaccination requirement. President Biden also directed, on September 9, 2021, 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 an ETS requiring that all employers with 100 or more employees ensure that their employees are fully vaccinated against COVID-19 by January 4, 2022, or tested weekly. Further, by December 5, 2021, employers must comply with all other OSHA ETS vaccine requirements, including providing paid time off for employees to get vaccinated and ensuring that unvaccinated workers wear face coverings in the workplace. For our sites and employees that are not already affected by the Order, as a company with more than 100 employees, we would be required to mandate COVID-19 vaccination of our workforce or require our unvaccinated employees to be tested on a weekly basis. On November 4, 2021, the 5th U.S. Circuit Court of Appeals granted an emergency stay of the OSHA ETS vaccine requirement. It is not currently possible to predict with any certainty the outcome of the legal challenges of the OSHA ETS or Order, the exact impact on the Company of the OSHA ETS or Order, or the requirements for U.S. Government contractors and their subcontractors.

Table of Contents

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 52% of revenue at September 30, 2021)

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 48% of revenue at September 30, 2021)

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. GSE is 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 DOE, US Navy and related defense sectors. As a result of this effort and established leadership position in key sectors, GSE is positioned to expand into essential clean energy opportunities that may arise such as wind, solar, hydrogen production, and others. In 2021, we will 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; creating 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; developing new services as a result of combining the expertise of the Company; and expanding into compelling adjacent markets such as clean energy as they may arise with renewed sales focus.

Table of Contents

Cross sell and upsell into existing markets:

GSE has spent the past several years executing an acquisition strategy to rollup providers of essential services to the industry. To ensure efficient and streamlined operations for the business, the Company has consolidated all of the engineering services together into one organization with one leader; and the Workforce Solutions teams together as one team under one leader. The business units operating 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 GSE 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, the Company is 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 creating 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, GSE is poised to benefit from and exploit this investment.

Organic growth through new and compelling technology:

While the company was managing through the pandemic, in parallel the leadership was working to investigate compelling opportunities by which new offerings that uniquely result from the combination of capabilities across GSE could create significant value for the industry and advance the efforts of decarbonizing the power sector. As a result, the Company has identified a robust pipeline of new and compelling technology solutions to develop and take to market. Net new solutions would create new revenue streams with the potential of on-going annuities through license revenue, software maintenance and services revenue. As the Company has 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. GSE’s 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 Enterprise, providing the technology solution 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 Data Validation and Reconciliation (DVR) (implemented by GSE’s True North division) that enhances the quality of data for analysis and decision making, provides a solution to better detect and identify faulty measurements/sensors and thus reduce maintenance costs by focusing on critical components.

In the area of engineering simulations, we deliver nuclear core and Balance-of-Plant modeling and visualization systems to the industry. To address the nuclear industry’s need for more accurate simulation of both normal and accident scenarios, we provide our DesignEP® and RELAP5-HD® solutions. Our entire JADETM suite of simulation software, including industry leading JTOPMERET® and JElectricTM software, provides the most accurate simulation of Balance-of-Plant and electrical systems available to the nuclear and fossil plant simulation market. The significant enhancements we have made to our SimExec® and OpenSim TM platforms enables customers to be more efficient in the daily operation of their simulators. We have brought SimExec® and OpenSimTM together into a next generation unified environment that adds new capabilities as requested by clients and driven by market need.

Table of Contents

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. GSE has pioneered a number of industry standards and intends to continue to be one of the most innovative companies in our industry.

- Strengthen and develop our talent while delivering high-quality solutions. Over the past several years GSE has assembled a unique and highly experienced group of talented individuals through organic growth and strategic acquisition. Our Engineering team comprised of design, simulation, regulatory compliance, and performance optimization capabilities is 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 September 30, 2021, we had approximately 330 employees, which includes approximately 197 employees in our Performance segment and approximately 133 employees in our Workforce Solutions segment.

Backlog

As of September 30, 2021, we had approximately $37.5 million of total gross revenue backlog, which included $31.5 million of Performance backlog and $6.0 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.

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 is 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

Table of Contents

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, GSE was 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:

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. We also 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, GSE provides 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, GSE has delivered more nuclear power plant simulators than any other company in the world.

Table of Contents

Even prior to the COVID pandemic, GSE 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 enabling the training organization to be more flexible and efficient.

GSE’s 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, GSE’s high-fidelity simulator enables designers to model the interaction between systems in advance of construction. 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, GSE technology is used to improve the efficiency of existing power generation assets. Our Thermal System Monitoring 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 Data Validation and Reconciliation techniques, GSE 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 GSE’s engineering organization. Our Engineering team helps our clients throughout the entire plant lifecycle. GSE is the engineer of choice in areas such as:

•

Design engineering for plant mechanical, electrical, I&C, civil and structural, fire protection and cyber systems

•

Engineering Programs addressing ASME codes, balance of plant programs other regulatory programs and economic driven programs such as plant thermal performance

•

Simulation engineering for nuclear, thermal and process plant training and virtual commissioning

We see organic growth through closer integration of these engineering activities and technologies to provide solutions to improve the performance of our customers’ people and plants.

- Workforce Solutions

As our customers’ experienced employees retire, 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 priced, discrete projects 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. GSE provides 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 certification, generic fundamentals training, and simulation supervisor training. GSE also provides 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 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.

Table of Contents

In addition to the core training and staffing business lines in the nuclear sector, we have significant organic growth opportunity with our workforce solutions and consulting services 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 already well positioned to offer expanded workforce solutions 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 organization with our Engineering and Performance group. Workforce Solutions is expanding our footprint with companies dedicated to the support of decarbonization, and we have already been awarded contracts to support engineering, manufacturing, and construction projects with companies focused on clean energy solutions. Further the U.S. government has already announced intentions to increase spending in key areas such as communication, clean energy, manufacturing, transportation, and environmental projects. We anticipated these developments and have made key hires to better position GSE to support those opportunities. As the pandemic has shown, we 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. Our workforce solutions offer our customers more flexibility to support ever changing needs. This flexibility combined with our ability to support all of these areas position GSE 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.

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										Nine Months Ended
(in thousands)	September 30, 2021					September 30, 2020					September 30, 2021					September 30, 2020
	$			%		$			%		$			%		$			%
Revenue	$	14,686		100.0	%	$	12,922		100.0	%	$	41,312		100.0	%	$	44,967		100.0	%
Cost of revenue		11,503		78.3	%		9,603		74.3	%		32,512		78.7	%		33,971		75.5	%
Gross profit		3,183		21.7	%		3,319		25.7	%		8,800		21.3	%		10,996		24.5	%

Operating expenses:
Selling, general and administrative		3,265		22.2	%		2,878		22.3	%		10,521		25.5	%		12,548		27.9	%
Research and development		149		1.0	%		137		1.1	%		460		1.1	%		526		1.2	%
Restructuring charges		(10	)	(0.1	)%		185		1.4	%		798		1.9	%		195		0.4	%
Loss on impairment		3		0.0	%		-		0.0	%		3		0.0	%		4,302		9.6	%
Depreciation		69		0.5	%		76		0.6	%		216		0.5	%		254		0.6	%
Amortization of intangible assets		286		1.9	%		414		3.2	%		929		2.2	%		1,528		3.4	%
Total operating expenses		3,762		25.6	%		3,690		28.6	%		12,927		31.3	%		19,353		43.0	%
Operating loss		(579	)	(3.9	)%		(371	)	(2.9	)%		(4,127	)	(10.1	)%		(8,357	)	(18.7	)%
Interest expense, net		(32	)	(0.2	)%		(128	)	(1.0	)%		(135	)	(0.3	)%		(556	)	(1.2	)%
Gain on derivative instruments, net		-		0.0	%		31		0.2	%		-		0.0	%		35		0.1	%
Other income, net		12,215		83.2	%		(77	)	(0.6	)%		16,853		40.8	%		(24	)	(0.1	)%
Income (loss) before income taxes		11,604		79.0	%		(545	)	(4.2	)%		12,591		30.5	%		(8,902	)	(19.8	)%
Provision for income taxes		166		1.1	%		116		0.9	%		127		0.3	%		166		0.4	%
Net income (loss)	$	11,438		77.9	%	$	(661	)	(5.1	)%	$	12,464		30.2	%	$	(9,068	)	(20.2	)%

Table of Contents

Revenue

Revenue for the three months ended September 30, 2021 totaled $14.7 million, which was 14% more than the $12.9 million of revenue for the three months ended September 30, 2020. Revenue for the nine months ended September 30, 2021 totaled $41.3 million, which was 8% less than the $45.0 million of revenue for the nine months ended September 30, 2020.

	Three Months Ended								Nine Months Ended
(in thousands)	September 30, 2021		September 30, 2020		Change				September 30, 2021		September 30, 2020		Change
Revenue:					$		%						$			%
Performance	$	7,375	$	7,257		118	2	%	$	21,318	$	25,240		(3,922	)	(16	)%
Workforce Solutions		7,311		5,665		1,646	29	%		19,994		19,727		267		1	%
Total revenue	$	14,686	$	12,922		1,764	14	%	$	41,312	$	44,967		(3,655	)	(8	)%

Performance Improvement Solutions revenue increased by 2% from $7.3 million to $7.4 million for the three months ended September 30, 2021 and 2020, respectively. The increase in revenue was primarily attributable to improvements in specialized engineering and consulting services offset by lower revenue on the SDB part of the business. We recorded total Performance Improvement Solutions orders of $11.2 million and $9.3 million for the three months ended September 30, 2021 and 2020, respectively.

Performance Improvement Solutions revenue decreased by 16% from $25.2 million to $21.3 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease of revenue was primarily due to several significant SDB projects ended in the prior fiscal year which were not replaced by new orders. We recorded total Performance Improvement Solutions orders of $22.6 million and $21.8 million for the nine months ended September 30, 2021 and 2020, respectively.

For the three months ended September 30, 2021, Workforce Solutions revenue increased by 29% to $7.3 million compared to revenue of $5.7 million for the three months ended September 30, 2021. The increase was primarily due to existing ongoing projects started in Q1 of 2021. We recorded total new orders of $3.5 million and $1.6 million for the three months ended September 30, 2021 and 2020, respectively.

For the nine months ended September 30, 2021, Workforce Solutions revenue increased by 1% to $20.0 million compared to revenue of $19.7 million for the nine months ended September 30, 2020. The increase in revenue was primarily due to existing ongoing projects started in Q1 of 2021, offset by ending of some large projects resulting in a reduction in demand for staffing from our major customers. We recorded total new orders of $15.9 million and $15.6 million for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, our backlog was $37.5 million, of which, $31.5 million was attributed to the Performance segment and $6.0 million was attributed to the Workforce Solutions segment. As of December 31, 2020, our backlog was $40.4 million with $30.3 million attributed to our Performance segment and $10.1 million to Workforce Solutions.

Table of Contents

Gross Profit

Gross profit was $3.2 million or 21.7% of revenue and $3.3 million or 25.7% of revenue for the three months ended September 30, 2021 and 2020 , respectively. Gross profit was $8.8 million or 21.3% of revenue and $11.0 million or 24.5% of revenue for the nine months ended September 30, 2021 and 2020, respectively.

(in thousands)	Three Months Ended									Nine Months Ended
	September 30, 2021				September 30, 2020					September 30, 2021					September 30, 2020
	$		%		$			%		$			%		$			%
Gross profit:
Performance Improvement Solutions	$	2,252	30.5	%		$	2,482	34.2	%		$	6,204	29.1	%		$	8,240	32.6	%
Workforce Solutions		931	12.7	%			837	14.8	%			2,596	13.0	%			2,756	14.0	%
Total gross profit	$	3,183	21.7	%		$	3,319	25.7	%		$	8,800	21.3	%		$	10,996	24.5	%

The Performance Improvement Solutions segment’s gross profit decreased by $235 thousand during three months ended September 30, 2021 over three months ended September 30, 2020. The Performance Improvement Solutions segment’s gross profit decreased by $2.0 million during nine months ended September 30, 2021 over nine months ended September 30, 2020. The decrease is primarily related to lower revenue due to several significant SDB projects ended in the prior fiscal year which were not replaced by new orders.

The Workforce Solutions segment’s gross profit increased by $99 thousand during three months ended September 30, 2021 over three months ended September 30, 2020. The increase was primarily due to a new customer added in Q1 of 2021. The Workforce Solutions segment’s gross profit decreased by $160 thousand during nine months ended September 30, 2021 over nine months ended September 30, 2020. The decrease in gross profit was primarily driven by the loss of a major project due to the COVID-19 pandemic offset by a new customer added in Q1 of 2021.

Selling, general and administrative expenses (“SG&A”)

Selling, general and administrative (SG&A) expenses totaled $3.3 million and $2.9 million for the three months ended September 30, 2021 and 2020, respectively. Selling, general and administrative (SG&A) expenses totaled $10.5 million and $12.5 million for the nine months ended September 30, 2021 and 2020, respectively. Fluctuations in the components of SG&A spending were as follows.

	Three months ended					Nine Months ended
(in thousands)	September 30, 2021		September 30, 2020			September 30, 2021			September 30, 2020

Corporate charges	$	2,364	$	2,565		$	7,754		$	9,036
Business development		714		1,013			2,230			2,759
Facility operation & maintenance (O&M)		186		241			654			732
Provision for loss on legal settlement		-		(952	)		-			(91	)
Bad debt (recovery) expense		-		10			(133	)		103
Other		1		1			16			9
Total	$	3,265	$	2,878		$	10,521		$	12,548

Corporate charges

During the three months ended September 30, 2021, corporate charges decreased by $0.2 million over the same period of the prior year. During the nine months ended September 30, 2021 corporate charges decreased by $1.3 million over the same period of the prior year. The decrease was primarily due to a reduction of external legal, audit, and worker’s fees of $0.8 million. Additionally, the Company saw a reduction in realized foreign exchange rate loss of $0.3 million during the nine months ended September 30, 2021.

Table of Contents

Business development expenses

Business development expense decreased $0.3 million during the three months ended September 30, 2021 over the same period of the prior fiscal year. Business development expense decreased $0.5 million during the nine months ended September 30, 2021 over the same period of the prior fiscal year. The decrease was primarily due to lower commission costs and reduced headcount during the nine months ended September 30, 2021.

Facility operation & maintenance (“O&M”)

Facility O&M expenses decreased $55 thousand for three months ended September 30, 2021, compared to the same period in 2020. The decrease was mainly due to a utility fee during the three months ended September 30, 2021. Facility O&M expenses decreased $78 thousand for nine months ended September 30, 2021, compared to the same period in 2020. The decrease in facility O&M during fiscal 2021 was mainly due to lease terminations in the first half of 2020.

Provision for loss on legal settlement

During the three months ended September 30, 2020, we received $1.0 million in cash, pursuant to a settlement agreement related to the purchase agreement of Absolute in fiscal 2017. The $1.0 million of cash proceeds was recorded as an offset against the $0.9 million provision for loss on legal settlement with a class of former employees of Absolute, recorded in the second quarter of fiscal 2020. For the nine months ended September 30, 2020, we had recorded a provision for loss on legal settlement, net as a reduction to corporate charges of $91 thousand. There were no similar transactions during the same period of 2021

Bad debt (recovery) expense

We recorded $(133) thousand and $103 thousand of bad debt (recovery) expense during the nine months ended September 30, 2021 and 2020, respectively. The bad debt recovery as of September 30, 2021 was driven by payment received for previously recorded bad debt.

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 $149 thousand and $137 thousand for the three months ended September 30, 2021 and 2020, respectively. Research and development costs totaled $460 thousand and $526 thousand for the nine months ended September 30, 2021 and 2020, respectively. The decrease was mainly due to lower headcount.

Restructuring

We recorded restructuring charges of $(10) thousand and $185 thousand during three months ended September 30, 2021 and 2020. During the nine months ended September 30, 2021 and 2020, we recorded restructuring charges of $798 thousand and $195 thousand, respectively. The increase was mainly due to final charges related to the liquidation of our Sweden operations during the period, pursuant to our foreign restructuring plan.

Loss on impairment of goodwill and definite-lived intangible assets

We recognized a $3 thousand ROU asset impairment during the three and nine months ended September 30, 2021. We recognized a $4.3 million intangible asset impairment during the nine months ended September 30, 2020.

Depreciation

We recorded depreciation expense of $69 thousand and $76 thousand for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense was $216 thousand and $254 thousand for the nine months ended September 30, 2021 and 2020, respectively. The reduction of $38 thousand for the nine months ended September 30, 2021 over the same period in 2020 was due primarily to assets becoming fully depreciated in 2021.

Table of Contents

Amortization of intangible assets

Amortization expense related to definite-lived intangible assets totaled $0.3 million and $0.4 million for the three months ended September 30, 2021 and 2020 and $0.9 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease in amortization expense was primarily due to the reduction in the carrying value of DP Engineering’s intangible assets due to the $4.3 million impairment in Q1 2020.

Interest expense, net

Interest expense totaled $32 thousand and $128 thousand for the three months ended September 30, 2021 and 2020, respectively. Interest expense totaled $135 thousand and $556 thousand for the nine months ended September 30, 2021 and 2020, respectively. The decrease for the three and nine month periods was due to a reduction in total indebtedness compared to nine months ended September 30, 2020.

Other income, net

For the three months ended September 30, 2021 and 2020, we recognized other income, net of $12.2 million and $(77) thousand, respectively. For the nine months ended September 30, 2021 and 2020, we recognized other income, net of $16.9 million and $(24) thousand, respectively. The increase was primarily due to the recording of $10.1 million PPP loan forgiveness by SBA and $7.2 million Employee Retention Credit during the period offset by 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 a couple of years. In May of 2021, we were informed by our tax advisor that this VAT refund was no longer collectable.

Income taxes 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 expense of $166 thousand and $116 thousand for the three months ended September 30, 2021 and 2020, respectively, were comprised mainly of foreign and state tax expense. Total income tax expense of $127 thousand and tax expense of $166 thousand for the nine months ended September 30, 2021 and 2020, respectively, were comprised mainly of foreign and state tax expense.

Our income effective tax rate was 1.4% and 1.0% for the three and nine months ended September 30, 2021, respectively. For the three and nine months ended September 30, 2021, the difference between our income tax expense at an effective tax rate of 1.4% and 1.0% respectively, and the U.S. statutory federal income tax rate of 21% was primarily due to accruals related to uncertain tax positions for certain foreign tax contingencies, a change in tax valuation allowance in our U.S. entity, and discrete item adjustments for U.S. and foreign taxes.

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 long-lived assets to be disposed, 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 April 13, 2021. 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 September 30, 2021, our cash and cash equivalents totaled $4.0 million, compared to $6.7 million as of December 31, 2020.

For the nine months ended September 30, 2021 and 2020, net cash used in operating activities was $0.3 million and net cash provided by operating activities was $1.6 million, respectively. The decrease of $1.9 million in cash flows used in operating activities was primarily driven by increased collections due to large milestone payments of large projects in the prior year.

Table of Contents

Net cash used in investing activities totaled $0.6 million and $0.2 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in the cash outflow for investing activities year over year was primarily driven by the increase of capital expenditures during the nine months ended September 30, 2021.

For the nine months ended September 30, 2021 and 2020, net cash used in financing activities was $1.7 million and $5.3 million, respectively. The decrease in cash used in financing activities of $3.6 million was driven by a $1.7 million repayment of line of credit during the nine months ended September 30, 2021 compared to.a repayment on term loans of $15.5 million offset by proceeds of the PPP Loan of $10 million during the nine months ended September 30, 2020.

Paycheck Protection Program Loan (“PPP Loan”)

On April 23, 2020, we received $10 million in funds under the Paycheck Protection Program (PPP), a part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The loan was serviced by Citizens Bank, N.A. (the “Bank”), and the application for these funds required us to, in good faith, certify that the current economic uncertainty made the loan necessary to support our ongoing operations. We used funds for payroll and related costs, rent and utilities. The receipt of these funds, and the forgiveness of the PPP Loan attendant to these funds, was dependent on our ability to adhere to the forgiveness criteria. The PPP Loan bore interest at a rate of 1% per annum and matures on April 23, 2022, with the first payment deferred until September 2021. Under the terms of the PPP Loan, certain amounts would be forgiven if they were used in accordance with the CARES Act. On August 5, 2021, the Company was notified that the Small Business Administration ("SBA") had forgiven the PPP loan including all accrued interest thereon was forgiven.

Credit Facilities

On December 29, 2016, we entered a 3-year $5.0 million revolving line of credit facility (“RLOC”) with the Citizens Bank, N.A. (the “Bank”) to fund general working capital needs and acquisitions. On May 11, 2018, we entered into the Amended and Restated Credit and Security Agreement (the “Credit Agreement” or the “Credit Facility”) to (a) expand the RLOC to include a letter of credit sub-facility and not be subject to a borrowing base and (b) to add a $25 million term loan facility, available to finance permitted acquisitions over the following 18 months. The credit facility was subject to certain financial covenants and reporting requirements and was scheduled to mature on May 11, 2023 and accrue interest at the USD LIBOR, plus a margin that varies depending on our overall leverage ratio. We subsequently amended and ratified the Credit Agreement a number of times. Due to a projected violation of the leverage ratio at the end of the first quarter, we signed the Ninth Amendment and Reaffirmation Agreement with an effective date of March 29, 2021. Pursuant to the Ninth Amendment and Reaffirmation Agreement, the Bank waived the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and we agreed, for each quarter thereafter, that the fixed charge coverage ratio shall not be less than 1.10 to 1.00. In addition, we agreed to not exceed a maximum leverage ratio starting on September 30, 2021 as follows: (i) 3.25 to 1.00 for the period ending September 30, 2021; (ii) 3.00 to 1.00 for the period ending on December 31, 2021, (iii) 2.75 to 1.00 for the period ending March 31, 2022; (iv) 2.50 to 1.00 for the period ending June 30, 2022 and (v) 2.00 to 1.00 for the periods ending September 30, 2022 and each December 31st, March 31st, June 30th and September 30th thereafter. We were also required to maintain a minimum of $2.5 million in aggregate USA liquidity. As part of the amendment, we agreed, at closing, (i) to make a $0.5 million pay down of RLOC; (ii) RLOC commitment to be reduced to $4.25 million; and (iii) $0.5 million of RLOC will only be available for issuance of Letters of Credit. We also agreed to pay $0.5 million to reduce RLOC to $3.75 million by June 30, 2021 and to $3.5 million by September 30, 2021. Commencing December 31, 2021 and on the last day of each quarter, we will pay $75 thousand to reduce the RLOC. We incurred$25 thousand fees related to this amendment during the year ended December 31, 2020.

Table of Contents

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

We intend to continue using the RLOC for short-term working capital needs when capacity is available and the issuance of letters of credit in connection with business operations provided, we remain in compliance with our covenants. Letter of credit issuance fees range between 1.25% and 2.00% of the value of the letter of credit, depending on our overall leverage ratio. We pay an unused RLOC fee quarterly based on the average daily unused balance.

Going Concern Consideration

In 2020 we had several projects (primarily in our Workforce Solutions business segment) delayed and new orders postponed because of the COVID-19 pandemic. We amended our credit facility with Citizens Bank, N.A. (“the Bank”) in 2020 based upon expected covenant violations and have been required to curtail term debt in exchange for revised financial covenants. Scheduled term loan repayments and agreed upon curtailment required us to use $18.5 million in available cash to pay-off our term debt in 2020. We signed a Ninth Amendment and Reaffirmation Agreement (the “Ninth Amendment”) with the Bank on March 29, 2021 to waive the fixed charge coverage ratio and leverage ratio for the quarters ending March 31 and June 30, 2021, and to adjust the thresholds for future covenants to ease the risk of non-compliance experienced in previous quarters (See Note 10). Our working capital position on September 30, 2021 was $6.7 million. This working capital was primarily due to the $10.1 million of PPP loan forgiveness at September 30, 2021. On August 5, 2021, the Company received approval from SBA that the PPP loan including all accrued interest thereon was forgiven.

The COVID-19 macroeconomic environment is considered fluid and although recovery is anticipated to steadily occur over the next 12 months, issues that could result for the delta virus could cause a further decline in revenue or stress our ability to meet covenant requirements. Jurisdictions where our businesses operate across the country are pushing toward re-opening places of business and government support, through the American Rescue Plan Act of 2021, will continue to support the broader economy. We have recorded $5.0 million employee retention tax credits to be refunded from the IRS and recorded an additional $2.2 million employee retention tax credit from unremitted payroll taxes made available under the CARES Act. However, the timing of these elements taking place are not predictable and may not serve to mitigate our situation or improve the Company’s health. Following the Ninth Amendment, our new covenant compliance remains dependent on meeting future projections, which are subject to the variability and unknown speed and extent of post-COVID-19 recovery. On November 12, 2021, due to the violation of Q3 2021 leverage ratio, we signed the Tenth Amendment and Reaffirmation Agreement with an effective date of November 12, 2021 to adjust the thresholds for future covenants to ease the risk of non-compliance (See Note 17).

The Company’s management continues to explore raising capital through its access to the public markets or entering into alternative financing arrangements. Furthermore, while recovery has been slower to materialize than expected the Company has experience an improvement in orders as well as a higher rate of opportunities across business segments. Future negative trends in operating results could be mitigated through various cost cutting measures including adjustments to headcount or compensation, vendor augmentation or delay of investment initiatives in the Company’s corporate office.

These actions, which are further supported by positively trending macroeconomic conditions, and the potential to see recovering business and orders may ease the risk of further bank covenant violations. However, when considering the unpredictability of the above, there continues to be substantial doubt the Company will continue as a going concern.

Table of Contents

Non-GAAP Financial Measures

Adjusted EBITDA

References to “EBITDA” mean net (loss) income, before considering interest expense (income), provision for income taxes, depreciation and amortization. References toAdjusted EBITDA excludes provision for legal settlement, loss on impairment, employee retention credit, PPP loan forgiveness, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, acquisition-related expense 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						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Net income (loss)	$	11,438		$	(661	)	$	12,464		$	(9,068	)
Interest expense, net		32			128			135			556
Provision for income taxes		166			116			127			166
Depreciation and amortization		432			579			1,426			2,030
EBITDA		12,068			162			14,152			(6,316	)
Provision for legal settlement		-			(952	)		-			(91	)
Loss on impairment		3			-			3			4,302
Employee retention credit		(2,087	)		-			(7,162	)		-
PPP Loan and accumulated interest forgiveness		(10,127	)		-			(10,127	)		-
Restructuring charges		(10	)		185			798			195
Stock-based compensation expense		283			33			784			357
Change in fair value of derivative instruments		-			(31	)		-			(35	)
Acquisition-related expense		-			3			-			191
VAT write-off		-			-			450			-
Adjusted EBITDA	$	130		$	(600	)	$	(1,102	)	$	(1,397	)

Table of Contents

Adjusted Net (Loss) Income and Adjusted (Loss) Earnings per Share Reconciliation

References to Adjusted Net (Loss) Income excludes the impact of provision for legal settlement, loss on impairment, employee retention credit, PPP loan forgiveness, impact of the change in fair value of contingent consideration, restructuring charges, stock-based compensation expense, impact of the change in fair value of derivative instruments, acquisition-related expenses and amortization of intangible assets related to acquisitions, and VAT write-off. Adjusted Net (Loss) Income and Adjusted (Loss) Earnings per Share (adjusted EPS) are not measures of financial performance under U.S. GAAP. Management believes adjusted net (loss) income and adjusted (loss) earnings 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) income and adjusted (loss) earnings 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						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020

Net income (loss)	$	11,438		$	(661	)	$	12,464		$	(9,068	)
Provision for legal settlement		-			(952	)		-			(91	)
Loss on impairment		3			-			3			4,302
Employee retention credit		(2,087	)		-			(7,162	)		-
PPP Loan and accumulated interest forgiveness		(10,127	)		-			(10,127	)		-
Restructuring charges		(10	)		185			798			195
Stock-based compensation expense		283			33			784			357
Change in fair value of derivative instruments		-			(31	)		-			(35	)
Acquisition-related expense		-			3			-			191
VAT write-off		-			-			450			-
Amortization of intangible assets related to acquisitions		286			414			929			1,528
Adjusted net loss	$	(214	)	$	(1,009	)	$	(1,861	)	$	(2,621	)

Adjusted net loss per common share – diluted	$	(0.01	)	$	(0.05	)	$	(0.09	)	$	(0.13	)

Weighted average shares outstanding used to compute adjusted net loss per share - diluted⁽¹⁾		20,863,479			20,563,452			20,714,068			20,438,571

⁽¹⁾ During the three and nine months ended September 30, 2021, we reported a U.S. GAAP net income and an adjusted net income. Accordingly there were no dilutive shares per share when calculating the diluted net income per common share for the three and nine months ended September 30, 2021.

⁽¹⁾ During the three and nine months ended September 30, 2020, we reported a U.S. GAAP net loss and an adjusted net loss. Accordingly there were 66,261 and 12,172 dilutive shares from RSUs that were excluded from the adjusted net loss per common share.

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

Not required of a smaller reporting company.

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, 2020.

Through Management’s evaluation of controls as of December 31, 2020, it was determined that a material weakness existed and related to management’s review of reconciliations over unbilled receivables and billings in excess of revenue earned. Our remediation of this material weakness was initiated by hiring additional skilled personnel to prepare and review reconciliations over unbilled receivables and billings in excess of revenue earned.

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.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

The Company and its subsidiaries are from time to time involved in ordinary routine litigation incidental to the conduct of its business. The Company and its subsidiaries are not a party to, and its property is not the subject of, any material pending legal proceedings that, in the opinion of management, are likely to have a material adverse effect on the Company’s business, financial condition or results of operations.

On March 29, 2019, a former employee of Absolute Consulting, Inc., filed a putative class action against Absolute and the Company, Joyce v. Absolute Consulting Inc., case number 1:19 cv 00868 RDB, in the United States District Court for the District of Maryland. The lawsuit alleges that plaintiff was not properly compensated for overtime hours that he worked. In addition, he alleges that there is a class of employees who were not properly compensated for overtime hours worked. Following a mediation session on July 14, 2020, the parties entered into a Settlement Agreement and Release on August 17, 2020, providing that the case would be settled and dismissed in exchange for Absolute’s payment of a gross settlement amount not to exceed $1.5 million. The court approved the settlement and dismissed the case with prejudice on September 8, 2020. After the passing of an opt-in notice period expired, the final cost of settling this case, including plaintiff’s attorney fees was approximately $1.4 million.

Table of Contents

The Company is involved in litigation in the ordinary course of business. While it is too early to determine the outcome of such matters, management does not expect the resolution of these matters to have a material impact on the Company’s financial position or results of operations.

Item 1a.

Risk Factors

The following additional risk factors should be read in conjunction with the risk factors set forth under “Item 1A. Risk Factors” in our 2020 Form 10-K. Except as described herein, there have been no material changes with respect to the risk factors disclosed in our 2020 Form 10-K.

Substantial doubt has been raised in our ability to continue as going concern as a result of the economic slowdown caused the global COVID 19 pandemic and continued deterioration of business could have an adverse effect.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.

We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.

Based on management’s assessment, management has concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2021 or at December 31, 2020 due to the existence of a material weaknesses in internal control over management’s review of reconciliations over unbilled receivables and billings in excess of revenue earned. Our remediation of these control weakness was actioned by hiring additional skilled personnel to prepare and review reconciliations over unbilled receivables and billings in excess of revenue earned.

Although we believe that these efforts have strengthened our internal control over financial reporting and address the concern that gave rise to the material weakness as of December 31, 2020, we cannot be certain that our expanded knowledge and revised internal control procedures will ensure that we maintain adequate internal control over our financial reporting in future periods. Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and The NASDAQ Capital Market (Nasdaq), we could confront an enforcement action from the SEC and/or delisting from Nasdaq. In either case, such an event could have a material adverse effect on our business. Finally, inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

A disruption, failure or breach of our networks or systems, including cyber-attacks, could harm our business.

Global cyber security threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems, and maintenance of backup and protective systems), cyber security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cyber security incident include reputational damage, litigation with third parties, civil or regulatory liability for loss of sensitive or protected information such as personal data, incident response costs, diminution in the value of our investment in research, development and engineering, loss of intellectual property, and increased cyber security protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.

Table of Contents

Our beliefs regarding our ability to contribute to global decarbonization may be based on materially inaccurate assumptions

An objective has been to create a leading business focused on decarbonizing the power industries by providing a diverse set of highly unique and essential services and technologies, primarily to serve the nuclear power industry, which we believe will be essential to decarbonization. While we believe that nuclear power will meaningfully contribute to decarbonization, these beliefs are based on certain assumptions, including, but not limited to, the immediate impact of global warming and the inability to meaningfully address global warming without maximizing nuclear power and other alternative energy sources. To the extent our assumptions are materially incorrect or incomplete, it could adversely impact our business, prospects, financial condition and operating results due to a reduction in demand for our services.

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.

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.

		Eighth Amendment

	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

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: November 15, 2021
	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)